**UNITED
          STATES**
 **SECURITIES
          AND EXCHANGE COMMISSION**
 **Washington,
          D.C. 20549**
 
 FORM
          10-Q
   **x**
                **QUARTERLY
                      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                      EXCHANGE ACT OF 1934**
 **For
          the quarterly period ended March 31, 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 000-51169**
 
 **ASPREVA
          PHARMACEUTICALS CORPORATION**
  (Exact
          name of registrant as specified in its charter)
 **British
                    Columbia, Canada**
                  (State
                    or other jurisdiction of
                  incorporation
                    or organization)
                **98-0435540**
                  (I.R.S.
                    Employer
                  Identification
                    No.)
  **1203
            - 4464 Markham Street,**
 **Victoria,
            British Columbia,**
 **Canada
            V8Z 7X8**
 (Address
            of principal executive office)
 
 **(250)
            744-2488**
 (Registrant’s
            telephone number, including area code)
 
 Indicate
            by check mark whether the registrant (1) has filed all reports required to
            be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
            during the preceding 12 months (or for such shorter period that the
            registrant was required to file such reports), and
            (2) has been subject to such filing requirements for the past 90 days:
            Yes o No
            x
 
 Indicate
            by check mark whether the registrant is a large accelerated filer, an
            accelerated filer, or a non-accelerated filer. See definition of “accelerated
            filer and large accelerated filer” in Rule 12b-2 of the Exchange
            Act:
 Large
                      Accelerated Filer o
                  Accelerated
                      Filer o
                  Non-accelerated
                      Filer x
 
 Indicate
            by check mark whether the registrant is a shell company (as defined in
            Rule
            12b-2 of the Exchange Act): Yes o No
            x
 
 As
            of April 20, 2006, the registrant had 34,581,071 common shares
            outstanding.
  
 
 
 1
 **ASPREVA
          PHARMACEUTICALS CORPORATION**
 **FORM
          10-Q**
 **For
          the Quarterly Period Ended March 31, 2006**
 
 **TABLE
          OF CONTENTS**
 
 **Page****PART
                    I - FINANCIAL INFORMATION**Item 1.
                    Financial Statements (unaudited)Consolidated
                    Balance Sheets - March 31, 2006 and December 31, 2005
                3Consolidated
                    Statements of Operations - Three month periods ended March 31,
                    2006 and
                    2005
                4Consolidated
                    Statements of Cash Flows - Three month periods ended March 31,
                    2006 and
                    2005
                5Notes
                    to Consolidated Financial Statements
                6Item 2.
                    Management’s Discussion and Analysis of Financial Condition and Results
                    of
                    Operations
                11Item 3.
                    Quantitative and Qualitative Disclosures About Market Risk
                20Item 4.
                    Controls and Procedures
                21**PART
                    II - OTHER INFORMATION**Item
                    1. Legal Proceedings
                22Item
                    1A. Risk Factors
                22Item
                    2. Unregistered Sales of Equity Securities and Use of
                    Proceeds
                33Item
                    3. Defaults Upon Senior Securities
                33Item
                    4. Submission of Matters to a Vote of Security Holders
                33Item
                    5. Other Information
                34Item
                    6. Exhibits
                35SIGNATURE
                36
 
 
  
 2
 
 **PART
          I - FINANCIAL INFORMATION**
 **Item 1.
          FINANCIAL STATEMENTS**
 ASPREVA
            PHARMACEUTICALS CORPORATION
  **CONSOLIDATED
          BALANCE SHEETS**
 **(in
          thousands of U.S. dollars)**
 **(unaudited)**
 
 **March
                    31,**
                
                **December
                    31,****2006**
                
                **2005****ASSETS**Current
                    assetsCash
                    and cash equivalents
                
                $
                44,610
                
                $
                14,759Marketable
                    securities (Note 3)
                
                
                99,038
                
                
                97,280Accounts
                    receivable
                
                
                66,843
                
                
                48,246Prepaid
                    expenses
                
                
                2,838
                
                
                2,005Deferred
                    income tax asset
                
                
                978
                
                
                1,896Foreign
                    currency contracts (Note 8)
                
                
                3,071
                
                
                2,377Total
                    current assets
                
                
                217,378
                
                
                166,563Property
                    and equipment, net of accumulated depreciationof
                    $1,008 (2005 - $856)
                
                
                2,589
                
                
                2,687Deferred
                    income tax asset
                
                
                2,890
                
                
                2,889Restricted
                    cash
                
                
                718
                
                
                716**TOTAL
                    ASSETS**
                
                $
                223,575
                
                $
                172,855**LIABILITIES
                    AND SHAREHOLDERS’ EQUITY**Current
                    liabilitiesAccounts
                    payable
                
                $
                10,621
                
                $
                8,463Accrued
                    liabilities
                
                
                10,105
                
                
                8,806Unearned
                    royalty advance
                
                
                6,142
                
                
                6,079Current
                    portion under capital leases
                
                
                451
                
                
                441Current
                    portion of deferred lease inducement
                
                
                121
                
                
                121Total
                    current liabilities
                
                
                27,440
                
                
                23,910Long-term
                    portion under capital leases
                
                
                300
                
                
                419Long-term
                    portion of deferred lease inducement
                
                
                450
                
                
                480Total
                    liabilities
                
                
                28,190
                
                
                24,809Commitments
                    and contingencies (Notes 7 and 12)Shareholders’
                    equity (Note 6)Common
                    sharesAuthorized:
                    unlimitedIssued
                    and outstanding
                
                
                145,733
                
                
                142,464March
                    31, 2006  - 34,578,240December 31,
                    2005  - 34,156,231Additional
                    paid-in capital
                
                
                8,726
                
                
                9,618Retained
                    earnings (deficit)
                
                
                39,221
                
                
                (5,531
                )Accumulated
                    other comprehensive income
                
                
                1,705
                
                
                1,495Total
                    shareholders’ equity
                
                
                195,385
                
                
                148,046**TOTAL****LIABILITIES
                    AND SHAREHOLDERS’ EQUITY**
                
                $
                223,575
                
                $
                172,855
 
 
 
 See
          accompanying notes to consolidated financial statements.
  3
 
 **ASPREVA
          PHARMACEUTICALS CORPORATION**
 **CONSOLIDATED
          STATEMENTS OF OPERATIONS**
 **(in
          thousands of U.S. dollars, except per share amounts)**
 **(unaudited)**
 
 **Three
                    Months Ended **March
                    31,******2006**
                
                **2005****Royalty
                    revenue**
                
                $
                62,680
                
                $
                -**Expenses**Research
                    and development
                
                
                9,814
                
                
                4,045Marketing,
                    general and administrative
                
                
                6,111
                
                
                5,35115,925
                
                
                9,396Operating
                    income (loss)
                
                
                46,755
                
                
                (9,396
                )**Other
                    income (expense)**Interest
                    and other income
                
                
                2,300
                
                
                451Interest
                    and other expense
                
                
                (14
                )
                
                (40
                )Total
                    other income
                
                
                2,286
                
                
                411**Income
                    (loss) before income taxes**
                
                
                49,041
                
                
                (8,985
                )**Income
                    tax expense**Current
                
                
                4,044
                
                
                -Deferred
                
                
                245
                
                
                -Total
                    income tax expense
                
                
                4,289
                
                
                -**Net
                    income (loss) for the period**
                
                $
                44,752
                
                $
                (8,985
                )**Net
                    income (loss) per common share**(Note
                    5)Basic
                
                $
                1.30
                
                $
                (0.46
                )Diluted
                
                $
                1.25
                
                $
                (0.46
                )
   See
            accompanying notes to consolidated financial statements.
 
 4
  **ASPREVA
          PHARMACEUTICALS CORPORATION**
 **CONSOLIDATED
          STATEMENTS OF CASH FLOWS**
 **(in
          thousands of U.S. dollars)**
 **(unaudited)**
 
 **Three
                    Months Ended **March
                    31,******2006**
                
                **2005****Operating
                    Activities**Net
                    income (loss) for the period
                
                $
                44,752
                
                $
                (8,985
                )Adjustment
                    to reconcile net income (loss) to cash provided by operating
                    activities:Depreciation
                    and amortization
                
                
                122
                
                
                108Deferred
                    taxes
                
                
                917
                
                
                -Stock-based
                    compensation
                
                
                973
                
                
                1,587Net
                    change in non-cash working capital items related to
                    operations:Accounts
                    receivable
                
                
                (19,116
                )
                
                (252
                )Investment
                    tax credits receivable
                
                
                -
                
                
                261Prepaid
                    expenses
                
                
                (833
                )
                
                423Restricted
                    cash
                
                
                (2
                )
                
                -Accounts
                    payable
                
                
                2,157
                
                
                (1,320
                )Accrued
                    liabilities
                
                
                1,299
                
                
                (1,459
                )Net
                    cash flows from (used in) operating activities
                
                
                30,269
                
                
                (9,637
                )**Investing
                    Activities**Purchases
                    of marketable securities
                
                
                (55,615
                )
                
                (55,952
                )Redemptions
                    of marketable securities
                
                
                53,955
                
                
                32,313Purchase
                    of property and equipment
                
                
                (54
                )
                
                (8
                )Net
                    cash flows used in investing activities
                
                
                (1,714
                )
                
                (23,647
                )**Financing
                    Activities**Issuance
                    of common shares
                
                
                1,405
                
                
                91,731Share
                    issue costs
                
                
                -
                
                
                (7,314
                )Payments
                    on capital lease obligations
                
                
                (109
                )
                
                (102
                )Net
                    cash flows from financing activities
                
                
                1,296
                
                
                84,315Effect
                    of exchange rate changes on cash and cash equivalents
                
                
                -
                
                
                (41
                )Net
                    increase in cash and cash equivalents
                
                
                29,851
                
                
                50,990Cash
                    and cash equivalents, beginning of the period
                
                
                14,759
                
                
                3,507Cash
                    and cash equivalents, end of the period
                
                $
                44,610
                
                $
                54,497See
                    Note 10 for supplemental cash flow information
 
  See
                accompanying notes to consolidated financial statements.
 
 5
  
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(unaudited)**
 (all
          tabular amounts in thousands of U.S. dollars other than share or per share
          data
          or unless otherwise stated)
 March
          31, 2006
 
  **1.**
                  **Nature of Business and
                    Basis of
                    Presentation**
 ****
 Unless
          the context otherwise required, all references to “Aspreva”, “we”, “our” and
“us” refer to Aspreva Pharmaceuticals Corporation and its
          subsidiaries.
  We
          were incorporated on December 20, 2001 under the Canada Business
          Corporation Act and continued under the Business Corporations Act (British
          Columbia) on November 19, 2004. Our principal business is to identify,
          develop and commercialize new indications for approved drugs and drug candidates
          for patients living with less common diseases.
 
 We
          have prepared these consolidated financial statements in accordance with
          U.S.
          generally accepted accounting principles for interim financial statements
          and
          with the instructions for Form 10-Q and Article 10 of Regulation S-X.
          Accordingly, the financial statements do not include all of the information
          and
          footnotes required by U.S. generally accepted accounting principles for
          annual
          financial statements. The financial statements should be read in conjunction
          with our audited consolidated financial statements and notes thereto included
          in
          our Annual Report on Form 10-K for the year ended December 31, 2005 filed
          with
          the United States Securities and Exchange Commission on March 2,
          2006.
 
 In
          the opinion of management, these consolidated financial statements include
          all
          normal and recurring adjustments considered necessary to present fairly
          our
          financial position, results of operations and cash flows. Interim results
          are
          not necessarily indicative of the operating results for the full year or
          for any
          other subsequent interim period.
  **2.**
                    **Significant Accounting
                      Policies**
 Our
          significant accounting policies are the same as described in Note 2 to
          our Notes
          to Consolidated Financial Statements included in our Annual Report on Form
          10-K
          for the year ended December 31, 2005 filed with the United States Securities
          and
          Exchange Commission on March 2, 2006 other than the adoption of  SFAS 123
          (R) as decribed below. The following is a summary of the significant accounting
          policies used in the preparation of these financial statements.
 
 **Stock-Based
          Compensation Expense**
 In
          December 2004, the Financial Accounting Standards Board, or FASB, issued
          Statement No. 123 (revised 2004), or SFAS 123 (R), *Share
          Based Payment* ,
          which is a revision of Statement No. 123, or SFAS 123, *Accounting
          for Stock-Based Compensation* ,
          as amended by SFAS 148. We adopted SFAS 123 (R) effective January 1, 2006.
          SFAS 123 (R) requires all share-based payments to employees, including
          grants of
          stock options, to be recognized over the service period in the statement
          of
          operations based on their fair values. In addition, SFAS 123 (R) amends
          the
          accounting for modifications and forfeitures of awards in determining
          compensation cost.
 
 SFAS
          123 (R) provides two transition methods - modified-prospective and
          modified-retrospective. The modified-prospective method recognizes the
          grant-date fair value of compensation for new and unvested awards beginning
          in
          the fiscal period in which the recognition provisions are first applied.
          Prior
          periods are not restated. Under the modified-retrospective method, entities
          are
          allowed to restate prior periods by recognizing a cumulative catch-up adjustment
          to compensatory cost in the period of adoption. We adopted this section
          using
          the modified-prospective method. Since we previously accounted for stock-based
          compensation under the fair value provisions of SFAS 123, adoption of SFAS
          123
          (R) did not have a significant impact on our financial position or consolidated
          statement of operations.
 
 **Revenue
          Recognition**
 Pursuant
          to our agreement with Hoffmann - La Roche Inc. and F. Hoffmann - La Roche
          Ltd.,
          collectively Roche, commencing April 1, 2005, we became entitled to a royalty
          based on an equal sharing of incremental net sales of CellCept in non-transplant
          indications above a negotiated baseline less a distribution fee, payable
          on a
          quarterly basis. This baseline was originally set in July 2003 at 134 million
          Swiss Francs, or CHF, and is subject to an annual price index adjustment.
          Roche
          and Aspreva reset the baseline for 2006 to CHF 130.5 million, after taking
          into
          account the price index adjustment and, for the time being, excluding Japan
          as a
          licensed territory under the agreement. We follow the provisions of the
          Securities and Exchange Commission’s Staff Accounting Bulletin No. 104, or SAB
          104, *Revenue
          Recognition* ,
          which sets forth criteria that must be met in order to recognize revenue:
          (i)
          there is persuasive evidence that an arrangement exists; (ii) delivery
          of the
          products and/or services has occurred; (iii) the selling price is fixed
          or
          determinable; and (iv) collectibility is reasonably assured.
 
 Roche
          and Aspreva have developed a proprietary sales tracking methodology to
          audit net
          sales of CellCept and to determine the portion attributable to sales from
          use in
          non-transplant indications. The results of this audit lag actual net sales
          by
          approximately six months. Roche and Aspreva use actual total CellCept sales
          results and estimates of the quarterly split between net sales attributed
          to
          transplant and non-transplant indications to calculate the royalty payment
          payable to us at the end of each quarter. We record a portion of this royalty
          payment as revenue within quarterly financial results, with the balance
          recorded
          as unearned royalty advance and subject to a subsequent reconciliation.
  6
  Once
          the six month lag period has passed, and audited results can be obtained,
          Aspreva and Roche employ a mechanism to reconcile audited amounts against
          the
          royalty previously paid to us. This reconciliation process is undertaken
          quarterly, based on the most recent available audit information. This
          reconciliation mechanism, however, will limit reconciliation payments to
          either
          Roche or Aspreva to a maximum amount of CHF 4.0 million per quarter.
          If the results of the reconciliation indicate that the CHF 4.0 million
          collar has been exceeded in favor of the same party for two consecutive
          quarters, we and Roche have agreed upon a mechanism to review the sales
          tracking
          methodology and/or our methodology for estimating royalty payments and
          introduce
          appropriate changes. The terms of this collar may be changed prospectively
          at
          any time by the joint committee formed under our agreement with Roche,
          on which
          we have equal representation.
 
