**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

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

**Forthe Quarterly Period Ended June 30, 2006**

**or**

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

**Forthe transition period from                 to                 **

**Commissionfile number 0-27628**

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**SUPERGEN, INC.**

(Exact name of registrantas specified in its charter)

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

 

**(925) 560 - 0100**

(Registrant’s telephonenumber, including area code)

**Not applicable**

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

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

Indicate by check markwhether registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See  definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act. (Check one):

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

 

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

The number of shares of the registrant’s Common Stock,$.001 par value, outstanding as of August 4, 2006 was 53,483,108.

 

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**TABLEOF CONTENTS**

|                  | ** ** | ** **                                                                                                              | ** ** | **Page No.** |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|--------------|
| **PART I**  | ** ** | **FINANCIAL INFORMATION**                                                                                               | ** ** | ** **   | ** ** |
|             |       | Item 1—Financial  Statements (Unaudited)                                                                           |       |         |   |
|             |       | Condensed  Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005                         |       | 3            |   |
|             |       | Condensed  Consolidated Statements of Operations for the three and six month periods  ended June 30, 2006 and 2005 |       | 4            |   |
|             |       | Condensed  Consolidated Statements of Cash Flows for the six month periods ended June 30,  2006 and 2005           |       | 5            |   |
|             |       | Notes  to Condensed Consolidated Financial Statements                                                                   |       | 6            |   |
|             |       | Item 2—Management’s  Discussion and Analysis of Financial Condition and Results of Operations            |       | 17           |   |
|             |       | Item  3—Quantitative and Qualitative Disclosures About Market Risk                                                 |       | 29           |   |
|             |       | Item  4—Controls and Procedures                                                                                    |       | 30           |   |
| **PART II** | ** ** | **OTHER INFORMATION**                                                                                                   |       |         |   |
|             |       | Item 1A—Risk  Factors                                                                                              |       | 31           |   |
|             |       | Item  4—Submission of Matters to a Vote of Security Holders                                                        |       | 46           |   |
|             |       | Item 5—Other  Information                                                                                          |       | 46           |   |
|             |       | Item 6—Exhibits                                                                                                    |       | 46           |   |
| **SIGNATURES**   |       | 47                                                                                                                      |       |
|                  |            |                                                                                                                         |            |              |  |  |  |

 

2

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

| ** **                                                                                                                                                                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                                              | ** ** | **(Unaudited)**   | ** ** | **(Note 1)**     | ** ** |
| **ASSETS**                                                                                                                                                                              | ** ** |              | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Current assets:                                                                                                                                                                         |       |              |       |                  |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                               |       |              | $          | 50,421                |       |   |   | $ | 47,664 |   |   |
| Accounts receivable, net                                                                                                                                                                |       |              | 2,914      |                  |       |   | 5,576 |   |   |
| Development revenue  receivable from MGI PHARMA, Inc.                                                                                                                                   |       |              | —     |                  |       |   | 550 |   |   |
| Inventories                                                                                                                                                                             |       |              | 807        |                  |       |   | 1,439 |   |   |
| Prepaid distribution and  marketing rights                                                                                                                                              |       |              | 1,987      |                  |       |   | — |   |   |
| Prepaid expenses and  other current assets                                                                                                                                              |       |              | 1,799      |                  |       |   | 1,407 |   |   |
| Total current assets                                                                                                                                                                    |       |              | 57,928     |                  |       |   | 56,636 |   |   |
| Marketable securities,  non-current                                                                                                                                                     |       |              | 245        |                  |       |   | 147 |   |   |
| Investment in stock of  related parties                                                                                                                                                 |       |              | 688        |                  |       |   | 673 |   |   |
| Due from related parties,  non-current                                                                                                                                                  |       |              | 43         |                  |       |   | 52 |   |   |
| Property, plant and  equipment, net                                                                                                                                                     |       |              | 3,217      |                  |       |   | 2,907 |   |   |
| Goodwill                                                                                                                                                                                |       |              | 731        |                  |       |   | 731 |   |   |
| Other intangibles, net                                                                                                                                                                  |       |              | 1,171      |                  |       |   | 290 |   |   |
| Restricted cash and  investments, non-current                                                                                                                                           |       |              | 11,514     |                  |       |   | 11,805 |   |   |
| Other assets                                                                                                                                                                            |       |              | 35         |                  |       |   | 30 |   |   |
| Total assets                                                                                                                                                                            |       |              | $          | 75,572                |       |   |   | $ | 73,271 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                          | ** ** |              | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Current liabilities:                                                                                                                                                                    |       |              |       |                  |       |   |   |   |   |
| Accounts payable and  accrued liabilities                                                                                                                                               |       |              | $          | 2,433                 |       |   |   | $ | 3,391 |   |   |
| Derivative liability                                                                                                                                                                    |       |              | 1,144      |                  |       |   | 1,817 |   |   |
| Payable to AVI  BioPharma, Inc.                                                                                                                                                    |       |              | 565        |                  |       |   | 565 |   |   |
| Deferred revenue                                                                                                                                                                        |       |              | 504        |                  |       |   | — |   |   |
| Accrued payroll and  employee benefits                                                                                                                                                  |       |              | 1,960      |                  |       |   | 2,269 |   |   |
| Total current liabilities                                                                                                                                                               |       |              | 6,606      |                  |       |   | 8,042 |   |   |
| Deferred rent.                                                                                                                                                                          |       |              | 958        |                  |       |   | 972 |   |   |
| Total liabilities                                                                                                                                                                       |       |              | 7,564      |                  |       |   | 9,014 |   |   |
| 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; 53,483,108 and 51,710,912 shares issued  and outstanding at June 30, 2006 and December 31, 2005,  respectively |       |              | 53         |                  |       |   | 52 |   |   |
| Additional paid in  capital                                                                                                                                                             |       |              | 420,461    |                  |       |   | 409,365 |   |   |
| Accumulated other  comprehensive gain                                                                                                                                                   |       |              | 3,349      |                  |       |   | 2,850 |   |   |
| Accumulated deficit                                                                                                                                                                     |       |              | (355,855   | )                     |       |   | (348,010 | ) |   |
| Total stockholders’  equity                                                                                                                                                        |       |              | 68,008     |                  |       |   | 64,257 |   |   |
| Total liabilities and stockholders’ equity                                                                                                                                         |       |              | $          | 75,572                |       |   |   | $ | 73,271 |   |   |

 

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** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                    | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                    | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Net product revenue                                                                           |       | $                                | 3,984      |                           | $          | 3,625 |   | $ | 6,868 |   | $ | 4,640 |   |
| Development and license revenue from MGI PHARMA,  Inc.                                        |       | —                           |       | 3,716                          |       | — |   | 6,941 |   |
| Distribution agreement and other revenue                                                      |       | —                           |       | 590                            |       | — |   | 757 |   |
| Milestone revenue                                                                             |       | 20,000                           |       | —                         |       | 20,000 |   | — |   |
| Total revenues                                                                                |       | 23,984                           |       | 7,931                          |       | 26,868 |   | 12,338 |   |
| Costs and  operating expenses:                                                                |       |                             |       |                           |       |   |   |   |   |
| Cost of product revenue                                                                       |       | 847                              |       | 700                            |       | 1,395 |   | 1,000 |   |
| Research and development                                                                      |       | 3,837                            |       | 2,891                          |       | 6,858 |   | 8,015 |   |
| Selling, general, and administrative                                                          |       | 6,066                            |       | 7,139                          |       | 12,559 |   | 13,397 |   |
| Acquired in-process research and development                                                  |       | 16,318                           |       | —                         |       | 16,318 |   | — |   |
| Total costs and operating expenses                                                            |       | 27,068                           |       | 10,730                         |       | 37,130 |   | 22,412 |   |
| Loss from operations                                                                          |       | (3,084                           | )          | (2,799                         | )          | (10,262 | ) | (10,074 | ) |
| Interest income                                                                               |       | 462                              |       | 411                            |       | 998 |   | 783 |   |
| Gain on  disposition of investment in AVI BioPharma stock resulting from exercise of  warrant |       | —                           |       | —                         |       | 780 |   | — |   |
| Change in  valuation of derivatives                                                           |       | 7,000                            |       | 500                            |       | 674 |   | 500 |   |
| Income (loss)  before income tax                                                              |       | 4,378                            |       | (1,888                         | )          | (7,810 | ) | (8,791 | ) |
| Income tax provision                                                                          |       | (35                              | )          | —                         |       | (35 | ) | — |   |
| Net income (loss)                                                                             |       | $                                | 4,343      |                           | $          | (1,888 | ) | $ | (7,845 | ) | $ | (8,791 | ) |
| Net income (loss) per  common share:                                                          |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                         |       | $                                | 0.08       |                           | $          | (0.04 | ) | $ | (0.15 | ) | $ | (0.17 | ) |
| Diluted                                                                                       |       | $                                | 0.08       |                           | $          | (0.04 | ) | $ | (0.15 | ) | $ | (0.17 | ) |
| Weighted average shares  outstanding:                                                         |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                         |       | 53,187                           |       | 51,183                         |       | 52,477 |   | 51,162 |   |
| Diluted                                                                                       |       | 53,671                           |       | 51,183                         |       | 52,477 |   | 51,162 |   |

 

