**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 **Washington,
D.C. 20549**
 
 **FORM
10-Q**
 
 **QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**
 **SECURITIES
EXCHANGE ACT OF 1934**
 
 **For
the Quarterly Period ended March 31, 2005**
 
 **Commission
File Number 000-51169**
 
 **ASPREVA
PHARMACEUTICALS CORPORATION**
 (Exact
name of registrant as specified in its charter)
 
 **British
      Columbia, Canada**
      (State
      or other jurisdiction of
      incorporation
      or organization)
    **98-0435540**
      (I.R.S.
      Employer
      Identification
      No.)
 
 **1203
- 4464 Markham Street,**
 **Victoria,
British Columbia,**
 **Canada
V8Z 7X8**
 (Address
of principal executive office)
 
 **(250)
744-2488**
 (Registrant’s
telephone number, including area code)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
 
 **Yes**o
    **No**x
 
 Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Securities Exchange Act of 1934):
 
 **Yes**o
    **No**x
 
 The
number of shares of the registrant’s Common Stock, no par value, outstanding as
of May 12, 2005 was 34,028,378 shares.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   1
  **ASPREVA
PHARMACEUTICALS CORPORATION**
 **FORM
10-Q**
 **For
the Quarterly Period Ended March 31, 2005**
 
 **TABLE
OF CONTENTS**
 
 **Page****PART
      I - FINANCIAL INFORMATION**Item 1.
      Financial Statements (unaudited)Consolidated
      Balance Sheets - March 31, 2005 and December 31, 2004
    
    
    3Consolidated
      Statements of Operations -
      Three
      months ended March 31, 2005 and 2004 and the cumulative period from
      December 20, 2001 (Inception) to March 31, 2005
    
    
    4Consolidated
      Statements of Cash Flows -
      Three
      months ended March 31, 2005 and 2004 and the cumulative period from
      December 20, 2001 (Inception) to March 31, 2005
    
    
    5Notes
      to Consolidated Financial Statements
    
    
    6Item 2.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations
    
    
    10Item 3.
      Quantitative And Qualitative Disclosure About Market Risk
    
    
    17Item 4.
      Controls And Procedures
    
    
    28**PART
      II - OTHER INFORMATION**Item
      1. Legal Proceedings
    
    
    29Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
    
    
    29Item
      3. Defaults Upon Senior Securities
    
    
    29Item
      4. Submission of Matters to a Vote of Security Holders
    
    
    29Item
      5. Other Information
    
    
    30Item
      6. Exhibits
    
    
    31SIGNATURE
    
    
    32
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  2
  **PART
I - FINANCIAL INFORMATION**
 **Item 1.
FINANCIAL STATEMENTS**
 **ASPREVA
PHARMACEUTICALS CORPORATION**
 **(a
development stage enterprise)**
 **CONSOLIDATED
BALANCE SHEETS**
 **(in
thousands of U.S. dollars)**
 **(unaudited)**
 
 **March
      31,**
    
    **December
      31,****2005**
    
    **2004****ASSETS**Current
      assetsCash
    
    $
    2,266
    
    $
    3,507Marketable
      securities
    
    
    108,124
    
    
    32,330Amounts
      receivable
    
    
    529
    
    
    277Investment
      tax credits receivable
    
    
    -
    
    
    261Prepaid
      expenses
    
    
    2,380
    
    
    2,803Total
      current assets
    
    
    113,299
    
    
    39,178Property
      and equipment, net of accumulated depreciation of $384 (2004 -
      $273)
    
    
    1,802
    
    
    1,763Deferred
      share issue costs
    
    
    -
    
    
    1,297Rental
      deposits
    
    
    83
    
    
    83**TOTAL
      ASSETS**
    
    $
    115,184
    
    $
    42,321**LIABILITIES
      AND SHAREHOLDERS’ EQUITY**Current
      liabilitiesBank
      indebtedness
    
    $
    -
    
    $
    231Accounts
      payable
    
    
    1,528
    
    
    2,848Accrued
      liabilities
    
    
    4,768
    
    
    5,402Capital
      lease obligations, current portion
    
    
    462
    
    
    341Deferred
      lease inducement, current portion
    
    
    56
    
    
    56Total
      current liabilities
    
    
    6,814
    
    
    8,878Capital
      lease obligations
    
    
    718
    
    
    568Deferred
      lease inducement
    
    
    221
    
    
    224Total
      liabilities
    
    
    7,753
    
    
    9,670Commitments
      (note 5)Convertible
      redeemable preferred sharesAuthorized:
      unlimitedIssued
      and outstanding (Series A)
    
    
    -
    
    
    49,341March 31,
      2005 — 0December 31,
      2004 — 12,677,192Shareholders’
      equity (deficiency) (note 4)Common
      sharesAuthorized:
      unlimitedIssued
      and outstanding
    
    
    136,868
    
    
    5,232March 31,
      2005 — 34,028,378December 31,
      2004 — 13,071,186Additional
      paid-in capital
    
    
    4,898
    
    
    3,311Deficit
      accumulated during the development stage
    
    
    (34,183
    )
    
    (25,198
    )Accumulated
      other comprehensive loss
    
    
    (152
    )
    
    (35
    )Total
      shareholders’ equity (deficiency)
    
    
    107,431
    
    
    (16,690
    )**TOTAL****LIABILITIES
      AND SHAREHOLDERS’ EQUITY**
    
    $
    115,184
    
    $
    42,321
 
 See
accompanying notes to consolidated financial statements.
  3
  **ASPREVA
PHARMACEUTICALS CORPORATION**
 **(a
development stage enterprise)**
 **CONSOLIDATED
STATEMENTS OF OPERATIONS**
 **(in
thousands of U.S. dollars, except share and per share
amounts)**
 **(unaudited)**
 **Period
      from****Three
      Months Ended**
    
    **December
      20, 2001****March
      31,**
    
    **(Inception)
      to****2005**
    
    **2004**
    
    **March
      31, 2005****Expenses**Research
      and development
    
    $
    4,045
    
    $
    782
    
    $
    15,489Marketing,
      general and administrative
    
    
    5,351
    
    
    435
    
    
    18,702Total
      expenses
    
    
    9,396
    
    
    1,217
    
    
    34,191**Other
      (income) expense**Interest
      and other income
    
    
    (451
    )
    
    (11
    )
    
    (990
    )Interest
      and other expense
    
    
    40
    
    
    810
    
    
    982Total
      other (income) expense
    
    
    (411
    )
    
    799
    
    
    (8
    )**Loss
      for the period**
    
    $
    (8,985
    )
    $
    (2,016
    )
    $
    (34,183
    )Basic
      and diluted loss per common share (note 3)
    
    $
    (0.46
    )
    $
    (0.17
    )Weighted
      average number of common shares (note 3)
    
    
    19,358,344
    
    
    12,208,456Pro
      forma basic and diluted loss per common share (note
3)
    
    $
    (0.32
    )
    $
    (0.13
    )Pro
      forma weighted average number of common shares (note 3)
    
    
    28,232,378
    
    
    15,830,511
 
 
 See
accompanying notes to consolidated financial statements.
 
 
  4
  **ASPREVA
PHARMACEUTICALS CORPORATION**
 **(a
development stage enterprise)**
 **CONSOLIDATED
STATEMENTS OF CASH FLOWS**
 **(in
thousands of U.S. dollars)**
 **(unaudited)**
 
 **Period
      from****Three
      Months Ended**
    
    **December
      20, 2001****March
      31,**
    
    **(Inception)
      to****2005**
    
    **2004**
    
    **March
      31, 2005**Cash
      Flows used in Operating ActivitiesLoss
      for the period
    
    $
    (8,985
    )
    $
    (2,016
    )
    $
    (34,183
    )Add
      non-cash items:Depreciation
      and amortization
    
    
    111
    
    
    5
    
    
    386Stock-based
      compensation
    
    
    1,587
    
    
    1,161
    
    
    4,898Amortization
      of lease inducement
    
    
    (3
    )
    
    -
    
    
    (9
    )Net
      change in non-cash working capital items related to
      operations:Amounts
      receivable
    
    
    (252
    )
    
    (30
    )
    
    (587
    )Investment
      tax credits receivable
    
    
    261
    
    
    (137
    )
    
    (13
    )Prepaid
      expenses
    
    
    423
    
    
    (98
    )
    
    (2,379
    )Rental
      deposits
    
    
    -
    
    
    (30
    )
    
    (83
    )Accounts
      payable
    
    
    (1,320
    )
    
    112
    
    
    1,549Accrued
      liabilities
    
    
    (1,459
    )
    
    314
    
    
    3,661Accrued
      interest on convertible promissory notes
    
    
    -
    
    
    49
    
    
    117Net
      cash flows used in operating activities
    
    
    (9,637
    )
    
    (670
    )
    
    (26,643
    )Cash
      Flows from (used in) Investing ActivitiesPurchases
      of marketable securities
    
    
    (411,911
    )
    
    -
    
    
    (590,588
    )Redemptions
      of marketable securities
    
    
    336,041
    
    
    1,361
    
    
    482,581Purchase
      of property and equipment
    
    
    (8
    )
    
    (16
    )
    
    (1,082
    )Net
      cash flows from (used in) investing activities
    
    
    (75,878
    )
    
    1,345
    
    
    (109,089
    )Cash
      Flows from Financing ActivitiesIssuance
      of preferred shares
    
    
    -
    
    
    53,000
    
    
    53,000Issuance
      of common shares
    
    
    91,731
    
    
    -
    
    
    92,822Share
      issue costs
    
    
    (7,314
    )
    
    (3,743
    )
    
    (11,979
    )Payments
      on capital lease obligations
    
    
    (102
    )
    
    -
    
    
    (234
    )Bank
      indebtedness
    
    
    -
    
    
    -
    
    
    231Share
      subscriptions received
    
    
    -
    
    
    -
    
    
    21Advances
      from shareholders
    
    
    -
    
    
    -
    
    
    58Proceeds
      from convertible promissory notes
    
    
    -
    
    
    -
    
    
    3,810Net
      cash flows from financing activities
    
    
    84,315
    
    
    49,257
    
    
    137,729Effect
      of exchange rate changes on cash
    
    
    (41
    )
    
    35
    
    
    269Net
      increase (decrease) in cash
    
    
    (1,241
    )
    
    49,967
    
    
    1,997Cash,
      beginning of the period
    
    
    3,507
    
    
    151
    
    
    -Cash,
      end of the period
    
    $
    2,266
    
    $
    50,118
    
    $
    2,266
  
 See
accompanying notes to consolidated financial statements.
 
  5
  **ASPREVA
PHARMACEUTICALS CORPORATION**
 **(a
development stage enterprise)**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **1.  Summary of
Significant Accounting Policies**
 
 **Overview
and Basis of Presentation**
 Aspreva
Pharmaceuticals Corporation was incorporated on December 20, 2001 under the
Canada Business Corporation Act and continued under the Business Corporations
Act (British Columbia) on November 19, 2004. Our principal business is to
identify, develop and commercialize new indications for approved drugs and drug
candidates for underserved patient populations. Since revenue recognition has
not commenced during the period covered by these financial statements, we are
considered a development stage enterprise as at March 31,
2005.
 
 We
have prepared these consolidated financial statements in accordance with U.S. generally accepted accounting principles for interim
financial statements and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, the financial statements do not include all
information and footnotes required by U.S. generally accepted accounting
principles for complete financial statements. The financial statements should be
read in conjunction with our audited consolidated financial statements and notes
thereto for the year ended December 31, 2004 included in our registration
statement on Form F-1 filed with the United States Securities and Exchange
Commission on January 24, 2005, as amended.
 
 All
amounts referenced herein are in U.S. dollars unless otherwise noted.
 
