**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**











**FORM
      10-Q**




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





**For
      the quarterly period ended September 30, 2006**





**or**





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





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




**Commission
      File Number 000-51169**





**ASPREVA
      PHARMACEUTICALS CORPORATION**





(Exact
      name
      of registrant as specified in its charter)




**British
                Columbia, Canada**
              (State
                or other jurisdiction of
              incorporation
                or organization)
            **98-0435540**
              (I.R.S.
                Employer
              Identification
                No.)




**1203
      - 4464 Markham Street,**


**Victoria,
      British Columbia,**


**Canada
      V8Z 7X8**


(Address
      of
      principal executive office)





**(250)
      744-2488**


(Registrant’s
      telephone number, including area code)





Indicate
      by
      check mark whether the registrant (1) has filed all reports required to be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the preceding 12 months (or for such shorter period that the registrant was
      required to file such reports), and (2) has been subject to such filing
      requirements for the past 90 days: Yes x No
      o




Indicate
      by
      check mark whether the registrant is a large accelerated filer, an accelerated
      filer, or a non-accelerated filer. See definition of “accelerated filer and
      large accelerated filer” in Rule 12b-2 of the Exchange Act:





Large
                Accelerated Filero
            Accelerated
                Filero
            Non-accelerated
                Filerx





Indicate
      by
      check mark whether the registrant is a shell company (as defined in Rule 12b-2
      of the Exchange Act): Yes o No x




As
      of
      October 31, 2006, the registrant had 34,046,147 common shares
      outstanding.
















**ASPREVA
        PHARMACEUTICALS CORPORATION**
 **FORM
        10-Q**
 **For
        the Quarterly Period Ended September 30, 2006**
  **TABLE
        OF CONTENTS**
 
 **Page****PART
                  I - FINANCIAL INFORMATION**Item 1.
                  Financial Statements (unaudited)
              3Consolidated
                  Balance Sheets - September 30, 2006 and December 31,
                  2005
              3Consolidated
                  Statements of Income - Three and Nine-month periods ended September
                  30,
                  2006 and 2005
              4Consolidated
                  Statements of Cash Flows - Three and Nine-month periods ended September
                  30, 2006 and 2005
              5Notes
                  to Consolidated Financial Statements
              6Item 2.
                  Management’s Discussion and Analysis of Financial Condition and Results of
                  Operations
              14Item 3.
                  Quantitative and Qualitative Disclosures About Market Risk
              26Item 4.
                  Controls and Procedures
              27**PART
                  II - OTHER INFORMATION**Item
                  1. Legal Proceedings
              28Item
                  1A. Risk Factors
              28Item
                  2. Unregistered Sales of Equity Securities and Use of
                  Proceeds
              40Item
                  3. Defaults Upon Senior Securities
              40Item
                  4. Submission of Matters to a Vote of Security Holders
              40Item
                  5. Other Information
              40Item
                  6. Exhibits
              41SIGNATURE
              42
 
 
 
 
  
   2
  **PART
        I - FINANCIAL INFORMATION**
 **Item 1.
        FINANCIAL STATEMENTS**
 
 **ASPREVA
        PHARMACEUTICALS CORPORATION**
 **CONSOLIDATED
        BALANCE SHEETS**
 **(in
        thousands of U.S. dollars)**
 **(unaudited)**
 
 **September
                  30,**
              
              **December
                  31,****2006**
              
              **2005****ASSETS**Current
                  assetsCash
                  and cash equivalents
              
              $
              28,704
              
              $
              14,759Marketable
                  securities (Note 3)
              
              
              199,383
              
              
              97,280Accounts
                  receivable
              
              
              52,717
              
              
              48,246Prepaid
                  expenses
              
              
              2,738
              
              
              2,005Deferred
                  income tax asset
              
              
              836
              
              
              1,896Foreign
                  currency contracts (Note 8)
              
              
              1,902
              
              
              2,377Total
                  current assets
              
              
              286,280
              
              
              166,563Property
                  and equipment, net of accumulated depreciation of $1,398 (2005
                  -
                  $856)
              
              
              3,791
              
              
              2,687Deferred
                  income tax asset
              
              
              1,887
              
              
              2,889Restricted
                  cash
              
              
              760
              
              
              716**TOTAL
                  ASSETS**
              
              $
              292,718
              
              $
              172,855**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY**Current
                  liabilitiesAccounts
                  payable
              
              $
              9,906
              
              $
              8,463Income
                  taxes payable
              
              
              8,828
              
              
              506Accrued
                  liabilities
              
              
              10,684
              
              
              8,300Unearned
                  royalty advance
              
              
              6,397
              
              
              6,079Foreign
                  currency contracts (Note 8)
              
              
              491
              
              
              -Current
                  portion under capital leases
              
              
              416
              
              
              441Current
                  portion of deferred lease inducement
              
              
              130
              
              
              121Total
                  current liabilities
              
              
              36,852
              
              
              23,910Long-term
                  portion under capital leases
              
              
              116
              
              
              419Long-term
                  portion of deferred lease inducement
              
              
              425
              
              
              480Total
                  liabilities
              
              
              37,393
              
              
              24,809Commitments
                  and contingencies (Notes 7 and 12)Shareholders’
                  equity (Note 6)Common
                  sharesAuthorized:
                  unlimitedIssued
                  and outstanding
              
              
              149,576
              
              
              142,464September
                  30, 2006  - 35,042,147December 31,
                  2005  - 34,156,231Additional
                  paid-in capital
              
              
              11,719
              
              
              9,618Retained
                  earnings (deficit)
              
              
              92,577
              
              
              (5,531
              )Accumulated
                  other comprehensive income
              
              
              1,453
              
              
              1,495Total
                  shareholders’ equity
              
              
              255,325
              
              
              148,046**TOTAL****LIABILITIES
                  AND SHAREHOLDERS’ EQUITY**
              
              $
              292,718
              
              $
              172,855
  See
        accompanying notes to consolidated financial statements.
 
  3
  **ASPREVA
        PHARMACEUTICALS CORPORATION**
 **CONSOLIDATED
        STATEMENTS OF INCOME**
 **(in
        thousands of U.S. dollars, except per share amounts)**
 **(unaudited)**
 
 
 **Three
                  months ended**
                **September
                  30**
              
              **Nine
                  months ended**
                **September
                  30****2006**
              
              **2005**
              
              **2006**
              
              **2005**Royalty
                  revenue
              
              $
              47,943
              
              $
              16,779
              
              $
              162,316
              
              $
              31,450ExpensesResearch
                  and development
              
              
              12,357
              
              
              8,018
              
              
              34,389
              
              
              19,215Marketing,
                  general and administrative
              
              
              9,969
              
              
              6,660
              
              
              26,833
              
              
              19,036Total
                  expenses
              
              
              22,326
              
              
              14,678
              
              
              61,222
              
              
              38,251Operating
                  income (loss)
              
              
              25,617
              
              
              2,101
              
              
              101,094
              
              
              (6,801
              )Other
                  income (expense)Interest
                  and other income
              
              
              3,259
              
              
              1,138
              
              
              7,673
              
              
              2,229Interest
                  and other expense
              
              
              (1
              )
              
              (13
              )
              
              (24
              )
              
              (36
              )Total
                  other income
              
              
              3,258
              
              
              1,125
              
              
              7,649
              
              
              2,193Income
                  (loss) before income taxes
              
              
              28,875
              
              
              3,226
              
              
              108,743
              
              
              (4,608
              )Income
                  tax expenseCurrent
              
              
              2,147
              
              
              -
              
              
              8,606
              
              
              -Deferred
              
              
              1,328
              
              
              -
              
              
              2,028
              
              
              -Total
                  income tax expense
              
              
              3,475
              
              
              -
              
              
              10,634
              
              
              -Net
                  income (loss) for the period
              
              $
              25,400
              
              $
              3,226
              
              $
              98,109
              
              $
              (4,608
              )Net
                  income (loss) per common share (Note 5)Basic
              
              
              0.73
              
              
              0.09
              
              
              2.83
              
              
              (0.16
              )Diluted
              
              
              0.71
              
              
              0.09
              
              
              2.73
              
              
              (0.16
              )
 
 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**
                **September
                  30**
              
              **Nine
                  months ended**
                **September
                  30****2006**
              
              **2005**
              
              **2006**
              
              **2005****Operating
                  Activities**Net
                  income (loss) for the period
              
              $
              25,400
              
              $
              3,226
              
              $
              98,109
              
              $
              (4,608
              )Adjustment
                  to reconcile net income (loss) to cash provided by operating
                  activities:Depreciation
                  and amortization
              
              
              209
              
              
              164
              
              
              542
              
              
              398Deferred
                  taxes
              
              
              1,328
              
              
              -
              
              
              2,028
              
              
              -Stock-based
                  compensation
              
              
              2,830
              
              
              1,928
              
              
              6,044
              
              
              5,112Amortization
                  of lease inducement
              
              
              (17
              )
              
              (10
              )
              
              (78
              )
              
              (24
              )Net
                  change in non-cash working capital items related to
                  operations:Accounts
                  receivable
              
              
              2,553
              
              
              628
              
              
              (5,100
              )
              
              (14,307
              )Investment
                  tax credits receivable
              
              
              -
              
              
              -
              
              
              -
              
              
              261Prepaid
                  expenses
              
              
              190
              
              
              (902
              )
              
              (733
              )
              
              250Deposits
              
              
              (4
              )
              
              (284
              )
              
              (44
              )
              
              (284
              )Accounts
                  payable
              
              
              (966
              )
              
              (609
              )
              
              1,791
              
              
              (2,936
              )Income
                  taxes payable
              
              
              2,455
              
              
              -
              
              
              8,322Accrued
                  liabilities
              
              
              1,109
              
              
              2,208
              
              
              2,384
              
              
              2,716Net
                  cash flows from (used in) operating activities
              
              
              35,087
              
              
              6,349
              
              
              113,265
              
              
              (13,422
              )**Investing
                  Activities**Purchases
                  of marketable securities
              
              
              (92,380
              )
              
              (40,083
              )
              
              (246,273
              )
              
              (139,628
              )Redemptions
                  of marketable securities
              
              
              51,507
              
              
              39,167
              
              
              145,757
              
              
              75,522Purchase
                  of property and equipment
              
              
              (1,316
              )
              
              (675
              )
              
              (1,645
              )
              
              (850
              )Net
                  cash flows used in investing activities
              
              
              (42,189
              )
              
              (1,591
              )
              
              (102,161
              )
              
              (64,956
              )**Financing
                  Activities**Issuance
                  of common shares
              
              
              1,214
              
              
              320
              
              
              3,169
              
              
              92,051Share
                  issue costs
              
              
              -
              
              
              -
              
              
              -
              
              
              (7,314
              )Payments
                  on capital lease obligations
              
              
              (109
              )
              
              (107
              )
              
              (328
              )
              
              (314
              )Net
                  cash flows from financing activities
              
              
              1,105
              
              
              213
              
              
              2,841
              
              
              84,423Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              -
              
              
              (18
              )
              
              -
              
              
              3Net
                  (decrease) increase in cash and cash equivalents
              
              
              (5,997
              )
              
              4,953
              
              
              13,945
              
              
              6,048Cash
                  and cash equivalents, beginning of the period
              
              
              34,701
              
              
              4,602
              
              
              14,759
              
              
              3,507Cash
                  and cash equivalents, end of the period
              
              $
              28,704
              
              $
              9,555
              
              $
              28,704
              
              $
              9,555
 
 See
        accompanying notes to consolidated financial statements.
  5
  **ASPREVA
        PHARMACEUTICALS CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(unaudited)**
 (all
        tabular
        amounts in thousands of U.S. dollars other than share or per share data or
        unless otherwise stated)
 September
        30, 2006
  **1.**  **Nature
        of Business and Basis of Presentation**
 
 Unless
        the
        context otherwise requires, all references to “Aspreva”, “we”, “our” and “us”
refer to Aspreva Pharmaceuticals Corporation and its subsidiaries.
  We
        were
        incorporated on December 20, 2001 under the Canada Business Corporation Act
        and continued under the Business Corporations Act (British Columbia) on
        November 19, 2004. Our principal business is to identify, develop and
        commercialize new indications for approved drugs and drug candidates for
        patients living with less common diseases.
 
 We
        have
        prepared these consolidated financial statements in accordance with U.S.
        generally accepted accounting principles for interim financial statements
        and
        with the instructions for Form 10-Q and Article 10 of Regulation S-X.
        Accordingly, the financial statements do not include all of the information
        and
        footnotes required by U.S. generally accepted accounting principles for annual
        financial statements. The financial statements should be read in conjunction
        with our audited consolidated financial statements and notes thereto included
        in
        our Annual Report on Form 10-K for the year ended December 31, 2005 filed
        with
        the United States Securities and Exchange Commission on March 2,
        2006.
 
 In
        the
        opinion of management, these consolidated financial statements include all
        normal and recurring adjustments considered necessary to present fairly our
        financial position, results of operations and cash flows. Interim results
        are
        not necessarily indicative of the operating results for the full year or
        for any
        other subsequent interim period.
  **2.**  **Significant
        Accounting Policies**
 
 Our
        significant accounting policies are the same as described in Note 2 to our
        Notes
        to Consolidated Financial Statements included in our Annual Report on Form
        10-K
        for the year ended December 31, 2005 filed with the United States Securities
        and
        Exchange Commission on March 2, 2006 other than the adoption of  SFAS 123
        (R) as described below. The following is a summary of the significant accounting
        policies used in the preparation of these financial statements.
 
 **Stock-Based
        Compensation Expense**
 Effective
        January 1, 2006, we adopted Statement of Financial Accounting Standards
        No. 123 (revised 2004), or SFAS 123(R)), *Share
        Based Payment* ,
        which
        supersedes our previous accounting under Statement No. 123, or SFAS 123, *Accounting
        for Stock-Based Compensation* .
        SFAS 123
        (R) requires the recognition of compensation expense, using a fair-value
        based
        method, for costs related to all share-based payments to employees, including
        grants of stock options. SFAS 123 (R) requires companies to estimate the
        fair
        value of share-based payment awards on the date of grant using an option-pricing
        model. We use the Black-Scholes option-pricing model to determine the fair
        value
        for our awards. The value of the portion of the award that is ultimately
        expected to vest is recognized as expense over the service period in the
        statement of income. We adopted SFAS 123 (R) using the modified prospective
        transition method which recognizes the grant-date fair value of compensation
        for
        new and unvested awards beginning in the fiscal period in which the recognition
        provisions are first applied. The modified prospective transition method
        does
        not require the restatement of prior periods to reflect the impact of SFAS123
        (R). Since we previously accounted for stock-based compensation under the
        fair
        value provisions of SFAS 123, adoption of SFAS 123 (R) did not have a
        significant impact on our financial position or consolidated statement of
        income.
 
 
 **Revenue
        Recognition**
 Pursuant
        to
        our agreement with Hoffmann - La Roche Inc. and F. Hoffmann - La Roche Ltd.,
        collectively Roche, commencing April 1, 2005, we became entitled to a royalty
        based on an equal sharing of incremental net sales of CellCept in non-transplant
        indications above a negotiated baseline less a distribution fee, payable
        on a
        quarterly basis. This baseline was originally set in July 2003 at 134 million
        Swiss Francs, or CHF, and is subject to an annual price index adjustment.
        Roche
        and Aspreva reset the baseline for 2006 to CHF 130.5 million, after taking
        into
  6
  account
        the
        price index adjustment and, for the time being, excluding Japan as a licensed
        territory under the agreement. We follow the provisions of the Securities
        and
        Exchange Commission’s Staff Accounting Bulletin No. 104, or SAB 104, *Revenue
        Recognition* ,
        which sets
        forth criteria that must be met in order to recognize revenue: (i) there
        is
        persuasive evidence that an arrangement exists; (ii) delivery of the products
        and/or services has occurred; (iii) the selling price is fixed or determinable;
        and (iv) collectibility is reasonably assured.
 
