**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 June 30, 2006**





**or**





**o**
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR**
              **15(d) OF
                THE SECURITIES EXCHANGE ACT OF
                1934**


**For
      the transition period from _______ to ___________**




**Commission
      File Number 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 x  No o





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 July 20, 2006, the registrant had 34,788,031 common shares
      outstanding.

















**ASPREVA
      PHARMACEUTICALS CORPORATION**


**FORM
      10-Q**


**For
      the Quarterly Period Ended June 30, 2006**




**TABLE
      OF CONTENTS**





**Page****PART
                I - FINANCIAL INFORMATION**Item 1.
                Financial Statements (unaudited)
            3Consolidated
                Balance Sheets - June 30, 2006 and December 31, 2005
            3Consolidated
                Statements of Operations - Three and Six-month periods ended June
                30, 2006
                and 2005
            4Consolidated
                Statements of Cash Flows - Three and Six-month periods ended June
                30, 2006
                and 2005
            5Notes
                to Consolidated Financial Statements
            6Item 2.
                Management’s Discussion and Analysis of Financial Condition and Results of
                Operations
            12Item 3.
                Quantitative and Qualitative Disclosures About Market Risk
            22Item 4.
                Controls and Procedures
            23**PART
                II - OTHER INFORMATION**Item
                1. Legal Proceedings
            24Item
                1A. Risk Factors
            24Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            35Item
                3. Defaults Upon Senior Securities
            35Item
                4. Submission of Matters to a Vote of Security Holders
            35Item
                5. Other Information
            36Item
                6. Exhibits
            37SIGNATURE
            38











2


**PART
      I - FINANCIAL INFORMATION**


**Item 1.
      FINANCIAL STATEMENTS**


**ASPREVA
      PHARMACEUTICALS CORPORATION**


**CONSOLIDATED
      BALANCE SHEETS**


**(in
      thousands of U.S. dollars)**


**(unaudited)**





**June
                30,**
            
            **December
                31,****2006**
            
            **2005****ASSETS**Current
                assetsCash
                and cash equivalents
            
            $
            34,701
            
            $
            14,759Marketable
                securities (Note 3)
            
            
            157,476
            
            
            97,280Accounts
                receivable
            
            
            56,165
            
            
            48,246Prepaid
                expenses
            
            
            2,928
            
            
            2,005Deferred
                income tax asset
            
            
            1,045
            
            
            1,896Foreign
                currency contracts (Note 8)
            
            
            -
            
            
            2,377Total
                current assets
            
            
            252,315
            
            
            166,563Property
                and equipment, net of accumulated depreciation of $1,190 (2005 -
                $856)
            
            
            2,683
            
            
            2,687Deferred
                income tax asset
            
            
            2,910
            
            
            2,889Restricted
                cash
            
            
            756
            
            
            716**TOTAL
                ASSETS**
            
            $
            258,664
            
            $
            172,855**LIABILITIES
                AND SHAREHOLDERS’ EQUITY**Current
                liabilitiesAccounts
                payable
            
            $
            10,735
            
            $
            8,463Accrued
                liabilities
            
            
            15,948
            
            
            8,806Unearned
                royalty advance
            
            
            6,532
            
            
            6,079Foreign
                currency contracts (Note 8)
            
            
            508
            
            
            -Current
                portion under capital leases
            
            
            467
            
            
            441Current
                portion of deferred lease inducement
            
            
            126
            
            
            121Total
                current liabilities
            
            
            34,316
            
            
            23,910Long-term
                portion under capital leases
            
            
            174
            
            
            419Long-term
                portion of deferred lease inducement
            
            
            445
            
            
            480Total
                liabilities
            
            
            34,935
            
            
            24,809Commitments
                and contingencies (Notes 7 and 12)Shareholders’
                equity (Note 6)Common
                sharesAuthorized:
                unlimitedIssued
                and outstanding
            
            
            147,085
            
            
            142,464June
                30, 2006  - 34,765,107December 31,
                2005  - 34,156,231Additional
                paid-in capital
            
            
            10,166
            
            
            9,618Retained
                earnings (deficit)
            
            
            67,177
            
            
            (5,531
            )Accumulated
                other comprehensive income (loss)
            
            
            (699
            )
            
            1,495Total
                shareholders’ equity
            
            
            223,729
            
            
            148,046**TOTAL****LIABILITIES
                AND SHAREHOLDERS’ EQUITY**
            
            $
            258,664
            
            $
            172,855





See
      accompanying notes to consolidated financial
      statements.


3


**ASPREVA
      PHARMACEUTICALS CORPORATION**


**CONSOLIDATED
      STATEMENTS OF INCOME**


**(in
      thousands of U.S. dollars, except per share amounts)**


**(unaudited)**





**Three
                months ended June 30**
            **Six
                months ended June 30****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005**Royalty
                revenue
            
            $
            51,693
            
            $
            14,671
            
            $
            114,373
            
            $
            14,671ExpensesResearch
                and development
            
            
            12,218
            
            
            7,152
            
            
            22,032
            
            
            11,197Marketing,
                general and administrative
            
            
            10,753
            
            
            7,025
            
            
            16,864
            
            
            12,376Total
                expenses
            
            
            22,971
            
            
            14,177
            
            
            38,896
            
            
            23,573Operating
                income (loss)
            
            
            28,722
            
            
            494
            
            
            75,477
            
            
            (8,902
            )Other
                income (expense)Interest
                and other income
            
            
            2,114
            
            
            711
            
            
            4,414
            
            
            1,163Interest
                and other expense
            
            
            (9
            )
            
            (54
            )
            
            (23
            )
            
            (94
            )Total
                other income
            
            
            2,105
            
            
            657
            
            
            4,391
            
            
            1,069Income
                (loss) before income taxes
            
            
            30,827
            
            
            1,151
            
            
            79,868
            
            
            (7,833
            )Income
                tax expenseCurrent
            
            
            2,415
            
            
            -
            
            
            6,459
            
            
            -Deferred
            
            
            456
            
            
            -
            
            
            701
            
            
            -Total
                income tax expense
            
            
            2,871
            
            
            -
            
            
            7,160
            
            
            -Net
                income (loss) for the period
            
            
            27,956
            
            
            1,151
            
            
            72,708
            
            
            (7,833
            )Net
                income (loss) per common share (Note 5)Basic
            
