**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





**QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**





**For
      the Quarterly Period ended June 30, 2005**





**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****ý**
            **No** ̈





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule 12b-2 of the Securities Exchange Act of 1934):








**Yes** ̈
            **No****ý**











The
      number of shares of the registrant’s Common Stock, no par value, outstanding as
      of July 31, 2005 was 34,028,378 shares.
































**ASPREVA
      PHARMACEUTICALS CORPORATION**


**FORM
      10-Q**


**For
      the Quarterly Period Ended June 30, 2005**





**TABLE
      OF CONTENTS**








**Page****PART
                I - FINANCIAL INFORMATION**Item 1.
                Financial Statements (unaudited)Consolidated
                Balance Sheets - June 30, 2005 and December 31, 2004
            
            
            3Consolidated
                Statements of Operations - Three and six month periods ended June
                30, 2005
                and 2004
            
            
            4Consolidated
                Statements of Cash Flows - Three and six month periods ended June
                30, 2005
                and 2004
            
            
            5Notes
                to Consolidated Financial Statements
            
            
            6Item 2.
                Management’s Discussion and Analysis of Financial Condition and Results of
                Operations
            
            
            11Item 3.
                Quantitative And Qualitative Disclosure About Market Risk
            
            
            18Item 4.
                Controls And Procedures
            
            
            27**PART
                II - OTHER INFORMATION**Item
                1. Legal Proceedings
            
            
            28Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            
            28Item
                3. Defaults Upon Senior Securities
            
            
            28Item
                4. Submission of Matters to a Vote of Security Holders
            
            
            28Item
                5. Other Information
            
            
            28Item
                6. Exhibits
            
            
            29SIGNATURE
            
            
            30























2








**PART
      I - FINANCIAL INFORMATION**


**Item 1.
      FINANCIAL STATEMENTS**


**ASPREVA
      PHARMACEUTICALS CORPORATION**


**CONSOLIDATED
      BALANCE SHEETS**


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


**(unaudited)**








**June
                30, 2005**
            
            **December
                31, 2004****ASSETS**Current
                assetsCash
            
            $
            3,602
            
            $
            3,507Marketable securities
            
            
            96,861
            
            
            32,330Accounts receivable (note 2)
            
            
            18,315
            
            
            277Investment tax credits receivable
            
            
            -
            
            
            261Prepaid expenses
            
            
            1,651
            
            
            2,803Total
                current assets
            
            
            120,429
            
            
            39,178Property and equipment, net of accumulated depreciation of $507 (2004
                -
                $273)
            
            
            1,846
            
            
            1,763Deferred share issue costs
            
            
            -
            
            
            1,297Deposits
            
            
            432
            
            
            434**TOTAL
                ASSETS**
            
            $
            122,707
            
            $
            42,672**LIABILITIES
                AND SHAREHOLDERS’ EQUITY**Current
                liabilitiesBank indebtedness
            
            $
            -
            
            $
            231Accounts payable
            
            
            1,697
            
            
            3,199Accrued liabilities
            
            
            5,913
            
            
            5,402Unearned royalty advance (note 2)
            
            
            3,118
            
            
            -Capital lease obligations, current portion
            
            
            523
            
            
            341Deferred lease inducement, current portion
            
            
            56
            
            
            56Total
                current liabilities
            
            
            11,307
            
            
            9,229Capital lease obligations
            
            
            552
            
            
            568Deferred lease inducement
            
            
            210
            
            
            224Total
                liabilities
            
            
            12,069
            
            
            10,021Contractual
                obligations, commitments and contingencies (notes 6 and
                10)Convertible redeemable preferred sharesAuthorized: unlimitedIssued and outstanding (Series A)
            
            
            -
            
            
            49,341June 30, 2005  - 0December 31, 2004  - 12,677,192Shareholders’
                equity (deficiency) (note 5)Common sharesAuthorized: unlimitedIssued and outstanding
            
            
            136,868
            
            
            5,232June 30, 2005  - 34,028,378December 31, 2004  - 13,071,186Additional paid-in capital
            
            
            6,495
            
            
            3,311Deficit
            
            
            (33,032
            )
            
            (25,198
            )Accumulated other comprehensive gain (loss)
            
            
            307
            
            
            (35
            )Total
                shareholders’ equity (deficiency)
            
            
            110,638
            
            
            (16,690
            )**TOTAL****LIABILITIES
                AND SHAREHOLDERS’ EQUITY**
            
            $
            122,707
            
            $
            42,672








See
      accompanying notes to consolidated financial statements.






3





**ASPREVA
      PHARMACEUTICALS CORPORATION**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


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


**(unaudited)**








**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004****Royalty
                revenue**(notes 2 and 9)
            
            $
            14,671
            
            $
            -
            
            $
            14,671
            
            $
            -**Expenses**Research and development
            
            
            7,152
            
            
            1,301
            
            
            11,197
            
            
            2,083Marketing, general and administrative
            
            
            7,025
            
            
            3,284
            
            
            12,376
            
            
            3,719Total
                expenses
            
            
            14,177
            
            
            4,585
            
            
            23,573
            
            
            5,802**Other
                (income) expense**Interest and other income
            
            
            (711
            )
            
            (183
            )
            
            (1,163
            )
            
            (194
            )Interest and other expense
            
            
            54
            
            
            -
            
            
            94
            
            
            810Total
                other (income) expense
            
            
            (657
            )
            
            (183
            )
            
            (1,069
            )
            
            616**Net income
                (loss) for the period**
            
            $
            1,151
            
            $
            (4,402
            )
            $
            (7,833
            )
            $
            (6,418
            )**Earnings
                (loss) per common share (note 4)**Basic
                and diluted
            
            $
            0.03
            
            $
            (0.34
            )
            $
            (0.29
            )
            $
            (0.50
            )Proforma
                basic and diluted
            
            
            0.03
            
            
            (0.17
            )
            
            (0.25
            )
            
            (0.31
            )




































































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**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Cash
                Flows used in Operating ActivitiesNet income (loss) for the period
            
            $
            1,151
            
            $
            (4,402
            )
            $
            (7,833
            )
            $
            (6,418
            )Add non-cash items:Depreciation and amortization
            
            
            123
            
            
            64
            
            
            234
            
            
            69Stock-based compensation
            
            
            1,597
            
            
            432
            
            
            3,184
            
            
            1,582Amortization of lease inducement
            
            
            (11
            )
            
            -
            
            
            (14
            )
            
            -Net change in non-cash working capital items related to
                operations:Accounts receivable
            
            
            (14,667
            )
            
            (685
            )
            
            (14,919
            )
            
            (715
            )Investment tax credits receivable
            
            
            -
            
            
            -
            
            
            261
            
            
            -Prepaid expenses
            
            
            729
            
            
            (47
            )
            
            1,152
            
            
            (145
            )Deposits
            
            
            -
            
            
            69
            
            
            -
            
            
            111Accounts payable
            
            
            (182
            )
            
            739
            
            
            (2,329
            )
            
            779Accrued liabilities
            
            
            1,142
            
            
            64
            
            
            510
            
            
            255Accrued interest on convertible promissory notes
            
            
            -
            
            
            -
            
            
            -
            
            
            49Net cash flows used in operating activities
            
            
            (10,118
            )
            
            (3,766
            )
            
            (19,754
            )
            
            (4,433
            )Cash
                Flows from (used in) Investing ActivitiesPurchases of marketable securities
            
            
            (77,957
            )
            
            (44,879
            )
            
            (489,868
            )
            
            (44,879
            )Redemptions of marketable securities
            
            
            89,668
            
            
            3,859
            
            
            425,709
            
            
            5,220Purchase of property and equipment
            
            
            (167
            )
            