 Roche
        and
        Aspreva have developed a proprietary sales tracking methodology to audit
        net
        sales of CellCept and to determine the portion attributable to sales from
        use in
        non-transplant indications. The results of this audit lag actual net sales
        by
        approximately six months. Roche and Aspreva use actual total CellCept sales
        results and estimates of the quarterly split between net sales attributed
        to
        transplant and non-transplant indications to calculate the royalty payment
        payable to us at the end of each quarter. We record a portion of this royalty
        payment as revenue within quarterly financial results, with the balance recorded
        as unearned royalty advance and subject to a subsequent reconciliation.
  Once
        the six
        month lag period has passed, and audited results can be obtained, Aspreva
        and
        Roche employ a mechanism to reconcile audited amounts against the royalty
        previously paid to us. This reconciliation process is undertaken quarterly,
        based on the most recent available audit information. This reconciliation
        mechanism, however, will limit reconciliation payments to either Roche or
        Aspreva to a maximum amount of CHF 4.0 million per quarter. If the
        results of the reconciliation indicate that the CHF 4.0 million collar
        has been exceeded in favor of the same party for two consecutive quarters,
        we
        and Roche have agreed upon a mechanism to review the sales tracking methodology
        and/or our methodology for estimating royalty payments and introduce appropriate
        changes. The terms of this collar may be changed prospectively at any time
        by
        the joint committee formed under our agreement with Roche, on which we have
        equal representation.
 
 We
        record
        all but CHF 4.0 million of the royalty payment as revenue within
        quarterly financial results. In subsequent quarters, consistent with the
        timing
        of the reconciliation described above, the remaining CHF 4.0 million
        of the royalty payment, as well as any additional payments to us or from
        us to
        Roche as a result of such reconciliation will be recorded in the period the
        reconciliation is completed. Thus, at any period end we will carry a maximum
        of
        CHF 4.0 million for each quarter that has not then been reconciled,
        classified as unearned royalty advance on the balance sheet. At September
        30,
        2006, there was CHF 8.0 million ($6.4 million) recorded in unearned royalties
        as
        the royalty revenue for the second quarter of 2006 and the third quarter
        of 2006
        have not been reconciled.
 
 In
        September
        2006, Aspreva and Roche agreed the final audited results for the net sales
        relating to the first quarter of 2006. The resulting reconciliation payment
        of
        $2.4 million, which is payable to Roche within 45 days of quarter-end, was
        determined utilizing the revised sales tracking methodology.
 
 For
        the
        three month period ended September 30, 2006, we recorded royalty revenue
        of
        $47.9 million, which is comprised of $47.1 million for the third quarter
        initial royalty payment ($50.3 million less $3.2 million collar recorded
        as
        unearned royalty advance) and a net reconciliation amount of $0.8 million
        ($3.2
        million less $2.4 million payable to Roche) arising from audited net sales
        data
        to the initial royalty payment for the first quarter of 2006. The net of
        the
        initial royalty payment and reconciliation payment are recorded in accounts
        receivable as of September 30, 2006, and are payable to us within 45 days
        of
        September 30, 2006.
 
 **3.**  **Marketable
        Securities**
 *Available
        for sale debt securities*
 
 **Cost**
              
              **Accrued**
                **interest**
              
              **Gross**
                **unrealized**
                **gains**
              
              **Gross**
                **unrealized**
                **losses**
              
              **Approximate**
                **market**
                **and
                  carrying**
                **value****September
                  30, 2006**
              
              $
              197,109
              
              $
              2,267
              
              $
              55
              
              $
              (48
              )
              $
              199,383**December
                  31, 2005**
              
              $
              96,687
              
              $
              740
              
              $
              2
              
              $
              (149
              )
              $
              97,280
 
  7
  **4.**  **Stock-Based
        Compensation**
 
 We
        have a
        stock option plan, the Aspreva 2002 Incentive Stock Option Plan, or the Plan.
        The Plan has been amended since its adoption, most recently in May 2006,
        to
        increase the number of common shares reserved for issuance to directors,
        officers, employees and consultants to 4,031,000. The exercise price of the
        options is determined by the Board (or a committee thereof) but generally
        will
        be at least equal to the fair value of the shares at the grant date. The
        stock
        options typically have a ten year term and vest ratably over a period of
        two to
        four years from the date of grant. As at September 30, 2006, 990,000 common
        shares were available for future grants. The stock options expire at various
        dates from June 2013 to May 2016. We issue new shares to satisfy stock option
        exercises.
 
 Included
        within the statements of operations are the following charges for stock-based
        compensation:
 
 **Three
                  months ended**
                **September
                  30**
              
              **Nine
                  months ended**
                **September
                  30****2006**
              
              **2005**
              
              **2006**
              
              **2005**Research
                  and development expense
              
              $
              991
              
              $
              660
              
              $
              2,116
              
              $
              1,814Marketing,
                  general and administrative expense
              
              
              1,839
              
              
              1,268
              
              
              3,928
              
              
              3,298Total
                  stock-based compensation
              
              $
              2,830
              
              $
              1,928
              
              $
              6,044
              
              $
              5,112
 
 We
        measure
        stock-based awards using the Black-Scholes option pricing model and amortize
        the
        fair value of granted stock options to the consolidated statement of operations
        over the vesting period of the options using the accelerated method. We
        estimated the fair value of options using the following
        assumptions:
  **Three
                    months ended**
                  **September
                    30**
                
                **Nine
                    months ended**
                  **September
                    30****2006**
                
                **2005**
                
                **2006**
                
                **2005**Expected
                    stock price volatility
                
                
                70
                %
                
                70
                %
                
                70
                %
                
                78
                %Average
                    risk-free interest rate
                
                
                4.0
                %
                
                4.0
                %
                
                4.0
                %
                
                4.0
                %Expected
                    option life in years
                
                
                5.0
                
                
                5.0
                
                
                5.0
                
                
                5.3Dividend
                    yield
                
                
                0
                %
                
                0
                %
                
                0
                %
                
                0
                %
 Given
        our
        short history we do not have sufficient historical data to determine volatility,
        therefore our expected volatility is based on comparable companies’ historical
        stock prices. As provided in Staff Accounting Bulletin No. 107 our computation
        of expected option life has been calculated to be the mid-point between the
        vesting date and the end of the contractual period.
 
 As
        required
        by SFAS 123 (R), previously recorded stock-based compensation expense totaling
        nil and $0.8 million was reversed in the three and nine months ended September
        30, 2006, respectively, to reflect the impact of actual stock option forfeitures
        within the period.
 
  8
  Stock
        option
        transactions for the nine-month period ended September 30, 2006, and the
        number
        of stock options outstanding as of September 30, 2006, are summarized below:
 
 **Number
                  of**
                **Shares**
              
              **Weighted
                  Average**
                **Exercise
                  Price**
              
              **Weighted
                  Average remaining contractual term (years)**
              
              **Aggregate
                  Intrinsic Value***All
                  dollar figures in Canadian dollars***Outstanding
                  at December 31, 2005**
              
              
              2,271,576
              
              $
              7.38Options
                  granted
              
              
              552,000
              
              
              29.29Options
                  forfeited
              
              
              (206,867
              )
              
              5.60Options
                  exercised
              
              
              (379,191
              )
              
              3.73**Outstanding
                  at March 31, 2006**
              
              
              2,237,518
              
              $
              13.57Options
                  granted
              
              
              60,000
              
              
              33.13Options
                  forfeited
              
              
              (10,000
              )
              
              14.95Options
                  exercised
              
              
              (158,317
              )
              
              3.10**Outstanding
                  at June 30, 2006**
              
              
              2,129,201
              
              $
              14.89Options
                  granted
              
              
              355,500
              
              
              30.26Options
                  forfeited
              
              
              (87,983
              )
              
              17.87Options
                  exercised
              
              
              (156,631
              )
              
              5.31**Outstanding
                  at September 30, 2006**
              
              
              2,240,087
              
              $
              17.88
              
              
              8.8
              
              $
              26,100**Exercisable
                  at September 30, 2006**
              
              
              555,231
              
              $
              10.42
              
              
              8.0
              
              $
              10,383
 
 Net
        cash
        proceeds from the exercise of stock options and warrants was $3.2 million
        and
        $320,000 for the nine months ended September 30, 2006 and 2005, respectively.
        Net cash proceeds from the exercise of stock options and warrants was $1.2
        million and $320,000 for the three months ended September 30, 2005,
        respectively.
 
 The
        intrinsic value of stock options exercised during the nine months ended
        September 30, 2006  and 2005 was $15.1million and $1.0 million,
        respectively. The intrinsic value of stock options exercised during the three
        months ended September 30, 2006 and 2005 was $1.6 million and $1.0 million,
        respectively .
 
 The
        estimated fair value of stock options vested during the three-month
        periods ended September 30, 2006 and 2005 was $2.2 million and $0.6 million,
        respectively. The estimated fair value of stock options vested during
        the nine-month periods ended September 30, 2006 and 2005 was $5.8 million
        and
        $1.5 million, respectively.
 
 The
        weighted
        average estimated fair value of stock options granted during the three-month
        periods ended September 30, 2006 and 2005 was $15.88 and $9.07 per share,
        respectively. The weighted average estimated fair value of stock options
        granted
        during the nine-month periods ended September 30, 2006 and 2005 was $15.71
        and
        $9.03 per share, respectively, based on the assumptions in the Black-Scholes
        valuation model discussed above.
 
 The
        unamortized amount of stock-based compensation relating to unvested stock
        options granted as at September 30, 2006 is $15.0 million, which will be
        amortized over the weighted average period of 2.7 years.
   9
  The
        following table summarizes information regarding options outstanding at
        September 30, 2006:
 
 **Options
                  Outstanding**
              
              **Options
                  Exercisable****Weighted****Average****Number
                  of**
              
              **Remaining**
              
              **Number
                  of****Weighted
                  Average**
              
              **Common
                  Shares**
              
              **Contractual
                  Life**
              
              **Common
                  Shares**
              
              **Weighted
                  Average**Price
                  Range
              
              **Exercise
                  Price**
              
              **Issuable**
              
              **(Years)**
              
              **Issuable**
              
              **Exercise
                  Price***(Exercisable
                  in Canadian dollars)*$0.78
              
              $
              0.78
              
              
              25,100
              
              
              6.9
              
              
              25,100
              
              $
              0.78$5.60
                  - $7.79
              
              $
              5.69
              
              
              843,511
              
              
              7.9
              
              
              349,698
              
              $
              5.62$14.95
                  - $17.45
              
              $
              16.58
              
              
              438,043
              
              
              8.9
              
              
              123,986
              
              $
              17.10$27.57
                  - $33.13
              
              $
              29.97
              
              
              933,433
              
              
              9.6
              
              
              56,447
              
              $
              29.75$0.78
                  - $33.13
              
              $
              17.88
              
              
              2,240,087
              
              
              8.8
              
              
              555,231
              
              $
              10.42
 
 **5.**  **Net
        Income (Loss) per Common Share**
 
 We
        calculate
        net income (loss) per common share in accordance with SFAS 128, *Earnings
        per Share* ,
        which
        requires the presentation of basic and diluted net income (loss) per common
        share using the treasury stock method.
 
 The
        denominators for basic and diluted net income (loss) per common share for
        the
        three and nine-month periods ended September 30, 2006 and 2005 were calculated
        as follows:
 
 **Three
                  months ended**
                **September
                  30**
              
              **Nine
                  months ended**
                **September
                  30****2006**
              
              **2005**
              
              **2006**
              
              **2005**Weighted
                  average shares outstanding used for basic net income (loss) per
                  common
                  share
              
              
              34,890,894
              
              
              34,040,185
              
              
              34,650,645
              
              
              29,196,082Effect
                  of dilutive stock options
              
              
              982,404
              
              
              1,327,522
              
              
              1,167,885
              
              
              -Effect
                  of dilutive warrants
              
              
              43,802
              
              
              155,695
              
              
              105,534
              
              
              -Weighted
                  average shares outstanding used for diluted net income (loss) per
                  common
                  share
              
              
              35,917,100
              
              
              35,523,402
              
              
              35,924,064
              
              
              29,196,082
 
 Diluted
        loss
        per common share is equivalent to basic loss per common share for the nine-month
        period ended September 30, 2005, as the outstanding options and warrants
        are
        anti-dilutive to the loss per common share.
 
 Due
        to their
        anti-dilutive nature, the following potentially issuable shares were omitted
        from the calculation of diluted net income (loss) per common share for these
        periods:
 
 **Three
                  months ended**
                **September
                  30**
              
              **Nine
                  months ended**
                **September
                  30****2006**
              
              **2005**
              
              **2006**
              
              **2005**Stock
                  options
              
              
              691,500
              
              
              2,127,499
              
              
              691,500
              
              
              2,127,499Warrants
              
              
              -
              
              
              206,998
              
              
              -
              
              
              206,998Total
              
              
              691,500
              
              
              2,334,497
              
              
              691,500
              
              
              2,334,497
 
  10
  **6.**  **Shareholders’
        Equity**
 
 **Statement
        of Shareholders’ Equity**
 The
        following table summarizes the activity in our shareholders’ equity from
        December 31, 2005 to September 30, 2006: ****
  Number
                  Of
                    Shares
                
                Common
                  Shares
                
                Additional
                  Paid-In
                  Capital
                
                Accumulated
                  Other
                  Comprehensive
                  Income/(Loss)
                
                Retained
                  Earnings/
                  (Deficit)
                
                Total
                  Shareholders’
                  Equity**Balance,
                    as of December 31, 2005**
                
                
                34,156,231
                
                $
                142,464
                
                $
                9,618
                
                $
                1,495
                
                $
                (5,531
                )
                $
                148,046Shares
                    issued on:Exercise
                    of options
                
                
                379,191
                
                
                2,939
                
                
                (1,714
                )
                
                -
                
                
                -
                
                
                1,225Exercise
                    of warrants
                
                
                42,818
                
                
                330
                
                
                (151
                )
                
                -
                
                
                -
                
                
                179Stock-based
                    compensation expense
                
                
                -
                
                
                -
                
                
                973
                
                
                -
                
                
                -
                
                
                973Unrealized
                    gain on derivative financial instruments
                
                
                -
                
                
                -
                
                
                -
                
                
                100
                
                
                -
                
                
                100Reclassification
                    of unrealized loss on marketable securities, net of tax
                
                
                -
                
                
                -
                
                
                -
                
                
                16
                
                
                -
                
                
                16Unrealized
                    loss on marketable securities, net of tax
                
                
                -
                
                
                -
                
                
                -
                
                
                94
                
                
                -
                
                
                94Net
                    income for the period
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                44,752
                
                
                44,752**Balance,
                    as of March 31, 2006**
                
                
                34,578,240
                
                $
                145,733
                
                $
                8,726
                
                $
                1,705
                
                $
                39,221
                
                $
                195,385Shares
                    issued on:Exercise
                    of options
                
                
                158,317
                
                
                1,129
                
                
                (701
                )
                
                -
                
                
                -
                
                
                428Exercise
                    of warrants
                
                
                28,550
                
                
                223
                
                
                (100
                )
                
                -
                
                
                -
                
                
                123Stock-based
                    compensation expense
                
                
                -
                
                
                -
                
                
                2,241
                
                
                -
                
                
                -
                
                
                2,241Unrealized
                    loss on derivative financial instruments
                
                
                -
                
                
                -
                
                
                -
                
                
                (2,355
                )
                
                -
                
                
                (2,355
                )Reclassification
                    of unrealized gain on marketable securities, net of tax
                
                
                -
                
                
                -
                
                
                -
                
                
                (63
                )
                
                -
                
                
                (63
                )Unrealized
                    gain on marketable securities, net of tax
                
                
                -
                
                
                -
                
                
                -
                
                
                14
                
                
                -
                
                
                14Net
                    income for the period
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                27,956
                
                
                27,956**Balance,
                    as of June 30, 2006**
                
                
                34,765,107
                
                $
                147,085
                
                $
                10,166
                
                $
                (699
                )
                $
                67,177
                
                $
                223,729Shares
                    issued on:Exercise
                    of options
                
                
                156,631
                
                
                1,553
                
                
                (853
                )
                
                -
                
                
                -
                
                
                700Exercise
                    of warrants
                
                
                120,409
                
                
                938
                
                
                (424
                )
                
                -
                
                
                -
                
                
                514Stock-based
                    compensation expense
                
                
                -
                
                
                -
                
                
                2,830
                
                
                -
                
                
                -
                
                
                2,830Unrealized gain
                    on derivative financial instruments
                
                
                -
                
                
                -
                
                
                -
                
                
                2,109
                
                
                -
                
                
                2,109Reclassification
                    of unrealized gain on marketable securities, net of tax
                
                
                -
                
                
                -
                
                
                -
                
                
                (18
                )
                
                -
                
                
                (18
                )Unrealized
                    gain on marketable securities, net of tax
                
                
                -
                
                
                -
                
                
                -
                
                
                61
                
                
                -
                
                
                61Net
                    income for the period
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                25,400
                
                
                25,400**Balance,
                    as of September 30, 2006**
                
                
                35,042,147
                
                
                149,576
                
                
                11,719
                
                
                1,453
                
                
                92,577
                
                
                255,325
  **Comprehensive
        Income**
 Comprehensive
        income was $27.6 million and $3.6 million for the three-month periods ended
        September 30, 2006 and 2005, respectively. Comprehensive income for the
        nine-month period ended September 30, 2006 was $98.1 million and comprehensive
        loss for the nine-month period ended September 30, 2005 was $3.9 million.
  **Warrants**
 In
        March
        2004, we issued warrants entitling the holders to acquire 230,360 common
        shares
        at an exercise price of Cdn$4.76 per share. Of these, 191,777 warrants were
        exercised during the nine-month period ended September 30, 2006. As of September
        30, 2006, there were 2,913 warrants outstanding which have subsequently
        expired.
  **7.**  **Contractual
        Obligations and Commitments**
 
 We
        have
        agreements with clinical sites and contract research organizations for the
        conduct of our clinical trials. We make payments to these sites and
        organizations based upon the number of patients enrolled and the period of
        follow-up in the trials. At September 30, 2006, we have commitments to these
        groups amounting to $20.2 million over the next three years.
 
