##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM  TO
 Commission File Number: 333-134709
 TRUBION PHARMACEUTICALS, INC.
 (Exact name of registrant as specified in its charter)
 DELAWARE
(State or other jurisdiction of incorporation or organization)
    
    52-2385898
(IRS Employer Identification No.)2401 FOURTH AVENUE, SUITE 1050 
SEATTLE, WASHINGTON
    
    98121(Address of registrants principal executive offices)
    
    (Zip Code)
 (206) 838-0500
 (Telephone number, including area code)
 N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
 o þ
  o o þ
 o þ




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##### 



TRUBION PHARMACEUTICALS, INC.
 INDEX
 PAGE NO.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Balance Sheets as of September 30, 2006 and December 31, 2005
    
    
    3Statements of Operations for the Three Months and Nine Months Ended September
30, 2006 and 2005
    
    
    4Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005
    
    
    5Notes to Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART II. OTHER INFORMATIONItem 1A. Risk Factors
    
    
    26Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 4. Submission of Matters to a Vote of Security Holders
    
    
    39Item 6. Exhibits
    
    
    40SIGNATURES
    
    
    41EXHIBIT INDEX
    
    
    42EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 TRUBION PHARMACEUTICALS, INC.
 
 BALANCE SHEETS
 (In thousands, except share data)
 September 30,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,828
    
    
    $
    4,681Investments
    
    
    23,745
    
    
    
    5,228Receivable from collaboration
    
    
    14,539
    
    
    
    40,000Deferred financing costs
    
    
    1,914
    
    
    
    Prepaid expenses
    
    
    312
    
    
    
    119Total current assets
    
    
    51,338
    
    
    
    50,028Property and equipment, net
    
    
    7,557
    
    
    
    3,898Other assets
    
    
    135
    
    
    
    83Total assets
    
    $
    59,030
    
    
    $
    54,009LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    768
    
    
    $
    833Accrued liabilities
    
    
    6,209
    
    
    
    1,954Current portion of notes payable
    
    
    891
    
    
    
    1,187Current portion of deferred rent
    
    
    178
    
    
    
    173Current portion of deferred revenue
    
    
    8,000
    
    
    
    8,000Total current liabilities
    
    
    16,046
    
    
    
    12,147Non-current portion of notes payable
    
    
    3,518
    
    
    
    1,276Non-current portion of deferred rent
    
    
    540
    
    
    
    675Non-current portion of deferred revenue
    
    
    25,778
    
    
    
    31,778Preferred stock warrant liability
    
    
    260
    
    
    
    282CommitmentsConvertible preferred stock, $0.001 par value per share 10,874,478 shares authorized at
September 30, 2006 and December 31, 2005; 10,652,057 issued and outstanding at September 30, 2006 and
December 31, 2005 (aggregate liquidation preference of $45,753 at September 30, 2006 and December 31,
2005)
    
    
    45,753
    
    
    
    45,753Stockholders equity (deficit):Preferred stock, $0.001 par value per share; 5,000,000 shares authorized, no shares
issued or outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value per share; 14,272,046 and 13,554,458 shares authorized at
September 30, 2006 and December 31, 2005; 1,459,748 and 1,395,201 shares issued and
outstanding at September 30, 2006 and December 31, 2005, respectively
    
    
    1
    
    
    
    1Additional paid-in capital
    
    
    6,885
    
    
    
    3,357Deferred stock-based compensation
    
    
    (977
    )
    
    
    (1,591
    )Accumulated other comprehensive income (loss)
    
    
    22
    
    
    
    (2
    )Accumulated deficit
    
    
    (38,796
    )
    
    
    (39,667
    )Total stockholders equity (deficit)
    
    
    (32,865
    )
    
    
    (37,902
    )Total liabilities, convertible preferred stock and stockholders equity (deficit)
    
    $
    59,030
    
    
    $
    54,009
  3




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##### Table of Contents



TRUBION PHARMACEUTICALS, INC.
 
