**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 THE SECURITIES EXCHANGE ACTOF 1934

**Forthe Quarterly Period Ended March 31, 2007**

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 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                             |   | (IRS Employer           |
| of incorporation  or organization)                        |   | 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 whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes x  No o

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

| Large accelerated filer  o |   | Accelerated filer  x |   | Non-accelerated  filer  o |
|--------------------------------------|--------|--------------------------------|--------|-------------------------------------|

 

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

Thenumber of shares of the registrant’s Common Stock, $.001 par value, outstandingas of May 4, 2007 was 57,394,890.

 

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**TABLEOF CONTENTS**

|                  | ** ** | ** **                                                                                                      | ** ** | **Page No.** |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|--------------|
| **PART I**  | ** ** | **FINANCIAL INFORMATION**                                                                                       | ** ** | ** **   |
|             |       | Item 1—Financial  Statements (Unaudited)                                                                   |       |         |
|             |       | Condensed Consolidated Balance Sheets as of  March 31, 2007 and December 31, 2006                     |       | 3            |
|             |       | Condensed Consolidated Statements of Operations for  the three month periods ended March 31, 2007 and 2006 |       | 4            |
|             |       | Condensed Consolidated Statements of Cash Flows for  the three month periods ended March 31, 2007 and 2006 |       | 5            |
|             |       | Notes to Condensed Consolidated Financial Statements                                                            |       | 6            |
|             |       | Item 2—Management’s Discussion and Analysis of  Financial Condition and Results of Operations         |       | 16           |
|             |       | Item 3—Quantitative and Qualitative Disclosures About  Market Risk                                         |       | 23           |
|             |       | Item 4—Controls and Procedures                                                                             |       | 23           |
| **PART II** | ** ** | **OTHER  INFORMATION**                                                                                          | ** ** | ** **   |
|             |       | Item 1A—Risk Factors                                                                                       |       | 25           |
|             |       | Item 6—Exhibits                                                                                            |       | 36           |
| **SIGNATURES**   |       | 37                                                                                                              |

 

2

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**SUPERGEN, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(In thousands, except share and per share amounts)**

| ** **                                                                                                                                                                              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                                              | ** ** | **(Unaudited)**    | ** ** | **(Note 1)**     | ** ** |
| **ASSETS**                                                                                                                                                                              |       |               |       |                  |       |   |   |   |   |
| Current assets:                                                                                                                                                                         |       |               |       |                  |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                               |       |               | $          | 74,394                |       |   |   | $ | 67,704 |   |   |
| Accounts receivable, net                                                                                                                                                                |       |               | 838        |                  |       |   | 489 |   |   |
| Development revenue receivable from MGI  PHARMA, Inc.                                                                                                                              |       |               | 29         |                  |       |   | 29 |   |   |
| Accounts receivable, Mayne Pharma                                                                                                                                                       |       |               | 764        |                  |       |   | 1,502 |   |   |
| Inventories, net                                                                                                                                                                        |       |               | 253        |                  |       |   | 223 |   |   |
| Prepaid distribution and marketing rights                                                                                                                                               |       |               | —     |                  |       |   | 630 |   |   |
| Prepaid expenses and other current assets                                                                                                                                               |       |               | 1,678      |                  |       |   | 1,111 |   |   |
| Total current assets                                                                                                                                                                    |       |               | 77,956     |                  |       |   | 71,688 |   |   |
| Marketable securities, non-current                                                                                                                                                      |       |               | 152        |                  |       |   | 179 |   |   |
| Investment in stock of related parties                                                                                                                                                  |       |               | 6,890      |                  |       |   | 659 |   |   |
| Due from related parties, non-current                                                                                                                                                   |       |               | 5          |                  |       |   | 31 |   |   |
| Property, plant and equipment, net                                                                                                                                                      |       |               | 3,716      |                  |       |   | 3,752 |   |   |
| Goodwill                                                                                                                                                                                |       |               | 731        |                  |       |   | 731 |   |   |
| Other intangibles, net                                                                                                                                                                  |       |               | 851        |                  |       |   | 958 |   |   |
| Restricted cash and investments, non-current                                                                                                                                            |       |               | 2,651      |                  |       |   | 10,043 |   |   |
| Other assets                                                                                                                                                                            |       |               | 5          |                  |       |   | 5 |   |   |
| Total assets                                                                                                                                                                            |       |               | $          | 92,957                |       |   |   | $ | 88,046 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                           |       |               |       |                  |       |   |   |   |   |
| Current liabilities:                                                                                                                                                                    |       |               |       |                  |       |   |   |   |   |
| Accounts payable and accrued liabilities                                                                                                                                                |       |               | $          | 2,631                 |       |   |   | $ | 5,202 |   |   |
| Payable to AVI BioPharma, Inc.                                                                                                                                                     |       |               | 565        |                  |       |   | 565 |   |   |
| Deferred gain on sale of products to Mayne Pharma                                                                                                                                       |       |               | 21,863     |                  |       |   | 11,754 |   |   |
| Deferred revenue                                                                                                                                                                        |       |               | —     |                  |       |   | 459 |   |   |
| Accrued payroll and employee benefits                                                                                                                                                   |       |               | 2,447      |                  |       |   | 3,296 |   |   |
| Total current liabilities                                                                                                                                                               |       |               | 27,506     |                  |       |   | 21,276 |   |   |
| Deferred rent                                                                                                                                                                           |       |               | 912        |                  |       |   | 938 |   |   |
| Total liabilities                                                                                                                                                                       |       |               | 28,418     |                  |       |   | 22,214 |   |   |
| 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; 55,713,539 and 55,177,377 shares issued and outstanding at  March 31, 2007 and December 31, 2006, respectively |       |               | 56         |                  |       |   | 55 |   |   |
| Additional paid in capital                                                                                                                                                              |       |               | 432,400    |                  |       |   | 429,147 |   |   |
| Accumulated other comprehensive gain                                                                                                                                                    |       |               | 704        |                  |       |   | 1,922 |   |   |
| Accumulated deficit                                                                                                                                                                     |       |               | (368,621   | )                     |       |   | (365,292 | ) |   |
| Total stockholders’ equity                                                                                                                                                         |       |               | 64,539     |                  |       |   | 65,832 |   |   |
| Total liabilities  and stockholders’ equity                                                                                                                                        |       |               | $          | 92,957                |       |   |   | $ | 88,046 |   |   |

 

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,**               | ** ** |
| ** **                                                                                    | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Revenues:                                                                                     |       |                             |       |   |   |
| Net product revenue                                                                           |       | $                                | 621        |   | $ | 2,884 |   |
| Royalty revenue                                                                               |       | 3,794                            |       | — |   |
| Total revenues                                                                                |       | 4,415                            |       | 2,884 |   |
| Costs and  operating expenses:                                                                |       |                             |       |   |   |
| Cost of product revenue                                                                       |       | 221                              |       | 548 |   |
| Research and development                                                                      |       | 5,063                            |       | 3,021 |   |
| Selling, general, and administrative                                                          |       | 3,575                            |       | 6,493 |   |
| Total costs and operating expenses                                                            |       | 8,859                            |       | 10,062 |   |
| Loss from operations                                                                          |       | (4,444                           | )          | (7,178 | ) |
| Interest income                                                                               |       | 944                              |       | 536 |   |
| Gain on  disposition of investment in AVI BioPharma stock resulting from exercise of  warrant |       | —                           |       | 780 |   |
| Foreign currency  transaction gain                                                            |       | 1                                |       | — |   |
| Change in  valuation of derivatives                                                           |       | —                           |       | (6,326 | ) |
| Loss before  income tax                                                                       |       | (3,499                           | )          | (12,188 | ) |
| Income tax benefit                                                                            |       | 170                              |       | — |   |
| Net loss                                                                                      |       | $                                | (3,329     | ) | $ | (12,188 | ) |
| Net loss per common  share:                                                                   |       |                             |       |   |   |
| Basic and diluted  net loss per comon share                                                   |       | $                                | (0.06      | ) | $ | (0.24 | ) |
| Weighted average shares  used in basic and diluted net loss per common share calculation      |       | 55,456                           |       | 51,758 |   |

 

See accompanying notes to condensed consolidated financial statements

4

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**SUPERGEN, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)(Unaudited)**

| ** **                                                                                 | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                 | ** ** | **March 31,**               | ** ** |
| ** **                                                                                 | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Operating activities:                                                                      |       |                             |       |   |   |
| Net loss                                                                                   |       | $                                | (3,329     | ) | $ | (12,188 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                             |       |   |   |
| Depreciation                                                                               |       | 247                              |       | 156 |   |
| Amortization of intangibles and distribution and  marketing rights                         |       | 737                              |       | 96 |   |
| Change in valuation of derivatives                                                         |       | —                           |       | 6,326 |   |
| Stock compensation expense                                                                 |       | 1,152                            |       | 671 |   |
| Gain on disposition of investment in AVI BioPharma  stock                                  |       | —                           |       | (780 | ) |
| Changes in  operating assets and liabilities:                                              |       |                             |       |   |   |
| Accounts receivable and development revenue  receivable                                    |       | 389                              |       | 5,451 |   |
| Inventories                                                                                |       | (30                              | )          | 119 |   |
| Prepaid expenses and other assets                                                          |       | (567                             | )          | (389 | ) |
| Due from related parties                                                                   |       | 26                               |       | — |   |
| Restricted cash and investments                                                            |       | (31                              | )          | (22 | ) |
| Accounts payable and other liabilities                                                     |       | (3,446                           | )          | (714 | ) |
| Deferred gain on sale of products to Mayne Pharma                                          |       | (203                             | )          | — |   |
| Deferred revenue                                                                           |       | (459                             | )          | — |   |
| Net cash provided by (used in) operating activities                                        |       | (5,514                           | )          | (1,274 | ) |
| Investing activities:                                                                      |       |                             |       |   |   |
| Sales or maturities of marketable securities                                               |       | —                           |       | 1,500 |   |
| Purchases of property and equipment                                                        |       | (211                             | )          | (9 | ) |
| Proceeds from sale of products to Mayne Pharma                                             |       | 10,312                           |       | — |   |
| Net cash provided  by investing activities                                                 |       | 10,101                           |       | 1,491 |   |
| Financing activities:                                                                      |       |                             |       |   |   |
| Proceeds from issuance of common stock, net of  issuance costs                             |       | 2,103                            |       | 541 |   |
| Net cash provided  by financing activities                                                 |       | 2,103                            |       | 541 |   |
| Net increase in  cash and cash equivalents                                                 |       | 6,690                            |       | 758 |   |
| Cash and cash  equivalents at beginning of period                                          |       | 67,704                           |       | 47,664 |   |
| Cash and cash  equivalents at end of period                                                |       | $                                | 74,394     |   | $ | 48,422 |   |

 

See accompanying notes to condensed consolidated financial statements

5

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2007 (Unaudited)**

**NOTE 1.**   BASIS OF PRESENTATION

The accompanying condensed unaudited consolidatedfinancial statements of SuperGen, Inc. (“we,” “SuperGen” or the “Company”) havebeen prepared in accordance with generally accepted accounting principles forinterim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor 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, 2007 are not necessarily indicative ofresults that may be expected for the year ending December 31, 2007.