            (421
            )
            
            (175
            )
            
            (437
            )Net cash flows from (used in) investing activities
            
            
            11,544
            
            
            (41,441
            )
            
            (64,334
            )
            
            (40,096
            )Cash Flows from (used in) Financing ActivitiesIssuance of preferred shares
            
            
            -
            
            
            -
            
            
            -
            
            
            53,000Issuance of common shares
            
            
            -
            
            
            -
            
            
            91,731
            
            
            -Share issue costs
            
            
            -
            
            
            -
            
            
            (7,314
            )
            
            (3,743
            )Payments on capital lease obligations
            
            
            (105
            )
            
            -
            
            
            (207
            )
            
            -Net cash flows from (used in) financing activities
            
            
            (105
            )
            
            -
            
            
            84,210
            
            
            49,257Effect of exchange rate changes on cash
            
            
            15
            
            
            (52
            )
            
            (27
            )
            
            (20
            )Net increase (decrease) in cash
            
            
            1,336
            
            
            (45,259
            )
            
            95
            
            
            4,708Cash, beginning of the period
            
            
            2,266
            
            
            50,118
            
            
            3,507
            
            
            151Cash, end of the period
            
            $
            3,602
            
            $
            4,859
            
            $
            3,602
            
            $
            4,859





See
      note 8 for supplemental cash flow information











See
      accompanying notes to consolidated financial statements.





5


**ASPREVA
      PHARMACEUTICALS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(unaudited)**





**1.
      Summary of Significant Accounting Policies**





**Overview
      and Basis of Presentation**


Aspreva
      Pharmaceuticals Corporation was 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 underserved patient populations. From inception to March 31,
      2005, we were a development stage company. With the commencement of royalty
      revenue on April 1, 2005, we are no longer a development stage
      company.





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 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 for the
      year ended December 31, 2004 included in our registration statement on Form
      F-1
      filed with the United States Securities and Exchange Commission on January
      24,
      2005, as amended.





All
      amounts referenced herein are in U.S. dollars unless otherwise noted.





All
      share, warrant, option and per unit data included in these financial statements
      have been adjusted to retroactively reflect the 1.284-for-1 stock-split effected
      on February 8, 2005.





**Principles
      of Consolidation**


These
      consolidated financial statements include our financial statements and those
      of
      our wholly-owned subsidiaries: Aspreva Pharmaceuticals SA (a Swiss company),
      Aspreva Pharmaceuticals Ltd. (a UK company), and Aspreva Pharmaceuticals, Inc.
      (a Delaware company). We have eliminated all material intercompany balances
      and
      transactions.





**Use
      of Estimates**


The
      preparation of the consolidated financial statements in conformity with U.S.
      generally accepted accounting principles requires management to make estimates
      and assumptions that affect the amounts reported in the financial statements
      and
      accompanying notes. Significant estimates are used for, but not limited to,
      assessment of the net realizable value of long-lived assets, calculation of
      stock-based compensation expense, assessment of clinical trial expense accruals,
      and taxes. Actual results could differ from those estimates.





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.
      Revenue Recognition**


In
      accordance with the terms of our agreement with Hoffman - La Roche Inc. and
      F.
      Hoffman - 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. In July 2005, Roche and Aspreva
      agreed that the baseline for 2005 would be CHF 123 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 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 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 value of this collar may be changed at any time by the joint
      committee formed under our agreement with Roche, on which we have equal
      representation, and will be a prospective change.





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, characterized 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.




We and Roche have calculated the royalty payment due to
      us as
      $17.8 million (CHF 22.8 million) for the three month period ended June
      30,
      2005. We have recognized $14.7 million of the royalty payment as revenue in
      the
      three month period ended June 30, 2005 and have recognized $3.1 million (CHF
      4.0
      million) as an unearned royalty advance until subsequent reconciliation between
      the parties. The entire royalty payment due to us is recorded in our accounts
      receivable as of June 30, 2005 and is payable to us within 45 days of quarter
      end. We and Roche have agreed to settle any reconciliation amounts in
      cash.




6





**ASPREVA
      PHARMACEUTICALS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(unaudited)**





**3.
      Stock-Based Compensation**


We
      have elected to follow the fair value method of accounting for stock-based
      awards as prescribed by Statement of Financial Accounting Standards
      No. 123, or SFAS 123, *Accounting
      for Stock-Based Compensation* ,
      as amended by SFAS 148. We measure stock-based awards using the
      Black-Scholes option pricing model, and amortize the fair value of stock options
      granted to the consolidated statement of operations over the vesting period
      of
      the options.





We
      estimate the fair value of options granted as at the date of grant using the
      Black-Scholes option-pricing model with the following weighted average
      assumptions:








**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Expected
                dividend yield
            
            
            0%
            
            
            0%
            
            
            0%
            
            
            0%Expected
                stock price volatility
            
            
            70%
            
            
            150%
            
            
            83%
            
            
            150%Risk-free
                interest rate
            
            
            4.0%
            
            
            4.0%
            
            
            4.0%
            
            
            4.0%Expected
                option life in years
            
            
            5.0
            
            
            8.0
            
            
            5.5
            
            
            8.0





Included
      within the statements of operations are the following charges for stock-based
      compensation ($000s):





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Research
                and development expense
            
            $
            567
            
            $
            108
            
            $
            1,154
            
            $
            196Marketing,
                general and administrative expense
            
            
            1,030
            
            
            324
            
            
            2,030
            
            
            577Interest
                and other expense
            
            
            -
            
            
            -
            
            
            -
            
            
            809Total
                stock-based compensation
            
            $
            1,597
            
            $
            432
            
            $
            3,184
            
            $
            1,582





Stock
      option transactions for the period and the number of stock options outstanding
      are summarized below:





**Number
                of Common Shares**
            
            **Weighted
                Average**
              **Exercise
                Price***Exercisable
                in*
              *Canadian
                dollars***Balance,
                December 31, 2004**
            
            
            1,884,912
            
            $
            4.61Options
                granted
            
            
            41,602
            
            
            6.39Options
                forfeited
            
            
            -
            
            
            -Options
                exercised
            
            
            -
            
            
            -**Balance,
                March 31, 2005**
            
            
            1,926,514
            
            $
            4.65Options
                granted
            
            
            140,300
            
            
            17.20Options
                forfeited
            
            
            (25,680
            )
            
            (5.60
            )Options
                exercised
            
            
            -
            
            
            -**Balance,
                June 30, 2005**
            
            
            2,041,134
            
            $
            5.64





The
      stock options expire at various dates from April 2013 to April 2015 .
      As of June 30, 2005, a total of 1,475,599 common shares are available for future
      grants. The stock options typically have a ten year contractual life and vest
      ratably over a period of two to four years from the date of grant.





**Stock
      Purchase Plan Trust**


In
      2002, we established the 2002 Aspreva Incentive Stock Purchase Plan Trust,
      or
      the Trust, for the purpose of distributing common shares to officers, directors,
      employees and consultants. The fair value of the common shares distributed
      to
      the Trust participants is being expensed over the vesting period with a
      corresponding credit to additional paid-in capital. Stock-based compensation
      related to the Trust shares amounted to $51,000 and $81,000 for the three month
      periods ended June 30, 2005 and 2004, respectively, and $102,000 and $147,000
      for the six month periods ended June 30, 2005 and 2004, respectively. As of
      June
      30, 2005, a total of 1,284,000 common shares had been distributed and no shares
      remained available for distribution under the trust.





**Warrants**


As
      of June 30, 2005, we had warrants outstanding entitling the holders to acquire
      230,360 common shares at an exercise price of C$4.76 per share. These warrants
      will terminate, if unexercised, in September, 2006.