 STATEMENTS OF OPERATIONS
 (In thousands, except share amounts)
 (unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    16,539
    
    
    $
    
    
    
    $
    30,175
    
    
    $
    127Operating expenses:Research and development *
    
    
    9,570
    
    
    
    4,201
    
    
    
    23,451
    
    
    
    10,924General and administrative *
    
    
    2,032
    
    
    
    759
    
    
    
    7,101
    
    
    
    2,498Total operating expenses
    
    
    11,602
    
    
    
    4,960
    
    
    
    30,552
    
    
    
    13,422Income (loss) from operations
    
    
    4,937
    
    
    
    (4,960
    )
    
    
    (377
    )
    
    
    (13,295
    )Interest income
    
    
    419
    
    
    
    128
    
    
    
    1,389
    
    
    
    378Interest expense
    
    
    (49
    )
    
    
    (52
    )
    
    
    (163
    )
    
    
    (150
    )Other income (expense)
    
    
    83
    
    
    
    (66
    )
    
    
    22
    
    
    
    (66
    )Income (loss) before cumulative effect of change in accounting principle
    
    
    5,390
    
    
    
    (4,950
    )
    
    
    871
    
    
    
    (13,133
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (62
    )
    
    
    
    
    
    
    (62
    )Net income (loss)
    
    $
    5,390
    
    
    $
    (5,012
    )
    
    $
    871
    
    
    $
    (13,195
    )Basic net income (loss) per share
    
    $
    3.79
    
    
    $
    (6.33
    )
    
    $
    0.63
    
    
    $
    (17.49
    )Diluted net income (loss) per share
    
    $
    0.40
    
    
    $
    (6.33
    )
    
    $
    0.06
    
    
    $
    (17.49
    )Shares used in computation of basic net income (loss) per share
    
    
    1,421,046
    
    
    
    791,486
    
    
    
    1,375,591
    
    
    
    754,337Shares used in computation of diluted net income (loss) per share
    
    
    13,245,187
    
    
    
    791,486
    
    
    
    13,162,726
    
    
    
    754,337* Includes non-cash stock-based compensation as follows:Research and development
    
    $
    514
    
    
    $
    281
    
    
    $
    1,944
    
    
    $
    536General and administrative
    
    
    504
    
    
    
    116
    
    
    
    2,141
    
    
    
    225Total non-cash stock-based compensation
    
    $
    1,018
    
    
    $
    397
    
    
    $
    4,085
    
    
    $
    761
  4




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TRUBION PHARMACEUTICALS, INC.
 
 STATEMENTS OF CASH FLOWS
 (In thousands)
 (unaudited)
 Nine Months EndedSeptember 30,2006
    
    
    2005Operating Activities:Net income (loss)
    
    $
    871
    
    
    $
    (13,195
    )Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:Non-cash stock-based compensation expense
    
    
    3,415
    
    
    
    321Non-cash stock-based consulting expense
    
    
    670
    
    
    
    440Depreciation and amortization expense
    
    
    897
    
    
    
    702Amortization of debt discount
    
    
    19
    
    
    
    13Revaluation of warrants to fair value
    
    
    (22
    )
    
    
    128Changes in operating assets and liabilities:Receivable from collaboration
    
    
    25,461
    
    
    
    Grant receivable
    
    
    
    
    
    
    294Deferred financing costs
    
    
    (1,914
    )
    
    
    Prepaid expenses and other assets
    
    
    (245
    )
    
    
    (117
    )Accounts payable
    
    
    (65
    )
    
    
    (205
    )Accrued liabilities
    
    
    4,262
    
    
    
    1,226Deferred revenue
    
    
    (6,000
    )
    
    
    Deferred rent
    
    
    (130
    )
    
    
    (129
    )Net cash provided by (used in) operating activities
    
    
    27,219
    
    
    
    (10,522
    )Investing Activities:Purchase of property and equipment
    
    
    (4,556
    )
    
    
    (879
    )Purchase of investments
    
    
    (70,048
    )
    
    
    (25,021
    )Maturities of investments
    
    
    51,555
    
    
    
    26,683Net cash provided by (used in) investing activities
    
    
    (23,049
    )
    
    
    783Financing Activities:Proceeds from issuance on notes payable
    
    
    2,847
    
    
    
    622Payments on notes payable
    
    
    (920
    )
    
    
    (647
    )Proceeds from issuance of convertible preferred stock, net of issuance costs
    
    
    
    
    
    
    11,997Proceeds from exercise of stock options
    
    
    50
    
    
    
    4Net cash provided by financing activities
    
    
    1,977
    
    
    
    11,976Net increase in cash and cash equivalents
    
    
    6,147
    
    
    
    2,237Cash and cash equivalents at beginning of period
    
    
    4,681
    
    
    
    4,020Cash and cash equivalents at end of period
    
    $
    10,828
    
    
    $
    6,257
  5




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##### Table of Contents



TRUBION PHARMACEUTICALS, INC.
 