The balance sheet at December 31, 2006 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, 2006.

**NOTE 2.**   STOCK-BASED COMPENSATION

We account for stock-based compensation in accordancewith the fair value recognition provisions of Statement of Financial AccountingStandards No. 123(R), “Share-BasedPayment” (“SFAS 123R”).

*StockOption Plans.**  *Wehave 12,263,000 shares of common stock authorized for issuance upon the grantof incentive stock options or nonstatutory stock options to employees,directors, and consultants under our 2003 Stock Plan. The number of shares tobe purchased, their price, and the terms of payment are determined by our Boardof Directors, provided that the exercise price for incentive stock optionscannot be less than the fair market value on the date of grant. The optionsgranted generally expire ten years after the date of grant and becomeexercisable at such times and under such conditions as determined by the Boardof Directors (generally over a four or five year period).

*EmployeeStock Purchase Plan.*   We also have an employeestock purchase plan (“ESPP”) that allows eligible employees to purchase commonstock at a price per share equal to 85% of the lower of the fair market valueof the common stock at the beginning or end of each six month period during theterm of the ESPP. The current offering period began November 15, 2006 and isscheduled to end on May 14, 2007. Upon adoption of SFAS 123R, webegan recording stock-based compensation expense related to the ESPP.

We recognized $1,152,000 and $690,000, respectively,in stock based compensation expense for the three months ended March 31,2007 and 2006. These amounts have been recorded in research and developmentexpense or selling, general and administrative expenses, based on the homedepartment of our employees.

6

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) MARCH 31, 2007 (Unaudited)**

**NOTE 2.**   STOCK-BASED COMPENSATION (Continued)

The fair value of eachstock award is estimated on the grant date using the Black-Scholesoption-pricing model based on the assumptions noted in the following table:

| ** **                | ** ** | **Three months ended** |
|---------------------------|------------|------------------------|
| ** **                | ** ** | **March 31,**     |
| ** **                | ** ** | **2007**               | ** ** | **2006** |
| Risk-free  interest rate  |       | 4.59                   | % |   | 4.60 | % |
| Dividend yield            |       | —                 |   |   | — |   |
| Expected  volatility      |       | 60.76                  | % |   | 64.58 | % |
| Expected life (in  years) |       | 5.14                   |   |   | 5.18 |   |
| Forfeiture rate           |       | 9.63                   | % |   | 12.02 | % |

 

Asummary of the Company’s stock option activity as of March 31, 2007, andchanges during the three months then ended is presented below:

| ** **                                         | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------------------|------------|--------------------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| Balance at December 31,  2006                 |       |                     | 6,615,153  |                                   |       |                                                | $          | 8.75                            |       |   |   |   |   |   |   |   |
| Granted                                            |       |                     | 1,563,524  |                                   |       |                                                | 5.07       |                            |       |   |   |   |   |   |   |
| Exercised                                          |       |                     | (174,135   | )                                      |       |                                                | 3.86       |                            |       |   |   |   |   |   |   |
| Forfeited                                          |       |                     | (65,908    | )                                      |       |                                                | 5.77       |                            |       |   |   |   |   |   |   |
| Expired                                            |       |                     | (333,064   | )                                      |       |                                                | 9.67       |                            |       |   |   |   |   |   |   |
| Balance at March 31,  2007                    |       |                     | 7,605,570  |                                   |       |                                                | $          | 8.09                            |       |   |   | 6.60 |   |   | $ | 5,277,853 |   |
| Vested or  expected to vest at March 31, 2007 |       |                     | 7,142,648  |                                   |       |                                                | $          | 8.18                            |       |   |   | 6.47 |   |   | $ | 4,998,262 |   |
| Exercisable at March 31,  2007                |       |                     | 5,037,418  |                                   |       |                                                | $          | 8.93                            |       |   |   | 5.45 |   |   | $ | 3,643,798 |   |

 

The weighted-average grant-date fair value of optionsgranted during the three months ended March 31, 2007 was $2.86. The totalintrinsic value of options exercised (i.e. the difference between the marketprice at exercise and the price paid to exercise the options) during the threemonths ended March 31, 2007 was $273,000 and the total amount of cashreceived from exercise of these options was $666,000.

As of March 31, 2007,there was $6,117,000 of total unrecognized compensation cost related tounvested stock-based awards. This cost is expected to be recognized over aweighted average period of 2.15 years. We expect approximately 2,105,530in unvested options to vest at some point in the future. Options expected tovest is calculated by applying an estimated forfeiture rate to the unvestedoptions.

**NOTE 3.**   CASH, CASH EQUIVALENTS, AND MARKETABLESECURITIES

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 

7

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) MARCH 31, 2007 (Unaudited)**

which invest primarily inU.S. government obligations and commercial paper. These instruments are highlyliquid and are subject to insignificant 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 31,2007 (in thousands):

| ** **                      | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|---------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| U.S. corporate  debt securities |       |                | $          | 70,011                       |       |                          |       | $               | 9          |   |   |   | $ | — |   |   | $ | 70,020 |   |
| Marketable equity  securities   |       |                | 5,846      |                         |       |                          | 698        |            |       |   | (2 | ) |   | 6,542 |   |
| Total                           |       |                | $          | 75,857                       |       |                          |       | $               | 707        |   |   |   | $ | (2 | ) |   | $ | 76,562 |   |

 

Theavailable-for-sale securities are classified on the balance sheet as of March 31,2007 as follows (in thousands):

| ** **                                                  | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|-------------------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| Amounts included  in cash and cash equivalents              |       |                | $          | 70,011                       |       |                          |       | $               | 9          |   |   |   | $ | — |   |   | $ | 70,020 |   |
| Amounts included  in investment in stock of related parties |       |                | 5,722      |                         |       |                          | 668        |            |       |   | — |   |   | 6,390 |   |
| Marketable  securities, non-current                         |       |                | 124        |                         |       |                          | 30         |            |       |   | (2 | ) |   | 152 |   |
| Total                                                       |       |                | $          | 75,857                       |       |                          |       | $               | 707        |   |   |   | $ | (2 | ) |   | $ | 76,562 |   |

 

Available-for-salesecurities by contractual maturity are shown below (in thousands):

| ** **                               | ** ** | **Fair Value**      | ** ** |
|------------------------------------------|------------|--------------------------|------------|
| ** **                               | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
| Debt securities  due in one year or less |       |                     | $          | 70,020 |   |   |   | $ | 64,031 |   |   |
| Marketable equity  securities            |       |                     | 6,542      |   |   |   | 7,761 |   |   |
| Total                                    |       |                     | $          | 76,562 |   |   |   | $ | 71,792 |   |   |

 

8

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) MARCH 31, 2007 (Unaudited)**

**NOTE 4.**   INVENTORIES

Inventoriesconsist of the following (in thousands):

| ** **      | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------|------------|--------------------------|------------|-----------------------------|------------|
| Work in process |       |                     | $          | 126                         |       |   |   | $ | 126 |   |   |
| Finished goods  |       |                     | 127        |                        |       |   | 97 |   |   |
| Total           |       |                     | $          | 253                         |       |   |   | $ | 223 |   |   |

 

**NOTE 5.**   LICENSE AND STOCK PURCHASE AGREEMENTSWITH MGI PHARMA, INC.

In August 2004, we entered into a license agreement,which became effective on September 21, 2004, with MGI PHARMA, Inc., a Minnesotacorporation (“MGI”) relating to Dacogen® (decitabine) for Injection, ananti-cancer therapeutic which has been approved by the United States Food DrugAdministration (“FDA”) for the treatment of patients with myelodysplasticsyndrome (“MDS”).

Pursuant to the terms of the license agreement, MGIreceived exclusive worldwide rights to the development, commercialization anddistribution of Dacogen for all indications. We are entitled to 20% to 30% inroyalties from MGI on all sales of licensed product worldwide. The licenseagreement will expire, on a country-by-country and licensed product-by-licensedproduct basis on the later to occur of (a) twenty years after the firstcommercial sale of the applicable licensed product in the respective country or(b) the expiration, termination, invalidation or abandonment of the patentrights covering the respective licensed product, or the manufacture or usethereof, in the respective country. Either we or MGI may terminate the licenseagreement for the non-payment by the other of any payment obligations under theagreement, or for any uncured material breach of the agreement. In addition, wehave the right to terminate the agreement if (i) MGI is acquired by an entitythat is not deemed an “equivalent” pharmaceutical company or (ii) MGI becomesinsolvent. None of the payments made pursuant to the agreement are refundable,except in the case of overpayment.

In May 2006, the FDA approved Dacogen for thetreatment of patients with MDS and MGI commenced commercial sales of Dacogen inthe United States. MGI is required to pay us royalties of 20% to 30% of netDacogen sales within 45 days after the end of each calendar quarter. Werecognize royalty revenue on a cash basis when we receive it from MGI becausewe do not have sufficient ability to accurately estimate Dacogen sales. Duringthe three months ended March 31, 2007, we recorded royalty revenue of$3,794,000, relating to Dacogen sales for the fourth quarter of 2006.

In July 2006, MGI executedan agreement to sublicense Dacogen to Cilag GmbH, a Johnson & Johnsoncompany, granting exclusive development and commercialization rights in allterritories outside North America.