 Occasionally,
        we enter into agreements with third parties in the ordinary course of business
        that include indemnification provisions that are customary in the industry.
        Those indemnifications generally require us to compensate the other party
        for
        certain damages and costs incurred as a result of third party claims or damages
        arising from these transactions. These indemnification provisions may survive
        termination of the underlying agreement. The nature of the indemnification
        obligation prevents us from making a reasonable estimate of the maximum
        potential amount we could be required to pay. Historically, we have not made
        any
        indemnification payments under such agreements and no amount has been accrued
        in
        the accompanying consolidated financial statements with respect to these
        indemnification obligations.
   11
  **8.**  **Derivative
        Financial Instruments**
 
 We
        use
        derivative financial instruments to hedge our royalty payments. Our royalty
        payments are received from Roche in Swiss francs, or CHF, on a quarterly
        basis
        45 days after each quarter end. Sales of CellCept are denominated in
        multi-currencies and are converted to CHF by Roche for the purpose of
        calculating amounts to be paid to us. To the extent the Swiss franc increases
        in
        value relative to these other currencies, the total aggregate CHF value of
        CellCept sales decreases and the amount that we are entitled to may be reduced.
        To mitigate this risk, at the beginning of each quarter, we enter into noon
        average rate contracts, or NARCs, to sell U.S. dollars and Euros and buy
        CHF.
        The NARCs are designed to hedge our direct exposures of forecasted transactions
        and pursuant to SFAS No. 133 *Accounting
        for Derivative Instruments and Hedging Activities* qualify as
        cash flow hedges. Forward contracts to sell CHF are entered into with settlement
        dates that coincide with the date we receive our royalty payments from Roche.
        The forward contracts entered into are based on forecasts and as such they
        are
        initially designated as cash flow hedges. For the period from the quarter
        end to
        the settlement date, the hedges are re-designated and are treated as fair
        value
        hedges. Any change in value between quarter end and settlement date is recorded
        in other income or expense as a foreign exchange gain or loss.
 
 As
        a result
        of our global operations with offices in Canada and Europe we incur significant
        amounts of our research and development and general and administrative
        expenditures in Canadian dollars, euros and pounds sterling. In order to
        hedge
        against the impact of fluctuations in the value of the Canadian dollar, euro
        and
        pounds sterling relative to the U.S. dollar, we enter into short-term forward
        contracts to purchase Canadian dollars, euros and pounds sterling. Forward
        hedges relating to forecasted expenditures are cash flow hedges.
 
 The
        following is a summary of the derivative instruments in place at September
        30,
        2006:
 
 **Type
                  of hedge**
              
              
              **Currency
                  Exchanged**
              
              
              **Settlement
                  dates**
              
              
              **Total**
                **Notional
                  Amount**
              
              
              **Average**
                **Settlement**
                **Amount**Forward
                  Contract
              
              
              Sell
                  USD buy CAD
              
              
              October
                  2006 - September 2007
              
              
              9,320
                  USD
              
              
              0.8869Forward
                  Contract
              
              
              Sell
                  USD buy GBP
              
              
              October
                  2006 - September 2007
              
              
              7,481
                  USD
              
              
              1.8101Forward
                  Contract
              
              
              Sell
                  CHF buy GBP
              
              
              November
                  2006 - May 2007
              
              
              2,616
                  CHF
              
              
              2.2226Forward
                  Contract
              
              
              Sell
                  CHF buy CAD
              
              
              November
                  2006 - May 2007
              
              
              1,300
                  CHF
              
              
              1.1076Forward
                  Contract
              
              
              Sell
                  USD buy Euro
              
              
              October
                  2006 - September 2007
              
              
              492
                  USD
              
              
              1.3018Forward
                  Contract
              
              
              Sell
                  CHF buy USD
              
              
              November
                  2006 - August 2007
              
              
              175,667
                  CHF
              
              
              1.2188NARC
              
              
              Sell
                  USD buy CHF
              
              
              November
                  2006 - February 2007
              
              
              55,458
                  USD
              
              
              0.8121NARC
              
              
              Sell
                  Euro buy CHF
              
              
              November
                  2006 - February 2007
              
              
              13,409
                  Euro
              
              
              0.6371
 
 The
        fair
        value of the derivative financial instruments is the estimated amount that
        we
        would receive or pay to terminate a contract at the reporting date. At September
        30, 2006, the fair value of our forward contracts and NARCs totaled $1.9
        million
        and ($491,000) respectively. $1.6 million of cash flow hedges was recorded
        in Other Comprehensive Income; and ($217,000) of fair value and cash flow
        hedges was recorded in the third quarter revenue.
 
 We
        do not
        use derivative financial instruments for speculative or trading purposes,
        nor do
        we hold or issue leveraged derivative financial instruments. All activity
        is
        governed by a board approved hedging policy and is monitored for compliance
        on
        an ongoing basis. We are exposed to credit loss in the event of non-performance
        by the counter-parties to the foreign exchange forward contracts and NARCs,
        however, we do not anticipate non-performance by any counter party.
 
 **9.**  **Income
        Taxes**
 
 The
        provision for income taxes was $10.6 million for the nine months ended September
        30, 2006, resulting in an effective global tax rate of 9.8 % for the period.
        The
        difference between the effective tax rate and the statutory Canadian federal
        income tax rate of 34.1% relates to differing foreign tax rates, changes
        in our
        deferred income tax valuation allowance and utilization of tax
        pools.
  12
  **10.**  **Supplemental
        Cash Flow**
 
 Supplemental
        cash flow information is as follows:
 **Three
                  months ended**
                **September
                  30**
              
              **Nine
                  months ended**
                **September
                  30****2006**
              
              **2005**
              
              **2006**
              
              **2005**Equipment
                  acquired under capital leases
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              140Income
                  taxes paid
              
              
              -
              
              
              -
              
              
              269
              
              
              -Interest
                  paid
              
              
              11
              
              
              13
              
              
              32
              
              
              38
 
 **11.**  **Related
        Party Transactions**
 
 We
        retain
        Farris, Vaughan, Wills & Murphy LLP, a law firm where R. Hector MacKay-Dunn,
        Q.C., is a senior partner. Mr. MacKay-Dunn is a member of our board of directors
        and acts as our Corporate Secretary. In the nine months ended September 30,
        2006
        and 2005, we incurred legal fees payable to Farris, Vaughan, Wills & Murphy
        LLP, of $415,000 and $712,000, respectively, all of which, excluding $15,000
        in
        accrued liabilities, has been paid as of September 30, 2006. In 2006, these
        fees
        relate primarily to general corporate legal advice while in 2005 these fees
        related primarily to services undertaken in conjunction with our initial
        public
        offering.
  **12.**  **Contingencies**
 
 From
        time to
        time, we may be involved in litigation relating to claims arising out of
        our
        operations. We are not currently involved in any material legal proceedings.
  **13.**  **Comparative
        Figures**
 
 Certain
        of
        the prior year’s figures including cash and cash equivalents have been
        reclassified to conform to the presentation adopted in the current
        period.
 
 **14.**  **Recent
        Accounting Pronouncements**
  In
        July
        2006, the Financial Accounting Standards Board, or FASB issued FASB
        Interpretation No. 48, *Accounting
        for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
        109,* or FIN 48.
        FIN 48 clarifies the accounting for uncertainty in income taxes recognized
        in an
        enterprise’s financial statements in accordance with FASB Statement No. 109, *Accounting
        for Income Taxes* .
        FIN 48
        prescribes a recognition threshold and measurement attribute for financial
        statement recognition and measurement of a tax position taken or expected
        to be
        taken in a tax return. FIN 48 also provides guidance on derecognizing,
        measurement, classification, interest and penalties, accounting in interim
        periods, disclosure and transition. FIN 48 is effective for fiscal years
        beginning after December 15, 2006. The cumulative effect of applying the
        provisions of FIN 48 will be reported as an adjustment to the opening balance
        of
        retained earnings or deficit at January 1, 2007. We are currently evaluating
        the
        effect this standard will have on our consolidated financial
        statements.
  13
  **Item
        2.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**  **OF
        FINANCIAL CONDITION AND RESULTS OF OPERATIONS**
  You
        should
        read the following discussion and analysis by our management of our financial
        condition and results of operations in conjunction with our audited consolidated
        financial statements and related notes thereto included as part of our Annual
        Report on Form 10-K for the year ended December 31, 2005 and our unaudited
        consolidated financial statements for the nine-month period ended September
        30,
        2006. Our consolidated financial statements have been prepared in accordance
        with U.S. generally accepted accounting principles and are presented in U.S.
        dollars.
  **Forward-Looking
        Statements**
  *The
          information in this discussion contains forward-looking statements within
          the
          meaning of Section 27A of the Securities Act of 1933 and Section 21E of
          the
          Securities Exchange Act of 1934 and/or forward-looking information under
          applicable Canadian provincial securities laws (collectively, “forward-looking
          statements”), which are subject to the “safe harbor” created by those sections.
          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. The forward-looking statements in this
          discussion include, but are not limited to, statements
          concerning:*
 •
                *our
                    strategy;*
 •
                *our
                    future operations;*
 •
                *our
                    future financial position;*
 •
                *our
                    future revenues;*
 •
                *our
                    projected costs;*
 •
                *prospects,
                    plans and objectives of our
                    management;*
 •
                *our
                    expectations regarding our relationship with Roche;*
 •
                *our
                    expectations regarding the development of CellCept for certain
                    autoimmune
                    indications; and*
 •
                *our
                    expectations with respect to our clinical trials of
                    CellCept.*
 
 *With
          respect to the forward-looking statements contained in this discussion,
          we have
          made numerous assumptions regarding, among other things:*
 •
                *our
                    ability to complete our clinical trials of
                    CellCept;*
 •
                *our
                    ability to file a sNDA with the FDA, as well as other applicable
                    filings
                    with the European Union and Canadian regulatory
                    authorities;*
 •
                *our
                    ability to protect our intellectual property rights and to not
                    infringe on
                    the intellectual property rights of others;*
 •
                *our
                    ability to comply with applicable governmental regulations and
                    standards;*
 •
                *our
                    ability to succeed at establishing a successful commercialization
                    program
                    for CellCept in any indication for which it may be approved;
                    and*
 •
                *other
                    assumptions set forth in Item 1A “Risk Factors” in this Quarterly Report
                    on Form 10Q.*
 
 *We
          may not actually achieve the plans, intentions, or expectations disclosed
          in our
          forward-looking statements or the underlying assumptions thereto, and you
          should
          not place undue reliance on our forward-looking statements. These
          forward-looking statements involve risks and uncertainties that could cause
          our
          actual results to differ materially from the plans, intentions and expectations
          disclosed in the forward-looking statements and underlying assumptions,
          including, without limitation, those set forth in Item 1A “Risk Factors” in this
          Quarterly Report on Form 10-Q. Our forward-looking statements do not reflect
          the
          potential impact of any future acquisitions, mergers, dispositions, joint
          ventures or investments we may make. We do not assume any obligation to
          update
          any forward-looking statements, other than as required by applicable
          law.*
   14
  **Overview**
  We
        are an
        emerging global pharmaceutical company focused on identifying, developing,
        and
        upon approval, commercializing existing approved drugs and drug candidates
        for
        new indications. Our focus is on delivering effective, evidence-based treatments
        to manage less common diseases.
  Our
        initial focus in autoimmune disease led us to identify the potential efficacy
        of
        the drug CellCept, (mycophenolate mofetil) in the treatment of autoimmune
        diseases. In July 2003, we entered into our first collaboration with Hoffmann
        -
        La Roche Inc. and F. Hoffmann - La Roche Ltd, or collectively Roche, for
        exclusive world-wide rights, excluding Japan, to develop and, upon regulatory
        approval, commercialize CellCept, for all autoimmune indications. CellCept
        is an
        immunosuppressant or “anti rejection” drug currently approved by the U.S. Food
        and Drug Administration, or FDA, for use in the prevention of rejection in
        patients receiving heart, kidney and liver transplants. We currently have
        two
        clinical development programs underway to evaluate CellCept in the treatment
        of
        the autoimmune diseases: lupus nephritis and pemphigus vulgaris. CellCept
        is not
        currently approved by the FDA for use in these autoimmune indications. In
        October 2006, we announced preliminary results of a third phase III trial
        of CellCept for the treatment of myasthenia gravis. The preliminary results
        of
        our analysis indicates that CellCept failed to meet both the primary and
        secondary endpoints as defined in the protocol. Given the results of the
        study
        we have discontinued our development efforts in this area.




We
        continue
        our intense focus on building our portfolio beyond CellCept and on leveraging
        the clinical, medical affairs and commercial infrastructure that we have
        established. Potential opportunities include single and multiple product
        partnerships with both large and mid size pharmaceutical and biotechnology
        companies, specialty autoimmune products in various stages of development
        and
        may include strategic acquisitions if the appropriate opportunity arises.
        We
        also anticipate that our Roche relationship will be expanded.
  **Collaborative
        Agreements**
  Under
        the
        terms of our collaboration agreement with Roche, we agreed to conduct three
        clinical programs in lupus nephritis, myasthenia gravis and pemphigus vulgaris.
        We are responsible for assembling the filings for the relevant regulatory
        authorities, and Roche are responsible for submitting applications to the
        regulatory authorities and will be the holder of any regulatory submissions
        and
        resulting regulatory approvals. Based on the preliminary results of our
        myasthenia gravis trial, we do not intend to continue any further development
        of
        CellCept in myasthenia gravis.
 
 Pursuant
        to
        our collaboration agreement with Roche we are entitled to a royalty based
        on an
        equal sharing of incremental net sales of CellCept in non-transplant indications
        above a negotiated baseline less a distribution fee, payable on a quarterly
        basis. This baseline is subject to an annual price index adjustment and Roche
        and Aspreva agreed that the baseline for 2006 would be CHF 130.5 million,
        excluding, for the time being, Japan as a licensed territory under the
        agreement.
 
