**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

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| **x** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|--------------------------------------------------------------------------------------------------------|

 

**Forthe quarterly period ended June 30, 2006**

**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 Road, Suite 270,South San Francisco, CA  94080**

(Address of principalexecutive offices)

**Registrant’s telephone number,including area code:** (206) 281-7001

**NeoRx Corporation300 Elliott Avenue West, Seattle, WA 98119-4114**

(former name, formeraddress and former fiscal year, if changed since last report)

Indicate by check markwhether the Registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

| Yes |   | x |   | No |   | o |
|-----|--------|---|--------|----|--------|---|

 

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

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

| Yes |   | o |   | No |   | x |
|-----|--------|---|--------|----|--------|---|

 

Asof August 7, 2006, 136,832,294 shares of the Registrant’s common stock,$.02 par value per share, were outstanding.

 

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**TABLE OF CONTENTSQUARTERLY REPORT ON FORM 10-QFOR THE QUARTER ENDED JUNE 30, 2006**
|                    | ** ** |                                                                                                                                   | ** ** | **PAGE**   |
|--------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| **PART I**    | ** ** | **FINANCIAL  INFORMATION**                                                                                                        | ** ** | ** ** |
| Item 1.            |       | Financial  Statements:                                                                                                            |       |       |
|               |       | Condensed  Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005 (unaudited)                            |       | 3          |
|               |       | Condensed  Consolidated Statements of Operations for the Three and Six Months Ended  June 30, 2006 and 2005 (unaudited) |       | 4          |
|               |       | Condensed  Consolidated Statements of Cash Flows for the Six Months Ended June 30,  2006 and 2005 (unaudited)           |       | 5          |
|               |       | Notes to  Condensed Consolidated Financial Statements (unaudited)                                                                 |       | 6          |
| Item 2.            |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                  |       | 13         |
| Item 3.            |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                       |       | 18         |
| Item 4.            |       | Controls  and Procedures                                                                                                          |       | 19         |
| **PART II**   | ** ** | **OTHER  INFORMATION**                                                                                                            | ** ** | ** ** |
| Item 1A.           |       | Risk Factors                                                                                                                      |       | 20         |
| Item 4.            |       | Submission  of Matters to a Vote of Security Holders                                                                              |       | 33         |
| Item 5.            |       | Other  Information                                                                                                                |       | 34         |
| Item 6             |       | Exhibits                                                                                                                          |       | 34         |
| Signatures         |       | 35                                                                                                                                |
| Exhibit Index |       | 36                                                                                                                                |

 

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, 2006    ** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                                                             | ** ** |                                                                        | ** ** | ** **                      |       |   | ** ** | ** ** |   |
| **Current assets:**                                                                                                                                                                    | ** ** |                                                                        | ** ** | ** **                      |       |   | ** ** | ** ** |   |
| Cash and cash equivalents                                                                                                                                                              |       |                                                                        | $          | 53,612                          |       |   |   | $ | 3,523 |   |   |
| Cash—restricted                                                                                                                                                                   |       |                                                                        | —     |                            |       |   | 1,000 |   |   |
| Prepaid expenses and other current assets                                                                                                                                              |       |                                                                        | 399        |                            |       |   | 455 |   |   |
| Assets held for sale                                                                                                                                                                   |       |                                                                        | —     |                            |       |   | 83 |   |   |
| Total current assets                                                                                                                                                                   |       |                                                                        | 54,011     |                            |       |   | 5,061 |   |   |
| Facilities and equipment, net                                                                                                                                                          |       |                                                                        | 269        |                            |       |   | 273 |   |   |
| Other assets                                                                                                                                                                           |       |                                                                        | 45         |                            |       |   | 45 |   |   |
| Assets held for sale                                                                                                                                                                   |       |                                                                        | 3,027      |                            |       |   | 3,027 |   |   |
| Licensed products, net of accumulated amortization  of $375 and $292                                                                                                                   |       |                                                                        | 1,625      |                            |       |   | 1,708 |   |   |
| **Total assets**                                                                                                                                                                       |       |                                                                        | $          | 58,977                          |       |   |   | $ | 10,114 |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                          | ** ** |                                                                        | ** ** | ** **                      |       |   | ** ** | ** ** |   |
| **Current  liabilities:**                                                                                                                                                              | ** ** |                                                                        | ** ** | ** **                      |       |   | ** ** | ** ** |   |
| Accounts payable                                                                                                                                                                       |       |                                                                        | $          | 727                             |       |   |   | $ | 995 |   |   |
| Accrued liabilities                                                                                                                                                                    |       |                                                                        | 1,462      |                            |       |   | 2,078 |   |   |
| Bank loan payable                                                                                                                                                                      |       |                                                                        | —     |                            |       |   | 3,868 |   |   |
| Total current liabilities                                                                                                                                                              |       |                                                                        | 2,189      |                            |       |   | 6,941 |   |   |
| **Shareholders’  equity:**                                                                                                                                                        | ** ** |                                                                        | ** ** | ** **                      |       |   | ** ** | ** ** |   |
| Preferred stock, $.02 par value, 3,000,000 shares  authorized:                                                                                                                         |       |                                                                        |       |                            |       |   |   |   |   |
| Convertible preferred stock, Series 1, 205,340  shares issued and outstanding at June 30, 2006 and December 31,  2005 (entitled  in liquidation to $5,175)              |       |                                                                        | 4          |                            |       |   | 4 |   |   |
| Convertible preferred stock, Series B, 0 and  1,575 shares issued  and outstanding at June 30, 2006 and December 31, 2005 (entitled in  liquidation to $15,750)         |       |                                                                        | —     |                            |       |   | — |   |   |
| Common stock, $.02 par value, 200,000,000 shares  authorized, 136,832,294 and 34,322,293 shares issued and outstanding at  June 30, 2006 and December 31, 2005, respectively |       |                                                                        | 2,736      |                            |       |   | 686 |   |   |
| Additional paid-in capital                                                                                                                                                             |       |                                                                        | 322,385    |                            |       |   | 258,283 |   |   |
| Accumulated deficit, including other comprehensive  loss of $0 and  $1 at June 30, 2006 and December 31, 2005, respectively                                                  |       |                                                                        | (268,337   | )                               |       |   | (255,800 | ) |   |
| Total shareholders’ equity                                                                                                                                                        |       |                                                                        | 56,788     |                            |       |   | 3,173 |   |   |
| **Total  liabilities and shareholders’ equity**                                                                                                                                   |       |                                                                        | $          | 58,977                          |       |   |   | $ | 10,114 |   |   |

 

See accompanying notes to the condensed consolidated financial statements.

3

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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,**                                                        | ** ** |
|------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **       2006       ** | ** ** | **        2005        ** | ** ** | **      2006      ** | ** ** | **      2005      ** | ** ** |
| **Revenues**                                   |       |                                                                                         | $          | —                                                                                                   |       |   |   | $ | 2 |   |   |   | $ | — |   |   |   | $ | 2 |   |   |
| **Operating  expenses:**                       | ** ** |                                                                                         |       |                                                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Research and  development                      |       |                                                                                         | 3,243      |                                                                                                     |       |   | 2,376 |   |   |   | 5,766 |   |   |   | 5,721 |   |   |
| General and  administrative                    |       |                                                                                         | 2,004      |                                                                                                     |       |   | 1,661 |   |   |   | 3,517 |   |   |   | 3,422 |   |   |
| Asset impairment  loss                         |       |                                                                                         | —     |                                                                                                     |       |   | 3,346 |   |   |   | — |   |   |   | 3,346 |   |   |
| Restructuring                                  |       |                                                                                         | —     |                                                                                                     |       |   | 1,504 |   |   |   | — |   |   |   | 1,504 |   |   |
| Gain on sale of  equipment                     |       |                                                                                         | (36        | )                                                                                                        |       |   | — |   |   |   | (73 | ) |   |   | — |   |   |
| Total operating expenses                       |       |                                                                                         | 5,211      |                                                                                                     |       |   | 8,887 |   |   |   | 9,210 |   |   |   | 13,993 |   |   |
| Loss from  operations                          |       |                                                                                         | (5,211     | )                                                                                                        |       |   | (8,885 | ) |   |   | (9,210 | ) |   |   | (13,991 | ) |   |
| **Other  income (expense):**                   | ** ** |                                                                                         |       |                                                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                |       |                                                                                         | 512        |                                                                                                     |       |   | 98 |   |   |   | 550 |   |   |   | 191 |   |   |
| Interest expense                               |       |                                                                                         | (1,789     | )                                                                                                        |       |   | (66 | ) |   |   | (3,627 | ) |   |   | (129 | ) |   |
| Total other income (expense)                   |       |                                                                                         | (1,277     | )                                                                                                        |       |   | 32 |   |   |   | (3,077 | ) |   |   | 62 |   |   |
| Net loss                                       |       |                                                                                         | (6,488     | )                                                                                                        |       |   | (8,853 | ) |   |   | (12,287 | ) |   |   | (13,929 | ) |   |
| Preferred stock dividends                      |       |                                                                                         | (125       | )                                                                                                        |       |   | (125 | ) |   |   | (250 | ) |   |   | (250 | ) |   |
| Net loss  applicable to common shares          |       |                                                                                         | $          | (6,613                                                                                                   | )          |   |   | $ | (8,978 | ) |   |   | $ | (12,537 | ) |   |   | $ | (14,179 | ) |   |
| Loss per share  applicable to common shares:   |       |                                                                                         |       |                                                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted                              |       |                                                                                         | $          | (0.06                                                                                                    | )          |   |   | $ | (0.26 | ) |   |   | $ | (0.18 | ) |   |   | $ | (0.43 | ) |   |
| Shares used in  calculation of loss per share: |       |                                                                                         |       |                                                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted                              |       |                                                                                         | 107,542    |                                                                                                     |       |   | 34,229 |   |   |   | 71,137 |   |   |   | 33,018 |   |   |

 

See accompanying notes to the condensed consolidated financial statements.