 NOTES TO FINANCIAL STATEMENTS
 1. The Company and Basis of Presentation
 Business
   Basis of Presentation
   Reverse Stock Split
  Initial Public Offering
   6




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##### Table of Contents



Exercise of Warrants
  2. Summary of Significant Accounting Policies
 Revenue Recognition
   Up-Front Fees and License Fees:
 Collaborative Research Funding:
 Milestones:
 Royalties:
 Research and Development
  Accounting for Stock-Based Compensation
 7




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Share-Based Payment Accounting for Stock
Issued to Employees Accounting for Stock-Based Compensation Accounting for Stock Based Compensation  Transition and Disclosure
  Three months ended
    
    
    Nine months endedSeptember 30, 2005
    
    
    September 30, 2005Net loss, as reported
    
    $
    (5,012
    )
    
    $
    (13,195
    )Add back: stock-based employee compensation
expense included in net loss
    
    
    148
    
    
    
    321Deduct: stock-based employee compensation expense
determined under the fair value method
    
    
    (151
    )
    
    
    (342
    )Pro forma net loss
    
    $
    (5,015
    )
    
    $
    (13,216
    )Basic and diluted net loss per share, as reported
    
    $
    (6.33
    )
    
    $
    (17.49
    )Pro forma basic and diluted net loss per share
    
    $
    (6.34
    )
    
    $
    (17.52
    )
  Three months ended
    
    Nine months endedSeptember 30, 2005
    September 30, 2005Risk-free interest rate
    
    
    4.35
    %
    
    
    4.35
    %Weighted-average expected life (in years)
    
    
    4.71
    
    
    
    4.89Expected dividend yield
    
    
    0
    %
    
    
    0
    %Expected volatility rate
    
    
    0
    %
    
    
    0
    %Weighted-average estimated fair value of employee
options
    
    $
    11.53
    
    
    $
    4.89
 Recent Accounting Pronouncements
 Accounting
for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FAS 109) .
 8




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Use of Estimates
  3. Cumulative Effect of Change in Accounting Principle
 Issuers Accounting under FASB
Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares That Are
Redeemable
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss) per common share, diluted:Income (loss) before cumulative effect of change
in accounting principle
    
    $
    0.40
    
    
    $
    (6.25
    )
    
    $
    0.06
    
    
    $
    (17.41
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (0.08
    )
    
    
    
    
    
    
    (0.08
    )Net income (loss)
    
    $
    0.40
    
    
    $
    (6.33
    )
    
    $
    0.06
    
    
    $
    (17.49
    )Shares used in computing diluted net income (loss)
per common share (in thousands)
    
    
    13,245
    
    
    
    791
    
    
    
    13,163
    
    
    
    754
  4. Net Income (Loss) per Share
  9




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Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    5,390
    
    
    $
    (5,012
    )
    
    $
    871
    
    
    $
    (13,195
    )Preferred stock warrant liability income
    
    
    (83
    )
    
    
    
    
    
    
    (22
    )
    
    
    Net income (loss), dilutive
    
    $
    5,307
    
    
    $
    (5,012
    )
    
    $
    849
    
    
    $
    (13,195
    )Weighted average common shares outstanding, basic
    
    
    1,421
    
    
    
    791
    
    
    
    1,376
    
    
    
    754Dilutive stock options and warrants
    
    
    1,153
    
    
    
    
    
    
    
    1,116
    
    
    
    Dilutive preferred stock
    
    
    10,652
    
    
    
    
    
    
    
    10,652
    
    
    
    Shares subject to repurchase
    
    
    19
    
    
    
    
    
    
    
    19
    
    
    
    Weighted average common shares outstanding, diluted
    
    
    13,245
    
    
    
    791
    
    
    
    13,163
    
    
    
    754Net income (loss) per common share, basic
    
    $
    3.79
    
    
    $
    (6.33
    )
    
    $
    0.63
    
    
    $
    (17.49
    )Net income (loss) per common share, diluted
    
    $
    0.40
    
    
    $
    (6.33
    )
    
    $
    0.06
    
    
    $
    (17.49
    )
  As ofSeptember 30, 2005Stock options
    
    
    1,303Warrants to purchase convertible preferred stock
    
    
    20Common shares subject to repurchase
    
    
    127Convertible preferred stock
    
    
    10,65212,102
 Non-GAAP
Pro Forma Basic Net Income (Loss) per Share
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    5,390
    
    
    $
    (5,012
    )
    
    $
    871
    
    
    $
    (13,195
    )Preferred stock warrant liability income
    
    
    (83
    )
    
    
    
    
    
    
    (22
    )
    
    
    Pro forma net income (loss)
    