7





**ASPREVA
      PHARMACEUTICALS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(unaudited)**





**4.
      Earnings (Loss) per Common Share**


We
      calculate earnings (loss) per common share in accordance with Statement
      of
      Financial Accounting Standards No. 128, *Earnings
      per Share* ,
      which requires the presentation of basic and diluted earnings (loss) per
      common share.





The
      denominators for basic and diluted earnings (loss) per common share for the
      three and six month periods ended June 30, 2005 and 2004 were calculated as
      follows:





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Weighted
                average shares outstanding used for basic earnings per common
                share
            
            
            34,028,378
            
            
            13,031,239
            
            
            26,733,886
            
            
            12,619,848Effect
                of dilutive stock options
            
            
            1,405,330
            
            
            -
            
            
            -
            
            
            -Effect
                of dilutive warrants
            
            
            237,205
            
            
            -
            
            
            -
            
            
            -Weighted
                average shares outstanding used for diluted earnings per common
                share
            
            
            35,670,913
            
            
            13,031,239
            
            
            26,733,886
            
            
            12,619,848





Diluted
      loss per common share is equivalent to basic loss per common share for the
      six
      month period ended June 30, 2005, and the three and six month periods ended
      June
      30, 2004, as the outstanding options, warrants and convertible redeemable
      preferred shares are anti-dilutive to loss per common
      share. Due to their anti-dilutive nature, the following potentially issuable
      shares were omitted from the calculation of diluted loss per common share for
      these periods:





**As
                of June 30,****2005**
            
            **2004**Stock
                Options
            
            
            2,041,134
            
            
            897,516Warrants
            
            
            230,360
            
            
            230,360Convertible
                redeemable preferred shares
            
            
            -
            
            
            12,677,192





The
      proforma basic and diluted earnings (loss) per common share calculations assume
      the conversion of the convertible redeemable preferred shares into common shares
      using the as-if converted method as of the date of issuance. The denominators
      for pro forma basic earnings (loss) per common share for the three and six
      month
      periods ended June 30, 2005 and 2004 were calculated as follows:





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Weighted
                average shares outstanding used for basic earnings per common
                share
            
            
            34,028,378
            
            
            13,031,239
            
            
            26,733,886
            
            
            12,619,848Pro
                forma adjustment to reflect weighted average effect of assumed conversion
                of 12,677,192 convertible redeemable preferred shares
            
            
            -
            
            
            12,677,192
            
            
            4,412,503
            
            
            8,149,623Weighted
                average shares outstanding used for proforma basic earnings per common
                share
            
            
            34,028,378
            
            
            25,708,431
            
            
            31,146,389
            
            
            20,769,471





The
      denominators for pro forma diluted earnings (loss) per common share for the
      three and six month periods ended June 30, 2005 and 2004 were calculated as
      follows:





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Weighted
                average shares outstanding used for diluted earnings per common
                share
            
            
            35,670,913
            
            
            13,031,239
            
            
            26,733,886
            
            
            12,619,848Pro
                forma adjustment to reflect weighted average effect of assumed conversion
                of 12,677,192 convertible redeemable preferred shares
            
            
            -
            
            
            12,677,192
            
            
            4,412,503
            
            
            8,149,623Weighted
                average shares outstanding used for proforma diluted earnings per
                common
                share
            
            
            35,670,913
            
            
            25,708,431
            
            
            31,146,389
            
            
            20,769,471





On
      March 4, 2005, in conjunction with our initial public offering, all of the
      outstanding Series A preferred shares were automatically converted,
      on a
      one-for-one basis, into 12,677,192 common shares. The converted preferred shares
      were cancelled and are not reissuable.







8


**ASPREVA
      PHARMACEUTICALS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(unaudited)**





**5.
      Shareholders’ Equity**


On
      March 4, 2005, we completed our initial public offering, of 8,280,000 common
      shares at a price of $11.00 per share and began trading on the Nasdaq National
      Market under the trading symbol ASPV and the Toronto Stock Exchange under the
      trading symbol ASV. Net cash proceeds from the initial public offering were
      approximately $82.3 million, after deducting underwriter discounts, commissions
      and other offering expenses. In conjunction with the initial public offering,
      all outstanding Series A preferred shares were converted into common shares
      on a
      one-for-one basis. Shares issued prior to our initial public offering are
      subject to lock-up agreements that expire on August 30, 2005, which in certain
      circumstances may be extended to October 3, 2005.





The
      following table summarizes the activity in our shareholders’ equity from our
      last fiscal year end at December 31, 2004, including the impact of our initial
      public offering: ****





Number
                of Shares
            
            Share
                Capital
            
            Additional
                Paid-In Capital
            
            Accumulated
                Other Comprehensive
              Loss
            
            Deficit
            
            Total
                Shareholders’ Equity(in
                thousands of U.S. dollars, except number of shares)**Balance,
                as of December 31, 2004**
            
            
            13,071,186
            
            $
            5,232
            
            $
            3,311
            
            $
            (35
            )
            $
            (25,198
            )
            $
            (16,690
            )Shares
                issued on:Conversion of preferred shares
            
            
            12,677,192
            
            
            49,341
            
            
            -
            
            
            -
            
            
            -
            
            
            49,341Net proceeds from initial public offering
            
            
            8,280,000
            
            
            82,295
            
            
            -
            
            
            -
            
            
            -
            
            
            82,295Stock-based
                compensation expense
            
            
            -
            
            
            -
            
            
            1,587
            
            
            -
            
            
            -
            
            
            1,587Unrealized
                loss on marketable securities
            
            
            -
            
            
            -
            
            
            -
            
            
            (117
            )
            
            -
            
            
            (117
            )Loss
                for the period
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (8,985
            )
            
            (8,985
            )**Balance,
                as of March 31, 2005**
            
            
            34,028,378
            
            $
            136,868
            
            $
            4,898
            
            $
            (152
            )
            $
            (34,183
            )
            $
            107,431Stock-based
                compensation expense
            
            
            -
            
            
            -
            
            
            1,597
            
            
            -
            
            
            -
            
            
            1,597Unrealized
                gain on marketable securities
            
            
            -
            
            
            -
            
            
            -
            
            
            459
            
            
            -
            
            
            459Income
                for the period
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,151
            
            
            1,151**Balance,
                as of June 30, 2005**
            
            
            34,028,378
            
            $
            136,868
            
            $
            6,495
            
            $
            307
            
            $
            (33,032
            )
            $
            110,638





Comprehensive
      income for the three month period ended June 30, 2005 was $1.6 million and
      comprehensive loss for the three month period ended June 30, 2004 was $4.4
      million. Comprehensive loss was $7.4 million and $6.4 million for the six month
      periods ended June 30, 2005 and 2004, respectively.





**Stockholder
      Rights Plan**


Effective
      March 3, 2005, we implemented a stockholder rights plan, or the Plan, pursuant
      to which the holder of a right is entitled to acquire, under certain conditions,
      our common shares at a 50% discount to the market upon a person or group of
      persons acquiring 20% or more of our common shares. The rights are not
      exercisable in the event of a Permitted Bid as defined in the Plan. The rights
      will terminate at the close of business on February 4, 2015 unless earlier
      redeemed by Aspreva, provided that all outstanding rights will terminate on
      the
      date of our 2010 annual general meeting of shareholders unless the Plan is
      reconfirmed by our shareholders at that meeting.





**6.
      Contractual Obligations and Commitments**


In
      April, 2005, we entered into a new facility operating lease for premises in
      New
      Jersey, USA to accommodate our U.S. regional office. The lease term is 5 years
      and our financial obligation is $222,000 per year, beginning in the third
      quarter of 2005.