4

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

| ** **                                                                   | ** ** | **Six Months Ended June 30,**                                | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **      2006      ** | ** ** | **      2005      ** | ** ** |
| **Cash flows from operating  activities:**                                   | ** ** |                                                                             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net loss                                                                     |       |                                                                             | $          | (12,287 | ) |   |   | $ | (13,929 | ) |   |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                                                             |       |   |   |   |   |   |   |
| Depreciation and amortization                                                |       |                                                                             | 136        |   |   |   | 321 |   |   |
| Amortization of discount on note payable                                     |       |                                                                             | 3,460      |   |   |   | — |   |   |
| (Gain)Loss on disposal of equipment                                          |       |                                                                             | (17        | ) |   |   | 16 |   |   |
| Asset impairment loss                                                        |       |                                                                             | —     |   |   |   | 3,346 |   |   |
| Restructuring                                                                |       |                                                                             | —     |   |   |   | 1,116 |   |   |
| Stock options and warrants issued for services                               |       |                                                                             | 5          |   |   |   | (22 | ) |   |
| Stock-based employee compensation                                            |       |                                                                             | 588        |   |   |   | 5 |   |   |
| Change in  operating assets and liabilities:                                 |       |                                                                             |       |   |   |   |   |   |   |
| Prepaid expenses and other assets                                            |       |                                                                             | 56         |   |   |   | 102 |   |   |
| Accounts payable                                                             |       |                                                                             | (268       | ) |   |   | (532 | ) |   |
| Accrued liabilities                                                          |       |                                                                             | (553       | ) |   |   | (71 | ) |   |
| Net cash used in operating activities                                        |       |                                                                             | (8,880     | ) |   |   | (9,648 | ) |   |
| **Cash  flows from investing activities:**                                   | ** ** |                                                                             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Proceeds from sales and maturities of investment  securities                 |       |                                                                             | —     |   |   |   | 1,500 |   |   |
| Facilities and equipment purchases                                           |       |                                                                             | (49        | ) |   |   | (77 | ) |   |
| Proceeds from sales of equipment                                             |       |                                                                             | 100        |   |   |   | — |   |   |
| Net cash provided by investing activities                                    |       |                                                                             | 51         |   |   |   | 1,423 |   |   |
| **Cash  flows from financing activities:**                                   | ** ** |                                                                             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Repayment of bank note payable principal                                     |       |                                                                             | (3,868     | ) |   |   | (106 | ) |   |
| Proceeds from bridge notes payable                                           |       |                                                                             | 3,460      |   |   |   | — |   |   |
| Decrease in restricted cash                                                  |       |                                                                             | 1,000      |   |   |   | — |   |   |
| Proceeds from stock options and warrants exercised                           |       |                                                                             | 10         |   |   |   | — |   |   |
| Preferred stock dividends                                                    |       |                                                                             | (250       | ) |   |   | (250 | ) |   |
| Net proceeds from issuance of common stock and  warrants                     |       |                                                                             | 58,566     |   |   |   | 3,813 |   |   |
| Net cash provided by financing activities                                    |       |                                                                             | 58,918     |   |   |   | 3,457 |   |   |
| Net increase (decrease) in cash and cash equivalents                         |       |                                                                             | 50,089     |   |   |   | (4,768 | ) |   |
| **Cash  and cash equivalents:**                                              | ** ** |                                                                             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Beginning of period                                                          |       |                                                                             | 3,523      |   |   |   | 16,254 |   |   |
| End of period                                                                |       |                                                                             | $          | 53,612 |   |   |   | $ | 11,486 |   |   |
| **Supplemental  disclosure of non-cash financing activity:**                 | ** ** |                                                                             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Accrual of preferred dividend                                                |       |                                                                             | $          | 250 |   |   |   | $ | 250 |   |   |
| Conversion of bridge loan into common stock                                  |       |                                                                             | $          | 3,460 |   |   |   | $ | — |   |   |
| **Supplemental  disclosure of cash paid during the period for:**             | ** ** |                                                                             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Cash paid for  interest                                                      |       |                                                                             | $          | 112 |   |   |   | $ | 134 |   |   |

 

See accompanying notes to the condensed consolidated financial statements.

5

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

**Note 1.**   Basisof Presentation

The accompanying unaudited condensed consolidatedfinancial statements include the accounts of Poniard Pharmaceuticals, Inc.(formerly NeoRx Corporation) and subsidiary (the Company). All intercompanybalances and transactions have been eliminated in consolidation.

The Company has historically experienced recurringoperating losses and negative cash flows from operations. As of June 30,2006, the Company had net working capital of $51,822,000 and had an accumulateddeficit of $268,337,000 with total shareholders’ equity of $56,788,000. On April 26,2006, the Company received approximately $65,000,000 in gross proceeds from theissuance of shares of the Company’s common stock and the concurrent issuance ofwarrants for the purchase of additional shares of common stock. With theproceeds of the equity financing, management believes that current cash andcash equivalent balances and funds from the equity financing will provideadequate resources to fund operations at least until the end of 2007. Theseconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States, assuming thatthe Company will continue as a going concern.

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, 2005filed with the SEC and available on the SEC’s website, www.sec.gov.

The accompanying condensed consolidated financialstatements are unaudited. In the opinion of management, the condensedconsolidated financial statements reflect all adjustments, consisting only ofnormal recurring accruals necessary to present fairly the Company’s financialposition as of June 30, 2006 and the results of operations and cash flowsfor the periods ended June 30, 2006 and 2005.

The results of operations for the periods ended June 30,2006 and 2005 are not necessarily indicative of the expected operating resultsfor 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.   Stock-BasedEmployee Compensation**

At June 30,2006, the Company’s 2004 Incentive Compensation Plan (the 2004 Plan) was theonly compensation plan under which options were available for grant. TheCompany’s 1991 Stock Option Plan for Non-Employee Directors (the DirectorsPlan) was terminated on March 31, 2005, and no further options can begranted under that plan. The Company’s 1994 Stock Option Plan (the 1994 Plan)was terminated on February 17, 2004 and no further options can be grantedunder that plan. The 2004 Plan, as amended and restated on June 16, 2006,authorizes the Company’s board or a committee appointed by the 

6

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

board to grant options to purchase a maximum aggregate of10,000,000 shares of common stock. The 2004 Plan allows for the issuance ofincentive stock options and nonqualified stock options to employees, officers,directors, agents, consultants, advisors and independent contractors of theCompany, subject to certain restrictions. All option grants expire ten yearsfrom the date of grant, except for certain grants to consultants, which haveexpirations based upon terms of service. Option grants for employees with atleast one year of service become exercisable in monthly increments over afour-year period from the grant date. Option grants for employees with lessthan one year of service and employees receiving promotions become exercisableat a rate of 25% after one year from the grant date and then in monthlyincrements at arate of 1¤48thper month over the following three years. As of June 30, 2006, there were3,207,499 shares of common stock available for issuance under the 2004 Plan.Although no Company securities are available for issuance under the DirectorsPlan or the 1994 Plan, options granted prior to termination of those planscontinue in effect in accordance with their terms.

Effective January 1, 2006, the Company adoptedStatement of Financial Accounting Standards (SFAS) No. 123R, “Share-BasedPayments,” which revises SFAS 123, “Accounting for Stock-Based Compensation.”Prior to this, theCompany accounted for its stock option plans for employees in accordance withthe provisions of Accounting Principles Board Opinion (APBO) No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations. Compensationexpense related to employee stock options was recorded if, on the date ofgrant, the fair value of the underlying stock exceeded the exercise price. TheCompany applied the disclosure-only requirements of SFAS No. 123, “Accountingfor Stock-Based Compensation,” and related interpretations, which allowed entitiesto continue to apply the provisions of APBO No. 25 for transactions withemployees and to provide pro forma results of operations disclosures foremployee stock option grants as if the fair-value based method of accounting inSFAS No. 123 had been applied to these transactions. Stockcompensation costs related to fixed employee awards with pro rata vesting weredisclosed on a straight-line basis over the period of benefit, generally thevesting period of the options. For options and warrants issued to non-employees,the Company recognized stock compensation costs utilizing the fair valuemethodology prescribed in SFAS No. 123 and EITF 96-18 over therelated period of benefit.

Under SFAS 123R, the Company is required to select avaluation technique or option-pricing model that meets the criteria as statedin the standard, which includes a binomial model and the Black-Scholes model.At the present time, the Company is continuing to use the Black-Scholes model.The adoption of SFAS 123R, applying the “modified prospective application”transition method, as elected by the Company, requires the Company to valuestock options prior to its adoption of SFAS 123R under the fair value methodand expense these amounts over the stock options remaining vesting period. Underthis transition method, compensation expense recognized during the six monthsended June 30, 2006 included compensation expense for all share-basedawards granted prior to, but not yet vested, as of December 31, 2005,based on the grant date fair value estimated in accordance with the originalprovisions of SFAS 123. In accordance with the modified prospective transitionmethod, the Company’s Consolidated Financial Statements for prior periods havenot been restated to reflect the impact of SFAS 123R.

As a result of adopting SFAS 123R on January 1,2006, the Company’s loss from operations and net loss for the six months ended June 30,2006 is $588,000 higher than if it had continued to account for share-basedcompensation under the recognition and measurement provisions of APBO No. 25,and related Interpretations, as permitted by SFAS 123. Basic and diluted netloss per share for the six months ended June 30, 2006 would have been$0.17 if the Company had not adopted SFAS 123R.

7

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

Had compensation cost for these stockoption plans for employees been determined prior to January 1, 2006 usingthe fair value based method of accounting under SFAS No. 123, the Company’snet loss applicable to common shares and loss per share would have been the proforma amounts indicated below (in thousands, except per share data): 

| ** **                                                                                         | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Net loss  applicable to common shares:                                                             |       |                                                  |       |                                                |       |   |   |   |   |
| As reported                                                                                        |       |                                                  | $          | (8,978                                              | )          |   |   | $ | (14,179 | ) |   |
| Add: Stock-based employee compensation expense  included in reported net loss                      |       |                                                  | 5          |                                                |       |   | 5 |   |   |
| Deduct: Stock-based employee compensation determined  under fair value based method for all awards |       |                                                  | (237       | )                                                   |       |   | (620 | ) |   |
| Pro forma                                                                                          |       |                                                  | $          | (9,210                                              | )          |   |   | $ | (14,794 | ) |   |
| Loss per common  share, basic and diluted:                                                         |       |                                                  |       |                                                |       |   |   |   |   |
| As reported                                                                                        |       |                                                  | $          | (0.26                                               | )          |   |   | $ | (0.43 | ) |   |
| Pro forma                                                                                          |       |                                                  | $          | (0.27                                               | )          |   |   | $ | (0.45 | ) |   |

 

Disclosures for the three and six months ended June 30,2006 are not presented because stock-based payments were accounted for underSFAS 123R’s fair-value method during these periods.

For the three and six months ended June 30, 2006,the Company recognized stock compensation expense of $343,000 and $588,000,respectively. The remaining unrecognized compensation cost related to unvestedawards at June 30, 2006, was approximately $5,240,000 and theweighted-average period of time over which this cost will be recognized is 8.4years.

TheCompany records compensation expense for employee stock options based on theestimated fair value of the options on the date of grant using the Black-Scholesoption-pricing model. This fair value is then amortized on a straight-linebasis over the requisite service periods of the grants, which is generally thevesting period. The Company uses historical data among other factors toestimate the expected price volatility, the expected option life and theexpected forfeiture rate. The risk-free rate is based on the U.S. Treasuryyield curve in effect at the time of the grant. The fair value of the Company’sstock options granted to employees for the three and six months ended June 30,2006 and 2005, respectively, was estimated using the Black-Scholes-Merton(Black-Scholes) model with the following weighted-average assumptions: 

| ** **                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Expected term  (years)       |       | 6.02  - 9.5                                     |       | 4.00                                          |       | 6.02  - 9.5 |   | 4.00 |   |
| Expected dividend  rate      |       | 0.0%                                            |       | 0.0                                           | %          | 0.0% |   | 0.0 | % |
| Risk-free  interest rate     |       | 4.95%  - 5.25%                                  |       | 3.67                                          | %          | 4.95%  - 5.25% |   | 3.81 | % |
| Expected  volatility         |       | 105.0%                                          |       | 124.7                                         | %          | 105.0% |   | 123.4 | % |
| Weighted-average  fair value |       | $0.83 - $1.17                                   |       | $0.49                                         |       | $0.83 - $1.17 |   | $0.84 |   |

 

8

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

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, 2006 (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, 2006 |       |                       | 4,323      |                                       |       |                                                | $          | 2.69                                |       |   |   |   |   |   |   |   |   |   |
| Granted                              |       |                       | 4,282      |                                       |       |                                                | 1.16       |                                |       |   |   |   |   |   |   |   |   |
| Exercised                            |       |                       | (16        | )                                          |       |                                                | 0.60       |                                |       |   |   |   |   |   |   |   |   |
| Forefeited or  expired               |       |                       | (27        | )                                          |       |                                                | 4.19       |                                |       |   |   |   |   |   |   |   |   |
| Outstanding at  June 30, 2006   |       |                       | 8,562      |                                       |       |                                                | $          | 1.93                                |       |   |   | 8.4 |   |   |   | $ | 457 |   |   |
| Exercisable at  June 30, 2006   |       |                       | 3,001      |                                       |       |                                                | $          | 3.22                                |       |   |   | 6.3 |   |   |   | $ | 269 |   |   |

