**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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FORM 10-Q

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**Forthe Quarterly Period Ended March 31, 2005**

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**Forthe transition period from                    to                    **

**Commissionfile number 0-27628**

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SUPERGEN, INC.

(Exact name of registrantas specified in its charter)

| Delaware                                                        | **91-1841574**                        |
|-----------------------------------------------------------------|---------------------------------------|
| (State or other jurisdiction  of incorporation or organization) | (IRS Employer  Identification Number) |
| **4140  Dublin Blvd, Suite 200, Dublin, California**       | **94568**                             |
| (Address of principal executive offices)                        | (Zip Code)                            |

 

**(925) 560 - 0100**

(Registrant’s telephonenumber, including area code)

**Not applicable**

(Former name, formeraddress and former fiscal year, if changed since last report)

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

Indicate by checkmarkwhether Registrant is an accelerated filer (as defined in Rule 12B-2of the Act). Yes x  No o

The number of shares ofthe registrant’s Common Stock, $.001 par value, outstanding as of May 2,2005 was 51,177,152.

 

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**TABLE OF CONTENTS**
| ** **       |                                                                                                                                       | **Page No.** |
|------------------|---------------------------------------------------------------------------------------------------------------------------------------|--------------|
| **PART I**  | **FINANCIAL INFORMATION**                                                                                                             | ** **   | ** ** | ** ** |
|             | Item 1—Financial Statements (Unaudited)                                                                                          |         |   |   |
|             | Condensed Consolidated  Balance Sheets as of March 31, 2005 and December 31, 2004                                           |         | 3 |   |
|             | Condensed Consolidated  Statements of Operations for the three month periods ended March 31,  2005 and 2004                      |         | 4 |   |
|             | Condensed Consolidated  Statements of Cash Flows for the three month periods ended March 31,  2005 and 2004                      |         | 5 |   |
|             | Notes to Condensed Consolidated  Financial Statements                                                                                 |         | 6 |   |
|             | Item 2—Management’s Discussion and  Analysis of Financial Condition and Results of Operations      |         | 12 |   |
|             | Item 3—Quantitative and Qualitative  Disclosures About Market Risk                                                               |         | 34 |   |
|             | Item 4—Controls and Procedures                                                                                                   |         | 34 |   |
| **PART II** | **OTHER INFORMATION**                                                                                                                 | ** **   | ** ** | ** ** |
|             | Item 6—Exhibits                                                                                                                  |         | 35 |   |
| **SIGNATURES**   |                                                                                                                                  | 36           |   |

 

2

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**SUPERGEN, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share amounts)**
| ** **                                                                                                                                                                                   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                   | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| ** **                                                                                                                                                                                   | ** ** | **(Unaudited)**    | ** ** | **(Note 1)**     | ** ** |
| **ASSETS**                                                                                                                                                                                   | ** ** |               | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Current assets:                                                                                                                                                                              |       |               |       | ** **            |       |   |   | ** ** |   |
| Cash and cash equivalents                                                                                                                                                                    |       |               | $          | 42,144                | ** ** |   |   | $ | 38,394 | ** ** |   |
| Marketable securities                                                                                                                                                                        |       |               | 18,370     | ** **            |       |   | 18,235 | ** ** |   |
| Accounts receivable, net                                                                                                                                                                     |       |               | 1,038      | ** **            |       |   | 4,926 | ** ** |   |
| Development revenue receivable from MGI PHARMA, Inc                                                                                                                                          |       |               | 724        | ** **            |       |   | 12,809 | ** ** |   |
| Inventories                                                                                                                                                                                  |       |               | 3,279      | ** **            |       |   | 3,306 | ** ** |   |
| Prepaid expenses and other current assets                                                                                                                                                    |       |               | 2,073      | ** **            |       |   | 1,403 | ** ** |   |
| Total current assets                                                                                                                                                                         |       |               | 67,628     | ** **            |       |   | 79,073 | ** ** |   |
| Marketable securities, non-current                                                                                                                                                           |       |               | 228        | ** **            |       |   | 188 | ** ** |   |
| Investment in  stock of related parties                                                                                                                                                      |       |               | 805        | ** **            |       |   | 798 | ** ** |   |
| Due from related  parties, non-current                                                                                                                                                       |       |               | 89         | ** **            |       |   | 93 | ** ** |   |
| Property, plant  and equipment, net                                                                                                                                                          |       |               | 3,452      | ** **            |       |   | 3,635 | ** ** |   |
| Goodwill                                                                                                                                                                                     |       |               | 731        | ** **            |       |   | 731 | ** ** |   |
| Other intangibles,  net                                                                                                                                                                      |       |               | 581        | ** **            |       |   | 677 | ** ** |   |
| Restricted cash  and investments, non-current                                                                                                                                                |       |               | 9,841      | ** **            |       |   | 9,432 | ** ** |   |
| Other assets                                                                                                                                                                                 |       |               | 30         | ** **            |       |   | 30 | ** ** |   |
| Total assets                                                                                                                                                                                 |       |               | $          | 83,385                | ** ** |   |   | $ | 94,657 | ** ** |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                               | ** ** |               | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Current liabilities:                                                                                                                                                                         |       |               |       | ** **            |       |   |   | ** ** |   |
| Accounts payable and accrued liabilities                                                                                                                                                     |       |               | $          | 3,660                 | ** ** |   |   | $ | 4,644 | ** ** |   |
| Derivative liability                                                                                                                                                                         |       |               | 1,607      | ** **            |       |   | 1,607 | ** ** |   |
| Payable to AVI BioPharma, Inc.                                                                                                                                                          |       |               | 565        | ** **            |       |   | 565 | ** ** |   |
| Deferred revenue                                                                                                                                                                             |       |               | 7,429      | ** **            |       |   | 11,572 | ** ** |   |
| Accrued payroll and employee benefits                                                                                                                                                        |       |               | 2,080      | ** **            |       |   | 2,129 | ** ** |   |
| Total current liabilities                                                                                                                                                                    |       |               | 15,341     | ** **            |       |   | 20,517 | ** ** |   |
| Deferred rent                                                                                                                                                                                |       |               | 940        | ** **            |       |   | 927 | ** ** |   |
| Total liabilities                                                                                                                                                                            |       |               | 16,281     | ** **            |       |   | 21,444 | ** ** |   |
| Commitments and contingencies                                                                                                                                                                |       |               |       | ** **            |       |   |   | ** ** |   |
| Stockholders’ equity:                                                                                                                                                                   |       |               |       | ** **            |       |   |   | ** ** |   |
| Preferred stock, $.001 par value; 2,000,000 shares  authorized; none outstanding                                                                                                             |       |               | —     | ** **            |       |   | — | ** ** |   |
| Common stock, $.001 par value; 150,000,000 shares  authorized; 51,145,423 and 51,127,314 shares issued and outstanding at  March 31, 2005 and December 31, 2004, respectively |       |               | 51         | ** **            |       |   | 51 | ** ** |   |
| Additional paid in capital                                                                                                                                                                   |       |               | 407,150    | ** **            |       |   | 406,789 | ** ** |   |
| Accumulated other comprehensive gain (loss)                                                                                                                                                  |       |               | 334        | ** **            |       |   | (99 | ) |   |
| Accumulated deficit                                                                                                                                                                          |       |               | (340,431   | )                     |       |   | (333,528 | ) |   |
| Total stockholders’ equity                                                                                                                                                              |       |               | 67,104     | ** **            |       |   | 73,213 | ** ** |   |
| Total liabilities and stockholders’ equity                                                                                                                                              |       |               | $          | 83,385                | ** ** |   |   | $ | 94,657 | ** ** |   |

 

See accompanying notes to condensed consolidated financial statements

3

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**SUPERGEN, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts)(unaudited)**
| ** **                                                                               | ** ** | **Three months ended**                                                 | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                               | ** ** | **March 31,**                                                               | ** ** |
| ** **                                                                               | ** ** | **      2005      ** | ** ** | **       2004       ** | ** ** |
| Revenues:                                                                                |       |                                                                             |       |   |   |   |   |   |   |
| Net product revenue                                                                      |       |                                                                             | $          | 1,015 |   |   |   | $ | 1,098 |   |   |
| Development and license revenue from MGI PHARMA,  Inc.                                   |       |                                                                             | 3,225      |   |   |   | — |   |   |
| Distribution agreement revenue                                                           |       |                                                                             | 167        |   |   |   | — |   |   |
| Total revenues                                                                           |       |                                                                             | 4,407      |   |   |   | 1,098 |   |   |
| Costs and  operating expenses:                                                           |       |                                                                             |       |   |   |   |   |   |   |
| Cost of product revenue                                                                  |       |                                                                             | 300        |   |   |   | 551 |   |   |
| Research and development                                                                 |       |                                                                             | 5,124      |   |   |   | 7,450 |   |   |
| Selling, general, and administrative                                                     |       |                                                                             | 6,258      |   |   |   | 5,548 |   |   |
| Total costs and operating expenses                                                       |       |                                                                             | 11,682     |   |   |   | 13,549 |   |   |
| Loss from operations                                                                     |       |                                                                             | (7,275     | ) |   |   | (12,451 | ) |   |
| Interest income                                                                          |       |                                                                             | 372        |   |   |   | 87 |   |   |
| Interest expense                                                                         |       |                                                                             | —     |   |   |   | (948 | ) |   |
| Amortization of  deemed discount on convertible debt                                     |       |                                                                             | —     |   |   |   | (4,019 | ) |   |
| Change in  valuation of derivatives                                                      |       |                                                                             | —     |   |   |   | (1,404 | ) |   |
| Net loss                                                                                 |       |                                                                             | $          | (6,903 | ) |   |   | $ | (18,735 | ) |   |
| Basic and diluted  net loss per common share                                             |       |                                                                             | $          | (0.13 | ) |   |   | $ | (0.48 | ) |   |
| Weighted average shares  used in basic and diluted net loss per common share calculation |       |                                                                             | 51,142     |   |   |   | 39,229 |   |   |

 

See accompanying notes to condensed consolidated financial statements

4

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**SUPERGEN, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)**
| ** **                                                                                 | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                 | ** ** | **March 31,**               | ** ** |
| ** **                                                                                 | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Operating activities:                                                                      |       |                             |       |   |   |
| Net loss                                                                                   |       | $                                | (6,903     | ) | $ | (18,735 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                             |       |   |   |
| Depreciation                                                                               |       | 218                              |       | 284 |   |
| Amortization of prepaid financing costs                                                    |       | —                           |       | 702 |   |
| Amortization of intangible assets                                                          |       | 96                               |       | 215 |   |
| Amortization of deemed discount on convertible debt                                        |       | —                           |       | 4,019 |   |
| Amortization of deferred revenue                                                           |       | (2,476                           | )          | — |   |
| Interest on convertible debt paid in common stock                                          |       | —                           |       | 242 |   |
| Change in valuation of derivatives                                                         |       | —                           |       | 1,404 |   |
| Stock compensation for modification of employee  options                                   |       | 268                              |       | 429 |   |
| Expense related to stock options and warrants  granted to non-employees                    |       | 30                               |       | — |   |
| Milestone, license, and research payments made in  common stock                            |       | —                           |       | 200 |   |
| Cash option paid in termination of distribution  agreement                                 |       | (1,500                           | )          | — |   |
| Changes in  operating assets and liabilities:                                              |       |                             |       |   |   |
| Accounts receivable and development revenue  receivable                                    |       | 15,973                           |       | (317 | ) |
| Inventories                                                                                |       | 27                               |       | (512 | ) |
| Prepaid expenses and other assets                                                          |       | (670                             | )          | (526 | ) |
| Due from related parties                                                                   |       | 4                                |       | 50 |   |
| Restricted cash and investments                                                            |       | (14                              | )          | (7 | ) |
| Accounts payable and other liabilities                                                     |       | (1,020                           | )          | (8 | ) |
| Deferred revenue                                                                           |       | (167                             | )          | — |   |
| Net cash provided  by (used in) operating activities                                       |       | 3,866                            |       | (12,560 | ) |
| Investing activities:                                                                      |       |                             |       |   |   |
| Purchases of marketable securities                                                         |       | (10,290                          | )          | (9,557 | ) |
| Sales or maturities of marketable securities                                               |       | 10,146                           |       | 7,350 |   |
| Purchase of intangible assets                                                              |       | —                           |       | (1,000 | ) |
| Release of restricted cash from collateral account                                         |       | —                           |       | 10,680 |   |
| Purchases of property and equipment                                                        |       | (35                              | )          | (116 | ) |
| Net cash provided  by (used in) investing activities                                       |       | (179                             | )          | 7,357 |   |
| Financing activities:                                                                      |       |                             |       |   |   |
| Proceeds from issuance of common stock, net of  issuance costs                             |       | 63                               |       | 32,867 |   |
| Net cash provided  by financing activities                                                 |       | 63                               |       | 32,867 |   |
| Net increase in  cash and cash equivalents                                                 |       | 3,750                            |       | 27,664 |   |
| Cash and cash  equivalents at beginning of period                                          |       | 38,394                           |       | 5,055 |   |
| Cash and cash  equivalents at end of period                                                |       | $                                | 42,144     |   | $ | 32,719 |   |
| Supplemental  Disclosure of Non-Cash Financing Activities:                                 |       |                             |       |   |   |
| Conversion of convertible notes into common stock                                          |       | $                                | —     |   | $ | 11,250 |   |

 

See accompanying notes to condensed consolidated financial statements

5

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (Unaudited)**

**NOTE 1.**   BASISOF PRESENTATION

The accompanying condensed unaudited consolidatedfinancial statements of SuperGen, Inc. (“we,” “SuperGen” or the “Company”)have been prepared in accordance with generally accepted accounting principlesfor interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not include all ofthe information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring adjustments) considered necessaryfor a fair presentation have been included. Operating results for the threemonth period ended March 31, 2005 are not necessarily indicative ofresults that may be expected for the year ending December 31, 2005.