 Our
          collaboration agreement with Roche currently excludes Japan as a licensed
          territory and thus excludes that region from our revenue sharing arrangement.
          In
          April 2006, Aspreva entered into a collaboration agreement with Chugai
          Pharmaceuticals Co., Ltd., for the potential development of CellCept in
          Japan
          for certain autoimmune indications. Chugai, a global pharmaceutical company,
          has
          the rights to CellCept in Japan where it is currently approved for the
          suppression of organ rejection in transplant patients. Pursuant to the
          collaboration agreement, Chugai met with the regulatory authorities in
          Japan
          during the third quarter this year to discuss how Aspreva’s existing clinical
          trial data may be used in support of the development of CellCept for certain
          autoimmune indications. A definitive agreement was not reached at this
          meeting
          and therefore, discussions will continue into 2007. Based on that meeting,
          Chugai resubmitted the proposed trial protocols to meet Japanese regulatory
          requirements and expects to meet with the authorities again in 2007. Our
          discussions continue with Chugai and we will confirm this agreement following
          Chugai's final decision whether or not to proceed on this collaboration
          agreement.
  **Clinical
        Development Program**
 
 Our
        clinical
        development for CellCept is currently focused on two specific autoimmune
        indications: lupus nephritis and pemphigus vulgaris. A third development
        program
        in myasthenia gravis has been discontinued in October, 2006. If we and
        Roche obtain regulatory approval for the use of CellCept in either of these
        indications, we will also be responsible for the promotion of CellCept for
        the
        approved autoimmune indications.
 
  15
  Our
        clinical
        programs have been designed to utilize portions of existing clinical data
        provided by investigator initiated trials (IITs). We expect to use the results
        of an IIT conducted by Dr. Ellen Ginzler of State University of New York,
        or
        SUNY Downstate Medical Center in Brooklyn, New York, to support our supplemental
        New Drug Application, or sNDA, with the FDA for the use of CellCept in the
        treatment of lupus nephritis. The results of Dr. Ginzler’s study (as published
        in the November 24, 2005 issue of the *New
        England Journal of Medicine* )
        are
        supportive of the potential efficacy and safety of CellCept in the induction
        phase of lupus nephritis, adding to the existing body of data that supports
        the
        potential benefit of CellCept in the treatment of lupus nephritis. CellCept
        is
        not currently approved by any regulatory agency for any indication outside
        of
        transplant, and although the results of Dr. Ginzler’s study are encouraging, a
        separate prospective, adequate and well-controlled study such as our
        international phase III lupus nephritis study is necessary to provide
        substantive evidence of the potential safety and efficacy of CellCept in
        patients with lupus nephritis.
  On
          October 26, 2006, we announced preliminary results of our analysis of the
          data
          from our myasthenia gravis study. Myasthenia gravis is a debilitating,
          chronic
          autoimmune neuromuscular disease in which the body produces auto antibodies
          which prevent the nerves from sending messages to the muscles. This study
          failed
          to demonstrate a treatment difference between 36 weeks of treatment with
          MMF and
          placebo in patients with mild to moderate MG on background oral corticosteroids
          and cholinesterase inhibitors. MMF is well tolerated in this patient population
          and the safety profile is consistent with what we would expect. There is
          no
          evidence that MMF worsened symptoms of MG and approximately 45% of patients
          were
          able to achieve the target endpoint of minimal MG symptoms and low prednisone
          and cholinesterase inhibitor doses; however, this percentage of patients
          was no
          different from placebo. We believe that the study was well designed and
          executed, that the sample size, choice of efficacy endpoints, requirements
          for
          background therapy and that the dose of CellCept was sufficient to demonstrate
          a
          treatment effect for MG should it exist. The results of our trial are consistent
          with the results of our preliminary analysis of the 80 patient investigator
          initiated trial for MG led by Dr. Donald Sanders of Duke University with
          The
          Muscle Study Group, a consortium of academic centers. We had intended to
          use the
          clinical data from Dr. Sanders’ trial to support our application for the use of
          CellCept in the treatment of myasthenia gravis; however, because of the
          results
          of these two studies, we do not intend to conduct further studies of CellCept
          in
          myasthenia gravis.
 **Lupus
        Nephritis**
 
 Systemic
        lupus erythematosus, commonly referred to as lupus, is a complex autoimmune
        disease affecting numerous organs and tissues. The immune system, which
        typically fights off viruses and bacteria, loses the ability to differentiate
        between foreign substances, or antigens, and its own cells and tissues. The
        involvement of the kidney, known as lupus nephritis, is considered to be
        the
        most serious manifestation of lupus.
 
 The
        Lupus
        Foundation of America estimates that between 500,000 and 1.5 million Americans
        have lupus. This wide range demonstrates the challenge that exists when trying
        to determine the true prevalence of less common diseases such as lupus. Our
        analysis of various sources of data estimates that there are about 600,000
        diagnosed lupus nephritis patients worldwide. Clinicians estimate that one
        third
        to one half of lupus patients have lupus nephritis which equals approximately
        200,000 Americans with lupus nephritis. Although we do not currently have
        an approved drug in any market, we believe that approximately 11% of
        diagnosed patients with lupus nephritis are currently being treated with
        CellCept. We believe current dosing of CellCept is 1.7 grams, and will increase
        as a result of clinical data at higher dosing levels.
 
 In
        July
        2005, we initiated enrolment of patients in our international phase III trial
        of
        CellCept in the treatment of lupus nephritis. Our trial is designed to enroll
        a
        target of 358 patients with biopsy-proven lupus nephritis. In September
        2006, we announced the completion of patient enrolment into this study. Total
        enrolment was 371 patients as we continued to accept patients who were
        already in screening. We expect to complete the induction phase of this trial
        in
        early 2007, and expect data lock on this trial in May 2007. We expect, if
        the data is supportive, to be filing regulatory submissions, including a
        sNDA
        with the FDA, as well as appropriate filings with the European Union and
        Canadian regulatory authorities, for lupus nephritis in the fourth quarter
        of
        2007.
 
 **Pemphigus
        Vulgaris**
 
 Pemphigus
        vulgaris is a rare dermatological autoimmune disease that, according to the
        International Pemphigus Foundation, affects approximately 40,000 people
        worldwide. Symptoms include painful and life-threatening blistering of the
        skin
        and mucous membranes which can cover much of the body.
 
  16
  In
        March
        2006, we completed enrollment of 77 patients in our international phase III
        trial of CellCept in the treatment of pemphigus vulgaris. Based on recent
        discussions with the FDA, we amended the protocol to include an additional
        15
        patients for a total of 92 patients to increase the statistical power of
        the
        study. We now expect to complete the trial in the second quarter of 2008
        and
        file a sNDA with the FDA, as well as appropriate filings with the European
        Union
        and Canadian regulatory authorities, in the fourth quarter of 2008. In June
        2006, we received orphan drug designation with the FDA for CellCept in the
        treatment of pemphigus vulgaris.
 
 **Preliminary
        Studies**
 
 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. We are exploring the possibility of several of these
        autoimmune diseases such as cardiovascular disease in lupus patients, multiple
        sclerosis, scleroderma and vasulitis through Investigator Initiated Trials.
        Our
        expectation is that the results of these IIT’s will provide better data on which
        to support our decisions to continue to explore the potential application
        of
        CellCept in these patient populations as well as broaden our understanding
        of
        CellCept as a therapeutic option.
 
 **Commercialization**
 
 We
        do not
        currently have an approved drug in any market. We intend to design our future
        commercialization activities to comply with the laws and regulations enforced
        by
        applicable regulatory authorities. Our overall commercialization strategy
        is to
        target a small subset of specialty physicians who treat a majority of patients
        with the greatest underserved medical needs.
 
 Prior
        to
        regulatory approval of CellCept for any autoimmune indications, we will conduct
        extensive market research regarding specialty physician prescribing practices
        and product positioning, and will undertake a market preparation program.
        We
        currently are fielding a team of medical liaison physicians and other medical
        professionals who interact with potential future presenters and medical advisors
        to help us identify knowledge gaps in the potential use of CellCept and to
        assist us in our clinical development planning. We currently have 12 such
        field
        based medical advisors deployed in the U.S. and major EU markets.
 
 **Critical
        Accounting Policies and Significant Judgments and Estimates**
 
 The
        preparation of our consolidated financial statements requires us to make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and the disclosure of contingent assets and liabilities at the
        date
        of the financial statements as well as the reported revenues and expenses
        during
        the reporting periods. We base our estimates on historical experience and
        on
        various other factors that we believe are reasonable under the circumstances,
        the results of which form the basis for making judgments about the carrying
        value of assets and liabilities that are not apparent from other sources.
        Actual
        results may differ from these estimates under different assumptions or
        conditions.
  Significant
        accounting policies are more fully described in the notes to our audited
        consolidated financial statements and notes thereto, included as part of
        our
        Annual Report on Form 10-K for the year ended December 31, 2005. However,
        we
        believe the following accounting policies relating to revenue recognition,
        stock-based compensation, clinical trial accounting, provision for income
        taxes
        and derivative instruments are the most critical accounting policies for
        assessing our financial performance.
 
 **Revenue
        Recognition**
  Pursuant
        to
        our collaboration agreement with Roche, commencing April 1, 2005, we became
        entitled to a royalty based on an equal sharing of incremental net sales
        of
        CellCept in non-transplant indications above a negotiated baseline less a
        distribution fee, payable on a quarterly basis. This baseline was originally
        set
        in July 2003 at CHF 134 million, and is subject to an annual price index
        adjustment. Roche and Aspreva have reset the baseline to CHF 130.5 million
        for
        2006, after taking into account the price index adjustment and, for the time
        being, excluding Japan as a licensed territory under the agreement. The baseline
        will be reset on an annual basis during the first quarter of each
        year.
   17
  We
        follow
        the revenue recognition criteria outlined in Staff Accounting Bulletin
        No. 104, Revenue Recognition. To summarize key requirements outlined in
        Staff Accounting Bulletin No. 104 relating specifically to CellCept:
  •
              royalties
                  are based upon Roche’s ex-factory sales;•
              pricing
                  of the transaction is agreed within the contract based upon Roche’s
                  underlying ex-factory sales price; and•
              collectibility
                  is reasonably assured and contractual arrangement has been agreed
                  and
                  executed with Roche.
 
 Any
        future
        non-CellCept royalty revenue will be recognized based on the terms of the
        specific collaboration agreements.
  Roche
        and
        Aspreva have developed a proprietary sales tracking methodology to audit
        net
        sales of CellCept and determine the portion attributable to sales from use
        in
        non-transplant indications. The results of this audit lag actual net sales
        by
        approximately six months. Roche and Aspreva use actual total CellCept sales
        results and estimates of the quarterly split between net sales attributed
        to
        transplant and non-transplant indications to calculate the initial royalty
        payment payable to us at the end of each quarter. We record a portion of
        this
        initial royalty payment as revenue within quarterly financial results, with
        the
        balance recorded as unearned royalty advance and subject to a subsequent
        reconciliation.
  Once
        the six
        month lag period has passed, and audited results can be obtained, Aspreva
        and
        Roche employ a mechanism to reconcile audited amounts against the initial
        royalty payment previously paid to us. This reconciliation process is undertaken
        quarterly, based on the most recent available audit information. This
        reconciliation mechanism, however, will limit reconciliation payments to
        either
        Roche or Aspreva by an amount of CHF 4.0 million per quarter. If the
        results of the reconciliation indicate that the CHF 4.0 million collar
        has been exceeded in favor of the same party for two consecutive quarters,
        we
        and Roche have agreed upon a mechanism to review the sales tracking methodology
        and/or our methodology for estimating royalty payments and introduce appropriate
        changes. The terms of this collar may be changed prospectively at any time
        by
        the joint committee formed under our agreement with Roche, on which we have
        equal representation.
 
 We
        record
        all but CHF 4.0 million of the initial royalty payment as revenue
        within quarterly financial results. In subsequent quarters, consistent with
        the
        timing of the reconciliation described above, the remaining
        CHF 4.0 million of the royalty payment, as well as any additional
        payments to us or from us to Roche as a result of such reconciliation will
        be
        recorded in the period the reconciliation is completed. Thus, at any period
        end
        we carry a maximum of CHF 4.0 million for each quarter that has not
        then been reconciled, classified as unearned royalty advance on the balance
        sheet. Roche and Aspreva have agreed to settle any royalty payment and
        reconciliation amount in cash, and we expect to settle such amounts within
        45 days of each quarter end.
 
 **Stock-Based
        Compensation**
 
 Stock-based
        compensation expense, which is a non-cash charge, results in part from
        estimating the fair value of employee stock options granted using the
        Black-Scholes option pricing model. The exercise price for option grants
        are
        based on the market value of our common shares.
 
 Prior
        to
        January 1, 2006, we accounted for employee stock options using the fair value
        method in accordance with Statement of Financial Accounting Standards No.
        123,
        or SFAS123, *Accounting
        for Stock-Based Compensation* .
        As of
        January 1, 2006 we adopted Statement of Financial Accounting Standards
        SFAS 123(R), *Share-based
        Payment* ,
        a revision
        of SFAS 123, using the modified prospective method to account for employee
        stock
        options. The Black-Scholes option pricing model requires the input of the
        fair
        value of our stock at the date of grant of the stock options as well as the
        input of several subjective assumptions including: the expected life of the
        option, the expected volatility at the time the options are granted, and
        the
        expected forfeiture rate at the time the options were granted. Our current
        estimate of expected stock price volatility is 70%, expected option life
        is five
        years, and expected forfeiture rate is 3%. The estimated fair value of our
        options as calculated by the Black-Scholes option pricing model is amortized,
        using the accelerated method, over the vesting period, which is generally
        two to
        four years.
 
 Changes
        in
        the inputs and assumptions can materially affect the measure of the estimated
        fair value of our employee stock options. Also, the accounting estimate of
        stock-based compensation expense is reasonably likely to change from period
        to
        period as further stock options are granted and adjustments are made for
        stock
        option forfeitures and cancellations.
 
  18
  
 Included
        within the statements of operations are the following charges for stock-based
        compensation:
 
 Three
                  months ended
                September
                  30
              
              Nine
                  months ended
                September
                  302006
              
              2005
              
              2006
              
              2005(in
                  thousands)Research
                  and development expense
              
              
              
              
              $
              991
              
              $
              660
              
              $
              2,116
              
              $
              1,814Marketing,
                  general and administrative expense
              
              
              
              
              
              1,839
              
              
              1,268
              
              
              3,928
              
              
              3,298Total
                  stock-based compensation
              
              
              
              
              $
              2,830
              
              $
              1,928
              
              $
              6,044
              
              $
              5,112
 
 **Clinical
        Trial Accounting**
 
 We
        record
        expenses for clinical research organizations, investigators and other vendors
        based upon the estimated amount of work completed on each trial. These estimates
        may or may not match the actual services performed by the organizations as
        determined by patient enrollment levels and related activities. We monitor
        patient enrollment levels and related activities to the extent possible through
        internal reviews, correspondence and discussions with contract research
        organizations and review of contractual terms. However, if we have incomplete
        or
        inaccurate information, we may underestimate activity levels associated with
        various trials at a given point in time. In this event, we could record
        significant research and development expenses in future periods when the
        actual
        activity level becomes known. All such costs are charged to research and
        development expenses as incurred. To date, we have not experienced material
        changes in these estimates.
 
 **Provision
        for Income Taxes**
 
 We
        have
        established a wholly-owned subsidiary, Aspreva Pharmaceuticals SA, a Swiss
        company, which is the principal party to our agreement with Roche. We have
        obtained a tax ruling from the Swiss tax authorities pursuant to which, certain
        income attributable to the exploitation of the CellCept rights we acquired
        from
        Roche and certain income attributable to the exploitation of rights we may
        acquire in the future from other third parties, will be subject to a reduced
        tax
        rate in Switzerland.
 