    $
    5,307
    
    
    $
    (5,012
    )
    
    $
    849
    
    
    $
    (13,195
    )Shares used to compute basic net income (loss) per
share
    
    
    1,421
    
    
    
    791
    
    
    
    1,376
    
    
    
    754Pro forma adjustments to reflect weighted-average
effect
of conversion of preferred stock on January 1, 2005
    
    
    10,652
    
    
    
    10,652
    
    
    
    10,652
    
    
    
    10,652Non-GAAP pro forma shares used in pro forma basic
net income (loss) per share
    
    
    12,073
    
    
    
    11,443
    
    
    
    12,028
    
    
    
    11,406Non-GAAP pro forma basic net income (loss) per share
    
    $
    0.44
    
    
    $
    (0.44
    )
    
    $
    0.07
    
    
    $
    (1.16
    )
 10




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##### Table of Contents



5. Collaboration Agreement
    6. Stock-Based Compensation
  Three Months Ended September 30,2006
    
    
    2005G&A
    
    
    R&D
    
    
    Total
    
    
    G&A
    
    
    R&D
    
    
    TotalEmployee stock options granted prior to January
1, 2006
    
    $
    66
    
    
    $
    63
    
    
    $
    129
    
    
    $
    106
    
    
    $
    41
    
    
    $
    147Employee stock options granted on or subsequent to
January 1, 2006
    
    
    422
    
    
    
    260
    
    
    
    682
    
    
    
    
    
    
    
    
    
    
    
    Non-employee stock options
    
    
    16
    
    
    
    191
    
    
    
    207
    
    
    
    10
    
    
    
    240
    
    
    
    250$
    504
    
    
    $
    514
    
    
    $
    1,018
    
    
    $
    116
    
    
    $
    281
    
    
    $
    397
 Nine Months Ended September 30,2006
    
    
    2005G&A
    
    
    R&D
    
    
    Total
    
    
    G&A
    
    
    R&D
    
    
    TotalEmployee stock options granted prior to January
1, 2006
    
    $
    199
    
    
    $
    205
    
    
    $
    404
    
    
    $
    206
    
    
    $
    115
    
    
    $
    321Employee stock options granted on or subsequent to
January 1, 2006
    
    
    1,888
    
    
    
    1,122
    
    
    
    3,010
    
    
    
    
    
    
    
    
    
    
    
    Non-employee stock options
    
    
    54
    
    
    
    617
    
    
    
    671
    
    
    
    19
    
    
    
    421
    
    
    
    440$
    2,141
    
    
    $
    1,944
    
    
    $
    4,085
    
    
    $
    225
    
    
    $
    536
    
    
    $
    761
 11




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##### Table of Contents



Employee Stock Options Granted Prior to January 1, 2006
  Remainder of 2006
    
    $
    1262007
    
    
    5032008
    
    
    3122009
    
    
    36$
    977
 Employee Stock Options Granted On or Subsequent to January 1, 2006
      12




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##### Table of Contents



Three months ended
    
    Nine months endedSeptember 30, 2006
    
    September 30, 2006Risk-free interest rate
    
    
    4.74
    %
    
    
    4.63%-5.04
    %Weighted-average expected life (in years)
    
    
    6.25
    
    
    
    5.5-6.25Expected dividend yield
    
    
    0
    %
    
    
    0
    %Expected volatility rate
    
    
    75
    %
    
    
    75
    %Weighted-average estimated fair value of employee
options
    
    $
    13.31
    
    
    $
    15.11
  Non-Employee Stock Options
 Accounting for Stock-Based Compensation Accounting for Stock-Based Compensation  Transition and Disclosure, Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services
  Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans.
  13




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##### Table of Contents



Equity Incentive Plans
   Options Outstanding
    
    
    Options ExercisableWeighted-AverageRemainingNumber
    
    
    Contractual Life
    
    
    Aggregate
    
    
    Number
    
    
    AggregateExercise Price per Share
    
    of Shares
    
    
    (in years)
    
    
    Intrinsic Value
    
    
    of Shares
    
    
    Intrinsic Value$0.07
    
    
    91,532
    
    
    
    5.99
    
    
    $
    1,394
    
    
    
    91,532
    
    
    $
    1,394$0.32
    
    
    682,876
    
    
    
    7.86
    
    
    
    10,234
    
    
    
    353,348
    
    
    
    5,295$2.70
    
    
    126,104
    
    
    
    9.17
    
    
    
    1,589
    
    
    
    73,586
    
    
    
    927$6.53
    
    
    530,905
    
    
    