The balance sheet at December 31, 2004 has beenderived from the audited financial statements at that date, but does notinclude all the information and footnotes required by generally acceptedaccounting principles for complete financial statements.

For further information,refer to the consolidated financial statements and footnotes included in theCompany’s annual report on Form 10-K for the year ended December 31,2004.

**NOTE 2.**   STOCK-BASED COMPENSATION

We account for stock issued toemployees in accordance with Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”) and comply with the disclosureprovisions of Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”) and Statement of FinancialAccounting Standards No. 148, “Accounting for Stock-Based Compensation—Transitionand Disclosure” (“SFAS 148”). Under APB 25, compensation expense of fixed stockoptions is based on the intrinsic value on the date of the grant, whichrepresents the difference, if any, between the fair value of the stock and theexercise price of the option.

We account for stock issued tonon-employees using the fair value approach, in accordance with the provisionsof SFAS 123 and EITF No. 96-18*,*“Accountingfor Equity Instruments That are Issued to Other Than Employees for Acquiring,or in Conjunction with Selling, Goods or Services.”

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) MARCH 31, 2005 (Unaudited)**

**NOTE 2.**   STOCK-BASEDCOMPENSATION (Continued)

Under the intrinsic valuemethod, when the exercise price of our employee stock options equals the marketprice of the underlying stock on the date of grant, no compensation expense isrecognized. The following table illustrates the pro forma effect on net lossand loss per share for the three month periods ended March 31, 2005 and2004 had we applied the fair value method to account for stock-based awards toemployees (in thousands, except per share amounts):
| ** **                                                                                                                                                                  | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
| Net loss, as  reported                                                                                                                                                      |       | $                                                | (6,903     | ) | $ | (18,735 | ) |
| Add: Stock-based  employee compensation expense included in the determination of net loss, as  reported                                                                     |       | 268                                              |       | 429 |   |
| Deduct:  Stock-based employee compensation expense that would have been included in  the determination of net loss if the fair value method had been applied to  all awards |       | (3,168                                           | )          | (1,203 | ) |
| Pro forma net  loss                                                                                                                                                         |       | $                                                | (9,803     | ) | $ | (19,509 | ) |
| Basic and diluted net  loss per common share:                                                                                                                               |       |                                             |       |   |   |
| As reported                                                                                                                                                                 |       | $                                                | (0.13      | ) | $ | (0.48 | ) |
| Pro forma                                                                                                                                                                   |       | $                                                | (0.19      | ) | $ | (0.50 | ) |

 

**NOTE 3.   CASH, CASHEQUIVALENTS, AND MARKETABLE SECURITIES**

Cash and cash equivalents include bank demanddeposits, certificates of deposit, investments in debt securities withmaturities of three months or less when purchased, and an interest in moneymarket funds which invest primarily in U.S. government obligations andcommercial paper. These instruments are highly liquid and are subject toinsignificant risk.

Investments in marketable securities consist of equitysecurities and corporate or government debt securities that have a readilyascertainable market value and are readily marketable. We report theseinvestments at fair value. We designate all marketable securities asavailable-for-sale, with unrealized gains and losses included as a component ofequity.

Thefollowing is a summary of available-for-sale securities as of March 31,2005 (in thousands):
| ** **                       | ** ** | ** Amortized   Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | ** Fair Value ** | ** ** |
|----------------------------------|------------|---------------------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------------------|------------|
| U.S. corporate  debt securities  |       |                            | $          | 44,865                       |       |                          |       | $                               | —     |   |   |   | $ | (12 | ) |   |   | $ | 44,853 |   |   |
| U.S. government  debt securities |       |                            | 12,437     |                         |       |                          | —     |                            |       |   | (16 | ) |   |   | 12,421 |   |   |
| Marketable equity  securities    |       |                            | 6,577      |                         |       |                          | 372        |                            |       |   | (10 | ) |   |   | 6,939 |   |   |
| Total                            |       |                            | $          | 63,879                       |       |                          |       | $                               | 372        |   |   |   | $ | (38 | ) |   |   | $ | 64,213 |   |   |

 

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) MARCH 31, 2005 (Unaudited)**

**NOTE 3.**   CASH, CASHEQUIVALENTS, AND MARKETABLE SECURITIES (Continued)

The available-for-salesecurities are classified on the balance sheet as of March 31, 2005 asfollows (in thousands):
| ** **                                                  | ** ** | **Amortized        Cost      ** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | ** Fair Value ** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------------------|------------|
| Amounts included  in cash and cash equivalents              |       |                                                                                        | $          | 38,908                       |       |                          |       | $                               | —     |   |   |   | $ | (4 | ) |   |   | $ | 38,904 |   |   |
| Marketable  securities, current                             |       |                                                                                        | 18,394     |                         |       |                          | —     |                            |       |   | (24 | ) |   |   | 18,370 |   |   |
| Amounts included  in investment in stock of related parties |       |                                                                                        | 120        |                         |       |                          | 5          |                            |       |   | — |   |   |   | 125 |   |   |
| Amounts included  in restricted cash and investments        |       |                                                                                        | 6,322      |                         |       |                          | 264        |                            |       |   | — |   |   |   | 6,586 |   |   |
| Marketable  securities, non-current                         |       |                                                                                        | 135        |                         |       |                          | 103        |                            |       |   | (10 | ) |   |   | 228 |   |   |
| Total                                                       |       |                                                                                        | $          | 63,879                       |       |                          |       | $                               | 372        |   |   |   | $ | (38 | ) |   |   | $ | 64,213 |   |   |

 

Available-for-salesecurities by contractual maturity are shown below (in thousands):
| ** **                             | ** ** | **Fair Value**                                                                              | ** ** |
|----------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **March 31,        2005      ** | ** ** | **December 31,  2004** | ** ** |
| Debt securities:                       |       |                                                                                             |       |   |   |   |   |   |   |
| Due in one year or less                |       |                                                                                             | $          | 57,274 |   |   |   | $ | 51,939 |   |   |
| Due after one year through three years |       |                                                                                             | —     |   |   |   | — |   |   |
|                                   |       |                                                                                             | 57,274     |   |   |   | 51,939 |   |   |
| Marketable equity  securities          |       |                                                                                             | 6,939      |   |   |   | 6,496 |   |   |
| Total                                  |       |                                                                                             | $          | 64,213 |   |   |   | $ | 58,435 |   |   |

 

**NOTE 4.   INVENTORIES**

Inventoriesconsist of the following (in thousands):
| ** **      | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials   |       |                     | $          | 83                          |       |   |   | $ | 83 |   |   |
| Work in process |       |                     | 764        |                        |       |   | 1,040 |   |   |
| Finished goods  |       |                     | 2,432      |                        |       |   | 2,183 |   |   |
|            |       |                     | $          | 3,279                       |       |   |   | $ | 3,306 |   |   |

 

**NOTE 5.   CONVERTIBLEDEBT FINANCING DERIVATIVE LIABILITY AND COLLATERAL**

On June 24, 2003, we closed a private placementtransaction in which we issued Senior Convertible Notes (“June Notes”) inthe aggregate principal amount of $21.25 million. In connection with theissuance of the June Notes, we issued to the note holders warrants topurchase the 2,634,211 shares of 

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) MARCH 31, 2005 (Unaudited)**

**NOTE 5.**   CONVERTIBLE DEBT FINANCING DERIVATIVE LIABILITY AND COLLATERAL(Continued)

AVI BioPharma, Inc.that we own (“AVI Shares”) at an exercise price of $5.00 per share. Thewarrants represent a derivative under SFAS 133 that must be recorded at fairvalue. Changes in the fair value of the derivative are recognized in earnings. Duringthe three months ended March 31, 2004, we recorded a change in the valueof this derivative of $2,212,000. There was no change in the value of thisderivative during the three months ended March 31, 2005.

In connection with theissuance of the warrants to acquire the 2,634,211 AVI Shares, we pledged theAVI Shares into a collateral account. The fair value of the AVI Shares isincluded in the accompanying balance sheet under non-current Restricted cashand investments. We also hold an additional 50,000 shares of AVI, which areincluded in the accompanying balance sheet in Investment in stock of relatedparties. We continue to hold all of the pledged and unpledged AVI Shares andreflect temporary changes in those share values in accumulated othercomprehensive gain or loss.

**NOTE 6.   STOCKPURCHASE AND LICENSE AGREEMENTS WITH MGI PHARMA, INC.**

In August 2004, we entered into three agreementswith MGI PHARMA, Inc., a Minnesota corporation (“MGI”): (1) a commonstock purchase agreement, (2) a license agreement relating to DacogenTM(decitabine), and (3) an investor rights agreement. The agreements becameeffective on September 21, 2004. Dacogen is our investigationalanti-cancer therapeutic which is currently in clinical trials for the treatmentof patients with myelodysplastic syndrome (“MDS”). Pursuant to the terms of thelicense agreement, MGI received exclusive worldwide rights to the development,commercialization and distribution of Dacogen for all indications.

In accordance with the stock purchase agreement, weissued 4,000,000 shares of our common stock to MGI at $10.00 per share, foraggregate proceeds totaling $40,000,000. We paid the placement agent $3,200,000in cash and issued the placement agent a warrant exercisable for 400,000 sharesof our common stock at an exercise price of $10.00 per share. We calculated thefair value of the warrant at $1,436,000. We allocated the aggregate proceedsand related costs of the placement agent fee and warrant valuation betweenequity, for the portion attributable to the stock purchase agreement, anddeferred revenue, for the portion attributable to the license agreement. Therefore,we allocated $23,662,000, the fair value of 4,000,000 shares of our commonstock at the time of the transaction, net of related offering costs, to equity,and allocated $12,625,000 to deferred revenue. The deferred revenue is beingamortized to license revenue over 15 months, which is the period of time inwhich our development obligations for Dacogen would transfer to MGI. During thethree months ended March 31, 2005, we recorded amortization of deferredrevenue of $2,476,000. We had no similar amortization during the three monthsended March 31, 2004.

Under the terms of thelicense agreement, MGI is obligated to reimburse us for certain development andallocated overhead costs of Dacogen until we receive marketing authorization. Inthe three months ended March 31, 2005, we recognized $749,000 ofdevelopment revenue relating to the reimbursement under this agreement. We hadno similar revenue during the three months ended March 31, 2004.

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) MARCH 31, 2005 (Unaudited)**

**NOTE 7.   ACQUISITIONOF NIPENT EUROPEAN MARKETING RIGHTS**

In February 2004, weentered into a Purchase and Sale Agreement with Pfizer Inc. to acquire Europeanmarketing rights for Nipent®, our drug that is currently approved for marketingin the United States for hairy cell leukemia. We paid Pfizer $1,000,000 underthis agreement and have classified this amount in Other intangibles in theaccompanying balance sheet. This amount is being amortized over 31 months, theestimated life of the benefit period. Accumulated amortization was $420,000 and$32,000 at March 31, 2005 and 2004, respectively.

**NOTE 8.   TERMINATIONOF AGREEMENT WITH ABBOTT LABORATORIES**

In December 1999, we entered into a Nipent distribution agreement with AbbottLaboratories. Beginning March 1, 2000, Abbott became the exclusive U.S.distributor of Nipent for a period of five years. We retained U.S. marketingrights for Nipent. Under this agreement, Abbott made a $5 million cash paymentto the Company in January 2000. This amount was included in deferredrevenue and was being amortized to distribution revenue over 60 months.

In March 2003, weentered into an agreement with Abbott that allowed us to terminate the Nipentdistribution agreement, for a stated fee that decreased over time to $1,500,000at March 2005. As part of the agreement, we paid Abbott $500,000 for theright to terminate the Nipent distribution agreement at our option. The$500,000 was recorded as a reduction of the deferred revenue we initiallyreceived from Abbott for the distribution rights, and we stopped amortizing theremaining balance of deferred revenue, which was $1,667,000 at that time. In February 2005, we exercised our optionand paid Abbott $1,500,000 to terminate the Nipent distribution agreement. Thisamount was charged against deferred revenue. The remaining balance in deferredrevenue of $167,000 was recorded as distribution agreement revenue in the threemonth period ending March 31, 2005.