 All
share, warrant, option and per unit data included in these financial statements
have been adjusted to retroactively reflect the 1.284-for-1 stock-split effected
on February 8, 2005.
 
 **Principles
of Consolidation**
 These
consolidated financial statements include our financial statements and those of
our wholly-owned subsidiaries: Aspreva Pharmaceuticals SA (a Swiss company),
Aspreva Ltd. (a UK company), and Aspreva Pharmaceuticals, Inc. (a Delaware
company). We have eliminated all material intercompany balances and
transactions.
 
 **Use
of Estimates**
 The
preparation of the consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Significant estimates are used for, but not limited to,
assessment of the net realizable value of long-lived assets, calculation of
stock-based compensation expense, assessment of clinical trial expense accruals,
and taxes. Actual results could differ from those estimates.
 
 In
the opinion of management, these consolidated financial statements include all
normal and recurring adjustments considered necessary to present fairly our
financial position, results of operations and cash flows.
 
 Interim
results are not necessarily indicative of the operating results for the full
year or for any other subsequent interim period.
 
 **2.  Stock-Based
Compensation**
 We
have elected to follow the fair value method of accounting for stock-based
awards as prescribed by Statement of Financial Accounting Standards
No. 123, or SFAS 123, *Accounting
for Stock-Based Compensation* ,
as amended by SFAS 148. We measure stock-based awards using the
Black-Scholes option pricing model, and amortize the fair value of stock options
granted to the consolidated statement of operations over the vesting period of
the options.
 
 We
estimate the fair value of options granted as at the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
 **Three
      Months Ended****March
      31,****2005**
    
    **2004**Expected
      dividend yield
    
    
    0
    %
    
    0
    %Expected
      stock price volatility
    
    
    150
    %
    
    150
    %Risk-free
      interest rate
    
    
    4.0
    %
    
    4.0
    %Expected
      option life in years
    
    
    8.0
    
    
    8.0
 
 Included
within the statements of operations are the following charges for stock-based
compensation ( $000s) :
 
 **Three
      Months Ended March 31,****2005**
    
    **2004**Research
      and development expense
    
    $
    587
    
    $
    88Marketing,
      general and administrative expense
    
    
    1,000
    
    
    264Interest
      and other expense
    
    
    -
    
    
    809Total
      stock-based
      compensation
    
    $
    1,587
    
    $
    1,161
  6
  **ASPREVA
PHARMACEUTICALS CORPORATION**
 **(a
development stage enterprise)**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 Stock
option transactions for the period and the number of stock options outstanding
are summarized below:
 
 **Number
      of**
    
    **Weighted
      Average****Common
      Shares**
    
    **Exercise
      Price***Exercisable
      in Canadian dollars*Balance,
      December 31, 2004
    
    
    1,884,912
    
    $
    4.61Options
      granted
    
    
    41,602
    
    
    6.39Options
      cancelled
    
    
    -
    
    
    -Options
      exercised
    
    
    -
    
    
    -Balance,
      March 31, 2005
    
    
    1,926,514
    
    $
    4.65
 The
stock options expire at various dates from April 2013 to January
2015 .
As of March 31, 2005, a total of 1,590,219 common shares are available for
future grants. The stock options typically have a ten year contractual life and
vest ratably over a period of two to four years from the date of grant.
 
 **Stock
Purchase Plan Trust**
 In
2002, we established the 2002 Aspreva Incentive Stock Purchase Plan Trust, or
the Trust, for the purpose of distributing common shares to officers, directors,
employees and consultants. The fair value of the common shares distributed to
the Trust participants is being expensed over the vesting period with a
corresponding credit to additional paid-in capital. Stock-based compensation
related to the Trust shares amounted to $51,000 and $66,000 for the three month
periods ended March 31, 2005 and 2004 respectively. As of March 31, 2005, a
total of 1,284,000 common shares had been distributed and no shares remained
available for distribution under the trust.
 
 **Warrants**
 As
at March 31, 2005, we had warrants outstanding entitling the holders to
acquire 230,360 common shares at an exercise price of C$4.76 per share. These
warrants will terminate, if unexercised, on September 15, 2006.
 
 **3.  Loss per
Share**
 We
calculate loss per share in accordance with Statement of Financial
Accounting Standards No. 128, *Earnings
per Share* ,
which requires the presentation of basic loss per share and diluted
loss per share.
 
 We
have computed basic loss per common share using the weighted average number of
common shares outstanding during the period. Diluted loss per common share is
equivalent to basic loss per common share for all periods presented, as the
outstanding options, warrants and convertible redeemable preferred shares are
anti-dilutive. Omitted
from the calculation of loss per share due to their anti-dilutive nature are the
following potentially issuable shares:
 **As
      of March 31,****2005**
    
    **2004**Stock
      options
    
    
    1,926,514
    
    
    897,516Warrants
    
    
    230,360
    
    
    230,360Convertible
      redeemable preferred shares
    
    
    -
    
    
    12,677,192
 
 On
March 4, 2005, in conjunction with our initial public offering, all of the
outstanding Series A preferred shares were automatically converted, on a
one-for-one basis, into 12,677,192 common shares. The preferred shares converted
were cancelled and are not reissuable.
 
 The
denominators for pro forma basic and diluted loss per common share for the three
months ended March 31, 2005 and 2004 were calculated as follows:
 **Three
      Months Ended March 31,****2005**
    
    **2004**Actual
      weighted average number of common shares
    
    
    19,358,344
    
    
    12,208,456Pro
      forma adjustment to reflect weighted average effect of assumed conversion
      of 12,677,192 convertible redeemable preferred shares
    
    
    8,874,034
    
    
    3,622,05528,232,378
    
    
    15,830,511
   7
 
 **ASPREVA
PHARMACEUTICALS CORPORATION**
 **(a
development stage enterprise)**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **4.  Shareholders’
Equity**
 On
March 4, 2005, we completed our initial public offering of 8,280,000 common
shares at a price of $11.00 per share and began trading on the Nasdaq National
Market under the trading symbol ASPV and the Toronto Stock Exchange under the
trading symbol ASV. Net cash proceeds of the initial public offering were
approximately $82.3 million, after deducting underwriter discounts, commissions
and other offering expenses. In conjunction with the initial public offering,
all outstanding preferred shares were converted into common shares on a
one-for-one basis. The following table summarizes the activity in our
shareholders’ equity for the three months ended March 31, 2005, including the
impact of our initial public offering: ****
 
 Deficit
      Accumulated
    
    TotalNumber
      of
    
    Share
    
    Additional
      Paid-
    
    Accumulated
      Other
    
    During
      the
    
    Shareholders’Shares
    
    Capital
    
    In
      Capital
    
    Comprehensive
      Loss
    
    Development
      Stage
    
    Equity(in
      thousands of U.S. dollars, except number of shares)**Balance,
      December 31, 2004**
    
    
    13,071,186
    
    $
    5,232
    
    $
    3,311
    
    $
    (35
    )
    $
    (25,198
    )
    $
    (16,690
    )Shares
      issued on:Conversion
      of preferred shares
    
    
    12,677,192
    
    
    49,341
    
    
    -
    
    
    -
    
    
    -
    
    
    49,341Net
      proceeds from initial public offering
    
    
    8,280,000
    
    
    82,295
    
    
    -
    
    
    -
    
    
    -
    
    
    82,295Stock-based
      compensation expense
    
    
    -
    
    
    -
    
    
    1,587
    
    
    -
    
    
    -
    
    
    1,587Unrealized
      loss on marketable securities
    
    
    -
    
    
    -
    
    
    -
    
    
    (117
    )
    
    -
    
    
    (117
    )Loss
      for the period
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (8,985
    )
    
    (8,985
    )**Balance,
      March 31, 2005**
    
    
    34,028,378
    
    $
    136,868
    
    $
    4,898
    
    $
    (152
    )
    $
    (34,183
    )
    $
    107,431
 
 Comprehensive
loss for the first quarter of 2005 and 2004 was $9.1 million and $2.0 million,
respectively.
 
 **Stockholder
Rights Plan**
 Effective
March 3, 2005, we implemented a stockholder rights plan, or the Plan, pursuant
to which the holder of a right is entitled to acquire, under certain conditions,
our common shares at a 50% discount to the market upon a person or group of
persons acquiring 20% or more of our common shares. The rights are not
exercisable in the event of a Permitted Bid as defined in the Plan. The rights
will terminate at the close of business on February 4, 2015 unless earlier
redeemed by Aspreva, provided that all outstanding rights will terminate on the
date of our 2010 annual general meeting of shareholders unless the Plan is
reconfirmed by our shareholders at that meeting.
 
 **5.  Contractual
Obligations and Commitments**
 We
entered into a new facility operating lease for premises in New Jersey, USA that
will be used to accommodate our U.S. regional office. The lease term is 5 years
and our financial obligation is $202,000 per year.
 
 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.
 
 **6.  Supplemental
Cash Flow**
 Supplemental
cash flow information is as follows ($000s):
 
 **Three
      Months Ended****March
      31,****2005**
    
    **2004**Equipment
      acquired under capital leases
    
    $
    140
    
    $
    -Interest
      paid
    
    
    12
    
    
    1
 
 **7.  Collaborative
Agreement**
 In
July 2003, we entered into a 14 year collaboration agreement with
Hoffmann-La Roche Inc. and F. Hoffmann-La Roche Ltd., or Roche,
for the worldwide rights, excluding Japan, to develop, market and promote
CellCept for all autoimmune indications, or the Roche Agreement.
 
 In
order to govern the terms and obligations of the Roche Agreement, Aspreva and
Roche formed a Joint Committee, comprised of three individuals from each
company. Under the Roche Agreement, we are obligated to use commercially
reasonable efforts to conduct three clinical trial programs and to prepare the
regulatory filings related thereto for the use of CellCept in the treatment of
autoimmune indications, pursuant to a development plan approved by the Joint
Committee. Upon regulatory approval of the use of CellCept in any such
autoimmune indication, we are obligated to use commercially reasonable efforts
to promote and detail to physicians CellCept for use in such approved
indication, pursuant to a commercialization plan approved by the Joint
Committee. Roche is responsible for filing all regulatory submissions for
approval, supplying amounts of CellCept as are needed for our clinical supplies,
at cost, and for manufacturing, distributing and selling CellCept for all uses.
  8
  **ASPREVA
PHARMACEUTICALS CORPORATION**
 **(a
development stage enterprise)**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 Pursuant
to our  collaboration
agreement with Roche, we expect to recognize revenue beginning April 1,
2005, based upon a royalty earned from Roche. This royalty is based upon an
equal sharing of incremental net sales of CellCept in non-transplant indications
above a negotiated baseline of 134 million Swiss Francs, or CHF, per
year and is payable on a quarterly basis.
 
 The
Roche Agreement may be unilaterally terminated by us for convenience prior to
its expiration in 2017. Either party may terminate early the Agreement after
2011 if there is a lack of non-transplant sales over the baseline for a
prolonged period. In addition, if CellCept is withdrawn from or recalled in any
given country, either party may terminate the Roche Agreement with respect to
that country.
 
 **8.  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 first quarter of 2005,
we incurred legal fees payable to Farris, Vaughan, Wills & Murphy LLP, of
$560,000 arising mainly from services related to our initial public offering,
$238,000 of which is recorded in our accrued liabilities as at March 31,
2005.
 