 

Cashproceeds and intrinsic value related to total stock options exercised duringthe three and six months ended June 30, 2006 and 2005 are provided in thefollowing table (dollars in thousands): 

| ** **                                  | ** ** | **Three Months Ended  June 30,**          | ** ** | **Six Months Ended  June 30,**            | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                  | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** |
| Proceeds from  stock options exercised      |       |                                                     | $3         |                                                     |       |   | $— |   |   |   | $10 |   |   |   | $— |   |   |
| Intrinsic value of stock  options exercised |       |                                                     | $3         |                                                     |       |   | $— |   |   |   | $9 |   |   |   | $— |   |   |

 

**Note 3.   Loss PerCommon Share**

Basic and diluted loss pershare are based on net loss applicable to common shares, which is comprised ofnet loss and preferred stock dividends in all periods presented. Shares used tocalculate basic loss per share are based on the weighted average number ofcommon shares outstanding during the period. Shares used to calculate dilutedloss per share are based on the potential dilution that would occur upon theexercise or conversion of securities into common stock using the treasury stockmethod. The calculation of diluted loss per share excludes the effect of thefollowing stock options and warrants to purchase additional shares of commonstock because the share increments would not be dilutive.

| ** **            | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **            | ** ** | **2006**                              | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Common stock  options |       | 8,562,058                             |       | 4,225,629                                     |       | 8,562,058 |   | 4,225,629 |   |
| Common stock warrants |       | 34,624,703                            |       | 3,225,400                                     |       | 34,624,703 |   | 3,225,400 |   |

 

In addition, 234,088shares of common stock that would be issuable upon conversion of the Company’s Series 1preferred stock are not included in the calculation of diluted loss per sharefor the periods ended June 30, 2006 and 2005, respectively, and the3,446,389 shares of common stock that would be issuable upon conversion of theCompany’s Series B preferred stock are not included in the calculation ofdiluted loss per share for the period ended June 30, 2005, because theeffect of including such shares would not be dilutive.

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

**Note4.   Comprehensive Loss**

The Company’s comprehensiveloss for the quarters ended June 30, 2006 and 2005 was $6,488,000 and$8,853,000, respectively. The comprehensive loss for the quarters ended June 30,2006 and 2005 consisted only of net loss of $6,488,000 and $8,853,000,respectively. The comprehensive loss for the six months ended June 30,2006 and 2005 was $12,287,000 and $13,928,000, respectively. The comprehensiveloss for the six months ended June 30, 2006 and 2005 consisted of net lossof $12,287,000 and $13,929,000, respectively, and a net unrealized gain oninvestment securities of $0 and $1,000, respectively.

**Note5.   Bridge Financing**

On February 1, 2006,the Company received loan proceeds of $3,460,000 from private investors (thebridge financing). Pursuant the bridge financing, the Company issuedconvertible promissory notes in the principal amount of the loan and five-yearwarrants to purchase an aggregate of 2,471,424 shares of common stock at anexercise price of $0.77 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, thedate of the closing of the Company’s equity financing (see Note 6). Theconvertible promissory notes provided for an interest rate of 8% per annum and,at the closing of the equity financing, the principal amount of the notes,together with approximately $63,000 of accrued interest thereon, automaticallyconverted, at a conversion rate of $0.70 per share, into an aggregate of5,033,860 shares of common stock.

**Note6.   Liquidity**

The Company receivedapproximately $62,027,000 in net cash proceeds from the sale of common stockand warrants, including the bridge financing, in April 2006 (the equityfinancing). The Company will need to raise additional capital or enter intostrategic partnerships for the clinical development of its picoplatin platinumcompound and other proposed product candidates.

On January 30, 2006,the Company entered into a letter agreement with Texas State Bank, pursuant towhich the Company agreed to change the maturity date of its promissory notewith the Bank to June 5, 2006. The Texas State Bank loan, which wassecured by the Company’s radiopharmaceutical plant and other STR assets locatedin Denton, Texas, had an adjustable interest rate equal to the bank prime ratereported in the Wall Street Journal (8.00% at May 23, 2006). The Companypaid off the outstanding balance of the loan, $2,714,000, on May 23, 2006.

During the second quarterof 2005 the Company terminated its STR manufacturing operations in Denton,Texas and began actively marketing the facility for sale. In 2005, the Companyrecorded costs associated with the closure and maintenance of the Dentonfacility of approximately $900,000. The Company estimates costs in 2006 relatedto these activities to be approximately $200,000.

On August 4, 2005,the Company entered into a research funding and option agreement with TheScripps Research Institute (TSRI). Under the agreement, the Company committedto provide TSRI an aggregate of $2,500,000 over a 26-month period to fundresearch relating to synthesis and evaluation of 

10

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

novelsmall molecule, multi-targeted protein kinase inhibitors as therapeutic agents,including for the treatment of cancer. The Company has the option to negotiatea worldwide exclusive license to use, enhance and develop any compounds arisingfrom the collaboration. The research funding is payable by the Company to TSRIquarterly in accordance with a negotiated budget. On August 8, 2005, theCompany made an initial funding payment to TSRI of $137,500. The Company paidTSRI $487,500 on April 28, 2006 and $287,500 on July 28, 2006. TheCompany has charged all such payments to research and development expense. TheCompany is obligated to pay TSRI $237,500 on October 1, 2006. Theagreement provides for additional aggregate funding payments of $1,350,000 in2007.

On April 26, 2006, the Company completed a$65,000,000 equity financing pursuant to a securities purchase agreement datedas of February 1, 2006. In connection with the financing, the Companyissued to a small group of institutional and other accredited investors anaggregate of 92,948,000 shares of common stock at a cash purchase price of$0.70 per share. Investors in the financing also received five-year warrants topurchase an aggregate of 27,857,000 shares of common stock at an exercise priceof $0.77 per share. Concurrent with the closing of the financing, the Companyissued an aggregate of 9,545,000 shares of common stock to the holders of its Series Bpreferred stock upon conversion of the outstanding Series B preferredshares. At the time of closing, the placement agent for the financing alsoreceived a five-year warrant to purchase, on the same terms as the investors,835,714 common shares.

As a result of the completion of the financing and theconversion of the Series B shares, the Company’s outstanding common stockincreased from approximately 34,332,000 shares to approximately 136,826,000shares. Entities affiliated with MPM Capital Management (MPM) acquiredbeneficial ownership of 46.5 million common shares, or approximately 31.5% of thecommon stock outstanding immediately following the financing. Entitiesaffiliated with Bay City Capital LLC (BCC) acquired beneficial ownership of27.9 million common shares, or approximately 19.5% of the common sharesoutstanding immediately following the financing. Two of the Company’sdirectors, Fred B. Craves and Carl S. Goldfischer, are managing directorsof BCC and possess capital and carried interests in the BCC entities thatparticipated in the financing. The Company has agreed, for as long as MPM ownsat least 10% of the shares of common stock and warrants purchased in thefinancing, to use its best efforts to cause one person designated by MPM andone person designated by mutual agreement of MPM and BCC to be nominated andelected to the Company’s board of directors. Nicholas J. Simon III, arepresentative of MPM, was appointed to the Company’s board of directors on April 26,2006. Mr. Simon is a general partner of certain of the MPM entities thatparticipated in the financing and possesses capital and carried interests inthose entities.

During July 2006, theCompany began relocating its corporate headquarters to San Francisco. TheCompany intends to maintain clinical and development and support activities andfacilities in Seattle. The addition of the San Francisco facility will resultin a substantial increase in rent and operating costs of the Company. On July 10,2006, the Company entered into an agreement with ARE-San Francisco No. 17LLC to lease approximately 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 $540,000 and is subjectto annual adjustments based on disbursements for tenant improvements andincreases in real estate values in the San Francisco metropolitan market. Baserent is payable in monthly installments of approximately $45,200. Additionalrent is payable monthly based on the Company’s share of operating expenses ofthe project in which the leased facilities are located, as described in thelease agreement. Monthly base rent during the first seven months of the leasewill average 

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

$21,000during the construction of tenant improvements. Base rent and operatingexpenses payable by the Company during 2006 are estimated at $128,000. Occupancyof the newly leased premises is expected to commence in September 2006. Annualoperating expenses under the lease may increase substantially as the Companymoves forward with its plans to establish laboratory facilities in the leasedspace. The Company may, upon written notice delivered at least nine monthsprior to expiration of the initial term of the lease, extend the lease for anadditional three years, with rent payable at the then market rate.

TheCompany had cash and cash equivalents of $53,600,000 at June 30, 2006. Companymanagement believes that current cash and cash equivalent balances will provideadequate resources to fund operations at least until the end of 2007. TheCompany’s actual capital requirements will depend upon numerous factors,including:

·       the scope and timing of theCompany’s picoplatin clinical program and other research and developmentefforts, including the progress and costs of the Company’s current Phase IItrial of picoplatin in small cell lung cancer;

·       the Company’s ability toobtain clinical supplies of picoplatin drug product in a timely andcost-effective manner;

·       actions taken by the USFood and Drug Administration (FDA) and other regulatory authorities;

·       the timing and amounts ofproceeds from the sale, if consummated, of the Denton facility and assets;

·       the timing and amount ofany milestone or other payments the Company might receive from potentialstrategic partners;

·       the Company’s degree ofsuccess in commercializing picoplatin or any other cancer therapy productcandidates;

·       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 Company’s relocation ofits corporate headquarters to San Francisco and the potential expansion of itsworkforce;

·       the costs of any researchcollaborations or strategic partnerships established; and

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

The Company had netoperating loss carryforwards of approximately $138,435,000 as of December 31,2005, which expire from 2006 through 2025. The closing of the equity financingresulted in a change of control, which will limit the Company’s ability toutilize these net operating loss carryforwards. Given such a limitation, theCompany may incur higher tax expense if it becomes profitable in the future,which also would affect its capital requirements.

There can be no assurance that the Company will beable to raise additional capital or enter into relationships with corporatepartners on a timely basis, on favorable terms, or at all. Conditions in thecapital markets in general and the life science capital market specifically mayaffect the Company’s potential financing sources and opportunities forstrategic partnering.

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**Item2.**                        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,” thenegative of these terms or other terminology. These statements are onlypredictions. Actual events or results may differ materially. In evaluatingthese statements, you should specifically consider various factors describedbelow in the section entitled “Risk Factors.” These factors may cause ouractual 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 and STR are ourtrademarks or registered trademarks in the United States and/or foreigncountries.

***Critical Accounting Policies and Estimates***

Our critical accounting policies and estimates havenot changed from those reported in our Annual Report on Form 10-Kfor the year ended December 31, 2005. For a more complete description,please refer to our Annual Report on Form 10-K.