            
            0.81
            
            
            0.03
            
            
            2.11
            
            
            (0.29
            )Diluted
            
            
            0.78
            
            
            0.03
            
            
            2.03
            
            
            (0.25
            )





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 June 30**
            **Six
                months ended June 30****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005****Operating
                Activities**Net
                income (loss) for the period
            
            $
            27,956
            
            $
            1,151
            
            $
            72,708
            
            $
            (7,833
            )Adjustment
                to reconcile net income (loss) to cash provided by operating
                activities:Depreciation
                and amortization
            
            
            181
            
            
            123
            
            
            333
            
            
            234Deferred
                taxes
            
            
            (87
            )
            
            -
            
            
            830
            
            
            -Stock-based
                compensation
            
            
            2,241
            
            
            1,597
            
            
            3,214
            
            
            3,184Amortization
                of lease inducement
            
            
            (31
            )
            
            (11
            )
            
            (61
            )
            
            (14
            )Net
                change in non-cash working capital items related to
                operations:Accounts
                receivable
            
            
            11,399
            
            
            (14,667
            )
            
            (7,782
            )
            
            (14,919
            )Investment
                tax credits receivable
            
            
            -
            
            
            -
            
            
            -
            
            
            261Prepaid
                expenses
            
            
            (90
            )
            
            729
            
            
            (923
            )
            
            1,152Deposits
            
            
            (38
            )
            
            -
            
            
            (40
            )
            
            -Accounts
                payable
            
            
            535
            
            
            (182
            )
            
            2,757
            
            
            (2,329
            )Accrued
                liabilities
            
            
            5,842
            
            
            1,142
            
            
            7,142
            
            
            510Net
                cash flows from (used in) operating activities
            
            
            47,908
            
            
            (10,118
            )
            
            78,178
            
            
            (19,754
            )**Investing
                Activities**Purchases
                of marketable securities
            
            
            (98,278
            )
            
            (43,593
            )
            
            (153,893
            )
            
            (99,545
            )Redemptions
                of marketable securities
            
            
            40,295
            
            
            4,073
            
            
            94,250
            
            
            36,386Purchase
                of property and equipment
            
            
            (275
            )
            
            (167
            )
            
            (329
            )
            
            (175
            )Net
                cash flows used in investing activities
            
            
            (58,258
            )
            
            (39,687
            )
            
            (59,972
            )
            
            (63,334
            )**Financing
                Activities**Issuance
                of common shares
            
            
            551
            
            
            -
            
            
            1,955
            
            
            91,731Share
                issue costs
            
            
            -
            
            
            -
            
            
            -
            
            
            (7,314
            )Payments
                on capital lease obligations
            
            
            (110
            )
            
            (105
            )
            
            (219
            )
            
            (207
            )Net
                cash flows from (used in) financing activities
            
            
            441
            
            
            (105
            )
            
            1,736
            
            
            84,210Effect
                of exchange rate changes on cash and cash equivalents
            
            
            -
            
            
            15
            
            
            -
            
            
            (27
            )Net
                (decrease) increase in cash and cash equivalents
            
            
            (9,909
            )
            
            (49,895
            )
            
            19,942
            
            
            1,095Cash
                and cash equivalents, beginning of the period
            
            
            44,610
            
            
            54,497
            
            
            14,759
            
            
            3,507Cash
                and cash equivalents, end of the period
            
            $
            34,701
            
            
            4,602
            
            
            34,701
            
            
            4,602





See
      accompanying notes to consolidated financial statements.


5


**ASPREVA
      PHARMACEUTICALS CORPORATION**


**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)


June
      30, 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**


Effective
      January 1, 2006, we adopted Statement of Financial Accounting Standards
      No. 123 (revised 2004), or SFAS 123(R)), *Share
      Based Payment* ,
      which supersedes our previous accounting under Statement No. 123, or SFAS 123, *Accounting
      for Stock-Based Compensation* .
      SFAS 123 (R) requires the recognition of compensation expense, using a
      fair-value based method, for costs related to all share-based payments to
      employees, including grants of stock options. SFAS 123 (R) requires companies
      to
      estimate the fair value of share-based payment awards on the date of grant
      using
      an option-pricing model. We use the Black-Scholes option-pricing model to
      determine the fair value for our awards. The value of the portion of the award
      that is ultimately expected to vest is recognized as expense over the service
      period in the statement of income. We adopted SFAS 123 (R) using the modified
      prospective transition method which 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. The modified prospective
      transition method does not require the restatement of prior periods to reflect
      the impact of SFAS123 (R). 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.




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.





6


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 June 30, 2006, there was CHF 8.0 million ($ 6.5 million) recorded
      in
      unearned royalties as the first quarter of 2006 and the second quarter of 2006
      have not been reconciled.





In
      December 2005, Aspreva and Roche made minor changes to the sales tracking
      methodology with a goal to reduce future quarterly reconciliation payments.
      In
      June 2006, Aspreva and Roche agreed the final audited results for the net sales
      relating to the fourth quarter of 2005. The resulting reconciliation payment
      of
      ($279,000), which is payable to Roche within 45 days of quarter-end, was
      determined utilizing the revised sales tracking methodology.





For
      the three month period ended June 30, 2006, we recorded royalty revenue of
      $51.7
      million, which is comprised of $48.7 million for the second quarter initial
      royalty payment ($52.0 million less $3.3 million collar recorded as unearned
      royalty advance) and $3.3 million (CHF 4 million) offset by $279,000 payable
      to
      Roche arising from the reconciliation of audited net sales data to the initial
      royalty payment for the fourth quarter of 2005. The net of the initial royalty
      payment and reconciliation payment are recorded in accounts receivable as of
      June 30, 2006, and are payable to us within 45 days of June 30,
      2006.