**NOTE 6.**   ACQUISITION OF MONTIGENPHARMACEUTICALS, INC.

On April 4, 2006, we completed our acquisition ofMontigen Pharmaceuticals, Inc. (“Montigen”), a privately-held oncology-focuseddrug discovery and development company headquartered in Salt Lake City, Utah. Montigen’sassets include its research and development team, a proprietary drug discovery 

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) MARCH 31, 2007 (Unaudited)**

**NOTE 6.**   ACQUISITION OF MONTIGEN PHARMACEUTICALS, INC.(Continued)

technology platform andoptimization process, CLIMBTM, and late-stage pre-clinical compounds targetingAurora-A Kinase and members of the Tyrosine Kinase receptor family.

Pursuant to the terms of the agreement, we paid theMontigen stockholders a total of $17.9 million upon the closing of thetransaction in cash and shares of SuperGen common stock. We will pay theMontigen stockholders an additional $22.0 million in shares of SuperGencommon stock, contingent upon achievement of specific regulatory milestones.

The acquisition of Montigen was accounted for as anacquisition of assets rather than as a business combination. The results ofoperations of Montigen since April 4, 2006 have been included in ourconsolidated financial statements and primarily consist of research anddevelopment expenses.

The values assigned to assembled workforce and CLIMBtechnology platform are being amortized over three years, the estimated usefullives of the assets. The accumulated amortization of the assembled workforceand CLIMB technology was $78,000 and $347,000, respectively at March 31,2007.

The $22.0 million infuture contingent regulatory milestone payments due to the Montigenstockholders will be recorded as additional acquired in-process research anddevelopment expense when paid.

**Subsequent Event—Paymentof First Milestone**

The first Montigencompound began Phase I clinical trials in April 2007, triggering the firstmilestone payment to the former Montigen stockholders of $10.0 million,which was paid in shares of our common stock.

**NOTE 7.**   ASSET ACQUISITION AGREEMENT WITH MAYNEPHARMA

**Sale of NorthAmerican Product Rights**

OnAugust 22, 2006, we executed an Asset Acquisition Agreement with Mayne Pharma(USA), Inc. (“Mayne”), pursuant to which Mayne acquired the North Americanrights to Nipent® and SurfaceSafe® cleaning system. We received cash proceedsof $13,395,000 upon closing of the transaction, which represented the purchaseprice per the agreement, reduced by a number of adjustments and holdbacks, asfollows (in thousands):

| Purchase price  per agreement |   | $      | 21,095 |   |
|-------------------------------|--------|--------|--------|--------|
| Less:Mitomycin  reduction     |   | (1,140 | )      |
| Supply holdback               |   | (5,000 | )      |
| Indemnification holdback      |   | (1,000 | )      |
| Net asset adjustment          |   | (445   | )      |
| Channel inventory adjustment  |   | (115   | )      |
| Initial cash proceeds         |   | $      | 13,395 |   |

 

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) MARCH 31, 2007 (Unaudited)**

**NOTE 7.   ASSETACQUISITION AGREEMENT WITH MAYNE PHARMA (Continued)**

The supply holdback is being held by Mayne until wecomplete the qualification and deliver an FDA approved manufacturer of Nipent,and the execution of a commercial supply agreement between Mayne and theapproved manufacturer. The indemnification holdback will be held by Mayne for18 months to cover any potential claims.

In addition to the initial payment and holdbacks, weare entitled to receive annual deferred payments totaling $14,140,000 over thenext five years based on achievement of specific annual sales targets by Mayne.These annual deferred payments may be accelerated under certain circumstances,including a change of control at Mayne. In February 2007, such a change incontrol occurred as Mayne was acquired by Hospira. As a result, we received anaccelerated milestone payment of $10,312,000 from Mayne.

In conjunction with the Asset Acquisition Agreementwith Mayne, we also entered into certain related agreements including thefollowing:

*Transition Services Agreement*—Wehave agreed to provide certain transition services to Mayne. This includesutilization of our sales and marketing personnel during a six month transitionperiod, for which we are being reimbursed by Mayne. In addition, Mayne hasagreed to provide certain transition services, without charge related tosupporting approval of a specified manufacturer of Nipent in Europe. During thethree months ended March 31, 2007, we billed $481,000 for servicesprovided to Mayne, which has been recorded as a reduction of our selling,general and administrative operating expenses. The transition services periodended on February 21, 2007.

*Supply Agreement*—To support ourEuropean business, Mayne will provide us with a supply of Nipent indefinitelyor until our potential sale of the European business to Mayne is finalized. Duringthe three months ended March 31, 2007, there were no purchases of Nipentfrom Mayne.

We have a number of additional obligations under theAsset Acquisition Agreement, including the following:

*Reimbursement of Costs for Alternate Supply*—Weare obligated to reimburse Mayne up to $1 million for transferringmanufacturing and purification capabilities related to crude pentostatin fromthe existing manufacturer to Mayne’s specified facility. During the threemonths ended March 31, 2007, we recorded $232,000 for alternate supplycost reimbursements, and have paid $374,000 to date.

*Development Plan Payments*—We areobligated to pay all remaining amounts due under a validation and supplyagreement for qualification of a Nipent manufacturing facility. This provisionrelates directly to the $5 million supply holdback noted above. During thethree months ended March 31, 2007, we recorded $90,000 of costs related tothis obligation.

*Price Protection*—We are obligatedto reimburse Mayne for three years for amounts paid to a new supplier of Nipentin excess of the amounts referenced in the Supply Agreement noted above. Contractnegotiations have not been completed on the new supply agreement and we believethere remains uncertainty around the amount of the price protection exposure. Oncethe supply agreement is negotiated we anticipate that we will have anappropriate basis to assess whether, and to what 

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) MARCH 31, 2007 (Unaudited)**

**NOTE 7.**   ASSET ACQUISITION AGREEMENT WITH MAYNE PHARMA (Continued)

extent, any price protection exposure exists, whichwill impact when we recognize the net gain on sale for this transaction.

*Retention and Severance Costs*—Wewere obligated to pay all retention and severance costs for employees thatcontinued to perform services under the Transition Services Agreement. Sinceour employees were required to stay with the company and perform transitionrelated services before they could collect their retention and severance, weaccrued the retention and severance costs as they were earned. During the threemonths March 31, 2007, we recorded $187,000 of retention and severancecosts, recorded in selling, general and administrative expenses. We recordedtotal retention and severance costs of $1,826,000 through the end of thetransition services period, which ended on February 21, 2007.

From the initial cash proceeds from the agreement of$13,395,000 and the accelerated milestone payment of $10,312,000, we deductedthe value of net assets delivered to Mayne, including inventory, prepaidexpenses, and manufacturing equipment, and also deducted the reimbursement ofalternative supply costs, resulting in a remaining net gain of $21,863,000 asof March 31, 2007. However, due to the uncertainty regarding the priceprotection exposure noted above, we have continued to defer the entire net gainas of March 31, 2007.

Due to the Company’scontinuing involvement with the Nipent operations, resulting from entering intothe related agreements and the additional obligations as described above, theCompany has reflected activities related to the Nipent and Surface Safebusinesses in operating activities for all periods presented.

**Subsequent Event—Saleof Remaining Worldwide Nipent Rights**

On April 2, 2007, weclosed an Asset Acquisition Agreement with Mayne, pursuant to which Mayneacquired the remaining worldwide rights to Nipent for a total consideration of$8 million, including approximately $3.75 million received upon theclosing of the transaction. We also sold for additional consideration relatedNipent inventory with the transaction. The balance of the purchase priceincludes $1.25 million of payments contingent on key events and theremaining $3 million is payable over a five-year period on the anniversaryof the closing date.

**NOTE 8.**   NIPENTEUROPEAN MARKETING AND DISTRIBUTION RIGHTS

**Pfizer MarketingRights**

In February 2004, weentered into a Purchase and Sale Agreement with Pfizer Inc. to acquire Europeanmarketing rights for Nipent, our drug approved for marketing in the UnitedStates for hairy cell leukemia. We paid Pfizer $1,000,000 under this agreementand classified this amount in Prepaid distribution and marketing rights in theaccompanying balance sheet. This amount was amortized over 31 months, theestimated life of the benefit period. Accumulated amortization was $806,000 at March 31,2006, and was fully amortized at September 30, 2006.

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) MARCH 31, 2007 (Unaudited)**

**NOTE 8.**   NIPENT EUROPEAN MARKETING AND DISTRIBUTION RIGHTS(Continued)

**Wyeth DistributionRights**

On June 1, 2006, we entered into an agreementwith Wyeth to terminate the European distribution of Nipent by Wyeth andtransition distribution to SuperGen. In connection with the execution of theamended agreement, we paid Wyeth $2.1 million in consideration for theacceleration of the transfer of the Nipent European distribution rights and thenet profit amounts to be paid by Wyeth as described below. The original distributionand supply agreement with Wyeth would have terminated on its own terms at nocost to SuperGen over a period of time, varying by country, through March 2007.Under the amended agreement, distribution rights transitioned for mostcountries, except Spain and France, on December 1, 2006. Spain and Francetransitioned in February 2007.

During the transition period, we continued to shipvials of Nipent to Wyeth for sale and distribution in various countries inEurope. On a monthly basis, Wyeth has remitted to SuperGen an additionalamount, defined in the amended and restated supply agreement as the “netprofit,” based on Wyeth’s sales of Nipent. The net profit has been computed asWyeth’s invoiced net sales, less the product acquisition cost from SuperGen,less 5% transfer fee and less 5% distribution fee. Recurring remittances toSuperGen may be adjusted by any Wyeth invoiced trade receivable that is overdueby 60 days or more. At the time distribution rights transferred, we repurchasedany unsold inventory held by Wyeth with a shelf life greater than 12 months.

We recorded the initial$2.1 million payment to Wyeth as Prepaid distribution and marketingrights, and amortized it as a reduction of product revenue over 10 months,which corresponds to the termination acceleration period of June 2006through March 2007.  This paymentwas fully amortized at March 31, 2007. We recognized the revenue, andrelated cost of revenue, when the vials were delivered to the end customer byWyeth.  We determined that Wyeth’sability to collect from the end customer is reasonably assured. During thethree months ended March 31, 2007, we recorded $257,000 of net profit fromWyeth, which was included in net product revenue.