 We
        believe that our effective overall global corporate tax rate realized
        through this structure will be less than 15%.
 
 We
        believe
        that our agreement with Roche should not be classified as a partnership for
        U.S. federal income tax purposes. If this belief is incorrect, the income
        of our Swiss subsidiary that is from sources within the United States, if
        any,
        could be taxable in the United States on a net income basis. In such event,
        our
        effective tax rate and our tax liability could increase.
 
 If
        we fail
        to maintain our tax structure, or one or more of the various taxation
        authorities successfully assert that more profits should be allocated to
        their
        respective tax jurisdictions, this may result in a higher overall effective
        tax
        rate. The foregoing analysis only applies to our agreement with Roche. Any
        future collaborations that we enter into may be structured differently and
        may
        result in different tax consequences.
 
 We
        account
        for income taxes under the liability method. Deferred tax assets and liabilities
        are recognized for the differences between the financial statement and income
        tax bases of assets and liabilities, and for operating losses and tax credit
        carry forwards. A valuation allowance is provided for the portion of deferred
        tax assets that is more likely than not to be unrealized. Deferred tax assets
        and liabilities are measured using the enacted tax rates and laws.
  Deferred
        tax
        assets arise from unused tax losses from prior periods, timing differences,
        credits available for research and development and share issue costs. We
        anticipate utilizing all loss carry forwards within 2006, and the balance
        of our
        recognized deferred tax assets of $4.5 million, comprised of Canadian tax
        credits, by 2009.
 
 **Derivative
        Instruments**
 
 We
        utilize
        foreign exchange forward contracts and other derivative instruments to manage
        our exposure to foreign exchange fluctuations.
 
  19
  We
        account
        for our derivative instruments in accordance with SFAS No. 133 *Accounting
        for Derivative Instruments and Hedging Activities* .
        Derivative
        instruments are recorded as assets or liabilities, measured at fair value.
        Derivatives that are not hedges, or are not designated as hedges, are adjusted
        to fair value through income. If the derivative is a hedge, depending upon
        the
        nature of the hedge, changes in the fair value of the derivatives are either
        offset against the fair value of assets, liabilities or firm commitments
        through
        income, or recognized in other comprehensive income (loss) until the hedged
        item
        is recognized in income. The ineffective portion of a derivative’s change in
        fair value is immediately recognized in income.
 
 **Results
        of Operations**
 
 Presented
        below is a comparison of our results of operations for the three and nine-month
        periods ended September 30, 2006 and 2005.
 
 **Royalty
        Revenue**
 
 In
        accordance with the terms of our agreement with Roche commencing April 1,
        2005,
        we became entitled to a royalty based on an equal sharing of incremental
        net
        sales of CellCept in non-transplant indications above a negotiated baseline
        less
        a distribution fee, payable on a quarterly basis. This baseline was originally
        set in July 2003 at CHF 134 million, and is subject to an annual price index
        adjustment. Roche and Aspreva have reset the baseline to CHF 130.5 million
        for
        2006, after taking into account the price index adjustment and, for the time
        being, excluding Japan as a licensed territory under the agreement.
 
 Under
        this
        agreement with Roche, we and Roche calculate and record the royalty payment
        due
        to us at the end of each quarter. We recognize a portion of this royalty
        payment
        as revenue within our quarterly financial results, and record CHF 4.0 million
        of
        the royalty payment due to us as unearned royalty advance on our consolidated
        balance sheets. This amount is subject to a subsequent reconciliation between
        Roche and Aspreva at which time the remaining CHF 4.0 million (approximately
        $3.2 million) of the royalty payment, as well as any additional payments
        to us
        or from us resulting from the reconciliations, will be recorded in the period
        the reconciliation is completed.
 
 The
        following summarizes the royalty revenue we have earned to date under our
        agreement with Roche:
  
 **June
                  30,**
                **2005**
              
              **September
                  30,**
                **2005**
              
              **December
                  31,**
                **2005**
              
              **March
                  31,**
                **2006**
              
              **June
                  30,**
                **2006**
              
              **September
                  30,**
                **2006**(in
                  millions)Initial
                  quarterly payment less collar
              
              $
              14.7
              
              $
              16.8
              
              $
              39.0
              
              $
              46.5
              
              $
              48.7
              
              $
              47.1Reconciliation
                  amount
              
              
              -
              
              
              -
              
              
              6.0
              
              
              16.2
              
              
              3.0
              
              
              0.8Total
                  royalty revenue
              
              $
              14.7
              
              $
              16.8
              
              $
              45.0
              
              $
              62.7
              
              $
              51.7
              
              $
              47.9
 
 Our
        third quarter 2006 revenue represents an increase over the third quarter
        2005
        revenue of $31.1 million and a decrease of $3.8 million over the second quarter
        of 2006. Third quarter 2006 revenue includes the negative impact of foreign
        exchange and reconciliation payments to Roche. The reconciliation amount
        is in
        compliance with the terms of Aspreva’s collaboration agreement with Roche and
        the sales tracking methodology. We continue to expect that the reconciliation
        amounts will be well within the collar as stated in the agreement moving
        forward.
 
 We
        believe continued strong underlying annual growth of CellCept prescriptions
        in
        the range of 20%-25% will be realized in 2006.




Currently
      51% of our revenue is derived from U.S. markets, 19% from major European markets
      (UK, Spain, Italy, France and Germany) and the remainder from rest of world
      markets.




In
      December
      2005, Aspreva and Roche made minor changes to the sales tracking methodology
      with a goal of reducing future volatility in quarterly reconciliation payments
      in the future. We and Roche continue to develop the proprietary sales tracking
      methodology and govern such developments through the Roche-Aspreva Joint
      Committee.




**Research
      and Development Expenses**





From
      inception to September 30, 2006, we have incurred total research and development
      expenses of $75.9 million. Research and development expenses include
      clinical development expenditures for the use of CellCept to treat lupus
      nephritis, myasthenia gravis and pemphigus vulgaris; preliminary studies of
      CellCept efficacy in multiple sclerosis and cardiovascular indications;
      regulatory affairs expenses related to CellCept; and expenses related to our
      business development team which is working to identify potential new drug
      opportunities. We expense research and development costs as they are incurred.





Clinical
      expenses primarily include clinical trial costs, salaries and related costs
      for
      clinical and regulatory personnel, supplies and materials, consultant services
      and facilities. Business development expenses primarily include salaries and
      related costs for business development personnel, and consultant services
      related to our efforts to identify other drug opportunities.








20





A
      majority
      of our research and development expenditures to date have been related to the
      clinical development of CellCept for autoimmune indications. We currently have
      rights to one clinical product, CellCept, and are focused on the use of CellCept
      to treat two specific autoimmune indications: lupus nephritis and pemphigus
      vulgaris. A third development program in myasthenia gravis was discontinued
      in
      October, 2006. In addition, we are funding preliminary studies for the potential
      utility of CellCept in the treatment of diseases such as multiple sclerosis
      and
      cardiovascular disease in autoimmune patients.





We
      anticipate completing our Phase III clinical trials for the use of CellCept
      in
      the induction phase of lupus nephritis in early 2007, and in the treatment
      of pemphigus vulgaris in 2008.  However, we may not be able to complete
      such clinical trials on schedule as our patient enrollment may be slower than
      expected, the results from a clinical trial may not be favorable, or the FDA
      or
      other regulatory agencies may require additional clinical trials. Further,
      data
      from clinical trials is subject to varying interpretation, and may be deemed
      insufficient by the regulatory agencies reviewing applications for marketing
      approvals. As such, clinical development and regulatory programs are subject
      to
      risks and changes that may significantly impact our expense projections and
      development timelines.





The
      following table shows the allocation of research and development
      expenses:




**Annual**
                **total**
              
              **Annual**
                **total**
              
              **Annual**
                **total**
              
              **For
                  the nine**
                **months**
                **ended**
                **September
                  30,**
              
              **Total
                  from**
                **inception
                  to**
                **September
                  30,****2003**
              
              **2004**
              
              **2005**
              
              **2006**
              
              **2006**(in
                  millions)Lupus
                  nephritis
              
              $
              0.1
              
              $
              4.9
              
              $
              11.9
              
              $
              15.5
              
              $
              32.4Myasthenia
                  gravis
              
              
              0.4
              
              
              2.2
              
              
              11.3
              
              
              9.1
              
              
              23.0Pemphigus
                  vulgaris
              
              
              0.4
              
              
              1.3
              
              
              3.3
              
              
              2.5
              
              
              7.5Other
              
              
              -
              
              
              -
              
              
              0.7
              
              
              2.1
              
              
              2.8Clinical
                  development expenditures
              
              
              0.9
              
              
              8.4
              
              
              27.2
              
              
              29.2
              
              
              65.7Business
                  development expenditures
              
              
              0.3
              
              
              1.7
              
              
              3.0
              
              
              5.2
              
              
              10.2Total
              
              $
              1.2
              
              $
              10.1
              
              $
              30.2
              
              $
              34.4
              
              $
              75.9





Research
      and
      development expenses were $12.4 million for the three-month period ended
      September 30, 2006, compared to $8.0 million for the three-month period
      ended September 30, 2005. The increase of $4.4 million was due to a $3.4
      million increase in our clinical development programs and 1.0 million increase
      in our business development operations. Clinical development costs increased
      as
      a result of: a $3.1 million increase in our lupus nephritis program costs
      reflecting the continued increase in activity as recruitment increased from
      less
      than 5% enrollment in the second quarter of 2005 to 100% enrollment as at
      September 30, 2006; a $219,000 increase in our myasthenia gravis program as
      a consequence of achieving full patient enrollment in November 2005; a $225,000
      decrease in our pemphigus vulgaris  program costs due to continuing
      enrollment in March 2006; and $354,000 increase in the funding of other programs
      exploring the potential utility of CellCept in the treatment of other autoimmune
      diseases such as cardiovascular disease in autoimmune patients and multiple
      sclerosis.





Included
      in
      the above we incurred an increase of $1.3 million in salaries and related costs
      as we continue to build out our global business development and clinical teams
      in our Canadian, European and U.S. offices. Stock-based compensation increased
      by $331,000 from the third quarter in 2005.





Research
      and
      development expenses were $34.4 million for the nine-month period ended
      September 30, 2006, compared to $19.2 million for the nine-month period
      ended September 30, 2005. The increase of $15.2 million was due to a $12.2
      million increase in our clinical development programs and $3.0 million increase
      in our business development operations. Clinical development costs increased
      as
      a result of: a $6.7 million increase in our lupus nephritis program costs
      reflecting the significant increase in recruitment activity to achieve full
      enrollment as at September 30, 2006; a $2.4 million increase in our myasthenia
      gravis  program as a consequence of achieving full patient
      enrollment and thus peak myasthenia gravis project spend rate; a $863,000
      increase in our pemphigus vulgaris  program costs due to achieving full
      enrollment and thus peak pemphigus vulgaris  project spend rate; and $2.2
      million increase in the funding of other programs including the potential
      utility for the use of CellCept in the treatment of other autoimmune diseases.








21





Included
      in
      the above we incurred an increase of $3.3 million in salaries and related costs
      as we continue to build out our global business development and clinical teams
      in our Canadian, European and U.S. offices. Stock-based compensation increased
      by $302,000 from the first nine months of 2005 as a result of normal headcount
      driven increases partially offset by the forfeiture in the period of previously
      expensed options.





The
      total
      number of employees engaged in research and development increased from 37 at
      September 30, 2005 to 56 at September 30, 2006, which includes 12 in our
      business development function.





**Marketing,
      General and Administrative Expenses**





Marketing,
      general and administrative expenses consist primarily of costs and salaries
      associated with building our infrastructure, costs of general corporate
      activities, and salaries and related costs for personnel in executive, finance,
      accounting, corporate compliance and operational functions. Prior to regulatory
      approval of CellCept for any autoimmune indications, we limit our marketing
      activity to conducting extensive market research regarding specialty physician
      prescribing practices and product positioning, and undertaking a market
      preparation program. We currently are fielding a team of 12 field
      based medical liaison physicians and other medical professionals in the
      U.S. and major EU markets who interact with potential future presenters and
      medical advisors to help us identify knowledge gaps in the potential use of
      CellCept and to assist us in our clinical development planning.





Marketing,
      general and administrative expenses were $10.0 million for the three-month
      period ended September 30, 2006, compared to $6.7 million for the
      three-month period ended September 30, 2005. The increase of $3.3 million
      was primarily due to additional salary and related expenses as we increased
      the number of employees undertaking marketing, general and administrative
      activities, including the continuing build out of our European and U.S.
      operations. Stock-based compensation increased by $571,000 over the third
      quarter of 2005. Also contributing to the increase are professional and
      consulting fees related to our Sarbanes-Oxley compliance program.





For
      the
      three month period ended September 30, 2006, our marketing costs represented
      41%
      of total marketing, general and administrative expenses. We expect our marketing
      infrastructure expenses to continue to increase as we continue to build out
      our
      U.S. and European operations. Our marketing program costs will increase
      significantly immediately prior to, and after, obtaining regulatory approvals.
      We expect the growth in our general and administrative expenses to keep pace
      with overall company activity as we continue to build our operations to support
      our business, incur the additional costs of being a publicly traded company,
      and
      support our agreement with Roche and additional collaborations.





Marketing,
      general and administrative expenses were $26.8 million for the nine-month
      period ended September 30, 2006, compared to $19.0 million for the
      nine-month period ended September 30, 2005. The increase of $7.8 million
      was primarily due to additional salary and related expenses and
      professional and consulting fees related to our Sarbanes-Oxley compliance
      program.





The
      total
      number of employees engaged in marketing, general and administrative
      activities increased from 56 at September 30, 2005 to 73 at September 30,
      2006.





**Interest
      and Other Income**





Interest
      and
      other income was $3.3 million for the three-month period ended September 30,
      2006, compared to $1.1 million for the three-month period ended September 30,
      2005. The increase of $2.2 million was due to several factors. We had
      significantly higher average investment balances during the three-month period
      ended September 30, 2006 arising from royalty revenue receipts and proceeds
      from
      our initial public offering. In comparison, midway through the three-month
      period ended September 30, 2005, we received our first payment of royalty
      proceeds. Additionally, net foreign exchange gains amounted to $354,000 in
      the
      three-month period ended September 30, 2006 compared to a gain of $219,000
      in
      the three-month period ended September 30, 2005.





Interest
      and
      other income was $7.7 million for the nine-month period ended September 30,
      2006, compared to $2.2 million for the nine-month period ended September 30,
      2005. The increase of $5.5 million was due to several factors. We had
      significantly higher average investment balances during the nine-month period
      ended September 30, 2006 comprised of royalty revenue receipts and proceeds
      from
      our initial public offering. In comparison, during the nine-month period ended
      September 30, 2005, we received our first royalty payment in August 2005 and
      received the proceeds from our initial public offering in March 2005.
      Additionally, net foreign exchange gains amounted to $1.1 million in the
      nine-month period ended September 30, 2006 compared to a loss of $242,000 in
      the
      nine-month period ended September 30, 2005. The net foreign exchange gain
      resulted from the stronger Canadian dollar and British pound sterling (relative
      to the U.S. dollar) when we translated our September 30, 2006 Canadian dollar
      and British pound sterling denominated marketable securities and cash
      balances.








22





**Interest
      and Other Expense**





Interest
      and
      other expense was $1,000 for the three-month period ended September 30, 2006,
      compared to $13,000 for the three-month period ended September 30, 2005.





Interest
      and
      other expense was $24,000 for the nine-month period ended September 30, 2006,
      compared to $36,000 for the nine-month period ended September 30, 2005.





**Income
      Taxes**





The
      provision for income taxes was $3.5 million for the three months ended September
      30, 2006, resulting in an effective global tax rate of 12.0 % for the period.





The
      provision for income taxes was $10.6 million for the nine months ended September
      30, 2006, resulting in an effective global tax rate of 9.8% for the period.