**3.**
            **Marketable
                Securities**


****


*Available
      for sale debt securities*


**Cost**
            
            
            **Accrued**
              **interest**
            
            
            **Gross**
              **unrealized**
              **gains**
            
            
            **Gross**
              **unrealized**
              **losses**
            
            
            **Approximate**
              **market**
              **and
                carrying**
              **value****June
                30, 2006**
            
            $
            156,287
            
            $
            1,232
            
            $
            42
            
            $
            (85
            )
            $
            157,476**December
                31, 2005**
            
            $
            96,687
            
            $
            740
            
            $
            2
            
            $
            (149
            )
            $
            97,280








**4.**
            **Stock-Based
                Compensation**


****


We
      have a stock option plan, the Aspreva 2002 Incentive Stock Option Plan, or
      the
      Plan. The Plan has been amended since its adoption, most recently in May 2006
      to
      increase the number of common shares reserved for issuance to directors,
      officers, employees and consultants to 4,031,000. The exercise price of the
      options is determined by the Board (or a committee thereof) but generally will
      be at least equal to the fair value of the shares at the grant date. The stock
      options typically have a ten year term and vest ratably over a period of two
      to
      four years from the date of grant. As at June 30, 2006 1,258,000 common shares
      were available for future grants. The stock options expire at various dates
      from
      April 2013 to May 2016. We issue new shares to satisfy stock option
      exercises.





Included
      within the statements of operations are the following charges for stock-based
      compensation:





**Three
                months ended June 30**
            **Six
                months ended June 30****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005**Research
                and development expense
            
            $
            784
            
            $
            567
            
            $
            1,125
            
            $
            1,154Marketing,
                general and administrative expense
            
            
            1,457
            
            
            1,030
            
            
            2,089
            
            
            2,030Total
                stock-based compensation
            
            $
            2,241
            
            $
            1,597
            
            $
            3,214
            
            $
            3,184





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 using the accelerated
      method. We estimated the fair value of options using the following
      assumptions:





**Three
                months ended June 30**
            **Six
                months ended June 30****2006**
            
            
            **2005**
            
            
            
            
            
            **2006**
            
            
            **2005**Expected
                stock price volatility
            
            
            70
            %
            
            70
            %
            
            
            
            
            70
            %
            
            83
            %Average
                risk-free interest rate
            
            
            4
            %
            
            4
            %
            
            
            
            
            4
            %
            
            4
            %Expected
                option life in years
            
            
            5.0
            
            
            5.0
            
            
            
            
            
            5.0
            
            
            5.5Dividend
                yield
            
            
            0
            %
            
            0
            %
            
            
            
            
            0
            %
            
            0
            %





Given
      our short history we do not have sufficient historical data to determine
      volatility, therefore our expected volatility is based on comparable companies’
historical stock prices. As provided in Staff Accounting Bulletin No. 107 our
      computation of expected option life has been calculated to be the mid-point
      between the vesting date and the end of the contractual period.





As
      required by SFAS 123 (R), previously recorded stock-based compensation expense
      totaling $0.8 million was reversed in the six months ended June 30, 2006 to
      reflect the impact of actual stock option forfeitures within the period.


7


Stock
      option transactions for the six-month period ended June 30, 2006, and the number
      of stock options outstanding as of June 30, 2006, are summarized below:





**Number
                of**
              **Shares**
            
            
            **Weighted
                Average**
              **Exercise
                Price**
            
            
            **Weighted
                Average remaining contractual term (years)**
            
            
            **Aggregate
                Intrinsic Value***All
                dollar figures in Canadian dollars***Outstanding
                at December 31, 2005**
            
            
            2,271,576
            
            $
            7.38Options
                granted
            
            
            552,000
            
            
            29.29Options
                forfeited
            
            
            (206,867
            )
            
            5.60Options
              exercised
            
            
            (379,191
            )
            
            3.73**Outstanding
              at March 31,
              2006**
            
            
            2,237,518
            
            $
            13.57Options
                granted
            
            
            60,000
            
            
            33.13Options
                forfeited
            
            
            (10,000
            )
            
            14.95Options
              exercised
            
            
            (158,317
            )
            
            3.10**Outstanding
                at June 30, 2006**
            
            
            2,129,201
            
            $
            14.89
            
            
            8.8
            
            $
            33,139**Exercisable
                at June 30, 2006**
            
            
            518,812
            
            $
            8.61
            
            
            8.1
            
            $
            11,256




Net
      cash proceeds from the exercise of stock options and warrants $2.0 million
      and
      nil for the six months ended June 30, 2006 and 2005, respectively.





The
      intrinsic value of stock options exercised during the six months ended June
      30, 2006 was Cdn $15.4 million ($13.5 million). No options were exercised
      during the six-month period ended June 30, 2005.




The
      estimated fair value of stock options vested during the three-month
      periods ended June 30, 2006 and 2005 was $1.9 million and $0.5 million,
      respectively. The estimated fair value of stock options vested during
      the six-month periods ended June 30, 2006 and 2005 was $3.7 million and $0.9
      million, respectively.





The
      weighted average estimated fair value of stock options granted during the
      three-month periods ended June 30, 2006 and 2005 was $18.08 and $8.46 per share,
      respectively. The weighted average estimated fair value of stock options granted
      during the six-month periods ended June 30, 2006 and 2005 was $15.60 and $8.99
      per share, respectively, based on the assumptions in the Black-Scholes valuation
      model discussed above.





The
      unamortized amount of stock-based compensation relating to unvested stock
      options granted and shares distributed from the Trust as at June 30, 2006 is
      $12.5 million, which will be amortized over the weighted average period of
      3.7
      years.