 We
          record all but CHF 4.0 million of the royalty payment as revenue
          within quarterly financial results. In subsequent quarters, consistent
          with the
          timing of the reconciliation described above, the remaining
          CHF 4.0 million of the royalty payment, as well as any additional
          payments to us or from us to Roche as a result of such reconciliation will
          be
          recorded in the period the reconciliation is completed. Thus, at any period
          end
          we will carry a maximum of CHF 4.0 million for each quarter that has
          not then been reconciled, classified as unearned royalty advance on the
          balance
          sheet. At March 31, 2006, there was CHF 8.0 million ($ 6.1 million) recorded
          in
          unearned royalties as the fourth quarter of 2005 and the first quarter
          of 2006
          have not been reconciled.
 
 In
          March 2006, Aspreva and Roche agreed to the final audited results for the
          net
          sales relating to the third quarter of 2005. The audit results were in
          excess of
          the CHF 4.0 million collar for the second consecutive quarter and, in accordance
          with our collaboration agreement, Roche and Aspreva agreed to settle this
          amount
          in full. For the three month period ended March 31, 2006, we recorded royalty
          revenue of $62.7 million, which is comprised of $46.5 million for the first
          quarter initial royalty payment ($49.6 million less $3.1 million collar
          recorded
          as unearned royalty advance) and $16.2 million (CHF 20.8 million) arising
          from
          the reconciliation of audited net sales data to the initial royalty payment
          for
          the third quarter of 2005. The initial royalty payment and reconciliation
          payment are recorded in accounts receivable as of March 31, 2006, and are
          payable to us within 45 days of March 31, 2006.
 
 In
          December 2005, Aspreva and Roche made minor changes to the sales tracking
          methodology with a goal to reduce quarterly reconciliation payments in
          the
          future. As a result, large reconciling amounts, such as experienced in
          the three
          month period ended March 31, 2006, are not expected to recur.
  **3.**
                    **Marketable
                      Securities**
 ****
 *Available
          for sale debt securities*
 **Cost**
                
                **Accrued**
                  **interest**
                
                **Gross**
                  **unrealized**
                  **gains**
                
                **Gross**
                  **unrealized**
                  **losses**
                
                **Approximate**
                  **market**
                  **and
                    carrying**
                  **value****March
                    31, 2006**
                
                $
                98,347
                
                $
                728
                
                $
                3
                
                $
                (40
                )
                $
                99,038**December
                    31, 2005**
                
                $
                96,687
                
                $
                740
                
                $
                2
                
                $
                (149
                )
                $
                97,280
 
  **4.**
                      **Stock-Based Compensation**
 ****
 We
          measure stock-based awards using the Black-Scholes option pricing model
          and
          amortize the fair value of granted stock options to the consolidated statement
          of operations over the vesting period of the options on an accelerated
          basis. We
          estimate the fair value of options using the following assumptions:
 
 **Three
                    Months Ended **March
                    31,******2006**
                
                **2005**Expected
                    stock price volatility
                
                
                70%
                
                
                150%Average
                    risk-free interest rate
                
                
                4.0%
                
                
                4.0%Expected
                    option life in years
                
                
                5.0
                
                
                8.0Dividend
                    yield
                
                
                0%
                
                
                0%Forfeiture
                    rate
                
                
                3%
                
                
                N/A
 
  7
  Included
          within the statements of operations are the following charges for stock-based
          compensation:
 **Three
                    Months Ended **March
                    31,******2006**
                
                **2005**Research
                    and development expense
                
                $
                341
                
                $
                587Marketing,
                    general and administrative expense
                
                
                632
                
                
                1,000Total
                    stock-based compensation
                
                $
                973
                
                $
                1,587
 
 As
          required by SFAS 123 (R), previously recorded stock-based compensation
          expense
          totaling $0.8 million was reversed in the three months ended March 31,
          2006 to
          reflect the impact of actual stock option forfeitures within the period.
  **5.**
                        **Net Income (Loss)
                          per Common
                          Share**
 ****
 We
          calculate net income (loss) per common share in accordance with
          SFAS 128, *Earnings
          per Share* ,
          which requires the presentation of basic and diluted net income (loss) per
          common share using the treasury stock method.
 
 The
          denominators for basic and diluted net income (loss) per common share for
          the
          three month periods ended March 31, 2006 and 2005 were calculated as follows:
 
 **Three
                    Months Ended **March
                    31,******2006**
                
                **2005**Weighted
                    average shares outstanding used for basic net income (loss) per
                    common
                    share
                
                
                34,375,761
                
                
                19,358,344Effect
                    of dilutive stock options
                
                
                1,186,127
                
                
                -Effect
                    of dilutive warrants
                
                
                128,255
                
                
                -Weighted
                    average shares outstanding used for diluted net income (loss)
                    per common
                    share
                
                
                35,690,143
                
                
                19,358,344
 
 Diluted
          loss per common share is equivalent to basic loss per common share for
          the three
          month period ended March 31, 2005, as the outstanding options and warrants
          are
          anti-dilutive to the loss per common share.
 
 Due
          to their anti-dilutive nature, the following potentially issuable shares
          were
          omitted from the calculation of diluted net income (loss) per common share
          for
          these periods:
 
 **As
                    of March 31,****2006**
                
                **2005**Stock
                    options
                
                
                551,724
                
                
                1,926,514Warrants
                
                
                -
                
                
                230,360Total
                
                
                551,724
                
                
                2,156,874
  **6.**
                          **Shareholders’
                            Equity**
 
 **Statement
          of Shareholders’ Equity**
 The
          following table summarizes the activity in our shareholders’ equity from
          December 31, 2005 to March 31, 2006: ****
 Number
                  of
                    Shares
                
                Common
                  Shares
                
                Additional
                  Paid-In
                  Capital
                
                Accumulated
                    Other Comprehensive Income
                
                Retained
                    Earnings/ (Deficit)
                
                Total
                    Shareholders’ Equity**Balance,
                    as of December 31, 2005**
                
                
                34,156,231
                
                $
                142,464
                
                $
                9,618
                
                $
                1,495
                
                $
                (5,531
                )
                $
                148,046Shares
                    issued on:Exercise
                    of options
                
                
                379,191
                
                
                2,939
                
                
                (1,714
                )
                
                -
                
                
                -
                
                
                1,225Exercise
                    of warrants
                
                
                42,818
                
                
                330
                
                
                (151
                )
                
                -
                
                
                -
                
                
                179Stock-based
                    compensation expense
                
                
                -
                
                
                -
                
                
                973
                
                
                -
                
                
                -
                
                
                973Unrealized
                    gain on derivative financial instruments
                
                
                -
                
                
                -
                
                
                -
                
                
                100
                
                
                -
                
                
                100Reclassification
                    of unrealized gain on marketable securities, net of tax
                
                
                -
                
                
                -
                
                
                -
                
                
                16
                
                
                -
                
                
                16Unrealized
                    loss on marketable securities, net of tax
                
                
                -
                
                
                -
                
                
                -
                
                
                94
                
                
                -
                
                
                94Net
                    income for the period
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                44,752
                
                
                44,752**Balance,
                    as of March 31, 2006**
                
                
                34,578,240
                
                $
                145,733
                
                $
                8,726
                
                $
                1,705
                
                $
                39,221
                
                $
                195,385
 
 
  8
  **Comprehensive
          Income**
 Comprehensive
          income for the three month period ended March 31, 2006 was $45.0 million
          and
          comprehensive loss for the three month period ended March 31, 2005 was
          $9.1
          million.
 
 **Stock
          Options**
 Stock
          option transactions for the three month period ended March 31, 2006, and
          the
          number of stock options outstanding as of March 31, 2006, are summarized
          below:
 
 **Number
                    of**
                  **Common
                    Shares**
                
                **Weighted
                    Average**
                  **Exercise
                    Price***Exercisable
                    in Canadian dollars***Balance,
                    December 31, 2005**
                
                
                2,271,576
                
                
                
                
                $
                7.38Options
                    granted
                
                
                552,000
                
                
                
                
                
                29.29Options
                    forfeited
                
                
                (206,867
                )
                
                
                
                
                5.60Options
                    exercised
                
                
                (379,191
                )
                
                
                
                
                3.73**Balance,
                    March 31, 2006**
                
                
                2,237,518
                
                
                
                
                $
                13.57
 
 The
          stock options expire at various dates from April 2013 to March 2016. As
          of March
          31, 2006, a total of 807,842 common shares are available for future grant
          under
          the Aspreva 2002 Incentive Stock Option Plan. The stock options typically
          have a
          ten year contractual life and vest ratably over a period of one to four
          years
          from the date of grant.
 
 **Warrants**
 In
          March 2004, we issued warrants entitling the holders to acquire 230,360
          common
          shares at an exercise price of C$4.76 per share. Of these, 42,818 warrants
          were
          exercised during the three month period ended March 31, 2006. As of March
          31,
          2006, we had 151,872 warrants outstanding. These warrants will expire,
          if
          unexercised, in September 2006.
 **7.**
                            **Contractual
                              Obligations and
                              Commitments**
 
 We
          have agreements with clinical sites and contract research organizations
          for the
          conduct of our clinical trials. We make payments to these sites and
          organizations based upon the number of patients enrolled and the period
          of
          follow-up in the trials. At March 31, 2006, we have commitments to these
          groups
          amounting to $25.4 million over the next three years.
 
 Occasionally,
          we enter into agreements with third parties in the ordinary course of business
          that include indemnification provisions that are customary in the industry.
          Those indemnifications generally require us to compensate the other party
          for
          certain damages and costs incurred as a result of third party claims or
          damages
          arising from these transactions. These indemnification provisions may survive
          termination of the underlying agreement. The nature of the indemnification
          obligation prevents us from making a reasonable estimate of the maximum
          potential amount we could be required to pay. Historically, we have not
          made any
          indemnification payments under such agreements and no amount has been accrued
          in
          the accompanying consolidated financial statements with respect to these
          indemnification obligations.
 **8.**
                              **Derivative
                                Financial
                                Instruments**
 We
          use derivative financial instruments to hedge our royalty payments. Our
          royalty
          payments are received from Roche in Swiss francs, or CHF, on a quarterly
          basis
          45 days after each quarter end. Sales of CellCept are denominated in
          multi-currencies and are converted to CHF by Roche for the purpose of
          calculating amounts to be paid to us. To the extent the Swiss franc increases
          in
          value relative to these other currencies, the total aggregate CHF value
          of
          CellCept sales decreases and the amount that we are entitled to may be
          reduced.
          To mitigate this risk, at the beginning of each quarter, we enter into
          noon
          average rate contracts or NARCs to sell U.S. dollars and Euros and buy
          CHF. The
          NARCs are designed to hedge our direct exposures of forecasted transactions
          and
          pursuant to SFAS No. 133 *Accounting
          for Derivative Instruments and Hedging Activities* qualify as cash flow hedges. Forward contracts to sell CHF are entered
          with
          settlement dates that coincide with the date we receive our royalty payments
          from Roche. The forward contracts entered into are based on forecasts and
          as
          such they are initially designated as cash flow hedges. For the period
          from the
          quarter end to the settlement date, the hedges are re-designated and are
          treated
          as fair value hedges. Any change in value between quarter end and settlement
          date is recorded in other income or expense as a foreign exchange gain
          or
          loss.
 
 As
          a result of our global operations with offices in Canada and the United
          Kingdom
          we incurred significant amount of our research and development and general
          and
          administrative expenditures in both Canadian dollars and pounds sterling.
          In
          order to hedge against the impact of fluctuations in the value of the Canadian
          dollar and pounds sterling relative to the U.S. dollar, we enter into short-term
          forward contracts to purchase both Canadian dollars and pounds sterling.
          Forward
          hedges relating to forecasted expenditures are cash flow hedges.
 
  9
  The
          following is a summary of the derivative instruments in place at March
          31,
          2006:
 
 **Type****of
                    hedge**
                
                **Currency****Exchanged**
                
                **Settlement****dates**
                
                **Total****Notional****Amount**
                
                **Average****Settlement****Amount**Forward
                    Contract
                
                Sell
                    USD buy CAD
                
                April
                    2006 - April 2007
                
                12,407
                    USD
                
                0.8631Forward
                    Contract
                
                Sell
                    USD buy GBP
                
                April
                    2006 - April 2007
                
                9,376
                    USD
                
                1.7514Forward
                    Contract
                
                Sell
                    CHF buy GBP
                
                May
                    2006 - February 2007
                
                4,753
                    CHF
                
                2.2455Forward
                    Contract
                
                Sell
                    CHF buy CAD
                
                May
                    2006 - February 2007
                
                1,573
                    CHF
                
                1.1225Forward
                    Contract
                
                Sell
                    CHF buy USD
                
                May
                    2006 - February 2007
                
                149,360
                    CHF
                
                1.2533NARC
                
                Sell
                    USD buy CHF
                
                May
                    2006 - August 2007
                
                42,568
                    USD
                
                0.7699NARC
                
                Sell
                    Euro buy CHF
                
                May
                    2006 - August 2007
                
                12,421
                    Euro
                
                0.6423
 
 The
          fair value of the derivative financial instruments is the estimated amount
          that
          we would receive or pay to terminate a contract at the reporting date.
          At March
          31, 2006, the fair value of our forward contracts totaled $3.0 million
          and
          $100,000 in respect of the NARCs. Of this, $1.9 million relates to cash
          flow
          hedges (recorded in Other Comprehensive Income); and $1.2 million relates
          to
          fair value hedges (recorded in revenue).
 
 We
          do not use derivative financial instruments for speculative or trading
          purposes,
          nor do we hold or issue leveraged derivative financial instruments. All
          activity
          is governed by a board approved hedging policy and is monitored for compliance
          on an ongoing basis. We are exposed to credit loss in the event of
          non-performance by the counter-parties to the foreign exchange forward
          contracts
          and NARCs, however, we do not anticipate non-performance by any counter
          party.
 **9.**
                                **Income
                                  Taxes**
 The
          provision for income taxes was $4.2 million for the three months ended
          March 31,
          2006, resulting in an effective global tax rate of 8.7% for the period.
          The
          difference between the effective tax rate and the statutory Canadian federal
          income tax rate of 34.1% relate to differing foreign tax rates, changes
          in our
          future income tax valuation allowance and utilization of tax pools. We
          believe
          the overall effective global tax rate for the full year will be less than
          20%.
 **10.**
                                **Supplemental
                                  Cash
                                  Flow**
 Supplemental
          cash flow information is as follows:
 
 **Three
                    Months Ended **March
                    31,******2006**
                
                **2005**Equipment
                    acquired under capital leases
                
                $
                -
                
                $
                140Income
                    taxes paid
                
                
                219
                
                
                -Interest
                    paid
                
                
                12
                
                
                12
 **11.**
                                **Related
                                  Party Transactions**
 We
          retain Farris, Vaughan, Wills & Murphy LLP, a law firm where R. Hector
          MacKay-Dunn, Q.C., is a senior partner. Mr. MacKay-Dunn is a member of
          our board
          of directors and acts as our Corporate Secretary. In the three months ended
          March 31, 2006 and 2005, we incurred legal fees payable to Farris, Vaughan,
          Wills & Murphy LLP, of $143,000 and $560,000, respectively, of which $30,000
          has been paid as of March 31, 2006. In 2006, these fees relate primarily
          to
          general corporate legal advice while in 2005 these fees related primarily
          to
          services undertaken in conjunction with our initial public
          offering.
 **12.**
                                **Contingencies**
 From
          time to time, we may be involved in litigation relating to claims arising
          out of
          our operations. We are not currently involved in any material legal proceedings.
  **13.**
                                **Comparative
                                  Figures**
 Certain
          of the prior year’s figures including cash and cash equivalents have been
          reclassified to conform to the presentation adopted in the current
          period.
 