For
      both
      periods, the difference between the effective tax rate and the statutory
      Canadian federal income tax rate of 34.1% relate to differing foreign tax rates,
      changes in our future income tax valuation allowance and utilization of tax
      pools.





**Cash
      Flows**




**Operating
      activities**  **





Net
      cash
      from operating activities was $35.1 million for the three-month period
      ended September 30, 2006, compared to net cash from operating activities of
      $6.3 million for the three-month period ended September 30, 2005. The
      increase of $28.8 million in net cash from operating activities reflects the
      receipt of the $51.5 million royalty receivable from Roche that was outstanding
      at June 30, 2006, compared to the $14.7 million received in the comparable
      period of 2005. This increase was offset somewhat by the increased level of
      expenditures in 2006.





Net
      cash
      from operating activities was $113.3 million for the nine-month period
      ended September 30, 2006, compared to net cash used in operating activities
      of
      $13.4 million for the nine-month period ended September 30, 2005. The
      increase of $126.7 million in net cash from operating activities includes the
      receipt of $157.4 million in royalties receivable from Roche during 2006
      compared to $14.7 million during the comparable period of 2005.





**Investing
      activities**





Net
      cash
      used in investing activities was $42.2 million for the three-month period
      ended September 30, 2006, while net cash used in investing activities was
      $1.6 million for the three-month period ended September 30, 2005. Purchases
      of marketable securities during the three-month period September 30, 2006 were
      $92.4 million, and were partially offset by proceeds from sales of
      short-term investments in marketable securities of $51.5 million. Royalty
      revenue received in the three-month period ended September 30, 2006 was
      sufficient to fund our current operations, which allowed us to put more of
      our
      investments into higher rate, longer term maturities as compared to the
      three-month period ended September 30, 2005.





Net
      cash
      used in investing activities was $102.2 million for the nine-month period
      ended September 30, 2006, while net cash used in investing activities was
      $65.0 million for the nine-month period ended September 30, 2005. Purchases
      of marketable securities during the nine-month period ended September 30, 2006
      were $246.3 million, and were partially offset by proceeds from sales of
      short-term investments in marketable securities of $145.8 million. Royalty
      revenue received in the nine-month period ended September 30, 2006 was
      sufficient to fund our current operations, which allowed us to put more of
      our
      investments into higher rate, longer term maturities as compared to the
      nine-month period ended September 30, 2005.








23





**Financing
      activities**





Net
      cash
      from financing activities was $1.1 million for the three-month period ended
      September 30, 2006, while net cash from financing activities was $213,000 for
      the three-month period ended September 30, 2005, in both cases reflecting cash
      received upon the exercise of warrants and employee stock options offset
      partially by payments on lease obligations.





Net
      cash
      from financing activities was $2.8 million for the nine-month period ended
      September 30, 2006, reflecting cash received upon the exercise of warrants
      and
      employee stock options net of payments on lease obligations. Net cash from
      financing activities was $84.4 million for the nine-month period ended September
      30, 2005, mainly reflecting the net proceeds of our initial public offering
      in
      March 2005.





**Liquidity
      and Capital Resources**





**Sources
      of Liquidity**





As
      of
      September 30, 2006, we had working capital of $249.4 million, which included
      $228.1 million in cash, cash equivalents and marketable securities. In
      aggregate, our cash resources increased by $116.1 million from $112.0 million
      at
      December 31, 2005. We also had $52.7 million in accounts receivable at September
      30, 2006, of which $48.2 million is due from Roche and payable to us within
      45
      days of September 30, 2006.




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





We
      expect
      that our available cash resources, and the revenue from our agreement with
      Roche, will be sufficient to support our current and planned programs and
      operations for at least 12 months. If our resources are insufficient to satisfy
      our liquidity requirements or if we pursue new indications for CellCept or
      enter
      into new indication partnerships, we may need to raise additional external
      funds
      through the sale of additional equity or debt securities. The sale of additional
      equity and debt securities may result in additional dilution to our
      stockholders. Additional financing may not be available in amounts or on terms
      acceptable to us or at all. If we are unable to obtain this additional
      financing, we may be required to reduce the scope of, delay or eliminate some
      or
      all of our planned research, development and commercialization activities,
      which
      could harm our business.





**Contractual
      Obligations and Commitments**




As
      of
      September 30, 2006, there was no material change in our capital lease or
      operating lease obligations or any other long-term liabilities reflected on
      our
      consolidated balance sheet as compared to such obligations and liabilities
      at
      December 31, 2005.





We
      also have
      agreements with clinical sites, and contract research organizations for the
      conduct of our clinical trials. We make payments to these sites and
      organizations based upon the number of patients enrolled and the period of
      follow-up in the trials. At September 30, 2006, we have commitments to these
      groups amounting to $17.2 million over the next three years. In addition we
      have
      contractual commitments for investigator initiated trials totaling $3.0 million
      over the next three years.





**Credit
      Facilities**





We
      have
      various agreements with a Canadian chartered bank providing for revolving demand
      facilities and a lease line in the aggregate amount of $3.6 million. As of
      September 30, 2006, we had $532,000 of outstanding indebtedness under our credit
      facilities. The Canadian chartered bank may cancel or restrict the availability
      of any unutilized portion of our facilities at any time and from time to time
      without notice. Our credit facilities are secured by a security agreement
      constituting a first ranking security interest in all our personal
      property.








24





**Off-Balance
      Sheet Arrangements**





Since
      inception we have not engaged in material off-balance sheet activities,
      including the use of structured finance, special purpose entities or variable
      interest entities.





**Related
      Party Transactions**





For
      a
      description of our related party transactions during the nine-month period
      ended
      September 30, 2006, please see Note 11 of our Notes to Consolidated Financial
      Statements.





**Recent
      Accounting Pronouncements**





In
      July
      2006, the Financial Accounting Standards Board, or FASB issued FASB
      Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
      109,* or FIN 48.
      FIN 48 clarifies the accounting for uncertainty in income taxes recognized
      in an
      enterprise’s financial statements in accordance with FASB Statement No. 109, *Accounting
      for Income Taxes* .
      FIN 48
      prescribes a recognition threshold and measurement attribute for financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. FIN 48 also provides guidance on derecognizing,
      measurement, classification, interest and penalties, accounting in interim
      periods, disclosure and transition. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. The cumulative effect of applying the
      provisions of FIN 48 will be reported as an adjustment to the opening balance
      of
      retained earnings or deficit at January 1, 2007. We are currently evaluating
      the
      effect this standard will have on our consolidated financial
      statements.





25





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





**Market
      Risks**





We
      are
      exposed to market risk, including changes to interest rates and foreign currency
      exchange rates.




We
      maintain
      risk management control systems to monitor the risks associated with foreign
      currency exchange rates. To reduce the volatility relating to these exposures,
      we enter into various derivative hedging transactions pursuant to our investment
      and risk management policies and procedures. We do not use derivatives for
      speculative or trading purposes, nor do we hold or issue leveraged derivative
      financial instruments. Though we intend for our risk management control systems
      to be comprehensive, there are inherent risks that may only be partially offset
      by our hedging programs should there be unfavorable movements in foreign
      currency exchange rates.




**Interest
      Rate Risk**




Our
      material
      interest-bearing assets consisted of cash, cash equivalents and marketable
      securities. The balance of our interest-bearing portfolio, including cash,
      cash
      equivalents and investments, was $228.2 million, or 78% of total current assets
      at September 30, 2006. Interest income related to this portfolio was $6.2
      million for the nine-month period ended September 30, 2006. Our interest income
      is sensitive to changes in the general level of interest rates, primarily U.S.
      interest rates. In this regard, changes in U.S. interest rates affect the
      interest-bearing portfolio.




**Foreign
      Currency Exchange and Foreign Economic Conditions Risk**





Financial
      risk is the risk to our results of operations that arises from fluctuations
      in
      interest rates and foreign exchange rates and the degree of volatility of these
      rates. Foreign exchange risk arises as our investments, which finance
      operations, are substantially denominated in U.S. dollars, our royalty payments
      are received in Swiss francs and our expenses are denominated in several foreign
      currencies, including U.S. dollars, Canadian dollars, pounds sterling and Euros.
      Interest rate risk arises due to our investments being in fixed interest highly
      liquid investments.





If
      exchange
      rates change by 10%, we do not believe that it would have a material impact
      on
      our results of operations or cash flows to date. However, future exchange rate
      fluctuations may affect our future operating results.





To
      mitigate
      the risk of foreign exchange fluctuations against the U.S. dollar, we have
      entered into a number of foreign exchange forward contracts and noon average
      rate contracts.





**Counterparties
      Credit Risks**




We
      could be
      exposed to losses related to the financial instruments described in Note 8
      to
      the Notes to Consolidated Financial Statements should one of our counterparties
      default. We attempt to mitigate this risk through credit rating monitoring
      procedures.








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 September 30, 2006. Based upon their evaluation
      and subject to the foregoing, our Chief Executive Officer and Chief Financial
      Officer concluded that our disclosure controls and procedures were reasonably
      effective in ensuring that information required to be disclosed by us in this
      Quarterly Report on Form 10-Q was recorded, processed, summarized and reported
      within the time periods specified in the Securities and Exchange Commission’s
      rules and Form 10-Q.





**Changes
      in internal controls**





There
      were
      no changes in our internal controls over financial reporting during the
      three-month period ended September 30, 2006 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
      1A. RISK FACTORS**





**Risks
      Related to Our Business**





**We
      anticipate that substantially all of our revenue for the foreseeable future
      will
      be from royalties based on sales of CellCept and we may not be able to sustain
      our profitability.**




Our
      operating results may fluctuate from period to period for a number of reasons.
      In budgeting our operating expenses, some of which are fixed in the short term,
      we assume that revenues will continue to grow. Even a relatively small revenue
      shortfall or a small increase in operating expenses may cause our results to
      be
      below expectations. A revenue shortfall or increase in operating expenses could
      arise from any number of factors including:




•
            lower
                than expected revenues on commercial sales of CellCept;•
            higher
                than expected operating expenses as we further develop CellCept for
                autoimmune indications, seek additional collaborations and operate
                as a
                public company;•
            higher
                than expected levels of marketing expenses and the expenses of potentially
                launching CellCept and any future products for our targeted indications;
                and•
            fluctuations
                in currency exchange rates.





We
      anticipate that substantially all of our revenue for the foreseeable future
      will
      be from royalties based on sales of CellCept pursuant to our agreement with
      Roche. Our revenue is dependent on Roche and our mutual ability to track product
      sales arising from the use of CellCept by transplant patients. The methodology
      for accurately tracking sales of CellCept that has been agreed to may be a
      source of dispute with Roche, which may negatively affect our revenue and our
      relationship.





**If
      we and Roche are unable to successfully manage our collaboration, the
      development and commercialization of CelICept for autoimmune indications may
      be
      delayed or prevented.**




Our
      collaboration with Roche involves a complex sharing of control over decisions,
      responsibilities, costs and benefits. Development and promotional activities
      related to CellCept in the autoimmune indications are approved by a joint
      committee, consisting of an equal number of our representatives and Roche's
      representatives. In the event that the joint committee is unable to reach
      consensus on an issue, the dispute will be referred to senior management of
      both
      parties. Unless and until senior management reaches agreement on such dispute,
      neither party will have the right to implement any changes to the status quo
      that would result from resolution of such matter. Ultimate decision making
      authority is vested in us as to some matters and in Roche as to other matters.
      Although we are responsible for compiling and preparing all applications for
      regulatory approval of CellCept in autoimmune indications, Roche has the
      ultimate decision making authority to submit these applications to the
      appropriate regulatory authorities. If Roche does not approve the application
      we
      prepared, or requires that we revise or modify the application, this could
      result in delays in receipt of regulatory approvals. In addition, Roche may
      develop and commercialize, either alone or with others, products that are
      similar to, or competitive with, CellCept. Roche may also change the focus
      of
      its development and commercialization efforts and dedicate fewer resources
      to
      CellCept or our collaboration.




**If
      we do not satisfy our obligations under the Roche agreement or if the agreement
      is terminated we may be forced to limit or cease our operations.**




Our
      agreement with Roche requires us to use commercially reasonable efforts to
      conduct three clinical trial programs for CellCept in autoimmune indications
      pursuant to an agreed upon development plan. Roche may allege that we are in
      breach of a material obligation under our agreement and seek to litigate the
      allegation. If Roche is successful in such litigation, Roche may either be
      awarded damages based upon such breach or the agreement might be terminated.
      After 2011, either party may terminate the agreement if there is a lack of
      non-transplant sales over the baseline for a prolonged period. In addition,
      if
      CellCept is withdrawn from or recalled in any given country, either party may
      terminate the agreement with respect to that country. If the agreement is
      terminated in its entirety or in a given country we may be forced to limit
      or
      cease our operations.







28





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.





However,
      we
      may in the future outsource the manufacturing of supply for our clinical trials
      to third parties other than Roche, subject to approval from Roche and the
      FDA.





**The
      expiration of Roche's patents covering CellCept may reduce our revenue as
      competitors may seek to sell generic versions of CellCept.**




Roche
      owns
      the patents covering the composition of matter of CellCept. The United States
      patent covering CellCept expires in May 2009. Counterparts of this patent expire
      in most European countries in late 2010 or early 2011, but in some instances
      expire as early as 2007. Roche patents covering the process for manufacture
      of
      CellCept expire in the United States in July 2012, and in most other countries
      in July 2013. We and Roche expect that following expiration of composition
      of
      matter 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
      we obtain
      an orphan drug designation and FDA approval of CellCept for an indication,
      we
      would be entitled to seven years of marketing exclusivity for that orphan drug
      indication. In June 2006, we were granted orphan drug designation for CellCepts’
use in pemphigus vulgaris. In March 2006, Roche and Aspreva agreed not to pursue
      orphan drug designation for CellCept's use in lupus nephritis. However, if
      a
      competitor obtained approval of a generic form of CellCept for another
      indication, such as transplant use, physicians would not be prevented from
      prescribing the generic drug for the orphan indication during the period of
      marketing exclusivity. Such prescribing practices could adversely affect the
      sales of CellCept for the orphan indication.







29





**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 have developed a comprehensive compliance program
      that seeks to establish internal controls to facilitate adherence to the rules
      and program requirements to which we are and will become subject. If, however,
      we are determined to have violated these and other laws, we could incur
      significant penalties and be subject to criminal prosecution. Roche might deem
      any such determination by a governmental authority to constitute a material
      breach of our agreement. In addition, management's attention could be diverted
      and our reputation and our ability to enter into future collaborations could
      be
      damaged.




**If
      CellCept and any future products do not gain meaningful market acceptance we
      are
      not likely to generate significant revenues or sustain
      profitability.**




The
      degree
      of market acceptance for any product that we commercialize will depend on a
      number of factors, including:




•
            acceptance
                by physicians and patients of each product as safe and
                effective;•
            potential
                advantages over existing or alternative therapies, including
                cost;•
            actual
                or perceived safety of similar classes of products;•
            relative
                convenience and ease of administration;•
            reimbursement
                policies of government and third-party payors;•
            effectiveness
                of our sales, marketing and medical education efforts;
                and•
            scope
                of the product label approved by the FDA and other regulatory
                agencies.





Hospitals
      or
      physicians may not choose to administer CellCept or any future product to the
      entire intended market, if at all. If CellCept and any future products do not
      achieve meaningful acceptance in their intended markets or if the intended
      market is smaller than anticipated, we are not likely to generate significant
      revenues or maintain profitability.