 **9.  Recent
Accounting Pronouncement**
 In
December 2004, the Financial Accounting Standards Board, or FASB, issued
SFAS 123(R), *Share
Based Payment* ,
which is a revision of SFAS 123, *Accounting
for Stock-Based Compensation* ,
as amended by SFAS 148. We are required to adopt SFAS 123(R) on
January 1, 2006. SFAS 123(R) requires all share-based payments to
employees, including grants of stock options, to be recognized in the statement
of operations based on their fair values using either the modified-prospective
or modified-retrospective method as defined in the standard. We have not yet
completed our evaluation, however, as we account for stock-based awards at fair
value in accordance with SFAS 123, it is not expected that the adoption of
SFAS 123(R) will have a material effect on our financial statements.
  
   
   
  
 
 
 
 
 
 
 
  9
  **Item
2.**
 **MANAGEMENT’S
DISCUSSION AND ANALYSIS**  **OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS**
 
 You
should read the following discussion and analysis by our management of our
financial condition and results of operations in conjunction with our audited
consolidated financial statements and related notes thereto for the year ended
December 31, 2004 included in our registration statement on Form F-1 filed with the United States Securities and
Exchange Commission on January 24, 2005, as amended. Our
consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles and are presented in U.S. dollars.
  **Forward-Looking
Statements**
  The
information in this discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 which are subject to the “safe harbor”
created by those sections.
 All
statements, other than statements of historical facts, included in this
quarterly report on Form 10-Q regarding our strategy, future operations, future
financial position, future revenues, projected costs, prospects and plans and
objectives of management are forward-looking statements as
the term is defined in the Private Securities Litigation Reform Act of
1995.
 
 The
words “anticipates”, “believes”, “estimates”, “expects”, “intends”, “may”,
“plans”, “projects”, “will”, “would” and similar expressions are intended to
identify forward-looking statements, although not all forward-looking statements
contain these identifying words. We may not actually achieve the plans,
intentions or expectations disclosed in our forward-looking statements and you
should not place undue reliance on our forward-looking statements. Actual
results or events could differ materially from the plans, intentions and
expectations disclosed in the forward-looking statements that we make. These
forward-looking statements involve risks and uncertainties that could cause our
actual results to differ materially from those in the forward-looking
statements, including, without limitation, the risks outlined under “Business
Risks” in this quarterly report on Form 10-Q. Our
forward-looking statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint ventures or investments we may make.
We do not assume any obligation to update any forward-looking statements.
 
 **Overview**
 
 We
are an emerging pharmaceutical company focused on identifying, developing and
commercializing new indications for approved drugs and drug candidates for
underserved patient populations. Our strategy, which we call “indication
partnering”, is to collaborate with pharmaceutical and biopharmaceutical
companies to pursue new indication approvals which lie beyond their strategic
focus. We currently have one collaboration and our goal is to secure a second
collaboration arrangement by the end of 2005. In these collaborations, we intend
to assume the clinical, regulatory and commercial activities for these non-core
indications of our collaborators’ existing drugs. We seek collaborations with
those companies that have approved drugs and drug candidates that we believe
have compelling scientific, clinical and commercial potential.
 
 In
July 2003, we entered into our first collaboration with Hoffmann-La Roche
Inc. and F. Hoffmann-La Roche Ltd, collectively Roche, for exclusive
world-wide rights, excluding Japan, to develop and, upon regulatory approval,
market CellCept for all autoimmune indications. Roche will manufacture,
distribute and record sales of CellCept. CellCept is a drug currently approved
in the United States, European Union, Canada and other countries for the
prevention of organ transplant rejection.
 
 Based
on our analysis of existing clinical trial and scientific data, we believe that
CellCept also has the potential to be effective in treating a variety of
autoimmune diseases. Our largest clinical program is in lupus nephritis. The
Lupus Foundation of America estimates that between 500,000 and 1.5 million
Americans have lupus. This wide range demonstrates the challenge that exists
when trying to determine the true prevalence of these underserved diseases such
as lupus. Our analysis of various sources of data including patient
diagnoses through International Classification of Disease codes, estimates
600,000 diagnosed lupus patients currently within the U.S. healthcare system.
Clinicians estimate that one third to one half of lupus patients have lupus
nephritis. We believe that 200,000 of these U.S. based lupus nephritis patients
could potentially benefit from CellCept therapy.
 
 Our
clinical development for CellCept focuses on three specific autoimmune
indications: lupus
nephritis ,
myasthenia gravis and pemphigus vulgaris. If we and Roche obtain regulatory
approval for the use of CellCept in any of these indications, we will also be
responsible for the promotion of CellCept for the approved autoimmune
indications. Phase III clinical trials for myasthenia gravis are active and
ongoing with completion expected in 2006. Phase III clinical trials for
pemphigus vulgaris are active and ongoing outside of the U.S. with completion
expected in 2007. We have concluded discussions with the U.S. Food and Drug
Administration, or FDA, on the development plan and have amended our
protocol. We intend to file the Investigational New Drug, or IND, during the
second quarter of 2005.
  
 10
 
 In
February 2005, we filed an IND, and a request for a special protocol
assessment, or SPA, with the FDA for the use of CellCept to treat lupus
nephritis. The FDA provided comments on the protocol and as there were no safety
concerns raised, our IND status became active in March 2005. We did not dose our
first patient in order to respond to the FDA comments on the SPA. We have
submitted an amended protocol which we believe fully addresses the comments
raised and we have indicated to the FDA our intention to initiate the trial. We
are distributing the amended protocols to the clinical sites and as soon as they
receive appropriate local Ethics
or Institutional Review Board approval, the first patient will be dosed. We expect this to occur during the
second quarter of 2005. We are currently awaiting a response from the FDA
regarding the SPA. We expect the six-month induction phase of the study to be
completed in late 2006.
 
 ***Revenues***
 Commencing
April 1, 2005 and during the term of our collaboration agreement, Roche is
obligated to pay us, on a quarterly basis, an amount equal to half of any
incremental net sales of CellCept attributed to the use of CellCept for
non-transplant indications above a negotiated baseline of 134 million Swiss
Francs, or CHF, per year, less a distribution fee.
 
 ***Research
and Development Expenses***
 Research
and development expenses consist primarily of clinical and regulatory expenses,
as well as business development expenses related to the identification of new
drug opportunities and related due diligence. Clinical expenses include clinical
trial costs, salaries and other related costs for personnel in clinical and
regulatory functions, supplies and materials, consultant services and
facilities. We expense research and development costs as they are incurred.
 
 A
majority of our expenditures to date have been related to the clinical
development of CellCept for autoimmune indications. From inception to
March 31, 2005, we have incurred total research and development expenses of
$15.5 million. Of this amount, approximately 80% was spent on clinical
activities required to advance the development of CellCept. The remaining
amounts were expended primarily on employee and consulting costs, supplies,
materials and infrastructure related to our efforts to identify other drug
opportunities.
 
 We
currently have rights to one clinical product, CellCept, and are focused on the
use of CellCept to treat three specific autoimmune indications: lupus nephritis,
myasthenia gravis and pemphigus vulgaris. Under the terms of our agreement with
Roche, we are obligated to use our best efforts until July 18, 2006, to raise
adequate capital to finance our first three clinical trial programs in
autoimmune indications. We believe that our available cash and marketable
securities as of March 31, 2005 will fulfill this obligation. The following
table shows the historical allocation of research and development expenses for
our current CellCept projects ($000s):
 
 **Annual
      total**
    
    **Annual
      total**
    
    **First
      quarter**
    
    **Project
      Total to****2003**
    
    **2004**
    
    **total
      2005**
    
    **March
      31, 2005**Lupus
      nephritis
    
    $
    81
    
    $
    4,902
    
    $
    1,991
    
    $
    6,974Myasthenia
      gravis
    
    
    464
    
    
    2,196
    
    
    750
    
    
    3,410Pemphigus
      vulgaris
    
    
    386
    
    
    1,314
    
    
    345
    
    
    2,045$
    931
    
    $
    8,412
    
    $
    3,086
    
    $
    12,429
 
 As
of March 31, 2005, we expect to incur further research and development expenses
of approximately $72 million to complete our current CellCept projects, as
follows:
 •
    approximately
      $49.0 million to complete our planned Phase III clinical trial
      for the use of CellCept in the induction and maintenance treatment of
      lupus nephritis;•
    approximately
      $11.2 million to complete our Phase III clinical trial for the
      use of CellCept to treat myasthenia gravis; and•
    approximately
      $11.7 million to complete our Phase III clinical trial for the
      use of CellCept to treat pemphigus vulgaris.
 
 We
anticipate completing our Phase III clinical trials for the use of CellCept in
the induction phase of lupus nephritis in late 2006, in the treatment of
myasthenia gravis in late 2006, and in the treatment of pemphigus vulgaris in
2007. However, we may not be able to complete our CellCept projects on schedule.
Our patient enrollment may be slower than expected, the results from a clinical
trial may not be favorable, or the FDA or other regulatory agencies may require
additional clinical trials. Further, data from clinical trials is subject to
varying interpretation, and may be deemed insufficient by the regulatory
agencies reviewing applications for marketing approvals. As such, clinical
development and regulatory programs are subject to risks and changes that may
significantly impact our expense projections and development
timelines.
 
 ***Marketing,
General and Administrative Expenses***
 Marketing,
general and administrative expenses consist primarily of costs and salaries
associated with building our commercial infrastructure, costs of general
corporate activities, and salaries and other related costs for personnel in
executive, finance, accounting, and operational functions. Slightly more than
half of our expenditures in the first quarter of 2005 were for the development
of our
  11
  commercial
infrastructure. The remainder included salaries, compliance costs associated
with being a public company and general infrastructure costs.
 
 We
expect our marketing infrastructure expenses to continue to increase as we build
out our United States 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 a being a publicly traded
company, and support our agreement with Roche and additional collaborations.
 
 **Critical
Accounting Policies and Significant Judgments and Estimates**
 
 The
preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported revenues and expenses during
the reporting periods. We base our estimates on historical experience and on
various other factors that we believe are reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
 
 Significant
accounting policies are more fully described in the notes to our audited
consolidated financial statements for the year ended December 31, 2004 included
in our registration statement on Form F-1 filed with the Securities and Exchange
Commission on January 24, 2005, as amended. However, we believe the following
accounting policies relating to revenue recognition, stock-based compensation,
clinical trial accounting and provision for income taxes are the most critical
accounting policies for assessing our financial performance.
 
 ***Revenue
Recognition***
 
 We
will 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:
 
 •
    revenue
      is based upon ex-factory sales, completed and apportioned between Roche
      and Aspreva;•
    pricing
      of the transaction is agreed within the contract based upon the 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. Pursuant
to our collaboration agreement with Roche, we expect to recognize revenue
beginning April 1, 2005, based upon a royalty earned from Roche. This
royalty is based upon an equal sharing of incremental net sales of CellCept in
non-transplant indications above a negotiated baseline of
CHF 134 million per year, less a distribution fee.
 
 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 have agreed to 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 will record a portion of
this royalty payment as revenue within quarterly financial results, with the
balance recorded as deferred revenue and subject to a subsequent reconciliation.
 
 Once
the six month lag period has passed, and audited results can be obtained,
Aspreva and Roche will employ a mechanism to reconcile audited amounts against
the royalty previously paid to us. This reconciliation process will be
undertaken quarterly, based on the most recent available audit information. This
reconciliation mechanism, however, will limit reconciliation payments to either
Roche or Aspreva by an amount of CHF 4.0 million for a quarter. If the
results of the reconciliation indicate that the CHF 4.0 million collar
has been exceeded in favor of the same party for two consecutive quarters, we
and Roche have agreed upon a mechanism to review the sales tracking methodology
and/or our methodology for estimating royalty payments and introduce appropriate
changes. The value of this collar may be changed at any time by the joint
committee formed under our agreement with Roche, on which we have equal
representation.
 