  10
 **Item
          2.**
 **MANAGEMENT’S
          DISCUSSION AND ANALYSIS**  **OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS**
 
 You
          should read the following discussion and analysis by our management of
          our
          financial condition and results of operations in conjunction with our audited
          consolidated financial statements and related notes thereto included as
          part of
          our Annual Report on Form 10-K for the year ended December 31, 2005 and
          our
          unaudited consolidated financial statements for the three month period
          ended
          March 31, 2006. Our consolidated financial statements have been prepared
          in
          accordance with U.S. generally accepted accounting principles and are presented
          in U.S. dollars.
  **Forward-Looking
          Statements**
  *The
          information in this discussion contains forward-looking statements within
          the
          meaning of Section 27A of the Securities Act of 1933 and Section 21E
          of the Securities Exchange Act of 1934 and/or forward-looking information
          under applicable Canadian provincial securities laws, or collectively
          forward-looking statements which are subject to the “safe harbor” created
          by those sections. These forward-looking statements include, but are not
          limited
          to, statements concerning our strategy, future operations, future financial
          position, future revenues, projected costs, prospects and plans and objectives
          of management are forward-looking statements. The words “anticipates”,
“believes”, “estimates”, “expects”, “intends”, “may”, “plans”, “projects”,
“will”, “would” and similar expressions are intended to identify forward-looking
          statements, although not all forward-looking statements contain these
          identifying words. We may not actually achieve the plans, intentions or
          expectations disclosed in our forward-looking statements and you should
          not
          place undue reliance on our forward-looking statements. Actual results
          or events
          could differ materially from the plans, intentions and expectations disclosed
          in
          the forward-looking statements that we make. These forward-looking statements
          involve risks and uncertainties that could cause our actual results to
          differ
          materially from those in the forward-looking statements, including, without
          limitation, the risks set forth in Item 1A “Risk Factors” in this Quarterly
          Report on Form 10-Q. Our forward-looking statements do not reflect the
          potential
          impact of any future acquisitions, mergers, dispositions, joint ventures
          or
          investments we may make. We do not assume any obligation to update any
          forward-looking statements, other than as required by applicable law.*
 
 **Overview**
 
 We
          are an emerging global pharmaceutical company focused on identifying,
          developing, and upon approval, commercializing existing approved drugs
          and drug
          candidates for new indications. Our focus is on delivering effective,
          evidence-based treatments to manage less common diseases.
 
 Our
          initial focus in autoimmune disease led us to identify the potential efficacy
          of
          the drug CellCept, (mycophenolate mofetil) in the treatment of autoimmune
          diseases. In July 2003, we entered into our first collaboration with Hoffmann
          -
          La Roche Inc. and F. Hoffmann - La Roche Ltd, or collectively Roche, for
          exclusive world-wide rights, excluding Japan, to develop and, upon regulatory
          approval, commercialize CellCept, for all autoimmune indications. CellCept
          is an
          immunosuppressant or “anti rejection” drug currently approved by the U.S. Food
          and Drug Administration, or FDA, for use in the prevention of rejection
          in
          patients receiving heart, kidney and liver transplants. We currently have
          three
          clinical development programs underway to evaluate CellCept in the treatment
          of
          the following autoimmune diseases: lupus nephritis, myasthenia gravis and
          pemphigus vulgaris. CellCept is not currently approved by the FDA for use
          in
          these autoimmune indications.
  **Collaborative
          Agreements**
 
 Under
          the terms of our collaboration agreement with Roche, we agreed to conduct
          three
          clinical programs in lupus nephritis, myasthenia gravis and pemphigus vulgaris.
          We are responsible for assembling the filings for the relevant regulatory
          authorities, and Roche are responsible for submitting applications to the
          regulatory authorities and will be the holder of any regulatory submissions
          and
          resulting regulatory approvals.
 
 Pursuant
          to our collaboration agreement with Roche we are entitled to a royalty
          based on
          an equal sharing of incremental net sales of CellCept in non-transplant
          indications above a negotiated baseline less a distribution fee, payable
          on a
          quarterly basis. This baseline is subject to an annual price index adjustment
          and Roche and Aspreva agreed that the baseline for 2006 would be CHF 130.5
          million, excluding, for the time being, Japan as a licensed territory under
          the
          agreement.
 
 Based
          on our analysis of existing clinical trial and scientific data, we believe
          that
          CellCept also has the potential to be effective in treating a variety of
          autoimmune diseases.
 
 Our
          collaboration agreement with Roche currently excludes Japan as a licensed
          territory and thus excludes that region from our revenue sharing arrangement.
          In
          April 2006, Aspreva entered into a collaboration agreement with Chugai
          Pharmaceuticals Co., Ltd., for the development of CellCept in Japan for
          certain
          autoimmune indications. Chugai, a global pharmaceutical company, has the
          rights
          to CellCept in Japan where it is currently approved for the suppression
          of organ
          rejection in transplant patients. Pursuant to the collaboration agreement,
          Chugai plans to meet with Japanese regulatory authorities during the third
          quarter of this year to discuss how Aspreva’s existing clinical trial data may
          be used in support of the development of CellCept for certain autoimmune
          indications. We will confirm this agreement following Chugai's final decision
          whether or not to proceed on this collaboration agreement following its
          meetings
          with the Japanese regulatory authorities.
  11
 **Clinical
          Development Program**
 
 Our
          clinical development for CellCept focuses on three specific autoimmune
          indications: lupus nephritis, myasthenia gravis and pemphigus vulgaris.
          If we
          and Roche obtain regulatory approval for the use of CellCept in any of
          these
          indications, we will also be responsible for the promotion of CellCept
          for the
          approved autoimmune indications.
 
 Our
          clinical programs have been designed to utilize portions of existing clinical
          data provided by investigator initiated trials (IITs). We expect to use
          the
          results of an IIT conducted by Dr. Ellen Ginzler of State University of
          New
          York, or SUNY Downstate Medical Center in Brooklyn, New York, to support
          our
          supplemental New Drug Application, or sNDA, with the FDA for the use of
          CellCept
          in the treatment of lupus nephritis. The results of Dr. Ginzler’s study (as
          published in the November 24, 2005 issue of the *New
          England Journal of Medicine* )
          are supportive of the potential efficacy and safety of CellCept in the
          induction
          phase of lupus nephritis, adding to the existing body of data that supports
          the
          potential benefit of CellCept in the treatment of lupus nephritis. CellCept
          is
          not currently approved by any regulatory agency for any indication outside
          of
          transplant, and although the results of Dr. Ginzler’s study are encouraging, a
          separate prospective, adequate and well-controlled study such as our
          international phase III lupus nephritis study is necessary to provide
          substantive evidence of the potential safety and efficacy of CellCept in
          patients with lupus nephritis. Similarly we expect to use an IIT conducted
          by
          Dr. Donald Sanders of Duke University to support our application for the
          use of
          CellCept in the treatment of myasthenia gravis. Dr. Sander’s study is structured
          slightly differently from our myasthenia gravis study particularly in areas
          such
          as length of therapy and steroid tapering. Results from Dr. Sanders’ IITs are
          expected in mid-2006.
 
 **Lupus
          Nephritis**
 
 Systemic
          lupus erythematosus, commonly referred to as lupus, is a complex autoimmune
          disease affecting numerous organs and tissues. The immune system, which
          typically fights off viruses and bacteria, loses the ability to differentiate
          between foreign substances, or antigens, and its own cells and tissues.
          The
          involvement of the kidney, known as lupus nephritis, is considered to be
          the
          most serious manifestation of lupus.
 
 The
          Lupus Foundation of America estimates that between 500,000 and 1.5 million
          Americans have lupus. This wide range demonstrates the challenge that exists
          when trying to determine the true prevalence of less common diseases such
          as
          lupus. Our analysis of various sources of data estimates 600,000 diagnosed
          lupus
          patients currently within the U.S. healthcare system. Clinicians estimate
          that
          one third to one half of lupus patients have lupus nephritis which equals
          approximately 200,000 Americans with lupus nephritis.
 
 In
          July 2005, we initiated enrolment of patients in our international phase
          III
          trial of CellCept in the treatment of lupus nephritis. Our trial is designed
          to
          enroll 358 patients with biopsy-proven lupus nephritis. Patient recruitment
          into this trial has become more challenging in light of recent positive
          publications suggesting the efficacy of CellCept in the treatment of lupus
          nephritis. In addition, a number of competing clinical studies also had
          an
          impact on recruitment into our study. However, given current patient enrolment
          rates, we do not anticipate any potential delay to be greater than two
          to four
          months.  We continue to expect, if the data is supportive, to be filing
          regulatory submissions, including a sNDA with the FDA, as well as well
          as
          appropriate filings with the European Union and Canadian regulatory authorities,
          for lupus nephritis in 2007.
 
 In
          March 2006, the FDA provided a response to Roche and Aspreva’s application for
          orphan drug designation for CellCept in the treatment of lupus nephritis,
          a
          subset of systemic lupus erythematosus, or SLE. Since the potential use
          of
          CellCept in SLE is not limited to patients with lupus nephritis only, and
          as the
          size of the broader patient population is significantly greater than the
          200,000
          maximum allowed for an orphan drug designation, the FDA determined that
          CellCept
          is not eligible for orphan drug designation for lupus nephritis. Roche
          and
          Aspreva met to evaluate the FDA’s response and agreed not to pursue the
          designation any further. We do not expect that the decision will harm
          on the potential future commercialization of CellCept for lupus nephritis.
  **Myasthenia
          Gravis**
 
 Myasthenia
          gravis is a debilitating, chronic autoimmune neuromuscular disease in which
          the
          body produces auto−antibodies which prevent the nerves from sending messages to
          the muscles. According to the Myasthenia Gravis Foundation, myasthenia
          gravis
          affects approximately 70,000 to 100,000 people worldwide, including
          approximately 36,000 people in the United States. Although myasthenia gravis
          can
          affect any voluntary muscle, it frequently involves muscles controlling
          eye
          movements, chewing, swallowing, coughing and facial expressions, and can
          be
          life−threatening in some of the affected patients. Complete remission is
          infrequent and long−term immunosuppression is usually required. Current
          treatments of myasthenia gravis include the use of cholinesterase inhibitors,
          steroids and other immunosuppressant drugs such as azathioprine.
   12
  In
          November 2005, we completed enrollment of 176 patients in our international
          phase III trial of CellCept in the treatment of myasthenia gravis. We expect
          to
          complete this trial in late 2006 and intend to submit a sNDA to the FDA,
          as well
          as appropriate filings with the European Union and Canadian regulatory
          authorities in 2007. In
          January 2006, we received orphan drug designation with the FDA for CellCept
          in
          the treatment of myasthenia gravis.
 
 **Pemphigus
          Vulgaris**
 
 Pemphigus
          vulgaris is a rare dermatological autoimmune disease that, according to
          the
          International Pemphigus Foundation, affects approximately 40,000 people
          worldwide. Symptoms include painful and life-threatening blistering of
          the skin
          and mucous membranes which can cover much of the body.
 
 In
          March 2006, we completed enrollment of 77 patients in our international
          phase
          III trial of CellCept in the treatment of pemphigus vulgaris. We expect
          to
          complete this trial in 2007 and intend to submit a sNDA to the FDA, as
          well as
          appropriate filings with the European Union and Canadian regulatory authorities,
          in 2007. We have filed an application with the FDA for orphan drug designation
          for CellCept in pemphigus vulgaris and anticipate a response from the FDA
          in the
          second quarter of 2006.
 
 **Preliminary
          Studies**
 
 There
          is a large and growing amount of data relating to the use of CellCept for
          the
          treatment of many different autoimmune diseases, and we are particularly
          interested in the potential of CellCept in the treatment of cardiovascular
          disease in autoimmune patients and multiple sclerosis patients.
 
 Cardiovascular
          disease is of interest because of its link to lupus. Studies have shown
          that
          cardiovascular disease is responsible for up to 30% of all deaths in patients
          with lupus; the risk of heart attack is 50 times greater in lupus patients;
          and
          sub-clinical atherosclerosis, or the thickening and hardening of the arteries,
          occurs in 40% of lupus patients. Third party preliminary data suggests
          that
          CellCept may have potentially beneficial cardiovascular characteristics;
          a
          hypothesis that is supported by studies of cardiac transplant patients.
          Some of
          these potential benefits include the inhibition of smooth muscle proliferation
          and the suppression of T-cell adhesion and penetration. We have funded
          an IIT
          for CellCept in cardiovascular disease. The protocol for this IIT has been
          established, and the trial is currently recruiting patients. Results are
          anticipated in 2007.
 
 Emerging
          literature also suggests that CellCept may be effective in the treatment
          of
          multiple sclerosis. There have been several small published studies that
          report
          that multiple sclerosis patients treated with CellCept have experienced
          an
          improvement in lesions, as measured by magnetic resonance imaging, a decreased
          rate of relapse and a reduced expanded disability status scale rating.
          We have
          funded an IIT for CellCept in multiple sclerosis that is expected to begin
          in
          2006 with results anticipated in 2007.
 
 We
          believe that the results of these preliminary studies will enable us to
          determine the value in pursuing future development programs in the use
          of
          CellCept to treat cardiovascular disease and multiple sclerosis.
 
 **Commercialization**
 
 We
          do not currently have an approved drug in any market. We intend to design
          our
          future commercialization activities to comply with the laws and regulations
          enforced by applicable regulatory authorities. Our overall commercialization
          strategy is to target a small subset of specialty physicians who treat
          a
          majority of patients with the greatest underserved medical needs.
 
 Prior
          to regulatory approval of CellCept for any autoimmune indications, we will
          conduct extensive market research regarding speciality physician prescribing
          practices and product positioning, and will undertake a market preparation
          program. We currently are fielding a team of medical liaison physicians
          and
          other medical professionals who interact with potential future presenters
          and
          medical advisors to help us identify knowledge gaps in the potential use
          of
          CellCept and to assist us in our clinical development planning. We currently
          have 8 such field based medical advisors deployed in the U.S. and major
          EU
          markets.
 
 **Critical
          Accounting Policies and Significant Judgments and Estimates**
 
 The
          preparation of our consolidated financial statements requires us to make
          estimates and assumptions that affect the reported amounts of assets and
          liabilities and the disclosure of contingent assets and liabilities at
          the date
          of the financial statements as well as the reported revenues and expenses
          during
          the reporting periods. We base our estimates on historical experience and
          on
          various other factors that we believe are reasonable under the circumstances,
          the results of which form the basis for making judgments about the carrying
          value of assets and liabilities that are not apparent from other sources.
          Actual
          results may differ from these estimates under different assumptions or
          conditions.
   13
  Significant
          accounting policies are more fully described in the notes to our audited
          consolidated financial statements and notes thereto, included as part of
          our
          Annual Report on Form 10-K for the year ended December 31, 2005. However,
          we
          believe the following accounting policies relating to revenue recognition,
          stock-based compensation, clinical trial accounting, provision for income
          taxes
          and derivative instruments are the most critical accounting policies for
          assessing our financial performance.
 
 **Revenue
          Recognition**
  Pursuant
          to our collaboration agreement with Roche, commencing April 1, 2005, we
          became entitled to a royalty based on an equal sharing of incremental net
          sales
          of CellCept in non-transplant indications above a negotiated baseline less
          a
          distribution fee, payable on a quarterly basis. This baseline was originally
          set
          in July 2003 at CHF 134 million, and is subject to an annual price index
          adjustment. Roche and Aspreva have reset the baseline to CHF 130.5 million
          for
          2006, after taking into account the price index adjustment and, for the
          time
          being, excluding Japan as a licensed territory under the agreement. The
          baseline
          will be reset on an annual basis during the first quarter of each
          year.
  We
          follow the revenue recognition criteria outlined in Staff Accounting Bulletin
          No. 104, Revenue Recognition. To summarize key requirements outlined in
          Staff Accounting Bulletin No. 104 relating specifically to CellCept:
  •
                royalties
                    are based upon Roche’s ex-factory sales;•
                pricing
                    of the transaction is agreed within the contract based upon Roche’s
                    underlying ex-factory sales price; and•
                collectibility
                    is reasonably assured and contractual arrangement has been agreed
                    and
                    executed with Roche.
  Any
          future non-CellCept royalty revenue will be recognized based on the terms
          of the
          specific collaboration agreements.
  Roche
          and Aspreva have developed a proprietary sales tracking methodology to
          audit net
          sales of CellCept and determine the portion attributable to sales from
          use in
          non-transplant indications. The results of this audit lag actual net sales
          by
          approximately six months. Roche and Aspreva use actual total CellCept sales
          results and estimates of the quarterly split between net sales attributed
          to
          transplant and non-transplant indications to calculate the initial royalty
          payment payable to us at the end of each quarter. We record a portion of
          this
          initial royalty payment as revenue within quarterly financial results,
          with the
          balance recorded as unearned royalty advance and subject to a subsequent
          reconciliation.
  Once
          the six month lag period has passed, and audited results can be obtained,
          Aspreva and Roche employ a mechanism to reconcile audited amounts against
          the
          initial royalty payment previously paid to us. This reconciliation process
          is
          undertaken quarterly, based on the most recent available audit information.
          This
          reconciliation mechanism, however, will limit reconciliation payments to
          either
          Roche or Aspreva by an amount of CHF 4.0 million per quarter. If the
          results of the reconciliation indicate that the CHF 4.0 million collar
          has been exceeded in favor of the same party for two consecutive quarters,
          we
          and Roche have agreed upon a mechanism to review the sales tracking methodology
          and/or our methodology for estimating royalty payments and introduce appropriate
          changes. The terms of this collar may be changed prospectively at any time
          by
          the joint committee formed under our agreement with Roche, on which we
          have
          equal representation.
 