The
      following table summarizes information regarding options outstanding at June
      30,
      2006:





**Options
                Outstanding**
            **Options
                Exercisable****Weighted****Average****Weighted**
            
            
            **Number
                of**
            
            
            **Remaining**
            
            
            **Number
                of**
            
            
            **Weighted****Average**
            
            
            **Common
                Shares**
            
            
            **Contractual
                Life**
            
            
            **Common
                Shares**
            
            
            **Average**Price
                Range
            
            
            **Exercise
                Price**
            
            
            **Issuable**
            
            
            **(Years)**
            
            
            **Issuable**
            
            
            **Exercise
                Price***(Exercisable
                in Canadian dollars)*$0.78
            
            $
            0.78
            
            
            80,240
            
            
            7.1
            
            
            63,298
            
            $
            0.78$5.60
                - $7.79
            
            $
            5.69
            
            
            951,624
            
            
            8.1
            
            
            321,057
            
            $
            5.61$14.95
                - $17.45
            
            $
            16.65
            
            
            486,015
            
            
            9.1
            
            
            107,510
            
            $
            17.15$27.57
                - $33.13
            
            $
            29.66
            
            
            611,322
            
            
            9.7
            
            
            26,947
            
            $
            28.68$0.78
                - $33.13
            
            $
            14.89
            
            
            2,129,201
            
            
            8.8
            
            
            518,812
            
            $
            8.61




**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.


8


The
      denominators for basic and diluted net income (loss) per common share for the
      three and six-month periods ended June 30, 2006 and 2005 were calculated as
      follows:





**Three
                months ended June 30**
            **Six
                months ended June 30****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005**Weighted
                average shares outstanding used for basic net income (loss) per common
                share
            
            
            34,676,544
            
            
            34,028,378
            
            
            34,527,315
            
            
            26,733,886Effect
                of dilutive stock options
            
            
            1,226,628
            
            
            1,405,330
            
            
            1,120,270
            
            
            -Effect
                of dilutive warrants
            
            
            108,271
            
            
            237,205
            
            
            106,475
            
            
            -Weighted
                average shares outstanding used for diluted net income (loss) per
                common
                share
            
            
            36,011,443
            
            
            35,670,913
            
            
            35,754,060
            
            
            26,733,886





Diluted
      loss per common share is equivalent to basic loss per common share for the
      six-month period ended June 30, 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:





**Three
                months ended June 30**
            
            **Six
                months ended June 30****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005**Stock
                options
            
            
            -
            
            
            2,041,134
            
            
            336,000
            
            
            2,041,134Warrants
            
            
            -
            
            
            230,360
            
            
            -
            
            
            230,360Total
            
            
            -
            
            
            2,271,494
            
            
            336,000
            
            
            2,271,494





**6.**
            **Shareholders’
                Equity**





**Statement
      of Shareholders’ Equity**


The
      following table summarizes the activity in our shareholders’ equity from
      December 31, 2005 to June 30, 2006: ****


Number
              of
                Shares
            
            
            Common
              Shares
            
            
            Additional
              Paid-In
              Capital
            
            
            Accumulated
                Other Comprehensive Income/(Loss)
            
            
            
            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
                gains on derivative financial instruments
            
            
            -
            
            
            -
            
            
            -
            
            
            100
            
            
            
            -
            
            
            
            100Reclassification
                of unrealized loss on marketable securities, net of tax
            
            
            -
            
            
            -
            
            
            -
            
            
            16
            
            
            
            -
            
            
            
            16Unrealized gains
                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
            
            
            $
            195,385Shares
                issued on:Exercise
                of options
            
            
            158,317
            
            
            1,129
            
            
            (701
            )
            
            -
            
            
            
            -
            
            
            
            428Exercise
                of warrants
            
            
            28,550
            
            
            223
            
            
            (100
            )
            
            -
            
            
            
            -
            
            
            
            123Stock-based
                compensation expense
            
            
            -
            
            
            -
            
            
            2,241
            
            
            -
            
            
            
            -
            
            
            
            2,241Unrealized gains
                on derivative financial instruments
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,355
            )
            
            
            -
            
            
            
            (2,355
            )Reclassification
                of unrealized gain on marketable securities, net of tax
            
            
            -
            
            
            -
            
            
            -
            
            
            (63
            )
            
            
            -
            
            
            
            (63
            )Unrealized gain
                on marketable securities, net of tax
            
            
            -
            
            
            -
            
            
            -
            
            
            14
            
            
            
            -
            
            
            
            14Net
                income for the period
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            27,956
            
            
            
            27,956**Balance,
                as of June 30, 2006**
            
            
            34,765,107
            
            $
            147,085
            
            $
            10,166
            
            $
            (699
            )
            
            $
            67,177
            
            
            $
            223,729





**Comprehensive
      Income**


Comprehensive
      income was $25.6 million and $1.6 million for the three-month periods ended
      June
      30, 2006 and  2005, respectively. Comprehensive income for the six-month
      period ended June 30, 2006 was $70.5 million and comprehensive loss for the
      six-month period ended June 30, 2005 was $7.4 million.




**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, 71,368 warrants
      were
      exercised during the six-month period ended June 30, 2006. As of June 30, 2006,
      we had 123,322 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 June 30, 2006, we have commitments to these groups
      amounting to $23.0 million over the next three years.





9





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 Europe we
      incurred significant amount of our research and development and general and
      administrative expenditures in Canadian dollars, euros and pounds sterling.
      In
      order to hedge against the impact of fluctuations in the value of the Canadian
      dollar, euro and pounds sterling relative to the U.S. dollar, we enter into
      short-term forward contracts to purchase Canadian dollars, euros and pounds
      sterling. Forward hedges relating to forecasted expenditures are cash flow
      hedges.