*Share-based Compensation*—BeginningJanuary 1, 2006, we account for share-based compensation arrangements inaccordance with the provisions of Statement of Financial Accounting Standards No. 123R,“Share-Based Payments,” which requires the measurement and recognition of compensationexpense for all share-based payment awards to employees and directors based onestimated fair values. We use the Black-Scholes option valuation model toestimate the fair value of our stock options at the date of grant. TheBlack-Scholes option valuation model was developed for use in estimating thefair value of traded options which have no vesting restrictions and are fullytransferable. Our employee stock options, however, have characteristicssignificantly different from those of traded options. For example, employeestock options are generally subject to vesting restrictions and are generallynot transferable. In addition, option valuation models require the input ofhighly subjective assumptions including the expected stock price volatility,the expected life of an option and the number of awards ultimately expected tovest. Changes in subjective input assumptions can materially affect the fairvalue estimates of an option. Furthermore, the estimated fair value of anoption does not necessarily represent the value that will ultimately berealized by an employee. We use historical data, and other related informationas appropriate, to estimate the expected price volatility, the expected optionlife and the expected forfeiture rate. The risk-free rate is based on the U.S.Treasury yield curve in effect at the time of a grant. If actual results arenot consistent with the Company’s assumptions and judgments used in estimatingthe key assumptions, we may be required to increase or decrease compensationexpense, which could be material to our results of operations.

***Results of Operations***

***Three and six months ended June 30, 2006 comparedto three and six months ended June 30, 2005***

There was no revenue for the three and six monthsended June 20, 2006, compared with revenue of $2,000 for the three and sixmonths ended June 30, 2005. Revenue for the three and six months ended June 30,2005 consisted of royalties from out-licensed intellectual property.

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Total operating expenses for the second quarter of 2006decreased 41% to $5.2 million, from $8.9 million for the second quarter of2005, and decreased 34% to $9.2 million for the six months ended June 30,2006, from $14.0 million for the same period in 2005. Total operating expensesfor the quarter and six months ended June 30, 2005 included a non-cashasset impairment charge of $3.3 million. Additionally, a restructuring chargeof $1.5 million was incurred relating to termination benefits for the reductionin staff completed in June 2005 and for other costs related to thetermination of our STR program.

Research and development (R&D) expenses increased37% to $3.2 million for the second quarter of 2006, from $2.4 million for thesecond quarter of 2005, and increased 1% to $5.8 million for the six monthsended June 30, 2006, from $5.7 million for the same period in 2005. Theincrease in R&D expenses for the second quarter of 2006 and six monthsended June 30, 2006 resulted from higher clinical costs associated withour picoplatin trials, largely offset by the termination of activities relatedto STR during the second quarter of 2005.

General and administrative (G&A) expensesincreased 21% to $2.0 million for the second quarter of 2006, from $1.7 millionfor the second quarter of 2005, and increased 3% to $3.5 million for the firstsix months of 2006, from $3.4 million for the same period in 2005. The increase in G&A costs for thequarter and six months ended June 30, 2006 is due primarily to therecording of stock option expense resulting from the adoption of Statement ofFinancial Accounting Standard 123R, offset by decreases in personnel andconsulting costs and the reversal in the second quarter of 2006 of an accrualfor liquidated damages that arose from an equity financing in 2003.

Cash and cash equivalents as of June 30, 2006were $53.6 million, compared with $3.5 million at December 31, 2005. On April 26,2006, we completed an equity financing, in which we raised approximately $62.0million in net cash proceeds through the private sale to institutional and othersophisticated investors of an aggregate of 92.9 million shares of common stock.The purchasers in the equity financing also received five-year warrants topurchase an aggregate of 27.9 million shares of common stock at an exerciseprice of $0.77 per share. In connection with the equity financing, we issued$3.5 million face amount of convertible promissory notes to investors on February 1,2006 (the bridge financing). The notes provided for an interest rate of 8% perannum. We used the funds received in the bridge financing for working capitalpending receipt of required shareholder approvals and other conditions tocompletion of the equity financing. The outstanding principal amount of thenotes, together with $63,000 of accrued interest, automatically converted, at aconversion price of $0.70 per share, into 5.0 million shares of commonstock at the closing of the equity financing.

As discussed below, wehave undertaken two new Phase I/II studies of picoplatin and initiated therelocation of our corporate headquarters to San Francisco, including executionof a five-year lease for executive office space and laboratory facilities. These,as well as increases in personnel and other plans for future growth, areexpected to result in significant increases in our operating costs, includingresearch 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 we donot obtain sufficient additional funds, we may be required to delay, reduce orcurtain the scope of our picoplatin and other product development activities.

***Major Research andDevelopment Projects***

Our major research and development project ispicoplatin (NX 473), a new-generation platinum-based cancer therapydesigned to overcome platinum resistance in the treatment of solid tumors. Weinitiated a Phase II clinical study of picoplatin in small cell lung cancer in June 2005and enrolled the first patient in July 2005. In April 2006, weexpanded our picoplatin Phase II clinical trial in small cell lung cancer toselected Eastern European countries by enrolling our first patients there. In May 2006,we treated our first patients in separate Phase I/II studies evaluatingpicoplatin in the front-line treatment of 

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patients with advancedcolorectal cancer and hormone refractory prostate cancer. As of June 30,2006, we have incurred costs of approximately $8.9 million in connection withthe entire picoplatin clinical program. Total estimated costs of our picoplatinPhase II trial in small cell lung cancer are in the range of $8 million to $10million through 2007, including the cost of drug supply. Total estimated costsof our picoplatin Phase I/II trial in colorectal cancer and our Phase I/IItrial in hormone refractory prostate cancer are in the range of $4 million to$6 million and $8 million to $11 million, respectively, through 2007, 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 drug product in orderto 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 drug product, or do not completedevelopment and obtain US and foreign regulatory approvals on a timely basis,our operations, financial position and liquidity could be severely impaired,including as follows:

·       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.

*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:

**Summary of Research and Development Costs**

| ** **                            | ** ** | **Quarter Ended June 30,**                | ** ** | **Six Months Ended June 30,**        | ** ** |
|---------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                            | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** |
| ** **                            | ** ** | **(in thousands)**                                  | ** ** | **(in thousands)**                                  | ** ** |
| Picoplatin                            |       |                                                     | $          | 2,398                                                    |       |   |   | $ | 873 |   |   |   | $ | 4,201 |   |   |   | $ | 1,360 |   |   |
| Overhead and  other research costs    |       |                                                     | 845        |                                                     |       |   | 1,503 |   |   |   | 1,565 |   |   |   | 4,361 |   |   |
| Total research and  development costs |       |                                                     | $          | 3,243                                                    |       |   |   | $ | 2,376 |   |   |   | $ | 5,766 |   |   |   | $ | 5,721 |   |   |

 

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***Liquidity and capital resources***

We have historically experienced recurring operatinglosses and negative cash flows from operations. As of June 30, 2006, wehad an accumulated deficit of $268.3 million with a shareholders’ equity of$56.8 million.

We finance our operations primarily through the saleof equity securities, technology licensing, collaborative agreements and debtinstruments. We invest excess cash in investment securities that will be usedto fund future operating costs. Cash and cash equivalents totaled $53.6 millionat June 30, 2006 compared to $3.5 million at December 31, 2005. Weprimarily fund current operations with our existing cash and investments. Cash used for operating activitiesfor the six months ended June 30, 2006 totaled $8.9 million. Revenues andother income sources for the second quarter of 2006 were not sufficient tocover operating expenses during the quarter.

We received approximately $62.0 million in net cashproceeds from the sale of common stock and warrants in April 2006. Withthe proceeds of the equity financing, we believe that our current cash and cashequivalent balances will provide adequate resources to fund operations at leastuntil the end of 2007.

On January 30, 2006, we entered into a letteragreement with Texas State Bank, pursuant to which we agreed to change the maturitydate of our promissory note with the Bank to June 5, 2006. The Texas StateBank loan, which was secured by our radiopharmaceutical plant and other STRassets located in Denton, Texas, had an adjustable interest rate equal to thebank prime rate reported in the Wall Street Journal (8.00% at May 23,2006). We paid off the outstanding balance of the loan, $2.7 million, on May 23, 2006.

On August 4, 2005, we entered into a ResearchFunding and Option Agreement with The Scripps Research Institute (TSRI). Underthe agreement, we committed to provide TSRI an aggregate of $2.5 millionover a 26-month period to fund research relating to synthesis andevaluation of novel small molecule, multi-targeted protein kinase inhibitors astherapeutic agents, including for the treatment of cancer. We have the optionto negotiate a worldwide exclusive license to use, enhance and develop anycompounds arising from the collaboration. The research funding is payable by usto TSRI quarterly in accordance with a negotiated budget. We made an initialfunding payment to TSRI of $137,500 on August 8, 2005, which we charged toR&D expense. We paid TSRI $487,500 on April 28, 3006 and $287,500 on July 28,2006, which we also charged to R&D expense. We are obligated to pay TSRI$237,500 on October 1, 2006. The agreement provides for additionalaggregate funding payments of $1.4 million in 2007.

We acquired the worldwide exclusive rights, excludingJapan, to develop, manufacture and commercialize picoplatin from AnorMED, Inc.in April 2004. Under the terms of the agreement, we paid AnorMED aone-time upfront milestone payment of $1.0 million in common stock and $1.0million in cash. The agreement also provides for additional milestone paymentsto AnorMED of up to $13 million, payable in cash or a combination of cash andcommon stock. Upon regulatory approval, AnorMED would receive royalty paymentsof up to 15% on product sales. We initiated our first picoplatin clinicaltrial, a Phase II study of picoplatin in small cell lung cancer, in July 2005,and it is unlikely that these milestones would be triggered during 2006. Becausewe cannot predict the length of time to completion of our Phase II study, thetime of initiation and completion of a Phase III study or the time of submissionof a New Drug Application for picoplatin, we are unable to predict when suchmilestones might be triggered after 2006.

On April 26, 2006, we completed a $65 millionequity financing pursuant to a securities purchase agreement dated as of February 1,2006. In connection with the financing, we issued to a small group ofinstitutional and other accredited investors an aggregate of 92.9 millionshares of common stock at a cash purchase price of $0.70 per share. Investorsin the financing also received five-year warrants to purchase an aggregate of27.9 million shares of common stock at an exercise price of $0.77 per share. Concurrentwith the closing of the financing, we issued an aggregate of 9.5 million sharesof common stock to the holders of 

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our Series Bpreferred stock upon conversion of our outstanding Series B preferredshares. At the time of closing, the placement agent for the financing alsoreceived a five-year warrant to purchase, on the same terms as the investors,835,714 common shares.

As a result of the completion of the financing and theconversion of the Series B shares, our outstanding common stock increasedfrom approximately 34.3 million shares to approximately 136.8 millionshares. Entities affiliated with MPM Capital Management (MPM) acquiredbeneficial ownership of 46.5 million common shares, or approximately 31.5% ofour common stock outstanding immediately following the financing. Entitiesaffiliated with Bay City Capital LLC (BCC) acquired beneficial ownership of27.9 million common shares, or approximately 19.5% of the common sharesoutstanding immediately following the financing. Two of our directors, Fred B.Craves and Carl S. Goldfischer, are managing directors of BCC and possesscapital and carried interests in the BCC entities that participated in thefinancing. We have agreed, for as long as MPM owns at least 10% of the sharesof common stock and warrants purchased in the financing, to use our bestefforts to cause one person designated by MPM and one person designated bymutual agreement of MPM and BCC to be nominated and elected to our board ofdirectors. Nicholas J. Simon III, a representative of MPM, was appointed to ourboard of directors on April 26, 2006. Mr. Simon is a general partnerof certain of the MPM entities that participated in the financing and possessescapital and carried interests in those entities.