 We
will record all but CHF 4.0 million of the royalty payment as revenue
within quarterly financial results. In subsequent quarters, consistent with the
timing of the reconciliation described above, the remaining
CHF 4.0 million of the royalty payment, as well as any additional
payments to us or from us to Roche as a result of such reconciliation will be
recorded in the current period. Thus, at any period end we will carry a maximum
of CHF 4.0 million for each quarter that has not then been reconciled,
characterized as deferred revenue 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 event.
  12
  ***Stock-Based
Compensation***
 
 Stock-based
compensation expense, which is a non-cash charge, results in part from
estimating the fair value of employee stock options granted using the
Black-Scholes option pricing model. On
March 4, 2005, we completed our initial public offering and began trading on the
Nasdaq National Market and the Toronto Stock Exchange. Prior to March 4, 2005,
g iven
the absence of an active market for our common shares, the exercise price of our
stock options on the date of grant was determined by our board of directors
using several factors, including progress and milestones achieved in our
business and sales of our preferred shares. Subsequent to March 4, 2005, the
exercise price for future option grants is based on the market value of our
common shares.
 
 We
account for employee stock options using the fair value method in accordance
with Statement of Financial Accounting Standards No. 123, *Accounting
for Stock-Based Compensation* ,
or SFAS No. 123. The Black-Scholes
option pricing model requires the input of several subjective assumptions including the expected life
of the option and the expected volatility at the time the options are granted as
well as the input of the fair value of our stock at the date of grant of the
stock options.
 
 The
estimated fair value as calculated by the Black-Scholes option pricing model is
amortized over the vesting period, which is generally two to four years. Until
we have a trading history as a public company, we continue to assume a
volatility of 150% based on competitive benchmarks and management judgement.
 
 Changes
in the inputs and assumptions can materially affect the measure of the estimated
fair value of our employee stock options. If we assumed a volatility of 100%,
our anticipated stock-based compensation expense for 2005 through 2008 for stock
options would be reduced by $830,000, from $13.2 million to $12.4 million.
In addition, this accounting estimate is reasonably likely to change from period
to period as further stock options are granted and adjustments are made for
stock option forfeitures and cancellations. In accordance with SFAS 123, we do
not record any deferred stock-based compensation on our balance sheet for our
stock options.
 
 Pursuant
to the 2002 Aspreva Incentive Stock Purchase Plan Trust, or the Trust, shares
have been distributed to certain of our employees subject to a return provision
which lapses ratably over a three-year period from the date of distribution. We
account for common shares distributed by the Trust as stock-based compensation,
using the fair value of the common share at time of distribution from the Trust,
amortized over the term of the return provisions specific to the award.
 
 On
March 5, 2004, warrants to purchase 230,360 common shares were issued in
conjunction with the issuance of convertible redeemable preferred shares. The
$809,000 fair value of the warrants was determined using the Black-Scholes model
and was included in interest and other expense.
 
 Included within the statements of operations are
      the following charges for stock-based compensation ($000s):**Three
      Months Ended March 31,****2005**
    
    **2004**Research
      and development expense
    
    $
    587
    
    $
    88Marketing,
      general and administrative expense
    
    
    1,000
    
    
    264Interest
      and other expense
    
    
    -
    
    
    809Total
      stock-based
      compensation
    
    $
    1,587
    
    $
    1,161
 
 ***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 enrolment levels and related activities.
We monitor patient enrolment levels and related activities to the extent
possible through
 internal
reviews, correspondence and discussions with contract research organizations and
review of contractual terms. However, if we have incomplete or inaccurate
information, we may underestimate activity levels associated with various trials
at a given point in time. In this event, we could record significant research
and development expenses in future periods when the actual activity level
becomes known. All such costs are charged to research and development expenses
as incurred. To date, we have not experienced material changes in these
estimates.
 
 ***Provision
for Income Taxes***
 
 We
have established a wholly-owned subsidiary, Aspreva Pharmaceuticals SA, a
Swiss company, which is the principal party to our agreement with Roche. We have
obtained a tax ruling from the Swiss tax authorities pursuant to which, certain
income attributable to the exploitation of the CellCept rights we acquired from
Roche and certain income attributable to the exploitation of rights we may
acquire in the future from other third parties, will be subject to a reduced tax
rate in Switzerland. We believe that dividends paid by
 
 
 
 13
 
 our
Swiss subsidiary to us will be subject to a five percent Swiss withholding tax
and will not be subject to Canadian income taxes.
 
 As
of March 31, 2005, we had deferred tax assets of $4.5 million, of
which $209,000 relates to scientific research and experimental development
expenditures, which are available to reduce future Canadian taxable income
without expiration dates, and $4.3 million relates to operating losses
carried forward which can be used to reduce taxable income of future years and
begin to expire in 2008. Of the $4.3 million, $981,000 relates to Canadian
loss carryforwards and $1.9 million relates to Swiss loss carryforwards. A
valuation allowance is provided to offset the deferred tax assets because the
realization of the benefit does not meet the more likely than not criteria. In
the event that we determine that we will be able to utilize our deferred tax
assets in the future, an adjustment to the valuation allowance would increase
net income in the period such determination is made.
 
 **RESULTS
OF OPERATIONS**
 
 Presented
below is a comparison of our results of operations for the three-month periods
ended March 31, 2005 and 2004.
 
 ***Revenues***
 
 We
have not generated any revenues from sales of commercial products since our
inception. Beginning in April 2005, we are entitled to share equally with Roche
the net sales of CellCept attributed to CellCept's use in non-transplant
indications above a negotiated baseline of CHF 134 million per year, less a
distribution fee.
 
 ***Research
and Development Expenses***
 
 Research
and development expenses were $4.0 million for the first quarter of 2005,
compared to $782,000 for the first quarter of 2004. The increase of
$3.2 million was primarily due to higher salary and related expenses of
$692,000 from the addition of personnel to support development of CellCept for
autoimmune indications, and higher project expenses of $2.5 million relating to
initiating our lupus nephritis Phase III clinical program, our ongoing
Phase III clinical trial for the use of CellCept in pemphigus vulgaris, and our
ongoing Phase III clinical trial for the use of CellCept in myasthenia
gravis. The number of employees engaged in research and development increased
from six at March 31, 2004 to 23 at March 31, 2005.
 
 ***Marketing,
General and Administrative Expenses***
 
 Marketing,
general and administrative expenses were $5.4 million for the first quarter of
2005, as compared to $435,000 for the first quarter of 2004. The increase of
$5.0 million was due in part to $1.9 million in higher salary and related
expenses, including stock-based compensation expenses, as we increased the
number of employees undertaking marketing, general and administrative
activities, a $1.5 million increase in expenses related to market research
and reimbursement studies, and unrestricted grants for medical education
programs. Also increasing our marketing, general and administrative expenses
were costs associated with being a publicly-traded company, including the costs
associated with directors & officers insurance premiums and higher
professional fees. The number of our employees engaged in marketing, general and
administrative activities increased from five at March 31, 2004 to 43 at March
31, 2005.
 
 ***Interest
and Other Income*** **
 
 Interest
and other income were $451,000 for the first quarter of 2005, compared to
$11,000 for the first quarter of 2004. The increase of $440,000 was primarily
due to significantly higher investment balances resulting from our initial
public offering.
 
 ***Interest
and Other Expense*** **
 
 Interest
and other expense were $40,000 for the first quarter of 2005, compared to
$810,000 for the first quarter of 2004. The decrease of $770,000 was due to the
one-time finance charge of $809,000 recorded in the first quarter of 2004 for
the issuance of warrants in conjunction with the issuance of preferred shares.
 
 
  14
  **Liquidity
and Capital Resources**
 
 ***Sources
of Liquidity***
 
 We
commenced operations in December 2001 and have incurred substantial net losses
since that time. Since our inception, we have financed our operations primarily
through the issuance of equity and debt securities. As of March 31, 2005,
we had an accumulated deficit of $34.2 million. Through March 31,
2005, we have received net proceeds of $136.9 million from the issuance of
our equity instruments including common shares, preferred shares, warrants and
convertible promissory notes.
 
 On
March 4, 2005, we completed our initial public offering of 8,280,000 common
shares which raised net proceeds of $82.3 million. W e
had $110.4 million and $35.8 million in cash and marketable securities as
at March 31, 2005 and December 31, 2004, respectively. We expect to continue to
devote substantial resources to continue the development of CellCept for the
treatment of lupus nephritis, myasthenia gravis and pemphigus vulgaris, and to
continue to pursue other collaborations. The investment in CellCept development
includes funding Phase III clinical trials as well as regulatory expenses
to support approval. In addition, we are expanding our infrastructure to prepare
for the potential commercialization of CellCept for these indications.
 
 We
expect that our available cash resources, and the revenue from our agreement
with Roche, will be sufficient to support our operations for at least 12 months.
If our resources are insufficient to satisfy our liquidity requirements or if we
pursue new indications for CellCept or enter into new indication partnerships,
we may need to raise additional external funds through the sale of additional
equity or debt securities. The sale of additional equity and debt securities may
result in additional dilution to our stockholders. Additional financing may not
be available in amounts or on terms acceptable to us or at all. If we are unable
to obtain this additional financing, we may be required to reduce the scope of,
delay or eliminate some or all of our planned research, development and
commercialization activities, which could harm our business.
 
 ***Cash
Flows***
 
 ***Operating
activities*** **
 Net
cash used in operating activities was $9.6 million and $670,000 for the
first quarter of 2005 and 2004, respectively. The increase of $8.9 million was
primarily due to significantly increased operational expenditures resulting in
operating losses of $9.0 million and the pay-down of $2.8 million in accounts
payable and accrued liabilities offset by the receipt of investment tax credits
and non-cash charges.
 
 ***Investing
activities*** ****
 Net
cash used in investing activities was $75.9 million for the first quarter of
2005, while net cash generated from investing activities was $1.3 million in the
first quarter of 2004. The increase of $77.2 million in net cash used in
investing activities resulted from the investment of net proceeds from our
initial public offering. Purchases of investments in marketable securities were
$411.9 million, partially offset by proceeds from sales of short-term
investments in marketable securities of $336.0 million.
 
 ***Financing
activities*** ****
 Net
cash provided by financing activities was $84.3 million and $49.3 million for
the first quarter of 2005 and 2004, respectively. The increase of $35.0 million
in net cash provided by financing activities consisted primarily of gross
proceeds of $91.7 million from our initial public offering, less financing
costs in the quarter of $7.3 million. In the first quarter of 2004, we issued
preferred shares for total gross proceeds of $53.0 million less financing costs
of $3.7 million **.**
 
 **Contractual
Obligations and Commitments**
 
 As
of March 31, 2005, there was no material change in capital lease or
operating lease obligations or any other long-term liabilities reflected on our
consolidated balance sheets as compared to such obligations and liabilities as
of December 31, 2004, except that we entered into a new facility operating
lease for premises in New Jersey, USA that will be used to accommodate our U.S.
regional office. The lease term is 5 years and our financial obligation is
$202,000 per year.
 
 **Credit
Facilities**
 
 In
April 2004, we entered into various agreements with a Canadian chartered bank
providing for revolving demand facilities and a lease line in the aggregate
amount of $2.5 million. As of March 31, 2005, we had $1.2 million
of outstanding indebtedness under our credit facilities. In April 2005, we took
a further $372,000 drawdown on the facility to support a letter of credit.
 
 The
Canadian chartered bank may cancel or restrict the availability of any
unutilized portion of our facilities at any time and from time to time without
notice. Our credit facilities are secured by a security agreement constituting a
first ranking security interest in all our personal property. In addition,
minimum deposit levels of $7.9 million are held with a Canadian chartered
bank to secure our credit facilities.
  
 15
 ****
 **Off-Balance
Sheet Arrangements**
 
 Since
inception we have not engaged in material off-balance sheet activities,
including the use of structured finance, special purpose entities or variable
interest entities.
 