The
      following is a summary of the derivative instruments in place at June 30,
      2006:





**Type
                of hedge**
            
            
            **Currency
                Exchanged**
            
            
            **Settlement
                dates**
            
            
            **Total
                Notional Amount**
            
            
            **Average
                Settlement Amount**Forward
                Contract
            
            
            Sell
                USD buy CAD
            
            
            July
                2006 - July 2007
            
            
            12,240
                USD
            
            
            0.8789Forward
                Contract
            
            
            Sell
                USD buy GBP
            
            
            July
                2006 - July 2007
            
            
            9,382
                USD
            
            
            1.7932Forward
                Contract
            
            
            Sell
                CHF buy GBP
            
            
            August
                2006 - May 2007
            
            
            4,388
                CHF
            
            
            2.2234Forward
                Contract
            
            
            Sell
                CHF buy CAD
            
            
            August
                2006 - May 2007
            
            
            1,674
                CHF
            
            
            1.1116Forward
                Contract
            
            
            Sell
                USD buy Euro
            
            
            July
                2006 - July 2007
            
            
            567
                USD
            
            
            1.2974Forward
                Contract
            
            
            Sell
                CHF buy USD
            
            
            August
                2006 - August 2007
            
            
            148,186
                CHF
            
            
            1.2302NARC
            
            
            Sell
                USD buy CHF
            
            
            August
                2006 - November 2007
            
            
            47,356
                USD
            
            
            0.7976NARC
            
            
            Sell
                Euro buy CHF
            
            
            August
                2006 - November 2007
            
            
            12,282
                Euro
            
            
            0.6392





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 June
      30, 2006, the fair value of our forward contracts totaled $(1.5) million and
      $1.0 million in respect of the NARCs. Of this, $(0.7) million relates to cash
      flow hedges (recorded in Other Comprehensive Income); and $0.2 million relates
      to fair value hedges (recorded in the second quarter 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 $7.2 million for the six months ended June 30,
      2006, resulting in an effective global tax rate of 9.0% for the period. The
      difference between the effective tax rate and the statutory Canadian federal
      income tax rate of 34.1% relates to differing foreign tax rates, changes in
      our
      deferred income tax valuation allowance and utilization of tax pools. We believe
      the overall effective global tax rate for us will be less than 20%.




**10.**
            **Supplemental
                Cash Flow**


Supplemental
      cash flow information is as follows:









**Three
                months ended June 30**
            
            
            
            **Six
                months ended June 30****2006**
            
            
            **2005**
            
            
            
            **2006**
            
            
            **2005**Equipment
                acquired under capital leases
            
            $
            -
            
            $
            -
            
            
            $
            -
            
            $
            140Income
                taxes paid
            
            
            50
            
            
            -
            
            
            
            269
            
            
            -Interest
                paid
            
            
            11
            
            
            13
            
            
            
            23
            
            
            25





**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 six months ended June
      30, 2006 and 2005, we incurred legal fees payable to Farris, Vaughan, Wills
      & Murphy LLP, of $270,000 and $560,000, respectively, all of which,
      excluding $36,000 in accrued liabilities, has been paid as of June 30, 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.




10




**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.


11


**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 six-month period ended
      June
      30, 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.




We
      continue our intense focus on building our portfolio beyond CellCept and on
      leveraging the clinical, medical affairs and commercial infrastructure that
      we
      have built. Potential opportunities include single and multiple product
      partnerships with both large and mid size pharmaceutical and biotechnology
      companies, specialty autoimmune products in various stages of development and
      may include strategic acquisitions if the appropriate opportunity arises. We
      also anticipate that our Roche relationship will be expanded.




**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.





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. Our discussions continue with Chugai and we will confirm this
      agreement following Chugai's final decision whether or not to proceed on this
      collaboration agreement following  meetings with the Japanese regulatory
      authorities.


12


**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. Sanders of Duke University to support
      our application for the use of CellCept in the treatment of myasthenia gravis.
      Dr. Sanders'  IIT is a prospective, multi-center, double-blinded,
      placebo-controlled trial designed to assess CellCept in combination with
      prednisone in the treatment of acquired myathenia gravis. Dr. Sander’s study is
      structured slightly differently from our myasthenia gravis study including
      a
      shorter length of therapy (12 weeks vs. 36 weeks) and lack of steroid tapering.
      Dr. Sanders and Duke University are currently compiling the results from their
      study. The results will be released as appropriate by Duke University and Dr.
      Sanders once they have fully completed their analysis. Concurrently, we are
      analyzing the data from our database which is derived from his study and this
      data will be included as supporting evidence in our application for the use
      of
      CellCept in the treatment of  myasthenia gravis.





**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 to be about 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. We believe that
      approximately 11% of diagnosed patients with lupus nephritis are currently
      being
      treated with CellCept. We believe current dosing of CellCept is 1.7 grams,
      and
      will increase as a result of clinical data at higher dosing
      levels.





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. Enrollment into
      this study is currently over 66% of our design. We expect to complete the
      induction phase of this trial in early 2007, and expect data lock on this trial
      in May 2007. We expect, if the data is supportive, to be filing regulatory
      submissions, including a sNDA with the FDA, as well as appropriate filings
      with
      the European Union and Canadian regulatory authorities, for lupus nephritis
      in
      November 2007 .




In
      March 2006, Roche and Aspreva agreed not to pursue an application for orphan
      drug designation for CellCept in the treatment of lupus nephritis, a subset
      of
      systemic lupus erythematosus, or SLE, as the FDA determined that CellCept is
      not
      eligible for orphan drug designation for lupus nephritis as the potential use
      of
      CellCept in SLE is not limited to patients with lupus nephritis only and
      consequently the size of the broader patient population is significantly greater
      than the 200,000 maximum allowed for an orphan drug designation.  We do not
      expect that the decision will harm 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.


13


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 the induction phase of this trial in late 2006 with data lock in
      October 2006. We intend to submit a sNDA to the FDA, as well as appropriate
      filings with the European Union and Canadian regulatory authorities in May
      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 the induction phase of this trial in 2007 with datalock in May 2007.
      We
      intend to submit a sNDA to the FDA, as well as appropriate filings with the
      European Union and Canadian regulatory authorities, in December 2007. In
      June 2006, we received orphan drug designation with the FDA for CellCept in
      the
      treatment of pemphigus vulgaris.





**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 two
      IITs for the treatment of CellCept in cardiovascular disease. The protocols
      for
      these IITs have been established, and the trials are 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
      committed to fund an IIT to investigate the use of CellCept in mono and
      combination therapy with Avonex in patients with relapse-remitting multiple
      sclerosis. The trial has been initiated and patient recruitment has begun.
      The
      study is expected to complete by the end of 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.





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.