**NOTE 9.   COMPREHENSIVELOSS**

For the three months endedMarch 31, 2005 and 2004, total comprehensive losses amounted to $6,470,000and $21,463,000, respectively. Comprehensive losses consisted primarily of thenet losses and changes in unrealized gains or losses on investments. Werecorded an unrealized gain on investments of $433,000 for the three monthsended March 31,2005, and recorded an unrealized loss of $2,728,000 for thethree month period ended March 31, 2004.

**NOTE 10.   BASIC NETLOSS PER SHARE**

Basic and diluted net loss per common share iscomputed by dividing net loss by the weighted average number of sharesoutstanding during the quarter.

As we have reported operating losses in each period,the effect of assuming the exercise of options and warrants would beanti-dilutive and, therefore, basic and diluted net loss per share are thesame.

The computation of diluted net loss per share for thethree months ended March 31, 2005 excludes the impact of options topurchase 6,828,000shares of common stock andwarrants to purchase 7,183,000 shares of common stock at March 31, 2005,as such impact would be antidilutive.

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) MARCH 31, 2005 (Unaudited)**

**NOTE 10.**   BASIC NET LOSSPER SHARE (Continued)

The computation of dilutednet loss per share for the three months ended March 31, 2004 excludes theimpact of options to purchase 6,333,000 shares of common stock, warrants topurchase 7,070,000 shares of common stock, and 2,357,000 shares of common stockissuable upon conversion of senior convertible notes at March 31, 2004, assuch impact would be antidilutive.

**NOTE 11.   RECENTACCOUNTING PRONOUNCEMENTS**

In December 2004, the Financial AccountingStandards Board issued Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS 123and supersedes APB 25. SFAS 123R requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thefinancial statements based on their fair values. The pro forma disclosurespreviously permitted under SFAS No. 123 no longer will be an alternativeto financial statement recognition. In accordance with a recently issuedSecurities and Exchange Commission rule, companies will be allowed to implementSFAS No. 123R as of the beginning of the first interim or annual periodthat begins after June 15, 2005. We currently expect that we will adoptSFAS 123R on January 1, 2006. Under SFAS 123R, we must determine theappropriate fair value model to be used for valuing share-based payments, theamortization method for compensation cost, and the transition method to be usedat date of adoption. The permitted transition methods include either retrospectiveor prospective adoption. Under the retrospective method, prior periods may berestated either as of the beginning of the year of adoption or for all periodspresented. The prospective method requires that compensation expense berecorded for all unvested stock options at the beginning of the first quarterof adoption of SFAS 123R, while the retrospective methods would recordcompensation expense for all unvested stock options beginning with the firstperiod presented. We are currently evaluating the requirements of SFAS 123R andexpect that adoption of SFAS 123R will have a material impact on ourconsolidated financial position and results of operations. We have not yetdetermined the method of adopting SFAS 123R, and we have not determined whetherthe adoption will result in amounts that are similar to the current pro formadisclosures under SFAS 123.

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**Item2.**

**MANAGEMENT’SDISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

*You should read the following discussion together withour condensed consolidated financial statements and related notes includedelsewhere in this report. The results discussed below are not necessarilyindicative of the results to be expected in any future periods. Our disclosure and analysis in this section of thereport also contain forward-looking statements. When we use the words “anticipate,”“estimate,” “project,” “intend,” “expect,” “plan,” “believe,” “should,” “likely”and similar expressions, we are making forward-looking statements.Forward-looking statements provide our current expectations or forecastsof future events. In particular, these statements include statements such as:the timing of receiving approval of our filings for Orathecin and Dacogen,including our*expectationthat the FDA will review and act on our NDA for Dacogen by September 2005; our estimates about becoming profitable; thepercentage of royalties we might expect to earn on Dacogen sales under ouragreement with MGI; our forecasts regarding our research and developmentexpenses; the impact of our outstanding indebtedness; and our statementsregarding the sufficiency of our cash to meet our operating needs. Our actualresults could differ materially from those predicted in the forward-lookingstatements as a result of risks and uncertainties including, but not limitedto, delays and risks associated with conducting and managing our clinicaltrials; developing products and obtaining regulatory approval; ability toestablish and maintain collaboration relationships; competition; ability toobtain funding; ability to protect our intellectual property; our dependence onthird party suppliers; risks associated with the hiring and loss of keypersonnel; adverse changes in the specific markets for our products; ability tolaunch and commercialize our products. Certain unknown or immaterial risks anduncertainties can also affect our forward-looking statements.Consequently, no forward-looking statement can be guaranteed and youshould not rely on these forward-looking statements. For adiscussion of the known and material risks that could affect our actualresults, please see “Factors Affecting Future Operating Results” in thissection of the report. We undertake no obligation to update any forward-lookingstatements, whether as a result of new information, future events or otherwise.However, readers should carefully review the risk factors set forth in this10-Q and other reports or documents we file from time to time with theSecurities and Exchange Commission.

**Overview**

We are a pharmaceutical company dedicated to thedevelopment and commercialization of therapies for solid tumors, hematologicalmalignancies, and blood disorders. Our strategy is to commercialize products byminimizing the time, expense and technical risk associated with drug researchthrough identifying and acquiring pharmaceutical compounds in the later stagesof development. Our primary objective is to become a leading supplier oftherapies for solid tumors, hematological malignancies, and blood disorders.

Since our incorporation in 1991 we have devotedsubstantially all of our resources to our product development efforts. Currentlywe have three key compounds, Orathecin, Dacogen and Nipent, that are the focusof our efforts.

*Orathecin.  *During January 2004,we submitted an New Drug Application (“NDA”) to the United States Food and DrugAdministration (“FDA”) for Orathecin. The filing was accepted by the FDA andindicated a target Prescription Drug User Fee Act (“PDUFA”) date of November 26,2004. At the request of the FDA, we submitted during November 2004additional clinical data from a trial of Orathecin as a first-line treatmentfor pancreatic cancer as well as new analyses of data from the pivotal study in2nd and 3rd line patients. The FDA classified these data as a Major Amendment,which triggered an extension of the review period by 90 days resulting in arevised target PDUFA date of February 26, 2005. Based on furtherdiscussions and feedback with both the FDA and consultants helping us dialogwith the FDA, it was determined the current package for Orathecin was notsufficient to gain approval at this time in the United States and we announcedthe withdrawal of the NDA in January 2005. During the period ended 

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March 31, 2005, wereceived the findings from the FDA and are reviewing these findings todetermine the most appropriate course of action in the future for Orathecin inthe United States. During July 2004, we submitted a MarketingAuthorization Application (“MAA”) seeking approval of Orathecin in thetreatment of pancreatic cancer to the European Agency for the Evaluations ofMedicinal Products (“EMEA”). EMEA procedures generally provide that a decisionon the Orathecin MAA will usually occur within 12 months of acceptance of submission,which could result in a decision by the EMEA in the second half of 2005. OurEuropean filing for Orathecin remains on track and is not affected by thewithdrawal of the NDA for Orathecin in the United States. There can be noguarantee that the EMEA will approve Orathecin.

*Dacogen.  *During March 2004,we reported results from our randomized Phase III study of Dacogen forinjection as a treatment for MDS. In October 2004, we submitted to theEMEA an MAA seeking approval of Dacogen in the treatment of myelodysplasticsyndrome. EMEA procedures generally provide that a decision on the Dacogen MAAwill usually occur within 12 months of acceptance of submission, which couldresult in a decision by them in the second half of 2005 or early 2006. In November 2004,we submitted an NDA to the FDA for Dacogen. The filing was accepted at the endof 2004 by the FDA and indicated a target PDUFA date of September 1, 2005.There can be no guarantee that the FDA or EMEA will approve Dacogen. During September 2004,we executed a definitive agreement granting MGI exclusive worldwide rights tothe development, manufacture, commercialization and distribution of Dacogen. Underthe terms of the agreement, MGI made a $40.0 million equity investment in usand will pay us up to $45.0 million in specific regulatory andcommercialization milestones. If Dacogen is approved, we could receive aroyalty on worldwide net sales starting at 20% and escalating to a maximum of30%. MGI has also committed to fund further development costs associated withDacogen at a minimum of $15.0 million over a three-year period.

*Nipent.  *Nipent is approvedby the FDA and EMEA for the treatment of hairy cell leukemia and is marketed byus in the United States and Europe. Nipent has also shown promise in otherdiseases and we are conducting a series of post-marketing Phase IV clinicaltrials for chronic lymphocytic leukemia (“CLL”), non-Hodgkin’s lymphoma (“NHL”),cutaneous and peripheral T-cell lymphomas, and graft-versus-host disease (“GvHD”).

*Other Products.  *Ourportfolio of other products includes Partaject-delivered busulfan, andinhaled versions of Orathecin and paclitaxel. We also market Surface Safe. Wehave also received regulatory approval to market our generic daunorubicin for avariety of acute leukemias and Mitozytrex (mitomycin for injection), for use inthe therapy of disseminated adenocarcinoma of the stomach or pancreas in provencombinations with other approved chemotherapeutic agents and as palliativetreatment when other modalities have failed. Moreover, we hold U.S. sales andmarketing rights to the cancer vaccine Avicine. We are continually evaluatingour product portfolio to determine whether it is appropriate for us to dedicatethe resources needed to commercialize these products ourselves or whether wewould be better served selling or licensing the rights to develop theseproducts to third parties.

To date, our product revenues have been limited andare derived primarily from sales of Nipent, which we are marketing in theUnited States and distributing in Europe for the treatment of hairy cellleukemia. Most of our products are still in the development stage, and we willrequire substantial additional investments in research and development,clinical trials, and in regulatory and sales and marketing activities tocommercialize current and future product candidates. Conducting clinical trialsis a lengthy, time-consuming, and expensive process involving inherentuncertainties and risks, and our studies may be insufficient to demonstratesafety and efficacy to support FDA approval of any of our product candidates.

As a result of our substantial research anddevelopment expenditures and minimal product revenues, we have incurredcumulative losses of $340.4 million through March 31, 2005, and havenever generated 

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enough funds through ouroperations to support our business. We expect to continue to incur operatinglosses at least through 2006.

Ultimately, our ability tobecome profitable will depend upon a variety of factors, including regulatory approvalsof our products, the timing of the introduction and market acceptance of ourproducts and competing products, MGI’s success in commercializing Dacogen, ifapproved, increases in sales and marketing expenses related to the launch ofnew products and our ability to control our costs and operating expenses. Ifthe results from our clinical trials are not positive, we may not be able toget sufficient funding to continue our trials or conduct new trials, and wewould be forced to scale down or cease our business operations. Moreover, ifour products are not approved or commercially accepted we will remainunprofitable for longer than we currently anticipate. Additionally, we might beforced to substantially scale down our operations or sell certain of ourassets, and it is likely the price of our stock would decline precipitously.

**Critical AccountingPolicies**

Our management discussion and analysis of ourfinancial condition and results of operations is based upon our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses, andreported disclosures. On an on-going basis, we evaluate our estimates,including those related to revenue recognition, intangible assets, valuation ofinvestments and derivative instruments. We base our estimates on historicalexperience and on various other assumptions that we believe are reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.

Our significant accountingpolicies are more fully disclosed in Note 1 to our condensed consolidatedfinancial statements. However, some of our accounting policies are particularlyimportant to the portrayal of our financial position and results of operationsand require the application of significant judgment by our management. Webelieve the following critical accounting policies, among others, affect ourmore significant judgments and estimates used in the preparation of ourconsolidated financial statements.

*Revenue Recognition*

Our net sales relate principally to Nipent and, to alesser extent, mitomycin. We recognize sales revenue upon shipment and relatedtransfer of title to customers, and collectibility is reasonably assured.Allowances are established for estimated product returns and exchanges.

Allowances for product returns and exchanges are basedon historical information and known trends from external sources. The costs ofproduct exchanges, which include actual product costs and related shippingcharges, are included in cost of product revenue. In estimating returns, weanalyze historical returns and sales patterns, the remaining shelf life ofinventory, and changes in demand. We continually assess our historicalexperience and adjust our allowances as appropriate. If actual product returnsand exchanges are greater than our estimates, additional allowances may berequired.

Cash advance paymentsreceived in connection with distribution agreements, license agreements, orresearch grants are deferred and recognized ratably over the period of therespective agreements or until services are performed. We recognize costreimbursement revenue under collaborative agreements as the related researchand development costs are incurred. We recognize milestone fees upon completionof specified milestones according to contract terms. Deferred revenuerepresents the portion of research payments received that has not been earned.

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*Intangible Assets*

We have intangible assetsrelated to goodwill and other acquired intangibles such as trademarks,covenants not to compete, and customer lists. The determination of relatedestimated useful lives and whether or not these assets are impaired involvessignificant judgment. Changes in strategy and/or market conditions couldsignificantly impact these judgments and require adjustments to recorded assetbalances. We review intangible assets, as well as other long-lived assets, forimpairment whenever events or circumstances indicate that the carrying amountmay not be fully recoverable.