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.








9





**ASPREVA
      PHARMACEUTICALS CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(unaudited)**







**7.
        Income Taxes**
 As
        at December 31, 2004, we had scientific research and experimental development
        expenditures (SRED) in the amount of $586,000 which have no expiry date,
        available to reduce future Canadian taxable income. We also have approximately
        $22,002,000 of losses carried forward available to reduce taxable income
        for
        future years of which approximately $2,753,000 is available in Canada and
        approximately $19,249,000 is available in Switzerland. A valuation allowance
        has
        been provided to offset these deferred tax assets because the realization
        of the
        benefit does not yet meet the more likely than not criteria.
  For
        the three month period ended June 30, 2005, we have utilized a portion of
        the
        losses carried forward to offset income taxes otherwise
        payable.




8.
      Supplemental Cash Flow


Supplemental
      cash flow information is as follows ($000s):





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Equipment
                acquired under capital leases
            
            $
            -
            
            $
            -
            
            $
            140
            
            $
            -Interest
                paid
            
            
            13
            
            
            1
            
            
            25
            
            
            1





**9.
      Collaborative Agreement**


In
      July 2003, we entered into a 14 year collaboration agreement with Roche
      for
      the worldwide rights, excluding Japan, to develop, market and promote CellCept
      for all autoimmune indications, or the Roche Agreement.





In
      order to govern the terms and obligations of the Roche Agreement, Aspreva and
      Roche formed a Joint Committee, comprised of three individuals from each
      company. Under the Roche Agreement, we are obligated to use commercially
      reasonable efforts to conduct three clinical trial programs and to prepare
      the
      regulatory filings related thereto for the use of CellCept in the treatment
      of
      autoimmune indications, pursuant to a development plan approved by the Joint
      Committee. Upon regulatory approval of the use of CellCept in any such
      autoimmune indication, we are obligated to use commercially reasonable efforts
      to promote and detail to physicians CellCept for use in such approved
      indication, pursuant to a commercialization plan approved by the Joint
      Committee. Roche is responsible for filing all regulatory submissions for
      approval, supplying amounts of CellCept as are needed for our clinical supplies,
      at cost, and for manufacturing, distributing and selling CellCept for all uses.





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. In July 2005, Roche and Aspreva
      agreed that the baseline for 2005 would be CHF 123 million, after taking into
      account the price index adjustment and, for the time being, excluding Japan
      as a
      licensed territory under the agreement.




The
      Roche Agreement may be unilaterally terminated by us for convenience prior
      to
      its expiration in 2017. Either party may terminate early the Agreement after
      2011 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 Roche Agreement with respect
      to
      that country.





**10.
      Related Party Transactions**


We
      retain Farris, Vaughan, Wills & Murphy LLP, a law firm where R. Hector
      MacKay-Dunn, Q.C., is a senior partner. Mr. MacKay-Dunn is a member of our
      board
      of directors and acts as our Corporate Secretary. In the three and six month
      periods ended June 30, 2005, we incurred legal fees payable to Farris, Vaughan,
      Wills & Murphy LLP, of $23,000 and $560,000, respectively, all of which has
      been paid as of June 30, 2005. These fees relate primarily to services
      undertaken in conjunction with our initial public offering.





**11.
      Contingencies**


We
        may, from time to time, be subject to claims and legal proceedings brought
        against us in the normal course of business. Such matters are subject to
        many
        uncertainties. We believe that adequate provisions have been made in the
        accounts where required and the ultimate resolution of such contingencies
        will
        not have a material adverse effect on our consolidated financial
        position.





**12.
      Recent Accounting Pronouncement**


In
      December 2004, the Financial Accounting Standards Board, or FASB, issued
      SFAS 123(R), *Share
      Based Payment* ,
      which is a revision of SFAS 123, *Accounting
      for Stock-Based Compensation* ,
      as amended by SFAS 148. We are required to adopt SFAS 123(R)
      on
      January 1, 2006. SFAS 123(R) requires all share-based payments to
      employees, including grants of stock options, to be recognized in the statement
      of operations based on their fair values using either the modified-prospective
      or modified-retrospective method as defined in the standard. We do not believe
      that our adoption of SFAS 123(R) will have a material effect on our
      financial statements.






10




**Item
      2.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**  **OF
      FINANCIAL CONDITION AND RESULTS OF OPERATIONS**





You
      should read the following discussion and analysis by our management of our
      financial condition and results of operations in conjunction with our audited
      consolidated financial statements and related notes thereto for the year ended
      December 31, 2004 included in our registration statement on Form F-1 filed
      with
      the United States Securities and Exchange Commission on January 24, 2005, as
      amended, and our unaudited consolidated financial statements for the six month
      period ended June 30, 2005. 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 which are subject to the “safe harbor”
      created by those sections. All statements, other than statements of historical
      facts, included in this quarterly report on Form 10-Q regarding our strategy,
      future operations, future financial position, future revenues, projected costs,
      prospects and plans and objectives of management are forward-looking statements
      as the term is defined in the Private Securities Litigation Reform Act of 1995.





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 outlined under “Business
      Risks” 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.





**Overview**





We
      are an emerging pharmaceutical company focused on identifying, developing and
      commercializing new indications for approved drugs and drug candidates for
      underserved patient populations. Our strategy, which we call “indication
      partnering”, is to collaborate with pharmaceutical and biopharmaceutical
      companies to pursue new indication approvals which lie beyond their strategic
      focus. In these collaborations, we intend to assume the clinical, regulatory
      and
      commercial activities for these non-core indications of our collaborators’
      existing drugs. We seek collaborations with those companies that have approved
      drugs and drug candidates that we believe have compelling scientific, clinical
      and commercial potential. We currently have one collaboration and our goal
      is to
      secure a second collaboration arrangement by the end of 2005.





In
      July 2003, we entered into our first collaboration with Hoffmann-La Roche
      Inc. and F. Hoffmann-La Roche Ltd, collectively Roche, for exclusive
      world-wide rights, excluding Japan, to develop and, upon regulatory approval,
      market CellCept for all autoimmune indications. Roche manufactures, distributes
      and records sales of CellCept, a drug currently approved in the United States,
      European Union, Canada and other countries for the prevention of organ
      transplant rejection.





Based
      on our analysis of existing clinical trial and scientific data, we believe
      that
      CellCept also has the potential to be effective in treating a variety of
      autoimmune diseases. Our largest clinical program is for lupus nephritis. 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 these underserved diseases
      such
      as lupus. Our analysis of various sources of data including patient diagnoses
      through International Classification of Disease codes, estimates 600,000
      diagnosed lupus patients currently within the U.S. healthcare system. Clinicians
      estimate that one third to one half of lupus patients have lupus nephritis.
      We
      believe that 200,000 of these U.S. based lupus nephritis patients could
      potentially benefit from CellCept therapy.





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.





In
      February 2005, we filed an Investigational New Drug application, or IND, and
      a
      request for a special protocol assessment, or SPA, with the U.S. Food and Drug
      Administration, or FDA, for the use of CellCept to treat lupus nephritis. The
      FDA provided comments on the protocol and, as there were no safety concerns
      raised, our IND status became active in March 2005. We delayed dosing our first
      patient until FDA comments on the SPA had been addressed. The amended trial
      protocol was evaluated by the FDA and we have reached agreement with the FDA
      on
      the protocol. The first patient was dosed in July 2005. We expect the
      six-month induction phase of the study for all patients to be completed
      in
      late 2006, and we may submit, in or around the second quarter of 2007, a
      supplemental IND and type II variation for the use of CellCept in the induction
      therapy of lupus nephritis. Moreover, in July 2005, we and Roche filed with
      the
      FDA a request for orphan drug designation for CellCept in lupus nephritis and
      we
      expect to receive the results of this submission in October 2005.