**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 specialty 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 12 such field based medical advisors deployed in the U.S. and major EU
      markets.





14


**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.




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
      June 2006, Aspreva and Roche agreed to the final audited results for the net
      sales relating to the fourth quarter of 2005. The audit results indicate that
      the minor changes made to the sales tracking methodology in December 2005 are
      effective as the reconciliation payment related to the fourth quarter of 2005
      is
      a payment of $279,000 payable to Roche within 45 days of quarter
      end.





15


**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 Statement of Financial Accounting Standards
      SFAS 123(R), *Share-based
      Payment* ,
      a revision of SFAS 123, using the modified prospective method 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, using the accelerated method, 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 June 30
            
            
            Six
                months ended June 302006
            
            
            2005
            
            
            2006
            
            
            2005(in
                millions)Research
                and development expense
            
            $
            0.8
            
            $
            0.6
            
            $
            1.1
            
            $
            1.2Marketing,
                general and administrative expense
            
            
            1.4
            
            
            1.0
            
            
            2.1
            
            
            2.0


Total
                stock-based compensation
            
            $
            2.2
            
            $
            1.6
            
            $
            3.2
            
            $
            3.2




**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.





16


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.




Deferred
      tax assets arise from unused tax losses from
      prior periods, timing differences, credits available for research and
      development and share issue costs. We anticipate utilizing all loss carry
      forwards within 2006, and the balance of our recognized deferred tax assets
      of
      $4.0 million, comprised of Canadian tax credits, by 2009.





**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 and six-month
      periods ended June 30, 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 $3.3 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**
            
            
            **June
                30, 2006**In
                millionsInitial
                quarterly payment less collar
            
            $
            14.7
            
            $
            16.8
            
            $
            39.0
            
            $
            46.5
            
            $
            48.7Reconciliation
                amount
            
            
            -
            
            
            -
            
            
            6.0
            
            
            16.2
            
            
            3.0Total
                royalty revenue
            
            $
            14.7
            
            $
            16.8
            
            $
            45.0
            
            $
            62.7
            
            $
            51.7




Currently
      49% of our revenue is derived from US markets, 19% from major European markets
      (UK, Spain, Italy, France and Germany) and the remainder from rest of world
      markets.




In
      December 2005, Aspreva and Roche made minor changes to the sales tracking
      methodology with a goal of reducing future volatility in 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.




**Research
      and Development Expenses**





From
      inception to June 30, 2006, we have incurred total research and development
      expenses of $63.5 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
      opportunities. We expense research and development costs as they are incurred.





17


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.





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 six months**
              **ended
                June 30,**
            
            
            **Total
                from inception to June 30****2003**
            
            
            **2004**
            
            
            **2005**
            
            
            **2005**
            
            
            **2006**
            
            
            **2006**(in
                millions)Lupus
                nephritis
            
            $
            0.1
            
            $
            4.9
            
            $
            11.9
            
            $
            5.2
            
            $
            8.8
            
            $
            25.7Myasthenia
                gravis
            
            
            0.4
            
            
            2.2
            
            
            11.3
            
            
            3.8
            
            
            6.1
            
            
            20.0Pemphigus
                vulgaris
            
            
            0.4
            
            
            1.3
            
            
            3.3
            
            
            1.0
            
            
            2.0
            
            
            7.0Other
            
            
            -
            
            
            -
            
            
            0.7
            
            
            -
            
            
            1.7
            
            
            2.4Clinical
                development expenditures
            
            
            0.9
            
            
            8.4
            
            
            27.2
            
            
            10.0
            
            
            18.6
            
            
            55.1Business
                development expenditures
            
            
            0.3
            
            
            1.7
            
            
            3.0
            
            
            1.2
            
            
            3.4
            
            
            8.4Total
            
            $
            1.2
            
            $
            10.1
            
            $
            30.2
            
            $
            11.2
            
            $
            22.0
            
            $
            63.5




Research
      and development expenses were $12.2 million for the three-month period
      ended June 30, 2006, compared to $7.2 million for the three-month period
      ended June 30, 2005. The increase of $5.0 million was due to a $3.8 million
      increase in our clinical development programs and $1.2 million increase in
      our
      business development operations. Clinical development costs increased as a
      result of: a $2.0 million increase in our lupus nephritis program costs
      reflecting the continued increase in activity as recruitment increased from
      0%
      in the second quarter of 2005 to over 66% of target enrollment as at June 30,
      2006; a $313,000 increase in our myasthenia gravis program as a consequence
      of achieving full patient enrollment and thus peak myasthenia gravis 
project spend rate; a $281,000 increase in our pemphigus vulgaris  program
      costs due to achieving full enrollment and thus peak pemphigus vulgaris 
project spend rate; and $1.2 million 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.





Included
      in the above we incurred an increase of $1.3 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
      increased by $217,000 from the second quarter in 2005.





Research
      and development expenses were $22.0 million for the six-month period ended
      June 30, 2006, compared to $11.2 million for the six-month period ended
      June 30, 2005. The increase of $10.8 million was due to a $8.6 million
      increase in our clinical development programs and $2.2 million increase in
      our
      business development operations. Clinical development costs increased as a
      result of: a $3.6 million increase in our lupus nephritis program costs
      reflecting the continued increase in recruitment activity; a $2.3 million
      increase in our myasthenia gravis  program as a consequence of achieving
      full patient enrollment and thus peak myasthenia gravis project spend rate;
      a $1.0 million increase in our pemphigus vulgaris  program costs due to
      achieving full enrollment and thus peak pemphigus vulgaris  project spend
      rate; and $1.7 million 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.





Included
      in the above we incurred an increase of $2.0 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 $29,000 from the first six months of 2005 as a result of the
      forfeiture in the period of previously expensed options.





18


The
      total number of employees engaged in research and development increased from
      27
      at June 30, 2005 to 58 at June 30, 2006, which includes 11 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 17 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 $10.8 million for the three-month
      period ended June 30, 2006, compared to $7.0 million for the three-month
      period ended June 30, 2005. The increase of $3.8 million was primarily due
      to additional salary and related 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 increased by $427,000 over the second quarter of 2005. Also
      contributing to the increase are professional and consulting fees related to
      our
      Sarbanes-Oxley compliance program.