During July 2006, we initiated the relocation ofour corporate headquarters to San Francisco. We intend to maintain clinical anddevelopment and support activities and facilities in Seattle. The addition ofthe San Francisco facility will result in a substantial increase in rent andoperating costs. On July 10, 2006, we entered into an agreement withARE-San Francisco No. 17 LLC to lease approximately 17,045 square feet ofoffice and laboratory space in South San Francisco, California. The initialterm of the lease is 60 months. The annual base rent under the lease isapproximately $540,000 and is subject to annual adjustments based ondisbursements for tenant improvements and increases in real estate values inthe San Francisco metropolitan market. Base rent is payable in monthlyinstallments of approximately $45,200. Additional rent is payable monthly basedon the Company’s share of operating expenses of the project in which the leasedfacilities are located, as described in the lease agreement. Monthly base rentduring the first seven months of the lease will average $21,000 during theconstruction of tenant improvements. Base rent and operating expenses payableduring 2006 are estimated at $128,000. Occupancy of the newly leased premisesis expected to commence in September 2006. Annual operating expenses underthe lease may increase substantially as we move forward with our plans toestablish laboratory facilities in the leased space. We may, upon writtennotice delivered at least nine months prior to expiration of the initial termof the lease, extend the lease for an additional three years, with rent payableat the then market rate.

We will requiresubstantial additional funding to develop and commercialize picoplatin and anyother proposed products and to fund our operations. Management is continuouslyexploring 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.

Our actual capitalrequirements will depend upon numerous factors, including:

·       thescope and timing of our picoplatin clinical program and other research anddevelopment efforts, including the progress and costs of our Phase II trial ofpicoplatin in small cell lung cancer;

·       ourability to obtain clinical supplies of picoplatin drug product in a timely andcost effective manner;

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·       actionstaken by the FDA and other regulatory authorities;

·       thetiming and amounts of proceeds from any sale, if consummated, of the Dentonfacility 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 cancer therapyproduct candidates;

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

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

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

·       thecosts of any research collaborations or strategic partnerships established; and

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

We had net operating loss carryforwards ofapproximately $138.4 million as of December 31, 2005, which expire from2006 through 2025. The closing of the equity financing resulted in a change ofcontrol, which will limit our ability to utilize these net operating losscarryforwards. Given such a limitation, we may incur higher tax expense if webecome profitable in the future, which also would affect our capitalrequirements.

**AtJune 30, 2006, we had the following long-term commitments (in thousands):**

| ** **                         | ** ** | **Less than 1  year** | ** ** | **2-3 years** | ** ** | **4-5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|------------------------------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------|------------|-----------|------------|
| Lease commitments:                 |       |                            |       |               |       |               |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Seattle office                     |       |                            | $          | 615                |       |               |       | $              | 1,140      |      |       |   | $ | 48 |   |   |   | $ | — |   |   | $ | 1,803 |   |
| San Francisco premises(1)          |       |                            | 373        |               |       |               | 1,084      |           |       |      | 1,084      |   |   |   | — |   |   | 2,541 |   |
|                               |       |                            | 988        |               |       |               | 2,224      |           |       |      | 1,132      |   |   |   | — |   |   | 4,344 |   |
| Purchase  commitments—Scripps |       |                            | 1,288      |               |       |               | 587        |           |       |      | —     |   |   |   | — |   |   | 1,875 |   |
| Total commitments                  |       |                            | $          | 2,276              |       |               |       | $              | 2,811      |      |       |   | $ | 1,132 |   |   |   | $ | — |   |   | $ | 6,219 |   |

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       (1) Leased signed in July 2006. See discussionabove for details.

**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 tomarket rate risk for changes in interest rates relates primarily to the Company’sdebt securities included in its investment portfolio. The Company does not haveany derivative financial instruments. The Company invests in debt instrumentsof the US 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. Fixed rate securities may have their fair marketvalue adversely impacted due to a rise in interest rates, while floating ratesecurities may produce less income than expected if interest rates decrease. 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 experience 

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lossesin principal if forced to sell securities that have declined in market valuedue to changes in interest rates. At June 30, 2006, the Company owned nogovernment debt instruments and no corporate debt securities.

**Item 4.**                        Controlsand Procedures

Under thesupervision and with the participation of the Company’s management, includingthe Company’s President and Chief Executive Officer and the Chief FinancialOfficer, the Company has evaluated the effectiveness and design of itsdisclosure controls and procedures (as such term is defined in Rules 13a-15(e) and15d-15(e)) as of June 30, 2006, to ensure that the informationdisclosed by the Company in the reports that the Company files or submits underthe Securities Exchange Act of 1934, as amended, is recorded, processed,summarized and reported within the time periods specified in the rules andforms. Based on this evaluation, the President and Chief Executive Officer andthe Chief Financial Officer have concluded that, as of June 30, 2006,these disclosure controls and procedures 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 President and Chief Executive Officer and its ChiefFinancial Officer**,**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, of the degree of compliance with the policies andprocedures may deteriorate. 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, 2006, we had an accumulated deficit of $268.3million. Our net loss for the quarter ended June 30, 2006 was $6.5 million.We had net losses of $21.0 million for the year ended December 31, 2005and $19.4 million for the year ended December 31, 2004. 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 revenues from product sales. In May 2005, we announced thediscontinuation of our skeletal targeted radiotherapy (STR) development programas part of a strategic plan to refocus our limited resources on the developmentof picoplatin (NX 473), a platinum-based cancer therapy. We do notanticipate that our picoplatin product candidate, or any other proposedproducts, will be commercially available for several years, if at all. Weexpect to incur additional operating losses in the future. These losses mayincrease significantly if we expand research, clinical development,manufacturing and commercialization efforts.

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

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

It is expensive to develop cancer therapy products andconduct clinical trials for these products. We have not generated revenue fromthe commercialization of any product, and we expect to continue to incursubstantial net operating losses and negative cash flows from operations forthe future. On April 26, 2006, we completed a $65 million equityfinancing; however, we will require substantial additional funding to developand commercialize picoplatin and any other proposed products and to fund ourfuture 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 the life science capital market specifically, may affect our potentialfinancing sources and opportunities for strategic partnering. If we raiseadditional funds by issuing common stock or securities convertible into orexercisable for common stock, our shareholders may experience substantialdilution, and new investors could have rights superior to current securityholders. If we are unable to obtain sufficient additional cash 

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when needed, we may beforced to reduce expenses though the delay, reduction or curtailment of ourpicoplatin and other development and commercialization activities.

The amount of additionalfinancing we will require in the future will depend on a number of factors,including:

·        thescope and timing of our picoplatin clinical program and other research anddevelopment efforts, including the progress and costs of our Phase II trial of picoplatinin small cell lung cancer;

·        ourability to obtain clinical supplies of picoplatin drug product in a timely andcost effective manner;

·        actionstaken by the FDA and other regulatory authorities;

·        thetiming and proceeds from the sale, if consummated, of the Denton facility andassets;

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

·        ourdegree of success in commercializing picoplatin or any other cancer therapyproduct candidates;

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

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

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

·        thecosts of any research collaborations or strategic partnerships established; and

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

We had net operating loss carryforwards ofapproximately $138.4 million as of December 31, 2005, which expire from2006 through 2025. The closing of the equity financing resulted in a change ofcontrol, which will limit our ability to utilize these net operating losscarryforwards. Given such a limitation, we may incur higher tax expense if webecome profitable in the future, which also would affect our capital requirements.

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

The manufacture and marketing of our picoplatinproduct candidate and our research and development activities are subject toregulation for safety, efficacy and quality by the FDA in the United States andby comparable authorities in other countries.

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

We have had only limited experience in filing andpursuing applications necessary to gain regulatory approvals. This may impedeour ability to obtain timely approvals from the FDA or foreign regulatoryagencies. We will not be able to commercialize our product candidates until weobtain regulatory approval, 

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and consequently any delayin obtaining, or inability to obtain, regulatory approval could harm ourbusiness.

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

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

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

In June 2005, we initiated a Phase II clinicaltrial of picoplatin for the treatment of patients with small cell lung cancerin clinical sites in North America and enrolled our first patient in July 2005.In April 2006, we announced the expansion of this Phase II trial intoEastern Europe with the treatment of the first patients there. Our on-goingPhase II study is a randomized trial comparing picoplatin to topotecan inpatients with small cell lung cancer who are refractory or resistant toprevious platinum-based therapy. Topotecan is an anti-tumor drug currentlyapproved by the FDA as a treatment for small cell lung cancer sensitive diseaseafter failure of first line chemotherapy. The endpoints of the picoplatin trialinclude survival, response rate (tumor shrinkage), duration of response andtime to progression. We amended our Phase II clinical trial protocol in January 2006from a two-arm study of picoplatin versus topotecan to a single arm study ofpicoplatin. We discontinued the topotecan arm of the study because patients andinvestigators often were unwilling to accept the topotecan arm of the two-armstudy. The rationale for the amendment was that the dose and schedule oftopotecan approved for use in patients with platinum-sensitive small cell lungcancer have minimal, if any, efficacy in patients with resistant or refractorysmall cell lung cancer and unacceptable toxicity, thus presenting a situationin which an ineffective but toxic treatment regimen was to be used as one armof the randomized Phase II trial. In April 2006, we amended the Phased IIclinical trial protocol to include platinum sensitive patients (patients whohave relapsed within 90 to 180 days of completing first line chemotherapy witha platinum-containing agent).

In May 2006, we treated our first patient in aPhase I/II study evaluating picoplatin in the front-line treatment of patientswith newly diagnosed metastatic colorectal cancer. This study is designed todetermine the safety and efficacy of picoplatin when combined with fluorouraciland leucovorin to treat patients newly diagnosed with metastatic disease. Weanticipate completing enrollment of the approximately 30-patient Phase Icomponent of the study later this year.

Also in May 2006, we enrolled our first patientin a Phase I/II trial of picoplatin in patients with newly diagnosed metastatichormone refractory prostate cancer.  Thisstudy is designed to determine the safety and efficacy of picoplatin whencombined with docetaxel. Docetaxel (Taxotere®) is the current standard of carein the treatment of metastatic hormone refractory prostate cancer. Weanticipate completing enrollment of the approximately 12-patient Phase Icomponent of the study later this year.

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The actual time forinitiation 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 enroll qualified patients into our studies;

·        ourability to obtain sufficient, reliable and affordable supplies of thepicoplatin drug product;

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

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

·        the extent of schedulingconflicts with participating clinicians and clinical institutions.

We may not initiate,advance or complete our picoplatin or any other proposed clinical studies asprojected or achieve successful results.

We will rely on academicinstitutions and clinical research organizations to conduct, supervise ormonitor some or all aspects of clinical trials involving picoplatin. Further,to the extent that we now or in the future participate in collaborativearrangements in connection with the development and commercialization of ourproposed products, we will have less control over the timing, planning andother aspects of our clinical trials. If we fail to initiate, advance orcomplete, or experience delays in or are forced to curtail our current orplanned clinical trials, our stock price and our ability to conduct ourbusiness could be materially negatively affected.

**If testing of a particular product does not yieldsuccessful results, we will be unable to commercialize that product.**

Ourresearch and development programs are designed to test the safety and efficacyof our proposed products in humans through extensive preclinical and clinicaltesting. We may experience numerous unforeseen events during, or as a resultof, the testing process that could delay or prevent commercialization ofpicoplatin or any other proposed products, including the following:

·        the safety and efficacyresults obtained in early human clinical trials may not be indicative ofresults obtained in later clinical trials;

·        the results of preclinicalstudies may be inconclusive, or they may not be indicative of results that willbe obtained in human clinical trials;

·        after reviewing testresults, we or any potential collaborators may abandon projects that wepreviously believed were promising;

·        our potentialcollaborators or regulators may suspend or terminate clinical trials if theparticipating subjects or patients are being exposed to unacceptable healthrisks; and

·        the effects of ourpotential products may not be the desired effects or may include undesirableside effects or other characteristics that preclude regulatory approval orlimit 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 

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safetyand efficacy of a cancer therapy product under development would delay orprevent regulatory approval of the product, which would prevent us frommarketing the proposed product.