    9.41
    
    
    
    4,660
    
    
    
    85,850
    
    
    
    754$8.35
    
    
    55,809
    
    
    
    9.51
    
    
    
    388
    
    
    
    
    
    
    
    $9.35
    
    
    49,020
    
    
    
    9.69
    
    
    
    292
    
    
    
    
    
    
    
    $11.86
    
    
    6,614
    
    
    
    9.99
    
    
    
    23
    
    
    
    
    
    
    
    $0.07 - $11.86
    
    
    1,542,860
    
    
    
    8.52
    
    
    $
    18,580
    
    
    
    604,316
    
    
    $
    8,370
  Weighted-Weighted-
    
    AverageAverage
    
    RemainingShares
    
    
    
    
    
    Exercise
    
    Contractual
    
    AggregateAvailable for
    
    Options
    
    Price Per
    
    Life
    
    IntrinsicGrant
    
    Granted
    
    Share
    
    (in years)
    
    ValueBalance at January 1, 2006
    
    
    60,622
    
    
    
    974,151
    
    
    $
    0.63Authorized increase in Plan
    
    
    1,136,542
    
    
    
    
    
    
    
    Granted at less then fair value
    
    
    (652,101
    )
    
    
    652,101
    
    
    
    6.94Forfeited
    
    
    18,845
    
    
    
    (18,845
    )
    
    
    2.29Exercised
    
    
    
    
    
    
    (64,547
    )
    
    
    0.78Balance at September 30, 2006
    
    
    563,908
    
    
    
    1,542,860
    
    
    
    3.26
    
    
    
    8.52
    
    
    $
    18,580Vested and expected to vest at
September 30, 2006
    
    
    
    
    
    
    1,472,000
    
    
    
    3.18
    
    
    
    0.73
    
    
    $
    17,841Exercisable at September 30, 2006
    
    
    
    
    
    
    604,316
    
    
    $
    1.45
    
    
    
    7.85
    
    
    $
    8,370
   14




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##### Table of Contents



OutstandingStockAwardsBalance at January 1, 2006
    
    
    96,108Units granted
    
    
    Units vested
    
    
    (77,069
    )Balance at September 30, 2006
    
    
    19,039
 7. Comprehensive Income (Loss)
 Reporting
Comprehensive Income
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    5,390
    
    
    $
    (5,012
    )
    
    $
    871
    
    
    $
    (13,195
    )Net unrealized gain on investments
    
    
    45
    
    
    
    4
    
    
    
    24
    
    
    
    4Comprehensive loss
    
    $
    5,435
    
    
    $
    (5,008
    )
    
    $
    895
    
    
    $
    (13,191
    )
 8. Property and Equipment
  September 30,
    
    
    December 31,2006
    
    
    2005Lab equipment
    
    $
    4,497
    
    
    $
    3,056Leasehold improvements
    
    
    4,464
    
    
    
    2,148Furniture and fixtures
    
    
    178
    
    
    
    180Computer equipment and software
    
    
    616
    
    
    
    358Construction in progress
    
    
    542
    
    
    
    10,297
    
    
    
    5,742Accumulated depreciation and amoritization
    
    
    (2,740
    )
    
    
    (1,844
    )$
    7,557
    
    
    $
    3,898
 15




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##### Table of Contents



9. Accrued Liabilities
  September 30,
    
    
    December 31,2006
    
    
    2005Accrued compensation
    
    $
    502
    
    
    $
    291Accrued professional fees
    
    
    774
    
    
    
    273Accrued preclinical and manufacturing
    
    
    3,585
    
    
    
    975Accrued clinical trials
    
    
    557
    
    
    
    324Accrued construction in progress
    
    
    523
    
    
    
    Other
    
    
    268
    
    
    
    91$
    6,209
    
    
    $
    1,954
 10. Notes Payable  Equipment Financing Arrangements
    11. Commitments
   16