 We
          record all but CHF 4.0 million of the initial royalty payment as
          revenue within quarterly financial results. In subsequent quarters, consistent
          with the timing of the reconciliation described above, the remaining
          CHF 4.0 million of the royalty payment, as well as any additional
          payments to us or from us to Roche as a result of such reconciliation will
          be
          recorded in the period the reconciliation is completed. Thus, at any period
          end
          we carry a maximum of CHF 4.0 million for each quarter that has not
          then been reconciled, classified as unearned royalty advance on the balance
          sheet. Roche and Aspreva have agreed to settle any royalty payment and
          reconciliation amount in cash, and we expect to settle such amounts within
          45 days of each quarter end.
  In
            March
            2006, Aspreva and Roche agreed to the final audited results for the net
            sales
            relating to the third quarter of 2005. The audit results were in excess
            of the
            CHF 4.0 million collar for the second consecutive quarter and, in accordance
            with the collaboration agreement, Roche and Aspreva agreed to settle
            this amount
            in full. As a consequence, revenue of $62.7 million (CHF 80.1 million)
            for the
            first quarter of 2006 includes $16.2 million (CHF 20.8 million) relating
            to the
            third quarter reconciliation.
 In
          December 2005, Aspreva and Roche made minor changes to the sales tracking
          methodology with a goal to reduce quarterly reconciliation payments in
          the
          future. As a result, large reconciling amounts, such as experienced in
          the three
          month period ended March 31, 2006, are not expected to recur.
   14
  **Stock-Based
          Compensation**
 
 Stock-based
          compensation expense, which is a non-cash charge, results in part from
          estimating the fair value of employee stock options granted using the
          Black-Scholes option pricing model. The exercise price for option grants
          are
          based on the market value of our common shares.
 
 Prior
          to January 1, 2006, we accounted for employee stock options using the fair
          value
          method in accordance with Statement of Financial Accounting Standards No.
          123,
          or SFAS123, *Accounting
          for Stock-Based Compensation* .
          As of January 1, 2006 we adopted prospectively Statement of Financial Accounting
          Standards SFAS 123(R), *Share
          Based Payments* ,
          a minor revision of SFAS 123, to account for employee stock options. The
          Black-Scholes option pricing model requires the input of the fair value
          of our
          stock at the date of grant of the stock options as well as the input of
          several
          subjective assumptions including: the expected life of the option, the
          expected
          volatility at the time the options are granted, and the expected forfeiture
          rate
          at the time the options were granted. Our current estimate of expected
          stock
          price volatility is 70%, expected option life is five years, and expected
          forfeiture rate is 3%. The estimated fair value of our options as calculated
          by
          the Black-Scholes option pricing model is amortized, on an accelerated
          basis,
          over the vesting period, which is generally two to four years.
 
 Changes
          in the inputs and assumptions can materially affect the measure of the
          estimated
          fair value of our employee stock options. Also, the accounting estimate
          of
          stock-based compensation expense is reasonably likely to change from period
          to
          period as further stock options are granted and adjustments are made for
          stock
          option forfeitures and cancellations.
 
 Included
          within the statements of operations are the following charges for stock-based
          compensation:
 
 **Three
                    Months Ended **March
                    31,******2006**
                
                **2005**(in
                    millions)Research
                    and development expense
                
                $
                0.4
                
                $
                0.6Marketing,
                    general and administrative expense
                
                
                0.6
                
                
                1.0Total
                    stock-based compensation
                
                $
                1.0
                
                $
                1.6
 
 **Clinical
          Trial Accounting**
 
 We
          record expenses for clinical research organizations, investigators and
          other
          vendors based upon the estimated amount of work completed on each trial.
          These
          estimates may or may not match the actual services performed by the
          organizations as determined by patient enrollment levels and related activities.
          We monitor patient enrollment levels and related activities to the extent
          possible through internal reviews, correspondence and discussions with
          contract
          research organizations and review of contractual terms. However, if we
          have
          incomplete or inaccurate information, we may underestimate activity levels
          associated with various trials at a given point in time. In this event,
          we could
          record significant research and development expenses in future periods
          when the
          actual activity level becomes known. All such costs are charged to research
          and
          development expenses as incurred. To date, we have not experienced material
          changes in these estimates.
 
 **Provision
          for Income Taxes**
 
 We
          have established a wholly-owned subsidiary, Aspreva Pharmaceuticals SA, a
          Swiss company, which is the principal party to our agreement with Roche.
          We have
          obtained a tax ruling from the Swiss tax authorities pursuant to which,
          certain
          income attributable to the exploitation of the CellCept rights we acquired
          from
          Roche and certain income attributable to the exploitation of rights we
          may
          acquire in the future from other third parties, will be subject to a reduced
          tax
          rate in Switzerland.
 
 We
          believe that our effective overall global corporate tax rate realized
          through this structure will be less than 20%.
 
 We
          believe that our agreement with Roche should not be classified as a partnership
          for U.S. federal income tax purposes. If this belief is incorrect, the
          income of our Swiss subsidiary that is from sources within the United States,
          if
          any, could be taxable in the United States on a net income basis. In such
          event,
          our effective tax rate and our tax liability could increase.
 
 If
          we fail to maintain our tax structure, or one or more of the various taxation
          authorities successfully assert that more profits should be allocated to
          their
          respective tax jurisdictions, this may result in a higher overall effective
          tax
          rate. The foregoing analysis only applies to our agreement with Roche.
          Any
          future collaborations that we enter into may be structured differently
          and may
          result in different tax consequences.
   15
  We
          account for income taxes under the liability method. Deferred tax assets
          and
          liabilities are recognized for the differences between the financial statement
          and income tax bases of assets and liabilities, and for operating losses
          and tax
          credit carry forwards. A valuation allowance is provided for the portion
          of
          deferred tax assets that is more likely than not to be unrealized. Deferred
          tax
          assets and liabilities are measured using the enacted tax rates and laws.
  **Derivative
          Instruments**
  We
          utilize foreign exchange forward contracts and other derivative instruments
          to
          manage our exposure to foreign exchange fluctuations.
 
 We
          account for our derivative instruments in accordance with SFAS No. 133 *Accounting
          for Derivative Instruments and Hedging Activities* .
          Derivative instruments are recorded as assets or liabilities, measured
          at fair
          value. Derivatives that are not hedges or are not designated as hedges
          are
          adjusted to fair value through income. If the derivative is a hedge, depending
          upon the nature of the hedge, changes in the fair value of the derivatives
          are
          either offset against the fair value of assets, liabilities or firm commitments
          through income, or recognized in other comprehensive income (loss) until
          the
          hedged item is recognized in income. The ineffective portion of a derivative’s
          change in fair value is immediately recognized in income.
 
 **Results
          of Operations**
 
 Presented
          below is a comparison of our results of operations for the three month
          periods
          ended March 31, 2006 and 2005.
 
 **Royalty
          Revenue**
 
 In
          accordance with the terms of our agreement with Roche commencing April
          1, 2005,
          we became entitled to a royalty based on an equal sharing of incremental
          net
          sales of CellCept in non-transplant indications above a negotiated baseline
          less
          a distribution fee, payable on a quarterly basis. This baseline was originally
          set in July 2003 at CHF 134 million, and is subject to an annual price
          index
          adjustment. Roche and Aspreva have reset the baseline to CHF 130.5 million
          for
          2006, after taking into account the price index adjustment and, for the
          time
          being, excluding Japan as a licensed territory under the agreement.
 
 Under
          this agreement with Roche, we and Roche calculate and record the royalty
          payment
          due to us at the end of each quarter. We recognize a portion of this royalty
          payment as revenue within our quarterly financial results, and record CHF
          4.0
          million of the royalty payment due to us as unearned royalty advance on
          our
          consolidated balance sheets. This amount is subject to a subsequent
          reconciliation between Roche and Aspreva at which time the remaining CHF
          4.0
          million (approximately $3.1 million) of the royalty payment, as well as
          any
          additional payments to us or from us resulting from the reconciliations,
          will be
          recorded in the period the reconciliation is completed.
 
 The
          following summarizes the royalty revenue we have earned to date under our
          agreement with Roche:
  **Three
                      months ended,****June
                      30,****2005**
                  
                  
                  **September
                      30, 2005**
                  
                  
                  **December
                      31, 2005**
                  
                  
                  **March
                      31, 2006**(in
                      millions)Initial
                      quarterly payment less collar
                  
                  $
                  14.7
                  
                  $
                  16.8
                  
                  $
                  39.0
                  
                  $
                  46.5Reconciliation
                      amount
                  
                  
                  -
                  
                  
                  -
                  
                  
                  6.0
                  
                  
                  16.2Total
                      royalty revenue
                  
                  $
                  14.7
                  
                  $
                  16.8
                  
                  $
                  45.0
                  
                  $
                  62.7
 **Research
          and Development Expenses**
 
 From
          inception to March 31, 2006, we have incurred total research and development
          expenses of $51.3 million. Research and development expenses include
          clinical development expenditures for the use of CellCept to treat lupus
          nephritis, myasthenia gravis and pemphigus vulgaris; preliminary studies
          of
          CellCept efficacy in multiple sclerosis and cardiovascular indications;
          regulatory affairs expenses related to CellCept; and expenses related to
          our
          business development team which is working to identify potential new drug
          and
          collaboration opportunities. We expense research and development costs
          as they
          are incurred.
 
 Clinical
          expenses primarily include clinical trial costs, salaries and related costs
          for
          clinical and regulatory personnel, supplies and materials, consultant services
          and facilities. Business development expenses primarily include salaries
          and
          related costs for business development personnel, and consultant services
          related to our efforts to identify other drug opportunities.
 
  16
  A
          majority of our research and development expenditures to date have been
          related
          to the clinical development of CellCept for autoimmune indications. We
          currently
          have rights to one clinical product, CellCept, and are focused on the use
          of
          CellCept to treat three specific autoimmune indications: lupus nephritis,
          myasthenia gravis and pemphigus vulgaris. In addition, we are funding
          preliminary studies for the use of CellCept in the treatment of multiple
          sclerosis and cardiovascular disease. Estimated spending in these two programs
          is expected to be between $5 million and $7 million over the next three
          years.
 
 We
          anticipate completing our Phase III clinical trials for the use of CellCept
          in
          the induction phase of lupus nephritis in early 2007, in the treatment of
          myasthenia gravis in late 2006, and in the treatment of pemphigus vulgaris
          in
          2007. However, we may not be able to complete such clinical trials on schedule
          as our patient enrollment may be slower than expected, the results from
          a
          clinical trial may not be favorable, or the FDA or other regulatory agencies
          may
          require additional clinical trials. Further, data from clinical trials
          is
          subject to varying interpretation, and may be deemed insufficient by the
          regulatory agencies reviewing applications for marketing approvals. As
          such,
          clinical development and regulatory programs are subject to risks and changes
          that may significantly impact our expense projections and development
          timelines.
 
 The
          following table shows the allocation of research and development
          expenses:
 **Annual**
                    **total**
                  
                  **Annual**
                    **total**
                  
                  **Annual**
                    **total**
                  
                  **For
                      the three months**
                    **ended
                      March 31,**
                  
                  **Total
                      from inception to March 31****2003**
                  
                  **2004**
                  
                  **2005**
                  
                  **2005**
                  
                  **2006**
                  
                  **2006**(in
                      millions)Lupus
                      nephritis, or “LN”
                  
                  $
                  0.1
                  
                  $
                  4.9
                  
                  $
                  11.9
                  
                  $
                  2.0
                  
                  $
                  3.9
                  
                  $
                  20.8Myasthenia
                      gravis, or “MG”
                  
                  
                  0.4
                  
                  
                  2.2
                  
                  
                  11.3
                  
                  
                  0.7
                  
                  
                  3.0
                  
                  
                  16.9Pemphigus
                      vulgaris, or “PV”
                  
                  
                  0.4
                  
                  
                  1.3
                  
                  
                  3.3
                  
                  
                  0.3
                  
                  
                  1.0
                  
                  
                  6.0Other
                  
                  
                  -
                  
                  
                  -
                  
                  
                  0.7
                  
                  
                  -
                  
                  
                  0.5
                  
                  
                  1.2Clinical
                      development expenditures
                  
                  
                  0.9
                  
                  
                  8.4
                  
                  
                  27.2
                  
                  
                  3.0
                  
                  
                  8.4
                  
                  
                  44.9Business
                      development expenditures
                  
                  
                  0.3
                  
                  
                  1.7
                  
                  
                  3.0
                  
                  
                  1.0
                  
                  
                  1.4
                  
                  
                  6.4Total
                  
                  $
                  1.2
                  
                  $
                  10.1
                  
                  $
                  30.2
                  
                  $
                  4.0
                  
                  $
                  9.8
                  
                  $
                  51.3
  Research
          and development expenses were $9.8 million for the three month period ended
          March 31, 2006, compared to $4.0 million for the three month period ended
          March 31, 2005. The increase of $5.8 million was due to a $5.4 million
          increase in our clinical development programs and $400,000 increase in
          our
          business development operations. Clinical development costs increased as
          a
          result of: a $1.9 million increase in our LN program costs reflecting the
          continued increase in activity as recruitment increased from 0% in the
          first
          quarter of 2005 to over 30% in 2006; a $2.3 million increase in our MG
          program
          as a consequence of achieving full patient enrollment and thus peak MG
          project spend rate; a $700,000 increase in our PV program costs due to
          achieving
          full enrollment and thus peak PV project spend rate; and $500,000 increase
          in
          the funding of other programs including preliminary studies for the use
          of
          CellCept in the treatment of cardiovascular disease in autoimmune patients
          and
          multiple sclerosis patients.
 
 We
          incurred an increase of $1.2 million in salaries and related costs as we
          continue to build out our global business development and clinical teams
          in our
          Canadian, European and U.S. offices. Stock-based compensation decreased
          by
          $246,000 from the first quarter in 2005 as a result of the forfeiture in
          the
          period of previously expensed options.
 
 The
          total number of employees engaged in research and development increased
          from 23
          at March 31, 2005 to 56 at March 31, 2006, which includes 12 employees
          in our
          business development function.
 
 **Marketing,
          General and Administrative Expenses**
 
 Marketing,
          general and administrative expenses consist primarily of costs and salaries
          associated with building our infrastructure, costs of general corporate
          activities, and salaries and related costs for personnel in executive, finance,
          accounting, corporate compliance and operational functions. Prior to regulatory
          approval of CellCept for any autoimmune indications, we limit our marketing
          activity to conducting extensive market research regarding specialty physician
          prescribing practices and product positioning, and undertaking a market
          preparation program. We currently are fielding a team of 14 medical liaison
          physicians and other medical professionals who interact with potential
          future
          presenters and medical advisors to help us identify knowledge gaps in the
          potential use of CellCept and to assist us in our clinical development
          planning.
 