 **Recent
Accounting Pronouncements**
 
 For
a description of the recent accounting pronouncements, please see Note 9 to our
Notes to Consolidated Financial Statements.
 
 **Related
Party Transactions**
 
 For
a description of our related party transactions during the three months ended
March 31, 2005, please see Note 8 to our Notes to Consolidated Financial
Statements.
   16
  **Item
3.  QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT MARKET RISK**
 
 **Market
Risks**
 
 Our
exposure to market risk is confined to cash and marketable securities. We invest
in highly liquid government bonds, treasury bills, certificates of deposit and
investment grade commercial paper. Due to the short term nature of our
investment portfolio we believe we have minimal interest rate risk arising from
our investments.
 
 Many
of our transactions are conducted in currencies other than the U.S. dollar.
If exchange rates change by 10%, we do not believe that it would have a material
impact on our results of operations or cash flows to date. However, future
exchange rate fluctuations may affect our future operating results.
 
 All
amounts paid by Roche to us will be in Swiss Francs. In addition, we currently
conduct some operations and incur a portion of our expenses in Canadian dollars
and pounds sterling. CellCept’s net sales are denominated in multiple currencies
and will be converted to Swiss Francs by Roche for the purpose of calculating
amounts to be paid to us. To the extent the Swiss Franc increases in value
relative to these other currencies, the total aggregate value of CellCept’s net
sales will decrease and the amount, if any, that we are entitled to may be
reduced. Although we expect to implement currency hedging techniques to mitigate
the impact of currency fluctuations on our financial results, these techniques
do not eliminate the effects of currency fluctuations with respect to
anticipated revenues or cash flows, and, as they are short term in nature, do
not protect us from prolonged periods of currency fluctuations.
 
 As
of March 31, 2005, we had not entered into any hedging transactions.
 
 **Business
Risks**
 
 **We
have a limited operating history, and expect to incur losses and to rely solely
on sales of CellCept for substantially all our revenue for the foreseeable
future.**
  We
were incorporated in 2001 and have a limited operating history. To date we have
not recorded any revenues. Since our inception through March 31, 2005, we have
incurred cumulative losses from operations of $34.2 million. Our losses to date
have resulted primarily from general and administrative costs relating to our
operations and costs related to the clinical development of CellCept for
autoimmune indications.
  We
anticipate that substantially all of our revenue for the foreseeable future will
be from sales of CellCept pursuant to our agreement with Roche. Beginning in
April 2005, we are entitled to share equally with Roche the net sales of
CellCept attributed to CellCept's use in non-transplant indications above a
negotiated baseline of 134 million Swiss Francs per year. 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.
  We
anticipate incurring substantial and increasing operating losses for the
foreseeable future as we further develop CellCept for autoimmune indications,
seek additional collaborations and operate as a public company. In addition, we
may never become profitable or sustain profitability if achieved.
  **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.
   17
  **If
we do not satisfy our obligations under the Roche agreement or if the agreement
is terminated we may be forced to limit or cease our operations.**
  Our
agreement with Roche requires us to use commercially reasonable efforts to
conduct three clinical trial programs for CellCept in autoimmune indications
pursuant to an agreed upon development plan. In addition, until July 18, 2006,
we are obligated to use our best efforts to raise adequate capital to finance
our first three clinical trial programs in autoimmune indications pursuant to
that development plan. As of March 31, 2005, we expect to incur aggregate
additional expenses of approximately $72.0 million to complete our first three
clinical trial programs. We believe that the net proceeds of our public offering
together with our available cash and marketable securities will fulfill this
obligation to use our best efforts. Roche may disagree that we have met our
obligations. Roche may allege that we are in breach of a material obligation
under our agreement and seek to litigate the allegation. If Roche is successful
in such litigation, Roche may either be awarded damages based upon such breach
or the agreement might be terminated. After 2011, either party may terminate the
agreement if there is a lack of non-transplant sales over the baseline for a
prolonged period. In addition, if CellCept is withdrawn from or recalled in any
given country, either party may terminate the agreement with respect to that
country. If the agreement is terminated in its entirety or in a given country we
may be forced to limit or cease our operations.
  Our
agreement with Roche contains provisions requiring us to comply with applicable
laws and regulations, including restrictions on the promotion of approved drugs
for off label uses. If it were determined by the FDA or other regulatory
authority that we violated the rules relating to off label promotion in
connection with our pre-approval communications regarding CellCept, we may be
deemed by Roche to be in material breach of the agreement. If we fail to cure
any material breach of the agreement, Roche may commence legal action for
damages and/or seek to terminate our agreement.
  
  **If
Roche does not manufacture, distribute, price or sell CellCept at levels which
generate sufficient revenue for us to operate, we may have to limit or cease our
operations.**
  We
do not own or operate any manufacturing or distribution facilities. Roche, not
Aspreva, controls the manufacture of CellCept and we have no alternative
supplier. If we are unable to obtain adequate supplies of CellCept from Roche
for our clinical trials, they could be delayed or prevented. In addition, if
there is a shortage of CellCept, Roche may decide to allocate available supplies
of CellCept to purchasers for use in transplant indications and not autoimmune
or other indications, thereby reducing our revenues. Roche is solely responsible
for distributing and selling CellCept, and setting the price, including all
discounts and rebates, of CellCept.
  Roche's
control over the manufacture, distribution, pricing and sale of CellCept exposes
us to a number of risks which are outside our control including:
  •
    Roche
      may fail to comply with FDA-mandated current good manufacturing practices
      or similar regulations in other jurisdictions resulting in mandated
      production halts or limitations;•
    Roche
      may experience manufacturing quality or control issues which halt or limit
      CellCept production;•
    a
      manufacturing plant may be closed as a result of a natural disaster or
      work stoppage;•
    Roche
      may experience short or long-term supply problems, or problems
      distributing CellCept, including difficulties importing or exporting
      supplies or products;•
    Roche
      may decrease its efforts to market and promote CellCept for the transplant
      indications thus lowering the visibility of CellCept in the market;
      and•
    Roche
      may set a low price for CellCept or give discounts or rebates that
      effectively lower the price of CellCept, which in either case could reduce
      our revenues.
  **The
expiration of Roche's patents covering CellCept may reduce our revenue as
competitors may seek to sell generic versions of CellCept.**
  Roche
owns the patents covering the composition of matter of CellCept. The United
States patent covering CellCept expires in May 2009. Counterparts of this patent
expire in most European countries in late 2010 or early 2011, but in some
instances expire as early as 2007. Roche patents covering the process for
manufacture of CellCept expire in the United States in July 2012, and in most
other countries in July 2013. We and Roche expect that following expiration of
all these patents competitors may manufacture and sell generic versions of
CellCept, at a lower price, which would reduce CellCept's revenues. In certain
jurisdictions, including most Canadian provinces, legislation mandates generic
substitution for brand name drugs. If competitors devise a means to manufacture
CellCept which does not infringe Roche's patents covering the process for
manufacture, competitors may seek to sell generic versions of CellCept upon
expiration of the composition of matter patents, which occurs in some countries
as early as 2007.
  In
addition, while we intend to seek orphan drug designation in the United States
for myasthenia gravis and pemphigus vulgaris, to the extent any competitor
obtains from the FDA approval of a generic form of CellCept after May 2009 with
an orphan drug designation for such indication prior to our obtaining FDA
approval for the same indication, they would be entitled to a seven year
marketing exclusivity period, during which time we would be prohibited from
marketing and promoting CellCept for the treatment of that orphan
indication.
   18
 
 We
may also seek orphan drug designation in the United States for lupus nephritis.
The FDA has in the past granted an orphan drug designation to drug candidates
for the treatment of lupus nephritis. However, the number of individuals
affected by lupus nephritis in the United States may be great enough that lupus
nephritis is not a rare disease and as a result does not meet the criteria for
orphan drug status.
  If
we obtain an orphan drug designation and FDA approval of CellCept for an
indication, we would be entitled to seven years of marketing exclusivity for
that orphan drug indication. However, if a competitor obtained approval of a
generic form of CellCept for another indication, such as transplant use,
physicians would not be prevented from prescribing the generic drug for the
orphan indication during the period of marketing exclusivity. Such prescribing
practices could adversely affect the sales of CellCept for the orphan
indication.
  **We
may incur significant liability if it is determined that we are promoting the
"off-label" use of drugs or are otherwise found in violation of federal and
state regulations in the United States or elsewhere.**
  Physicians
may prescribe drug products for uses that are not described in the product's
labelling and that differ from those approved by the FDA or other applicable
regulatory agencies. Such off-label uses are common across medical specialities.
We are aware that some physicians are prescribing CellCept for the treatment of
certain autoimmune diseases, although neither we nor Roche are permitted to
promote CellCept for the treatment of any autoimmune diseases, and the FDA and
other regulatory agencies have not approved the use of CellCept for any
autoimmune indications. Although the FDA and other regulatory agencies do not
regulate a physician's choice of treatments, the FDA and other regulatory
agencies do restrict communications on the subject of off-label use. Companies
may not promote drugs for off-label uses. Accordingly, prior to approval of any
autoimmune indications for CellCept, we may not promote CellCept for such
indications. The FDA and other regulatory agencies actively enforce regulations
prohibiting promotion of off-label uses and the promotion of products for which
marketing clearance has not been obtained. A company that is found to have
improperly promoted off-label uses may be subject to significant liability,
including civil and administrative remedies as well as criminal
sanctions.
  Notwithstanding
the regulatory restrictions on off-label promotion, the FDA and other regulatory
authorities allow companies to engage in truthful, non-misleading, and
non-promotional speech concerning their products. We engage in medical education
activities and communicate with investigators and potential investigators
regarding our clinical trials. Although we believe that all of our
communications regarding CellCept are in compliance with the relevant regulatory
requirements, the FDA or another regulatory authority may disagree, and we may
be subject to significant liability, including civil and administrative remedies
as well as criminal sanctions.
  We
and our collaborators are also subject to the U.S. federal False Claims Act and
U.S. federal Anti-Kickback law. We are in the process of developing a
comprehensive compliance program that will seek to establish internal controls
to facilitate adherence to the rules and program requirements to which we are
and will become subject. If, however, we are determined to have violated these
and other laws, we could incur significant penalties and be subject to criminal
prosecution. Roche might deem any such determination by a governmental authority
to constitute a material breach of our agreement. In addition, management's
attention could be diverted and our reputation and our ability to enter into
future collaborations could be damaged.
  **If
CellCept and any future products do not gain meaningful market acceptance we are
not likely to generate significant revenues or become
profitable.**
  The
degree of market acceptance for any product that we commercialize will depend on
a number of factors, including:
  •
    acceptance
      by physicians and patients of each product as safe and
      effective;•
    potential
      advantages over existing or alternative therapies, including
      cost;•
    actual
      or perceived safety of similar classes of products;•
    relative
      convenience and ease of administration;•
    reimbursement
      policies of government and third-party payors;•
    effectiveness
      of our sales, marketing and medical education efforts;
  and•
    scope
      of the product label approved by the FDA and other regulatory
      agencies.
  Hospitals
or physicians may not choose to administer CellCept or any future product to the
entire intended market, if at all. If CellCept and any future products do not
achieve meaningful acceptance in their intended markets or if the intended
market is smaller than anticipated, we are not likely to generate significant
revenues or become profitable.
  