**NOTE 9.**   CONVERTIBLEDEBT FINANCING DERIVATIVE LIABILITY AND COLLATERAL

In June 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 the issuanceof the June Notes, we issued to the note holders warrants to purchase the2,634,211 shares of AVI BioPharma, Inc. that we own (“AVI Shares”) at anexercise price of $5.00 per share. The warrants represented a derivative underStatement of Financial Accounting Standards (“SFAS”) 133 that must be recordedat fair value. Changes in the fair value of the derivative have been recognizedin earnings. During the three months ended March 31, 2006, we recorded achange in the value of this derivative of $6,326,000. There was no similarcharge in the three months ended March 31, 2007 as the warrants expired onDecember 31, 2006.

During the three months ended March 31, 2006, oneof the warrant holders exercised 300,000 warrants. As part of this transaction,we received $1,500,000 in cash and transferred 300,000 of the AVI Shares to thewarrant holder. We recognized a gain on disposition of the shares of $780,000,representing the difference between our carrying value of the shares and theproceeds we received.

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) MARCH 31, 2007 (Unaudited)**

**NOTE 9.**   CONVERTIBLE DEBT FINANCING DERIVATIVE LIABILITY AND COLLATERAL (Continued)

In connection with theissuance of the warrants to acquire the AVI Shares, the AVI Shares had beenpledged into a collateral account. At December 31, 2006, the fair value ofthe pledged 2,334,211 AVI Shares were included in the accompanying balancesheet under non-current Restricted cash and investments, with an additional50,000 unrestricted shares of AVI included in Investment in stock of relatedparties. As noted above, the warrants expired on December 31, 2006, andthe 2,334,211 pledged shares were released from the collateral account. At March 31,2007, all 2,384,211 AVI Shares are included in Investment in stock of relatedparties. We reflect temporary changes in the value of those shares as part ofaccumulated other comprehensive gain or loss in stockholders’ equity.

**NOTE 10.**   COMPREHENSIVELOSS

Comprehensive lossesconsisted primarily of the net income or loss and changes in unrealized gainsor losses on investments. For the three months ended March 31, 2007 and2006, total comprehensive losses amounted to $4,547,000 and $2,542,000,respectively.   We recorded unrealizedlosses on investments of $1,218,000 for the three months ended March 31,2007 and unrealized gains on investments of $9,646,000 for the three monthsended March 31, 2006.

**NOTE 11.**   BASICAND DILUTED EARNINGS (LOSS) PER SHARE

In periods in which we have reported operating losses,basic and diluted net loss per common share is computed by dividing net loss bythe weighted average number of shares outstanding during the period. The effectof assuming the exercise of options and warrants would be anti-dilutive and,therefore, basic and diluted net loss per share are the same.

Thecomputation of diluted net loss per share for the three months ended March 31,2007 and 2006 excludes the impact of the following (in thousands):

| ** **                         | ** ** | **March 31,** | ** ** |
|------------------------------------|------------|--------------------|------------|
| ** **                         | ** ** | **2007**           | ** ** | **2006** | ** ** |
| Options to  purchase common stock  |       | 7,606              |       | 6,368 |   |
| Warrants to purchase  common stock |       | 4,596              |       | 6,725 |   |

 

**NOTE 12.   INCOMETAXES**

We have recorded a tax benefit of $170,000 for thethree months ended March 31, 2007, based on the Company’s estimatedeffective tax rate for the year. The effective tax rate is based on theanticipated alternative minimum taxes and state income taxed that will beincurred in the current year. We recorded no tax benefit or provision for thethree months ended March 31, 2006.

We adopted the provisions of Financial AccountingStandards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes” (“FIN 48”), on January 1, 2007. There was no impact onour consolidated financial position, results of operations and cash flows as aresult of adoption. We have no unrecognized tax benefit, as described in FIN48, as of March 31, 2007. Also, there are no accrued amounts for interestand penalties.

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) MARCH 31, 2007 (Unaudited)**

**NOTE 12.**   INCOME TAXES (Continued)

Our policy will be torecognize interest and penalties related to income taxes as a component ofincome tax expense. We are subject to income tax examinations for U.S. Federalincomes taxes and state income taxes from 1992 forward due to net operatinglosses in tax years 1992 through 2005. We are subject to tax examinations inthe United Kingdom from 2001 forward. We do not anticipate that totalunrecognized tax benefits will significantly change prior to March 31,2008.

**NOTE 13.   RECENTACCOUNTING PRONOUNCEMENTS**

In September 2006,the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157defines fair value, establishes a framework for measuring fair value, andexpands disclosures about fair value measurements. This statement clarifies howto measure fair value as permitted under other accounting pronouncements butdoes not require any new fair value measurements. However, for some entities,the application of this statement will change current practice. We will berequired to adopt SFAS No. 157 as of January 1, 2008. We arecurrently evaluating the impact of SFAS No. 157 and have not yetdetermined the effect on our earnings or financial position.

**NOTE 14.   SUBSEQUENTEVENT—SALE OF PRODUCTS TO INTAS**

On April 17, 2007, we sold the rights toanticancer agents mitomycin and paclitaxel to Intas Pharmaceuticals Ltd. for anaggregate purchase price of $1.2 million. We received $600,000 uponclosing of the transaction, with the balance due at the time of producttransfer later in the second quarter. We will also sell for additionalconsideration certain related inventory with the transaction.

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**Item 2.**                        Management’sDiscussion and Analysis of FinancialCondition and Results of Operations

*You should read the following discussion together withour consolidated financial statements and related notes included elsewhere inthis report. The results discussed below are not necessarily indicative of theresults to be expected in any future periods. Our disclosure and analysis inthis section of the report also contain forward-looking statements. Whenwe use the words “anticipate,” “estimate,” “project,” “intend,” “expect,” “plan,”“believe,” “should,” “likely” and similar expressions, we are making forward-lookingstatements. Forward-looking statements provide our current expectationsor forecasts of future events. In particular, these statements include statementssuch as: our estimates about becoming profitable; the percentage of royaltieswe expect to earn on Dacogen sales under our agreement with MGI; our forecastsregarding our research and development expenses; and our statements regardingthe sufficiency of our cash to meet our operating needs. Our actual resultscould 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; and ourability to launch and commercialize our products. Certain unknown or immaterialrisks and uncertainties 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 a discussion ofthe known and material risks that could affect our actual results, please seethe “Risk Factors” section of this report. We undertake no obligation to updateany forward-looking statements, whether as a result of new information, futureevents or otherwise. Readers should carefully review the Risk Factors sectionas well as other reports or documents we file from time to time with theSecurities and Exchange Commission.*

**Overview**

We are a pharmaceutical company dedicated to thediscovery, development and commercialization of therapies to treat patientswith cancer. We have a number of Aurora-A and Tyrosine Kinase inhibitors andDNA methyltransferase pre-clinical products under development. In 2006, Dacogenreceived approval for marketing in the United States, Nipent and our commercialinfrastructure was sold to Mayne Pharma, and we acquired a drug discovery anddevelopment company to complement our ongoing licensing efforts. These changeswere implemented to mitigate the ongoing risk of competitive in-licensing andmaximize the return on both existing resources and our incoming royalty andmilestone revenue.

Since our incorporation in 1991 we have devotedsubstantially all of our resources to our product development efforts. Our pastdevelopment efforts have been focused on the key compounds of Dacogen andNipent.

*Dacogen.**  *The FDA approved Dacogen for the treatment ofpatients with MDS in May 2006.

In September 2004, we executed an agreementgranting MGI exclusive worldwide rights to the development, manufacture,commercialization and distribution of Dacogen. Under the terms of theagreement, MGI made a $40.0 million equity investment in our company andwill pay up to $45.0 million in specific regulatory and commercializationmilestone payments. To date, we have received $32.5 million of thesemilestone payments, including $20.0 million upon first commercial sale ofDacogen in the U.S. in May 2006. In accordance with our agreement withMGI, we are entitled to receive a royalty on worldwide net sales starting at20% and escalating to a maximum of 30%. During the three months ended March 31,2007, we recorded royalty revenue of $3.8 million. Because we do not havesufficient ability to accurately estimate Dacogen sales, we recognize royaltyrevenue on a cash basis when we receive it from MGI.

In July 2006, MGI executed an agreement tosublicense Dacogen to Cilag GmbH, a Johnson & Johnson company,granting exclusive development and commercialization rights in all territoriesoutside 

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North America. Inaccordance with our license agreement with MGI, we are entitled to receive 50%of any payments MGI receives as a result of any sublicenses. We received $5.0 million,50% of the $10 million upfront payment MGI received, and, as a result ofboth the original agreement with MGI and this sublicense with Cilag GmbH, mayreceive up to $23.75 million in future milestone payments as they areachieved for Dacogen globally. Janssen-Cilag companies will be responsible forconducting regulatory and commercial activities related to Dacogen in allterritories outside North America, while MGI retains all commercializationrights and responsibility for all activities in the United States, Canada andMexico.

*Nipent.**  *Nipent is approved by the FDA and EMEA for thetreatment of hairy cell leukemia. Nipent was marketed by us in the UnitedStates until August 2006, and distributed in Europe through March 2007.

On June 1, 2006, we entered into an amended andrestated supply agreement with Wyeth to terminate the European distribution ofNipent by Wyeth and transition distribution to SuperGen. In connection with theexecution of the amended agreement, we paid Wyeth $2.1 million inconsideration for the acceleration of the transfer of the Nipent Europeandistribution rights and the net profit amounts to be paid by Wyeth as describedbelow. The original distribution and supply agreement with Wyeth would haveterminated on its own terms at no cost to SuperGen over a period of time,varying by country, through March 2007. Under the amended agreement,distribution rights transitioned for most countries, except Spain and France,on December 1, 2006. Spain and France transitioned in February 2007.

During the transition period, we shipped vials ofNipent to Wyeth for sale and distribution in various countries in Europe. On amonthly basis, Wyeth remitted to SuperGen an additional amount, defined in theamended and restated supply agreement as the “net profit,” based on Wyeth’ssales of Nipent. The net profit has been computed as Wyeth’s invoiced netsales, less the product acquisition cost from SuperGen, less 5% transfer fee(based on product cost) and less 5% distribution fee (based on net revenue). Recurringremittances to SuperGen may be adjusted by any Wyeth invoiced trade receivablethat is overdue by 60 days or more. Based on discussions with Wyeth, we believethat Wyeth’s ability to collect these amounts is reasonably assured. On December 1,2006, we repurchased most of the unsold European inventory held by Wyeth with ashelf life greater than 12 months, and repurchased the inventories for Spainand France in February 2007.