 Marketing,
          general and administrative expenses were $6.1 million for the three month
          period ended March 31, 2006, compared to $5.4 million for the three month
          period ended March 31, 2005. The increase of $700,000 was primarily due to
          additional salary and related expenses, excluding stock-based compensation
          expenses, as we increased the number of employees undertaking marketing,
          general
          and administrative activities, including the build out of our European
          and U.S.
          operations. Stock-based compensation decreased by $368,000 over the first
          quarter of 2005 as a result of the forfeiture in the period of stock options
          previously expensed.
   17
  The
          total number of employees engaged in marketing, general and administrative
          activities increased from 43 at March 31, 2005 to 60 at March 31,
          2006.
  For
          the
          quarter ended March 31, 2006 our marketing costs represented 35% of total
          marketing, general and administrative expenses. We
          expect our marketing infrastructure expenses to continue to increase as
          we
          continue to build out our U.S. and European operations. Our marketing program
          costs will increase significantly immediately prior to and after obtaining
          regulatory approvals. We expect the growth in our general and administrative
          expenses to keep pace with overall company activity as we continue to build
          our
          operations to support our business, incur the additional costs of being
          a
          publicly traded company, and support our agreement with Roche and additional
          collaborations.
 
 **Interest
          and Other Income**
 
 Interest
          and other income was $2.3 million for the three month period ended March
          31,
          2006, compared to $451,000 for the three month period ended March 31, 2005.
          The
          increase of $1.9 million was due to several factors. We had significantly
          higher
          average investment balances during the three month period ended March 31,
          2006
          comprised of royalty revenue receipts and proceeds from our initial public
          offering. In the three month period ended March 31, 2005, we did not have
          royalty revenue and the proceeds from our initial public offering were
          received
          in March 2005. Additionally, net foreign exchange gains amounted to $817,000
          in
          the three month period ended March 31, 2006 compared to a loss of $97,000
          in the
          three month period ended March 31, 2005. The net foreign exchange gains
          resulted
          from the stronger Canadian dollar and British pound sterling (relative
          to the
          U.S. dollar) when we translated our March 31, 2006 Canadian dollar and
          British
          pound sterling denominated marketable securities and cash balances.
 
 **Interest
          and Other Expense**
 
 Interest
          and other expense was $14,000 for the three month period ended March 31,
          2006,
          compared to $40,000 for the three month period ended March 31, 2005.
 
 **Income
          Taxes**
 
 The
          provision for income taxes was $4.3 million for the three months ended
          March 31,
          2006, resulting in an effective global tax rate of 8.7% for the period.
          The
          difference between the effective tax rate and the statutory Canadian federal
          income tax rate of 34.1% relate to differing foreign tax rates, changes
          in our
          future income tax valuation allowance and utilization of tax pools.
 
 **Cash
          Flows**
  **Operating
          activities**  **
 Net
          cash from operating activities was $30.3 million for the three month period
          ended March 31, 2006, compared to net cash used in operating activities
          of
          $9.6 million for the three month period ended March 31, 2005. The increase
          of $39.9 million in net cash from operating activities includes the receipt
          of
          the $44.4 million royalty receivable from Roche that was outstanding at
          December
          31, 2005.
 
 **Investing
          activities**
 Net
          cash used in investing activities was $1.7 million for the three month
          period ended March 31, 2006, while net cash used in investing activities
          was
          $23.6 million for the three month period ended March 31, 2005. Purchases of
          investments in marketable securities during the three month period ended
          March
          31, 2006 were $55.6 million, and were mainly offset by proceeds from sales
          of short-term investments in marketable securities of $54.0 million.
          Royalty revenue received in the three month period ended March 31, 2006
          was
          sufficient to fund our current operations, which allowed us to put more
          of our
          investments into higher rate, longer term maturities as compared to the
          three
          month period ended March 31, 2005.
 
 **Financing
          activities**
 Net
          cash from financing activities was $1.3 million for the three month period
          ended
          March 31, 2006, reflecting cash received upon the exercise of warrants
          and
          employee stock options. Net cash from financing activities was $84.3 million
          for
          the three month period ended March 31, 2005, reflecting the net proceeds
          of our
          initial public offering in March 2005.
 
 
 **Liquidity
          and Capital Resources**
 
 **Sources
          of Liquidity**
 
 As
          of March 31, 2006, we had working capital of $186.5 million, which included
          $143.6 million in cash, cash equivalents and marketable securities. In
          aggregate, our cash resources increased by $31.6 million from $112.0 million
          at
          December 31, 2005. We had $66.8 million in accounts receivable at March
          31,
          2006, of which $61.5 million is due from Roche and payable within 45 days
          of
          March 31, 2006.
   18
  We
          expect to continue to devote substantial resources to continue the development
          of CellCept for the treatment of lupus nephritis, myasthenia gravis and
          pemphigus vulgaris, and to continue to pursue other collaborations. The
          investment in CellCept development includes funding Phase III clinical
          trials as well as regulatory expenses to support approval. In addition,
          we are
          expanding our infrastructure to prepare for the potential commercialization
          of
          CellCept for these indications.
 
 We
          expect that our available cash resources, and the revenue from our agreement
          with Roche, will be sufficient to support our current and planned programs
          and
          operations for at least 12 months. If our resources are insufficient to
          satisfy
          our liquidity requirements or if we pursue new indications for CellCept
          or enter
          into new indication partnerships, we may need to raise additional external
          funds
          through the sale of additional equity or debt securities. The sale of additional
          equity and debt securities may result in additional dilution to our
          stockholders. Additional financing may not be available in amounts or on
          terms
          acceptable to us or at all. If we are unable to obtain this additional
          financing, we may be required to reduce the scope of, delay or eliminate
          some or
          all of our planned research, development and commercialization activities,
          which
          could harm our business.
 
 **Contractual
          Obligations and Commitments**
  As
          of March 31, 2006, there was no material change in our capital lease or
          operating lease obligations or any other long-term liabilities reflected
          on our
          consolidated balance sheet as compared to such obligations and liabilities
          at
          December 31, 2005.
 
 We
          also have agreements with clinical sites, and contract research organizations
          for the conduct of our clinical trials. We make payments to these sites
          and
          organizations based upon the number of patients enrolled and the period
          of
          follow-up in the trials. At March 31, 2006, we have commitments to these
          groups
          amounting to $20.9 million over the next three years. In addition we have
          contractual commitments for investigator initiated trials totaling $4.5
          million
          over the next three years.
 
 **Credit
          Facilities**
 
 We
          have various agreements with a Canadian chartered bank providing for revolving
          demand facilities and a lease line in the aggregate amount of $3.6 million.
          As of March 31, 2006, we had $751,000 of outstanding indebtedness under our
          credit facilities. The Canadian chartered bank may cancel or restrict the
          availability of any unutilized portion of our facilities at any time and
          from
          time to time without notice. Our credit facilities are secured by a security
          agreement constituting a first ranking security interest in all our personal
          property.
 
 **Off-Balance
          Sheet Arrangements**
 
 Since
          inception we have not engaged in material off-balance sheet activities,
          including the use of structured finance, special purpose entities or variable
          interest entities.
 
 **Related
          Party Transactions**
 
 For
          a description of our related party transactions during the three month
          period
          ended March 31, 2006, please see Note 11 to our Notes to Consolidated Financial
          Statements.
  **Recent
          Accounting Pronouncements**
 
 None.
 
  19
  **Item
          3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**
 
 **Market
          Risks**
 
 We
          are exposed to market risk, including changes to interest rates and foreign
          currency exchange rates.
  We
          maintain risk management control systems to monitor the risks associated
          with
          foreign currency exchange rates. To reduce the volatility relating to these
          exposures, we enter into various derivative hedging transactions pursuant
          to our
          investment and risk management policies and procedures. We do not use
          derivatives for speculative purposes. Though we intend for our risk management
          control systems to be comprehensive, there are inherent risks that may
          only be
          partially offset by our hedging programs should there be unfavorable movements
          in foreign currency exchange rates.
  **Interest
          Rate Risk**
  Our
          material interest-bearing assets consisted of cash, cash equivalents and
          marketable securities. The balance of our interest-bearing portfolio, including
          cash, cash equivalents and investments, was $143.7 million or 66% of total
          current assets at March 31, 2006. Interest income related to this portfolio
          was
          $1.4 million for the three month period ended March 31, 2006. Our interest
          income is sensitive to changes in the general level of interest rates,
          primarily
          U.S. interest rates. In this regard, changes in U.S. interest rates affect
          the
          interest-bearing portfolio.
  **Foreign
          Currency Exchange and Foreign Economic Conditions Risk**
 
 Financial
          risk is the risk to our results of operations that arises from fluctuations
          in
          interest rates and foreign exchange rates and the degree of volatility
          of these
          rates. Foreign exchange risk arises as our investments, which finance
          operations, are substantially denominated in US dollars, our royalty payments
          are received in Swiss francs and our expenses are denominated in several
          foreign
          currencies, including US dollars, Canadian dollars, pounds sterling and
          Euros.
          Interest rate risk arises due to our investments being in fixed interest
          highly
          liquid investments.
 
 If
          exchange rates change by 10%, we do not believe that it would have a material
          impact on our results of operations or cash flows to date. However, future
          exchange rate fluctuations may affect our future operating results.
  To
          mitigate the risk of foreign exchange fluctuations against the US dollar, we
          have entered into a number of foreign exchange forward contracts and noon
          average rate contracts.
 
 **Counterparties
          Credit Risks**
  We
          could be exposed to losses related to the financial instruments described
          in
          Note 8 to the Notes to Consolidated Financial Statements should one of
          our
          counterparties default. We attempt to mitigate this risk through credit
          rating
          monitoring procedures.
  
  20
  **Item
          4. CONTROLS AND PROCEDURES**
 
 **Evaluation
          of disclosure controls and procedures**
 
 We
          maintain “disclosure controls and procedures” (as such term is defined under
          Securities Exchange Act Rule 13a-15(e)) that are designed to ensure that
          information required to be disclosed in our reports is recorded, processed,
          summarized and reported within the time periods specified in the Securities
          and
          Exchange Commission’s rules and forms, and that such information is accumulated
          and communicated to our management, including our Chief Executive Officer
          and
          Chief Financial Officer, as appropriate, to allow timely decisions regarding
          required disclosures. In designing and evaluating the disclosure controls
          and
          procedures, our management recognized that any controls and procedures,
          no
          matter how well designed and operated, can provide only reasonable assurance
          of
          achieving the desired control objectives and in reaching a reasonable level
          of
          assurance our management necessarily was required to apply its judgment
          in
          evaluating the cost-benefit relationship of possible controls and procedures.
 
 We
          have carried out an evaluation under the supervision and with the participation
          of our management, including our Chief Executive Officer and Chief Financial
          Officer, of the effectiveness of the design and operation of our disclosure
          controls and procedures as of March 31, 2006. Based upon their evaluation
          and
          subject to the foregoing, our Chief Executive Officer and Chief Financial
          Officer concluded that our disclosure controls and procedures were reasonably
          effective in ensuring that information required to be disclosed by us in
          this
          Quarterly Report on Form 10-Q was recorded, processed, summarized and reported
          within the time periods specified in the Securities and Exchange Commission’s
          rules and Form 10-Q.
 
 **Changes
          in internal controls**
 
 There
          were no changes in our internal controls over financial reporting during
          the
          three month period ended March 31, 2006 that have materially affected or
          are
          reasonably likely to materially affect our internal controls over financial
          reporting.
 
 
  21
  **PART
          II - OTHER INFORMATION**
 
 **ITEM 1.
          LEGAL PROCEEDINGS**
 
 None.
 
 
 **ITEM
          1A. RISK FACTORS**
 
 **Risks
          Related to Our Business**
 
 **We
          anticipate that substantially all of our revenue for the foreseeable future
          will
          be from royalties based on sales of CellCept and we may not be able to
          sustain
          our profitability.**
  Our
          operating results may fluctuate from period to period for a number of reasons.
          In budgeting our operating expenses, some of which are fixed in the short
          term,
          we assume that revenues will continue to grow. Even a relatively small
          revenue
          shortfall or a small increase in operating expenses may cause our results
          to be
          below expectations. A revenue shortfall or increase in operating expenses
          could
          arise from any number of factors including:
  •
                lower
                    than expected revenues on commercial sales of CellCept;•
                higher
                    than expected operating expenses as we further develop CellCept
                    for
                    autoimmune indications, seek additional collaborations and operate
                    as a
                    public company;•
                higher
                    than expected levels of marketing expenses and the expenses of
                    potentially
                    launching CellCept and any future products for our targeted indications;
                    and•
                fluctuations
                    in currency exchange rates.
 
 We
          anticipate that substantially all of our revenue for the foreseeable future
          will
          be from royalties based on sales of CellCept pursuant to our agreement
          with
          Roche. Our revenue is dependent on Roche and our mutual ability to track
          product
          sales arising from the use of CellCept by transplant patients. The methodology
          for accurately tracking sales of CellCept that has been agreed to may be
          a
          source of dispute with Roche, which may negatively affect our revenue and
          our
          relationship.
 
 **If
          we and Roche are unable to successfully manage our collaboration, the
          development and commercialization of CelICept for autoimmune indications
          may be
          delayed or prevented.**
  Our
          collaboration with Roche involves a complex sharing of control over decisions,
          responsibilities, costs and benefits. Development and promotional activities
          related to CellCept in the autoimmune indications are approved by a joint
          committee, consisting of an equal number of our representatives and Roche's
          representatives. In the event that the joint committee is unable to reach
          consensus on an issue, the dispute will be referred to senior management
          of both
          parties. Unless and until senior management reaches agreement on such dispute,
          neither party will have the right to implement any changes to the status
          quo
          that would result from resolution of such matter. Ultimate decision making
          authority is vested in us as to some matters and in Roche as to other matters.
          Although we are responsible for compiling and preparing all applications
          for
          regulatory approval of CellCept in autoimmune indications, Roche has the
          ultimate decision making authority to submit these applications to the
          appropriate regulatory authorities. If Roche does not approve the application
          we
          prepared, or requires that we revise or modify the application, this could
          result in delays in receipt of regulatory approvals. In addition, Roche
          may
          develop and commercialize, either alone or with others, products that are
          similar to, or competitive with, CellCept. Roche may also change the focus
          of
          its development and commercialization efforts and dedicate fewer resources
          to
          CellCept or our collaboration.
  **If
          we do not satisfy our obligations under the Roche agreement or if the agreement
          is terminated we may be forced to limit or cease our operations.**
  Our
          agreement with Roche requires us to use commercially reasonable efforts
          to
          conduct three clinical trial programs for CellCept in autoimmune indications
          pursuant to an agreed upon development plan. Roche may allege that we are
          in
          breach of a material obligation under our agreement and seek to litigate
          the
          allegation. If Roche is successful in such litigation, Roche may either
          be
          awarded damages based upon such breach or the agreement might be terminated.
          After 2011, either party may terminate the agreement if there is a lack
          of
          non-transplant sales over the baseline for a prolonged period. In addition,
          if
          CellCept is withdrawn from or recalled in any given country, either party
          may
          terminate the agreement with respect to that country. If the agreement
          is
          terminated in its entirety or in a given country we may be forced to limit
          or
          cease our operations.
  Our
          agreement with Roche contains provisions requiring us to comply with applicable
          laws and regulations, including restrictions on the promotion of approved
          drugs
          for off label uses. If it were determined by the FDA or other regulatory
          authority that we violated the rules relating to off label promotion in
          connection with our pre-approval communications regarding CellCept, we
          may be
          deemed by Roche to be in material breach of the agreement. If we fail to
          cure
          any material breach of the agreement, Roche may commence legal action for
          damages and/or seek to terminate our agreement.
   22
  **If
          Roche does not manufacture, distribute, price or sell CellCept at levels
          which
          generate sufficient revenue for us to operate, we may have to limit or
          cease our
          operations.**
  We
          do not own or operate any manufacturing or distribution facilities. Roche,
          not
          Aspreva, controls the manufacture of CellCept and we have no alternative
          supplier. If we are unable to obtain adequate supplies of CellCept from
          Roche
          for our clinical trials, they could be delayed or prevented. In addition,
          if
          there is a shortage of CellCept, Roche may decide to allocate available
          supplies
          of CellCept to purchasers for use in transplant indications and not autoimmune
          or other indications, thereby reducing our revenues. Roche is solely responsible
          for distributing and selling CellCept, and setting the price, including
          all
          discounts and rebates, of CellCept.
  Roche's
          control over the manufacture, distribution, pricing and sale of CellCept
          exposes
          us to a number of risks which are outside our control including:
  •
                Roche
                    may fail to comply with FDA-mandated current good manufacturing
                    practices
                    or similar regulations in other jurisdictions resulting in mandated
                    production halts or limitations;•
                Roche
                    may experience manufacturing quality or control issues which
                    halt or limit
                    CellCept production;•
                a
                    manufacturing plant may be closed as a result of a natural disaster
                    or
                    work stoppage;•
                Roche
                    may experience short or long-term supply problems, or problems
                    distributing CellCept, including difficulties importing or exporting
                    supplies or products;•
                Roche
                    may decrease its efforts to market and promote CellCept for the
                    transplant
                    indications thus lowering the visibility of CellCept in the market;
                    and•
                Roche
                    may set a low price for CellCept or give discounts or rebates
                    that
                    effectively lower the price of CellCept, which in either case
                    could reduce
                    our revenues.
 