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, which are subject to the safe harbor created by those sections.
Forward-looking statements are based on our managements beliefs and assumptions and on information
currently available to our management. In some cases, you can identify forward-looking statements
by terms such as may, will, should, could, would, expect, plans, anticipates,
believes, estimates, projects, predicts, potential and similar expressions intended to
identify forward-looking statements. Examples of these statements include, but are not limited to,
statements regarding: the implications of interim or final results of our clinical trials, the
progress of our research programs, including clinical testing, the extent to which our issued and
pending patents may protect our products and technology, our ability to identify new product
candidates, the potential of such product candidates to lead to the development of commercial
products, our anticipated timing for initiation or completion of our clinical trials for any of our
product candidates, our future operating expenses, our future losses, our future expenditures for
research and development and the sufficiency of our cash resources. Our actual results could differ
materially from those anticipated in these forward-looking statements for many reasons, including
the risks faced by us and described in Part II, Item 1A of this Quarterly Report on Form 10-Q and
our other filings with the SEC. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this Quarterly Report on Form 10-Q . You should read
this Quarterly Report on Form 10-Q completely and with the understanding that our actual future
results may be materially different from what we expect. Except as required by law, we assume no
obligation to update these forward-looking statements, whether as a result of new information,
future events or otherwise.
 The following discussion and analysis should be read in conjunction with the unaudited
financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form
10-Q.
 Overview
    17




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Critical Accounting Policies and Significant Judgments and Estimates
   18




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Revenue Recognition
   Up-Front Fees and License Fees:
 Collaborative Research Funding:
 Milestones:
 Royalties:
 Preclinical Study and Clinical Trial Accruals
  
    
    fees paid to contract research organizations in connection with preclinical studies;
    
    fees paid to contract research organizations and other clinical sites in connection with clinical trials; and
    
    fees paid to contract manufacturers in connection with the production of
components and drug materials for preclinical studies and clinical trials.
  19




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Stock-Based Compensation
 Share-Based Payment Accounting for Certain
Transactions Involving Stock Compensation, an interpretation of APB 25 Accounting for Stock-Based
Compensation, Accounting for Stock-Based Compensation  Transition and
Disclosure.
     20




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Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans
 Results of Operations for the Three Months and Nine Months Ended September 30, 2006 and 2005
 Revenue.
  Research and Development Expenses.
   (in thousands)
 21




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##### Table of Contents



Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Research and preclinical programs
    
    $
    3,673
    
    
    $
    1,828
    
    
    $
    9,448
    
    
    $
    5,627Clinical development programs
    
    
    5,897
    
    
    
    2,373
    
    
    
    14,003
    
    
    
    5,297Total research and development
    
    $
    9,570
    
    
    $
    4,201
    
    
    $
    23,451
    
    
    $
    10,924
    General and Administrative Expenses.
  Net Interest Income.
  22




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Cumulative Effect of Change in Accounting Principle.
 Issuers Accounting under FASB Statement No. 150 for Freestanding Warrants and
Other Similar Instruments on Shares That Are Redeemable
 Liquidity and Capital Resources
        23




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
    
    expenditures related to continued preclinical and clinical development of our product candidates
during this period will be within budgeted levels;
    
    unexpected costs related to the development of our manufacturing capability will not be material; and
    
    the hiring of a number of new employees at salary levels consistent with our estimates to support
our continued growth during this period.
  
    
    milestone payments projected to be received under the Wyeth collaboration agreement;
    
    the hiring of a number of new employees at salary levels consistent with our estimates to support
our continued growth during this period;
    
    the scope, rate of progress, results and costs of our preclinical testing, clinical trials and
other research and development activities;
    
    the terms and timing of any additional collaborative or licensing agreements that we may establish;
    
    the cost, timing and outcomes of regulatory approvals;
    
    the number and characteristics of product candidates that we pursue;
    
    the cost of establishing clinical and commercial supplies of our product candidates;
    
    the cost of preparing, filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights; and
    
    the extent to which we acquire or invest in businesses, products or technologies, although we
currently have no commitments or agreements relating to any of these types of transactions.
 24
    Table of Contents    
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
      25




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1A. Risk Factors
 You should carefully consider the risks described below before making an investment decision.
Our business, prospects, financial condition or operating results could be materially adversely
affected by any of these risks. The trading price of our common stock could decline due to any of
these risks and you may lose all or part of your investment. In assessing the risks described
below, you should also refer to the other information contained in this prospectus, including our
financial statements and the related notes, before deciding to purchase any shares of our common
stock.
 Risks Related to our Business
 Our success is dependent on the success of our lead product candidate, TRU-015, and we cannot
be certain that it will receive regulatory approval or be successfully commercialized.
  We are a biopharmaceutical company with a limited operating history, have not generated
revenue from product sales and face many risks inherent in our business. If we do not overcome
these risks, our business will not succeed.
  
    
    obtain sufficient capital to support our efforts to develop our technology and create a
pipeline of product candidates and
    
    complete and continue to enhance the characteristics and development of our product candidates.
 We have incurred operating losses in each year since our inception and expect to continue to
incur substantial and increasing losses for the foreseeable future.
 26
    Table of Contents    There is no assurance that we will be granted regulatory approval for any of our product
candidates.
  We are dependent upon our collaborative relationship with Wyeth to develop, manufacture and
commercialize our lead product candidate, TRU-015, and other selected product candidates.
    27