*Valuation ofInvestments in Financial Instruments*

Investments in financial instruments are carried atfair value with unrealized gains and losses included in accumulated othercomprehensive income or loss in stockholders’ equity. Our investment portfolioincludes equity securities that could subject us to material market risk andcorporate obligations that subject us to varying levels of credit risk. If thefair value of a financial instrument has declined below its carrying value fora period in excess of six consecutive months or if the decline is due to asignificant adverse event, such that the carrying amount of these investmentsmay not be fully recoverable, the impairment is considered to be other thantemporary. An other than temporary decline in fair value of a financialinstrument would be subject to a write-down resulting in a charge againstearnings. The determination of whether a decline in fair value is other thantemporary requires significant judgment, and could have a material impact onour balance sheet and results of operations. Our management reviews thesecurities within our portfolio for other than temporary declines in value on aregular basis. The prices of some of our marketable securities, in particularAVI, are subject to considerable volatility. Decreases in the fair value ofthese securities may significantly impact our results of operations.

Investments in equitysecurities without readily determinable fair value are carried at cost. Weperiodically review those carried costs and evaluate whether an impairment hasoccurred. The determination of whether an impairment has occurred requiressignificant judgment, as each investment may have unique market or developmentopportunities.

*DerivativeInstruments*

In connection with our June 2003convertible debt transaction, we issued to the note holders warrants topurchase 2,634,211 shares of common stock of AVI at $5.00 per share. As of March 31,2005, we owned sufficient shares of AVI to cover the potential obligation.These warrants are considered to be a derivative and have been recorded on thebalance sheet at fair value. The accounting for derivatives is complex, andrequires significant judgments and estimates involved in determining the fairvalue in the absence of quoted market values. These estimates are based onvaluation methodologies and assumptions deemed appropriate in thecircumstances. The fair value of the warrants is based on various assumptionsinput into the Black-Scholes pricing model. These assumptions include theestimated market volatility and interest rates used in the determination offair value. The use of different assumptions may have a material effect on theestimated fair value amount and the results of operations.

**Results ofOperations**

*Three months ended March 31, 2005 compared tothree months ended March 31, 2004:*
| ** **                       | ** ** | **Three months ended  March 31,** | ** ** | **Change**                                                           | ** ** |
|----------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **Revenues**                     | ** ** | ** **                                       | ** ** | **     2005     ** | ** ** | **     2004     ** | ** ** | **Dollar** | ** ** | **    Percent    ** | ** ** |
| ** **                       | ** ** | **(Dollars in thousands)**             | ** ** |
| Net product  revenue             |       |                                             | $          | 1,015                                                                |       |   |   | $ | 1,098 |   |   | $ | (83 | ) |   | (7.6 | )% |   |
| Development and  license revenue |       |                                             | 3,225      |                                                                 |       |   | — |   |   | 3,225 |   |   | — |   |   |
| Distribution agreement  revenue  |       |                                             | 167        |                                                                 |       |   | — |   |   | 167 |   |   | — |   |   |
|                                  |            |                                                  |            |                                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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The decrease in net product revenues for the periodended March 31, 2005 was due primarily to lower unit sales of genericmitomycin. Net sales of Nipent, our drug currently approved for the treatmentof hairy cell leukemia, were essentially flat over the comparable periods in2004 and 2005. Nipent sales for the period ended March 31, 2004 includedapproximately $528,000 in sales to Europe. We had no European sales for thecomparable period in 2005. Unlike our Nipent sales efforts in the U.S. marketwhere we call on clinicians directly, our role in Europe has been limited tothat of a supplier. As such, we have not had a direct influence on Nipent salesat the clinical level, making the timing and magnitude of European salesdifficult to predict and dependent on the efforts of our European distributor.During the first quarter of 2004, we acquired the marketing rights for Nipentin Europe, which allows us to charge a higher unit price for Nipent in Europecompared to the unit prices charged under the previous supply agreement.

Development and license revenue for the period ended March 31,2005 relates to our license agreement entered into with MGI PHARMA, Inc.in September 2004. Development and license revenue included $2,476,000related to the amortization of deferred revenue in connection with the upfrontpayment received from MGI, and $749,000 related to reimbursement of Dacogendevelopment and allocated overhead costs.

Distributionagreement revenue for the period ended March 31, 2005 relates to thetermination of our Nipent distribution agreement with Abbott Laboratories. Uponsigning this agreement in 1999, we received $5.0 million from Abbott, which wasrecorded as deferred revenue and was being amortized over a five-year period. InFebruary 2005, we paid Abbott $1,500,000 to terminate this agreement, andthis amount was charged against the unamortized balance of deferred revenue of$1,667,000. The remaining $167,000 was recorded as distribution agreementrevenue in the three months ended March 31, 2005 as a result of thetermination of the distribution agreement.
| ** **                                      | ** ** | **Three months ended  March 31,** | ** ** | **Change**                                                           | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **Costs and operating expenses** | ** ** | ** **                                       | ** ** | **     2005     ** | ** ** | **     2004     ** | ** ** | **Dollar** | ** ** | **     Percent     ** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands)**             | ** ** |
| Cost of product  revenue                        |       |                                             | $          | 300                                                                  |       |   |   | $ | 551 |   |   | $ | (251 | ) |   | (45.6 | )% |   |
| Research and development                        |       |                                             | 5,124      |                                                                 |       |   | 7,450 |   |   | (2,326 | ) |   | (31.2 | ) |   |
| Selling, general and  administrative            |       |                                             | 6,258      |                                                                 |       |   | 5,548 |   |   | 710 |   |   | 12.8 |   |   |
|                                                 |            |                                                  |            |                                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Cost of product revenue as a percentage of net productrevenue was 30% in the first quarter of 2005 compared to 50% in the same periodin 2004. The decrease for the period ended March 31, 2005 is due to avariation in product mix, with a larger portion of our sales being related todomestic Nipent, which is sold at higher margins than mitomycin and Nipent inEurope. Nipent sales for the period ended March 31, 2004 includedapproximately $528,000 in sales to Europe, while we had no European sales forthe comparable period in 2005. Current margins may not be indicative of futuremargins due to possible variations in product mix, average selling prices, andmanufacturing costs.

The decrease in research and development expenses wasdue to lower clinical study and clinical supply costs for Orathecin andDacogen, as those clinical studies have wound down after the completion of ourFDA and European submissions for Orathecin and Dacogen during the latter halfof 2004. In addition, the expenses for the period ended March 31, 2004included a $500,000 non-cash charge paid in shares of our common stock to theStehlin Foundation as a milestone payment for the acceptance of the submissionof the NDA for Orathecin.

We conduct research internally and also throughcollaborations with third parties, and we intend to maintain our strongcommitment to our research and development efforts in the future. Our researchand development activities consist primarily of clinical development and therelated advancement of our existing product candidates through clinical trials.Our major research and development projects include Orathecin, Dacogen, andstudies of other indications of Nipent. Conducting clinical trials is alengthy, 

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expensive and uncertainprocess. Completion of clinical trials may take several years or more. Thelength of time generally varies substantially according to the type,complexity, novelty and intended use of the product candidate. Our clinicaltrials may be suspended at any time if we or the FDA believe the patientsparticipating in our studies are exposed to unacceptable health risks. We mayencounter problems in our studies which will cause us or the FDA to delay orsuspend the studies. Because of these uncertainties, we cannot predict when orwhether we will successfully complete the development of our product candidatesor the ultimate product development cost.

Theincrease in selling, general and administrative expenses for the period ended March 31,2005 relates primarily to additional expenses in connection with our Europeanoperations as they scale up sales and marketing efforts related to futurecommercialization of Nipent in Europe.
| ** **                                           | ** ** | **Three months ended  March 31,** | ** ** | **Change**                                               | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------|------------|
| **Other income (expense)**                 | ** ** | ** **                                       | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands)**             | ** ** |
| Interest income                                      |       |                                             | $          | 372                                                      |       |   | $ | 87 |   | $ | 285 |   | 327.6 | % |
| Interest expense                                     |       |                                             | —     |                                                     |       | (948 | ) | (948 | ) | (100.0 | ) |
| Amortization of deemed  discount on convertible debt |       |                                             | —     |                                                     |       | (4,019 | ) | (4,019 | ) | (100.0 | ) |
| Change in valuation of  derivative                   |       |                                             | —     |                                                     |       | (1,404 | ) | (1,404 | ) | (100.0 | ) |
|                                                      |            |                                                  |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in interest income was due to higheravailable cash and marketable securities balances and a modest increase ininterest rates for the period ended March 31, 2005, compared to the sameperiod in 2004.

Interest expense in the first quarter of 2004consisted of amortization of prepaid financing costs of $702,000 and interestof $246,000, relating to our outstanding convertible notes issued in 2003. Thesenotes were fully paid at December 31, 2004.

Non-cash amortization of deemed discount onconvertible debt in the first quarter of 2004 relates to the convertible notesissued in 2003. These notes were fully paid at December 31, 2004.

The change in derivativevaluation of $1,404,000 in the first quarter of 2004 represented the change inthe valuation of two derivatives. As part of the June 2003 convertibledebt transaction, we issued to the note holders warrants to purchase 2,634,211shares of AVI at $5.00 per share. These warrants represent a derivativeinstrument and are valued each quarter using the Black-Scholes pricing model.During the first quarter of 2004, the value of this derivative had decreasedfrom the December 31, 2003 value of $5,505,000 by $2,212,000, which wasrecorded as other income for the period ended March 31, 2004. We alsorecorded an expense of $3,616,000 related to the derivative accountingtreatment of initially unregistered warrants issued in connection with theprivate placement of shares of our common stock completed in March 2004,in accordance with EITF 00-19, “Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” Inthe first quarter of 2005, there was no change in value of the derivativeassociated with the warrants to purchase the AVI shares at $5.00 per share.

**Liquidity and Capital Resources**

Our cash, cash equivalents, and both short andlong-term marketable securities totaled $60,742,000 at March 31, 2005,compared to $56,817,000 at December 31, 2004. In addition, we held2,684,211 shares of registered stock of AVI, most of which are held as securityfor the warrants we issued to convertible debt holders to purchase the2,634,211 AVI shares at $5.00 per share. The AVI shares had a market value of$6,710,000 at March 31, 2005, and are classified on the balance sheetunder non-current Restricted cash and investments, as well as Investment instock of related parties.

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Net cash provided by operating activities was$3,866,000 in the first quarter of 2005, and consisted primarily of the netloss of $6,903,000, plus non-cash amortization of deferred revenue of$2,476,000 from the MGI payment received in September 2004, cash fee of$1,500,000 paid to Abbott to terminate our U.S. Nipent distributionagreement, an increase in accounts payable and other liabilities of $1,020,000,offset by a decrease in accounts receivable of $15,973,000, primarily due tothe receipt of milestone and development funds from MGI during the quarter. Thenet cash used in operating activities in the first quarter of 2004 was$12,560,000, which consisted primarily of the net loss of $18,735,000, less$4,019,000 non-cash amortization of deemed discount on our convertible debt,$702,000 amortization of prepaid financing costs, and $1,404,000 non-cashchange in the valuation of derivatives.

Net cash used in investing activities was $179,000 inthe first quarter of 2005, and consisted of $10,146,000 in proceeds from thesale or maturity of marketable securities, offset by $10,290,000 from thepurchase of marketable securities. Net cash provided by investing activitieswas $7,357,000 million in the first quarter of 2004, which consisted primarilyof $10,680,000 million from the release of restricted cash from the collateralaccount related to our convertible debt, $7,350,000 in proceeds from the saleor maturity of marketable securities, offset by $9,557,000 from the purchase ofmarketable securities and $1,000,000 paid for the purchase of European productrights for Nipent.

Net cash provided by financing activities was $63,000in the first quarter of 2005, and consisted of proceeds from exercises of stockoptions. Net cash provided by financing activities was $32,867,000 in the firstquarter of 2004, consisting of proceeds from the issuance of common stock in aprivate placement transaction and proceeds from exercises of stock options.

We have financed our operations primarily through theissuance of equity and debt securities and the receipt of milestone payments inconnection with collaborative agreements. We believe that our current cash,cash equivalents, marketable securities and other investments will satisfy ourcash requirements through 2006. However, it is our intention to pursueadditional financing options, including the selling of additional shares ofstock in a public or private offering and/or exploring marketing partnershipopportunities for Orathecin and Nipent.

We believe that our needfor additional funding will increase in the future, especially if we receiveregulatory approval for Orathecin, and that our continued ability to raisefunds from external sources will be critical to our success. We continue toactively consider future contractual arrangements that would requiresignificant financial commitments. If we experience currently unanticipatedcash requirements, we could require additional capital much sooner thanpresently anticipated. We may raise money by the sale of our equity securitiesor debt, or the exercise of outstanding warrants and stock options by theholders of such warrants or options. However, given uncertain market conditionsand the volatility of our stock price, we may not be able to sell oursecurities in public offerings or private placements at prices and on termsthat are favorable to us, if at all. We may also choose to obtain fundingthrough licensing and other contractual agreements. Such arrangements mayrequire us to relinquish our rights to our technologies, products or marketingterritories, or to grant licenses on terms that are not favorable to us. If wefail to obtain adequate funding in a timely manner, or at all, we will beforced to scale back our product development activities or our operations in amanner that will ensure we can discharge our obligations as they come due inthe ordinary course of business at least through the end of 2006.