Our
      phase III clinical trial for myasthenia gravis is ongoing and is expected to
      be
      completed in late 2006. Our phase III clinical trial for pemphigus vulgaris
      is
      active and ongoing with completion expected in 2007. During the second quarter
      of 2005, we concluded discussions with the FDA on the development plan for
      pemphigus vulgaris and filed an IND. The IND status became active on June 25,
      2005. The
      FDA discussions resulted in the addition of a third dosing arm to the ongoing
      trial and resulted in an increase in the number of patients required in the
      trial from 64 to 72. Also, during the last half of 2005, we anticipate
      requesting from the FDA orphan drug designation for CellCept in both myasthenia
      gravis and pemphigus vulgaris.





***Revenues***


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 134 million Swiss Francs, or CHF, and
      is subject to an annual price index adjustment. In July 2005, Roche and Aspreva
      agreed that the baseline for 2005 would be CHF 123 million, after taking into
      account the price index adjustment and, for the time being, excluding Japan
      as a
      licensed territory under the agreement.




11





***Research
      and Development Expenses***


Research
      and development expenses consist primarily of clinical and regulatory expenses,
      as well as business development expenses related to the identification of new
      drug opportunities and related due diligence. Clinical expenses include clinical
      trial costs, salaries and other related costs for personnel in clinical and
      regulatory functions, supplies and materials, consultant services and
      facilities. We expense research and development costs as they are incurred.





A
      majority of our expenditures to date have been related to the clinical
      development of CellCept for autoimmune indications. From inception to June
      30,
      2005, we have incurred total research and development expenses of
      $22.1 million. Of this amount, approximately 80% was spent on clinical
      activities required to advance the development of CellCept. The remaining
      amounts were expended primarily on employee and consulting costs, supplies,
      materials and infrastructure related to our business development efforts to
      identify other drug opportunities.





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. Under the terms of our agreement
      with
      Roche, we are obligated to use our best efforts until July 18, 2006, to raise
      adequate capital to finance our first three clinical trial programs in
      autoimmune indications. We believe that our available cash and marketable
      securities as of June 30, 2005 will fulfill our obligation. The following table
      shows the historical allocation of research and development expenses for our
      current CellCept projects ($000s):




**Annual
                total**
            
            **Annual
                total**
            
            **Six
                months ended**
            
            **Project
                total to****2003**
            
            **2004**
            
            **June
                30, 2005**
            
            **June
                30, 2005**Lupus
                nephritis
            
            $
            81
            
            $
            4,902
            
            $
            3,334
            
            $
            8,317Myasthenia
                gravis
            
            
            464
            
            
            2,196
            
            
            2,357
            
            
            5,017Pemphigus
                vulgaris
            
            
            386
            
            
            1,314
            
            
            623
            
            
            2,323$
            931
            
            $
            8,412
            
            $
            6,314
            
            $
            15,657





As
      of June 30, 2005, we expect to incur further research and development expenses
      of approximately $69 million to complete our current CellCept projects,
      as
      follows:





•
            approximately
                $47.7 million to complete our planned Phase III clinical
                trial
                for the use of CellCept in the induction and maintenance treatment
                of
                lupus nephritis;•
            approximately
                $9.6 million to complete our Phase III clinical trial
                for the
                use of CellCept to treat myasthenia gravis; and•
            approximately
                $11.4 million to complete our Phase III clinical trial
                for the
                use of CellCept to treat pemphigus vulgaris.





We
      anticipate completing our Phase III clinical trials for the use of CellCept
      in
      the induction phase of lupus nephritis in late 2006, 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 our CellCept projects on schedule.
      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.





***Marketing,
      General and Administrative Expenses***


Marketing,
      general and administrative expenses consist primarily of costs and salaries
      associated with building our commercial infrastructure, costs of general
      corporate activities, and salaries and other related costs for personnel in
      executive, finance, accounting, corporate compliance and operational functions.





We
      expect our marketing infrastructure expenses to continue to increase as we
      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.





**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 for the year ended December 31, 2004 included
      in our registration statement on Form F-1 filed with the Securities and Exchange
      Commission on January 24, 2005, as amended. However, we believe the following
      accounting policies relating to revenue recognition, stock-based compensation,
      clinical trial accounting and provision for income taxes are the most critical
      accounting policies for assessing our financial performance.







12


***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. The baseline was originally
      set in July 2003 at CHF 134 million and
      is subject to an annual price index adjustment. In July 2005, Roche and Aspreva
      agreed that the baseline for 2005 would be CHF 123 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 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 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 will employ a mechanism to reconcile audited amounts against
      the royalty previously paid to us. This reconciliation process will be
      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 value of this collar may be changed at any time by the joint
      committee formed under our agreement with Roche, on which we have equal
      representation, and will be a prospective change.





We
      will 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, characterized 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.





***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. On March 4, 2005, we completed our initial
      public offering and began trading on the Nasdaq National Market and the Toronto
      Stock Exchange. Prior to March 4, 2005, given the absence of an active market
      for our common shares, the exercise price of our stock options on the date
      of
      grant was determined by our board of directors using several factors, including
      progress and milestones achieved in our business and sales of our preferred
      shares. Subsequent to March 4, 2005, the exercise price for future option grants
      is based on the market value of our common shares.





We
      account for employee stock options using the fair value method in accordance
      with Statement of Financial Accounting Standards No. 123, *Accounting
      for Stock-Based Compensation* ,
      or SFAS No. 123. The Black-Scholes
      option pricing model requires the input of several subjective assumptions including the expected
      life
      of the option and the expected volatility at the time the options are granted
      as
      well as the input of the fair value of our stock at the date of grant of the
      stock options.





The
      estimated fair value of our options as calculated by the Black-Scholes option
      pricing model is amortized over the vesting period, which is generally two
      to
      four years. In estimating the value of our options in the second quarter of
      2005, management reviewed competitive benchmarks and revised the expected stock
      price volatility from 150% to 70%, and the expected option life from 8 years
      to
      5 years. We believe that the revised assumptions better account for the
      variables that exist in the financial and industry environment in which we
      now
      operate, and reflect the experience of public companies that best resemble
      our
      company in terms of workforce and industry characteristics.





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. In accordance with SFAS 123, we do not
      record any deferred stock-based compensation on our balance sheet for our stock
      options.





Pursuant
      to the 2002 Aspreva Incentive Stock Purchase Plan Trust, or the Trust, shares
      have been distributed to certain of our employees subject to a return provision
      which lapses ratably over a three-year period from the date of distribution.
      We
      account for common shares distributed by the Trust as stock-based compensation,
      using the fair value of the common share at time of distribution from the Trust,
      amortized over the term of the return provisions specific to the award.





On
      March 5, 2004, warrants to purchase 230,360 common shares were issued in
      conjunction with the issuance of convertible redeemable preferred shares. The
      $809,000 fair value of the warrants was determined using the Black-Scholes
      option pricing model and was included in interest and other
      expense.







13


Included
      within the statements of operations are the following charges for stock-based
      compensation ($000s):





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Research
                and development expense
            
            $
            567
            
            $
            108
            
            $
            1,154
            
            $
            196Marketing,
                general and administrative expense
            
            
            1,030
            
            
            324
            
            
            2,030
            
            
            587Interest
                and other expense
            
            
            -
            
            
            -
            
            
            -
            
            
            809Total
                stock-based compensation
            
            $
            1,597
            
            $
            432
            
            $
            3,184
            
            $
            1,592





***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 dividends paid by our Swiss subsidiary
      to
      us will be subject to a five percent Swiss withholding tax and will not be
      subject to Canadian income taxes. To date, no dividends have been
      paid.