 19
  
  **Any
failure or delay in obtaining additional capital may curtail the development or
commercialization of CellCept or any future products.**
  We
expect that our future need for additional capital will be substantial. The
extent of this need will depend on many factors, some of which are beyond our
control, including:
  •
    our
      ability to develop and obtain regulatory approval for CellCept and any
      future products in our targeted indications;•
    our
      ability to establish marketing and sales capabilities and the costs of
      launching CellCept and any future products for our targeted
      indications;•
    the
      extent of costs associated with protecting and expanding our patent and
      other intellectual property rights;•
    market
      acceptance of CellCept and any future products for our targeted
      indications;•
    future
      payments, if any, we receive or make under existing or future
      collaborative arrangements;•
    the
      timing of regulatory approvals needed to market products for our targeted
      indications;•
    the
      need to acquire licenses for new products or compounds;
  and•
    compliance
      with rules and regulations implemented by the U.S. Securities and Exchange
      Commission, Canadian provincial securities regulatory authorities, the
      Nasdaq National Market and the Toronto Stock
Exchange.
 
 We
have no committed sources of additional capital. Funds may not be available to
us in the future on favorable terms, if at all, and we may be required to delay,
reduce the scope of, or eliminate research and development efforts or clinical
trials for CellCept or other future products. We may also be forced to curtail
or restructure our operations, obtain funds by entering into arrangements with
collaborators on unattractive terms or relinquish rights to technologies or
product candidates that we would not otherwise relinquish in order to continue
our operations.
  **If
we are not successful in establishing additional collaborations we will not be
able to grow our business.**
  Our
long-term success depends upon our ability to identify drugs and drug candidates
with significant indication expansion potential and to acquire the rights for
those undeveloped indications from multiple collaborators, thus creating
multiple sources of revenue. We face intense competition from other companies
for collaborative arrangements with pharmaceutical and biopharmaceutical
companies, and there are no barriers prohibiting other companies from adopting
our indication expansion business model. Pharmaceutical and biopharmaceutical
companies may also decide to pursue new indications for their products
themselves, rather than enter into collaborative arrangements to develop new
indications. In addition, accurate sales tracking may be difficult or impossible
under future collaborations which may preclude a collaboration or lead to
disputes once a collaboration has been established. We currently only have one
collaboration. If we are unable to enter into additional collaborations, we will
continue to be dependent upon Roche for substantially all our revenues, and we
will be limited in our ability to grow our business. In addition, the fact that
we are collaborating with Roche, or other potential collaborators, may be viewed
negatively by other potential collaborators, making them less likely to enter
into arrangements with us.
  **The
terms and conditions of any future collaboration agreements may be less
favorable than our agreement with Roche.**
  Our
strategy is to seek collaborations with pharmaceutical and biopharmaceutical
companies to develop and commercialize new indications. Any new collaborations
that we may secure will likely involve drugs or drug candidates, or
collaborators, with characteristics different from CellCept or Roche. These
characteristics may include:
  •
    costs
      to manufacture, distribute and sell;•
    patent
      terms;•
    expenditures
      by our collaborators on research and development;•
    size
      and difficulty of development programs for potential product
      indications;•
    competitive
      threats; and•
    other
      factors relevant to the development and commercialization of such
      products.
  We
expect that any new collaborations will be highly negotiated, and the above
characteristics all may play a role in the financial terms of such
collaborations, possibly resulting in any or all of the following:
  •
    our
      payment of upfront or milestone fees for product
rights;•
    greater
      clinical trial expenses;•
    longer
      timelines to approval;
  20
  •
    lower
      revenue sharing percentages;•
    shorter
      agreement periods; or•
    less
      than global product rights.
  In
addition, any new collaboration agreement may provide that we only begin sharing
revenue with our collaborator after some long period of time after entering into
such collaboration, or after some specific action or approval over which we may
have limited control.
  **If
we fail to establish sufficient marketing and sales promotion capabilities, or
enter into successful arrangements with third parties to conduct these
activities, we may be unable to generate sufficient revenue to continue our
operations.**
  Roche
is solely responsible for distributing and selling CellCept. If we obtain
approval of CellCept for autoimmune indications, or any future products, we
intend to market and promote them through our own sales promotion force in the
United States and certain other countries. We currently have no marketing or
sales promotion capabilities, lack an infrastructure to support such activities,
and have no experience in the commercialization of pharmaceutical products. We
may not be able to attract and retain qualified marketing or sales promotion
people or be able to establish an effective sales promotion force.
  In
countries where we do not have a sales promotion force, we may establish
relationships with third parties. However, we may not be able to enter into such
arrangements on favorable terms or at all and to the extent that we enter into
such arrangements, our revenue will depend on their efforts, which may not be
successful.
  **If
product liability lawsuits are successfully brought against us, we will incur
significant liabilities and may be required to limit the commercialization of
our product candidates.**
  Our
use of CellCept and other products in clinical trials, and our promotion of any
products, may expose us to product liability claims and associated adverse
publicity. We have a product liability insurance policy for our clinical trials
in the United Kingdom, Belgium, Switzerland and Israel with aggregate coverage
of $3.7 million, in the United States and Canada with aggregate coverage of $3.0
million, and policies in varying amounts for all the other countries in which we
are conducting clinical trials. Our insurance coverage may not protect us
against any or all of the product liability claims which could be brought
against us in the future. Prior to the commercialization of CellCept in
autoimmune indications, we expect to obtain product liability insurance for
potential claims associated with our promotion of CellCept. However, we may not
be able to obtain or maintain adequate insurance coverage at a commercially
reasonable cost or in sufficient amounts or scope to protect us against
potential losses. Roche is obligated to indemnify us for any product liability
claims, except if the claims arise due to false or misleading promotional
activity on our part. In the event a product liability claim is brought against
us, we may be required to pay legal and other expenses to defend the claim and,
if such a claim is successful, damage awards not covered by our insurance. We
may also be obligated to indemnify our collaborators. Defending any product
liability claim or claims could require us to expend significant financial and
managerial resources.
  **If
our competitors are able to develop and market products that are preferred over
CellCept or other product candidates that we may develop, we may not be able to
generate sufficient revenues to continue our operations.**
  We
may not be able to contend successfully with competitors. The biotechnology and
pharmaceutical industries are highly competitive and subject to significant and
rapid technological change as researchers learn more about diseases and develop
new technologies and treatments. Our current and potential competitors generally
include major multinational pharmaceutical companies, biopharmaceutical firms,
specialty pharmaceutical companies, universities and other research
institutions.
  In
the transplant market, CellCept currently competes with Novartis' product,
Myfortic. If CellCept is approved for any autoimmune indications, Novartis may
choose to also pursue clinical trials for the same indications. If approved,
CellCept will also compete with immunosuppressants, such as steroids and
cytotoxic agents, including cyclophosphamide, cyclosporine and azathioprine. A
cytotoxic agent is an anti-cancer substance that acts by killing or preventing
the division of cells. In addition, we are aware of several companies that have
products in development or on the market that may be competitive with CellCept
in lupus nephritis, myasthenia gravis and pemphigus vulgaris. Some of the
companies have commenced clinical trials for products targeting the same markets
and indications that we are addressing.
  The
existence of these products, other products or treatments of which we are not
aware, or products or treatments that may be developed in the future may reduce
the marketability of CellCept and any future products, particularly to the
extent such products:
  •
    are
      more effective;•
    have
      fewer or less severe adverse side effects;•
    have
      better patient compliance;
   21
 
 •
    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 first quarter of 2005, we increased our number of employees by 13 and, as of
March 31, 2005, we had 66 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 and the United Kingdom and intend to
establish operations in Italy, Germany, France, Spain 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 key employees, and if we are not able to
retain them or recruit additional qualified personnel, we may be unable to
successfully develop or commercialize CellCept.**
  Our
success depends upon the continued contributions of our executive officers and
scientific and technical personnel. We are highly dependent on Richard M.
Glickman, our Chief Executive Officer, Noel F. Hall, our President, and Reinhard
W.A. Baildon, our Executive Vice President, Clinical and Regulatory Affairs. Due
to the specialized knowledge each of our executive officers and key employees
possesses with respect to CellCept and our operations, the loss of service of
any of our executive officers or key employees could delay or prevent the
successful completion of the clinical trials necessary for the commercialization
of CellCept for lupus nephritis, myasthenia gravis or pemphigus vulgaris and
could harm our relationship with Roche. We carry key man life insurance coverage
of $1.2 million for each of Richard M. Glickman and Noel F. Hall. We do not
carry key man life insurance for any of our other executive officers or key
employees.
  We
have employment agreements with each of our executive officers and key
employees; however, each may terminate their employment upon notice and without
cause or good reason. We currently are not aware that any executive officer or
key employee is planning to leave or retire.
  Our
success also depends in part on our ability to attract and retain highly
qualified scientific, commercial and administrative personnel. In order to
pursue our product development and commercialization strategies, we will need to
attract and hire additional personnel with experience in a number of
disciplines, including clinical testing, government regulation, sales and
marketing, drug reimbursement and information systems. There is intense
competition for personnel in the fields in which we operate. We have not
experienced difficulty to date in attracting and retaining the personnel we
require. If, however, we are unable to continue to attract new employees and
retain existing employees, we may be unable to continue our development and
commercialization activities.
  **We
may incur losses associated with currency fluctuations and may not be able to
effectively hedge our exposure.**
  Our
operations are in many instances conducted in currencies other than the U.S.
dollar and fluctuations in the value of currencies relative to the U.S. dollar
could cause us to incur currency exchange losses. All amounts paid by Roche to
us will be in Swiss Francs. In addition, we currently conduct some operations
and incur a portion of our expenses in Canadian dollars and pounds sterling.
Although we expect to implement currency hedging techniques to mitigate the
impact of currency fluctuations on our financial results, these techniques do
not eliminate the effects of currency fluctuations with respect to anticipated
revenues or cash flows, and, as they are short term in nature, do not protect us
from prolonged periods of currency fluctuations.
  CellCept's
net sales are denominated in multiple currencies and will be converted to Swiss
Francs **** by
Roche for the purpose of
 
 
 22
 
 calculating
amounts to be paid to us. To the extent the Swiss Franc increases in value
relative to these other currencies, the total aggregate value of CellCept's net
sales will decrease and the amount, if any, that we are entitled to may be
reduced.
  **We
will not be able to commercialize our product candidates if our clinical trials
do not demonstrate safety and efficacy in humans.**
  We
are currently not authorized to market CellCept for autoimmune indications in
any jurisdiction, and we may never be authorized to market CellCept for any
autoimmune indication. The development and commercialization of CellCept for
autoimmune indications, and any future products, are subject to extensive and
rigorous regulation by the U.S. federal government, principally the FDA, other
federal, state and local agencies, and governmental authorities elsewhere. Prior
to marketing CellCept for any autoimmune indication, we must conduct, at our own
expense, extensive clinical trials to demonstrate with substantial evidence to
the satisfaction of the FDA and other regulatory authorities that CellCept is
safe and effective for the indication. We have no prior experience as a company
in conducting clinical trials. Preclinical studies and clinical trials are
expensive, can take many years and have uncertain outcomes. In addition, the
regulatory approval procedures vary among countries and additional testing may
be required in some jurisdictions. It may take several years to complete the
requisite clinical trials, and a product candidate may fail any stage of
testing. Difficulties and risks associated with clinical trials may result in
our failure to receive regulatory approval to market CellCept for autoimmune
indications or our inability to commercialize any future products for new
indications. The FDA, other regulatory authorities, our collaborators, or we may
suspend or terminate clinical trials at any time. The commencement and
completion of our clinical trials could be delayed or prevented by several
factors, including:
  •
    delays
      in obtaining regulatory approvals to commence or continue a
      study;•
    delays
      in identifying and reaching agreement on acceptable terms with prospective
      clinical trial sites;•
    insufficient
      quantities of the study drug;•
    slower
      than expected rates of patient recruitment and enrollment or the inability
      to reach full enrollment;•
    inconclusive
      or negative interim results during clinical trials, including lack of
      effectiveness or unforeseen safety issues;•
    death
      of, or serious adverse effects experienced by, one or more patients during
      a clinical trial even if the reasons are not related to the study drug,
      including the advanced stage of the patient's disease or medical
      condition;•
    uncertain
      dosing issues;•
    inability
      to monitor patients adequately during and after
  treatment;•
    inability
      or unwillingness of contract laboratories to follow good laboratory
      practices;•
    inability
      or unwillingness of clinical investigators to follow our clinical
      protocols or good clinical practices generally; and•
    inability
      or unwillingness of other third parties to perform data collection and
      analysis in a timely or accurate manner.
  Delays
or failures in obtaining regulatory approvals may:
 
 •
    delay
      or prevent the commercialization of any product that we develop for new
      indications;•
    diminish
      any competitive advantages;•
    reduce
      or eliminate revenue from the sale of CellCept and any future products;
      and•
    adversely
      affect our ability to attract new
collaborators.
 