On August 22, 2006, we closed a transaction withMayne Pharma (USA), Inc., whereby Mayne acquired the North American rightsto Nipent and SurfaceSafe cleaning system. Pursuant to the Asset AcquisitionAgreement, we received cash proceeds of $13.4 million upon closing of thetransaction. In addition to the initial payment and holdbacks, we had the rightto receive annual deferred payments totaling $14.1 million over the nextfive years based on achievement of specific sales targets. These annualdeferred payments may be accelerated under certain circumstances, including achange of control of Mayne. Such a change of control occurred in February 2007when Mayne was acquired by Hospira, and we received $10.3 million of thedeferred payments. We continued to maintain our commercial operationsorganization to support the sales and marketing of Nipent during the six-monthtransition period, which ended on February 21, 2007. We have beenreimbursed by Mayne for all Nipent sales and marketing costs during thetransition period, including employee salaries and overhead.

On April 2, 2007, we closed a transaction withMayne, pursuant to which Mayne acquired the remaining worldwide rights toNipent for a total consideration of $8 million, including approximately$3.75 million received upon the closing of the sale. We also sold foradditional consideration related Nipent inventory with the transaction. Thebalance of the purchase price includes $1.25 million of paymentscontingent on key events and the remaining $3 million is payable over afive-year period on the anniversary of the closing date.

*MontigenAcquisition.**  *In April 2006,we completed our acquisition of Montigen, a privately-held oncology-focuseddrug discovery and development company headquartered in Salt Lake City, Utah. Montigen’sassets included its research and development team, a proprietary drug discoverytechnology 

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platform and optimizationprocess known as CLIMB, and late-stage pre-clinical compounds targetingAurora-A Kinase and members of the Tyrosine Kinase receptor family.

Pursuant to the terms of the merger agreement withMontigen, we paid the Montigen stockholders a total of $17.9 million uponthe closing of the transaction in cash and shares of SuperGen common stock. Wewill pay the Montigen stockholders an additional $22.0 million in sharesof SuperGen common stock, contingent upon achievement of specific regulatorymilestones. The first Montigen compound began Phase I clinical trials in April 2007,which triggered the first milestone payment to the former Montigen stockholdersof $10.0 million paid in shares of our common stock.

To date, our product revenues have been limited andwere derived primarily from sales of Nipent for the treatment of hairy cellleukemia, which was marketed in the United States until August 2006 and inEurope through March 2007. Most of our products are still in thedevelopment stage, and we will require substantial additional investments inresearch and development, clinical trials, regulatory and in sales andmarketing activities to commercialize current and future product candidates. Conductingclinical trials is a lengthy, time-consuming, and expensive process involvinginherent uncertainties and risks, and our studies may be insufficient todemonstrate safety and efficacy to support FDA approval of any of our productcandidates.

As a result of our substantial research and developmentexpenditures and minimal product revenues, we have incurred cumulative lossesof $368.6 million through March 31, 2007, and have never generatedenough funds through our operations to support our business. We expect tocontinue to incur operating losses at least through 2008.

Ultimately, our ability tobecome profitable will depend upon a variety of factors, including regulatoryapprovals of our products, the timing of the introduction and market acceptanceof our products and competing products, MGI’s success in commercializingDacogen, the launch of new products and our ability to control our ongoingcosts and operating expenses. If the results from our clinical trials are notpositive, we may not be able to get sufficient funding to continue our trialsor conduct new trials, and we would be forced to scale down or cease ourbusiness operations. Moreover, if our products are not approved or commerciallyaccepted we will remain unprofitable for longer than we currently anticipate. Additionally,we might be forced to substantially scale down our operations or sell certainof our assets, and it is likely the price of our stock would declineprecipitously.

**Critical AccountingPolicies**

Our management discussion and analysis of ourfinancial condition and results of operations is based upon our condensedconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the 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 consolidated financialstatements included in our 2006 Annual Report on Form 10-K. However,some of our accounting policies are particularly important to the portrayal ofour financial position and results of operations and require the application ofsignificant judgment by our management. We believe the following criticalaccounting policies, among others, affect our more significant judgments andestimates used in the preparation of our condensed consolidated financialstatements.

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*Stock-BasedCompensation*

We account for stock-based compensation in accordancewith the fair value recognition provisions of Statement of Financial AccountingStandards No. 123(R), “Share-Based Payment” (“SFAS 123R”).

The fair value of each stock award is estimated on thegrant date using the Black-Scholes option-pricing model based on assumptionsfor volatility, risk-free interest rates, expected life of the option, anddividends (if any). Expected volatility is determined based on a blend ofhistorical volatility and implied volatility of our common stock based on theperiod of time corresponding to the expected life of the stock options. Theexpected life of our stock options is based on our historical data andrepresents the period of time that stock options granted are expected to beoutstanding. The risk-free interest rate is based on the U.S. Treasury yieldcurve in effect at the time of grant commensurate with the expected lifeassumption.

We are using the straight-line attribution method torecognize stock based compensation expense. The amount of stock-basedcompensation recognized during a period is based on the value of the portion ofthe awards that are ultimately expected to vest. SFAS 123R requires forfeituresto be estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates. The term “forfeitures”is distinct from “cancellations” or “expirations” and represents only theunvested portion of the surrendered option. This analysis will be re-evaluatedquarterly and the forfeiture rate will be adjusted as necessary. Ultimately,the actual expense recognized over the vesting period will only be for thoseshares that vest.

As of March 31, 2007,there was $6,117,000 of total unrecognized compensation cost related tounvested stock-based awards. This cost is expected to be recognized over aweighted average period of 2.15 years. We expect approximately 2,106,000 inunvested options to vest at some point in the future. Options expected to vestis calculated by applying an estimated forfeiture rate to the unvested options.

*Revenue Recognition*

Our net product revenues have related principally toNipent. We recognize sales revenue upon shipment and related transfer of titleto customers, and when collectibility is reasonably assured.

Cash advance payments received in connection withdistribution agreements, license agreements, or research grants are generallydeferred and recognized ratably over the period of the respective agreements oruntil services are performed. We recognize cost reimbursement revenue undercollaborative agreements as the related research and development costs areincurred. We recognize milestone fees upon completion of specified milestonesaccording to contract terms. Deferred revenue represents the portion of suchcash advance payments received that have not been earned.

We accounted for our $2.1 million payment toWyeth in June 2006 as Prepaid distribution and marketing rights, whichwere amortized against revenue over 10 months, equaling the terminationacceleration period of June 2006 through March 2007. The amortizationof $630,000 through the three months ended March 31, 2007 was reflected asa reduction of product revenue. Proceeds from our initial product shipments toWyeth were deferred and were recognized as revenue (and related cost ofrevenue) when the product was delivered to the end customer by Wyeth. Under theterms of our amended license agreement with Wyeth, we receive an additionalamount of net profit based on Wyeth’s sales of Nipent. During the three monthsended March 31, 2007, we received $257,000 of net profit, which wasincluded in net product revenue.

MGI is required to pay us royalties of 20% to 30% ofnet Dacogen sales within 45 days after the end of each calendar quarter. Duringthe three month period ended March 31, 2007, we recorded royalty revenueof $3.8 million. Because we do not have sufficient ability to accuratelyestimate Dacogen sales, we recognize royalty revenue on a cash basis when wereceive it from MGI. In accordance with our license agreement with MGI, we areentitled to receive 50% of any payments MGI receives as a result of any 

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sublicenses. We received$5.0 million, 50% of the $10 million upfront payment MGI received,and, as a result of both the original agreement with MGI and a sublicense withCilag GmbH, may receive up to $23.75 million in future milestone paymentsas they are achieved for Dacogen globally.

We received initial cashproceeds from the Asset Acquisition Agreement with Mayne Pharma of $13,395,000.From the initial cash proceeds and the accelerated milestone payment of$10,312,000, we deducted the value of net assets delivered to Mayne, includinginventory, prepaid expenses, and manufacturing equipment, and also deducted thereimbursement of alternative supply costs, resulting in a remaining net gain of$21,863,000. However, due to the uncertainty regarding the price protectionexposure noted in Note 7, we have deferred the entire net gain as of March 31,2007. We expect that Mayne and the new supplier will have completednegotiations on a commercial supply agreement by the end of the second quarterof 2007.

*Goodwill andIntangible Assets*

We have intangible assetsrelated to goodwill and other acquired intangibles such as acquired workforce,CLIMB process technology, trademarks, covenants not to compete, and customerlists. The determination of related estimated useful lives and whether or notthese assets are impaired involves significant judgment. Changes in strategyand/or market conditions could significantly impact these judgments and requireadjustments to recorded asset balances. We review intangible assets, as well asother long-lived assets, for impairment whenever events or circumstancesindicate that the carrying amount may not be fully recoverable. Additionally,we review goodwill for impairment annually in accordance with FASB Statement No. 142,“Goodwill and Other Intangible Assets.”

*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 on ourbalance sheet and results of operations. Our management reviews the securitieswithin our portfolio for other than temporary declines in value on a regularbasis. The prices of some of our marketable securities, in particular AVI, aresubject to considerable volatility. Decreases in the fair value of thesesecurities may significantly impact our results of operations.

Investments in equity securities without readilydeterminable fair value are carried at cost. We periodically review thosecarried costs and evaluate whether an impairment has occurred. Thedetermination of whether an impairment has occurred requires significantjudgment, as each investment may have unique market or developmentopportunities.