 However,
          we may in the future outsource the manufacturing of supply for our clinical
          trials to third parties other than Roche, subject to approval from Roche
          and the
          FDA.
 
 **The
          expiration of Roche's patents covering CellCept may reduce our revenue
          as
          competitors may seek to sell generic versions of CellCept.**
  Roche
          owns the patents covering the composition of matter of CellCept. The United
          States patent covering CellCept expires in May 2009. Counterparts of this
          patent
          expire in most European countries in late 2010 or early 2011, but in some
          instances expire as early as 2007. Roche patents covering the process for
          manufacture of CellCept expire in the United States in July 2012, and in
          most
          other countries in July 2013. We and Roche expect that following expiration
          of
          all these patents competitors may manufacture and sell generic versions
          of
          CellCept, at a lower price, which would reduce CellCept's revenues. In
          certain
          jurisdictions, including most Canadian provinces, legislation mandates
          generic
          substitution for brand name drugs. If competitors devise a means to manufacture
          CellCept which does not infringe Roche's patents covering the process for
          manufacture, competitors may seek to sell generic versions of CellCept
          upon
          expiration of the composition of matter patents, which occurs in some countries
          as early as 2007.
  If
          we obtain an orphan drug designation and FDA approval of CellCept for an
          indication, we would be entitled to seven years of marketing exclusivity
          for
          that orphan drug indication. In January 2006, we were granted orphan drug
          designation for CellCept’s use in myasthenia gravis. In April 2006, Roche and
          Aspreva agreed not to pursue orphan drug designation for CellCept's use
          in lupus
          nephritis. However,
          if a competitor obtained approval of a generic form of CellCept for another
          indication, such as transplant use, physicians would not be prevented from
          prescribing the generic drug for the orphan indication during the period
          of
          marketing exclusivity. Such prescribing practices could adversely affect
          the
          sales of CellCept for the orphan indication.
  **We
          may incur significant liability if it is determined that we are promoting
          the
          "off-label" use of drugs or are otherwise found in violation of federal
          and
          state regulations in the United States or elsewhere.**
  Physicians
          may prescribe drug products for uses that are not described in the product's
          labelling and that differ from those approved by the FDA or other applicable
          regulatory agencies. Such off-label uses are common across medical specialities.
          We are aware that some physicians are prescribing CellCept for the treatment
          of
          certain autoimmune diseases, although neither we nor Roche are permitted
          to
          promote CellCept for the treatment of any autoimmune diseases, and the
          FDA and
          other regulatory agencies have not approved the use of CellCept for any
          autoimmune indications. Although the FDA and other regulatory agencies
          do not
          regulate a physician's choice of treatments, the FDA and other regulatory
          agencies do restrict communications on the subject of off-label use. Companies
          may not promote drugs for off-label uses. Accordingly, prior to approval
          of any
          autoimmune indications for CellCept, we may not promote CellCept for such
          indications. The FDA and other regulatory agencies actively enforce regulations
          prohibiting promotion of off-label uses and the promotion of products for
          which
          marketing clearance has not been obtained. A company that is found to have
          improperly promoted off-label uses may be subject to significant liability,
          including civil and administrative remedies as well as criminal
          sanctions.
   23
  Notwithstanding
          the regulatory restrictions on off-label promotion, the FDA and other regulatory
          authorities allow companies to engage in truthful, non-misleading, and
          non-promotional speech concerning their products. We engage in medical
          education
          activities and communicate with investigators and potential investigators
          regarding our clinical trials. Although we believe that all of our
          communications regarding CellCept are in compliance with the relevant regulatory
          requirements, the FDA or another regulatory authority may disagree, and
          we may
          be subject to significant liability, including civil and administrative
          remedies
          as well as criminal sanctions.
  We
          and our collaborators are also subject to the U.S. federal False Claims
          Act and
          U.S. federal Anti-Kickback law. We have developed a comprehensive compliance
          program that seeks to establish internal controls to facilitate adherence
          to the
          rules and program requirements to which we are and will become subject.
          If,
          however, we are determined to have violated these and other laws, we could
          incur
          significant penalties and be subject to criminal prosecution. Roche might
          deem
          any such determination by a governmental authority to constitute a material
          breach of our agreement. In addition, management's attention could be diverted
          and our reputation and our ability to enter into future collaborations
          could be
          damaged.
  **If
          CellCept and any future products do not gain meaningful market acceptance
          we are
          not likely to generate significant revenues or sustain
          profitability.**
  The
          degree of market acceptance for any product that we commercialize will
          depend on
          a number of factors, including:
  •
                  acceptance
                        by physicians and patients of each product as safe and
                        effective;•
                  potential
                        advantages over existing or alternative therapies, including
                        cost;•
                  actual
                        or perceived safety of similar classes of
                        products;•
                  relative
                        convenience and ease of administration;•
                  reimbursement
                        policies of government and third-party payors;•
                  effectiveness
                        of our sales, marketing and medical education efforts;
                        and•
                  scope
                        of the product label approved by the FDA and other regulatory
                        agencies.
 Hospitals
            or physicians may not choose to administer CellCept or any future product
            to the
            entire intended market, if at all. If CellCept and any future products
            do not
            achieve meaningful acceptance in their intended markets or if the intended
            market is smaller than anticipated, we are not likely to generate significant
            revenues or maintain profitability.
  **Any
          failure or delay in obtaining additional capital may curtail the development
          or
          commercialization of CellCept or any future products.**
  We
          expect that our future need for additional capital will be substantial.
          The
          extent of this need will depend on many factors, some of which are beyond
          our
          control, including:
  •
                our
                    ability to develop and obtain regulatory approval for CellCept
                    and any
                    future products in our targeted indications;•
                our
                    ability to establish marketing and sales capabilities and the
                    costs of
                    launching CellCept and any future products for our targeted
                    indications;•
                the
                    extent of costs associated with protecting and expanding our
                    patent and
                    other intellectual property rights;•
                market
                    acceptance of CellCept and any future products for our targeted
                    indications;•
                future
                    payments, if any, we receive or make under existing or future
                    collaborative arrangements;•
                the
                    timing of regulatory approvals needed to market products for
                    our targeted
                    indications;•
                the
                    need to acquire licenses for new products or compounds;
                    and•
                compliance
                    with rules and regulations implemented by the U.S. Securities
                    and Exchange
                    Commission, Canadian provincial securities regulatory authorities,
                    the
                    NASDAQ National Market and the Toronto Stock
                    Exchange.
 
 We
          have no committed sources of additional capital. Funds may not be available
          to
          us in the future on favorable terms, if at all, and we may be required
          to delay,
          reduce the scope of, or eliminate research and development efforts or clinical
          trials for CellCept or other future products. We may also be forced to
          curtail
          or restructure our operations, obtain funds by entering into arrangements
          with
          collaborators on unattractive terms or relinquish rights to technologies
          or
          product candidates that we would not otherwise relinquish in order to continue
          our operations.
   24
  **If
          we are not successful in establishing additional collaborations we will
          not be
          able to grow our business.**
  Our
          long-term success depends upon our ability to identify drugs and drug candidates
          with significant potential and to acquire the rights for those indications
          from
          multiple collaborators, thus creating multiple sources of revenue. We face
          intense competition from other companies for collaborative arrangements
          with
          pharmaceutical and biopharmaceutical companies, and there are no barriers
          prohibiting other companies from adopting our business model. Pharmaceutical
          and
          biopharmaceutical companies may also decide to pursue new indications for
          their
          products themselves, rather than enter into collaborative arrangements
          to
          develop new indications. In addition, accurate sales tracking may be difficult
          or impossible under future collaborations which may preclude a collaboration
          or
          lead to disputes once a collaboration has been established. We currently
          only
          have two collaborations. If we are unable to enter into additional
          collaborations, we will continue to be dependent upon Roche for substantially
          all our revenues, and we will be limited in our ability to grow our business.
          In
          addition, the fact that we are collaborating with Roche, or other potential
          collaborators, may be viewed negatively by other potential collaborators,
          making
          them less likely to enter into arrangements with us.
  **The
          terms and conditions of any future collaboration agreements may be less
          favorable than our agreement with Roche.**
  Our
          strategy is to seek collaborations with pharmaceutical and biopharmaceutical
          companies to develop and commercialize new indications. Any new collaborations
          that we may secure will likely involve drugs or drug candidates, or
          collaborators, with characteristics different from CellCept or Roche. These
          characteristics may include:
  •
                  costs
                        to manufacture, distribute and sell;•
                  patent
                        terms;•
                  expenditures
                        by our collaborators on research and development;•
                  size
                        and difficulty of development programs for potential product
                        indications;•
                  competitive
                        threats; and•
                  other
                        factors relevant to the development and commercialization
                        of such
                        products.
 We
            expect that any new collaborations will be highly negotiated, and the
            above
            characteristics all may play a role in the financial terms of such
            collaborations, possibly resulting in any or all of the
            following:
  •
                our
                    payment of upfront or milestone fees for product
                    rights;•
                greater
                    clinical trial expenses;•
                longer
                    timelines to approval;•
                lower
                    revenue sharing percentages;•
                shorter
                    agreement periods; or•
                less
                    than global product rights.
 
 In
          addition, any new collaboration agreement may provide that we only begin
          sharing
          revenue with our collaborator after some long period of time after entering
          into
          such collaboration, or after some specific action or approval over which
          we may
          have limited control.
  **If
          we fail to establish sufficient marketing and sales promotion capabilities,
          or
          enter into successful arrangements with third parties to conduct these
          activities, we may be unable to generate sufficient revenue to continue
          our
          operations.**
  Roche
          is solely responsible for distributing and selling CellCept. If we obtain
          approval of CellCept for autoimmune indications, or any future products,
          we
          intend to market and promote them through our own sales promotion force
          in the
          United States and certain other countries. We currently have no sales promotion
          capabilities, limited marketing capabilities, limited infrastructure to
          support
          such activities, and have limited experience in the commercialization of
          pharmaceutical products. We may not be able to attract and retain qualified
          marketing or sales promotion people or be able to establish an effective
          sales
          promotion force.
  In
          countries where we do not have a sales promotion force, we may establish
          relationships with third parties. However, we may not be able to enter
          into such
          arrangements on favorable terms or at all and to the extent that we enter
          into
          such arrangements, our revenue will depend on their efforts, which may
          not be
          successful.
  
  25
  **If
          product liability lawsuits are successfully brought against us, we will
          incur
          significant liabilities and may be required to limit the commercialization
          of
          our product candidates.**
  Our
          use of CellCept and other products in clinical trials, and our future promotion
          of any products, may expose us to product liability claims and associated
          adverse publicity. We have a global product clinical trial insurance policy,
          with aggregate coverage of $10.0 million, for countries not requiring a
          local
          insurance policy (including USA and Canada). In addition, we have policies
          in
          varying amounts for all the other countries in which we are conducting
          clinical
          trials, and which do not fall within the scope of our global policy. Our
          insurance coverage may not protect us against any or all of the product
          liability claims which could be brought against us in the future. Prior
          to the
          commercialization of CellCept in autoimmune indications, we expect to obtain
          product liability insurance for potential claims associated with our promotion
          of CellCept. However, we may not be able to obtain or maintain adequate
          insurance coverage at a commercially reasonable cost or in sufficient amounts
          or
          scope to protect us against potential losses. Roche is obligated to indemnify
          us
          for any product liability claims, except if the claims arise due to false
          or
          misleading promotional activity on our part. In the event a product liability
          claim is brought against us, we may be required to pay legal and other
          expenses
          to defend the claim and, if such a claim is successful, damage awards not
          covered by our insurance. We may also be obligated to indemnify our
          collaborators. Defending any product liability claim or claims could require
          us
          to expend significant financial and managerial resources.
 
 **If
          our competitors are able to develop and market products that are preferred
          over
          CellCept or other product candidates that we may develop, we may not be
          able to
          generate sufficient revenues to continue our operations.**
  We
          may not be able to contend successfully with competitors. The biotechnology
          and
          pharmaceutical industries are highly competitive and subject to significant
          and
          rapid technological change as researchers learn more about diseases and
          develop
          new technologies and treatments. Our current and potential competitors
          generally
          include major multinational pharmaceutical companies, biopharmaceutical
          firms,
          specialty pharmaceutical companies, universities and other research
          institutions.
  In
          the transplant market, CellCept currently competes with Novartis' product,
          Myfortic. If CellCept is approved for any autoimmune indications, Novartis
          may
          choose to also pursue clinical trials and regulatory approval for the same
          indications. If approved, CellCept will also compete with immunosuppressants,
          such as steroids and cytotoxic agents, including cyclophosphamide, cyclosporine
          and azathioprine. A cytotoxic agent is an anti-cancer substance that acts
          by
          killing or preventing the division of cells. In addition, we are aware
          of
          several companies that have products in development or on the market that
          may be
          competitive with CellCept in lupus nephritis, myasthenia gravis and pemphigus
          vulgaris. Some of the companies have commenced clinical trials for products
          targeting the same markets and indications that we are addressing.
 
 The
          existence of these products, other products or treatments of which we are
          not
          aware, or products or treatments that may be developed in the future may
          reduce
          the marketability of CellCept and any future products, particularly to
          the
          extent such products:
  •
                are
                    more effective;•
                have
                    fewer or less severe adverse side effects;•
                have
                    better patient compliance;•
                receive
                    better reimbursement terms;•
                are
                    accepted by more physicians;•
                are
                    more adaptable to various modes of dosing;•
                have
                    better distribution channels;•
                are
                    easier to administer; or•
                are
                    less expensive.
 