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Our relationship with Wyeth may have a negative effect on our ability to enter into
relationships with third parties.
  Any failure or delay in commencing or completing clinical trials for product candidates could
severely harm our business.
  
    
    our or our collaborators ability to obtain regulatory approval to commence a clinical trial;
    
    our or our collaborators ability to manufacture or obtain from third parties materials sufficient for use in
preclinical studies and clinical trials;
    
    delays in patient enrollment and variability in the number and types of patients available for clinical trials;
    
    poor effectiveness of product candidates during clinical trials;
    
    unforeseen safety issues or side effects;
    
    governmental or regulatory delays and changes in regulatory requirements, policy and guidelines; and
    
    varying interpretation of data by the FDA and similar foreign regulatory agencies.
  We rely on third parties to conduct our clinical trials. If these third parties do not perform
as contractually required or otherwise expected, we may not be able to obtain regulatory approval
for or commercialize our product candidates.
 28
    Table of Contents    Even if our product candidates receive regulatory approval, they could be subject to
restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply
with regulatory requirements or if we experience unanticipated problems with our products.
  
    
    restrictions on the products or manufacturing processes;
    
    withdrawal of the products from the market;
    
    voluntary or mandatory recalls;
    
    Fines;
    
    suspension of regulatory approvals;
    
    product seizures; or
    
    injunctions or the imposition of civil or criminal penalties.
  Failure to obtain regulatory approval in foreign jurisdictions would prevent us from marketing
our products internationally.
  Our product candidates may never achieve market acceptance even if we obtain regulatory
approvals.
  
    
    our ability to provide acceptable evidence of safety and efficacy;
 29




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##### Table of Contents




    
    the prevalence and severity of adverse side effects;
    
    availability, relative cost and relative efficacy of alternative and competing treatments;
    
    the effectiveness of our marketing and distribution strategy;
    
    publicity concerning our products or competing products and treatments; and
    
    our ability to obtain sufficient third-party insurance coverage or reimbursement.
  If we are unable to obtain, maintain and enforce our proprietary rights, we may not be able to
compete effectively or operate profitably.
  
    
    obtain patent and other proprietary protection for our technology, processes and product candidates;
    
    defend patents once issued;
    
    preserve trade secrets; and
    
    operate without infringing the patents and proprietary rights of third parties.
  
    
    we might not have been the first to make the inventions covered by any of our patents, if issued, or our
pending patent applications;
    
    we might not have been the first to file patent applications for these inventions;
    
    others may independently develop similar or alternative technologies or duplicate any of our technologies;
    
    it is possible that none of our pending patent applications will result in issued patents or, if issued,
these patents may not be sufficient to protect our technology or provide us with a basis for
commercially-viable products and may not provide us with any competitive advantages;
    
    if our pending applications issue as patents, they may be challenged by third parties as not infringed,
invalid or unenforceable under United States or foreign laws;
    
    if issued, the patents under which we hold rights may not be valid or enforceable; or
    
    we may develop additional proprietary technologies that are not patentable and which may not be
adequately protected through trade secrets, if for example a competitor were to independently develop
duplicative, similar or alternative technologies.
 30
    Table of Contents     If our SMIP technology or our product candidates, including TRU-015, conflict with the rights
of others, we may not be able to manufacture or market our product candidates, which could have a
material and adverse effect on us and on our collaboration agreement with Wyeth.
     31




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##### Table of Contents



We may incur substantial costs as a result of litigation or other proceedings relating to
patent and other intellectual property rights.
  If any products we develop become subject to unfavorable pricing regulations, third-party
reimbursement practices or healthcare reform initiatives, our business could be harmed.
  32




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##### Table of Contents



We face potential product liability exposure, and if successful claims are brought against us,
we may incur substantial liability for a product candidate and may have to limit its
commercialization.
  
    
    decreased demand for our product candidates;
    
    impairment of our business reputation;
    
    withdrawal of clinical trial participants;
    
    costs of related litigation;
    
    substantial monetary awards to patients or other claimants;
    
    loss of revenues; and
    
    the inability to commercialize our product candidates.
  We currently rely on a single manufacturer to supply one of our product candidates, which
could delay or prevent the clinical development and commercialization of our product candidates.
  33