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

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

**We are dependent onsuppliers for the timely delivery of materials and services and may experiencefuture interruptions in supply.**

For our picoplatin product candidate to be successful,we need sufficient, reliable and affordable supplies of the picoplatin drugproduct. Sources of picoplatin drug product may be limited, and third-partysuppliers of picoplatin drug product may be unable to manufacture drug productin amounts and at prices necessary to successfully commercialize our picoplatinproduct. Moreover, third-party manufacturers must continuously adhere tocurrent Good Manufacturing Practice (cGMP) regulations enforced by the FDA throughits facilities inspection program. If the facilities of these manufacturerscannot pass a pre-approval plant inspection, the FDA will not grant a NewDrug Application (NDA) for our proposed products. In complying with cGMP andforeign regulatory requirements, any of our third-party manufacturers will beobligated to expend time, money and effort in production, record-keeping andquality control to assure that our products meet applicable specifications andother requirements. If any of our third-party manufacturers fails to complywith these requirements, we may be subject to regulatory action.

We have a limited supply of picoplatin drug productthat was manufactured by a prior licensee in September 2004 and earlier. Thedrug product has been demonstrated to be stable for 18 to 24 months from thedate of manufacture, which time period is not sufficient to complete ourcurrent and proposed clinical trials of picoplatin***.***We have entered into an agreement with Hyaluron, Inc. to manufacture andsupply additional picoplatin drug product on a purchase order, fixed fee basis,for our North American and Eastern European trials. The agreement will continueuntil April 15, 2010, subject to earlier termination by either party inthe event of an uncured material breach or the liquidation or bankruptcy of theother party. We may terminate the agreement if we decide to no longer pursuemanufacturing or distribution of picoplatin. There is no assurance thatHyaluron will be able to provide sufficient supplies of picoplatin drug producton a timely or cost-effective basis. There are in general relatively fewmanufacturers and suppliers of picoplatin drug product. If Hyaluron or analternate manufacturer is unable or unwilling to manufacture and provide drugproduct at a cost and on other terms acceptable to us, we may suffer delays in,or be prevented from, initiating or completing our clinical trials ofpicoplatin.

In connection with our product development activities,we rely on third-party contractors to perform for us, or assist us with,certain specialized services, including drug manufacture and supply,dispensing, distribution and shipping, and clinical trial management. Becausethese contractors provide specialized services, their activities and quality ofperformance may be outside our direct control. If these contractors do notperform their obligations in a timely manner, or if we encounter difficultieswith the quality of services we receive from these contractors, we may incursignificant additional costs and delays in product development activities,which could have a material negative effect on our business.

If we cannot negotiate and maintain collaborativearrangements with third parties, our research, development, manufacturing,sales and marketing activities may not be cost-effective or successful. Our

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success will depend insignificant part on our ability to attract and maintain collaborative partnersand strategic relationships to support the development, sale, marketing,distribution and manufacture of picoplatin and any other future productcandidates and technologies in the US and Europe. At present, our only materialcollaborative agreement is the exclusive worldwide (except Japan) licensegranted to us by AnorMED, Inc. for the development and commercial sale ofpicoplatin. Under that license, we are solely responsible for the developmentand commercialization of picoplatin. AnorMED retains the right, at our cost, toprosecute patent applications and maintain all patents. The parties executedthe license agreement in April 2004, at which time we paid AnorMED aone-time upfront milestone payment of $1.0 million in our common stock and$1.0 million in cash. The agreement also provides for additional milestonepayments to AnorMED of up to $13.0 million, payable in cash or a combination ofcash and our common stock. These milestones include our successful completionof a picoplatin Phase II study or initiation of a picoplatin Phase III study,submission to the FDA of a New Drug Application (NDA) for picoplatin,regulatory approval from the FDA of picoplatin and the attainment of certainlevels of annual net sales of picoplatin. Upon regulatory approval, AnorMEDalso would receive royalty payments of up to 15% on product sales. We cannot becertain of the extent of our success, if any, in commercializing picoplatin andattaining established milestones. We initiated our first picoplatin trial, aPhase II study of picoplatin in small cell lung cancer in June 2005, andit is unlikely that these milestones will be triggered during 2006. Because wecannot predict the length of time to complete our Phase II study, the time orinitiation and completion of a Phase III study or the time of submission of anNDA for picoplatin, we are unable to predict when such milestones may betriggered after 2006. The license agreement may be terminated by either partyfor breach if the other party files a petition in bankruptcy or insolvency orfor reorganization or is dissolved, liquidated or makes assignment for thebenefit of creditors. We can terminate the license at any time upon priorwritten notice to AnorMED. If not earlier terminated, the license agreementwill continue in effect, in each country in the territory in which the licensedproduct is sold or manufactured, until the earlier of (i) expiration ofthe last valid claim of a pending or issued patent covering the licensedproduct in that country or (ii) a specified number of years after firstcommercial sale of the licensed product in that country.  If AnorMED 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, we entered into a researchfunding and option agreement with The Scripps Research Institute (TSRI). Underthe agreement, we will 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 as therapeutic agents,including for the treatment of cancer. We have the option to negotiate aworldwide exclusive license to use, enhance and develop any compounds arisingfrom the collaboration. The research funding is payable by us to TSRI quarterlyin accordance with a negotiated budget. We made an initial funding payment toTSRI of $137,500, on August 8, 2005, which we charged to R&D expense. Wepaid TSRI $487,500 on April 28, 2006 and $287,500 on July 28, 2006,which we also charged to R&D expense. We are obligated to pay TSRI $237,500on October 1, 2006. The agreement provides for additional aggregatefunding payments of $1.4 million in 2007. We have no assurance that theresearch funded under this arrangement will be successful or ultimately willgive rise to any viable product candidates. Further, there can be no assurancethat we will be able to negotiate, on acceptable terms, a license with respectto any of the compounds arising from the collaboration.

None of our current employees has experience selling,marketing and distributing therapeutic products. To the extent we aresuccessful in obtaining approval for the commercial sale of picoplatin or anyother product candidate, we may need to secure one or more corporate partnersto conduct these activities. We may not be able to enter into partneringarrangements in a timely manner or on terms acceptable to us. To the extentthat we enter into co-promotion or other licensing arrangements, our productrevenues are likely to be lower than if we directly marketed and sold ourproducts, and any 

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revenues we receive woulddepend upon the efforts of third parties, which efforts may not be successful.If we are not able to secure adequate partnering arrangements, we would have tohire additional employees or consultants with expertise in sales, marketing anddistribution. Employees with relevant skills may not be available to us.Additionally, any increase in the number of employees would increase our expenselevel and could have a material adverse effect on our financial position.

**We face substantial competition in the development ofcancer therapies and may not be able to compete successfully, and our potentialproducts may be rendered obsolete by rapid technological change.**

The competition for development of cancer therapies issubstantial. There are numerous competitors developing products to treat thecancers for which we are seeking to develop products. Our initial focus forpicoplatin is small cell lung cancer, a disease for which there currently arelimited effective therapeutic options. Numerous companies, includingAstraZeneca PLC, Cell Therapeutics, Inc., Exelexis, Inc., ImCloneSystems Incorporated, ImmunoGen, Inc., Sanofi-Aventis Group, Inex PharmaceuticalsCorporation, Ipsen Limited, The Menarini Group, OSI Genetics, Inc. andPharmaMar USA, Inc., also are developing and testing therapeutics forsmall cell lung cancer. These therapeutics include chemotherapy, inhibitors,monoclonal antibodies, antagonists and interferons. We cannot assure you thatwe will be able to effectively compete with these or future third party productdevelopment programs. Many of our existing or potential competitors have, orhave access to, substantially greater financial, research and development,marketing and production resources than we do and may be better equipped thanwe are to develop, manufacture and market competing products. Further, ourcompetitors may have, or may develop and introduce, new products that wouldrender our picoplatin or any other proposed product candidates lesscompetitive, uneconomical or obsolete.

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

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

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

In addition, the protection afforded by issued patentsis limited in duration. With respect to picoplatin, in the United States weexpect to rely primarily on US Patent Number 5,665,771 (expiring February 7,2016), which is licensed to us by AnorMED, and additional licensed patentsexpiring in 2016 covering picoplatin in the European Union. The FDA has alsodesignated picoplatin as an orphan drug for 

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the treatment of smallcell lung cancer under the provisions of the Orphan Drug Act, which entitles usto exclusive marketing rights for picoplatin in the United States for sevenyears following market approval. We may also be able to rely on the Hatch-WaxmanAct to extend the term of a US patent covering picoplatin after regulatoryapproval, if any, of such product in the US.

Under our license agreement with AnorMED, AnorMEDretains the right to prosecute patent applications and maintain all licensed patents,with Poniard reimbursing such expenses. Under the AnorMED agreement, we havethe right to sue any third party infringers of the picoplatin patents in thelicensed territory (worldwide except Japan). If we do not file suit, AnorMED,in its sole discretion, has the right to sue the infringer at its expense.

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

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

Our competitors or others may have or may acquirepatent rights that they could enforce against us. In such case, we may be requiredto alter our products, pay licensing fees or cease activities. If our productsconflict with patent rights of others, third parties could bring legal actionsagainst us claiming damages and seeking to enjoin manufacturing and marketingof the affected products. If these legal actions are successful, in addition toany potential liability for damages, we could be required to obtain a licensein order to continue to manufacture or market the affected products. We may notprevail in any legal action and a required license under the patent may not beavailable 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.

In April 2003, we received $10 million from thesale to Boston Scientific Corporation (BSC) of certain non-core patents andpatent applications and the grant to BSC of exclusive license rights to certainpatents and patent applications. BSC originally asserted four such patents intwo lawsuits against Johnson & Johnson, Inc., its subsidiary,Cordis Corporation, and Guidant Corporation, alleging infringement of suchpatents. In both lawsuits, the defendants denied infringement and assertedinvalidity and unenforceability of the patents. BSC subsequently withdrew threeof the patents from the litigation, including the patents that were assigned toBSC. We understand that BSC is still asserting a licensed patent against thedefendants, but has also agreed, in principle, to purchase Guidant. Although weare not currently a party to the lawsuits, our management and counsel have beendeposed in connection with the lawsuits. It is 

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possible that BSC, if itis unsuccessful or has limited success with its claims, may seek damages fromus, including recovery of all or a portion of the amounts it paid to us in 2003.We cannot assess the likelihood of whether such claim will be brought againstus or the extent of recovery, if any, on any such claim***.***

**Product liability claims in excess of the amount ofour insurance would adversely affect our financial condition.**

The testing, manufacturing, marketing and sale ofpicoplatin and any other proposed cancer therapy products, including pastclinical and manufacturing activities in connection with our terminated STR radiotherapeutic,may subject us to product liability claims. We are insured against such risksup to a $10 million annual aggregate limit in connection with clinicaltrials of our products under development and intend to obtain product liabilitycoverage in the future. However, insurance coverage may not be available to usat an acceptable cost. We may not be able to obtain insurance coverage thatwill be adequate to satisfy any liability that may arise. Regardless of meritor eventual outcome, product liability claims may result in decreased demandfor a product, injury to our reputation, withdrawal of clinical trialvolunteers and loss of revenues. As a result, regardless of whether we areinsured, a product liability claim or product recall may result in losses thatcould 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 incursignificant costs to comply with environmental and health and safety regulationsin the future. Because we have discontinued operations in facilities that havehad past research and manufacturing processes where hazardous or radioactivematerials have been in use, we may have significant decommissioning costsassociated with the termination of operation of these facilities. Thesepotential decommissioning costs also may reduce the market value of thefacilities and may limit our ability to sell or otherwise dispose of thesefacilities in a timely and cost-effective manner. We have terminated our STRmanufacturing operations in Denton, Texas and are actively marketing thefacility for sale. In 2005, we recorded costs associated with the closure ofthe Denton facility of $0.9 million. We estimate costs in 2006 related to theseactivities at $0.2 million. These costs could increase substantially, dependingon actions of regulators or if we discover previously unknown contamination inor around the facility. In addition, the risk of accidental contamination orinjury from hazardous or radioactive materials cannot be completely eliminated.In the event of such an accident, we could be held liable for any resultingdamages, and any such liability could exceed our resources. Our currentinsurance does not cover liability for the clean-up of hazardous wastematerials or other environmental risks.