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




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







30








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





**If
      we are not successful in establishing additional collaborations we will not
      be
      able to grow our business.**




Our
      long-term success depends upon our ability to identify drugs and drug candidates
      with significant potential and to acquire the rights for those indications
      from
      multiple collaborators, thus creating multiple sources of revenue. We face
      intense competition from other companies for collaborative arrangements with
      pharmaceutical and biopharmaceutical companies, and there are no barriers
      prohibiting other companies from adopting our business model. Pharmaceutical
      and
      biopharmaceutical companies may also decide to pursue new indications for their
      products themselves, rather than enter into collaborative arrangements to
      develop new indications. In addition, accurate sales tracking may be difficult
      or impossible under future collaborations which may preclude a collaboration
      or
      lead to disputes once a collaboration has been established. We currently only
      have two collaborations. If we are unable to enter into additional
      collaborations, we will continue to be dependent upon Roche for substantially
      all our revenues, and we will be limited in our ability to grow our business.
      In
      addition, the fact that we are collaborating with Roche, or other potential
      collaborators, may be viewed negatively by other potential collaborators, making
      them less likely to enter into arrangements with us.




**The
      terms and conditions of any future collaboration agreements may be less
      favorable than our agreement with Roche.**




Our
      strategy
      is to seek collaborations with pharmaceutical and biopharmaceutical companies
      to
      develop and commercialize new indications. Any new collaborations that we may
      secure will likely involve drugs or drug candidates, or collaborators, with
      characteristics different from CellCept or Roche. These characteristics may
      include:




•
            costs
                to manufacture, distribute and sell;•
            patent
                terms;•
            expenditures
                by our collaborators on research and development;•
            size
                and difficulty of development programs for potential product
                indications;•
            competitive
                threats; and•
            other
                factors relevant to the development and commercialization of such
                products.





We
      expect
      that any new collaborations will be highly negotiated, and the above
      characteristics all may play a role in the financial terms of such
      collaborations, possibly resulting in any or all of the following:




•
            our
                payment of upfront or milestone fees for product
                rights;•
            greater
                clinical trial expenses;•
            longer
                timelines to approval;•
            lower
                revenue sharing percentages;•
            shorter
                agreement periods; or•
            less
                than global product rights.








31





In
      addition,
      any new collaboration agreement may provide that we only begin sharing revenue
      with our collaborator after some long period of time after entering into such
      collaboration, or after some specific action or approval over which we may
      have
      limited control.




**If
      we fail to establish sufficient marketing and sales promotion capabilities,
      or
      enter into successful arrangements with third parties to conduct these
      activities, we may be unable to generate sufficient revenue to continue our
      operations.**




Roche
      is
      solely responsible for distributing and selling CellCept. If we obtain approval
      of CellCept for autoimmune indications, or any future products, we intend to
      market and promote them through our own sales promotion force in the United
      States and certain other countries. We currently have no sales promotion
      capabilities, limited marketing capabilities, limited infrastructure to support
      such activities, and have limited experience in the commercialization of
      pharmaceutical products. We may not be able to attract and retain qualified
      marketing or sales promotion people or be able to establish an effective sales
      promotion force.




In
      countries
      where we do not have a sales promotion force, we may establish relationships
      with third parties. However, we may not be able to enter into such arrangements
      on favorable terms or at all and to the extent that we enter into such
      arrangements, our revenue will depend on their efforts, which may not be
      successful.





**If
      product liability lawsuits are successfully brought against us, we will incur
      significant liabilities and may be required to limit the commercialization
      of
      our product candidates.**




Our
      use of
      CellCept and other products in clinical trials, and our future promotion of
      any
      products, may expose us to product liability claims and associated adverse
      publicity. We have a global product clinical trial insurance policy, with
      aggregate coverage of $10.0 million, for countries not requiring a local
      insurance policy (including USA and Canada). In addition, we have policies
      in
      varying amounts for all the other countries in which we are conducting clinical
      trials, and which do not fall within the scope of our global policy. Our
      insurance coverage may not protect us against any or all of the product
      liability claims which could be brought against us in the future. Prior to
      the
      commercialization of CellCept in autoimmune indications, we expect to obtain
      product liability insurance for potential claims associated with our promotion
      of CellCept. However, we may not be able to obtain or maintain adequate
      insurance coverage at a commercially reasonable cost or in sufficient amounts
      or
      scope to protect us against potential losses. Roche is obligated to indemnify
      us
      for any product liability claims, except if the claims arise due to false or
      misleading promotional activity on our part. In the event a product liability
      claim is brought against us, we may be required to pay legal and other expenses
      to defend the claim and, if such a claim is successful, damage awards not
      covered by our insurance. We may also be obligated to indemnify our
      collaborators. Defending any product liability claim or claims could require
      us
      to expend significant financial and managerial resources.





**If
      our competitors are able to develop and market products that are preferred
      over
      CellCept or other product candidates that we may develop, we may not be able
      to
      generate sufficient revenues to continue our operations.**





We
      may not
      be able to contend successfully with competitors. The biotechnology and
      pharmaceutical industries are highly competitive and subject to significant
      and
      rapid technological change as researchers learn more about diseases and develop
      new technologies and treatments. Our current and potential competitors generally
      include major multinational pharmaceutical companies, biopharmaceutical firms,
      specialty pharmaceutical companies, universities and other research
      institutions.




In
      the
      transplant market, CellCept currently competes with Novartis' product, Myfortic.
      If CellCept is approved for any autoimmune indications, Novartis may choose
      to
      also pursue clinical trials and regulatory approval for the same indications.
      If
      approved, CellCept will also compete with immunosuppressants, such as steroids
      and cytotoxic agents, including cyclophosphamide, cyclosporine and azathioprine.
      A cytotoxic agent is an anti-cancer substance that acts by killing or preventing
      the division of cells. In addition, we are aware of several companies that
      have
      products in development or on the market that may be competitive with CellCept
      in lupus nephritis 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:








32








•
            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
      nine-month period ended September 30, 2006, we increased our number of employees
      by 23 and, as of September 30, 2006, we had 129 employees. In order to continue
      the development and potential commercialization of CellCept for autoimmune
      indications and enter into new collaborations we will need to expand our
      clinical development, regulatory, marketing and sales promotion capabilities.
      We
      currently have operations in Canada, the United States, the United Kingdom,
      and
      Switzerland. Our ability to manage our global operations and expected growth
      will require us to continue to improve our operational, financial and management
      controls, reporting systems and procedures. We may not be able to make such
      improvements in an efficient or timely manner and may discover deficiencies
      in
      existing systems and controls. Our ability to develop and commercialize products
      for new indications and compete effectively, and our future financial
      performance will depend, in part, on our ability to manage any future growth
      effectively.




**We
      depend on our executive officers, and if we are not able to retain them or
      recruit additional qualified personnel, we may be unable to successfully develop
      or commercialize CellCept.**




Our
      success
      depends upon the continued contributions of our executive officers and
      scientific and technical personnel. We are highly dependent on Richard M.
      Glickman, our Chief Executive Officer, Noel F. Hall, our President, Bruce
      Cousins, our Chief Financial Officer and Executive Vice President, Charles
      F.
      Goulburn, our Executive Vice President, Global Pharmaceutical Operations, and
      Dr. Richard Jones, our Senior Vice President, Clinical and Regulatory Affairs.
      Due to the specialized knowledge that each of our executive
      officers possess with respect to CellCept and our operations, the loss of
      service of any of our executive officers could delay or prevent the
      successful completion of the clinical trials necessary for the commercialization
      of CellCept for lupus nephritis or pemphigus vulgaris and could harm our
      relationship with Roche. We carry key man life insurance coverage of $1.3
      million for each of Richard M. Glickman and Noel F. Hall. We do not carry key
      man life insurance for any of our other executive officers.




We
      have
      employment agreements with each of our executive officers; however, each may
      terminate their employment upon notice and without cause or good reason. We
      currently are not aware that any executive officer is planning to leave or
      retire.




Our
      success
      also depends in part on our ability to attract and retain highly qualified
      scientific, commercial and administrative personnel. In order to pursue our
      product development and commercialization strategies, we will need to attract
      and hire additional personnel with experience in a number of disciplines,
      including clinical testing, government regulation, sales and marketing, drug
      reimbursement and information systems. There is intense competition for
      personnel in the fields in which we operate. We have not experienced difficulty
      to date in attracting and retaining the personnel we require. If, however,
      we
      are unable to continue to attract new employees and retain existing employees,
      we may be unable to continue our development and commercialization
      activities.








33





**We
      may incur losses associated with currency fluctuations and may not be able
      to
      effectively hedge our exposure.**




Our
      operations are in many instances conducted in currencies other than the U.S.
      dollar and fluctuations in the value of currencies relative to the U.S. dollar
      could cause us to incur currency exchange losses. All amounts paid by Roche
      to
      us will be in Swiss Francs. In addition, we currently conduct some operations
      and incur a portion of our expenses in Canadian dollars, pounds sterling and
      other foreign currencies. Although we have implemented currency hedging
      techniques to mitigate the impact of currency fluctuations on our financial
      results, these techniques do not eliminate the effects of currency fluctuations
      with respect to anticipated revenues or cash flows, and, as they are short
      term
      in nature, do not protect us from prolonged periods of currency
      fluctuations.




CellCept
      net
      sales are denominated in multiple currencies and will be converted to Swiss
      Francs **** by
      Roche for
      the purpose of calculating amounts to be paid to us. To the extent the Swiss
      Franc increases in value relative to these other currencies, the total aggregate
      value of CellCept's net sales will decrease and the amount, if any, that we
      are
      entitled to may be reduced.




**Risks
      Related to Regulatory Matters**




**We
      will not be able to commercialize our product candidates if our clinical trials
      do not demonstrate safety and efficacy in humans.**




We
      are
      currently not authorized to market CellCept for autoimmune indications in any
      jurisdiction, and we may never be authorized to market CellCept for any
      autoimmune indication. The development and commercialization of CellCept for
      autoimmune indications, and any future products, are subject to extensive and
      rigorous regulation by the U.S. federal government, principally the FDA, other
      federal, state and local agencies, and governmental authorities elsewhere.
      Prior
      to marketing CellCept for any autoimmune indication, we must conduct, at our
      own
      expense, extensive clinical trials to demonstrate with substantial evidence
      to
      the satisfaction of the FDA and other regulatory authorities that CellCept
      is
      safe and effective for the indication. We have no prior experience as a company
      in conducting clinical trials. Preclinical studies and clinical trials are
      expensive, can take many years and have uncertain outcomes. In addition, the
      regulatory approval procedures vary among countries and additional testing
      may
      be required in some jurisdictions. It may take several years to complete the
      requisite clinical trials, and a product candidate may fail any stage of
      testing. Difficulties and risks associated with clinical trials may result
      in
      our failure to receive regulatory approval to market CellCept for autoimmune
      indications or our inability to commercialize any future products for new
      indications. The FDA, other regulatory authorities, our collaborators, or we
      may
      suspend or terminate clinical trials at any time. The commencement and
      completion of our clinical trials could be delayed or prevented by several
      factors, including:




•
            delays
                in obtaining regulatory approvals to commence or continue a
                study;•
            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.










34





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; and,•
            impact
                our staffing levels.




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.
      In October 2006, we announced preliminary results of our phase III trial of
      CellCept for the treatment of myasthenia gravis. The preliminary results of
      our
      analysis indicates that CellCept failed to meet both the primary and secondary
      endpoints. Given the results of the study we have discontinued our development
      efforts in this area. We are aware that Roche conducted three phase III clinical
      trials for CellCept in the treatment of rheumatoid arthritis which did not
      demonstrate efficacy. Even if we believe the data collected from clinical trials
      of drugs are promising, such data may not be sufficient to support approval
      by
      the FDA or any other regulatory authority. The FDA or other regulatory
      authorities could also interpret our data differently, which could delay, limit
      or prevent regulatory approval.




We
      expect to
      rely in part on the results of CellCept clinical trials that were previously
      performed by or on behalf of Roche and on clinical trials that were previously
      performed or are being performed by third-party physicians. These trial results
      may not be predictive of the results of the clinical trials that we plan to
      conduct for the purposes of our targeted indications. In addition, the results
      of prior clinical trials may not be acceptable to the FDA or other regulatory
      authorities because the data may be incomplete, outdated or not otherwise
      acceptable for inclusion in our submissions for regulatory approval for CellCept
      in autoimmune indications.




**Even
      if CellCept or any future product candidate receives regulatory approval, we
      and
      our collaborators may still face development and regulatory difficulties that
      may delay or impair future sales.**




If
      we or our
      collaborators obtain regulatory approval for CellCept for any of our targeted
      indications, or any other product, we and our collaborators will continue to
      be
      subject to extensive regulation by the FDA, other federal authorities, certain
      state agencies and regulatory authorities elsewhere. These regulations will
      impact many aspects of our operations and the drug manufacturer's operations
      including manufacture, record keeping, quality control, adverse event reporting,
      storage, labelling, advertising, promotion, sale and distribution, export and
      personnel. The FDA and state agencies may conduct periodic inspections to assess
      compliance with these requirements. We, together with our collaborators, will
      be
      required to conduct post-marketing surveillance of the product. We also may
      be
      required to conduct post-marketing studies. Our or our collaborators' failure
      to
      comply with applicable FDA and other regulatory requirements, or the later
      discovery of previously unknown problems, may result in restrictions
      including:




•
            delays
                in commercialization;•
            refusal
                by the FDA or other similar regulatory agencies to review pending
                applications or supplements to approved applications;•
            product
                recalls or seizures;•
            warning
                letters;•
            suspension
                of manufacturing;•
            withdrawals
                of previously approved marketing applications;•
            fines
                and other civil penalties;•
            injunctions,
                suspensions or revocations of marketing licenses;•
            refusals
                to permit products to be imported to or exported from the United
                States;
                and•
            criminal
                prosecutions.





Post-approval
      marketing laws and regulations in other jurisdictions generally provide for
      the
      same types of sanctions that may be imposed in the United States.




**We
      may experience delays in patient enrollment, which would delay regulatory
      approval of CellCept in autoimmune indications and possibly reduce our
      revenues.**




Our
      ability
      to obtain, and the timing of, regulatory approval for CellCept in any autoimmune
      indication depends in part on our ability to successfully complete clinical
      trials of CellCept in that autoimmune indication. The ability to complete
      clinical trials depends, in part, on the rate of patient enrollment and patient
      retention, which is a function of many factors, some of which are beyond our
      control. In particular, because some of our clinical trials will be blinded
      so
      that some patients receive CellCept and others receive another drug or a
      placebo, and because CellCept is marketed for transplant indications and
      prescribed by physicians, patients may not want to participate in a clinical
      trial in which they could receive a placebo or drug other than CellCept.








35





**If
      third-party clinical research organizations do not perform in an acceptable
      and
      timely manner, our clinical trials could be delayed or
      unsuccessful.**




We
      have
      limited experience as a company in conducting and managing clinical
      trials, and rely on third parties, including contract research organizations,
      outside consultants and principal investigators to assist us in managing,
      monitoring and conducting our clinical trials. We rely on these parties to
      assist in the recruitment of sites for participation in clinical trials, to
      maintain positive relations with the clinical sites and to ensure that these
      sites conduct the trials in compliance with the protocol and our instructions.
      If these third parties fail to perform satisfactorily or do not adequately
      fulfill their obligations to us, our clinical trials may be delayed or
      unsuccessful. The FDA or other regulatory agencies may inspect some of our
      clinical sites or our third-party vendors' sites, to determine if our clinical
      trials are being conducted according to current good clinical practices. If
      the
      FDA or another applicable regulatory agency determines that our third-party
      vendors are not in compliance with applicable regulations, we may be required
      to
      delay, repeat or terminate such clinical trials. Any delay, repetition or
      termination of our clinical trials could prevent or delay the commercialization
      of CellCept for autoimmune indications and any other future product
      candidate.




**If
      government and third-party payors fail to provide coverage and adequate
      reimbursement rates for our product candidates, our revenues and potential
      for
      profitability will be reduced.**




In
      the
      United States and elsewhere, our product revenues will depend principally upon
      the reimbursement rates established by third-party payors, including government
      health administration authorities, managed-care providers, public health
      insurers, private health insurers and other organizations. These third-party
      payors are increasingly challenging the price, and examining the cost
      effectiveness, of medical products and services. In addition, significant
      uncertainty exists as to the reimbursement status, if any, of newly approved
      drugs, pharmaceutical products or product indications. We may need to conduct
      post-marketing clinical trials in order to demonstrate the cost-effectiveness
      of
      products. Such studies may require us to commit a significant amount of
      management time and financial and other resources. CellCept is included in
      various drug compendia as a commercially approved drug in connection with the
      prevention of organ rejection and certain third party payors provide
      reimbursement for this use of CellCept because of such inclusion. However,
      CellCept or other future products may not be reimbursed or covered by any of
      these third-party payors for our targeted indications.