See accompanying notes to condensed consolidated financial statements

4

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

| ** **                                                                                 | ** ** | **Six months ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                 | ** ** | **June 30,**              | ** ** |
| ** **                                                                                 | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| Operating activities:                                                                      |       |                           |       |   |   |
| Net loss                                                                                   |       | $                              | (7,845     | ) | $ | (8,791 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                           |       |   |   |
| Depreciation                                                                               |       | 368                            |       | 425 |   |
| Amortization of intangibles and distribution and  marketing rights                         |       | 509                            |       | 193 |   |
| Amortization of deferred revenue                                                           |       | —                         |       | (4,952 | ) |
| Change in valuation of derivatives                                                         |       | (674                           | )          | (500 | ) |
| Stock compensation expense                                                                 |       | 1,474                          |       | 334 |   |
| Gain on disposition of investment in AVI BioPharma  stock                                  |       | (780                           | )          | — |   |
| Cash paid for distribution and marketing rights                                            |       | (2,100                         | )          | (1,500 | ) |
| Acquired in-process research and development                                               |       | 16,318                         |       | — |   |
| Changes in  operating assets and liabilities:                                              |       |                           |       |   |   |
| Accounts receivable and development revenue  receivable                                    |       | 3,212                          |       | 14,527 |   |
| Inventories                                                                                |       | 632                            |       | 443 |   |
| Prepaid expenses and other assets                                                          |       | (360                           | )          | (601 | ) |
| Due from related parties                                                                   |       | 9                              |       | 18 |   |
| Restricted cash and investments                                                            |       | (44                            | )          | 18 |   |
| Accounts payable and other liabilities                                                     |       | (1,678                         | )          | (2,961 | ) |
| Deferred revenue                                                                           |       | 504                            |       | (167 | ) |
| Net cash provided by (used in) operating activities                                        |       | 9,545                          |       | (3,514 | ) |
| Investing activities:                                                                      |       |                           |       |   |   |
| Purchases of marketable securities                                                         |       | —                         |       | (11,285 | ) |
| Sales or maturities of marketable securities                                               |       | 1,500                          |       | 17,035 |   |
| Purchases of property and equipment                                                        |       | (272                           | )          | (71 | ) |
| Acquisition of Montigen net assets, net of cash  acquired                                  |       | (8,693                         | )          | — |   |
| Net cash provided  by (used in) investing activities                                       |       | (7,465                         | )          | 5,679 |   |
| Financing activities:                                                                      |       |                           |       |   |   |
| Proceeds from issuance of common stock, net of  issuance costs                             |       | 677                            |       | 271 |   |
| Net cash provided  by financing activities                                                 |       | 677                            |       | 271 |   |
| Net increase in  cash and cash equivalents                                                 |       | 2,757                          |       | 2,436 |   |
| Cash and cash  equivalents at beginning of period                                          |       | 47,664                         |       | 38,394 |   |
| Cash and cash equivalents at end of period                                                 |       | $                              | 50,421     |   | $ | 40,830 |   |
| Supplemental Disclosure of Non-Cash Financing  Activities:                                 |       |                           |       |   |   |
| Common stock  issued in connection with Montigen acquisition                               |       | $                              | 8,947      |   | $ | — |   |

 

See accompanying notes to condensed consolidated financial statements

5

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2006 (Unaudited)**

**NOTE 1.   BASIS OFPRESENTATION**

The accompanying condensed unaudited consolidatedfinancial statements of SuperGen, Inc. (“we,” “SuperGen” or the “Company”)have been prepared in accordance with generally accepted accounting principlesfor interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not include all ofthe information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring adjustments) considered necessaryfor a fair presentation have been included. Operating results for the three andsix month periods ended June 30, 2006 are not necessarily indicative ofresults that may be expected for the year ending December 31, 2006.

The balance sheet at December 31, 2005 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 31,2005.

**NOTE 2.**   STOCK-BASED COMPENSATION

Effective January 1, 2006, we adopted the fairvalue recognition provisions of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS 123R”),using the modified-prospective-transition method. Under this transition method,compensation cost recognized for the three and six months ended June 30,2006 includes: (a) compensation cost for all stock-based payments granted,but not yet vested as of January 1, 2006, based on the grant-date fairvalue estimated in accordance with the original provisions of Statement ofFinancial Accounting Standards No. 123, “Accounting for Stock Based Compensation” (“SFAS 123”), and (b) compensationcost for all stock-based payments granted subsequent to January 1, 2006,based on the grant-date fair value estimated in accordance with the provisionsof SFAS 123R. Such amounts have been reduced by our estimate of forfeitures ofall unvested awards. Results for prior periods have not been restated.

*StockOption Plans.  *We have 12,263,000 shares of common stock authorized forissuance upon the grant of incentive stock options or nonstatutory stockoptions to employees, directors, and consultants under our stock option plans,including our 2003 Stock Plan and 1996 Directors’ Stock Option Plan. The numberof shares to be purchased, their price, and the terms of payment are determinedby our Board of Directors, provided that the exercise price for incentive stockoptions cannot 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 May 15, 2006 and isscheduled to end on November 14, 2006. Under Accounting Principles BoardOpinion No. 25, “Accounting forStock Issued to Employees” (“APB 25”), we were not required to recognizestock-based compensation expense for the cost of stock options or 

6

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2006 (Unaudited)**

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

shares issued under theCompany’s ESPP. Upon adoption of SFAS 123R, we began recording stock-basedcompensation expense related to the ESPP.

As a result of the January 1, 2006 adoption ofSFAS 123R, we recognized $754,000 and $1,444,000, respectively in stock basedcompensation expense for the three and six months ended June 30, 2006. Asa result of this adoption, our basic and diluted net income per common sharefor the three months ended June 30, 2006 are lower by $0.02, and our basicand diluted net loss per common share for the six months ended June 30,2006 are higher by $0.03.

Thefair value of each stock award is estimated on the grant date using theBlack-Scholes option-pricing model based on the assumptions noted in thefollowing table:

| ** **               | ** ** | **Three months ended**June 30, | ** ** | **Six months ended**June 30, | ** ** |
|--------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **               | ** ** | **2006**                                      | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| Risk-free  interest rate |       |                                          | 4.95       | %                                           |       |   | 3.87 | % |   |   | 4.74 | % |   | 4.09 | % |
| Dividend yield           |       |                                          | —     |                                        |       |   | — |   |   |   | — |   |   | — |   |
| Expected  volatility     |       |                                          | 68.26      | %                                           |       |   | 81.80 | % |   |   | 66.0 | % |   | 82.23 | % |
| Expected life (in years) |       |                                          | 5.18       |                                        |       |   | 5.00 |   |   |   | 5.18 |   |   | 5.00 |   |

 

Upon the adoption of SFAS 123R in 2006, we changed ourmethod of computing expected volatility to include a blend of historicalvolatility and implied volatility of our common stock based on the period oftime corresponding to the expected life of the stock options. We could not relyexclusively on implied volatility because options on SuperGen stock withremaining terms of greater than one year are not regularly traded in the market.In prior years, we calculated the fair value of stock awards using onlyhistorical volatility dating back to 1996. The expected life of stock optionsgranted is based exclusively on historical data and represents the weightedaverage period of time that stock options granted are expected to beoutstanding. The expected life is applied to one group as a whole as we do notexpect substantially different exercise or post-vesting termination behavioramong our employee population. The risk-free interest rate is based on the U.S.Treasury yield curve in effect at the time of grant commensurate with theexpected life assumption.

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. We have applied an annualforfeiture rate of 12.02% to all unvested options as of June 30, 2006. Thisanalysis will be re-evaluated quarterly and the forfeiture rate will beadjusted as necessary. Ultimately, the actual expense recognized over thevesting period will only be for those shares that vest.

7

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2006 (Unaudited)**

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

A summary of the Company’sstock option activity as of June 30, 2006, and changes during the sixmonths then ended is presented below:

| ** **                                        | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------------------------|------------|--------------------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| Balance at  December 31, 2005                |       |                     | 6,549,725  |                                   |       |                                                | $          | 9.07                            |       |   |   |   |   |   |   |   |
| Granted                                           |       |                     | 727,200    |                                   |       |                                                | $          | 5.00                            |       |   |   |   |   |   |   |   |
| Exercised                                         |       |                     | (124,632   | )                                      |       |                                                | $          | 4.74                            |       |   |   |   |   |   |   |   |
| Forfeited                                         |       |                     | (24,009    | )                                      |       |                                                | $          | 6.40                            |       |   |   |   |   |   |   |   |
| Expired                                           |       |                     | (513,938   | )                                      |       |                                                | $          | 6.48                            |       |   |   |   |   |   |   |   |
| Balance at June 30,  2006                    |       |                     | 6,614,346  |                                   |       |                                                | $          | 8.92                            |       |   |   | 6.45 |   |   | $ | 517,800 |   |
| Vested or expected to  vest at June 30, 2006 |       |                     | 6,303,592  |                                   |       |                                                | $          | 8.95                            |       |   |   | 6.36 |   |   | $ | 517,300 |   |
| Exercisable at June 30, 2006                 |       |                     | 4,939,253  |                                   |       |                                                | $          | 9.45                            |       |   |   | 5.78 |   |   | $ | 500,900 |   |

 

The weighted-average grant-date fair value of optionsgranted during the six months ended June 30, 2006 was $2.96. 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 sixmonths ended June 30, 2006 was $49,000 and the total amount of cashreceived from exercise of these options was $591,000.

As of June 30, 2006, there was $4,568,000 oftotal unrecognized compensation cost related to unvested stock-based awards. Thiscost is expected to be recognized over a weighted average period of 2.40 years.We expect approximately 1,364,339 in unvested options to vest at some point inthe future. Options expected to vest is calculated by applying an estimatedforfeiture rate to the unvested options.