**Factors AffectingFuture Operating Results**

*The followingsection lists some, but not all, of the risks and uncertainties that may have amaterial adverse effect on our business, financial condition and results ofoperations. You should carefully consider these risks in evaluating our companyand business. Our business operations may be impaired if any of the following risksactually occur, and by additional risks and uncertainties that we do not knowof or that we currently consider immaterial. In such case, the trading price ofour common stock could decline.*

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*This report also contains forward-looking statementsthat involve risks and uncertainties. Our actual results could differmaterially from those anticipated in the forward-looking statements as a resultof certain factors, including the risks described below and elsewhere in thisreport.*

***Risks Related to Orathecin, Dacogen and Nipent***

*If we do not receive regulatory approval for Dacogen,our future revenues may be limited and our business would be harmed.*

Our NDA submission for Dacogen was accepted for filingby the FDA on December 31, 2004. We expect that the FDA will review andact on the NDA by September 2005. Our European subsidiary, EuroGenPharmaceuticals Ltd., submitted an MAA for Dacogen to the EMEA, whichsubmission was accepted for review on October 25, 2004. EMEA proceduresprovide that a decision on the Dacogen MAA will usually occur within 12 monthsof acceptance of the submission.

The primary data analysis from our Phase III study ofDacogen indicates that the patients who were randomized to the Dacogen arm ofthe study had an increased time to progression to AML or death (p=0.042Wilcoxon test, p=0.198 Log-rank test), compared to patients randomized tosupportive care only. Both analyses were specified in the protocol. Althoughthe results from the Log-rank test were not statistically significant, we believethat these data are clinically significant and, as a result, formed the basisof our NDA submission. In addition, adverse events were reported morefrequently for patients randomized to the Dacogen arm, as compared to thosereceiving supportive care, specifically, Leucopenia, febrile neutropenia,nausea, constipation, diarrhea, vomiting, pneumonia, arthralgia, headache andinsomnia. Severe adverse events were observed more frequently in patientsrandomized to Dacogen. The mortality rate for patients in the study was 12% forDacogen and 9% for supportive care. Consequently, there is no assurance thatthe FDA will agree with our assessment that Dacogen provides a clinicallysignificant benefit, that the FDA will not take the position that the studiesfailed for statistical reasons, or that we will not be required to conductadditional large scale clinical trials. Even if this data supports thesubmission of an NDA, the approval process may take a significant amount oftime and we may never receive approval. If Dacogen is unsuccessful for anyreason, including if the results of the Phase III study are deemed insufficientfrom either a clinical or statistical basis by the FDA, our future revenueswould be limited and our business would be harmed. Additionally, we might beforced to substantially scale down our operations or sell certain of ourassets, and it is likely the price of our stock would decline precipitously.

In addition, pursuant to our license agreement withMGI, we are expecting to receive payments from MGI in connection with theachievement of certain regulatory milestones. If these regulatory milestonesare not met, we will not receive these payments and our financial condition andbusiness would be harmed.

*We are relying on European regulatory approval andsuccessful commercialization of Orathecin. If our MAA submission for Orathecindoes not support regulatory approval by the EMEA for any reason, our businesswill be harmed.*

On July 1, 2004 our European subsidiary, EuroGenPharmaceuticals Ltd., submitted an MAA for Orathecin to the EMEA. Thisapplication is being reviewed under the EMEA Centralized Procedure, wheremarketing authorization is applied for in all 25 European Union member statessimultaneously. EMEA procedures provide that a decision on the Orathecin MAAwill usually occur within 12 months of acceptance of the submission.

Even though the EMEA accepted our submission forfiling, the EMEA may not ultimately approve our MAA for Orathecin. The approvalprocess may take a significant amount of time and approval of our applicationwill be based on the agency’s review of Orathecin’s safety and efficacy.Important factors that the EMEA will take into account in its review andanalysis include, among other things, time to disease 

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progression and objectivetumor response as well as toxicities seen in patients who were treated withOrathecin.

Given the large scale of the Orathecin clinicalprogram, the complexity of the clinical trials and the inherent uncertaintiesassociated with clinical trials of such magnitude and complexity, the data andstatistical analysis from these trials may not support regulatory approval orwe may be required to perform additional studies before obtaining regulatoryapproval. For example, the design of these trials allowed patients whoinitially were being treated with gemcitabine or other therapies to cross overto treatment with Orathecin. At the time the trials were designed, we believedthat the percentage of patients who would cross over for treatment withOrathecin would be in the range of 10% to 20% of the total enrolled patients.The number of patients in our trials who actually crossed over to treatmentwith Orathecin significantly exceeded the number anticipated and was nearly 50%in two of our Phase III studies. The extent of this cross over has negativelyaffected the statistical analysis of the study, making it difficult todetermine if the product is efficacious with respect to survival.

In May 2003, we announced data from one of ourPhase III studies of Orathecin in patients with advanced pancreatic cancer,most of whom had previously failed two or more chemotherapy treatments. Thestudy randomized 409 patients to either Orathecin or “best medical therapy.”The primary study end-point was overall survival with secondaryend-points, including objective tumor response and time to disease progression.We did not meet the primary end-point, although we did meet two of thesecondary end-points. The two secondary end-points were independent of across-over effect, whereas the primary end-point was not. The released data,and the data from our other clinical trials, may not be sufficient to supportregulatory approval for Orathecin, and additional trials may be required beforewe can obtain regulatory approval.

If, for any reason, the EMEA ultimately determines notto approve our application for Orathecin, we would be unable to proceed withour current plans for commercializing Orathecin in Europe. Additionally, wemight be forced to scale down our expansion effort with our European operationsor sell certain of our assets, and it is likely the price of our stock coulddecline.

*We are currently conducting clinical trials withOrathecin as a combination therapy. If these clinical trials do not supportregulatory approval, our business may be harmed.*

In early January 2005we announced the withdrawal of our NDA for Orathecin based on feedback from theFDA that the data package we submitted in support of the drug would not besufficient to gain regulatory approval. However, we are continuing to conductclinical trials with Orathecin as a combination therapy while we review anddetermine whether or not we will continue to pursue regulatory approval forOrathecin. Clinical trials are expensive to conduct, time-consuming and haveuncertain outcomes. We will incur substantial expense while conducting thesestudies, and if we are unable to complete the studies, or if the results of thestudies do not support regulatory approval of Orathecin as a combinationtherapy, we will incur significant operating losses and our business will beharmed.

*If we receive regulatory approval of Orathecin for thetreatment of patients with refractory pancreatic cancer, Orathecin may not becommercially successful.*

If Orathecin receives regulatory approval, whether inEurope, in the United States if we pursue regulatory approval with the FDA, orultimately as a combination therapy, patients and physicians may not readilyaccept it, which would result in lower than projected sales and substantialharm to our business. Acceptance will be a function of Orathecin beingclinically useful and demonstrating superior therapeutic effect with anacceptable side effect profile as compared to currently existing or futuretreatments. In addition, even if Orathecin does achieve market acceptance, wemay not be able to maintain that market acceptance over time if new productsare introduced that are more favorably received than Orathecin or renderOrathecin obsolete.

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*If we receive regulatory approval of Dacogen for the treatmentof patients with myelodysplastic syndromes, Dacogen may not be commerciallysuccessful.*

If Dacogen receives regulatory approval in the UnitedStates or Europe, patients and physicians may not readily accept it, whichwould result in lower than projected sales and substantial harm to our businessthrough the receipt of lower royalty revenue from MGI.

*If we are unable to expand our clinical support foruse of Nipent to treat additional diseases our revenues will not expand asplanned.*

Part of our strategyinvolves expanding the market opportunities for our approved drugs, includingNipent, by seeking clinical support of their use for treatment of patients withadditional diseases. We are currently marketing Nipent for the treatment ofpatients with hairy cell leukemia, and revenues from selling Nipent provided 80-90%of our revenues for the past three years. We are conducting a series ofclinical trials with Nipent, including Phase IV trials for CLL, NHL, cutaneousand peripheral T-cell lymphomas and Phase II/III studies for GvHD. If ourNipent clinical trials are not successful, we will not be able to increase ourrevenue from Nipent.

***Risks Related to Our Financial Condition and CommonStock***

*We have a historyof operating losses and we expect to continue to incur losses for theforeseeable future.*

Since inception, we have funded our research anddevelopment activities primarily from private placements and public offeringsof our securities, milestone payments and revenues generated primarily fromsales of Nipent, which is marketed in the United States for the treatment ofpatients with hairy cell leukemia. Our substantial research and developmentexpenditures and limited revenues have resulted in significant net losses. Wehave incurred cumulative losses of $340.4 million from inception through March 31,2005, and our products have not generated sufficient revenues to support ourbusiness during that time. We expect to continue to incur substantial operatinglosses at least through 2006 and may never achieve profitability.

Whether we achieveprofitability depends primarily on the following factors:

·       ourability to obtain regulatory approval for Dacogen and the successfulcommercialization of Dacogen by MGI;

·       ourability to successfully commercialize Orathecin in Europe;

·       ourability to develop and obtain regulatory approval of Nipent for indicationsother than hairy cell leukemia;

·       ourability to bring to market other proprietary products that are advancingthrough our internal clinical development infrastructure;

·       ourability to successfully expand our product pipeline through in-licensing andproduct acquisition;

·       ourability to successfully market Nipent in Europe as planned;

·       ourresearch and development efforts, including the timing and costs of clinicaltrials;

·       ourcompetition’s ability to develop and bring to market competing products;

·       ourability to control costs and expenses associated with manufacturing,distributing and selling our products, as well as general and administrativecosts related to conducting our business;

·       costsand expenses associated with entering into licensing and other collaborativeagreements; and

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·       delaysin production or inadequate commercial sales of Dacogen, Orathecin and otherproducts, once regulatory approvals have been received.

Our products and product candidates, even ifsuccessfully developed and approved, may not generate sufficient or sustainablerevenues to enable us to achieve or sustain profitability.

*We will require additional funding to expand our productpipeline, strengthen our commercialization efforts and expand our Europeanoperations, and if we are unable to raise the necessary capital or to do so onacceptable terms, our planned expansion and continued survival could be harmed.*

We will continue to spend substantial resources onexpanding our product pipeline, strengthening our commercialization efforts forour existing products, developing new avenues of revenue for Nipent, scaling-upof European operations to market, selling and distributing our existing andfuture products, and conducting research and development, including clinicaltrials for other products and product candidates. We anticipate that ourcapital resources will be adequate to fund operations and capital expendituresthrough 2005. However, if we experience unanticipated cash requirements duringthis period, we could require additional funds much sooner. We may raise moneyby the sale of our equity securities or debt, or the exercise of outstandingwarrants and stock options by the holders of such warrants and options.However, given uncertain market conditions and the volatility of our stockprice, we may not be able to sell our securities in public offerings or privateplacements at prices and on terms that are favorable to us, if at all. Also,the dilutive effect of additional financings could adversely affect our pershare results. We may also choose to obtain funding through licensing and othercontractual agreements. For example, we recently licensed the worldwide rightsto the development, commercialization and distribution of Dacogen to MGI. Sucharrangements may require us to relinquish our rights to our technologies,products or marketing territories, or to grant licenses on terms that are notfavorable to us. If we fail to obtain adequate funding in a timely manner, orat all, we will be forced to scale back our product development activities, orbe forced to cease our operations.

*Our collaborative relationship with MGI may notproduce the financial benefits that we are anticipating, which could cause ourbusiness to suffer.*

In addition to raising money by selling our equitysecurities to MGI in connection with the license agreement, we also expect torecord development and license revenue from payments made to us by MGI uponthe achievement of regulatory and commercialization milestones. However, we mayfail to achieve these milestones, either because we are unable to secureregulatory approval of Dacogen or due to our inability to expend the resourcesto commence sales of Dacogen as prescribed by the license agreement. Inaddition, the license agreement contemplates that MGI will pay us (i) acertain portion of revenues payable to MGI as a result of MGI sublicensing therights to market, sell and/or distribute Dacogen, to the extent such revenuesare in excess of the milestone payments, and (ii) a 20% royalty increasingto a maximum of 30% on annual worldwide net sales of Dacogen. We cannotguarantee that we will ever receive these payments, as MGI may choose not tosublicense Dacogen at all, nor can we be assured that MGI will expend theresources to sell Dacogen worldwide, or be successful in doing so.