 The
results of early clinical trials do not necessarily predict the results of later
clinical trials. Drugs in later clinical trials may fail to show desired safety
and efficacy traits despite having progressed through initial clinical trials.
We are aware that Roche conducted three Phase III clinical trials for CellCept
in the treatment of rheumatoid arthritis which did not demonstrate efficacy.
Even if we believe the data collected from clinical trials of drugs are
promising, such data may not be sufficient to support approval by the FDA or any
other regulatory authority. The FDA or other regulatory authorities could also
interpret our data differently, which could delay, limit or prevent regulatory
approval.
  We
expect to rely in part on the results of CellCept clinical trials that were
previously performed by or on behalf of Roche and on clinical trials that were
previously performed by third-party physicians. These trial results may not be
predictive of the results of the clinical trials that we plan to conduct for the
purposes of our targeted indications. In addition, the results of prior clinical
trials may not be acceptable to the FDA or other regulatory authorities because
the data may be incomplete, outdated or not otherwise acceptable for inclusion
in our submissions for regulatory approval for CellCept in autoimmune
indications.
  
  23
  **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 our clinical trials will be blinded so that
some patients receive CellCept and others receive another drug or a placebo, and
because CellCept is marketed for transplant indications and prescribed by
physicians, patients may not want to participate in a clinical trial in which
they could receive a placebo or drug other than CellCept. For example, we have
experienced slower than expected enrollment in one of our Phase III clinical
trials of CellCept to treat myasthenia gravis, which we believe may be due, at
least in part, to the off label availability of CellCept.
  **If
third-party clinical research organizations do not perform in an acceptable and
timely manner, our clinical trials could be delayed or
unsuccessful.**
  We
have limited experience in conducting and managing clinical trials, and rely on
third parties, including contract research organizations, outside consultants
and principal investigators to assist us in managing, monitoring and conducting
our clinical trials. We rely on these parties to assist in the recruitment of
sites for participation in clinical trials, to maintain positive relations with
the clinical sites and to ensure that these sites conduct the trials in
compliance with the protocol and our instructions. If these third parties fail
to perform satisfactorily or do not adequately fulfill their obligations to us,
our clinical trials may be delayed or unsuccessful. The FDA or other regulatory
agencies may inspect some of our clinical sites or our third-party vendors'
sites, to determine if our clinical trials are being conducted according to
current good clinical practices. If the FDA or another applicable regulatory
agency determines that our third-party vendors are not in compliance with
applicable regulations, we may be required to delay, repeat or terminate such
clinical trials. Any delay, repetition or termination of our clinical trials
could prevent or delay the commercialization of CellCept for autoimmune
indications and any other future product candidate.
  **If
government and third-party payors fail to provide coverage and adequate
reimbursement rates for our product candidates, our revenues and potential for
profitability will be reduced.**
  In
the United States and elsewhere, our product revenues will depend principally
upon the reimbursement rates established by third-
 
 
 24
 
 party
payors, including government health administration authorities, managed-care
providers, public health insurers, private health insurers and other
organizations. These third-party payors are increasingly challenging the price,
and examining the cost effectiveness, of medical products and services. In
addition, significant uncertainty exists as to the reimbursement status, if any,
of newly approved drugs, pharmaceutical products or product indications. We may
need to conduct post-marketing clinical trials in order to demonstrate the
cost-effectiveness of products. Such studies may require us to commit a
significant amount of management time and financial and other resources.
CellCept is included in various drug compendia as a commercially approved drug
in connection with the prevention of organ rejection and certain third party
payors provide reimbursement for this use of CellCept because of such inclusion.
However, CellCept or other future products may not be reimbursed or covered by
any of these third-party payors for our targeted indications.
  In
some countries other than the United States, particularly the countries of the
European Union and Canada, the pricing of prescription pharmaceuticals is
subject to governmental control. In these countries, obtaining pricing approval
from governmental authorities can take six to twelve months or longer after the
receipt of regulatory marketing approval of a product for an indication. To
obtain reimbursement or pricing approval in some countries, we may be required
to conduct a clinical trial that compares the cost-effectiveness of a product
that is the subject of a collaboration with us to other available therapies. If
reimbursement of such products is unavailable or limited in scope or amount or
if pricing is set at unsatisfactory levels, our revenues could be
reduced.
  Domestic
and foreign governments continue to propose and pass legislation designed to
reduce the cost of healthcare, including drugs. In the United States, there have
been, and we expect that there will continue to be, federal and state proposals
to implement similar governmental control. In addition, increasing emphasis on
managed care in the United States will continue to put pressure on the pricing
of pharmaceutical products. For example, the Medicare Prescription Drug
Improvement and Modernization Act of 2003 reforms the way Medicare will cover
and reimburse for pharmaceutical products. The legislation expands Medicare
coverage for drug purchases by the elderly and eventually will introduce a new
reimbursement methodology based on average sales prices for certain drugs. In
addition, the new legislation provides authority for limiting the number of
outpatient drugs that will be covered in any therapeutic class. As a result of
the new legislation and the expansion of federal coverage of drug products, we
expect that there will be additional pressure to contain and reduce costs. The
Medicaid program and state healthcare laws and regulations may also be modified
to change the scope of covered products and/or reimbursement methodology. Cost
control initiatives could decrease the established reimbursement rates that we
receive for any products in the future, which would limit our revenues and
profitability. Legislation and regulations affecting the pricing of
pharmaceutical products, including CellCept, may change at any time, which could
further limit or eliminate reimbursement rates for CellCept or other
products.
  **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,
 
 
 25
 
 or
conclude that, without patent rights, the risk of bringing products to the
market is too great. Even if we or our collaborators are issued patents covering
our products we cannot predict with certainty whether we or our collaborators
will be able to ultimately enforce our patents or proprietary rights. Any
patents that we own or license may be challenged, invalidated or circumvented
and may not provide us with protection against competitors. We or our
collaborators may be forced to engage in costly and time-consuming litigation in
order to protect our intellectual property rights. In addition, our
collaborators may choose not to enforce or maintain their intellectual property
rights, and we may be forced to incur substantial additional costs to maintain
or enforce such rights. Patent rights may not provide us with adequate
proprietary protection or competitive advantages against competitors with
similar products or technologies. The laws of certain foreign countries do not
protect our intellectual property rights to the same extent as do the laws of
the United States.
  In
addition to patents, we rely on trade secrets and proprietary know-how. We seek
protection, in part, through confidentiality and non-disclosure agreements.
These agreements may not provide meaningful protection of our technology or
adequate remedies in the event of unauthorized use or disclosure of confidential
and proprietary information and, in any event, others may develop independently,
or obtain access to, the same or similar information. Our failure or inability
to protect our trade secrets and proprietary know-how could impair our
competitive position.
  **If
our stock price is volatile, purchasers of our common shares could incur
substantial losses.**
  Our
stock price is likely to be volatile. The stock market in general and the market
for biopharmaceutical and biotechnology companies in particular have experienced
extreme volatility that has often been unrelated to the operating performance of
particular companies. The price for our common shares may be influenced by many
factors, including:
  •
    our
      ability to develop and obtain regulatory approval for CellCept and any
      future products in our targeted indications;•
    our
      ability to establish marketing and sales capabilities and the costs of
      launching CellCept and any future products for our targeted
      indications;•
    market
      acceptance of CellCept and any future products for our targeted
      indications;•
    developments
      concerning our collaboration with Roche;•
    our
      success in establishing additional collaborations;•
    regulatory
      developments in the United States, Canada and other
    countries;•
    developments
      or disputes concerning patents or other proprietary
  rights;•
    public
      concern over CellCept or any future products;•
    litigation;•
    the
      departure of key personnel;•
    future
      sales of our common shares;•
    variations
      in our financial results or those of companies that are perceived to be
      similar to us;•
    investors’
      perceptions of us; and•
    general
      economic, industry and market conditions.
  **If
there are substantial sales of our common shares, our stock price could
decline.**
  If
our existing stockholders sell a large number of our common shares or the public
market perceives that existing stockholders might sell our common shares, the
market price of our common shares could decline significantly. Upon our initial
public offering on March 4, 2005, we had 34,028,378 common shares outstanding,
including 8,280,000 shares sold in our initial public offering. Of the remaining
25,748,378 shares outstanding upon the closing of our initial public offering,
in the U.S. public market approximately 25,722,698 shares may be sold pursuant
to Rule 144, 144(k) and 701, and in Canada approximately all of such shares may
be sold pursuant to the securities laws of the provinces of Canada, in each case
upon the expiration of the 180-day lock-up agreements. The lock-up agreements
may be extended to 214 days in certain circumstances.
  Holders
of approximately 12,677,192 common shares have rights, subject to some
conditions, to require us to file registration statements under the Securities
Act of 1933, as amended, or the Securities Act, covering their shares or to
include their shares in registration statements that we may file under the
Securities Act for ourselves or other stockholders. Once we register these
common shares, they can be freely sold in the public market upon issuance,
subject to the lock-up agreements discussed above.
  **Our
executive officers, directors and major stockholders continue to have
substantial control over us and will maintain the ability to control all matters
submitted to stockholders for approval.**
  As
of March 31, 2005, our directors, executive officers and principal stockholders,
together with their affiliates, beneficially owned approximately 66% of our
outstanding common shares, including shares subject to outstanding stock options
and warrants. These
 
 
 