The following tableillustrates the effect on net loss and net loss per share had we applied thefair value recognition provisions of SFAS 123R in the three and six monthsended June 30, 2005. For purposes of this pro-forma disclosure, the valueof the options is estimated using a Black-Scholes option-pricing model andamortized to expense over the options’ vesting periods.

| ** **                                                                                                                                                                                | ** ** | **Three months  ended**June 30, 2005 | ** ** | **Six months  ended**June 30, 2005 | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                                                                                | ** ** | **(Revised)**                                       | ** ** |
| Net loss, as reported                                                                                                                                                                     |       |                                                | $          | (1,888                                            | )          |   |   | $ | (8,791 | ) |   |
| Add: Stock-based employee compensation expense  included in the determination of net loss, as reported                                                                                    |       |                                                | —     |                                              |       |   | 268 |   |   |
| Deduct: Stock-based employee compensation expense  that would have been included in the determination of net loss if the  fair value method had been applied to all awards |       |                                                | (943       | )                                                 |       |   | (4,191 | ) |   |
| Pro forma net loss                                                                                                                                                                        |       |                                                | $          | (2,831                                            | )          |   |   | $ | (12,714 | ) |   |
| Basic and diluted  net loss per common share:                                                                                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| As reported                                                                                                                                                                               |       |                                                | $          | (0.04                                             | )          |   |   | $ | (0.17 | ) |   |
| Pro forma                                                                                                                                                                                 |       |                                                | $          | (0.06                                             | )          |   |   | $ | (0.25 | ) |   |

 

8

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2006 (Unaudited)**

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

During the preparation ofthe notes to the condensed consolidated financial statements for the quarterended March 31, 2006, we determined that the calculation of our pro-formanet loss reported under SFAS 123 for the year ended December 31, 2005, aspreviously reported, was understated as a result of our having inadvertentlyexcluded the fair value of (and, therefore, the amortization expense relatedto) options granted to members of our Board of Directors during 2002 through2005. Accordingly, pro-forma expense for each of the 2005 quarterly periodsended March 31, June 30, September 30 and December 31 wereunderstated by $76,000, $82,000, $120,000, and $120,000, respectively, or$398,000 for the year ended December 31, 2005. These revisions had noeffect on our previously reported consolidated results of operations orfinancial condition.

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

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

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

The following is a summaryof available-for-sale securities as of June 30, 2006 (in thousands):

| ** **                      | ** ** | **Amortized**Cost | ** ** | **Gross  Unrealized**Gains | ** ** | **Gross  Unrealized**Losses | ** ** | **Fair Value** | ** ** |
|---------------------------------|------------|-------------------|------------|----------------------------|------------|-----------------------------|------------|---------------------|------------|
| U.S. corporate  debt securities |       |              | $          | 44,078                     |       |                        |       | $                   | 10         |   |   |   | $ | — |   |   |   | $ | 44,088 |   |   |
| Marketable equity  securities   |       |              | 5,846      |                       |       |                        | 3,340      |                |       |   | (1 | ) |   |   | 9,185 |   |   |
| Total                           |       |              | $          | 49,924                     |       |                        |       | $                   | 3,350      |   |   |   | $ | (1 | ) |   |   | $ | 53,273 |   |   |

 

Theavailable-for-sale securities are classified on the balance sheet as of June 30,2006 as follows (in thousands):

| ** **                                                       | ** ** | **Amortized**Cost | ** ** | **Gross**UnrealizedGains | ** ** | **Gross**UnrealizedLosses | ** ** | **Fair Value** | ** ** |
|------------------------------------------------------------------|------------|-------------------|------------|--------------------------|------------|---------------------------|------------|---------------------|------------|
| Amounts included in cash  and cash equivalents                   |       |              | $          | 44,078                   |       |                      |       | $                   | 10         |   |   |   | $ | — |   |   |   | $ | 44,088 |   |   |
| Amounts included in  investment in stock of related parties |       |              | 120        |                     |       |                      | 68         |                |       |   | — |   |   |   | 188 |   |   |
| Amounts included in  restricted cash and investments             |       |              | 5,602      |                     |       |                      | 3,150      |                |       |   | — |   |   |   | 8,752 |   |   |
| Marketable securities,  non-current                              |       |              | 124        |                     |       |                      | 122        |                |       |   | (1 | ) |   |   | 245 |   |   |
| Total                                                            |       |              | $          | 49,924                   |       |                      |       | $                   | 3,350      |   |   |   | $ | (1 | ) |   |   | $ | 53,273 |   |   |

 

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2006 (Unaudited)**

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

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

| ** **                               | ** ** | **Fair Value**   | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **June 30,**2006 | ** ** | **December 31,  2005** | ** ** |
| Debt securities due in  one year or less |       | $                     | 44,088     |   |   | $ | 44,690 |   |   |
| Marketable equity  securities            |       | 9,185                 |       |   | 9,407 |   |   |
| Total                                    |       | $                     | 53,273     |   |   | $ | 54,097 |   |   |

 

**NOTE 4.   INVENTORIES**

Inventoriesconsist of the following (in thousands):

| ** **      | ** ** | **June 30,**2006 | ** ** | **December 31,  2005** | ** ** |
|-----------------|------------|-----------------------|------------|-----------------------------|------------|
| Raw materials   |       |                  | $          | 67                          |       |   |   | $ | 67 |   |   |
| Work in process |       |                  | 431        |                        |       |   | 197 |   |   |
| Finished goods  |       |                  | 309        |                        |       |   | 1,175 |   |   |
| Total           |       |                  | $          | 807                         |       |   |   | $ | 1,439 |   |   |

 

**NOTE 5.   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 theissuance of the June Notes, we issued to the note holders warrants topurchase the 2,634,211 shares of AVI BioPharma, Inc. that we own (“AVIShares”) at an exercise price of $5.00 per share. The warrants represent aderivative under SFAS 133 that must be recorded at fair value. Changes in thefair value of the derivative are recognized in earnings. During the threemonths ended June 30, 2006 and 2005, we recorded changes in the value ofthis derivative of $7,000,000 and $500,000, respectively. During the six monthsended June 30, 2006 and 2005, we recorded changes in the value of thisderivative of $674,000 and $500,000, respectively.

During the six months ended June 30, 2006, one ofthe warrant holders exercised 300,000 warrants. As part of this transaction, wereceived $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.

In connection with theissuance of the warrants to acquire the AVI Shares, we pledged the AVI Sharesinto a collateral account. The fair value of the AVI Shares is included in theaccompanying balance sheet under non-current Restricted cash and investments. Wealso hold an additional 50,000 shares of AVI, which are included in theaccompanying balance sheet in Investment in stock of related parties. Wecontinue to hold the remaining 2,334,211 pledged and 50,000 unpledged AVIShares and reflect temporary changes in those share values as part ofaccumulated other comprehensive gain or loss in stockholders’ equity.

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2006 (Unaudited)**

**NOTE 6.   LICENSE ANDSTOCK PURCHASE AGREEMENTS WITH MGI PHARMA, INC.**

In August 2004, we entered into three agreementswith MGI PHARMA, Inc., a Minnesota corporation (“MGI”): (1) a licenseagreement relating to DacogenTM (decitabine), (2) a common stock purchaseagreement, and (3) an investor rights agreement. The agreements becameeffective on September 21, 2004. Dacogen is an investigational anti-cancertherapeutic which was recently 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 will receive 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 anentity that is not deemed an “equivalent” pharmaceutical company or (ii) MGIbecomes insolvent. None of the payments made pursuant to the agreement arerefundable, except in the case of overpayment.

In accordance with the stock purchase agreement, weissued 4,000,000 shares of our common stock to MGI at $10.00 per share, foraggregate proceeds totaling $40,000,000. We paid the placement agent $3,200,000in cash and issued the placement agent a warrant exercisable for 400,000 sharesof our common stock at an exercise price of $10.00 per share. We calculated thefair value of the warrant at $1,436,000. We allocated the aggregate proceedsand related costs of the placement agent fee and warrant valuation betweenequity, for the portion attributable to the stock purchase agreement, anddeferred revenue, for the portion attributable to the license agreement. Therefore,we allocated $23,662,000, the fair value of 4,000,000 shares of our commonstock at the time of the transaction, net of related offering costs, to equity,and allocated $12,625,000 to deferred revenue. The deferred revenue wasamortized to license revenue over 15 months, which was the period of time inwhich our development obligations for Dacogen transferred to MGI. During thethree and six months ended June 30, 2005, we recorded amortization ofdeferred revenue of $2,476,000 and $4,952,000, respectively. The deferredrevenue was fully amortized at December 31, 2005, so we had noamortization in 2006.

Under the terms of the license agreement, MGI wasobligated to reimburse us for certain development and allocated overhead costsof Dacogen until we received marketing authorization. In the three and sixmonths ended June 30, 2005, we recognized $1,240,000 and $1,989,000,respectively of development revenue relating to the reimbursement under thisagreement. We had no similar revenue during 2006.

In May 2006, the FDAapproved Dacogen for the treatment of patients with MDS and MGI commencedcommercial sales of Dacogen in the United States. In accordance with ourlicense agreement 

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2006 (Unaudited)**

**NOTE 6.**   LICENSE AND STOCK PURCHASE AGREEMENTS WITH MGI PHARMA, INC.(Continued)

withMGI, we received a milestone payment and recorded milestone revenue of $20.0million in the three months ended June 30, 2006. MGI is required to pay usroyalties of 20% to 30% of net Dacogen sales within 45 days after the end ofeach calendar quarter. We did not record any royalty revenue for the three andsix month periods ended June 30, 2006 because we were unable to accuratelyestimate the amount of Dacogen sales by MGI. To the extent we do not havesufficient ability to accurately estimate Dacogen sales, we will recognizeroyalty revenue on a cash basis when we receive it from MGI.