As
        at December 31, 2004, we had scientific research and experimental development
        expenditures (SRED) in the amount of $586,000 which have no expiry date,
        available to reduce future Canadian taxable income. We also have approximately
        $22,002,000 of losses carried forward available to reduce taxable income
        for
        future years of which approximately $2,753,000 is available in Canada and
        approximately $19,249,000 is available in Switzerland. A valuation allowance
        has
        been provided to offset these deferred tax assets because the realization
        of the
        benefit does not yet meet the more likely than not criteria.
  For
        the three month period ended June 30, 2005, we have utilized a portion of
        the
        losses carried forward to offset income taxes otherwise
        payable.


**RESULTS
      OF OPERATIONS**





Presented
      below is a comparison of our results of operations for the three and six-month
      periods ended June 30, 2005 and 2004.





**Three
      month period ended June 30, 2005 compared to three month period ended June
      30,
      2004**





***Royalty
      Revenues***





In
      accordance with the terms of our agreement with Hoffman - La Roche Inc. and
      F.
      Hoffman - 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 CHF 134 million and
      is subject to an annual price index adjustment. In July 2005, Roche and Aspreva
      agreed that the baseline for 2005 would be CHF 123 million, 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 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 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.
      No reconciliations have been completed to date.





We
      and Roche have calculated the royalty payment due to us as $17.8 million (CHF
      22.8 million) for the three month period ended June 30, 2005. We have recognized
      $14.7 million of the royalty payment as revenue in the three month period ended
      June 30, 2005 and have recognized $3.1 million (CHF 4.0 million) as an unearned
      royalty advance until subsequent reconciliation between the parties. The entire
      royalty payment due to us is recorded in our accounts receivable as of June
      30,
      2005 and payable to us within 45 days of quarter end. We and Roche have agreed
      to settle any reconciliation amounts in cash.





Prior
      to April 1, 2005, we had not generated any royalty revenue.







14


***Research
      and Development Expenses***





Research
      and development expenses were $7.2 million for the three month period
      ended
      June 30, 2005, compared to $1.3 million for the three month period ended
      June 30, 2004. The increase of $5.9 million was due to an increase in
      project expenses of $4.1 million relating to initiating our lupus nephritis
      Phase III clinical program, our ongoing Phase III clinical trial for
      the
      use of CellCept in pemphigus vulgaris, and our ongoing Phase III clinical
      trial for the use of CellCept in myasthenia gravis as well as an increase of
      $705,000 in salary and related expenses for the addition of personnel to support
      development of CellCept for autoimmune indications.





The
      number of employees engaged in research and development increased from eight
      at
      June 30, 2004 to 27 at June 30, 2005.





***Marketing,
      General and Administrative Expenses***





Marketing,
      general and administrative expenses were $7.0 million for the three
      month
      period ended June 30, 2005, compared to $3.3 million for the three month
      period ended June 30, 2004. The increase of $3.7 million was due to
      $2.0
      million in higher salary and related expenses, including stock-based
      compensation expenses, as we increased the number of employees undertaking
      marketing, general and administrative activities, a $1.4 million increase
      in expenses related to market research and reimbursement studies, and
      unrestricted grants for medical education programs. Also increasing our
      marketing, general and administrative expenses were costs associated with being
      a publicly-traded company, including the costs associated with directors &
      officers insurance premiums and higher professional fees.





The
      number of our employees engaged in marketing, general and administrative
      activities increased from 18 at June 30, 2004 to 50 at June 30,
      2005.





***Interest
      and Other Income*** **





Interest
      and other income was $711,000 for the three month period ended June 30, 2005,
      compared to $183,000 for the three month period ended June 30, 2004. The
      increase of $528,000 was primarily due to significantly higher investment
      balances resulting from our initial public offering.





***Interest
      and Other Expense*** **





Interest
      and other expense was $54,000 for the three month period ended June 30, 2005,
      compared to nil for the three month period ended June 30, 2004. The increase
      was
      the interest component of equipment leases entered into during late 2004 and
      early 2005.





***Cash
      Flows***




***Operating
      activities*** **


**


Net
      cash used in operating activities was $10.1 million for the three month
      period ended June 30, 2005, compared to $3.8 million for the three month
      period ended June 30, 2004. The increase of $6.3 million was due to a
      significant increase in our accounts receivable for the initial royalty payment
      due to us from Roche. The increase in accounts receivable is partially offset
      by
      an increase in accrued liabilities and non-cash charges.





***Investing
      activities*** ****





Net
      cash from investing activities was $11.5 million for the three month
      period
      ended June 30, 2005, while net cash used in investing activities was
      $41.4 million for the three month period ended June 30, 2004. Purchases
      of
      investments in marketable securities during the three month period ended June
      30, 2005 were $78.0 million, and were more than offset by proceeds from
      sales of short-term investments in marketable securities of $89.7 million.
      The net cash flow was used to fund operations within the quarter. During the
      comparative period in 2004, cash used in investing activities resulted primarily
      from the investment of proceeds from the issuance of Series A preferred shares
      in March 2004.





***Financing
      activities*** ****





Net
      cash used in financing activities, all for the repayment of asset lease
      obligations, was $105,000 for the three month period ended June 30, 2005,
      compared to $0 for the three month period ended June 30, 2004.





**Six
      month period ended June 30, 2005 compared to six month period ended June 30,
      2004**





***Research
      and Development Expenses***





Research
      and development expenses were $11.2 million for the six month period
      ended
      June 30, 2005, compared to $2.1 million for the six month period ended
      June
      30, 2004. The increase of $9.1 million was due to an increase in project
      expenses of $6.0 million relating to initiating our lupus nephritis
      Phase III clinical program, our ongoing Phase III clinical trial for
      the
      use of CellCept in pemphigus vulgaris, and our ongoing Phase III clinical
      trial for the use of CellCept in myasthenia gravis and an increase of $1.1
      million in salary and related expenses for the addition of personnel to support
      development of CellCept for autoimmune indications.





***Marketing,
      General and Administrative Expenses***





Marketing,
      general and administrative expenses were $12.4 million for the six month
      period ended June 30, 2005, compared to $3.7 million for the six month
      period ended June 30, 2004. The increase of $8.7 million was due to
      an
      increase of $4.4 million in salary and related expenses, including stock-based
      compensation expenses, as we increased the number of employees undertaking
      marketing, general and administrative activities, a $2.4 million increase
      in expenses related to market research and reimbursement studies, and
      unrestricted grants for medical education programs.






15





Also
      impacting our marketing, general and administrative expenses were costs
      associated with being a publicly-traded company, including the costs associated
      with directors & officers insurance premiums and higher professional fees.





***Interest
      and Other Income*** **





Interest
      and other income was $1.2 million for the six month period ended June
      30,
      2005, compared to $194,000 for the six month period ended June 30, 2004. The
      increase of $969,000 was primarily due to significantly higher investment
      balances resulting from our initial public offering.





***Interest
      and Other Expense***





Interest
      and other expense was $94,000 for the six month period ended June 30, 2005,
      compared to $810,000 for the six month period ended June 30, 2004. The decrease
      of $716,000 was due to the one-time finance charge of $809,000 recorded in
      the
      first quarter of 2004 for the issuance of warrants in conjunction with the
      issuance of preferred shares, partially offset by the interest component of
      equipment leases entered into during the fourth quarter of 2004 and the first
      quarter of 2005.