**Even if we bringproducts to market, changes in healthcare reimbursement could adversely affectour ability to effectively price our products or obtain adequate reimbursementfor sales of our products.**

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

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to the consumer will beavailable or will be sufficient to allow us to competitively or profitably sellour products.

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

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

As of June 30, 2006, we had a total work force of21 full-time employees and 3 part-time employees. During July and August 2006,we will be moving our corporate headquarters to newly leased facilities in SanFrancisco. Occupancy of the new executive office space is expected to commencein September 2006. We will maintain our current clinical development andsupport activities in Seattle and do not have plans to relocate any of our 20employees currently in Seattle. Our success depends, to a significant extent,on the continued contributions of our principal management and scientificpersonnel participating in our picoplatin development program. We have limitedor no redundancy of personnel in key development areas, including finance,legal, clinical operations, regulatory affairs and quality control andassurance. The loss of the services of one or more of our employees could delayour picoplatin product development activities or any other proposed programsand research and development efforts. We do not maintain key-person lifeinsurance on any of our officers, employees or consultants.

Competition for qualified employees among companies inthe biotechnology and biopharmaceutical industry is intense. Our future successdepends upon our ability to attract, retain and motivate highly skilledemployees and consultants. In order to commercialize our proposed productssuccessfully, we will in 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 in controlagreements and severance agreements with all of our executive officers andconsulting agreements with various of our scientific advisors. Our agreementswith our executive officers provide for “at will” employment, which means thateach executive may terminate his or her service with us at any time. Inaddition, our scientific advisors may terminate their services to us at anytime.

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**Risks Related toOur Common Stock**

**Our common stock may bedelisted from The Nasdaq Capital Market if we are unable to maintain compliancewith 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 withthe $1.00 minimum bid price requirement. We will not be eligible to relist ourcommon stock on The Nasdaq Global Market unless and until our common stockmaintains a minimum bid price of $5.00 per share for 90 consecutive tradingdays and we otherwise comply with the initial listing requirements for TheNasdaq Global Market. Trading on the Nasdaq Capital Market may have a negativeimpact on the value of our common stock, because securities trading on theNasdaq Capital Market typically are less liquid than those traded on The NasdaqGlobal Market.

On August 7, 2006, we received a notice fromNasdaq indicating that we are not in compliance with Nasdaq Marketplace Rule 4310(c)(4) (theMinimum Bid Price Rule) because the closing bid price of our common stock hasbeen below $1.00 per share for 30 consecutive trading days. In accordance withNasdaq Marketplace Rules, we have 180 calendar days, or until, February 5,2007, to regain compliance with the Minimum Bid Price Rule. To regaincompliance, the closing bid price of our common stock must remain at $1.00 pershare or more for a minimum of ten consecutive trading days. If we do notregain compliance with the Minimum Bid Price Rule by February 5,2007, Nasdaq will determine whether we meet the Nasdaq Capital Market initiallisting criteria set forth in Marketplace Rule 4310(c), except for theMinimum Bid Price Rule. If we meet the initial listing criteria, we will beentitled to an additional 180 calendar day cure period. If we are noteligible for an additional cure period, Nasdaq will provide us writtennotification that our common stock will be delisted. In such case, we have theright to appeal Nasdaq’s delisting determination to a Listing QualificationsPanel.

Our board of directors has approved seekingshareholder approval of a 1-for-6 reverse stock spilt of our commonstock at a special meeting of shareholders scheduled to be held on September 22,2006. We believe the reverse stock split may help facilitate our efforts toregain compliance with the Minimum Bid Price Rule, although we cannot provideyou any assurance that this will be the case or that any such price increasecan be sustained. Detailed information about the reverse stock split will becontained in the definitive proxy statement mailed to shareholders prior to thespecial meeting and filed with the SEC.

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 wereto be delisted from The Nasdaq Capital Market, and our trading price remainsbelow $5.00 per share, trading in our common stock might also become subject tothe requirements of certain rules promulgated under the SecuritiesExchange Act of 1934, which require additional disclosure by broker-dealersin connection with any trade involving a stock defined as a “penny stock”(generally, any equity security not listed on a national securities exchange orquoted on Nasdaq that has a market price of less than $5.00 per share, subjectto certain exceptions). Many brokerage firms are 

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reluctantto recommend low-priced stocks to their clients. Moreover, various regulationsand policies restrict the ability of shareholders to borrow against or “margin”low-priced stocks, and declines in the stock price below certain levels maytrigger unexpected margin calls. Additionally, because brokers’ commissions onlow-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-dealersfrom facilitating trades in our common stock, which could severely limit themarket liquidity of the stock and the ability of investors to trade our commonstock.

**Our stock price is volatile and, as a result, youcould lose some or all of your investment.**

There has been ahistory of significant volatility in the market prices of securities ofbiotechnology companies, including our common stock. In 2005, the high and lowclosing sale prices of our common stock were $2.34 and $0.47. In 2004, the highand low closing sale prices were $5.78 and $1.43. The high and low closing saleprices during the period from January 3, 2006 through August 7, 2006were $1.57 and $0.56. Our stock price has been and may continue to be affectedby this type of market volatility, as well as our own performance. Our businessand the relative price of our common stock may be influenced by a large varietyof factors, including:

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

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

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

·        developmentsconcerning patents, proprietary rights and potential infringement;

·        developmentsconcerning potential agreements with collaborators;

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

·        ouravailable cash or other sources of funding; and

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

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

In the past, securities class action litigation oftenhas been brought against companies following periods of volatility in theirstock prices. We may in the future be the target of similar litigation.Securities litigation could result in substantial costs and divert ourmanagement’s time and resources, which could cause our business to suffer.

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**Certain provisions in our articles of incorporationand Washington state law could discourage a change of control.**

Our articles of incorporation authorize our board ofdirectors to issue up to 200 million shares of common stock and up to 3.0million shares of preferred stock. With respect to preferred stock, our boardhas the authority 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 on April 10,1996 and the preferred stock purchase rights issued to each common shareholderthereunder expired, by their respective terms, 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 acquisition, unless the transaction or acquisition of shares isapproved by a majority of the members of the target corporation’s board ofdirectors prior to the acquisition. Prohibited transactions include, amongother things:

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

·        termination of 5% or moreof the employees of the target corporation; or

·        receipt by the acquiringperson of any disproportionate benefit as a shareholder.

A corporation may not optout of this statute. This provision may have the effect of delaying, deterringor preventing a change in control of the company or limiting future investmentin the company by significant shareholders and their affiliates and associates.

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.

**As a result of the closing of the equity financing,the number of shares of our common stock outstanding increased substantiallyand certain investors beneficially own significant blocks of our common stock;such common shares are generally available for resale in the public market.**

On April 26, 2006, wecompleted a $65 million equity financing pursuant to a securities purchase agreementdated as of February 1, 2006. In connection with the financing,  we issued to a small group of institutionaland other accredited investors an aggregate of 92.9 million shares of commonstock at a cash purchase price of $0.70 per share. Investors in the financingalso received five-year warrants to purchase an aggregate of 27.9 millionshares of common stock at an exercise price of $0.77 per share. Concurrent withthe closing of the financing, we issued an aggregate of 9.5 million shares ofcommon stock to the holders of our Series B preferred stock uponconversion of our outstanding Series B preferred shares. At the time ofclosing, the placement agent for the financing also received a five-yearwarrant to purchase, on the same terms as the investors, 835,714 common shares.The issuance of such shares and warrants resulted in substantial dilution toshareholders who held our common stock prior to the financing.

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As a result of the completion of the financing and theconversion of the Series B shares, our outstanding common stock increasedfrom approximately 34.3 million shares to approximately 136.8 millionshares.  Entities affiliated with MPMCapital Management (MPM) acquired beneficial ownership of 46.5 million commonshares, or approximately 31.5% of our common stock outstanding immediatelyfollowing the financing. Entities affiliated with Bay City Capital LLC (BCC)acquired beneficial ownership of 27.9 million common shares, or approximately19.5% of the common shares outstanding immediately following the financing. Twoof our directors, Fred B. Craves and Carl S. Goldfischer, are managingdirectors of BCC and possess capital and carried interests in the BCC entitiesthat participated in the financing. We have agreed, for as long as MPM owns atleast 10% of the shares of common stock and warrants purchased in thefinancing, to use our best efforts to cause one person designated by MPM andone person designated by mutual agreement of MPM and BCC to be nominated andelected to our board of directors. Nicholas J. Simon III, a representative ofMPM, was appointed to our board of directors on April 26, 2006.Mr. Simon is a general partner of certain of the MPM entities thatparticipated in the financing and possesses capital and carried interests inthose entities.

Pursuant to the securitiespurchase agreement, we maintain an effective registration statement with theSEC covering the resale of the 92.9 million shares of common stock issued inthe equity financing and the 27.9 million shares of common stock issuable uponexercise of the warrants.  Accordingly,these shares are generally available for immediate resale in the public market.In addition, the approximately 9.5 million shares of common stock issuedupon conversion of the Series B preferred stock currently are availablefor immediate resale pursuant to a registration statement or an exemption fromregistration under Rule 144(k) of the Securities Act. The marketprice of our common stock could fall as a result of such resales due to theincreased number of shares available for sale in the market.