**Subsequent Event—EuropeanSublicense**

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. We received 50% of the $10 million upfrontpayment and, as a result of both the original agreement with MGI and thissublicense with Cilag GmbH, may receive up to $23.75 million in futuremilestone payments as they are achieved for Dacogen globally. Janssen-Cilagcompanies will be responsible for conducting regulatory and commercialactivities related to Dacogen in all territories outside North America, whileMGI retains all commercialization rights and responsibility for all activitiesin the United States, Canada and Mexico.

**NOTE 7.   ACQUISITIONOF MONTIGEN PHARMACEUTICALS, 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’s assets include its research and development team, a proprietary drugdiscovery technology platform and optimization process, CLIMBTM, and late-stagepre-clinical compounds targeting aurora-A kinase and members of the tyrosinekinase 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 SuperGen commonstock, contingent upon achievement of specific regulatory milestones. Wereceived a permit from the Commissioner of Corporations for the State ofCalifornia so that the issuance of the shares of SuperGen common stock areexempt from registration under the Securities Act of 1933.

The acquisition of Montigen has been accounted for asan acquisition of assets rather than as a business combination in accordancewith the criteria outlined in Emerging Issues Task Force 98-3. Montigenwas a development stage company that was focused on developing a business andhad not commenced its principal business operations. It also lacked thenecessary elements of a business because it did not have completed products. Theresults of operations of Montigen since April 4, 2006 have been includedin our consolidated financial statements and primarily consist of research anddevelopment expenses.

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2006 (Unaudited)**

**NOTE 7.**   ACQUISITION OF MONTIGEN PHARMACEUTICALS, INC.(Continued)

The aggregate purchaseprice of Montigen was $18,127,000, which included cash paid of $8,989,000, theissuance of 1,625,626 shares of SuperGen common stock valued at $8,947,000 intotal, and $191,000 in direct transaction costs. The purchase price has beenallocated on April 4, 2006 as follows:

| Net tangible  assets                          |   | $          | 532,000    |   |
|-----------------------------------------------|--------|------------|------------|--------|
| Assembled  workforce                          |   | 235,000    |       |
| CLIMB Technology  Platform                    |   | 1,042,000  |       |
| Acquired in-process  research and development |   | 16,318,000 |       |
| Total                                         |   | $          | 18,127,000 |   |

 

The $532,000 of net tangible assets included $486,000in cash, prepaids and other current assets of $37,000, $405,000 of fixedassets, and $396,000 of assumed liabilities. The values assigned to assembledworkforce and CLIMB technology platform are being amortized over three years,the estimated useful lives of the assets. The accumulated amortization of theassembled workforce and CLIMB technology was $20,000 and $87,000, respectivelyat June 30, 2006.

The value assigned toacquired in-process research and development represented the fair value ofMontigen’s incomplete research and development programs that had not yetreached technological feasibility and had no alternative future use as of theacquisition date. A summary of these compounds is as follows:

| ** **                                           | ** ** | **Adjusted**Fair Value | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|
| Compound 1 (MP  470)—Tyrosine kinase inhibitor  |       | $                           | 1,091,000  |   |
| Compound 2  (529/235)—Aurora-A kinase inhibitor |       | 15,227,000                  |       |
| Total Acquired  in-process research and development  |       | $                           | 16,318,000 |   |

 

The value of the acquired in-process research anddevelopment was determined by estimating the future net cash flows for the twocompounds between 2006 and 2029 using a present value risk adjusted discountrate of 26%. This discount rate is a significant assumption and is based on ourestimated weighted average cost of capital adjusted upward for the risksassociated with the projects acquired. The projected cash flows from theacquired projects were based on estimates of revenues and operating profitsrelated to the projects considering the stage of development of each potentialproduct acquired, the time and resources needed to complete the development andapproval of each product, the life of each potential commercialized product andassociated risks including the inherent difficulties and uncertainties indeveloping a drug compound, including obtaining FDA and other regulatoryapprovals, and risks related to the viability of and potential alternativetreatments in any future target markets. The $22.0 million in future contingentregulatory milestone payments due to the Montigen stockholders will be recordedas additional acquired in-process research and development expense when paid.

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2006 (Unaudited)**

**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 that is currently approved for marketingin the United States for hairy cell leukemia. We paid Pfizer $1,000,000 underthis agreement and have classified this amount in Prepaid distribution andmarketing rights in the accompanying balance sheet. This amount is beingamortized over 31 months, the estimated life of the benefit period. Accumulatedamortization was $903,000 and $516,000 at June 30, 2006 and June 30,2005, respectively.

**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 the accelerationof the transfer of the Nipent European distribution rights and the net profitamounts to be paid by Wyeth as described below. Distribution rights under theamended agreement are expected to transition no later than December 1,2006. The originaldistribution and supply agreement with Wyeth would have terminated on its ownterms at no cost to SuperGen over a period of time, varying by country, throughMarch 2007.

During the transition period, SuperGen will continueto ship vials of Nipent to Wyeth for sale and distribution in various countriesin Europe. On a monthly basis, Wyeth will remit 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 will be 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 transfer, SuperGen will berequired to repurchase any unsold inventory held by Wyeth with a shelf lifegreater than 12 months and limited amounts of packaging materials. All revenuerelated to shipments of product that may be subject to repurchase by SuperGenunder the amended agreement have been deferred as of June 30, 2006.

We have accounted for theinitial $2.1 million payment to Wyeth as Prepaid distribution and marketingrights, which will be amortized against revenue over 10 months, equaling thetermination acceleration period of June 2006 through March 2007. Theamortization of $210,000 per month will be reflected as a reduction of productrevenue. Proceeds from our initial product shipments to Wyeth will initially bedeferred and recognized as revenue (as will related cost of revenue) when theproduct is delivered to the end customer by Wyeth, assuming that we havesufficient evidence to conclude that collectibility from the end customer isreasonably assured. At the time distribution rights are transferred, we expectthat any remaining deferred revenue from distributor shipments will approximateSuperGen’s obligation to repurchase unsold inventory from Wyeth.

**NOTE 9.   TERMINATIONOF AGREEMENT WITH ABBOTT LABORATORIES**

In December 1999, we entered into a Nipent distribution agreement with AbbottLaboratories. Beginning March 1, 2000, Abbott became the exclusive U.S.distributor of Nipent for a period of five years. 

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2006 (Unaudited)**

Weretained U.S. marketing rights for Nipent. Under this agreement, Abbott made a$5 million cash payment to the Company in January 2000. This amount wasincluded in deferred revenue and was being amortized to distribution revenueover 60 months.

In March 2003,we entered into an agreement with Abbott that allowed us to terminate theNipent distribution agreement, for a stated fee that decreased over time to$1,500,000 at March 2005. As part of the agreement, we paid Abbott$500,000 for the right to terminate the Nipent distribution agreement at ouroption. The $500,000 was recorded as a reduction of the deferred revenue weinitially received from Abbott for the distribution rights, and we stoppedamortizing the remaining balance of deferred revenue, which was $1,667,000 atthat time. In February 2005, weexercised our option and paid Abbott $1,500,000 to terminate the Nipentdistribution agreement. This amount was charged against deferred revenue. Theremaining balance in deferred revenue of $167,000 was recorded as distributionagreement revenue in the six month period ending June 30, 2005. We had nosimilar revenue during the six month period ending June 30, 2006.

**NOTE 10.   COMPREHENSIVELOSS**

For the three months ended June 30, 2006 and2005, total comprehensive losses amounted to $4,804,000 and $2,441,000,respectively. Comprehensive losses consisted primarily of the net income orloss and changes in unrealized gains or losses on investments. We recordedunrealized losses on investments of $9,147,000 and $553,000 for the threemonths ended June 30, 2006 and 2005, respectively.

For the six months ended June 30,2006 and 2005, total comprehensive losses amounted to $7,346,000 and$8,911,000, respectively. Comprehensive losses consisted primarily of the netlosses and changes in unrealized gains or losses on investments. We recordedunrealized gains on investments of $499,000 for the six months ended June 30,2006 and unrealized losses on investments of $120,000 and for the six monthsended June 30, 2005.

**NOTE 11.   BASIC ANDDILUTED 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 six months ended June 30,2006 and the three and six months ended June 30, 2005 excludes the impactof the following (in thousands):

| ** **                         | ** ** | **Six months ended**June 30, 2006 | ** ** | **Three and six  months ended**June 30, 2005 | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| Options to  purchase common stock  |       |                                                  | 6,614      |                                                                  |       |   | 6,609 |   |   |
| Warrants to purchase  common stock |       |                                                  | 6,725      |                                                                  |       |   | 7,183 |   |   |

 

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) JUNE 30, 2006 (Unaudited)**

**NOTE 11.**   BASIC AND DILUTED EARNINGS (LOSS) PER SHARE(Continued)

For the three months ended June 30, 2006, basicearnings per share is calculated based on the weighted average number of commonshares outstanding during the period. Diluted earnings per share is calculatedbased on the weighted average number of common shares and dilutive potentialcommon shares resulting from the assumed exercise of outstanding stock optionsand warrants using the treasury stock method. The following table is areconciliation of the denominator used in the calculation of basic and dilutedearnings per share (in thousands):

| Weighted-average  common shares outstanding used in calculation of basic earnings per share                |   | 53,187 |   |
|------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Dilutive stock  options and warrants                                                                       |   | 484    |   |
| Weighted-average common  shares outstanding used in calculation of diluted earnings (loss) per  share |   | 53,671 |   |

 

**NOTE 12.   INCOMETAXES**

We recorded a taxprovision of approximately $35,000 for the three and six months ended June 30,2006, related to federal alternative minimum taxes. We recorded no taxprovision for the six months ended June 30, 2005.