*Our equity investment in AVI exposes us to equityprice risk and any impairment charge would affect our results of operations.*

We are exposed to equity price risk on our equityinvestment in AVI. Currently we own 2,684,211 shares of AVI. During theyear ended December 31, 2004, we recorded a write-down of $7.9 millionrelated to other than temporary decline in the value of our equity investmentin AVI, resulting in a reduction of our cost basis in the AVI shares. Under ouraccounting policy, marketable equity securities are presumed to be impaired iftheir fair value is less than their cost basis for more than six months, absentcompelling evidence to the contrary. As of June 30, 2004, the AVI shareshad been trading below our original cost basis for more than six months. Sincethere was no compelling evidence to the 

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contrary, we recorded theimpairment charge of $7.9 million in our results of operations. The amountof the charge was based on the difference between the market price of theshares as of June 30, 2004 and our adjusted cost basis. The public tradingprices of the AVI shares have fluctuated significantly since we purchased themand could continue to do so. If the public trading prices of these sharescontinue to trade below their new cost basis in future periods, we may incuradditional impairment charges relating to this investment, which in turn willaffect our results of operations.

In addition, in connectionwith the restructuring of our February Notes and the issuance of the June Notes,we issued three-year warrants to the June Note holders exercisable into2,634,211 of our AVI shares at an exercise price of $5.00 per share, and wepledged the AVI shares to secure our obligation under the June Notes.These warrants expire on December 31, 2006.

***Product Development and Regulatory Risks***

*Before we can seek regulatory approval of any of ourproduct candidates, we must complete clinical trials, which are expensive andhave uncertain outcomes.*

Most of our products are in the developmental stageand, prior to their sale, will require regulatory approval and the commitmentof substantial resources. Before obtaining regulatory approvals for thecommercial sale of any of our product candidates, we must demonstrate throughpre-clinical testing and clinical trials that our product candidates are safeand effective for use in humans.

We have a portfolio of cancer drugs in various stagesof development, including Nipent (for indications other than hairy cellleukemia, Phase IV), Partaject busulfan (Phase I/II), inhaled Orathecin (PhaseI/II), Orathecin capsules as a combination therapy (Phase II), and we have beenconducting pre-clinical studies for VEGF and Cremophor-free paclitaxel. Inaddition, we expect to commence new clinical trials from time to time in thecourse of our business as our product development work continues. Conductingclinical trials is a lengthy, time consuming and expensive process and theresults are inherently uncertain. We have incurred and will continue to incursubstantial expense for, and we have devoted and expect to continue to devote asignificant amount of time to, pre-clinical testing and clinical trials.However, regulatory authorities may not permit us to undertake any additionalclinical trials for our product candidates. If we are unable to complete ourclinical trials, our business will be severely harmed and the price of ourstock will likely decline.

We have ongoing research and pre-clinical projectsthat may lead to product candidates, but we have not begun clinical trials forthese projects. If we do not successfully complete our pre-clinical trials, wecould not commence clinical trials as planned.

*Our clinical trials may be delayed or terminated,which would prevent us from seeking necessary regulatory approvals.*

Completion ofclinical trials may take several years or more. The length of a clinical trialvaries substantially according to the type, complexity, novelty and intendeduse of the product candidate. For example, our three Phase III Orathecinclinical trials lasted from 1998 through the end of 2003. The length of timeand complexity of these studies make statistical analysis difficult andregulatory approval unpredictable. The commencement and rate of completion ofour clinical trials may be delayed by many factors, including:

·       ineffectivenessof the study compound, or perceptions by physicians that the compound is noteffective for a particular indication;

·       inabilityto manufacture sufficient quantities of compounds for use in clinical trials;

·       inabilityto obtain FDA approval of our clinical trial protocols;

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·       slowerthan expected rate of patient recruitment;

·       inabilityto adequately follow patients after treatment;

·       difficultyin managing multiple clinical sites;

·       unforeseensafety issues;

·       lackof efficacy demonstrated during the clinical trials; or

·       governmentor regulatory delays.

If we are unable to achieve a satisfactory rate ofcompletion of our clinical trials, our business will be significantly harmed.

*We may be required to suspend, repeat or terminate ourclinical trials if they are not conducted in compliance with regulatoryrequirements, if the trial results are negative, inconclusive or if they failto demonstrate safety or efficacy.*

Our clinical trials must be conducted in accordancewith the FDA’s regulations and are subject to continuous oversight by the FDAand institutional review boards at the medical institutions where the clinicaltrials are conducted. We outsource certain aspects of our research anddevelopment activities to contract research organizations (“CROs”). We haveagreements with these CROs for certain of our clinical programs. We and ourCROs are required to comply with GCPs, regulations and guidelines enforced bythe FDA for all of our products in clinical development. The FDA enforces GCPsthrough periodic inspections of study sponsors, principal investigators, andstudy sites. If our CROs or we fail to comply with applicable GCPs, theclinical data generated in our studies may be deemed unreliable and the FDA mayrequire us to perform additional studies before approving our applications. Inaddition, our clinical trials must be conducted with product candidatesproduced under current GMPs, and may require a large number of test subjects.Our failure to comply with these regulations may require us to repeat clinicalstudies, which would delay the regulatory approval process.

Even if we achieve positive interim results inclinical trials, these results do not necessarily predict final results, andacceptable results in early trials may not be repeated in later trials. Anumber of companies in the pharmaceutical industry have suffered significantsetbacks in advanced clinical trials, even after achieving promising results inearlier trials. Negative or inconclusive results or adverse medical eventsduring a clinical trial could cause us to repeat or terminate a clinical trial.Our clinical trials may be suspended at any time if we or the FDA believe thepatients participating in our studies are exposed to unacceptable health risksor if the FDA finds deficiencies in the conduct of these trials.

We may encounter other problems and failures in ourstudies that would cause us or the FDA to delay or suspend the studies. Thepotential failures would delay development of our product candidates, hinderour ability to conduct related pre-clinical testing and clinical trials andfurther delay the commencement of the regulatory approval process. Moreover, wemay then be required to conduct other clinical trials for the productcandidates, which would require substantial funding and time. We may be unableto obtain funding to conduct such clinical trials. The failures or perceivedfailures in our clinical trials would delay our product development and theregulatory approval process, damage our business prospects, make it difficultfor us to establish collaboration and partnership relationships and negativelyaffect our reputation and competitive position in the pharmaceutical industry.

*Our failure to obtain regulatory approvals to marketour product candidates in foreign countries would adversely affect ouranticipated revenues.*

Sales of our products in foreign jurisdictions will besubject to separate regulatory requirements and marketing approvals. Approvalin the United States, or in any one foreign jurisdiction, does not ensureapproval in any other jurisdiction. The process of obtaining foreign approvalsmay result in significant 

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delays, difficulties andexpenses for us, and may require additional clinical trials. So far, we haveapplied through our subsidiary EuroGen for regulatory approval to marketOrathecin, mitomycin and paclitaxel in the United Kingdom and in othercountries within the European Union. Although many of the regulationsapplicable to our products in these foreign countries are similar to thosepromulgated by the FDA, many of these requirements also vary widely fromcountry to country, which could delay the introduction of our products in thosecountries. Failure to comply with these regulatory requirements or to obtainrequired approvals would impair our ability to commercialize our products inforeign markets.

Nipent is currently sold in Europe, and in early 2004we acquired the rights to distribute and market Nipent there directly. We planto commence distribution and marketing Nipent in Europe in the second half of2005. However, our revenue from sales of Nipent in Europe is currentlyinsignificant, and there is no guarantee that our distribution and marketingefforts will result in significantly increased revenues. Our strategy is toobtain regulatory approvals to sell our products in Europe and elsewhere, andwe intend to contract with third-party licensees or distributors forsales outside the United States. Delays in obtaining regulatory approval fromforeign jurisdictions will impair the commercialization of our products andwould delay anticipated revenues.

*Even if we obtain regulatory approval, we willcontinue to be subject to extensive government regulation that may cause us todelay the introduction of our products or withdraw our products from themarket.*

Even if regulatory approval of our products isobtained, later discovery of previously unknown problems may result inrestrictions of a product, including withdrawal of that product from themarket. Further, governmental approval may subject us to ongoing requirementsfor post-marketing studies. For example, despite receipt of governmental approval,the facilities of our third-party manufacturers are still subject tounannounced inspections by the FDA and must continue to comply with GMPs andother regulations. These regulations govern all areas of production, recordkeeping, personnel and quality control. In the past, our third-partymanufacturers have experienced delayed FDA approval, which adversely affectedour ability to supply Nipent in 2002. If we or our third-partymanufacturers fail to comply with any of the manufacturing regulations, we maybe subject to, among other things, product seizures, recalls, fines,injunctions, suspensions or revocations of marketing licenses, operatingrestrictions and criminal prosecution.

Physicians may prescribe drugs for uses that are notdescribed in a product’s labeling for uses that differ from those tested by usand approved by the FDA. While such “off-label” uses are common and the FDAdoes not regulate physicians’ choice of treatments, the FDA does restrict amanufacturer’s communications on the subject of off-label use. Companies cannotactively promote FDA-approved drugs for off-label uses, but they maydisseminate to physicians articles published in peer-reviewed journals. To theextent allowed by law, we intend to disseminate peer-reviewed articles on ourproducts to our physician customers. If, however, our promotional activitiesfail to comply with the FDA’s regulations or guidelines, we may be subject towarnings and/or enforcement action by the FDA. For example, in November 2002we issued a press release announcing our receipt of FDA approval to marketMitozytrex. In March 2003, the FDA issued a “Talk Paper” regarding thispress release, taking the position that we made certain unsupported claimsabout the drug and did not disclose the serious side effects such assuppression of bone marrow activity. We revised our internal procedures to helpensure our promotional activities and public disclosure will meet regulatoryrequirements. Nonetheless, any warning or enforcement actions by the FDA couldharm our reputation in the market, result in significant fines or have otherresults that would harm our business.

*The continuing efforts of government and third-partypayers to contain or reduce the costs of healthcare may adversely affect ourrevenues.*

Sales of our products depend in part upon theavailability of reimbursement from third-party payers, such as healthadministration authorities like Medicare/Medicaid, managed care providers andprivate 

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health insurers. Third-partypayers are increasingly challenging the price and examining the costeffectiveness of medical products and services, which may effectively limitphysicians’ ability to select products and procedures.

In addition, significant uncertainty exists as to thereimbursement status of newly approved healthcare products. For example,currently Medicare does not reimburse self-administered products, which couldcover some of our product candidates. Adequate third-party reimbursementmay not be available to enable us to maintain price levels sufficient torealize an appropriate return on our investment in a particular product. Inaddition, we believe government agencies will continue to propose and passlegislation designed to reduce the cost of healthcare, which could furtherlimit reimbursement for pharmaceuticals, and we anticipate that there willcontinue to be proposals in the United States to implement government controlover the pricing or profitability of prescription pharmaceuticals, as iscurrently the case in many foreign markets. If our current and proposedproducts are not considered cost-effective, reimbursement to the consumer maynot be available or be sufficient to allow us to sell products on a competitivebasis. The failure of the government and third-party payers to provide adequatecoverage and reimbursement rates for our product candidates could adverselyaffect the market acceptance of our products, our competitive position and ourfinancial performance.

*If we are unable to comply with environmental laws andregulations, our business may be harmed.*

We are subject to federal, state and local laws andregulations governing the use, manufacture, storage, handling and disposal ofhazardous materials and waste products. We currently maintain a supply ofbiohazardous materials at our facilities. We believe our safety procedures forthese materials comply with all applicable environmental laws and regulations,and we carry insurance coverage we believe is adequate for the size of ourbusiness. However, we cannot entirely eliminate the risk of accidentalcontamination or injury from these materials. If an accident or environmentaldischarge occurs, we could be held liable for any resulting damages, whichcould exceed our insurance coverage and financial resources.

We currently outsourcecertain of our research and development programs involving the controlled useof biohazardous materials. We believe our collaborators have in place safetyprocedures for these materials that comply with governmental standards.Nevertheless, if an accident does occur, our research and product developmentwill be negatively affected.

***Additional Risks Associated with Our Business***

*If the third-party manufacturers upon whom werely fail to produce our products in the volumes that we require on a timelybasis, or to comply with stringent regulations applicable to pharmaceuticaldrug manufacturers, we may face delays in the delivery of, or be unable to meetdemand for, our products.*

Because we have nomanufacturing facilities, we rely on third parties for manufacturing activitiesrelated to all of our products. As we develop new products and increase salesof our existing products, we must establish and maintain relationships withmanufacturers to produce and package sufficient supplies of our finishedpharmaceutical products, including Nipent. Reliance on third partymanufacturing presents the following risks:

·       delaysin scale-up to quantities needed for multiple clinical trials, or failure to (a) manufacturesuch quantities to our specifications or (b) deliver such quantities onthe dates we require, which could cause delay or suspension of clinical trials,regulatory submissions and commercialization of our products;

·       inabilityto fulfill our commercial needs if market demand for our products increasessuddenly, which would require us to seek new manufacturing arrangements and mayresult in substantial delays in meeting market demand;

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·       potentialrelinquishment or sharing of intellectual property rights to any improvementsin the manufacturing processes or new manufacturing processes for our products;and

·       unannouncedongoing inspections by the FDA and corresponding state agencies for compliancewith GMPs, regulations and foreign standards, and failure to comply with any ofthese regulations and standards may subject us to, among other things, productseizures, recalls, fines, injunctions, suspensions or revocations of marketinglicenses, operating restrictions and criminal prosecution.