For
      the three month period ended June 30, 2006, our marketing costs represented
      47%
      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.





Marketing,
      general and administrative expenses were $16.9 million for the six-month
      period ended June 30, 2006, compared to $12.4 million for the six-month
      period ended June 30, 2005. The increase of $4.5 million was primarily due
      to additional salary and related expenses and professional and consulting fees
      related to our Sarbanes-Oxley compliance program.





The
      total number of employees engaged in marketing, general and administrative
      activities increased from 50 at June 30, 2005 to 72 at June 30,
      2006.




**Interest
      and Other Income**





Interest
      and other income was $2.1 million for the three-month period ended June 30,
      2006, compared to $711,000 for the three-month period ended June 30, 2005.
      The
      increase of $1.4 million was due to several factors. We had significantly higher
      average investment balances during the three-month period ended June 30, 2006
      comprised of royalty revenue receipts and proceeds from our initial public
      offering. In the three-month period ended June 30, 2005, we had not yet received
      royalty proceeds. Additionally, net foreign exchange losses amounted to $97,000
      in the three-month period ended June 30, 2006 compared to a loss of $40,000
      in
      the three-month period ended June 30, 2005.





Interest

      and other income was $4.4 million for the six-month period ended June 30, 2006,
      compared to $1.2 million for the six-month period ended June 30, 2005. The
      increase of $3.2 million was due to several factors. We had significantly higher
      average investment balances during the six-month period ended June 30, 2006
      comprised of royalty revenue receipts and proceeds from our initial public
      offering. In the six-month period ended June 30, 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 $769,000 in the
      six-month period ended June 30, 2006 compared to a loss of $137,000 in the
      six-month period ended June 30, 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 June 30, 2006 Canadian dollar and British
      pound sterling denominated marketable securities and cash
      balances.





**Interest
      and Other Expense**





Interest
      and other expense was $9,000 for the three-month period ended June 30, 2006,
      compared to $54,000 for the three-month period ended June 30, 2005.





Interest
      and other expense was $23,000 for the six-month period ended June 30, 2006,
      compared to $94,000 for the six-month period ended June 30, 2005.





**Income
      Taxes**





The
      provision for income taxes was $2.9 million for the three months ended June
      30,
      2006, resulting in an effective global tax rate of 9.3% for the period.





19


The
      provision for income taxes was $7.2 million for the six months ended June 30,
      2006, resulting in an effective global tax rate of 9.0% for the period.





For
      both periods, 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 $47.9 million for the three-month period
      ended June 30, 2006, compared to net cash used in operating activities of
      $10.1 million for the three-month period ended June 30, 2005. The increase
      of $58.0 million in net cash from operating activities reflects the receipt
      of
      the $61.5 million royalty receivable from Roche that was outstanding at March
      31, 2006.





Net
      cash from operating activities was $78.2 million for the six-month period
      ended June 30, 2006, compared to net cash used in operating activities of
      $19.8 million for the six-month period ended June 30, 2005. The increase of
      $98.0 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, and the $61.5 million royalty receivable from Roche that was outstanding
      at March 31, 2006.





**Investing
      activities**





Net
      cash used in investing activities was $58.3 million for the three-month
      period ended June 30, 2006, while net cash used in investing activities was
      $39.7 million for the three-month period ended June 30, 2005. Purchases of
      investments in marketable securities during the three-month period ended June
      30, 2006 were $98.3 million, and were mainly offset by proceeds from sales
      of short-term investments in marketable securities of $40.3 million.
      Royalty revenue received in the three-month period ended June 30, 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 June 30, 2005.





Net
      cash used in investing activities was $60.0 million for the six-month
      period ended June 30, 2006, while net cash used in investing activities was
      $63.3 million for the six-month period ended June 30, 2005. Purchases of
      investments in marketable securities during the six-month period ended June
      30,
      2006 were $153.9 million, and were mainly offset by proceeds from sales of
      short-term investments in marketable securities of $94.3 million. Royalty
      revenue received in the six-month period ended June 30, 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 six-month period
      ended June 30, 2005.





**Financing
      activities**





Net
      cash from financing activities was $441,000 for the three-month period ended
      June 30, 2006, reflecting cash received upon the exercise of warrants and
      employee stock options. Net cash used in financing activities was $105,000
      for
      the three-month period ended June 30, 2005, reflecting payments on lease
      obligations.





Net
      cash from financing activities was $1.7 million for the six-month period ended
      June 30, 2006, reflecting cash received upon the exercise of warrants and
      employee stock options. Net cash from financing activities was $84.2 million
      for
      the six-month period ended June 30, 2005, mainly reflecting the net proceeds
      of
      our initial public offering in March 2005.





**Liquidity
      and Capital Resources**





**Sources
      of Liquidity**





As
      of June 30, 2006, we had working capital of $218.0 million, which included
      $192.2 million in cash, cash equivalents and marketable securities. In
      aggregate, our cash resources increased by $80.2 million from $112.0 million
      at
      December 31, 2005. We also had $56.2 million in accounts receivable at June
      30,
      2006, of which $51.5 million is due from Roche and payable within 45 days of
      June 30, 2006.




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.





20


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 June 30, 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 June 30, 2006, we have commitments to these groups
      amounting to $19.6 million over the next three years. In addition we have
      contractual commitments for investigator initiated trials totaling $3.4 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 June 30, 2006, we had $641,000 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 six-month period
      ended June 30, 2006, please see Note 11 of our Notes to Consolidated Financial
      Statements.





**Recent
      Accounting Pronouncements**





None.





21


**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 or trading purposes, nor do we hold or issue
      leveraged derivative financial instruments. 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 $192.2 million, or 76% of total
      current assets at June 30, 2006. Interest income related to this portfolio
      was
      $3.6 million for the six-month period ended June 30, 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 U.S. dollars, our royalty payments
      are received in Swiss francs and our expenses are denominated in several foreign
      currencies, including U.S. 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 U.S. 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.