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

A.    The Companyheld a special meeting of shareholders on April 25, 2006 to vote on twoproposals.

The proposal to approve the securities financingdescribed in the Securities Purchase Agreement dated as of February 1,2006 and the issuances of shares of common stock and warrants contemplatedthereby was approved by the votes set forth below:

Holdersof Common Stock Voting as a Separate Voting Group:

| For     |   | 19,639,824 |   |
|---------|--------|------------|--------|
| Against |   | 732,161    |   |
| Abstain |   | 237,230    |   |

 

The proposal to approve an amendment to the Company’sArticles of Incorporation to increase the number of authorized shares of commonstock from 150,000,000 shares to 200,000,000 shares was approved by the voteset forth below:

Holdersof Common Stock and Series B Stock Voting Together as a Single VotingGroup:

| For     |   | 22,391,776 |   |
|---------|--------|------------|--------|
| Against |   | 899,906    |   |
| Abstain |   | 288,918    |   |

 

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Holdersof Common Stock Voting as a Separate Voting Group:

| For     |   | 19,420,391 |   |
|---------|--------|------------|--------|
| Against |   | 899,906    |   |
| Abstain |   | 288,918    |   |

 

B.     The Company’s annual meeting ofshareholders was held on June 16, 2006. The following nominees wereelected as directors, each to hold office until his successor is elected andqualified, by the vote set forth below:

| **Nominee**            | ** ** | ** ** | ** ** | **For**   | ** ** | **Abstain** | ** ** |
|------------------------|------------|------------|------------|-----------|------------|-------------|------------|
| Gerald Mc Mahon        |       | 32,987,275 |       | 1,293,081 |       |
| Frederick B.  Craves   |       | 32,795,031 |       | 1,485,325 |       |
| E. Rolland  Dickson    |       | 33,186,481 |       | 1,093,875 |       |
| Carl S.  Goldfischer   |       | 33,066,602 |       | 1,213,754 |       |
| Robert M.  Littauer    |       | 32,574,122 |       | 1,706,234 |       |
| Nicholas J. Simon  III |       | 32,963,558 |       | 1,316,798 |       |
| Alan A. Steigrod       |       | 33,282,645 |       | 987,711   |       |
| David R. Stevens       |       | 33,471,839 |       | 808,517   |       |

 

The proposal toapprove an amendment and restatement of the Company’s 2004 IncentiveCompensation Plan (i) to increase the number of shares of common stockissuable under the plan from 5,000,000 shares to 10,000,000, (ii) to addperformance criteria for option grants, and (iii) to extend the term ofthe plan by two years was approved by the votes set forth below:

Holdersof Common Stock and Series B Stock Voting Together as a Single VotingGroup:

| For     |   | 14,203,057 |   |
|---------|--------|------------|--------|
| Against |   | 2,425,265  |   |
| Abstain |   | 270,904    |   |

 

Holdersof Common Stock Voting as a Separate Voting Group:

| For     |   | 14,203,057 |   |
|---------|--------|------------|--------|
| Against |   | 2,425,265  |   |
| Abstain |   | 270,904    |   |

 

**Item 5.**                        OtherInformation.

During July and August 2006,the Company will be relocating its corporate headquarters from Seattle to SanFrancisco. The new address of the corporate headquarters is 7000 ShorelineRoad, Suite 270, South San Francisco, CA 94080. Occupancy of the new executive office space is expected tocommence in September 2006. The Company will maintain clinical developmentand support activities at 300 Elliott Avenue West, Suite 500, Seattle, WA98101 (206) 281-7001. Updated telephone numbers and other contactinformation will be available on the Company’s website, www.poniard.com.

**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 14,  2006 | By:                             |  /s/ CAROLINE M. LOEWY |
|                        | Caroline M. Loewy               |
|                        | *Chief Financial Officer*       |
|                        | *(Principal Financial Officer)* |

 

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**EXHIBIT INDEX**

| Exhibit | ** ** | ** **                                                                                                                                                                                                                  | ** ** | **Description** | ** ** | ** ** |
|---------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|
| 3.1     |       | Amended and Restated Articles of Incorporation, as amended  June 16, 2006                                                                                                                                              |       | (G)             |
| 3.2     |       | Restated Bylaws, as amended March 28, 2006                                                                                                                                                                             |       | (V)             |
| 10.1    |       | Restated 1994 Stock Option Plan(‡)                                                                                                                                                                                     |       | (F)             |
| 10.2    |       | Lease Agreement for 410 West Harrison facility, dated  March 1, 1996, between NeoRx Corporation and Diamond Parking, Inc                                                                                               |       | (H)             |
| 10.3    |       | Amendment No. 1, dated August 14, 2000, to Lease  Agreement between NeoRx Corporation and Dina Corporation                                                                                                        |       | (J)             |
| 10.4    |       | 1991 Stock Option Plan for Non-Employee Directors, as amended(‡)                                                                                                                                                       |       | (E)             |
| 10.5    |       | 1991 Restricted Stock Plan(‡)                                                                                                                                                                                          |       | (D)             |
| 10.6    |       | Indemnification Agreement(‡)                                                                                                                                                                                           |       | (H)             |
| 10.7    |       | Stock Option Grant Program for Nonemployee Directors under the  NeoRx 2004 Incentive Compensation Plan, as amended(‡)                                                                                                  |       | (B)             |
| 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   |       | Stock Option Grant Program for Nonemployee Directors under the  NeoRx Corporation 1994 Restated Stock Option Plan(‡)                                                                                              |       | (M)             |
| 10.12   |       | Facilities Lease, dated February 15, 2002, between NeoRx  Corporation and Selig Real Estate Holdings Six                                                                                                          |       | (A)             |
| 10.13   |       | Lease Termination/Continuation Agreement dated October 8,  2002, between NeoRx Corporation and Dina Corporation                                                                                                   |       | (N)             |
| 10.14   |       | Amended and Restated 2004 Incentive Compensation Plan as amended  and restated June 16, 2006(‡)                                                                                                              |       | (G)             |
| 10.15   |       | Manufacturing and Supply Agreement dated as of May 4, 2004,  between Hyaluron, Inc. and the Company. Certain portions of the  agreement have been omitted pursuant to a request for confidential  treatment. |       | (T)             |
| 10.16   |       | Key Executive Severance Agreement dated as of February 28,  2003, between the Company and Anna Wight(‡)                                                                                                           |       | (C)             |
| 10.17   |       | 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)             |
| 10.18   |       | Change of Control Agreement dated as of February 28, 2003,  between the Company and Anna Wight(‡)                                                                                                            |       | (C)             |
| 10.19   |       | Key Executive Severance Agreement dated as of June 23,  2005, between the Company and David A. Karlin(‡)                                                                                                          |       | (P)             |
| 10.20   |       | Change of Control Agreement dated as of June 23, 2005,  between the Company and David A. Karlin(‡)                                                                                                                |       | (P)             |
| 10.21   |       | Employment Letter dated as of April 26, 2004, between the  Company and Gerald McMahon(‡)                                                                                                                     |       | (L)             |

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| 10.22 |   | Key Executive Severance Agreement dated as of May 11, 2004,  between the Company and Gerald McMahon(‡)                                                                                                                 |   | (R) |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----|
| 10.23 |   | Change of Control Agreement dated as of May 11, 2004,  between the Company and Gerald McMahon(‡)                                                                                                                       |   | (R) |
| 10.24 |   | Key Executive Severance Agreement dated as of July 24,  2006, between the Company and Alan B. Glassberg(‡)                                                                                                             |   | (X) |
| 10.25 |   | Change of Control Agreement dated as of July 24, 2006,  between the Company and Alan B. Glassberg(‡)                                                                                                              |   | (X) |
| 10.26 |   | Key Employee Severance Agreement dated as of July 11, 2006,  between the Company and Michael K. Jackson(‡)                                                                                                             |   | (X) |
| 10.27 |   | Form of Non-Qualified Stock Option Agreement under 2004  Incentive Compensation Plan(‡)                                                                                                                                     |   | (O) |
| 10.28 |   | Form of Incentive Stock Option Agreement under 2004 Incentive  Compensation  Plan(‡)                                                                                                                                        |   | (O) |
| 10.29 |   | Key Executive Severance Agreement dated as of June 23,  2006, between the Company and Caroline M. Loewy(‡)                                                                                                             |   | (S) |
| 10.30 |   | Change of Control Agreement dated as of June 23, 2006,  between the Company and Caroline M. Loewy(‡)                                                                                                                   |   | (S) |
| 10.31 |   | Executive Severance Agreement dated as of June 23, 2006,  between the Company and Cheni Kwok(‡)                                                                                                                        |   | (S) |
| 10.32 |   | Change of Control Agreement dated as of July 1, 2006,  between the Company and Cheni Kwok(‡)                                                                                                                      |   | (S) |
| 10.33 |   | 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) |
| 10.34 |   | Form of Directors’ Indemnification Agreements(‡)                                                                                                                                                                  |   | (K) |
| 10.35 |   | Lease Agreement dated as of July 10, 2006, between the  Company and ARE San Francisco No. 17 LLC                                                                                                                  |   | (W) |
| 31.1  |   | Rule 13a-14(a)/15d-14(a) Certification of President  and Chief Executive Officer                                                                                                                                       |   | (X) |
| 31.2  |   | Rule 13a-14(a)/15d-14(a) Certification of  Chief Financial Officer                                                                                                                                                     |   | (X) |
| 32.1  |   | Section 1350 Certification of President and Chief Executive  Officer                                                                                                                                                        |   | (X) |
| 32.2  |   | Section 1350  Certification of Chief Financial Officer                                                                                                                                                                      |   | (X) |

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       (‡) Management contract or compensatory plan.

    (A) Filedas an exhibit to the Company’s Form 10-K for the fiscal year endedDecember 31, 2001, and incorporated herein by reference.

     (B) Filedas an exhibit to the Company’s Current Report on Form 8-K filedJune 16, 2005, and incorporated herein by reference.

     (C) Filedas an exhibit to the Company’s Registration Statement on Form S-3/A(Registration No. 333-111344) filed on February 23, 2004, andincorporated herein by reference.

    (D) Filedas an exhibit to the Company’s Annual Report on Form 10-K for thefiscal year ended September 30, 1991, and incorporated herein byreference.

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     (E) Incorporatedby reference to Exhibit A to the Company’s definitive proxy statement onSchedule 14A filed April 10, 1996.

      (F) Filedas an exhibit to the Company’s Form 10-K for the fiscal year endedDecember 31, 1995, and incorporated herein by reference.

   (G) Filedas an exhibit to the Company’s Current Report on Form 8-K filed onJune 21, 2006 and incorporated herein by reference.

   (H) Filedas an exhibit to the Company’s Form 10-Q for the quarterly periodended March 31, 1996, and incorporated herein by reference.

         (I) Filedas an exhibit to the Company’s Form 10-K for the fiscal year endedDecember 31, 2000, and incorporated herein by reference.

        (J) Filedas an exhibit to the Company’s Form 10-K for the fiscal year endedDecember 31, 1998, and incorporated herein by reference.

    (K) Filedas an exhibit to the Company’s Current Reports on Form 8-K filed onApril 28, 2006 and June 27, 2006, and incorporated herein byreference.

      (L) Filedas an exhibit to the Company’s Form 10-Q for the quarterly periodended March 31, 2005, and incorporated herein by reference.

  (M) Filedas an exhibit to the Company’s Form 10-Q for the quarterly periodended June 30, 2002, and incorporated herein by reference.

    (N) Filedas an exhibit to the Company’s Form 10-Q for the quarterly periodended September 30, 2002, and incorporated herein by reference.

   (O) Filedas an exhibit to the Company’s Form 10-Q for the quarterly periodended September 30, 2004, and incorporated herein by reference.

      (P) Filedas an exhibit to the Company’s Current Report on Form 8-K filed onJune 29, 2005, and incorporated herein by reference.

   (Q) Filedas an exhibit to the Company’s Form 10-Q for the quarterly periodended March 31, 2004, and incorporated herein by reference.

    (R) Filedas an exhibit to the Company’s Form 10-Q for the quarterly periodended June 30, 2004, and incorporated herein by reference.

       (S) Filedas an exhibit to the Company’s Current Report on Form 8-K filedJune 23, 2006, and incorporated herein by reference.

     (T) Filedas an exhibit to the Company’s Form 10-Q for the quarterly periodended June 30, 2005, and incorporated herein by reference.

   (U) Filed as an exhibit tothe Company’s Form 10-Q for the quarterly period endedSeptember 30, 2005, and incorporated herein by reference.

    (V) Filed as an exhibit tothe Company’s Form 10-Q for the quarterly period endedMarch 31, 2006 and incorporated herein by reference.

(W) Filed as an exhibit tothe Company’s Current Report Form 8-K filed on July 13, 2006and incorporated herein by reference.

    (X) Filedherewith.

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