 Some
          of our competitors, either alone or together with their collaborators,
          have
          substantially greater financial resources and larger research, development
          and
          regulatory staffs than we do. In addition, many of our competitors, either
          alone
          or together with their collaborators, have significantly greater experience
          than
          we do in discovering, developing, manufacturing and marketing products.
          Additional mergers and acquisitions in the pharmaceutical and biotechnology
          industries may result in even more resources being concentrated in our
          competitors.
  **If
          we are unable to effectively manage our expected future growth, we may
          be unable
          to develop or commercialize CellCept or any other product candidate
          successfully.**
  In
          the three month period ended March 31, 2006, we increased our number of
          employees by 33 and, as of March 31, 2006, we had 139 employees. In order
          to
          continue the development and potential commercialization of CellCept for
          autoimmune indications and enter into new collaborations we will need to
          expand
          our clinical development, regulatory, marketing and sales promotion
          capabilities. We currently have operations in Canada, the United States,
          the
          United Kingdom, and Switzerland. Our ability to manage our global operations
          and
          expected growth will require us to continue to improve our operational,
          financial and management controls, reporting systems and procedures. We
          may not
          be able to make such improvements in an efficient or timely manner and
          may
          discover deficiencies in existing systems and controls. Our ability to
          develop
          and commercialize products for new indications and compete effectively,
          and our
          future financial performance will depend, in part, on our ability to manage
          any
          future growth effectively.
   26
  **We
          depend on our executive officers, and if we are not able to retain them or
          recruit additional qualified personnel, we may be unable to successfully
          develop
          or commercialize CellCept.**
  Our
          success depends upon the continued contributions of our executive officers
          and
          scientific and technical personnel. We are highly dependent on Richard
          M.
          Glickman, our Chief Executive Officer, Noel F. Hall, our President, Bruce
          Cousins, our Chief Financial Officer, and Reinhard W.A. Baildon, our Executive
          Vice President, Clinical and Regulatory Affairs. Due to the specialized
          knowledge that each of our executive officers possess with respect to
          CellCept and our operations, the loss of service of any of our executive
          officers could delay or prevent the successful completion of the clinical
          trials necessary for the commercialization of CellCept for lupus nephritis,
          myasthenia gravis or pemphigus vulgaris and could harm our relationship
          with
          Roche. We carry key man life insurance coverage of $1.2 million for each
          of
          Richard M. Glickman and Noel F. Hall. We do not carry key man life insurance
          for
          any of our other executive officers.
  We
          have employment agreements with each of our executive officers; however,
          each
          may terminate their employment upon notice and without cause or good reason.
          We
          currently are not aware that any executive officer is planning to leave
          or
          retire.
  Our
          success also depends in part on our ability to attract and retain highly
          qualified scientific, commercial and administrative personnel. In order
          to
          pursue our product development and commercialization strategies, we will
          need to
          attract and hire additional personnel with experience in a number of
          disciplines, including clinical testing, government regulation, sales and
          marketing, drug reimbursement and information systems. There is intense
          competition for personnel in the fields in which we operate. We have not
          experienced difficulty to date in attracting and retaining the personnel
          we
          require. If, however, we are unable to continue to attract new employees
          and
          retain existing employees, we may be unable to continue our development
          and
          commercialization activities.
 
 **We
          may incur losses associated with currency fluctuations and may not be able
          to
          effectively hedge our exposure.**
  Our
          operations are in many instances conducted in currencies other than the
          U.S.
          dollar and fluctuations in the value of currencies relative to the U.S.
          dollar
          could cause us to incur currency exchange losses. All amounts paid by Roche
          to
          us will be in Swiss Francs. In addition, we currently conduct some operations
          and incur a portion of our expenses in Canadian dollars, pounds sterling
          and
          other foreign currencies. Although we have implemented currency hedging
          techniques to mitigate the impact of currency fluctuations on our financial
          results, these techniques do not eliminate the effects of currency fluctuations
          with respect to anticipated revenues or cash flows, and, as they are short
          term
          in nature, do not protect us from prolonged periods of currency
          fluctuations.
  CellCept
          net sales are denominated in multiple currencies and will be converted
          to Swiss
          Francs **** by
          Roche for the purpose of calculating amounts to be paid to us. To the extent
          the
          Swiss Franc increases in value relative to these other currencies, the
          total
          aggregate value of CellCept's net sales will decrease and the amount, if
          any,
          that we are entitled to may be reduced.
  **Risks
          Related to Regulatory Matters**
  **We
          will not be able to commercialize our product candidates if our clinical
          trials
          do not demonstrate safety and efficacy in humans.**
  We
          are currently not authorized to market CellCept for autoimmune indications
          in
          any jurisdiction, and we may never be authorized to market CellCept for
          any
          autoimmune indication. The development and commercialization of CellCept
          for
          autoimmune indications, and any future products, are subject to extensive
          and
          rigorous regulation by the U.S. federal government, principally the FDA,
          other
          federal, state and local agencies, and governmental authorities elsewhere.
          Prior
          to marketing CellCept for any autoimmune indication, we must conduct, at
          our own
          expense, extensive clinical trials to demonstrate with substantial evidence
          to
          the satisfaction of the FDA and other regulatory authorities that CellCept
          is
          safe and effective for the indication. We have no prior experience as a
          company
          in conducting clinical trials. Preclinical studies and clinical trials
          are
          expensive, can take many years and have uncertain outcomes. In addition,
          the
          regulatory approval procedures vary among countries and additional testing
          may
          be required in some jurisdictions. It may take several years to complete
          the
          requisite clinical trials, and a product candidate may fail any stage of
          testing. Difficulties and risks associated with clinical trials may result
          in
          our failure to receive regulatory approval to market CellCept for autoimmune
          indications or our inability to commercialize any future products for new
          indications. The FDA, other regulatory authorities, our collaborators,
          or we may
          suspend or terminate clinical trials at any time. The commencement and
          completion of our clinical trials could be delayed or prevented by several
          factors, including:
  •
                delays
                    in obtaining regulatory approvals to commence or continue a
                    study;
   27
   •
                delays
                    in identifying and reaching agreement on acceptable terms with
                    prospective
                    clinical trial sites;•
                insufficient
                    quantities of the study drug;•
                slower
                    than expected rates of patient recruitment and enrollment or
                    the inability
                    to reach full enrollment;•
                inconclusive
                    or negative interim results during clinical trials, including
                    lack of
                    effectiveness or unforeseen safety issues;•
                death
                    of, or serious adverse effects experienced by, one or more patients
                    during
                    a clinical trial even if the reasons are not related to the study
                    drug,
                    including the advanced stage of the patient's disease or medical
                    condition;•
                uncertain
                    dosing issues;•
                inability
                    to monitor patients adequately during and after
                    treatment;•
                inability
                    or unwillingness of contract laboratories to follow good laboratory
                    practices;•
                inability
                    or unwillingness of clinical investigators to follow our clinical
                    protocols or good clinical practices generally; and•
                inability
                    or unwillingness of other third parties to perform data collection
                    and
                    analysis in a timely or accurate
                    manner.
 
 Delays or failures in obtaining regulatory approvals may:
  •
                delay
                    or prevent the commercialization of any product that we develop
                    for new
                    indications;•
                diminish
                    any competitive advantages;•
                reduce
                    or eliminate revenue from the sale of CellCept and any future
                    products;
                    and•
                adversely
                    affect our ability to attract new
                    collaborators.
  The
          results of early clinical trials do not necessarily predict the results
          of later
          clinical trials. Drugs in later clinical trials may fail to show desired
          safety
          and efficacy traits despite having progressed through initial clinical
          trials.
          We are aware that Roche conducted three phase III clinical trials for CellCept
          in the treatment of rheumatoid arthritis which did not demonstrate efficacy.
          Even if we believe the data collected from clinical trials of drugs are
          promising, such data may not be sufficient to support approval by the FDA
          or any
          other regulatory authority. The FDA or other regulatory authorities could
          also
          interpret our data differently, which could delay, limit or prevent regulatory
          approval.
  We
          expect to rely in part on the results of CellCept clinical trials that
          were
          previously performed by or on behalf of Roche and on clinical trials that
          were
          previously performed or are being performed by third-party physicians.
          These
          trial results may not be predictive of the results of the clinical trials
          that
          we plan to conduct for the purposes of our targeted indications. In addition,
          the results of prior clinical trials may not be acceptable to the FDA or
          other
          regulatory authorities because the data may be incomplete, outdated or
          not
          otherwise acceptable for inclusion in our submissions for regulatory approval
          for CellCept in autoimmune indications.
  **Even
          if CellCept or any future product candidate receives regulatory approval,
          we and
          our collaborators may still face development and regulatory difficulties
          that
          may delay or impair future sales.**
  If
          we or our collaborators obtain regulatory approval for CellCept for any
          of our
          targeted indications, or any other product, we and our collaborators will
          continue to be subject to extensive regulation by the FDA, other federal
          authorities, certain state agencies and regulatory authorities elsewhere.
          These
          regulations will impact many aspects of our operations and the drug
          manufacturer's operations including manufacture, record keeping, quality
          control, adverse event reporting, storage, labelling, advertising, promotion,
          sale and distribution, export and personnel. The FDA and state agencies
          may
          conduct periodic inspections to assess compliance with these requirements.
          We,
          together with our collaborators, will be required to conduct post-marketing
          surveillance of the product. We also may be required to conduct post-marketing
          studies. Our or our collaborators' failure to comply with applicable FDA
          and
          other regulatory requirements, or the later discovery of previously unknown
          problems, may result in restrictions including:
  •
                delays
                    in commercialization;•
                refusal
                    by the FDA or other similar regulatory agencies to review pending
                    applications or supplements to approved applications;•
                product
                    recalls or seizures;•
                warning
                    letters;•
                suspension
                    of manufacturing;•
                withdrawals
                    of previously approved marketing applications;•
                fines
                    and other civil penalties;•
                injunctions,
                    suspensions or revocations of marketing licenses;•
                refusals
                    to permit products to be imported to or exported from the United
                    States;
                    and•
                criminal
                    prosecutions.
   28
  Post-approval
          marketing laws and regulations in other jurisdictions generally provide
          for the
          same types of sanctions that may be imposed in the United States.
  **We
          may experience delays in patient enrollment, which would delay regulatory
          approval of CellCept in autoimmune indications and possibly reduce our
          revenues.**
  Our
          ability to obtain, and the timing of, regulatory approval for CellCept
          in any
          autoimmune indication depends in part on our ability to successfully complete
          clinical trials of CellCept in that autoimmune indication. The ability
          to
          complete clinical trials depends, in part, on the rate of patient enrollment
          and
          patient retention, which is a function of many factors, some of which are
          beyond
          our control. In particular, because some of our clinical trials will be
          blinded
          so that some patients receive CellCept and others receive another drug
          or a
          placebo, and because CellCept is marketed for transplant indications and
          prescribed by physicians, patients may not want to participate in a clinical
          trial in which they could receive a placebo or drug other than CellCept.
 
 **If
          third-party clinical research organizations do not perform in an acceptable
          and
          timely manner, our clinical trials could be delayed or
          unsuccessful.**
  We
          have limited experience as a company in conducting and managing
          clinical trials, and rely on third parties, including contract research
          organizations, outside consultants and principal investigators to assist
          us in
          managing, monitoring and conducting our clinical trials. We rely on these
          parties to assist in the recruitment of sites for participation in clinical
          trials, to maintain positive relations with the clinical sites and to ensure
          that these sites conduct the trials in compliance with the protocol and
          our
          instructions. If these third parties fail to perform satisfactorily or
          do not
          adequately fulfill their obligations to us, our clinical trials may be
          delayed
          or unsuccessful. The FDA or other regulatory agencies may inspect some
          of our
          clinical sites or our third-party vendors' sites, to determine if our clinical
          trials are being conducted according to current good clinical practices.
          If the
          FDA or another applicable regulatory agency determines that our third-party
          vendors are not in compliance with applicable regulations, we may be required
          to
          delay, repeat or terminate such clinical trials. Any delay, repetition
          or
          termination of our clinical trials could prevent or delay the commercialization
          of CellCept for autoimmune indications and any other future product
          candidate.
  **If
          government and third-party payors fail to provide coverage and adequate
          reimbursement rates for our product candidates, our revenues and potential
          for
          profitability will be reduced.**
  In
          the United States and elsewhere, our product revenues will depend principally
          upon the reimbursement rates established by third-party payors, including
          government health administration authorities, managed-care providers, public
          health insurers, private health insurers and other organizations. These
          third-party payors are increasingly challenging the price, and examining
          the
          cost effectiveness, of medical products and services. In addition, significant
          uncertainty exists as to the reimbursement status, if any, of newly approved
          drugs, pharmaceutical products or product indications. We may need to conduct
          post-marketing clinical trials in order to demonstrate the cost-effectiveness
          of
          products. Such studies may require us to commit a significant amount of
          management time and financial and other resources. CellCept is included
          in
          various drug compendia as a commercially approved drug in connection with
          the
          prevention of organ rejection and certain third party payors provide
          reimbursement for this use of CellCept because of such inclusion. However,
          CellCept or other future products may not be reimbursed or covered by any
          of
          these third-party payors for our targeted indications.
  In
          some countries other than the United States, particularly the countries
          of the
          European Union and Canada, the pricing of prescription pharmaceuticals
          is
          subject to governmental control. In these countries, obtaining pricing
          approval
          from governmental authorities can take six to twelve months or longer after
          the
          receipt of regulatory marketing approval of a product for an indication.
          To
          obtain reimbursement or pricing approval in some countries, we may be required
          to conduct a clinical trial that compares the cost-effectiveness of a product
          that is the subject of a collaboration with us to other available therapies.
          If
          reimbursement of such products is unavailable or limited in scope or amount
          or
          if pricing is set at unsatisfactory levels our revenues could be
          reduced.
  Domestic
          and foreign governments continue to propose and pass legislation designed
          to
          reduce the cost of healthcare, including drugs. In the United States, there
          have
          been, and we expect that there will continue to be, federal and state proposals
          to implement similar governmental control. In addition, increasing emphasis
          on
          managed care in the United States will continue to put pressure on the
          pricing
          of pharmaceutical products. For example, the Medicare Prescription Drug
          Improvement and Modernization Act of 2003 reforms the way Medicare will
          cover
          and reimburse for pharmaceutical products. The legislation expands Medicare
          coverage for drug purchases by the elderly and has resulted in a new
          reimbursement methodology based on average sales prices for certain drugs.
          In
          addition, the new legislation provides authority for limiting the number
          of
          outpatient drugs that will be covered in any therapeutic class. As a result
          of
          the new legislation and the expansion of federal coverage of drug products,
          we
          expect that there will be additional pressure to contain and reduce costs.
          The
          Medicaid program has recently been modified and state healthcare laws and
          regulations will soon be amended to conform to the federal changes. The
          new laws
          and regulations will reduce Medicaid reimbursement. Cost control initiatives
          could decrease the established reimbursement rates that we receive for
          any
          products in the future, which would limit our revenues and profitability.
          Legislation and regulations affecting the pricing of pharmaceutical products,
          including CellCept, may change at any time, which could further limit or
          eliminate reimbursement rates for CellCept or other products.
   29
  **Risks
          Related to Intellectual Property**
  **We
          may incur significant expenses or be prevented from developing or
          commercializing products as a result of an intellectual property infringement
          claim.**
  Our
          commercial success depends in part on our ability to operate without infringing
          the patents and other proprietary rights of third parties. Infringement
          proceedings in the pharmaceutical and biotechnology industries are lengthy,
          costly and time-consuming and their outcome is uncertain. If we become
          involved
          in any patent litigation, interference or other administrative proceedings,
          we
          will incur substantial expense and the efforts of our technical and management
          personnel will be significantly diverted. As a result of such litigation
          or
          proceedings we could lose our proprietary position and be restricted or
          prevented from developing, manufacturing and selling the affected products,
          incur significant damage awards, including punitive damages, or be required
          to
          seek third-party licenses that may not be available on commercially acceptable
          terms, if at all.
 
 Although
          Roche has an extensive patent estate covering the composition of matter,
          methods
          of treatment and manufacture of CellCept, it is possible that a third party
          may
          be issued a patent covering some aspect of CellCept or its use. If this
          happens,
          we and Roche may be restricted from developing and commercializing CellCept
          for
          autoimmune indications. If a third party brings an infringement claim against
          us
          based solely upon the development or promotion of CellCept in autoimmune
          indications, Roche has the right under our agreement to deduct 50% of its
          cost
          in defending such action, plus any amounts paid in settlement or in a judgment
          against Roche or Aspreva, from the calculation of CeIlCept's net sales
          prior to
          determining our share of such sales. Roche is obligated to indemnify us
          if the
          infringing activity relates to the development and commercialization of
          CellCept
          in both transplant and non-transplant indications.
  **If
          we or our collaborators are unable to adequately protect or enforce our
          intellectual property, our competitive position could be
          impaired.**
  Our
          commercial success depends in part on our ability to:
 
 •
                obtain
                    patents or rights to patents and maintain their
                    validity;•
                protect
                    our trade secrets; and•
                effectively
                    enforce our proprietary rights or patents against
                    infringers.
 