22


**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 June 30, 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 June 30, 2006 that have materially affected or are
      reasonably likely to materially affect our internal controls over financial
      reporting.





23


**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.


24


**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 June 2006, we were
      granted orphan drug designation for CellCepts’ use in pemphigus vulgaris. 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.




25


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 Global 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.


26


**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.


27


**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 six-month period ended June 30, 2006, we increased our number of employees
      by 24 and, as of June 30, 2006, we had 130 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.




28


**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 Dr. Richard Jones, our Senior Vice
      President, Clinical and Regulatory Affairs. Dr Reinhard Bailden, Executive
      Vice
      President, Clinical and Regulatory Affairs, announced plans for retirement
      in
      July 2006. This retirement will be effective September 2006. 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 $1.3
      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;







29




•
            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.





30


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.


31


**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 July 20, 2006, our common shares have traded on the NASDAQ Global Market
      between $11.00 and $34.89 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;





32




•
            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 June 30, 2006, our directors and executive officers, together with their
      affiliates, beneficially owned approximately 25% 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.


33


**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.




34


**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 six months ended June 30, 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 June 30, 2006, we had applied the aggregate net proceeds of $82.3 million
      from our initial public offering as follows:


Working
                capital:
              $82.3
                millionTemporary investments:
              nil





*Recent
      Sales of Unregistered Securities*





From
      April 1, 2006 through June 30, 2006, an aggregate of 28,550 common shares were
      issued to 10 accredited investors at a price of $4.27 ($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.**





The
      2006 Annual and Special General Meeting of the shareholders of Aspreva
      Pharmaceuticals Corporation was held on Wednesday, May 24, 2006 for the
      following purposes:





1.
            to
                elect eight directors for the ensuing year;




2.
            to
                appoint Ernst & Young LLP as our auditor and independent registered
                public accounting firm for the ensuing year and to authorise the
                audit
                committee of our board of directors to fix the remuneration to be
                paid to
                the auditor and independent registered public accounting firm;




3.
            to
                amend the Aspreva 2002 Incentive Stock Option Plan to increase from
                3,531,000 to 4,031,000 common shares in respect of which stock options
                may
                be granted thereunder; and






35




4.
            to
                transact such other business as may properly come before the meeting,
                or
                at any adjournments or postponements
                thereof.





In
      addition, at the 2006 Annual and Special General Meeting our shareholders
      received our 2005 Annual Report and our audited consolidated financial
      statements for the year ended December 31, 2005, together with the report of
      the
      auditor and independent registered public accounting firm on those financial
      statements.





We
      are not subject to Section 14(a) of the Securities Exchange Act of 1934, as
      amended. There was no solicitation in opposition of management’s solicitations.





The
      final vote on the proposals was recorded as follows:





**Proposal
      1:**





The
      following eight directors were elected for the ensuing year by the following
      vote:





Nominee
            For
            WithheldRichard
                M. Glickman
            26,063,152
            94,565Noel
                F. Hall
            26,096,642
            61,075Kirk
                K. Calhoun, C.P.A.
            26,147,642
            10,375Ronald
                M. Hunt
            26,146,642
            11,075Julia
                G. Levy, Ph.D.
            21,290,945
            4,866,772R.
                Hector MacKay-Dunn, Q.C.
            25,873,782
            283,935George
                M. Milne, Ph.D.
            26,147,692
            10,025Arnold
                L. Oronsky, Ph.D.
            26,077,972
            79,745




**Proposal
      2:**





The
      appointment of Ernst & Young LLP as our auditor and independent registered
      public accounting firm for the ensuing year and to authorise the audit committee
      of our board of directors to fix the remuneration to be paid to the auditor
      and
      independent registered public accounting firm was approved by the following
      vote:




For
            Against
            Withheld26,099,297
            -
            58,420





**Proposal
      3:**





The
      amendment of the Aspreva 2002 Incentive Stock Option Plan to increase from
      3,531,000 to 4,031,000 common shares in respect of which stock options may
      be
      granted thereunder was approved by the following vote:




For
            Against
            Withheld
            Insiders
            No-Vote10,315,755
            6,803,438
            -
            70,400
            8,968,124





**ITEM 5.
      OTHER INFORMATION**




On
        June 13, 2006, we announced the appointment of Dr. William L. Hunter
        to  our
        Board of Directors.  Dr. Hunter, 43, co-founded Angiotech  Pharmaceuticals,
        Inc. in 1992, and currently serves as President and Chief  Executive
        Officer.  Dr. Hunter has previously served on the Boards of
        Active  Pass
        Pharmaceuticals, Inc., Vigil Health Management, Viewpoint, Inc. and
        the  Canadian
        Arthritis Network, and served on the Steering Committee for BIO  2002.


36


**ITEM 6.
      EXHIBITS.**




10.3(1)
            
            Apreva
                2002 Incentive Stock Plan31.1
            
            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).(1)
            Filed
              as
              an attachment to our Proxy Statement for our 2006 Annual and Special
              General Meeting of Shareholders held on May 24, 2006, as set forth
              in a
              Current Report on Form 8-K (File No. 000-51169), dated April 20, 2006,
              and
              filed with the U.S. Securities and Exchange Commission on April 20,
              2006,
              and incorporated herein by reference.* 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


**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 CORPORATIONAugust
                2, 2006
            /s/
              Bruce G. CousinsBruce
                G. CousinsChief
                Financial Officer(Principal
                Financial and Accounting Officer)





38


**EXHIBIT
      INDEX**


10.3(1)
              
              Apreva
                  2002 Incentive Stock Plan31.1
              
              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).(1)
              Filed
                as
                an attachment to our Proxy Statement for our 2006 Annual and Special
                General Meeting of Shareholders held on May 24, 2006, as set forth
                in a
                Current Report on Form 8-K (File No. 000-51169), dated April 20,
                2006, and
                filed with the U.S. Securities and Exchange Commission on April 20,
                2006,
                and incorporated herein by reference.* 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.


39