***Cash
      Flows***




***Operating
      activities*** **





Net
      cash used in operating activities was $21.1 million for the six month
      period ended June 30, 2005, compared to $4.4 million for the six month
      period ended June 30, 2004. The increase of $16.7 million was primarily due
      to a
      significant increase in accounts receivable related to our royalty payment
      due
      from Roche and a pay-down of accounts payable partially offset by an increase
      in
      accrued liabilities, the receipt of investment tax credits and non-cash charges.





***Investing
      activities*** ****





Net
      cash used in investing activities was $64.3 million for the six month
      period ended June 30, 2005, compared to $40.1 million for the six month
      period ended June 30, 2004. Purchases of investments in marketable securities
      during the six month period ended June 30, 2005 were $489.9 million,
      resulting mainly from the investment and reinvestment of net proceeds from
      our
      initial public offering. These were partially offset by proceeds from sales
      of
      short-term investments in marketable securities of
      $425.7 million.




***Financing
      activities*** ****





Net
      cash provided by financing activities was $84.2 million for the six
      month
      period ended June 30, 2005, reflecting proceeds from our initial public
      offering, and $49.3 million for the six month period ended June 30,
      2004,
      reflecting proceeds from the issuance of preferred shares in March 2004.








**Liquidity
      and Capital Resources**





***Sources
      of Liquidity***





We
      commenced operations in December 2001 and incurred substantial losses from
      inception through March 31, 2005. On March 4, 2005, we completed our initial
      public offering of 8,280,000 common shares which raised net proceeds of $82.3
      million, after deducting underwriter discounts, commission and other offering
      expenses. Since our inception, we have financed our operations primarily through
      the issuance of equity and debt securities. As of June 30, 2005, we had an
      accumulated deficit of $33.0 million. However, 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. In July 2005, Roche and Aspreva
      agreed that the baseline for 2005 would be CHF 123 million, after taking into
      account the price index adjustment and, for the time being, excluding Japan
      as a
      licensed territory under the agreement.




As
      of June 30, 2005, we had $100.5 million in cash and marketable
      securities.





We
      expect to continue to devote substantial resources to continue the development
      of CellCept for the treatment of lupus nephritis, myasthenia gravis and
      pemphigus vulgaris, and to continue to pursue other collaborations. The
      investment in CellCept development includes funding Phase III clinical
      trials as well as regulatory expenses to support approval. In addition, we
      are
      expanding our infrastructure to prepare for the potential commercialization
      of
      CellCept for these indications.





We
      expect that our available cash resources, and the revenue from our agreement
      with Roche, will be sufficient to support our 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.






16





**Contractual
      Obligations and Commitments**




As
      of June 30, 2005, there was no material change in capital lease or operating
      lease obligations or any other long-term liabilities reflected on our
      consolidated balance sheets as compared to such obligations and liabilities
      at
      December 31, 2004, except that we entered into a new facility operating
      lease for premises in New Jersey, USA that will be used to accommodate our
      U.S.
      regional office. The lease term is 5 years and our financial obligation is
      $222,000 per year beginning in the third quarter of 2005.





**Credit
      Facilities**





In
      April 2004, we entered into various agreements with a Canadian chartered bank
      providing for revolving demand facilities and a lease line in the aggregate
      amount of $2.5 million. As of June 30, 2005, we had $1.1 million
      of
      outstanding indebtedness under our credit facilities, and had issued a letter
      of
      guarantee for $372,000. 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. In addition, minimum deposit levels of $7.9 million are held
      with
      a Canadian chartered bank to secure our credit facilities.





**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.





**Recent
      Accounting Pronouncements**





For
      a description of the recent accounting pronouncement, please see Note 12 to
      our
      Notes to Consolidated Financial Statements.





**Related
      Party Transactions**





For
      a description of our related party transactions during the three and six month
      periods ended June 30, 2005, please see Note 10 to our Notes to Consolidated
      Financial Statements.






17





**Item
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**





**Market
      Risks**





Our
      exposure to market risk is confined to cash and marketable securities. We invest
      in highly liquid government bonds, treasury bills, certificates of deposit
      and
      investment grade commercial paper. Due to the short term nature of our
      investment portfolio we believe we have minimal interest rate risk arising
      from
      our investments.





Many
      of our transactions are conducted in currencies other than the U.S. dollar.
      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.





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
      and pounds sterling. CellCept’s 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. Although we expect to implement 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. As of June
      30,
      2005, we had not entered into any hedging transactions. However we entered
      into
      our initial hedging transactions in July 2005.





**Business
      Risks**





**We
      have a limited operating history, have incurred losses since our inception,
      we
      may not sustain our profitability, our future operating results are uncertain,
      and we anticipate that substantially all of our revenue for the forseeable
      future will be from royalties based on sales of CellCept.**




We
      were incorporated in 2001 and have a limited operating history. Since our
      inception through June 30, 2005, we have incurred cumulative losses from
      operations of $33.0 million. Our losses to date have resulted primarily from
      general and administrative costs relating to our operations and costs related
      to
      the clinical development of CellCept for autoimmune indications.




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. In July 2005, Roche and Aspreva
      agreed that the baseline for 2005 would be CHF 123 million, after taking into
      account the price index adjustment and, for the time being, excluding Japan
      as a
      licensed territory under the agreement. For this quarter, royalty revenue
      recognized was $14.7 million and we recorded our first profitable quarter.
      Although we were profitable for the three months period ended June 30, 2005,
      future operating results and profitability are not certain and we may not
      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 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.






18





**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. In addition, until July 18, 2006,
      we are obligated to use our best efforts to raise adequate capital to finance
      our first three clinical trial programs in autoimmune indications pursuant
      to
      that development plan. As of June 30, 2005, we expect to incur aggregate
      additional expenses of approximately $69 million to complete our first three
      clinical trial programs. We believe that our available cash and marketable
      securities will fulfill this obligation to use our best efforts. Roche may
      disagree that we have met our obligations. 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.




**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.





**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.




In
      addition, while we intend to seek orphan drug designation in the United States
      for myasthenia gravis and pemphigus vulgaris, to the extent any competitor
      obtains from the FDA approval of a generic form of CellCept after May 2009
      with
      an orphan drug designation for such indication prior to our obtaining FDA
      approval for the same indication, they would be entitled to a seven year
      marketing exclusivity period, during which time we would be prohibited from
      marketing and promoting CellCept for the treatment of that orphan
      indication.




We
      may also seek orphan drug designation in the United States for lupus nephritis.
      The FDA has in the past granted an orphan drug designation to drug candidates
      for the treatment of lupus nephritis. However, the number of individuals
      affected by lupus nephritis in the United States may be great enough that lupus
      nephritis is not a rare disease and as a result does not meet the criteria
      for
      orphan drug status.




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. 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.






19




**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.




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 are in the process of developing a
      comprehensive compliance program that will seek 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 become
      profitable.**




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 become profitable.




**Any
      failure or delay in obtaining additional capital may curtail the development
      or
      commercialization of CellCept or any future products.**




We
      expect that our future need for additional capital will be substantial. The
      extent of this need will depend on many factors, some of which are beyond our
      control, including:




•
            our
                ability to develop and obtain regulatory approval for CellCept and
                any
                future products in our targeted indications;•
            our
                ability to establish marketing and sales capabilities and the costs
                of
                launching CellCept and any future products for our targeted
                indications;•
            the
                extent of costs associated with protecting and expanding our patent
                and
                other intellectual property rights;•
            market
                acceptance of CellCept and any future products for our targeted
                indications;•
            future
                payments, if any, we receive or make under existing or future
                collaborative arrangements;•
            the
                timing of regulatory approvals needed to market products for our
                targeted
                indications;•
            the
                need to acquire licenses for new products or compounds;
                and•
            compliance
                with rules and regulations implemented by the U.S. Securities and
                Exchange
                Commission, Canadian provincial securities regulatory authorities,
                the
                Nasdaq National Market and the Toronto Stock
                Exchange.