**NOTE 13.   ASSETACQUISITION AGREEMENT WITH MAYNE PHARMA**

On June 21, 2006, we announced that we haveentered into an Asset Acquisition Agreement with Mayne Pharma (USA), Inc.(“Mayne”), pursuant to which Mayne will acquire the North American rights toNipent and SurfaceSafe® cleaning system from SuperGen for a total maximumconsideration of $34 million, including approximately $14 million upon theclosing of the transaction. The remaining payments, other than the $1.0 millionescrow, are contingent upon the occurrence of certain key events andachievement of specified revenue milestones. The transaction has been approvedby both companies’ board of directors, and is subject to a number of closingconditions, including the execution of a Transition Services Agreement and aSupply Agreement. Subject to the satisfactory completion of all closingconditions, the transaction is anticipated to close in the third quarter of 2006.

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**Item2.    Management’s Discussion and Analysis of Financial Condition andResults of Operations**

*You should read the following discussion together withour condensed consolidated financial statements and related notes includedelsewhere in this report. The results discussed below are not necessarilyindicative of the results to be expected in any future periods. Our disclosure and analysis in this section of thereport also contain forward-looking statements. When we use the words “anticipate,”“estimate,” “project,” “intend,” “expect,” “plan,” “believe,” “should,” “likely”and similar expressions, we are making forward-looking statements.Forward-looking statements provide our current expectations or forecastsof future events. In particular, these statements include statements such as:our estimates about becoming profitable; the percentage of royalties we expectto earn on Dacogen sales under our agreement with MGI; our forecasts regardingour research and development expenses; and our statements regarding thesufficiency of our cash to meet our operating needs. Our actual results coulddiffer materially from those predicted in the forward-looking statementsas a result of risks and uncertainties including, but not limited to, delaysand risks associated with conducting and managing our clinical trials;developing products and obtaining regulatory approval; ability to establish andmaintain collaboration relationships; competition; ability to obtain funding;ability to protect our intellectual property; our dependence on third partysuppliers; risks associated with the hiring and loss of key personnel; adversechanges in the specific markets for our products; and our ability to launch andcommercialize our products. Certain unknown or immaterial risks and uncertaintiescan also affect our forward-looking statements. Consequently, no forward-lookingstatement can be guaranteed and you should not rely on these forward-lookingstatements. For a discussion of the known and material risks that couldaffect our actual results, please see the “Risk Factors” section of this report.We undertake no obligation to update any forward-looking statements, whether asa result of new information, future events or otherwise. Readers shouldcarefully review the Risk Factors section below as well as other reports ordocuments we file from time to time with the Securities and ExchangeCommission.*

**Overview**

We are a pharmaceutical companydedicated to the discovery, acquisition, rapid development andcommercialization of therapies for solid tumors, hematological malignancies andblood disorders. In addition, we have a number of aurora-A and tyrosine kinaseinhibitors and DNA methyltransferase preclinical products under development.Our strategy is to commercialize products by minimizing the time, expense andtechnical risk associated with drug research through identifying and acquiringpharmaceutical compounds. Our primary objective is to become a leading supplierof therapies for solid tumors, hematological malignancies, and blood disorders.

Since our incorporation in 1991 we have devotedsubstantially all of our resources to our product development efforts. Ourrecent development efforts have been focused on three key compounds: Dacogen,Orathecin, and Nipent.

*Dacogen.**  *Our originalsubmission for Dacogen was accepted for filing by the United States Food andDrug Administration (“FDA”) on December 31, 2004. On September 1,2005, we received an Approvable Letter for Dacogen from the FDA, which providedthat Dacogen was approvable pending the FDA’s review of a requested analysis ofthe transfusion requirements of patients enrolled in the completed Phase IIItrial, submission of certain other information, and completion of labelingdiscussions. We completed the collection and analysis of the data requested bythe FDA and submitted our response to the Approvable Letter on November 15,2005. On December 15, 2005, the FDA accepted our resubmission as acomplete response to the Approvable Letter. On May 3, 2006, the FDAapproved Dacogen for the treatment of patients with myelodysplastic syndromes (“MDS”).

In September 2004, we executed a definitiveagreement granting MGI PHARMA Inc. (“MGI”) exclusive worldwide rights to thedevelopment, manufacture, commercialization and distribution of Dacogen. Underthe terms of the agreement, MGI made a $40.0 million equity investment in usand will pay up to $45.0 million in specific regulatory and commercializationmilestones. To date, we have received $32.5 million of these milestones, including$20.0 million upon first commercial sale of Dacogen in the U.S. 

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in May2006. Now that Dacogen is approved, we will receive a royalty on worldwide netsales starting at 20% and escalating to a maximum of 30%.

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 North America. We received 50% of the $10 million upfront payment and,as a result of both the original agreement with MGI and this sublicense withCilag GmbH, may receive up to $23.75 million in future milestone payments asthey are achieved for Dacogen globally. Janssen-Cilag companies will beresponsible for conducting regulatory and commercial activities related toDacogen in all territories outside North America, while MGI retains allcommercialization rights and responsibility for all activities in the UnitedStates, Canada and Mexico.

*Orathecin.**  *In January 2004 we submitted a new drugapplication (“NDA”) under accelerated approval procedures to the FDA forOrathecin for the treatment of pancreatic cancer patients that have failed oneor more therapies. After further discussions and feedback with both the FDA andconsultants helping us dialog with the FDA, we determined the package forOrathecin was not sufficient to gain approval in the United States and wewithdrew the NDA in January 2006. In April 2006, we announced that wehad completed the pre-specified interim analysis of the Orathecin Phase IIclinical trial studying Orathecin plus gemcitabine as first-line combinationtherapy for advanced pancreatic cancer patients who have not undergonechemotherapy. The multi-center trial enrolled 39 patients with primary advancedpancreatic cancer. This protocol included a prospectively defined interimanalysis to estimate median survival. The analysis resulted in an estimatedmedian survival of 6.0 months, with a Kaplan-Meier one year survival to be 27%.Although the estimated one year survival is encouraging compared to similarstudies in this indication, the study did not meet the pre-specified thresholdfor median survival in order to proceed to a phase III randomized study. Thesafety profile for this patient group was very similar to prior studies ofOrathecin as a single agent or in combination with gemcitabine. The study willremain closed to enrollment, but open for patient follow-up. We are workingwith clinical advisors, investigators, and potential partners to evaluate thebest options for Orathecin that will maximize the product’s potential to helppatients in need and realize its commercial value for our stockholders.

In July 2004, we submitted a MarketingAuthorization Application (“MAA”) to the European Medicines Agency (“EMEA”)seeking approval of Orathecin. Based on extensive discussions with the EMEA, wewithdrew the MAA in January 2006.

*Nipent.**  *Nipent isapproved by the FDA and EMEA for the treatment of hairy cell leukemia and ismarketed by us in the United States and distributed in Europe. Nipent has also shown promise in other diseasesand we are conducting a series of post-marketing Phase IV clinical trials forchronic lymphocytic leukemia (“CLL”), non-Hodgkin’s lymphoma (“NHL”), cutaneousand peripheral T-cell lymphomas and graft-versus-host disease (“GvHD”).

On June 21, 2006, we announced that we haveentered into an Asset Acquisition Agreement with Mayne Pharma (USA), Inc.(“Mayne”), pursuant to which Mayne will acquire the North American rights toNipent and SurfaceSafe® cleaning system from SuperGen for a total maximumconsideration of $34 million, including approximately $14 million upon theclosing of the transaction. The remaining payments, other than the $1.0 millionescrow, are contingent upon the occurrence of certain key events andachievement of specified revenue milestones. The transaction has been approvedby both companies’ board of directors, and is subject to a number of closingconditions, including the execution of a Transition Services Agreement and aSupply Agreement. The transaction is anticipated to close in the third quarterof 2006.

*OtherProducts.**  *Ourportfolio of other products includes Partaject-delivered busulfan. Wealso market Surface Safe. We have received regulatory approval to marketMitozytrex (mitomycin for injection) for use in the therapy of disseminatedadenocarcinoma of the stomach or pancreas in proven combinations 

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with other approvedchemotherapeutic agents and as palliative treatment when other modalities havefailed. Moreover, we hold United States sales and marketing rights to thecancer vaccine Avicine. We are continually evaluating our product portfolio todetermine whether it is appropriate for us to dedicate the resources needed tocommercialize these products ourselves or whether we would be better servedselling or licensing the rights to develop these products to third parties.

*MontigenAcquisition.**  *On January 27, 2006, we announcedthat we had entered into a definitive agreement to acquire MontigenPharmaceuticals, Inc. (“Montigen”), a privately-held oncology-focused drugdiscovery and development company headquartered in Salt Lake City, Utah. Montigen’sassets include its research and development team, a proprietary drug discovery technologyplatform and optimization process, CLIMBTM, and late-stage pre-clinicalcompounds targeting aurora-A kinase and members of the tyrosine kinase receptorfamily. We expect one of the Montigen compounds to be the subject of a pre-INDmeeting with the FDA later this year.