Any of these factors could delay clinical trials orcommercialization of our product candidates under development, interfere withcurrent sales and entail higher costs. For example, a failed production batchof Nipent in the second quarter of 2003 affected our ability to supply Nipentand adversely affected our sales.

Currently we store the majority of the unpurified,bulk form of Nipent at the manufacturer’s location. Improper storage, fire,natural disaster, theft or other conditions at this location may lead to theloss or destruction of the bulk concentrate. Even if the manufacturer’s and ourinsurance coverage is adequate, such event would inevitably cause delays indistribution and sales of our products and harm our operating results.

*Our business may be harmed if the manufacture of ourproducts is interrupted or discontinued.*

We may be unable to maintain our relationships withour third-party manufacturers. If we need to replace or seek newmanufacturing arrangements, we may have difficulty locating and entering intoarrangements with qualified contract manufacturers on acceptable terms, if atall. We are aware of only a limited number of companies on a worldwide basiswho operate manufacturing facilities in which our products can be manufacturedto our specifications and in compliance with GMPs. It could take severalmonths, or significantly longer, for a new contract manufacturing facility toobtain FDA approval and to develop substantially equivalent processes for theproduction of our products. We may not be able to contract with any of thesecompanies on acceptable terms, if at all. For example, the company that hadbeen purifying Nipent filed for bankruptcy in mid 2001. Shortly thereafter wecontracted with a new manufacturer for the purification of Nipent, and thatmanufacturer was qualified by the FDA by May 2002. We experiencedunusually low inventory levels during the first quarter of 2002, while we werewaiting for the new company to be qualified. The company that had beenpurifying Nipent filed for reorganization under Chapter 11 and has ceasedoperations in late 2004. We are in the process of contracting with anothermanufacturer for the purification of Nipent. If the new manufacturer is not qualifiedby the FDA or if the new manufacturer should go out of business, we maynot have adequate inventory levels to sustain our business while we identifyand contract with another manufacturer for the purification of Nipent.

*If our suppliers cannot provide the components werequire, our product sales and revenue could be harmed.*

We rely on third-party suppliers to provide uswith numerous components used in our products under development, includingOrathecin and Dacogen. Relying on third-party suppliers makes usvulnerable to component failures and interruptions in supply, either of whichcould impair our ability to conduct clinical trials or to ship our products toour customers on a timely basis. Using third-party suppliers makes itdifficult and sometimes impossible for us to maintain quality control, manageinventory and production schedules and control production costs. Vendor leadtimes to supply us with ordered components vary significantly and can exceedsix months or more. Both now and as we expand our need for manufacturingcapacity, we cannot be sure that our suppliers will furnish us with requiredcomponents when we need them. These factors could make it difficult for us toeffectively and efficiently manufacture our products, and could adverselyimpact our clinical trials, product development and sales of our products.

Some suppliers are ouronly source for a particular component, which makes us vulnerable to costincreases and supply interruptions. We generally rely on one manufacturer foreach product. We rely on one manufacturer for Nipent, a sole source supplierfor the processing of pentostatin, which is used in the 

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manufacturingof Nipent, and a sole source supplier for the ingredient used in thepurification of pentostatin. We also rely on sole source suppliers formitomycin products and Surface Safe.

Vendors may decide tolimit or eliminate sales of certain products to the medical industry due toproduct liability or other concerns. For example, one component used in thepurification of pentostatin is no longer commercially available. In the eventone of our sole source suppliers decides not to manufacture the component, goesout of business, or decides to cut off our supply, we may be unable to locatereplacement supply sources, or the sources that we may locate may not provideus with similar reliability or pricing and our business could suffer. If wecannot obtain a necessary component, we may need to find, test and obtainregulatory approval for a replacement component, produce the component orredesign the related product, which would cause significant delay and couldincrease our manufacturing costs. Any of these events could adversely impactour sales and results of operations.

*Wehave limited sales and marketing capabilities and may not be able tosuccessfully commercialize our products.*

We currently have limitedsales and marketing resources. Although we have approximately 37 sales,marketing and sales support personnel focusing on the sale of our products tohospitals and hospital buying groups, we must expand our sales and marketingorganization to support commercialization of our new products. Building up oursales capabilities will require significant expenditures. We may not succeed inexpanding and enhancing our sales and marketing capabilities or have sufficientresources to do so. If we do develop such capabilities, we will compete withother companies that have experienced and well-funded sales and marketingoperations. We may not be able to upgrade our in-house sales expertise whichmay limit our ability to gain market acceptance for our products worldwide andgenerate revenues. If we fail to establish successful sales and marketingcapabilities, we will not be able to market or sell our products effectivelyand our business, financial condition and results of operations will bematerially and adversely affected.

We intend to enter intostrategic partnerships for the commercialization of our products outside of theUnited States. However, we may not be able to negotiate acceptable arrangementswith partners, if at all. Moreover, such arrangements may involve sharing ofprofits from sales, requirements to relinquish certain of our rights to ourproducts or marketing territories and impositions of other limitations on ouroperations.

*If weare not able to maintain and successfully establish new collaborative andlicensing arrangements with third parties, our product development and businesswill be harmed.*

Our business model isbased on establishing collaborative relationships with other parties both tolicense compounds upon which our products and technologies are based and tomanufacture our products or our collaborators’ products. It is critical that wegain access to compounds and technologies to license for further development.For example, we licensed the exclusive worldwide royalty-bearing rightsto Orathecin from The Stehlin Foundation for Research. Due to the expense ofthe drug approval process we must have relationships with establishedpharmaceutical companies to offset some of our development costs in exchangefor a combination of development, marketing and distribution rights.

Fromtime to time we enter into discussions with various companies regarding theestablishment of new collaborations. If we are not successful in establishingnew partners for our product candidates, we may not be able to pursue furtherdevelopment of such product candidates and/or may have to reduce or cease ourcurrent development programs, which would materially harm our business. Even ifwe are successful in establishing new collaborations, they are subject tonumerous risks and uncertainties including:

·       ourability to negotiate acceptable collaborative arrangements;

·       thecollaboration making us less attractive to potential acquirers;

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·       freedomof our collaborative partners to pursue alternative technologies either ontheir own or with others, including our competitors, for the diseases targetedby our programs and products;

·       thepotential failure of our partners to fulfill their contractual obligations ortheir decision to terminate our relationships, in which event we may berequired to seek other partners, or expend substantial resources to pursuethese activities independently; and

·       ourability to manage, interact and coordinate our timelines and objectives withour collaborative partners may not be successful.

In addition, our collaborators may undergo businesscombinations, which could have the effect of making a collaboration with usless attractive to them for a number of reasons. For example, if an existingcollaborator purchases a company that is one of our competitors, that companymay be less willing to continue its collaboration with us. A company that has astrategy of purchasing companies with attractive technologies might have lessincentive to enter into a collaboration agreement with us. Moreover, disputesmay arise with respect to the ownership of rights to any technology or productsdeveloped with any current or future collaborator. Lengthy negotiations withpotential collaborators or disagreements between us and our collaborators maylead to delays in or termination of the research, development orcommercialization of product candidates or result in time consuming andexpensive litigation or arbitration.

*Our collaborative relationships with third partiescould cause us to expend significant funds on development costs with noassurance of financial return.*

From time to time we enter into collaborativerelationships with third parties to co-develop and market products. For example,we entered into an agreement with Peregrine Pharmaceuticals in February 2001,pursuant to which we licensed a drug-targeting technology known as VascularTargeting Agent, which is a proprietary platform designed to specificallytarget a tumor’s blood supply and subsequently destroy the tumor with variousattached therapeutic agents. The licensed technology is specifically related toVEGF. Under the agreement, we made an up-front equity investment in Peregrineof $600,000 and will be obligated to make subsequent milestone payments thatcould ultimately total $8.25 million. In addition, we will pay royaltiesto Peregrine based on the net revenues of any drugs we commercialize using theVEGF technology.

These relationships require substantial financialcommitments from us, and at the same time the product developments are subjectto the same regulatory requirements, risks and uncertainties associated withthe development of our other product candidates. The compounds that are thesubject of these collaborative agreements may prove to be ineffective, may failto receive regulatory approvals, may be unprotectable by patents or otherintellectual property rights, or may not be otherwise commercially viable. Ifthese collaborative relationships are not successful, our product developmentswill be adversely affected, and our investments and efforts devoted to theproduct developments will be wasted.

*Our ability to protect our intellectual propertyrights will be critically important to the success of our business, and we maynot be able to protect these rights in the United States or abroad.*

The success of our operations depends in part on ourability to obtain patents, protect trade secrets, operate without infringingthe proprietary rights of others and enforce our proprietary rights againstaccused infringers.

We actively pursue a policy of seeking patentprotection when applicable for our proprietary products and technologies,whether they are developed in-house or acquired from third parties. Weattempt to protect our intellectual property position by filing United Statesand foreign patent applications related to our proprietary technology,inventions and improvements that are important to the development of ourbusiness. To date, we have acquired licenses to or assignments of over 40 U.S.patents covering various aspects of our proprietary drugs and technologies,including 37 patents for various aspects of Orathecin 

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and related products, fivepatents under our Nipent product portfolio, although none covers the use ofNipent for the treatment of patients with hairy cell leukemia, six patents forour paclitaxel related products, one patent for Dacogen used in combinationwith an anti-neoplastic agent for the treatment of cancer, and twopatents for our Surface Safe product. These issued United States patents willbegin to expire in October 2012. We have been granted patents and havereceived patent licenses relating to our proprietary formulation technology,non-oncology and Partaject technologies, among which at least fivepatents are issued or licensed to us. In addition, we are prosecuting a numberof patent applications for drug candidates that we are not actively developingat this time.

We also have patents, licenses to patents and pendingpatent applications in Europe, Australia, Japan, Canada, Mexico and NewZealand, among other countries. In addition, we have patent applicationspending in China, Hungary and Israel. Limitations on patent protection, and thedifferences in what constitutes patentable subject matter, may limit theprotection we have on patents issued or licensed to us in these countries. Inaddition, laws of foreign countries may not protect our intellectual propertyto the same extent as would laws in the United States. To minimize our costs andexpenses and to maintain effective protection, we focus our patent andlicensing activities within the European Union, Canada and Japan. Indetermining whether or not to seek patent protection or to license any patentin a foreign country, we weigh the relevant costs and benefits, and consider,among other things, the market potential and profitability, the scope of patentprotection afforded by the law of the jurisdiction and its enforceability, andthe nature of terms with any potential licensees. Failure to obtain adequatepatent protection for our proprietary drugs and technology would impair ourability to be commercially competitive in these markets.

The pharmaceutical industry is characterized by alarge number of patent filings involving complex legal and factual questions,and therefore we cannot predict with certainty whether our patents will beenforced effectively. Competitors may have filed applications for, or beenissued patents on, products or processes that compete with or are similar to ours.We may not be aware of all of the patents potentially adverse to our interestswhich may have been issued to others. In addition, third parties may challenge,invalidate or circumvent any of our patents. Thus, any patents that we own orlicense from third parties may not provide adequate protection againstcompetitors, if at all. Our pending patent applications and those we may filein the future, or those we may license from third parties, may not result inpatents being issued with adequate claim scope, if at all.

In addition to pursuing patent protection inappropriate instances, we also rely on trade secret protection or regulatorymarketing exclusivity for unpatented proprietary technology. However, tradesecrets are difficult to protect. Our trade secrets or those of ourcollaborators may become known or may be independently discovered by others.

In the pharmaceutical industry there has been, and webelieve that there will continue to be, significant litigation regarding patentand other intellectual property rights. Claims may be brought against us in thefuture based on patents held by others. These persons could bring legal actionsagainst us claiming damages and seeking to enjoin clinical testing,manufacturing and marketing of the affected product. If we become involved inlitigation, it could consume a substantial portion of our resources, regardlessof the outcome of the litigation. If a lawsuit against us is successful, inaddition to any potential liability for damages, we could be required to obtaina license to continue to manufacture or market the affected product. We cannotassure you that we would prevail in a lawsuit filed against us or that we couldobtain any licenses required under any patents on acceptable terms, if at all.

Our proprietaryproducts are dependent upon compliance with numerous licenses and agreements.These licenses and agreements require us to make royalty and other payments,reasonably exploit the underlying technology of the applicable patents, andcomply with regulatory filings. If we fail to comply 

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with these licenses andagreements, we could lose the underlying rights to one or more of thesepotential products, which would adversely affect our product development andharm our business.