We
      have no committed sources of additional capital. Funds may not be available
      to
      us in the future on favorable terms, if at all, and we may be required to delay,
      reduce the scope of, or eliminate research and development efforts or clinical
      trials for CellCept or other future products. We may also be forced to curtail
      or restructure our operations, obtain funds by entering into arrangements with
      collaborators on unattractive terms or relinquish rights to technologies or
      product candidates that we would not otherwise relinquish in order to continue
      our operations.






20


**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 indication expansion potential and to acquire the rights for
      those undeveloped 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 indication expansion 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
      one
      collaboration. 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 marketing or
      sales promotion capabilities, lack an infrastructure to support such activities,
      and have no 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.




**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 promotion of
      any
      products, may expose us to product liability claims and associated adverse
      publicity. We have a product liability insurance policy for our clinical trials
      in the United Kingdom, Belgium, Switzerland and Israel with aggregate coverage
      of $3.7 million, in the United States and Canada with aggregate coverage of
      $3.0
      million, and policies in varying amounts for all the other countries in which
      we
      are conducting clinical trials. 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.






21




**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 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 second quarter of 2005, we increased our number of employees by 11 and,
      as
      of June 30, 2005, we had 77 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, Switzerland,
      France, Spain, and Italy. 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.




**We
      depend on our executive officers and key employees, 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, and Reinhard
      W.A. Baildon, our Executive Vice President, Clinical and Regulatory Affairs.
      Due
      to the specialized knowledge each of our executive officers and key employees
      possesses with respect to CellCept and our operations, the loss of service
      of
      any of our executive officers or key employees could delay or prevent the
      successful completion of the clinical trials necessary for the commercialization
      of CellCept for lupus nephritis, myasthenia gravis or pemphigus vulgaris and
      could harm our relationship with Roche. We
      carry key man life insurance coverage of $1.2 million for each of Richard M.
      Glickman and Noel F. Hall. We do not carry key man life insurance for any of
      our
      other executive officers or key employees.




We
      have employment agreements with each of our executive officers and key
      employees; however, each may terminate their employment upon notice and without
      cause or good reason. We currently are not aware that any executive officer
      or
      key employee 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 and pounds sterling.
      Although we have implemented currency hedging techniques subsequent to June
      30,
      2005 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.






22


CellCept's
      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.




**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;•
            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 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;






23





•
            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.




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 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. For example, we have
      experienced slower than expected enrollment in one of our Phase III clinical
      trials of CellCept to treat myasthenia gravis, which we believe may be due,
      at
      least in part, to the off label availability of 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 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 eventually will introduce 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 and state healthcare laws and regulations may also be modified
      to change the scope of covered products and/or reimbursement methodology. 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.






24




**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.




**If
      our stock price is volatile, purchasers of our common shares could incur
      substantial losses.**




Our
      stock price is likely to be volatile. 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;•
            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.







25


**If
      there are substantial sales of our common shares, our stock price could decline.**




If
      our existing stockholders sell a large number of our common shares or the public
      market perceives that existing stockholders might sell our common shares, the
      market price of our common shares could decline significantly. Upon our initial
      public offering on March 4, 2005, we had 34,028,378 common shares outstanding,
      including 8,280,000 shares sold in our initial public offering.




Of
      the remaining 25,748,378 shares outstanding upon the closing of our initial
      public offering, in the U.S. public market approximately 25,722,698 shares
      may
      be sold pursuant to Rule 144, 144(k) and 701, and in Canada approximately all
      of
      such shares may be sold pursuant to the securities laws of the provinces of
      Canada, in all cases upon the expiration of the lock-up agreements on August
      30,
      2005 which in certain circumstances may be extended as late as October 3, 2005.




Holders
      of approximately 12,677,192 common shares have rights, subject to some
      conditions, to require us to file registration statements under the Securities
      Act of 1933, as amended, or the Securities Act, covering their shares or to
      include their shares in registration statements that we may file under the
      Securities Act for ourselves or other stockholders. Once we register these
      common shares, they can be freely sold in the public market upon issuance,
      subject to the lock-up agreements discussed above.




**Our
      executive officers, directors and major stockholders continue to have
      substantial control over us and will maintain the ability to control all matters
      submitted to stockholders for approval.**




As
      of June 30, 2005, our directors, executive officers and principal stockholders,
      together with their affiliates, beneficially owned approximately 66% of our
      outstanding common shares, including shares subject to outstanding stock options
      and warrants. These stockholders, acting together, will exercise significant
      influence over all matters requiring stockholder 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 stockholder 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 stockholder 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 stockholder 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 stockholders 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.




**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 stockholders.**




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
      stockholders 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 stockholders 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 stockholders 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.






26





**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, 2005. 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, 2005 that have materially affected or are
      reasonably likely to materially affect our internal controls over financial
      reporting.








27





**Part
      II - OTHER INFORMATION**





**ITEM 1.
      LEGAL PROCEEDINGS.**




None.





**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.





As
      of June 30, 2005, we had applied the aggregate net proceeds of $82.3 million
      from our initial public offering as follows:





Working
                capital:
            $16.4
                millionTemporary
                investments:
            $65.9
                million





***Recent
      Sales of Unregistered Securities***





From
      April 1, 2005 through June 30, 2005, pursuant to our 2002 Incentive Stock Option
      Plan, we granted stock options with a ten year term to employees to purchase
      an
      aggregate of 140,300 common shares, at an exercise price of $13.90 ($Cdn 17.20).
      None of the employees who were granted options are residents of the United
      States.





**ITEM 3.
      DEFAULTS UPON SENIOR SECURITIES**





None.





**ITEM 4.
      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**





None.





**ITEM 5.
      OTHER INFORMATION**





None.







28





**ITEM 6.
      EXHIBITS.**





31.1
            
            Certification
                of the Chief Executive Officer, as required by Rule 13a-14(a) of
                the
                Securities and Exchange Act of 1934, as amended.31.2
            
            Certification
                of the Chief Financial Officer, as required by Rule 13a-14(a) of
                the
                Securities and Exchange Act of 1934, as amended.32.1*
            
            Certification
                of the Chief Executive Officer, as required by Rule 13a-14(b) 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) and
                Section
                1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C.
                Section 1350).





*
      The certifications attached as Exhibits 32.1 and 32.2 accompany this quarterly
      report on Form 10-Q, are not deemed filed with the Security and Exchange
      Commission and are not to be incorporated by reference into any filing of
      Aspreva Pharmaceuticals Corporation under the Securities Act of 1933, as
      amended, or the Securities Exchange Act of 1934, as amended, whether made before
      or after the date of this Form 10-Q, irrespective of any general incorporation
      language contained in such filing.






29





**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
                9, 2005
            /s/
                 Bruce G. CousinsBruce
                G. CousinsChief
                Financial Officer(Principal
                Financial and Accounting Officer)








30





**EXHIBIT
      INDEX**





31.1
            
            Certification
                of the Chief Executive Officer, as required by Rule 13a-14(a) of
                the
                Securities and Exchange Act of 1934, as amended.31.2
            
            Certification
                of the Chief Financial Officer, as required by Rule 13a-14(a) of
                the
                Securities and Exchange Act of 1934, as amended.32.1*
            
            Certification
                of the Chief Executive Officer, as required by Rule 13a-14(b) 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) and
                Section
                1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C.
                Section 1350).







31