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**Results ofOperations**

*Three months ended March 31, 2007 compared tothree months ended March 31, 2006:*

| ** **           | ** ** | **Three months ended**     | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **           | ** ** | **March 31,**                   | ** ** | **Change** | ** ** |
| **Revenues**         | ** ** | ** **                           | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **           | ** ** | **(Dollars in thousands)** | ** ** |
| Net product  revenue |       | $                                    | 621        |       | $          | 2,884      |       | $ | (2,263 | ) |   | (78.5 | )% |   |
| Royalty revenue      |       | 3,794                                |       | —     |       | 3,794      |       |   | — |   |   |
|                      |            |                                      |            |            |            |            |            |  |  |  |  |  |  |  |  |  |

 

The decrease in net product revenue for the threemonths ended March 31, 2007 was due primarily to the sale of our NorthAmerican rights to Nipent and Surface Safe to Mayne Pharma effective onAugust 22, 2006. Net product revenues in 2007 relate only to sales inEurope.

Duringthe three months ended March 31, 2007, we recorded royalty revenue of$3,794,000 related to Dacogen sales for the fourth quarter of 2006. MGI isrequired to pay us royalties of 20% to 30% of net Dacogen sales within 45 daysafter the end of each calendar quarter. Because we do not have sufficientability to accurately estimate Dacogen sales, we recognize royalty revenue on acash basis when we receive it from MGI. Dacogen was approved for sale by theFDA in May 2006.

| ** **                                      | ** ** | **Three months ended**     | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **                                      | ** ** | **March 31,**                   | ** ** | **Change** | ** ** |
| **Costs and operating expenses** | ** ** | ** **                           | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands)** | ** ** |
| Cost of product  revenue                        |       | $                                    | 221        |       | $          | 548        |       | $ | (327 | ) |   | (59.7 | )% |   |
| Research and  development                       |       | 5,063                                |       | 3,021      |       | 2,042      |       |   | 67.6 |   |   |
| Selling, general and  administrative            |       | 3,575                                |       | 6,493      |       | (2,918     | )          |   | (44.9 | ) |   |
|                                                 |            |                                      |            |            |            |            |            |  |  |  |  |  |  |  |  |  |

 

The decline in cost of product revenue was due to thesale of our North American rights to Nipent and Surface Safe to Mayne Pharma effectiveon August 22, 2006.

The increase in research and development expenses wasdue to higher drug discovery research costs associated with the acquisition ofMontigen facility in Salt Lake City, Utah in April 2006 and employee stockcompensation costs recorded as a result of the implementation of SFAS 123R,offset by lower clinical research and supply costs related to Nipent.

Thedecrease in selling, general and administrative expenses for the three monthsended March 31, 2007 relates primarily to lower costs associated withsales and marketing programs due to the sale of Nipent and Surface Safe toMayne in August 2006, offset by higher expenses relating to the recordingof stock compensation expense as a result of the implementation of SFAS 123R.

| ** **                           | ** ** | **Three months ended**     | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **March 31,**                   | ** ** | **Change** | ** ** |
| **Other income (expense)** | ** ** | ** **                           | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                           | ** ** | **(Dollars in thousands)** | ** ** |
| Interest income                      |       | $                                    | 944        |       | $          | 536        |       | $ | 408 |   |   | 76.1 | % |   |
| Gain on  disposition of AVI stock    |       | —                               |       | 780        |       | (780       | )          |   | (100.0 | ) |   |
| Foreign currency  transaction gain   |       | 1                                    |       | —     |       | 1          |       |   | — |   |   |
| Change in valuation of  derivatives  |       | —                               |       | (6,326     | )          | (6,326     | )          |   | (100.0 | ) |   |
|                                      |            |                                      |            |            |            |            |            |  |  |  |  |  |  |  |  |  |

 

The increase in interest income was due to higheravailable cash and marketable securities balances and an increase in interestrates for the three months ended March 31, 2007, compared to the sameperiod in 2006.

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As part of our June 2003 convertible debttransaction, we issued to the note holders warrants to purchase 2,634,211shares of AVI at $5.00 per share. During the three months ended March 31,2006, one of the warrant holders exercised 300,000 warrants. As part of thistransaction, we received $1,500,000 in cash and transferred 300,000 of the AVIShares to the warrant holder. We recognized a gain on disposition of the sharesof $780,000, representing the difference between our $2.40 per share adjustedcost basis of the shares and the exercise price. We had no similar transactionduring the three months ended March 31, 2007.

The warrants issued in theJune 2003 convertible debt transaction represent a derivative instrumentand are revalued each quarter using the Black-Scholes pricing model. During thefirst quarter of 2006, the value of this derivative had increased by$6,326,000, due to an increase in the market value of the underlying shares ofAVI at March 31, 2006. The warrants expired on December 31, 2006, sothere was no corresponding transaction during the three months ended March 31,2007.

**Liquidity andCapital Resources**

Our cash, cash equivalents, and marketable securitiestotaled $74,546,000 at March 31, 2007 compared to $67,883,000 at December 31,2006. In addition, we held 2,384,211 shares of registered stock of AVI, whichhad a market value of $6,390,000 at March 31, 2007. In connection with theissuance of the warrants to acquire the AVI Shares in 2003, the AVI Shares hadbeen pledged into a collateral account. The warrants expired on December 31,2006, and 2,334,211 pledged shares were released from the collateral account.At March 31, 2007, all 2,384,211 AVI Shares are included in Investment instock of related parties.

Net cash used in operating activities was $5,514,000in the first quarter of 2007, and consisted primarily of the net loss of$3,329,000 and a decrease in accounts payable and other liabilities of$3,446,000, offset by non-cash stock compensation expense of $1,152,000. Netcash used in operating activities was $1,274,000 in the first quarter of 2006,and consisted primarily of the net loss of $12,188,000, offset by an increasein the valuation of derivatives of $6,326,000 and a decrease in accountsreceivable of $5,451,000.

Net cash provided by investing activities was$10,101,000 in the first quarter of 2007, and consisted primarily of theaccelerated milestone payments from Mayne Pharma of $10,312,000 due to a changein control at Mayne. Net cash provided by investing activities was $1,491,000in the first quarter of 2006, and related primarily to the proceeds of$1,500,000 from disposition of shares of AVI BioPharma as a result of theexercise of warrants.

Net cash provided by financing activities was$2,103,000 and $541,000 in the first quarter of 2007 and 2006, respectively,and both consisted of proceeds from the exercise of stock options or warrants.

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 2008. However, it is our intention to consideradditional financing options, including the selling of additional shares ofstock in a public or private offering and/or exploring marketing partnershipopportunities for existing or newly acquired or licensed products and developmentactivities resulting from the acquired research operation based in Salt LakeCity, Utah.

In addition to the contractual obligations disclosedin Management’s Discussion and Analysis included in our annual report on Form 10-Kfor the year ended December 31, 2006, effective April 4, 2006, wehave $22.0 million in future contingent regulatory milestone payments due tothe Montigen stockholders, which would be payable in shares of SuperGen stock.The first portion of this milestone 

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payment, for $10.0million, was paid in shares of our common stock in April 2007, which willbe recorded as additional acquired in-process research and development expensein the second quarter of 2007.

We believe that our needfor additional funding will increase in the future and that our continuedability to raise funds from external sources will be critical to our success.We continue to actively consider future contractual arrangements that wouldrequire significant 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.

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

**Interest Rate Risk**

Due to the short-term nature of our interest bearingassets, which consist primarily of certificates of deposit, United Statescorporate obligations, and United States government obligations, we believethat our exposure to interest rate market risk would not significantly affectour operations.

Our investment policy isto manage our marketable securities portfolio to preserve principal andliquidity while maximizing the return on the investment portfolio. Ourmarketable 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.

**Foreign Currency Risk**

We currently sell ourproduct primarily in Europe. Accordingly, we are subject to exposure fromadverse movements in foreign currency exchange rates. To date, the effect ofchanges in foreign currency exchange rates on revenue and operating expenses hasnot been material. Operating expenses incurred by our foreign subsidiaries aredenominated primarily in local currencies. We currently do not use financialinstruments to hedge these operating expenses. We will assess our need toutilize financial instruments to hedge currency exposures on an ongoing basis.

**Item 4.**                        ControlsAnd Procedures

(a)   Evaluationof disclosure controls and procedures.

As of March 31, 2007, our management evaluated,with the participation of our chief executive officer and our chief financialofficer, the effectiveness of our disclosure controls and procedures as of theend of the period covered by this quarterly report on Form 10-Q.Except as noted below, there have been no changes in our internal control overfinancial reporting that occurred during this quarterly period that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting. Based on this quarter’s evaluation,our chief executive officer and our chief financial officer have concluded thatdue to the material weakness that was identified as of December 31, 2006,our disclosure controls and procedures are not effective to ensure thatinformation we are required to disclose 

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in reports that we file orsubmit under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms.

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of our annual or interim financialstatements will not be prevented or detected. Our management’s assessment ofour internal control over financial reporting performed during the preparationof our consolidated financial statements as of December 31, 2006identified the following material weakness (as defined by the Public CompanyAccounting Oversight Board) in our internal control over financial reporting:

The Company determined thatas of December 31, 2006 a material weakness existed in the Company’sability to maintain effective internal controls over the application ofgenerally accepted accounting principles (“GAAP”) to non-routine and complextransactions due to insufficient GAAP expertise commensurate with the Company’sfinancial reporting requirements. As a result of this material weakness, errorswere identified in the following two areas: (1) In connection with itsperiodic assessment of goodwill for impairment, the Company inappropriatelyevaluated goodwill for impairment below the reporting unit level, and (2) TheCompany did not determine whether the computations in the reports used torecord compensation cost for share based payments appropriately applied theestimated forfeiture rate such that compensation cost recognized for the yearended December 31, 2006 was at least equal to the portion of thegrant-date value of the awards that were vested at that date. As a result,adjustments to correct the identified errors were recorded in the consolidatedfinancial statements for the year ended December 31, 2006 related togoodwill, additional paid in capital, and costs and operating expenses.

*Remediation EffortsRelated to Material Weakness in Internal Control Over Financial Reporting*

In response to thematerial weakness in internal controls described above, we have taken steps toimprove our ability to maintain effective internal controls over theapplication of GAAP to non-routine and complex transactions to meet ourfinancial reporting requirements. Specific measures we have begun to adoptinclude:

·       Assessingand enhancing the experience and knowledge of personnel used in applying GAAPand determining when it is appropriate to consult with third party specialistson non-routine and complex accounting transactions.

·       Providing additionaltraining to all personnel in the application of GAAP to reduce the likelihoodof a material misstatement of our annual or interim financial statements.

(b)   Changes ininternal control over financial reporting.