The transaction closed on April 4, 2006. Pursuantto the terms of the agreement, we paid the Montigen stockholders a total of$17.9 million upon the closing of the transaction, consisting of $9.0 millionin cash and 1,625,626 shares of SuperGen common stock at an average price of$5.50 per share. We will pay the Montigen stockholders an additional $22.0million in shares of SuperGen common stock, contingent upon achievement ofspecific regulatory milestones. We received a permit from the Commissioner ofCorporations for the State of California so that the issuance of the shares ofSuperGen common stock are exempt from registration under the Securities Act of1933.

The acquisition of Montigen has been accounted for asan acquisition of assets rather than as a business combination in accordancewith the criteria outlined in Emerging Issues Task Force 98-3. Montigenwas a development stage company that was focused on developing a business andhad not commenced its principal business operations. It also lacked thenecessary elements of a business because it did not have completed products. Theresults of operations of Montigen since April 4, 2006 have been includedin our consolidated financial statements and primarily consist of research anddevelopment expenses.

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

As a result of our substantial research anddevelopment expenditures and minimal product revenues, we have incurredcumulative losses of $355.9 million through June 30, 2006, and have nevergenerated enough funds through our operations to support our business. Weexpect to continue to incur operating losses at least through 2007.

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, increases in sales and marketing expenses related to the launch of newproducts and our ability to control our ongoing costs and operating expenses. Ifthe results from our clinical trials are not positive, we may not be able toget sufficient funding to continue our trials or conduct new trials, and wewould be forced to scale down or cease our business operations. Moreover, ifour products are not approved or commercially accepted we will remainunprofitable for longer than we currently anticipate. Additionally, we might beforced to substantially scale down our operations or sell certain of ourassets, and it is likely the price of our stock would decline precipitously.

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**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 2005 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.

*Stock-BasedCompensation*

On January 1, 2006, we adopted the fair valuerecognition provisions of Statement of Financial Accounting Standards No. 123(R),**“Share-BasedPayment,” (“SFAS 123R”), using the modified-prospective-transitionmethod. Under this transition method, compensation cost recognized for thefirst six months of 2006 includes: (a) compensation cost for allstock-based payments granted, but not yet vested as of January 1, 2006,based on the grant-date fair value estimated in accordance with the originalprovisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation”(“SFAS 123”), and (b) compensation cost for all stock-based paymentsgranted subsequent to January 1, 2006, based on the grant-date fair valueestimated in accordance with the provisions of SFAS 123R. Such amounts havebeen reduced by our estimate of forfeitures of all unvested awards. Results forprior periods have not been restated.

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. Treasuryyield curve 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. We have applied an annualforfeiture rate of 12.02% to all unvested options as of June 30, 2006.This analysis will be re-evaluated quarterly and the forfeiture rate will beadjusted as necessary. Ultimately, the actual expense recognized over thevesting period will only be for those shares that vest.

As of June 30, 2006,there was $4,568,000 of total unrecognized compensation cost related tounvested stock-based awards. This cost is expected to be recognized over aweighted average period of 2.40 years. 

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Weexpect approximately 1,364,000 in unvested options to vest at some point in thefuture. Options expected to vest is calculated by applying an estimatedforfeiture rate to the unvested options.

*Revenue Recognition*

Our net product revenues relate principally to Nipentand, to a lesser extent, mitomycin. We recognize sales revenue upon shipmentand related transfer of title to customers, and collectibility is reasonablyassured. Our gross product revenues have been reduced as we establishallowances for early payment discounts, product returns, product exchanges, andchargebacks, which are described in more detail as follows:

*EarlyPayment Discounts**—The*reserve represents an estimatefor the portion of our accounts receivable trade customers that qualify for ourearly payment discounts program. For qualified customers we offer payment termsof 2%-45, net 46 days. In prior years, the early payment discounts takenwere not material and were recorded upon receipt of customer payments. Due toincreasing levels of product revenue and continued utilization of the earlypayment discounts program by our eligible accounts receivable trade customersduring 2005, we determined the need to establish a reserve for the program tobetter match and record estimated early payment discounts that will be takenwith the corresponding product revenue. The reserve for early payment discountsis charged to product revenue. The reserve is calculated by (i) analyzinghistorical customer payment discount activity and trends, (ii) considerationof payments terms for any existing contractual commitments, and (iii) otherinternal or external factors including (a) changes in buying patterns bycustomers and (b) changing conditions in the financial strength of ourcustomers.

*ProductReturns**—The*reserve represents an estimatefor the portion of product revenue that may be returned in the future forcredit. Products can be returned for credit only under limited circumstancessuch as expiring product returned under backorder or out-of-stock circumstances.The reserve for product returns is charged to product revenue. The reserve iscalculated by (i) analyzing historical product return activity and trends,(ii) consideration of product returns within the framework of any relevantcontractual commitments, and (iii) other internal or external factorsincluding (a) inventory held by wholesalers and distributors and theremaining shelf life of their inventory, (b) our ability to continuesupplying product to our customers, (c) actual and anticipated salesactivity based on our internal estimates and (d) independent product usageinformation.

*ProductExchanges**—The*reserve represents an estimatefor the portion of product shipments that may be exchanged in the future. Productexchanges generally consist of damaged product, shortages existing upon productreceipt by the customer or product that is returned within three months afterproduct expiration. The cost for product exchanges is included in cost ofproduct revenue. The reserve is calculated by (i) analyzing historicalproduct exchange activity and trends, (ii) consideration of productexchanges within the framework of any related contractual commitments, and (iii) otherinternal or external factors including (a) inventory held by wholesalersand distributors and the remaining shelf life of their inventory, (b) changesin actual and anticipated sales based on our internal estimates and (c) anyindependent product usage information.

*Chargebacks**—The*reserverepresents an estimate for the portion of product revenue that may be subjectto our chargeback program. We market our products primarily to wholesalers anddistributors. The wholesalers and distributors then sell to indirect customers,which include hospitals, clinics, government agencies, pharmacies, physicianoffices, managed care organizations, nursing homes, pharmacy benefit managementcompanies, and group purchasing organizations. In addition to our existingchargeback programs which include rebates and governmental transactions, weexpanded our chargeback program during 2004 and entered into agreements withcertain indirect customers to establish contract pricing for our primaryproduct, Nipent. When the product is purchased by a qualifying indirectcustomer from the 

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wholesaler or distributora chargeback is generated. Chargebacks are the mechanism for reimbursing thewholesaler or distributor for the difference between our retail price to thewholesaler or distributor and the indirect customer’s contract price. There maybe a time lag of one to six months between the original sale to the wholesaleror distributor and the subsequent sale to the indirect customer generating thechargeback. In previous years, chargebacks were charged to revenue when issued.Nipent sales in the U.S. increased from $11.6 million in 2004 to $15.1 millionin 2005, broadening product revenue subject to our expanded chargeback program.Due to the increase in product revenue subject to the expanded chargebackprogram, we determined the need to establish a reserve for chargebacks in orderto better match and record our estimated financial exposure for chargebackswith the corresponding product revenue. The reserve for chargebacks is chargedto product revenue. The reserve is calculated by (i) analyzing historicalchargeback activity and trends, (ii) consideration of our obligationswithin the framework of existing, expiring and new contractual commitments, and(iii) other internal or external factors including (a) actual andanticipated purchasing trends by our wholesalers and distributors and qualifyingindirect customers, (b) expectation and timing of product price increasesand (c) anticipated changes in the industry, customer base or governmentregulation that may impact the use, structure or administration of chargebackprograms.

A rollforward of each component of ourreserve balances is noted below (in thousands):

| **Rollforward Activity**               | ** ** | ** ** | ** ** | **Early  Payment  Discounts** | ** ** | **Product   Returns** | ** ** | **Product   Exchanges** | ** ** | **Chargebacks** | ** ** |
|---------------------------------------------|------------|------------|------------|-------------------------------|------------|----------------------------|------------|------------------------------|------------|-----------------|------------|
| Balances at December 31, 2005          |       |       | $          | 120                           |       |                       |       | $                            | 150        |            |       |   | $ | 12 |   |   |   | $ | 500 |   |   |
| Provision made  in the current period       |       |       | 155        |                          |       |                       | 60         |                         |       |            | 10         |   |   |   | 701 |   |   |
| Actual returns or credits in current period |       |       | (201       | )                             |       |                       | (47        | )                            |       |            | —     |   |   |   | (749 | ) |   |
| Balances at June 30, 2006              |       |       | $          | 74                            |       |                       |       | $                            | 163        |            |       |   | $ | 22 |   |   |   | $ | 452 |   |   |

 

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 ofresearch payments received that has not been earned.

We have accounted for our $2.1 million payment toWyeth in June 2006 as Prepaid distribution and marketing rights, which will beamortized against revenue over 10 months, equaling the terminationacceleration period of June 2006 through March 2007. The amortization of$210,000 per month will be reflected as a reduction of product revenue.Proceeds from our initial product shipments to Wyeth will initially be deferredand recognized as revenue (as will related cost of revenue) when the product isdelivered to the end customer by Wyeth, assuming that we have sufficientevidence to conclude that collectibility from the end customer is reasonablyassured.

In accordance with ourlicense agreement with MGI, we received a milestone payment and recordedmilestone revenue of $20.0 million in the three months ended June 30,2006. MGI is required to pay us royalties of 20% to 30% of net Dacogen saleswithin 45 days after the end of each calendar quarter. We did not recordany royalty revenue for the three and six month periods ended June 30,2006 because we were unable to accurately estimate the amount of Dacogen salesby MGI. To the extent we do not have sufficient ability to accurately estimateDacogen sales, we will recognize royalty revenue on a cash basis when wereceive it from MGI.