*If we fail tocompete effectively against other pharmaceutical companies, our business willsuffer.*

The pharmaceutical industry in general and theoncology sector in particular is highly competitive and subject to significantand rapid technological change. Our competitors and probable competitorsinclude companies such as Aventis SG, Berlex Laboratories, Bristol-MyersSquibb Company, Eli Lilly & Co., GlaxoSmithKline, Novartis AG, Pfizer,Pharmion Corp. and others.

Many of our competitors and research institutions areaddressing the same diseases and disease indications and working on products totreat such diseases as we are, and have substantially greater financial,research and development, manufacturing and marketing experience and resourcesthan we do. Some of our competitors have received regulatory approval of, orare developing or testing product candidates that compete directly with, ourproduct candidates. For example, while we received orphan drug status forOrathecin and there is currently no competitor in the oral delivery market forthe treatment of pancreatic cancer, there are approved drugs for the treatmentof pancreatic cancer, including gemcitabine by Eli Lilly. In addition, BerlexLaboratories’ fludarabine competes with Nipent in the leukemia market, andDacogen faces potential competition from Pharmion’s Vidaza, which was approvedby the FDA in the first half of 2004.

Many of these competitors have significantly greaterexperience than we do in developing products, undertaking pre-clinical testingand clinical trials, obtaining FDA and other regulatory approvals, andmanufacturing and marketing products. Accordingly, our competitors may succeedin obtaining patent protection, receiving FDA approval or commercializingproducts before we do. If we commence sales of our product candidates, we willbe competing against companies with greater marketing expertise andmanufacturing capabilities, areas in which we have limited or no experience.

We also face intense competition from other companiesfor collaborative relationships, for establishing relationships with academicand research institutions, and for licenses to proprietary technology.

Our competitive positions in our generic drugs areuncertain and subject to risks. The market for generic drugs, including thepricing for generic drugs, is extremely competitive. As a result, unless ourgeneric drugs are the first or among the initial few to launch, there is a highrisk that our products would not gain meaningful market share, or we would notbe able to maintain our price and continue the product line. Moreover,marketing of generic drugs is also subject to regulatory approval, and if wewere not able to obtain such approval before our competitors, we would lose ourcompetitive advantage. Failure to maintain our competitive position could havea material adverse effect on our business and results of operations.

*The pharmaceutical industry in general and theoncology sector in particular is subject to significant and rapid technologicalchange. Developments by competitors may render our product candidates ortechnologies obsolete or non-competitive.*

Our competitors may succeed in developing technologiesor products that are more effective than ours. Additionally, our products thatare under patent protection face intense competition from competitors’proprietary products. This competition may increase as new products enter themarket.

A number of ourcompetitors have substantially more capital, research and development,regulatory, manufacturing, marketing, human and other resources and experiencethan we have. As a result, our competitors may:

·       developproducts that are more effective or less costly than any of our current orfuture products or that render our products obsolete;

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·       produceand market their products more successfully than we do;

·       establishsuperior proprietary positions; or

·       obtainFDA approval for labeling claims that are more favorable than those for ourproducts.

We will also face increasing competition fromlower-cost generic products after patents on our proprietary products expire.Loss of patent protection typically leads to a rapid decline in sales for thatproduct and could affect our future results. As new products enter the market,our products may become obsolete or our competitors’ products may be moreeffective or more effectively marketed and sold than our products.Technological advances, competitive forces and loss of intellectual propertyprotection rights for our products may render our products obsolete.

*We are developing products based upon compounds thatmay be covered by patents held by third parties that are expected to expire oralready expired. These compounds may also be the subject of method,formulation, and manufacturing process patents held by third parties. If thesepatents do not expire as anticipated or are expanded in scope, we will not beable to develop our products as planned.*

We developed, or are in the process of developing, andare planning to market several generic and proprietary formulation productsbased on existing compounds. Specifically, with respect to our genericproducts, we received approval of Abbreviated Antibiotic Drug Applications forour generic mitomycin for solid tumors and daunorubicin for a variety of acuteleukemias, and have filed an Abbreviated New Drug Application for our genericpaclitaxel.

Our proprietary formulation technology is a platformtechnology that employs the use of an inert chemical excipient, cyclodextrin,combined with a drug. Most anti-cancer drugs are cytotoxic, and most mustbe administered intravenously. If a vein is missed on injection, the drug canleak to surrounding tissue, causing ulceration that sometimes requires plasticsurgery to correct. Our proprietary formulation technology is designed to “shield”the drug from the injection site, thus providing the patient protection fromtissue ulceration. This technology may increase the relative solubility ofhard-to-dissolve anti-cancer drugs, hence increasing its stability orshelf life. However, each of these benefits must be supported by appropriatedata and approved by the FDA before we can make any claim in this regard. Ourfirst product utilizing our proprietary formulation technology, a formulationof generic mitomycin, was approved by the FDA in November 2002 asMitozytrex (mitomycin for injection) for use in the therapy of disseminatedadenocarcinoma of the stomach or pancreas in proven combinations with otherapproved chemotherapeutic agents and as palliative treatment when othermodalities have failed. We cannot promote Mitozytrex as providing any injectionsite ulceration protection, nor can we promote any increased stability,solubility or shelf life extension, as compared to generic mitomycin. We wouldbe required to develop and submit additional data to the FDA and receive FDA approvalbefore we could make these claims.

Through March 31, 2005, we have spentapproximately $6.4 million on developing and marketing our generic andproprietary formulation products. We have completed our pre-commercialinvestment in developing Mitozytrex, and as of now we have not committed to aninternal budget for additional proprietary formulation development programs. Inaddition, we have no further generic drug development commitments, as we arefocusing on developing our proprietary drug candidates.

We do not hold any intellectual property rights as tothe underlying compounds on which our generic or proprietary formulationproducts are based. We may in the future evaluate the generic drug market anddevelop additional generic or proprietary products based on these compounds,which may also be the subject of method, formulation and manufacturing processpatents held by third parties. Our development of generic or proprietaryproducts may also take place prior to, but in anticipation of, the expectedexpiration of existing patent protection for drugs developed by third parties.However, if existing patent protection on such products is otherwisemaintained, extended or expanded, it is unlikely that we will be 

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able tomarket our own generic or proprietary formulation products without obtaining alicense from the patent owner, which may not be available on commerciallyacceptable terms, if at all.

*We may be subject to product liability lawsuits andour insurance may be inadequate to cover damages.*

Clinical trials andcommercial use of our current and potential products may expose us to liabilityclaims from the use or sale of these products. Consumers, healthcare providers,pharmaceutical companies and others selling such products might make claims of thiskind. We may experience financial losses in the future due to product liabilityclaims. We have obtained limited product liability insurance coverage for ourproducts and clinical trials, under which the coverage limits are$10.0 million per occurrence and $10.0 million in the aggregate. Wedo not know whether this coverage will be adequate to protect us in the eventof a claim. We may not be able to obtain or maintain insurance coverage in thefuture at a reasonable cost or in sufficient amounts to protect us againstlosses. If third parties bring a successful product liability claim or seriesof claims against us for uninsured liabilities or in excess of insuredliabilities, we may not have sufficient financial resources to completedevelopment or commercialization of any of our product candidates and ourbusiness and results of operations will be adversely affected.

*If weare unable to attract and retain additional, highly skilled personnel requiredfor the expansion of our activities, our business will suffer.*

Further, our success isdependent on key personnel, including members of our senior management andscientific staff. If any of our executive officers decides to leave and wecannot locate a qualified replacement in time to allow a smooth transition, ourbusiness operation may be adversely affected. To successfully expand ouroperations, we will need to attract and retain additional highly skilledindividuals, particularly in the areas of sales, marketing, clinicaladministration, manufacturing and finance. We compete with other companies forthe services of existing and potential employees, however to the extent theseemployees favor larger, more established employers, we may be at adisadvantage.

*Earthquakeor other natural or man-made disasters and business interruptions couldadversely affect our business.*

Our operations arevulnerable to interruption by fire, power loss, floods, telecommunicationsfailure and other events beyond our control. In addition, our operations aresusceptible to disruption as a result of natural disasters such as earthquakes.So far we have never experienced any significant disruption of our operationsas a result of earthquakes or other natural disasters. Although we have acontingency recovery plan, any significant business interruption could causedelays in our drug development and sales and harm our business.

*Provisionsin our certificate of incorporation, bylaws and applicable Delaware law mayprevent or discourage third parties or stockholders from attempting to replaceour management.*

Anti-takeoverprovisions of our certificate of incorporation and bylaws make it moredifficult for a third party to acquire us, even if doing so would be beneficialto our stockholders. These provisions include:

·       authorizationof the issuance of up to 2,000,000 shares of our preferred stock;

·       eliminationof cumulative voting; and

·       eliminationof stockholder action by written consent.

Our bylaws establishprocedures, including notice procedures, with regard to the nomination, otherthan by or at the direction of our board of directors, of candidates forelection as directors or for stockholder proposals to be submitted atstockholder meetings.

We are also subject to Section 203of the Delaware General Corporation Law, an anti-takeover provision. Ingeneral, Section 203 of the Delaware General Corporation Law prevents astockholder 

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owning15 percent or more of a corporation’s outstanding voting stock fromengaging in business combinations with a Delaware corporation for three yearsfollowing the date the stockholder acquired 15 percent or more of acorporation’s outstanding voting stock. This restriction is subject toexceptions, including the approval of the board of directors and of the holdersof at least two-thirds of the outstanding shares of voting stock not owned bythe interested stockholder.

We believe that thebenefits of increased protection of our potential ability to negotiate with theproponents of unfriendly or unsolicited proposals to acquire or restructure usoutweigh the disadvantages of discouraging those proposals because, among otherthings, negotiation of those proposals could result in an improvement of theirterms. Nevertheless, these provisions are expected to discourage differenttypes of coercive takeover practices and inadequate takeover bids and toencourage persons seeking to acquire control of our company to first negotiatewith us, and may have the effect of preventing or discouraging third parties orstockholders from attempting to replace our management.

**Item 3.**                        Quantitativeand Qualitative Disclosures About Market Risk

Due to the short-termnature of our interest bearing assets, which consist primarily of certificatesof deposit, U.S. corporate obligations, and U.S. government obligations, webelieve that our exposure to interest rate market risk would not significantlyaffect our operations.

Ourinvestment policy is to manage our marketable securities portfolio to preserveprincipal and liquidity while maximizing the return on the investment portfolio.Our marketable securities portfolio is primarily invested in corporate debtsecurities with an average maturity of under one year and a minimum investmentgrade rating of A or A-1 or better to minimize credit risk. Althoughchanges in interest rates may affect the fair value of the marketablesecurities portfolio and cause unrealized gains or losses, such gains or losseswould not be realized unless the investments were to be sold prior to maturity.

As part of our June 2003convertible debt transaction, we issued to the note holders warrants topurchase 2,634,211 shares of common stock of AVI at $5.00 per share. Thesewarrants are considered a derivative and were valued on the balance sheet at$10.1 million using the Black-Scholes method on June 24, 2003. On March 31,2005, the value of the derivative had declined to $1.6 million. As the fair value of the common stock of AVI hasfluctuated significantly in the past two years, the valuation of the derivativemay have a significant impact on our results of operations.

Weoperate primarily in the United States and all product sales are denominated inU.S. dollars. Accordingly, we do not have any exposure to foreign currency ratefluctuations.

**Item 4.**                        ControlsAnd Procedures

(a)   Evaluationof disclosure controls and procedures.

Ourmanagement evaluated, with the participation of our chief executive officer andour chief financial officer, the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this quarterly report on Form 10-Q.Based on this evaluation, our chief executive officer and our chief financialofficer have concluded that our disclosure controls and procedures areeffective to ensure that information we are required to disclose in reportsthat we file or submit under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms.

(b)   Changesin internal control over financial reporting.

There was no change in ourinternal control over financial reporting that occurred during the periodcovered by this Quarterly Report on Form 10-Q that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

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**SUPERGEN, INC.PART II—OTHER INFORMATION**

**Item 6.**                        Exhibits
|        | **Exhibit No.** | ** ** | ** **                                                                                                                                                                                       | ** ** | **Description of Document** |
|--------|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|
|   | 31.1            |       | Certification of Chief  Executive Officer under Section 302(a) of the Sarbanes-Oxley Act of  2002                                                                                      |
|   | 31.2            |       | Certification  of Chief Financial Officer under Section 302(a) of the  Sarbanes-Oxley Act of 2002                                                                                      |
|   | 32.1            |       | Certifications  of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act Of 2002 |

 

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|        | SUPERGEN, INC.     |
|--------|--------------------|
| Date:  | May 10,  2005 |   | By: |   | /s/ JAMES S.J. MANUSO |
|   |               |   | James S.J. Manuso Ph.D. |
|   |               | *President and Chief Executive  Officer (Principal Executive Officer)* |
|   | By:                |   | /s/ MICHAEL MOLKENTIN |
|   |               |   | Michael Molkentin |
|   |               | *Chief Financial Officer* |
|   |               | *(Principal Financial and Accounting Officer)* |

 

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