Except as noted above, there were no changes in ourinternal control over financial reporting that occurred during the periodcovered by this Quarterly Report on Form 10-Q that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

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**SUPERGEN, INC.**

**PART II -OTHER INFORMATION**

**Item 1A.**                RiskFactors

*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 followingrisks actually occur, and by additional risks and uncertainties that we do notknow of or that we currently consider immaterial. In such case, the tradingprice of our common stock could decline.*

*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 Dacogen and Nipent***

*Dacogen may not becommercially successful.*

Even though Dacogen hasbeen approved in the United States and even if it receives regulatory approvalin Europe at a future date, patients and physicians may not readily accept it,which would result in lower than projected sales and cause substantial harm toour business through the receipt of lower royalty revenue from MGI. Inaddition, pursuant to our license agreement with MGI, we are expecting toreceive payments from MGI in connection with the achievement of certaincommercialization milestones. If these commercialization milestones are notmet, we will not receive these payments and our financial condition andbusiness would be harmed.

*If Dacogen does not receive regulatory approval inEurope, our future revenues may be limited and our business would be harmed.*

Our European subsidiary, EuroGen Pharmaceuticals Ltd.,submitted an MAA for Dacogen to the EMEA, which submission was accepted forreview on October 25, 2004. MGI and SuperGen determined that additionalclinical data will be required to continue the review of Dacogen in Europe. Therefore,we withdrew the MAA for Dacogen in November 2005.

In July 2006, MGIannounced that it had sublicensed Dacogen to Cilag GmbH, a Johnson &Johnson company, granting exclusive development and commercialization rights inall territories outside North America. We received 50% of the $10 millionupfront payment and, as a result of both the original agreement with MGI andthis sublicense with Cilag GmbH, may receive up to $23.75 million infuture milestone payments as they are achieved for Dacogen sales globally. Cilagwill be responsible for conducting regulatory and commercial activities relatedto Dacogen in all territories outside North America, while MGI retains allcommercialization rights and responsibility for all activities in the UnitedStates, Canada and Mexico. However, if Dacogen is never approved in Europe, wewill not receive any of the expected royalty payments for commercial sales byJanssen-Cilag and our business will be harmed.

*Our right to receive a significant portion of theconsideration in the transaction with Mayne Pharma is subject to contingenciesbeyond our control.*

In August 2006 wesold the North American rights to Nipent and Surface Safe to Mayne Pharma (USA), Inc.for a total aggregate consideration of approximately $34.0 million. $5.0 millionof that aggregate amount is a supply holdback, and Mayne is not obligated torelease this holdback to us until our Nipent manufacturer has been qualifiedand approved by the FDA and Mayne has successfully negotiated a commercialsupply agreement with the product manufacturer. We cannot control or influencethis approval process. In addition, over $3.8 million of the aggregateconsideration will not be paid to us unless 

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anduntil Mayne achieves specified targets for sales of Nipent, over the next fiveyears. Achievement of these sales targets are beyond our control. If theconditions for the release of the supply holdback are not met, and/or we arenot entitled to the approximately $3.8 million of deferred payments, wewill not have received full value for Nipent. If we are not able to sell ourrevenue generating and otherwise valuable assets for full value, our financialcondition and business will be harmed.

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

*We have a history of operating losses and we expect tocontinue to incur losses for the foreseeable 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 from salesof Nipent. The North American rights to Nipent were sold to Mayne Pharma in August 2006and we recently sold the remaining worldwide rights to Nipent to Mayne in April 2007.Our substantial research and development expenditures and limited revenues haveresulted in significant net losses. We have incurred cumulative losses of$368.6 million from inception through March 31, 2007, and ourproducts have not generated sufficient revenues to support our business duringthat time. We expect to continue to incur substantial operating losses at leastthrough 2008 and may never achieve profitability.

Whether we achieveprofitability depends primarily on the following factors:

·       thesuccessful commercialization of Dacogen in North America by MGI;

·       obtainingregulatory approval in Europe and the successful commercialization of Dacogenoutside of North America by the Janssen-Cilag companies;

·       delaysin production of Dacogen or inadequate commercial sales of other products,after regulatory approvals have been received;

·       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;

·       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; and

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

Our products and productcandidates, even if successfully developed and approved, may not generatesufficient or sustainable revenues to enable us to achieve or sustainprofitability.

*We will require additional funding to expand ourproduct pipeline and commercialize new drugs, and if we are unable to raise thenecessary capital or to do so on acceptable terms, our planned expansion andcontinued chances of survival could be harmed.*

We will continue to spendsubstantial resources on expanding our product pipeline, selling anddistributing future products, and conducting research and development,including clinical trials for our product candidates. We anticipate that ourcapital resources will be adequate to fund operations and capital expendituresat least through 2008. However, if we experience unanticipated cashrequirements during this period, we could require additional funds much sooner.We may raise money by the sale of our equity securities or debt, or theexercise of outstanding warrants and stock options by the holders of suchwarrants and options. However, given uncertain market conditions and thevolatility of our stock price, we 

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may notbe able to sell our securities in public offerings or private placements atprices and/or on terms that are favorable to us, if at all. Also, the dilutiveeffect of additional financings could adversely affect our per share results.We may also choose to obtain funding through licensing and other contractualagreements. For example, we licensed the worldwide rights to the development,commercialization and distribution of Dacogen to MGI. 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 be forced to ceaseour operations.

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

In addition to raisingmoney by selling our equity securities to MGI in connection with the licenseagreement, we also expect to record development and license revenue frompayments made to us by MGI upon the achievement of regulatory andcommercialization milestones. However, we may fail to achieve these milestones,either because we are unable to secure regulatory approval of Dacogen in Europeor Asia or due to MGI’s or Janssen-Cilag’s inability to expend the resources togrow or commence sales of Dacogen as prescribed by the license agreement. Inaddition, the license agreement provides 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 continue to receive these payments, and we cannot beassured that MGI will expend the resources to expand sales of Dacogen in NorthAmerica, or that the Janssen-Cilag companies will expend the resources to sellit in Europe and elsewhere, or that either company 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.*

Our investments arecarried at fair value with unrealized gains and losses included in accumulatedother comprehensive income or loss in stockholders’ equity. However, we areexposed to equity price risk on our equity investment in AVI. Currently we own2,384,211 shares of AVI. During the year ended December 31, 2004, werecorded a write-down of $7.9 million related to an other than temporarydecline in the value of our equity investment in AVI, resulting in a reductionof our cost basis in the AVI shares. Under our accounting policy, marketableequity securities are presumed to be impaired if their fair value is less thantheir cost basis for more than six months, absent compelling evidence to thecontrary. As of June 30, 2004, the AVI shares had been trading below ouroriginal cost basis for more than six months. Since there was no compellingevidence to the contrary, we recorded the impairment charge of $7.9 millionin our results of operations. The amount of the charge was based on thedifference between the market price of the shares as of June 30, 2004 andour adjusted cost basis. The public trading prices of the AVI shares havefluctuated significantly since we purchased them and could continue to do so.If the public trading prices of these shares continue to trade below their newcost basis in future periods, we may incur additional impairment chargesrelating to this investment, which in turn will affect our results ofoperations.

***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 the 

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commercial sale of any ofour product candidates, we must demonstrate through pre-clinical testing andclinical trials that our product candidates are safe and effective for use inhumans.

We have a portfolio of cancer drugs in various stagesof development. In addition, we expect to commence new clinical trials fromtime to time in the course of our business as our product development workcontinues. Conducting clinical trials is a lengthy, time consuming andexpensive process and the results are inherently uncertain. We have incurredand will continue to incur substantial expense for, and we have devoted andexpect to continue to devote a significant amount of time to, pre-clinicaltesting and clinical trials. However, regulatory authorities may not permit usto undertake any additional clinical trials for our product candidates. If weare unable to complete our clinical trials, our business will be severelyharmed and the price of our stock will likely decline.

We have ongoing researchand pre-clinical projects that may lead to product candidates, but we have notbegun clinical trials for these projects. If we do not successfully completeour pre-clinical trials, we could 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;

·       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 toachieve a satisfactory rate of completion of our clinical trials, our businesswill be significantly harmed.

*We may be required to suspend, repeat or terminate ourclinical trials if they are not conducted in compliance with regulatoryrequirements.*

Our clinical trials mustbe conducted in accordance with the FDA’s regulations and are subject tocontinuous oversight by the FDA and institutional review boards at the medicalinstitutions where the clinical trials are conducted. We outsource certainaspects of our research and development activities to contract researchorganizations (“CROs”). We have agreements with these CROs for certain of ourclinical programs. We and our CROs are required to comply with good clinicalpractice (“GCP”) regulations and guidelines enforced by the FDA for all of ourproducts in clinical development. The FDA 

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enforcesGCPs through 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 good manufacturing practices (“GMPs”), and may require alarge number of test subjects. Our failure to comply with these regulations mayrequire us to repeat clinical studies, which would delay the regulatoryapproval process.

*Wemay be required to suspend, repeat or terminate our clinical trials if latertrial results fail to demonstrate safety and efficacy, or if the results arenegative, inconclusive or if they fail to demonstrate safety or efficacy.*

Our clinical trials may besuspended at any time if we or the FDA believe the patients participating inour studies are exposed to unacceptable health risks or if we or the FDA finddeficiencies in the conduct of these trials. Adverse medical events during aclinical trial could cause us to terminate or repeat a clinical trial.

We may encounter otherproblems and failures in our studies that would cause us or the FDA to delay orsuspend the studies. Even if we achieve positive interim results in clinicaltrials, these results do not necessarily predict final results, and acceptableresults in early trials may not be repeated in later trials. A number ofcompanies in the pharmaceutical industry have suffered significant setbacks inadvanced clinical trials, even after achieving promising results in earliertrials.

Negative or inconclusiveresults during a clinical trial could cause us to terminate or repeat aclinical trial. The potential failures would delay development of our productcandidates, hinder our ability to conduct related pre-clinical testing andclinical trials and further delay the commencement of the regulatory approvalprocess. Further, the failures or perceived failures in our clinical trialswould delay our product development and the regulatory approval process, damageour business prospects, make it difficult for us to establish collaboration andpartnership relationships and negatively affect our reputation and competitiveposition in the pharmaceutical industry. Finally, if we are required to conductother clinical trials for the product candidates, the additional trials wouldrequire substantial funding and time, and we may be unable to obtain funding toconduct such clinical trials.