 26
 
 stockholders,
acting together, will exercise significant influence over all matters requiring
stockholder approval, including the election of directors and any amendment of
our notice of articles or articles. This concentration of ownership could also
have the effect of delaying or preventing a change in our control.
  **Our
articles, our stockholder rights plan and certain Canadian laws could delay or
deter a change of control.**
  Our
authorized preferred capital stock is available for issuance from time to time
at the discretion of our board of directors, without stockholder approval. Our
articles grant our board of directors the authority, subject to the corporate
law of British Columbia, to determine or alter the special rights and
restrictions granted to or imposed on any wholly unissued series of preferred
shares, and such rights may be superior to those of our common
shares.
  Also,
pursuant to our stockholder rights plan, anyone who seeks to acquire 20% or more
of our outstanding common shares is required to make a bid complying with
specific provisions of the plan.
  Limitations
on the ability to acquire and hold our common shares may be imposed by the
Competition Act (Canada). This legislation permits the Commissioner of
Competition of Canada to review any acquisition of a significant interest in us.
This legislation grants the Commissioner jurisdiction to challenge such an
acquisition before the Canadian Competition Tribunal if the Commissioner
believes that it would, or would be likely to, result in a substantial lessening
or prevention of competition in any market in Canada. The Investment Canada Act
(Canada) subjects an acquisition of control of a company by a non-Canadian to
government review if the value of our assets as calculated pursuant to the
legislation exceeds a threshold amount. A reviewable acquisition may not proceed
unless the relevant minister is satisfied that the investment is likely to be a
net benefit to Canada.
  Any
of the foregoing could prevent or delay a change of control and may deprive or
limit strategic opportunities for our stockholders to sell their
shares.
  **We
may be a passive foreign investment company for U.S. tax purposes which may
negatively affect U.S. investors.**
  For
U.S. federal income taxation purposes, we will be a passive foreign investment
company, or PFIC, if in any taxable year either: (a) 75% or more of our gross
income consists of passive income; or (b) 50% or more of the value of our assets
is attributable to assets that produce, or are held for the production of,
passive income. If we meet either test, our shares held by a U.S. person in that
year will be PFIC shares for that year and all subsequent years in which they
are held by that person. Because in the past our gross income consisted mostly
of interest, we have been a PFIC in prior taxable years. We may also be a PFIC
in future taxable years. Gain realized by a U.S. investor from the sale of PFIC
shares is taxed as ordinary income, as opposed to capital gain, and subject to
an interest charge unless the U.S. person has timely made one of the tax
elections described in the section titled "United States Federal Income Tax
Information for United States Holders".
  The
PFIC rules are extremely complex. A U.S. person is encouraged to consult his or
her U.S. tax advisor before making an investment in our shares.
  **As
a foreign private issuer, we are subject to different U.S. securities laws and
rules than a domestic U.S. issuer, which may limit the information publicly
available to our stockholders.**
  As
a foreign private issuer we are not required to comply with all the periodic
disclosure requirements of the Securities Exchange Act of 1934 and therefore
there may be less publicly available information about Aspreva than if we were a
U.S. domestic issuer. In addition, our officers, directors, and principal
stockholders are exempt from the reporting and "short-swing" profit recovery
provisions of Section 16 of the Securities Exchange Act of 1934 and the rules
thereunder. Therefore, our stockholders may not know on a timely basis when our
officers, directors and principal stockholders purchase or sell our common
shares.
  **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.
   27
  **Item
4.  CONTROLS AND
PROCEDURES**
 
 **Evaluation
of disclosure controls and procedures**
 
 We
maintain “disclosure controls and procedures” (as such term is defined under
Securities Exchange Act Rule 13a-15(e)) that are designed to ensure that
information required to be disclosed in our reports is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosures. In designing and evaluating the disclosure controls and
procedures, our management recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives and in reaching a reasonable level of
assurance our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
 
 We
have carried out an evaluation under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of March 31, 2005. Based upon their evaluation and
subject to the foregoing, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were reasonably
effective in ensuring that information required to be disclosed by us in this
quarterly report on Form 10-Q was recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and Form 10-Q.
 
 **Changes
in internal controls**
 
 There
were no changes in our internal controls over financial reporting during the
three months ended March 31, 2005 that have materially affected or are
reasonably likely to materially affect our internal controls over financial
reporting.
 
 
 
 
  28
  **Part
II - OTHER INFORMATION**
 
 **ITEM 1.  LEGAL
PROCEEDINGS.**
 
 None.
 
 **ITEM 2.  UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**
 
 ***Use
of Proceeds***
 
 Our
initial public offering of common shares was effected through a registration
statement on Form F-1 (File No. 333-122234) that was declared effective by the
Securities and Exchange Commission on March 3, 2005, pursuant to which we sold
all 8,280,000 of our common shares that were registered thereunder.
 
 Our
initial public offering of common shares commenced on March 4, 2005 and was
completed after all of the shares of common stock that were registered were
sold. The managing underwriters in our initial public offering were Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC,
Pacific Growth Equities, LLC and BMO Nesbitt Burns Inc. The aggregate offering
price of the 8,280,000 shares registered and sold was $91.7 million. Of this
amount, $6.4 million was paid in underwriting discounts and commissions, and an
additional $3.0 million of expenses was incurred, of which approximately $1.3
million was incurred during the year ended December 31, 2004 and $1.7 million
was incurred during the three months ended March 31, 2005. Expenses of $1.1
million were incurred with Farris, Vaughan, Wills & Murphy LLP, Vancouver,
British Columbia. R. Hector MacKay-Dunn, Q.C., a member of our board of
directors and our Corporate Secretary is a senior partner of Farris, Vaughan,
Wills & Murphy LLP. No other expenses were incurred, directly or indirectly,
to directors, officers or persons owning 10% or more of our common stock, or to
our affiliates.
 
 We
intend to use the net proceeds of the offering primarily to continue the
development of CellCept for the treatment of lupus nephritis, myasthenia gravis
and pemphigus vulgaris, and to continue to pursue other collaborations. The
investment in CellCept development includes funding Phase III clinical
trials as well as regulatory expenses to support approval. In addition, our
infrastructure is being expanded to prepare for the potential commercialization
of CellCept for these indications.
 
 As
of March 31, 2005, we had applied the estimated aggregate net proceeds of $82.3
million from our initial public offering as follows:
 Working
capital: $6.3 million
 Temporary
investments: $76.0 million
 
 ***Recent
Sales of Unregistered Securities***
 
 From
January 1, 2005 through March 31, 2005, pursuant to our 2002 Incentive Stock
Option Plan, we granted stock options with a ten year term to employees to
purchase an aggregate of 41,602 common shares, at an exercise price of $6.39.
None of the employees who were granted options are residents of the United
States.
 
 **ITEM 3.  DEFAULTS UPON
SENIOR SECURITIES**
 
 None.
 
 **ITEM 4.  SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS.**
  In
January 2005, we submitted for approval the following matters to our common and
Series A preferred stockholders voting together as a single class. As of the
record date for taking such action, we had 20,034,378 common shares outstanding
(assuming the conversion of all our outstanding Series A preferred shares into
common shares, and not giving effect to the 1.284-for-1 stock split of our
outstanding common and Series A preferred shares). At our Special General
Meeting held on February 4, 2005, 14,431,826 of such shares were voted in
person or by proxy in favor of the following matters (no votes were cast against
such matters):
  1.
    Approving
      a Shareholder Rights Plan Agreement and Shareholder Rights
      Plan.
   29
  
 2.
    Approving
      an amendment to the Aspreva 2002 Incentive Stock Option Plan increasing
      the common shares authorized for issuance under such plan from 1,750,000
      to 2,750,000 (before giving effect to the 1.284-for-1 split described
      below).3.
    Approving
      a 1.284-for-1 stock split of our outstanding common and Series A preferred
      shares, including:(a)
    an
      amendment to our notice of articles to change the authorized share
      structure of the Series A preferred shares to take into consideration the
      above stock split; and(b)
    an
      amendment to our articles to change the special rights and restrictions of
      our Series A preferred shares to take into consideration the above stock
      split.4.
    Approving
      the amendment to our articles to change:(a)
    the
      approval thresholds for the following actions from a special resolution to
      an ordinary resolution:(i)
    create
      one or more classes or series of shares or, if none of the shares of a
      class or series of shares are allotted or issued, eliminate that class or
      series of shares; and(ii)
    if
      we are authorized to issue shares of a class of shares with par
      value:(A)
    decrease
      the par value of those shares; or(B)
    if
      none of the shares of that class of shares are allotted or issued,
      increase the par value of those shares;(b)
    the
      approval thresholds to subdivide or consolidate all or any of our
      unissued, or fully paid issued, shares from a special resolution to a
      directors’ resolution;(c)
    the
      approval threshold to set the number of our directors (as either a public
      company or not a public company) from an ordinary resolution to a
      directors’ resolution; and(d)
    the
      quorum requirement for the transaction of business at a meeting of our
      shareholders from two persons who are, or who represent by proxy,
      shareholders who, in the aggregate, hold at least 5% of the issued shares
      entitled to be voted at the meeting, to two persons who are, or who
      represent by proxy, shareholders who, in the aggregate, hold at least 20%
      of the issued shares entitled to be voted at the
  meeting.
  In
January 2005, we also submitted for approval by consent resolution to our Series
A preferred stockholders the matters described in paragraphs 3 and 4 above. As
of the record date for taking such action, we had 9,873,204 Series A preferred
shares outstanding (not giving effect to the 1.284-for-1 stock split of our
outstanding Series A preferred shares). Written consents were received from each
Series A preferred stockholder who voted unanimously in favor of such
matters.
 
 **ITEM 5.
OTHER INFORMATION**
 
 In
April 2005, we paid cash bonuses and granted bonus stock options to our
executive officers. The cash bonuses had been fully accrued at December 31, 2004
and did not impact first quarter 2005 expenses. The stock options have ten-year
terms, an exercise price of $14.21 (C$17.20) and vest monthly over three years.
Bonuses paid and options granted in April 2005 to those individuals identified
as our “Named Executive Officers” in our registration
statement on Form F-1 filed with the Securities and Exchange Commission, on
January 24, 2005, as amended, were:
 
 **Named
      Executive Officer**
    
    **Position**
    
    **Cash
      bonus paid**
    
    **Number
      of shares subject to stock options**Richard
      Glickman
    
    Chairman
      and Chief Executive Officer
    
    $
    171,000
    
    
    35,750Noel
      Hall
    
    President
    
    
    154,000
    
    
    30,000Bruce
      Cousins
    
    Chief
      Financial Officer
    
    
    93,000
    
    
    13,000Reinhard
      Baildon
    
    Executive
      Vice President, Clinical and Regulatory Affairs
    
    
    130,000
    
    
    18,250
 
 Each
of our Named Executive Officers is eligible for a discretionary performance
bonus determined as a percentage of such officer's annual base salary as set
forth in such officer's employment agreement with Aspreva. On April 20, 2005,
the Compensation Committee of the Board of Directors approved an increase of 5%
to the discretionary performance bonus percentage for each Named Executive
Officer, thereby increasing Mr. Glickman's and Mr. Hall's percentage from 35% to
40%, and Mr. Cousins' and Mr. Baildon's percentage from 30% to 35%.
 
  30
  
 **ITEM** **6.  EXHIBITS.**
 
 31.1
    Certification
      of the Chief Executive Officer, as required by Rule 13a-14(A) of the
      Securities and Exchange Act of 1934, as amended.31.2
    Certification
      of the Chief Financial Officer, as required by Rule 13a-14(A) of the
      Securities and Exchange Act of 1934, as amended.32.1*
    Certification
      of the Chief Executive Officer, as required by Rule 13a-14(B) and Section
      1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C.
      Section 1350).32.2*
    Certification
      of the Chief Financial Officer, as required by Rule 13a-14(B) and Section
      1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C.
      Section 1350).
 
 *
The certifications attached as Exhibits 32.1 and 32.2 accompany this quarterly
report on Form 10-Q, are not deemed filed with the Security and Exchange
Commission and are not to be incorporated by reference into any filing of
Aspreva Pharmaceuticals Corporation under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, whether made before
or after the date of this Form 10-Q, irrespective of any general incorporation
language contained in such filing.
  31
   **SIGNATURES**
 
 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 CORPORATIONMay
      12, 2005
    /s/
       Bruce G. CousinsBruce
      G. CousinsChief
      Financial Officer(Principal
      Financial and Accounting Officer)
 
  
  32
  **EXHIBIT
INDEX**
 31.1
    Certification of the
      Chief Executive Officer, as required by Rule 13a-14(A) of the Securities
      and Exchange Act of 1934, as amended.31.2
    Certification
      of the Chief Financial Officer, as required by Rule 13a-14(A) of the
      Securities and Exchange Act of 1934, as amended.32.1*
    Certification
      of the Chief Executive Officer, as required by Rule 13a-14(B) and Section
      1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C.
      Section 1350).32.2*
    Certification
      of the Chief Financial Officer, as required by Rule 13a-14(B) and Section
      1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C.
      Section 1350).
 
 33