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*Intangible 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.

*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 a significantadverse event, such that the carrying amount of these investments may not befully recoverable, the impairment is considered to be other than temporary. Another than temporary decline in fair value of a financial instrument would besubject to a write-down resulting in a charge against earnings. Thedetermination of whether a decline in fair value is other than temporaryrequires significant judgment, and could have a material impact on our balancesheet and results of operations. Our management reviews the securities withinour portfolio for other than temporary declines in value on a regular basis.The prices of some of our marketable securities, in particular AVI, are subjectto considerable volatility. Decreases in the fair value of these securities maysignificantly impact our results of operations.

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

*DerivativeInstruments*

In connection with our June 2003convertible debt transaction, we issued to the note holders warrants topurchase 2,634,211 shares of common stock of AVI at $5.00 per share. In January 2006,300,000 of these warrants were exercised. As of June 30, 2006, we owned2,334,211 shares of AVI to cover the remaining outstanding warrants. Thesewarrants are considered to be a derivative and have been recorded on thebalance sheet at estimated fair value. The accounting for derivatives iscomplex, and requires significant judgments and estimates involved indetermining the estimated fair value in the absence of quoted market values.These estimates are based on valuation methodologies and assumptions deemedappropriate in the circumstances. The estimated fair value of the warrants isbased on various assumptions input into the Black-Scholes pricing model.These assumptions include the estimated market volatility and interest ratesused in the determination of fair value. The use of different assumptions mayhave a material effect on the estimated fair value amount and the results ofoperations.

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**Results ofOperations**

*Three months endedJune 30, 2006 compared to three months ended June 30, 2005:*

| ** **                                | ** ** | **Three months ended**June 30, | ** ** | **Change** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| **Revenues**                              | ** ** | ** **                                    | ** ** | **2006**   | ** ** | **2005** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                | ** ** | **(Dollars in thousands)**          | ** ** |
| Net product  revenue                      |       | $                                             | 3,984      |       | $          | 3,625 |   | $ | 359 |   | 9.9 | % |
| Development and  license revenue          |       | —                                        |       | 3,716      |       | (3,716 | ) | (100.0 | ) |
| Distribution  agreement and other revenue |       | —                                        |       | 590        |       | (590 | ) | (100.0 | ) |
| Milestone revenue                         |       | 20,000                                        |       | —     |       | 20,000 |   | 100.0 |   |
|                                           |            |                                               |            |            |            |  |  |  |  |  |  |  |  |  |

 

The increase in net product revenue for the threemonths ended June 30, 2006 was due primarily to higher unit sales ofNipent, our drug currently approved for the treatment of hairy cell leukemia.Net Nipent sales increased to $3,515,000 in the three months endedJune 30, 2006, compared to $3,374,000 in the three months endedJune 30, 2005. Nipent sales for the three months ended June 30, 2005included $504,000 in sales to Europe. We did not record European sales in thethree months ended June 30, 2006.

Development and license revenue for the three monthsended June 30, 2005 relates to our license agreement entered into with MGIin September 2004. Development and license revenue included $2,476,000related to the amortization of deferred revenue in connection with the upfrontpayment received from MGI, and $1,240,000 related to reimbursement of Dacogendevelopment and allocated overhead costs. We had no similar revenue during thethree months ended June 30, 2006.

Distribution agreement and other revenue of $590,000relates to the transfer agreement with American Pharmaceutical Partners, Inc.whereby we transferred the ANDA and all rights, title, and interest in ourgeneric daunorubicin. We had no similar revenue during the three months ended June 30, 2006.

Milestonerevenue of $20,000,000 recognized in the three months ended June 30, 2006relates to our license agreement with MGI and was earned upon first commercialsales of Dacogen by MGI in May 2006.

| ** **                                      | ** ** | **Three months ended**June 30, | ** ** | **Change** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| **Costs and operating expenses** | ** ** | ** **                                    | ** ** | **2006**   | ** ** | **2005** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands)**          | ** ** |
| Cost of product  revenue                        |       | $                                             | 847        |       | $          | 700 |   | $ | 147 |   |   | 21.0 | % |   |
| Research and  development                       |       | 3,837                                         |       | 2,891      |       | 946 |   |   | 32.7 |   |   |
| Selling, general  and administrative            |       | 6,066                                         |       | 7,139      |       | (1,073 | ) |   | (15.0 | ) |   |
| Acquired in-process  research and development   |       | 16,318                                        |       | —     |       | 16,318 |   |   | 100.0 |   |   |
|                                                 |            |                                               |            |            |            |  |  |  |  |  |  |  |  |  |  |  |

 

Cost of product revenue as a percentage of net productrevenue was 21% in the second quarter of 2006 compared to 19% in the sameperiod in 2005. The increase for the three months ended June 30, 2006primarily due to a write off of $164,000 to cost of product revenue for twofailed manufacturing batches of mitomycin. Current margins may not beindicative of future margins due to possible variations in product mix, averageselling prices, and manufacturing costs.

The increase in research and development expenses wasdue to higher Phase IV clinical trial costs for Nipent, drug discovery researchcosts associated with the newly acquired Montigen facility in Salt Lake City,and employee stock compensation costs recorded as a result of theimplementation of SFAS 123R. We conduct research internally and also throughcollaborations with third parties, and we intend to maintain our strongcommitment to our research and development efforts in the future. Our researchand development activities consist primarily of clinical development and therelated advancement of our existing product candidates through clinical trials.Conducting clinical trials is a lengthy, expensive and 

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uncertain process.Completion of clinical trials may take several years or more. The length oftime generally varies substantially according to the type, complexity, noveltyand intended use of the product candidate. Our clinical trials may be suspendedat any time if we or the FDA believe the patients participating in our studiesare exposed to unacceptable health risks. We may encounter problems in ourstudies which will cause us or the FDA to delay or suspend the studies. Becauseof these uncertainties, we cannot predict when or whether we will successfullycomplete the development of our product candidates or the ultimate productdevelopment cost.

The decrease in selling, general and administrativeexpenses for the three months ended June 30, 2006 relates primarily toreduced expenses at EuroGen, our European subsidiary, lower costs associatedwith marketing speakers programs, offset by higher expenses relating to therecording of stock compensation expense as a result of the implementation ofSFAS 123R.

Acquiredin-process research and development expense recorded in the three months ended June 30,2006 relates to the valuation of our acquisition of Montigen in April 2006.The value assigned to acquired in-process research and development representedthe fair value of Montigen’s incomplete research and development programs thathad not yet reached technological feasibility and had no alternative future useas of the acquisition date. The value of the acquired in-process research anddevelopment was determined by estimating the future net cash flows for the twocompounds between 2006 and 2029 using a present value risk adjusted discountrate of 26%. This discount rate is a significant assumption and is based on ourestimated weighted average cost of capital adjusted upward for the risksassociated with the projects acquired. The projected cash flows from theacquired projects were based on estimates of revenues and operating profitsrelated to the projects considering the stage of development of each potentialproduct acquired, the time and resources needed to complete the development andapproval of each product, the life of each potential commercialized product andassociated risks including the inherent difficulties and uncertainties indeveloping a drug compound, including obtaining FDA and other regulatoryapprovals, and risks related to the viability of and potential alternativetreatments in any future target markets.

| ** **                           | ** ** | **Three months ended**June 30, | ** ** | **Change**                                               | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------------------|------------|
| **Other income (expense)** | ** ** | ** **                                    | ** ** | **    2006    ** | ** ** | **   2005   ** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                           | ** ** | **(Dollars in thousands)**          | ** ** |
| Interest income                      |       |                                          | $          | 462                                                      |       |   |   | $ | 411 |   |   | $ | 51 |   | 12.4 | % |
| Change in valuation of  derivatives  |       |                                          | 7,000      |                                                     |       |   | 500 |   |   | 6,500 |   | 1,300.0 |   |
|                                      |            |                                               |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in interest income was due to higheravailable cash and marketable securities balances and an increase in interestrates for the three months ended June 30, 2006, compared to the sameperiod in 2005.

As part of our June 2003convertible debt transaction, we issued to the note holders warrants topurchase 2,634,211 shares of AVI at $5.00 per share. The warrants issued in thetransaction represent a derivative instrument and are revalued each quarterusing the Black-Scholes pricing model. During the three months ended June 30,2006, the value of this derivative had declined by $7,000,000, due to a declinein the market value of the underlying shares of AVI at June 30, 2006,compared to a similar decline of only $500,000 during the three months ended June 30,2005.

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*Six months ended June 30,2006 compared to six months ended June 30, 2005:*

| ** **                                | ** ** | **Six months ended**June 30, | ** ** | **Change** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|------------|------------|
| **Revenues**                              | ** ** | ** **                                  | ** ** | **2006**   | ** ** | **2005** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                | ** ** | **(Dollars in thousands)**        | ** ** |
| Net product  revenue                      |       | $                                           | 6,868      |       | $          | 4,640 |   | $ | 2,228 |   | 48.0 | % |
| Development and  license revenue          |       | —                                      |       | 6,941      |       | (6,941 | ) | (100.0 | ) |
| Distribution  agreement and other revenue |       | —                                      |       | 757        |       | (757 | ) | (100.0 | ) |
| Milestone revenue                         |       | 20,000                                      |       | —     |       | 20,000 |   | 100.0 |   |
|                                           |            |                                             |            |            |            |  |  |  |  |  |  |  |  |  |

 

The increase in net product revenue for the six monthsended June 30, 2006 was due primarily to higher unit sales of Nipent, ourdrug currently approved for the treatment of hairy cell leukemia. Net Nipentsales increased to $6,029,000 in the six months ended June 30, 2006,compared to $4,213,000 in the six months ended June 30, 2005. Nipent salesfor the six months ended June 30, 2005 included $504,000 in sales toEurope. We did not record European sales in the six months ended June 30,2006.