*Ourfailure to obtain regulatory approvals to market our product candidates inforeign countries and delays caused by government regulation would adverselyaffect our anticipated revenues.*

Sales of our products inforeign jurisdictions will be subject to separate regulatory requirements and marketingapprovals. Approval in the United States, or in any one foreign jurisdiction,does not ensure approval in any other jurisdiction. The process of obtainingforeign approvals may result in significant delays, difficulties and expensesfor us, and may require additional clinical trials. Although many of theregulations applicable to our products in these foreign countries are similarto those promulgated by the FDA, many of these requirements also vary widelyfrom country to country, which could delay the introduction of our products inthose countries. Failure to comply with these regulatory requirements or toobtain required approvals would impair our ability to commercialize ourproducts in foreign markets.

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 governmentalapproval, the facilities of our third-party manufacturers are stillsubject to unannounced inspections by the FDA and must continue to comply withGMPs and other regulations. These regulations govern all areas of production,record keeping, personnel and quality control. 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.

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*If we are unable tocomply with environmental laws and regulations, 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 fail to comply with stringent regulations applicable topharmaceutical drug manufacturers, we may face delays in the delivery of, or beunable to meet demand 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, we must establishand maintain relationships with manufacturers to produce and package sufficientsupplies of our finished pharmaceutical products. 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 future commercial needs if market demand for our productsincreases suddenly, which would require us to seek new manufacturingarrangements and may result in substantial delays in meeting market demand;

·       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 coulddelay clinical trials or commercialization of our product candidates underdevelopment, interfere with current sales and entail higher costs.

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

We may be unable tomaintain our relationships with our third-party manufacturers. If we needto replace or seek new manufacturing arrangements, we may have difficultylocating and entering into arrangements with qualified contract manufacturerson acceptable terms, if at all. We are aware of only a limited number ofcompanies on a worldwide basis who operate manufacturing facilities in whichour products can be manufactured to our specifications and in compliance withGMPs. It could take several months, or significantly longer, for a new contractmanufacturing facility to obtain FDA approval and to 

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developsubstantially equivalent processes for the production of our products. We maynot be able to contract with any of these companies on acceptable terms, if atall. For example, the company that had been purifying Nipent filed forreorganization under Chapter 11 and ceased operations in late 2004. Wecontracted with another manufacturer for the purification of Nipent, but thismanufacturer has not yet received qualification by the FDA. If the newmanufacturer fails to get final FDA qualification or goes out of business, wewill be unable to satisfy the conditions necessary to receive from Mayne Pharmathe $5.0 million held back from us pursuant to the terms of that transaction.

*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. Relying onthird-party suppliers makes us vulnerable to component failures andinterruptions in supply, either of which could impair our ability to conductclinical trials or to ship our products to our customers on a timely basis.Using third-party suppliers makes it difficult and sometimes impossiblefor us to maintain quality control, manage inventory and production schedulesand control production costs. Vendor lead times to supply us with orderedcomponents vary significantly and can exceed six months or more. Both now andas we expand our need for manufacturing capacity, we cannot be sure that oursuppliers will furnish us with required components when we need them. Thesefactors could make it difficult for us to effectively and efficientlymanufacture our products, and could adversely impact our clinical trials, productdevelopment and sales of our products.

Some suppliers are our only source for a particularcomponent, which makes us vulnerable to cost increases and supplyinterruptions. We generally rely on one manufacturer for each product.

Vendors may decide to limitor eliminate sales of certain products to the medical industry due to productliability or other concerns. In the event one of our sole source suppliersdecides not to manufacture the component, goes out of business, or decides tocut off our supply, we may be unable to locate replacement supply sources, orthe sources that we may locate may not provide us with similar reliability orpricing and our business could suffer. If we cannot obtain a necessarycomponent, we may need to find, test and obtain regulatory approval for areplacement component, produce the component or redesign the related product,which would cause significant delay and could increase our manufacturing costs.Any of these events could adversely impact our sales and results of operations.

*If we are not able to maintain and successfullyestablish new collaborative and licensing arrangements with third parties, ourproduct development and business will be harmed.*

Our business model is based on establishingcollaborative relationships with other parties both to license compounds uponwhich our products and technologies are based and to manufacture our productsor our collaborators’ products. It is critical that we gain access to compoundsand technologies to license for further development. Due to the expense of thedrug 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.

From time to timewe enter into discussions with various companies regarding the establishment ofnew collaborations. If we are not successful in establishing new partners forour product candidates, we may not be able to pursue further development ofsuch product candidates and/or may have to reduce or cease our currentdevelopment programs, which would materially harm our business. Even if we aresuccessful in establishing new collaborations, they are subject to numerousrisks 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, ourcollaborators may undergo business combinations, which could have the effect ofmaking the collaboration with us less attractive to them for a number ofreasons. For example, if an existing collaborator purchases a company that isone of our competitors, that company may be less willing to continue itscollaboration with us. A company that has a strategy of purchasing companieswith attractive technologies might have less incentive to enter into acollaboration agreement with us. Moreover, disputes may arise with respect tothe ownership of rights to any technology or products developed with anycurrent or future collaborator. Lengthy negotiations with potentialcollaborators or disagreements between us and our collaborators may lead todelays in or termination of the research, development or commercialization ofproduct candidates or result in time consuming and expensive litigation orarbitration.

*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 enterinto collaborative relationships with third parties to co-develop and marketproducts. These relationships require substantial financial commitments fromus, and at the same time the product developments are subject to the sameregulatory requirements, risks and uncertainties associated with thedevelopment of our other product candidates. The compounds that are the subjectof these collaborative agreements may prove to be ineffective, may fail toreceive 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 65 U.S.patents covering various aspects of our proprietary drugs and technologies,including 41 patents for various aspects of Orathecin and related products, sixpatents for various aspects of Dacogen and related products. We have beengranted patents and have received patent licenses relating to our proprietary formulationtechnology, non-oncology and non-core technologies, among which at least10 patents are issued or licensed to us. In addition, we are prosecuting anumber of patent applications for drug candidates that we are not activelydeveloping at this time.

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We also have patents, licenses to patents and pendingpatent applications in Europe, Australia, Japan, Canada, Mexico, China, Israeland India among other countries. 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 costsand expenses and maintain effective protection, we focus our foreign patent andlicensing activities primarily in the European Union, Canada, Australia andJapan. In determining whether or not to seek patent protection or to licenseany patent in a foreign country, we weigh the relevant costs and benefits, andconsider, among other things, the market potential and profitability, the scopeof patent protection afforded by the law of the jurisdiction and itsenforceability, and the nature of terms with any potential licensees. Failureto obtain adequate patent protection for our proprietary drugs and technologywould impair our ability 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 toours. We may not be aware of all of the patents potentially adverse to ourinterests which may have been issued to others. In addition, third parties maychallenge, invalidate or circumvent any of our patents. Thus, any patents thatwe own or license from third parties may not provide adequate protectionagainst competitors, if at all. Our pending patent applications and those wemay file in the future, or those we may license from third parties, may notresult in patents 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 proprietary productsare dependent upon compliance with numerous licenses and agreements. Theselicenses 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 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 to compete effectively against otherpharmaceutical companies, our business will suffer.*

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, Bristol-Myers Squibb Company,Celgene, Eli Lilly & Co., GlaxoSmithKline, Novartis AG, Pfizer,Pharmion Corp. and others.

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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 forproducts, or are developing or testing product candidates that compete directlywith, our product candidates. For example, Dacogen faces competition fromPharmion’s Vidaza, and Celgene’s Revlimid.

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, and manufacturingand marketing products. Accordingly, our competitors may succeed in obtainingpatent protection, receiving FDA approval or commercializing products before wedo. If we commence sales of our product candidates, we will be competingagainst companies with greater marketing expertise and manufacturingcapabilities, 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 positionsin our generic drugs are uncertain and subject to risks. The market for genericdrugs, including the pricing for generic drugs, is extremely competitive. As aresult, unless our generic drugs are the first or among the initial few tolaunch, there is a high risk that our products would not gain meaningful marketshare, or we would not be able to maintain our price and continue the productline. Moreover, marketing of generic drugs is also subject to regulatoryapproval, and if we were not able to obtain such approval before ourcompetitors, we would lose our competitive advantage. Failure to maintain ourcompetitive position could have a material adverse effect on our business andresults 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;

·       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 faceincreasing competition from lower-cost generic products after patents on ourproprietary products expire. Loss of patent protection typically leads to arapid decline in sales for that product and could affect our future results. Asnew products enter the market, our products may become obsolete or ourcompetitors’ products may be more effective or more effectively marketed andsold than our products. Technological advances, competitive forces and loss ofintellectual property protection rights for our products may render ourproducts obsolete.

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*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 ofthis kind. We may experience financial losses in the future due to productliability claims. We have obtained limited product liability insurance coveragefor our products 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 we are unable to attract and retain additional,highly skilled personnel required for the expansion of our activities, our businesswill 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 clinical administration, pre-clinicaland development research, manufacturing and finance. We compete with othercompanies for the services of existing and potential employees, however to theextent these employees favor larger, more established employers, we may be at adisadvantage.

*Earthquake or other natural or man-made disasters andbusiness interruptions could adversely 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.

*Provisions in our certificate of incorporation, bylawsand applicable Delaware law may prevent or discourage third parties or stockholdersfrom attempting to replace our 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 establish procedures, including noticeprocedures, with regard to the nomination, other than by or at the direction ofour board of directors, of candidates for election as directors or forstockholder proposals to be submitted at stockholder meetings.

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We are also subject to Section 203 of theDelaware General Corporation Law, an anti-takeover provision. In general, Section 203of the Delaware General Corporation Law prevents a stockholder owning 15% ormore of a corporation’s outstanding voting stock from engaging in businesscombinations with a Delaware corporation for three years following the date thestockholder acquired 15% or more of a corporation’s outstanding voting stock.This restriction is subject to exceptions, including the approval of the boardof directors and of the holders of at least two-thirds of the outstandingshares of voting stock not owned by the 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.

**Item6.**                        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, 2007 |   | 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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