 Patent
          applications may not result in patents being issued. Until a patent is
          issued,
          the claims covered by the patent may be narrowed or removed entirely and
          therefore we may not obtain adequate patent protection. As a result, we
          may face
          unanticipated competition, or conclude that, without patent rights, the
          risk of
          bringing products to the market is too great. Even if we or our collaborators
          are issued patents covering our products we cannot predict with certainty
          whether we or our collaborators will be able to ultimately enforce our
          patents
          or proprietary rights. Any patents that we own or license may be challenged,
          invalidated or circumvented and may not provide us with protection against
          competitors. We or our collaborators may be forced to engage in costly
          and
          time-consuming litigation in order to protect our intellectual property
          rights.
          In addition, our collaborators may choose not to enforce or maintain their
          intellectual property rights, and we may be forced to incur substantial
          additional costs to maintain or enforce such rights. Patent rights may
          not
          provide us with adequate proprietary protection or competitive advantages
          against competitors with similar products or technologies. The laws of
          certain
          foreign countries do not protect our intellectual property rights to the
          same
          extent as do the laws of the United States.
  In
          addition to patents, we rely on trade secrets and proprietary know-how.
          We seek
          protection, in part, through confidentiality and non-disclosure agreements.
          These agreements may not provide meaningful protection of our technology
          or
          adequate remedies in the event of unauthorized use or disclosure of confidential
          and proprietary information and, in any event, others may develop independently,
          or obtain access to, the same or similar information. Our failure or inability
          to protect our trade secrets and proprietary know-how could impair our
          competitive position.
  **Our
          stock price is volatile and purchasers of our common shares could incur
          substantial losses.**
  Our
          stock price is volatile. Since our initial public offering on March 4,
          2005 and
          through April 20, 2006, our common shares have traded on the NASDAQ National
          Market between $11.18 and $32.29 per share. The stock market in general
          and the
          market for biopharmaceutical and biotechnology companies in particular
          have
          experienced extreme volatility that has often been unrelated to the operating
          performance of particular companies. The price for our common shares may
          be
          influenced by many factors, including:
 
 •
                our
                    ability to develop and obtain regulatory approval for CellCept
                    and any
                    future products in our targeted indications;•
                our
                    ability to establish marketing and sales capabilities and the
                    costs of
                    launching CellCept and any future products for our targeted
                    indications;
   30
  •
                market
                    acceptance of CellCept and any future products for our targeted
                    indications;•
                developments
                    concerning our collaboration with Roche;•
                our
                    success in establishing additional collaborations;•
                regulatory
                    developments in the United States, Canada and other
                    countries;•
                developments
                    or disputes concerning patents or other proprietary
                    rights;•
                public
                    concern over CellCept or any future products;•
                litigation;•
                the
                    departure of key personnel;•
                future
                    sales of our common shares;•
                variations
                    in our financial results or those of companies that are perceived
                    to be
                    similar to us;•
                investors’
                    perceptions of us; and•
                general
                    economic, industry and market
                    conditions.
  **If
          there are substantial sales of our common shares, our stock price could
          decline.**
  If
          our existing shareholders sell a large number of our common shares or the
          public
          market perceives that existing shareholders might sell our common shares,
          the
          market price of our common shares could decline significantly.
  **Our
          executive officers, directors and major shareholders continue to have
          substantial control over us and will maintain the ability to control all
          matters
          submitted to shareholders for approval.**
  As
          of March 31, 2006, our directors and executive officers, together with
          their
          affiliates, beneficially owned approximately 32% of our outstanding common
          shares, including shares subject to outstanding stock options and warrants.
          These shareholders, acting together, can exercise significant influence
          over all
          matters requiring shareholder approval, including the election of directors
          and
          any amendment of our notice of articles or articles. This concentration
          of
          ownership could also have the effect of delaying or preventing a change
          in our
          control.
  **Our
          articles, our shareholder rights plan and certain Canadian laws could delay
          or
          deter a change of control.**
  Our
          authorized preferred capital stock is available for issuance from time
          to time
          at the discretion of our board of directors, without shareholder approval.
          Our
          articles grant our board of directors the authority, subject to the corporate
          law of British Columbia, to determine or alter the special rights and
          restrictions granted to or imposed on any wholly unissued series of preferred
          shares, and such rights may be superior to those of our common
          shares.
  Also,
          pursuant to our shareholder rights plan, anyone who seeks to acquire 20%
          or more
          of our outstanding common shares is required to make a bid complying with
          specific provisions of the plan.
  Limitations
          on the ability to acquire and hold our common shares may be imposed by
          the
          Competition Act (Canada). This legislation permits the Commissioner of
          Competition of Canada to review any acquisition of a significant interest
          in us.
          This legislation grants the Commissioner jurisdiction to challenge such
          an
          acquisition before the Canadian Competition Tribunal if the Commissioner
          believes that it would, or would be likely to, result in a substantial
          lessening
          or prevention of competition in any market in Canada. The Investment Canada
          Act
          (Canada) subjects an acquisition of control of a company by a non-Canadian
          to
          government review if the value of our assets as calculated pursuant to
          the
          legislation exceeds a threshold amount. A reviewable acquisition may not
          proceed
          unless the relevant minister is satisfied that the investment is likely
          to be a
          net benefit to Canada.
  Any
          of the foregoing could prevent or delay a change of control and may deprive
          or
          limit strategic opportunities for our shareholders to sell their
          shares.
  **We
          may be a passive foreign investment company for U.S. tax purposes which
          may
          negatively affect U.S. investors.**
  For
          U.S. federal income taxation purposes, we will be a passive foreign investment
          company, or PFIC, if in any taxable year either: (a) 75% or more of our
          gross
          income consists of passive income; or (b) 50% or more of the value of our
          assets
          is attributable to assets that produce, or are held for the production
          of,
          passive income. If we meet either test, our shares held by a U.S. person
          in that
          year will be PFIC shares for that year and all subsequent years in which
          they
          are held by that person. Because in the past our gross income consisted
          mostly
          of interest, we have been a PFIC in prior taxable years. We may also be
          a PFIC
          in future taxable years. Gain realized by a U.S. investor from the sale
          of PFIC
          shares is taxed as ordinary income, as opposed to capital gain, and subject
          to
          an interest charge unless the U.S. person has timely made a certain tax
          election.
  The
          PFIC rules are extremely complex. A U.S. person is encouraged to consult
          his or
          her U.S. tax advisor before making an investment in our shares.
 
  31
  **As
          a foreign private issuer, we are subject to different U.S. securities laws
          and
          rules than a domestic U.S. issuer, which may limit the information publicly
          available to our shareholders.**
  As
          a foreign private issuer we are not required to comply with all the periodic
          disclosure requirements of the Securities Exchange Act of 1934 and therefore
          there may be less publicly available information about Aspreva than if
          we were a
          U.S. domestic issuer. In addition, our officers, directors, and principal
          shareholders are exempt from the reporting and "short-swing" profit recovery
          provisions of Section 16 of the Securities Exchange Act of 1934 and the
          rules
          thereunder. However, under Canadian provincial securities laws, our officers,
          directors and principal shareholders are required to file reports in electronic
          format through the System for Electronic Disclosure by Insiders, or SEDI,
          disclosing changes in beneficial ownership of, or control or direction
          over, our
          common shares and other securities. Our shareholders can access such reports
          at
          www.sedi.ca.
 
 **You
          may be unable to enforce actions against us, or certain of our directors
          and
          officers, under U.S. federal securities laws.**
  We
          are a corporation organized under the laws of British Columbia, Canada.
          A
          majority of our directors and officers reside principally in Canada. Because
          all
          or a substantial portion of our assets and the assets of these persons
          are
          located outside the U.S., it may not be possible for you to effect service
          of
          process within the United States upon us or those persons. Furthermore
          it may
          not be possible for you to enforce against us or them in the United States,
          judgments obtained in U.S. courts based upon the civil liability provisions
          of
          the U.S. federal securities laws or other laws of the U.S. There is doubt
          as to
          the enforceability, in original actions in Canadian courts, of liabilities
          based
          upon the U.S. federal securities laws and as to the enforceability in Canadian
          courts of judgments of U.S. courts obtained in actions based upon the civil
          liability provisions of the U.S. federal securities laws. Therefore, it
          may not
          be possible to enforce those actions against us or certain of our directors
          and
          officers.
  
  32
   **ITEM 2.
          UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
          PROCEEDS.**
 
 *Use
          of Proceeds*
 
 Our
          initial public offering of common shares was effected through a registration
          statement on Form F-1 (File No. 333-122234) that was declared effective
          by the
          Securities and Exchange Commission on March 3, 2005, pursuant to which
          we sold
          all 8,280,000 of our common shares that were registered thereunder.
 
 Our
          initial public offering of common shares commenced on March 4, 2005 and
          was
          completed after all of the shares of common stock that were registered
          were
          sold. The managing underwriters in our initial public offering were Merrill
          Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC,
          Pacific Growth Equities, LLC and BMO Nesbitt Burns Inc. The aggregate offering
          price of the 8,280,000 shares registered and sold was $91.7 million. Of
          this
          amount, $6.4 million was paid in underwriting discounts and commissions,
          and an
          additional $3.0 million of expenses was incurred, of which approximately
          $1.3
          million was incurred during the year ended December 31, 2004 and $1.7 million
          was incurred during the three months ended March 31, 2005. Expenses of
          $1.1
          million were incurred with Farris, Vaughan, Wills & Murphy LLP, Vancouver,
          British Columbia. R. Hector MacKay-Dunn, Q.C., a member of our board of
          directors and our Corporate Secretary is a senior partner of Farris, Vaughan,
          Wills & Murphy LLP. No other expenses were incurred, directly or indirectly,
          to directors, officers or persons owning 10% or more of our common stock,
          or to
          our affiliates.
 
 We
          intend to use the net proceeds of the offering primarily to continue the
          development of CellCept for the treatment of lupus nephritis, myasthenia
          gravis
          and pemphigus vulgaris, and to continue to pursue other collaborations.
          The
          investment in CellCept development includes funding Phase III clinical
          trials as well as regulatory expenses to support approval. In addition,
          our
          infrastructure is being expanded to prepare for the potential commercialization
          of CellCept for these indications. The amounts we actually expend in these
          areas
          may vary significantly from our expectations and will depend on a number
          of
          factors, including operating costs and capital expenditures.
 
 As
          of March 31, 2006, we had applied the aggregate net proceeds of $82.3 million
          from our initial public offering as follows:
 Working
          capital: $62.1
          million
 Temporary
          investments: $20.2
          million
 
 
 *Recent
          Sales of Unregistered Securities*
 
 From
          January 1, 2006 through March 31, 2006, an aggregate of 42,818 common shares
          were issued to 8 accredited investors at a price of $4.08 ($Cdn 4.76) per
          share
          upon the exercise of warrants. The offer and sale of such common shares
          were
          made outside of the United States pursuant to Regulation S of the Securities
          Act.
 
 
 **ITEM 3.
          DEFAULTS UPON SENIOR SECURITIES**
 
 None.
 
 
 **ITEM 4.
          SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**
 
 None.
 
 
  33
  **ITEM 5.
          OTHER INFORMATION**
 
 *Executive
          Officer Cash Bonuses and Stock Options*
 
 On
          February 15, 2006, the compensation committee of our board of directors
          awarded cash bonuses and granted stock options to our Named Executive Officers
          for the year ended December 31, 2005, as follows:
 
 **Named
                    Executive**
                  **Officer**
                **Position**
                **Cash
                    Bonus**
                  **Awarded
                    (1)**
                **Number
                    of Shares**
                  **Subject
                    to Stock Options (2)**Richard
                    Glickman
                Chairman
                    and Chief Executive Officer
                $136,000
                35,000Noel
                    Hall
                President
                85,000
                25,000Bruce
                    Cousins
                Chief
                    Financial Officer
                81,000
                15,000Reinhard
                    Baildon
                Executive
                    Vice President, Clinical and Regulatory Affairs
                114,000
                18,000
 
 (1)
                The
                    cash bonuses were fully accrued at December 31, 2005 and did
                    not impact
                    expenses for the three month period ended March 31, 2006.
 
 (2)
                Each
                    stock option has an exercise price payable in Canadian dollars
                    of C$27.57
                    ($23.84), being the closing price of our common shares on the
                    effective
                    grant date as reported on the Toronto Stock Exchange, has a ten
                    year term
                    and vests in equal monthly amounts for 48 months from the date
                    of
                    grant.
 
 *2006
          Performance Bonus Calculation*
 
 Each
          of our Named Executive Officers is eligible for a discretionary performance
          bonus determined as a percentage of such officer's annual base salary as
          set
          forth in such officer's employment agreement with Aspreva. On February
          15,
          2006, the compensation committee of our board of directors approved
          increases in the annual discretionary performance bonuses applicable to
          Mesrrs.
          Glickman and Hall from 40% to 50% of their respective base salaries. Mr.
          Cousins' and Dr. Baildon's annual discretionary performance bonuses remain
          at
          35% of their respective base salaries. Our compensation committee has not
          yet
          approved the corporate and personal goals pursuant to which the performance
          of
          the Named Executive Officers will be evaluated in 2006 for the purposes
          of
          awarding discretionary performance bonuses and stock option grants.
 
  34
  **ITEM 6.
          EXHIBITS.**
 31.1
                
                Certification
                    of the Chief Executive Officer, as required by Rule 13a-14(a)
                    of the
                    Securities and Exchange Act of 1934, as amended.31.2
                
                Certification
                    of the Chief Financial Officer, as required by Rule 13a-14(a)
                    of the
                    Securities and Exchange Act of 1934, as amended.32.1*
                
                Certification
                    of the Chief Executive Officer, as required by Rule 13a-14(b)
                    of the
                    Securities and Exchange Act of 1934, as amended and Section 1350
                    of
                    Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section
                    1350).32.2*
                
                Certification
                    of the Chief Financial Officer, as required by Rule 13a-14(b)
                    of the
                    Securities and Exchange Act of 1934, as amended  and Section
                    1350 of Chapter 63 of Title 18 of the United States Code (18
                    U.S.C.
                    Section 1350).
 
 *
          The certifications attached as Exhibits 32.1 and 32.2 accompany this quarterly
          report on Form 10-Q, are not deemed filed with the Security and Exchange
          Commission and are not to be incorporated by reference into any filing
          of
          Aspreva Pharmaceuticals Corporation under the Securities Act of 1933, as
          amended, or the Securities Exchange Act of 1934, as amended, whether made
          before
          or after the date of this Form 10-Q, irrespective of any general incorporation
          language contained in such filing.
 
  35
 **SIGNATURE**
 
 Pursuant
          to the requirements of the Securities Exchange Act of 1934, the registrant
          has
          duly caused this report to be signed on its behalf by the undersigned thereunto
          duly authorized.
 
 ASPREVA
                    PHARMACEUTICALS CORPORATIONApril
                    26, 2006
                /s/
                    Bruce G. CousinsBruce
                    G. CousinsChief
                    Financial Officer(Principal
                    Financial and Accounting Officer)
  36
  **EXHIBIT
        INDEX**
  31.1
              
              Certification
                  of the Chief Executive Officer, as required by Rule 13a-14(a) of
                  the
                  Securities and Exchange Act of 1934, as amended.31.2
              
              Certification
                  of the Chief Financial Officer, as required by Rule 13a-14(a) of
                  the
                  Securities and Exchange Act of 1934, as amended.32.1*
              
              Certification
                  of the Chief Executive Officer, as required by Rule 13a-14(b) of
                  the
                  Securities and Exchange Act of 1934, as amended and Section 1350
                  of
                  Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section
                  1350).32.2*
              
              Certification
                  of the Chief Financial Officer, as required by Rule 13a-14(b) of
                  the
                  Securities and Exchange Act of 1934, as amended and Section 1350
                  of
                  Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section
                  1350).
 
 *
        The certifications attached as Exhibits 32.1 and 32.2 accompany this quarterly
        report on Form 10-Q, are not deemed filed with the Security and Exchange
        Commission and are not to be incorporated by reference into any filing of
        Aspreva Pharmaceuticals Corporation under the Securities Act of 1933, as
        amended, or the Securities Exchange Act of 1934, as amended,whether made
        before
        or after the date of this Form 10-Q, irrespective of any general incorporation
        language contained in such filing.






37