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##### Table of Contents



We face substantial competition, which may result in others discovering, developing or
commercializing products before, or more successfully, than we do.
  TRU-015 Product. ® ® ® ® ® ® ® tm
 TRU-016 Program. ® ® ® ® ® ®
  
    
    design and develop products that are superior to other products in the market;
    
    attract qualified scientific, medical, sales and marketing and commercial personnel;
 34




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##### Table of Contents




    
    obtain patent and/or other proprietary protection for our processes and product candidates;
    
    obtain required regulatory approvals; and
    
    successfully collaborate with others in the design, development and commercialization of new products.
  If we are unable to establish a sales and marketing infrastructure or enter into
collaborations with partners to perform these functions, we will not be able to commercialize our
product candidates.
  
    
    our inability to recruit and retain adequate numbers of effective sales and marketing personnel;
    
    the inability of sales personnel to obtain access to or persuade adequate numbers of physicians
to prescribe our products;
    
    the lack of complementary products to be offered by sales personnel, which may put us at a
competitive disadvantage relative to companies with more extensive product lines; and
    
    unforeseen costs and expenses associated with creating a sales and marketing organization.
  The loss of members of our management team could substantially disrupt our business
operations.
  We rely on highly skilled personnel, and if we are unable to retain or motivate key personnel
or hire qualified personnel, we may not be able to maintain our operations or grow effectively.
 35
    Table of Contents    If we use biological and hazardous materials in a manner that causes contamination or injury
or violates laws, we may be liable for damages.
  Our management and auditors have identified a material weakness in our internal controls that,
if not properly remediated, could result in material misstatements in our financial statements and
the inability of our management to provide its report on the effectiveness of our internal controls
as required by the Sarbanes-Oxley Act of 2002 for the year ending December 31, 2007, either of
which could cause investors to lose confidence in our reported financial information and have a
negative effect on the trading price of our stock.
    
    
    strengthening our internal staffing and technical expertise in
financial and Securities Exchange Commission, or SEC,
accounting and reporting;
    
    segregating duties within our accounting and finance department;
    
    upgrading our accounting software systems; and
    
    engaging an outside compliance consulting firm to advise us on
improving our internal controls to take advantage of best
practices.
  36




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##### Table of Contents



If we fail to obtain the capital necessary to fund our operations, we may be unable to develop
our product candidates and we could be forced to share our rights to these product candidates with
third parties on terms that may not be favorable to us.
   The trading price of our common stock may be volatile.
  
    
    quarterly variations in our results of operations or those of our collaborators or competitors,
    
    our ability to develop and market new and enhanced product candidates on a timely basis,
 
 
    
    commencement of, or our involvement in, litigation,
    
    changes in governmental regulations or in the status of our regulatory approvals,
 37




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##### Table of Contents




    
    changes in earnings estimates or recommendations by securities analysts,
    
    any major change in our board or management,
    
    general economic conditions and slow or negative growth of our markets, and
    
    political instability, natural disasters, war and/or events of terrorism.
  If securities analysts do not publish research or reports about our business, or if they
downgrade our stock, the price of our stock could decline.
  Future sales of shares by existing stockholders could cause our stock price to decline.
   The concentration of our capital stock ownership with insiders will likely limit your ability
to influence corporate matters.
  Anti-takeover provisions in our charter documents and under Delaware law could make an
acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent
attempts by our stockholders to replace or remove our current management.
 38




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##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Recent Sales of Unregistered Equity Securities
   Use of Proceeds from the Sale of Registered Securities
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
    
    For: 10,308,549
    
    Against: 0
 39




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##### Table of Contents



ITEM 6. EXHIBITS
 ExhibitNumber
    
    Description10.1(A)
    
    Loan and Security Agreement between the registrant and Comerica Bank, dated September 20, 2006.31.1*
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C § 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith.(A)
    
    Incorporated by reference to exhibits of the same number filed with the Amendment No. 3 to the
Registrants Registration Statement of Form S-1 (File No. 33-134709) on September 22, 2006. 40




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##### Table of Contents



SIGNATURES
   TRUBION PHARMACEUTICALS, INC.By:
    
    /s/ Michelle BurrisMichelle BurrisSenior Vice President andChief Financial Officer(Principal Accounting and Financial Officer)
 41




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description10.1(A)
    
    Loan and Security Agreement between the registrant and Comerica Bank, dated September 20, 2006.31.1*
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C § 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith.(A)
    
    Incorporated by reference to exhibits of the same number filed with the Registrants
Registration Statement of Form S-1 (File No. 33-134709) on September 22, 2006. 42