In
      some
      countries other than the United States, particularly the countries of the
      European Union and Canada, the pricing of prescription pharmaceuticals is
      subject to governmental control. In these countries, obtaining pricing approval
      from governmental authorities can take six to twelve months or longer after
      the
      receipt of regulatory marketing approval of a product for an indication. To
      obtain reimbursement or pricing approval in some countries, we may be required
      to conduct a clinical trial that compares the cost-effectiveness of a product
      that is the subject of a collaboration with us to other available therapies.
      If
      reimbursement of such products is unavailable or limited in scope or amount
      or
      if pricing is set at unsatisfactory levels our revenues could be
      reduced.




Domestic
      and
      foreign governments continue to propose and pass legislation designed to reduce
      the cost of healthcare, including drugs. In the United States, there have been,
      and we expect that there will continue to be, federal and state proposals to
      implement similar governmental control. In addition, increasing emphasis on
      managed care in the United States will continue to put pressure on the pricing
      of pharmaceutical products. For example, the Medicare Prescription Drug
      Improvement and Modernization Act of 2003 reforms the way Medicare will cover
      and reimburse for pharmaceutical products. The legislation expands Medicare
      coverage for drug purchases by the elderly and has resulted in a new
      reimbursement methodology based on average sales prices for certain drugs.
      In
      addition, the new legislation provides authority for limiting the number of
      outpatient drugs that will be covered in any therapeutic class. As a result
      of
      the new legislation and the expansion of federal coverage of drug products,
      we
      expect that there will be additional pressure to contain and reduce costs.
      The
      Medicaid program has recently been modified and state healthcare laws and
      regulations will soon be amended to conform to the federal changes. The new
      laws
      and regulations will reduce Medicaid reimbursement. Cost control initiatives
      could decrease the established reimbursement rates that we receive for any
      products in the future, which would limit our revenues and profitability.
      Legislation and regulations affecting the pricing of pharmaceutical products,
      including CellCept, may change at any time, which could further limit or
      eliminate reimbursement rates for CellCept or other products.








36





**Risks
      Related to Intellectual Property**




**We
      may incur significant expenses or be prevented from developing or
      commercializing products as a result of an intellectual property infringement
      claim.**




Our
      commercial success depends in part on our ability to operate without infringing
      the patents and other proprietary rights of third parties. Infringement
      proceedings in the pharmaceutical and biotechnology industries are lengthy,
      costly and time-consuming and their outcome is uncertain. If we become involved
      in any patent litigation, interference or other administrative proceedings,
      we
      will incur substantial expense and the efforts of our technical and management
      personnel will be significantly diverted. As a result of such litigation or
      proceedings we could lose our proprietary position and be restricted or
      prevented from developing, manufacturing and selling the affected products,
      incur significant damage awards, including punitive damages, or be required
      to
      seek third-party licenses that may not be available on commercially acceptable
      terms, if at all.





Although
      Roche has an extensive patent estate covering the composition of matter, methods
      of treatment and manufacture of CellCept, it is possible that a third party
      may
      be issued a patent covering some aspect of CellCept or its use. If this happens,
      we and Roche may be restricted from developing and commercializing CellCept
      for
      autoimmune indications. If a third party brings an infringement claim against
      us
      based solely upon the development or promotion of CellCept in autoimmune
      indications, Roche has the right under our agreement to deduct 50% of its cost
      in defending such action, plus any amounts paid in settlement or in a judgment
      against Roche or Aspreva, from the calculation of CeIlCept's net sales prior
      to
      determining our share of such sales. Roche is obligated to indemnify us if
      the
      infringing activity relates to the development and commercialization of CellCept
      in both transplant and non-transplant indications.




**If
      we or our collaborators are unable to adequately protect or enforce our
      intellectual property, our competitive position could be
      impaired.**




Our
      commercial success depends in part on our ability to:





•
            obtain
                patents or rights to patents and maintain their
                validity;•
            protect
                our trade secrets; and•
            effectively
                enforce our proprietary rights or patents against
                infringers.





Patent
      applications may not result in patents being issued. Until a patent is issued,
      the claims covered by the patent may be narrowed or removed entirely and
      therefore we may not obtain adequate patent protection. As a result, we may
      face
      unanticipated competition, or conclude that, without patent rights, the risk
      of
      bringing products to the market is too great. Even if we or our collaborators
      are issued patents covering our products we cannot predict with certainty
      whether we or our collaborators will be able to ultimately enforce our patents
      or proprietary rights. Any patents that we own or license may be challenged,
      invalidated or circumvented and may not provide us with protection against
      competitors. We or our collaborators may be forced to engage in costly and
      time-consuming litigation in order to protect our intellectual property rights.
      In addition, our collaborators may choose not to enforce or maintain their
      intellectual property rights, and we may be forced to incur substantial
      additional costs to maintain or enforce such rights. Patent rights may not
      provide us with adequate proprietary protection or competitive advantages
      against competitors with similar products or technologies. The laws of certain
      foreign countries do not protect our intellectual property rights to the same
      extent as do the laws of the United States.




In
      addition
      to patents, we rely on trade secrets and proprietary know-how. We seek
      protection, in part, through confidentiality and non-disclosure agreements.
      These agreements may not provide meaningful protection of our technology or
      adequate remedies in the event of unauthorized use or disclosure of confidential
      and proprietary information and, in any event, others may develop independently,
      or obtain access to, the same or similar information. Our failure or inability
      to protect our trade secrets and proprietary know-how could impair our
      competitive position.




**Our
      stock price is volatile and purchasers of our common shares could incur
      substantial losses.**




Our
      stock
      price is volatile. Since our initial public offering on March 4, 2005 and
      through October 31, 2006, our common shares have traded on the NASDAQ Global
      Select Market between $11.00 and $34.89 per share. The stock market in general
      and the market for biopharmaceutical and biotechnology companies in particular
      have experienced extreme volatility that has often been unrelated to the
      operating performance of particular companies. The price for our common shares
      may be influenced by many factors, including:





37











•
            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.




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




If
      our
      existing shareholders sell a large number of our common shares or the public
      market perceives that existing shareholders might sell our common shares, the
      market price of our common shares could decline significantly.




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




As
      of
      September 30, 2006, our directors and executive officers, together with their
      affiliates, beneficially owned approximately 21% of our outstanding common
      shares, including shares subject to outstanding stock options and warrants.
      These shareholders, acting together, can exercise significant influence over
      all
      matters requiring shareholder approval, including the election of directors
      and
      any amendment of our notice of articles or articles. This concentration of
      ownership could also have the effect of delaying or preventing a change in
      our
      control.




**Our
      articles, our shareholder rights plan and certain Canadian laws could delay
      or
      deter a change of control.**




Our
      authorized preferred capital stock is available for issuance from time to time
      at the discretion of our board of directors, without shareholder approval.
      Our
      articles grant our board of directors the authority, subject to the corporate
      law of British Columbia, to determine or alter the special rights and
      restrictions granted to or imposed on any wholly unissued series of preferred
      shares, and such rights may be superior to those of our common
      shares.




Also,
      pursuant to our shareholder rights plan, anyone who seeks to acquire 20% or
      more
      of our outstanding common shares is required to make a bid complying with
      specific provisions of the plan.




Limitations
      on the ability to acquire and hold our common shares may be imposed by the
      Competition Act (Canada). This legislation permits the Commissioner of
      Competition of Canada to review any acquisition of a significant interest in
      us.
      This legislation grants the Commissioner jurisdiction to challenge such an
      acquisition before the Canadian Competition Tribunal if the Commissioner
      believes that it would, or would be likely to, result in a substantial lessening
      or prevention of competition in any market in Canada. The Investment Canada
      Act
      (Canada) subjects an acquisition of control of a company by a non-Canadian
      to
      government review if the value of our assets as calculated pursuant to the
      legislation exceeds a threshold amount. A reviewable acquisition may not proceed
      unless the relevant minister is satisfied that the investment is likely to
      be a
      net benefit to Canada.




Any
      of the
      foregoing could prevent or delay a change of control and may deprive or limit
      strategic opportunities for our shareholders to sell their shares.







38





**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 shareholders.**




As
      a foreign
      private issuer we are not required to comply with all the periodic disclosure
      requirements of the Securities Exchange Act of 1934 and therefore there may
      be
      less publicly available information about Aspreva than if we were a U.S.
      domestic issuer. In addition, our officers, directors, and principal
      shareholders are exempt from the reporting and "short-swing" profit recovery
      provisions of Section 16 of the Securities Exchange Act of 1934 and the rules
      thereunder. However, under Canadian provincial securities laws, our officers,
      directors and principal shareholders are required to file reports in electronic
      format through the System for Electronic Disclosure by Insiders, or SEDI,
      disclosing changes in beneficial ownership of, or control or direction over,
      our
      common shares and other securities. Our shareholders can access such reports
      at
      www.sedi.ca.





**You
      may be unable to enforce actions against us, or certain of our directors and
      officers, under U.S. federal securities laws.**




We
      are a
      corporation organized under the laws of British Columbia, Canada. A majority
      of
      our directors and officers reside principally in Canada. Because all or a
      substantial portion of our assets and the assets of these persons are located
      outside the U.S., it may not be possible for you to effect service of process
      within the United States upon us or those persons. Furthermore it may not be
      possible for you to enforce against us or them in the United States, judgments
      obtained in U.S. courts based upon the civil liability provisions of the U.S.
      federal securities laws or other laws of the U.S. There is doubt as to the
      enforceability, in original actions in Canadian courts, of liabilities based
      upon the U.S. federal securities laws and as to the enforceability in Canadian
      courts of judgments of U.S. courts obtained in actions based upon the civil
      liability provisions of the U.S. federal securities laws. Therefore, it may
      not
      be possible to enforce those actions against us or certain of our directors
      and
      officers.







39





**ITEM 2.
      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS.**





*Recent
      Sales of Unregistered Securities*





From
      July 1,
      2006 through September 30, 2006, an aggregate of 120,409 common shares were
      issued to 15 accredited investors at a price of $4.27 ($Cdn 4.76) per share
      upon
      the exercise of warrants. The offer and sale of such common shares were made
      outside of the United States pursuant to Regulation S of the Securities
      Act.





**ITEM 3.
      DEFAULTS UPON SENIOR SECURITIES**





None.




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





None.





**ITEM 5.
      OTHER INFORMATION**





On
      October
      19, 2006, Mr. Charles F. Goulburn was appointed as Executive Vice President,
      Global Pharmaceutical Operations. In September 2004, we entered into an
      employment agreement with Mr. Goulburn effective October 18, 2004, which was
      amended on October 23, 2006. We have also entered into a change of control
      agreement with Mr. Goulburn, effective October 24, 2006.





On
      October 24, 2006, we amended our employment contract with Dr. Richard Jones,
      Senior Vice President, Clinical & Regulatory Affairs, originally entered
      into on March 6, 2006, which are filed herewith as Exhibit 10.28. Under the
      terms of his amended employment agreement, Dr. Jones is now entitled to an
      annual salary of Cdn. $310,000, and a possible bonus of up to 35% of his
      annual salary.







40





**ITEM 6.
      EXHIBITS.**





10.28
            
            Employment
                agreement between Aspreva Pharmaceuticals Corporation and Dr. Richard
                Jones effective March 6, 2006, as amended on October 24,
                2006.10.29(1)
            
            Change
                of control agreement, between Aspreva Pharmaceuticals Corporation
                and Dr.
                Richard Jones, effective March 6, 2006.10.30(2)
            
            Employment
                agreement between Aspreva Pharmaceuticals Corporation and Mr. Charles
                F.
                Goulburn, effective October 18, 2004, as amended on October 23,
                2006.10.31(2)
            
            Change
                of control agreement between Aspreva Pharmaceuticals Corporation
                and Mr.
                Charles F. Goulburn, effective October 24, 2006.31.1
            
            Certification
                of the Chief Executive Officer, as required by Rule 13a-14(a) of
                the
                Securities and Exchange Act of 1934, as amended.31.2
            
            Certification
                of the Chief Financial Officer, as required by Rule 13a-14(a) of
                the
                Securities and Exchange Act of 1934, as amended.32.1*
            
            Certification
                of the Chief Executive Officer, as required by Rule 13a-14(b) of
                the
                Securities and Exchange Act of 1934, as amended and Section 1350
                of
                Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section
                1350).32.2*
            
            Certification
                of the Chief Financial Officer, as required by Rule 13a-14(b) of
                the
                Securities and Exchange Act of 1934, as amended  and Section
                1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C.
                Section 1350).(1)
            Filed
                as the like numbered exhibit to our Current Report
                on Form8-K, dated July 11, 2006, and filed with the U.S.
                Securities and Exchange Commission on July 17, 2006 and incorporated
                herein by reference.(2)
            Filed
              as the like numbered exhibit to our Current Report on Form 8-K, dated
              October 19, 2006, and filed with the U.S. Securities and Exchange
              Commission on October 25, 2006 and incorporated herein by reference.*
                The certifications attached as Exhibits 32.1 and 32.2 accompany this
                quarterly report on Form 10-Q, are not deemed filed with the Security
                and
                Exchange Commission and are not to be incorporated by reference into
                any
                filing of Aspreva Pharmaceuticals Corporation under the Securities
                Act of
                1933, as amended, or the Securities Exchange Act of 1934, as amended,
                whether made before or after the date of this Form 10-Q, irrespective
                of
                any general incorporation language contained in such filing.











41








**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 CORPORATIONNovember
                9, 2006
            /s/
              Bruce G. CousinsBruce
                G. CousinsChief
                Financial Officer and Executive Vice President(Principal
                Financial and Accounting Officer)











42





**EXHIBIT
      INDEX**





10.28
            
            Employment
                agreement between Aspreva Pharmaceuticals Corporation and Dr. Richard
                Jones effective March 6, 2006, as amended on October 24,
                2006.10.29(1)
            
            Change
                of control agreement, between Aspreva Pharmaceuticals Corporation
                and Dr.
                Richard Jones, effective March 6, 2006.10.30(2)
            
            Employment
                agreement between Aspreva Pharmaceuticals Corporation and Mr. Charles
                F.
                Goulburn, effective October 18, 2004, as amended on October 23,
                2006.10.31(2)
            
            Change
                of control agreement between Aspreva Pharmaceuticals Corporation
                and Mr.
                Charles F. Goulburn, effective October 24, 2006.31.1
            
            Certification
                of the Chief Executive Officer, as required by Rule 13a-14(a) of
                the
                Securities and Exchange Act of 1934, as amended.31.2
            
            Certification
                of the Chief Financial Officer, as required by Rule 13a-14(a) of
                the
                Securities and Exchange Act of 1934, as amended.32.1*
            
            Certification
                of the Chief Executive Officer, as required by Rule 13a-14(b) of
                the
                Securities and Exchange Act of 1934, as amended and Section 1350
                of
                Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section
                1350).32.2*
            
            Certification
                of the Chief Financial Officer, as required by Rule 13a-14(b) of
                the
                Securities and Exchange Act of 1934, as amended  and Section
                1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C.
                Section 1350).(1)
            Filed
                as the like numbered exhibit to our Current Report
                on Form8-K, dated July 11, 2006, and filed with the U.S.
                Securities and Exchange Commission on July 17, 2006 and incorporated
                herein by reference.(2)
            Filed
              as the like numbered exhibit to our Current Report on Form 8-K, dated
              October 19, 2006, and filed with the U.S. Securities and Exchange
              Commission on October 25, 2006 and incorporated herein by reference.





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


43