Development and license revenue for the six monthsended June 30, 2005 related to our license agreement entered into with MGIin September 2004. Development and license revenue included $4,952,000related to the amortization of deferred revenue in connection with the upfrontpayment received from MGI, and $1,989,000 related to reimbursement of Dacogendevelopment and allocated overhead costs. We had no similar revenue during thesix months ended June 30, 2006.

Distribution agreement and other revenue for the six monthsended June 30, 2005 related to the termination of our Nipent distributionagreement with Abbott Laboratories. Upon signing this agreement in 1999, wereceived $5.0 million from Abbott, which was recorded as deferred revenue andwas being amortized over a five-year period. In February 2005, we paidAbbott $1,500,000 to terminate this agreement, and this amount was chargedagainst the unamortized balance of deferred revenue of $1,667,000. Theremaining $167,000 was recorded as distribution agreement revenue in the sixmonths ended June 30, 2005 as a result of the termination of thedistribution agreement. The remaining $590,000 in revenue relates to thetransfer agreement with American Pharmaceutical Partners, Inc. whereby wetransferred the ANDA and all rights, title, and interest in our genericdaunorubicin. We had no similar revenue during the six months ended June 30,2006.

Milestonerevenue of $20,000,000 recognized in the six months ended June 30, 2006relates to our license agreement with MGI and was earned upon first commercialsales of Dacogen by MGI in May 2006.

| ** **                                      | ** ** | **Six months ended**June 30, | ** ** | **Change** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------|------------|------------|------------|
| **Costs and operating expenses** | ** ** | ** **                                  | ** ** | **2006**   | ** ** | **2005** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands)**        | ** ** |
| Cost of product  revenue                        |       | $                                           | 1,395      |       | $          | 1,000 |   | $ | 395 |   |   | 39.5 | % |   |
| Research and  development                       |       | 6,858                                       |       | 8,015      |       | (1,157 | ) |   | (14.4 | ) |   |
| Selling, general  and administrative            |       | 12,559                                      |       | 13,397     |       | (838 | ) |   | (6.3 | ) |   |
| Acquired in-process  research and development   |       | 16,318                                      |       | —     |       | 16,318 |   |   | 100.0 |   |   |
|                                                 |            |                                             |            |            |            |  |  |  |  |  |  |  |  |  |  |  |

 

Cost of product revenue as a percentage of net productrevenue was 20% in the first half of 2006 compared to 22% in the same period in2005. The decrease for the six months ended June 30, 2006 is due to avariation in product mix, with a larger portion of our sales being related todomestic Nipent, which is sold at higher margins than mitomycin, and animprovement of manufacturing yield, which resulted in lower per unitmanufacturing costs. Current margins may not be indicative of future marginsdue to possible variations in product mix, average selling prices, andmanufacturing costs.

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The decrease in research and development expenses wasdue to lower clinical study and clinical supply costs for Orathecin andDacogen, as those clinical studies have wound down after the completion of ourFDA and European submissions during the latter half of 2004, offset by higherPhase IV clinical trial costs for Nipent, drug discovery research costsassociated with the newly acquired Montigen facility in Salt Lake City, andemployee stock compensation costs recorded as a result of the implementation ofSFAS 123R. We conduct research internally and also through collaborations withthird parties, and we intend to maintain our strong commitment to our researchand development efforts in the future. Our research and development activitiesconsist primarily of clinical development and the related advancement of ourexisting product candidates through clinical trials. Conducting clinical trialsis a lengthy, expensive and uncertain process. Completion of clinical trialsmay take several years or more. The length of time generally variessubstantially according to the type, complexity, novelty and intended use ofthe product candidate. Our clinical trials may be suspended at any time if weor the FDA believe the patients participating in our studies are exposed tounacceptable health risks. We may encounter problems in our studies which willcause us or the FDA to delay or suspend the studies. Because of theseuncertainties, we cannot predict when or whether we will successfully completethe development of our product candidates or the ultimate product developmentcost.

The decrease in selling, general and administrativeexpenses for the six months ended June 30, 2006 relates primarily toreduced expenses at EuroGen, our European subsidiary, lower costs associatedwith sales and marketing programs, offset by higher expenses relating to therecording of stock compensation expense as a result of the implementation ofSFAS 123R.

Acquiredin-process research and development expense recorded in the six months ended June 30,2006 relates to the valuation of our acquisition of Montigen in April 2006.The value assigned to acquired in-process research and development representedthe fair value of Montigen’s incomplete research and development programs thathad not yet reached technological feasibility and had no alternative future useas of the acquisition date. The value of the acquired in-process research anddevelopment was determined by estimating the future net cash flows for the twocompounds between 2006 and 2029 using a present value risk adjusted discountrate of 26%. This discount rate is a significant assumption and is based on ourestimated weighted average cost of capital adjusted upward for the risksassociated with the projects acquired. The projected cash flows from theacquired projects were based on estimates of revenues and operating profitsrelated to the projects considering the stage of development of each potentialproduct acquired, the time and resources needed to complete the development andapproval of each product, the life of each potential commercialized product andassociated risks including the inherent difficulties and uncertainties indeveloping a drug compound, including obtaining FDA and other regulatoryapprovals, and risks related to the viability of and potential alternativetreatments in any future target markets.

| ** **                                                                                   | ** ** | **Six months ended**June 30, | ** ** | **Change**                                   | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------|------------|
| **Other income (expense)**                                                         | ** ** | ** **                                  | ** ** | **   2006   ** | ** ** | **   2005   ** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                                                                   | ** ** | **(Dollars in thousands)**        | ** ** |
| Interest income                                                                              |       |                                        | $          | 998                                          |       |   |   | $ | 783 |   |   |   | $ | 215 |   |   |   | 27.5 | % |   |
| Gain on  disposition of investment in AVI BioPharmastock resulting from exercise of  warrant |       |                                        | 780        |                                         |       |   | — |   |   |   | 780 |   |   |   | 100.0 |   |   |
| Change in valuation of  derivatives                                                          |       |                                        | 674        |                                         |       |   | 500 |   |   |   | 174 |   |   |   | 34.8 |   |   |
|                                                                                              |            |                                             |            |                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in interest income was due to higheravailable cash and marketable securities balances and an increase in interestrates for the six months ended June 30, 2006, compared to the same periodin 2005.

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 six months ended June 30,2006, one of 

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the warrant holdersexercised 300,000 warrants. As part of this transaction, we received $1,500,000in cash and transferred 300,000 of the AVI Shares to the warrant holder. Werecognized a gain on disposition of the shares of $780,000, representing thedifference between our $2.40 per share adjusted cost basis of the shares andthe exercise price.

The warrants issued in theJune 2003 convertible debt transaction represent a derivative instrumentand are revalued each quarter using the Black-Scholes pricing model. During thesix months ended June 30, 2006, the value of this derivative had declinedby $674,000, primarily due to the declining life of the derivative. In sixmonths ended June 30, 2005, the derivative declined in value by $500,000.

**Liquidity andCapital Resources**

Our cash, cash equivalents, and both short andlong-term marketable securities totaled $50,666,000 at June 30, 2006compared to $47,811,000 at December 31, 2005. In addition, we held2,384,211 shares of registered stock of AVI, most of which are held as securityfor the warrants we issued to convertible debt holders to purchase the2,334,211 AVI shares at $5.00 per share. The AVI shares had a market value of$8,941,000 at June 30, 2006. The AVI shares are classified on the balancesheet under non-current Restricted cash and investments, as well as Investmentin stock of related parties.

Net cash provided by operating activities was$9,545,000 in the six months ended June 30, 2006, and consisted primarilyof the net loss of $7,845,000, a cash option of $2,100,000 paid to Wyeth forNipent European distribution rights, and $1,678,000 decrease in accounts payableand accrued liabilities, offset by non-cash stock compensation expense of$1,474,000, acquired in-process research and development expense of$16,318,000, and a decrease in accounts receivable of $3,212,000. Net cash usedin operating activities was $3,514,000 in the six months ended June 30,2005, and consisted primarily of the net loss of $8,791,000, plus non-cashamortization of deferred revenue of $4,952,000 from the MGI payment received inSeptember 2004, $1,500,000 paid to Abbott to terminate our U.S. Nipentdistribution agreement, a decrease in accounts payable and other liabilities of$2,961,000, offset by a decrease in accounts receivable of $14,527,000,primarily due to the receipt of milestone and development funds from MGI.

Net cash used in investing activities was $7,465,000in the six months ended June 30, 2006, which consisted of $8,693,000related to the acquisition of the net assets of Montigen, offset by theproceeds of $1,500,000 from disposition of shares of AVI BioPharma as a resultof the exercise of warrants. Net cash provided by investing activities was$5,679,000 in the six months ended June 30, 2005, and consisted of$17,035,000 in proceeds from the sale or maturity of marketable securities,offset by $11,285,000 from the purchase of marketable securities.

Net cash provided by financing activities was $677,000in the six months ended June 30,2006, and consisted of proceeds from the exercise of stock options. Net cashprovided by financing activities was $271,000 in the six months ended June 30, 2005, and consisted of proceedsfrom exercises of stock options.

We have financed our operations primarily through theissuance of equity and debt securities and the receipt of milestone payments inconnection with collaborative agreements. We believe that our current cash,cash equivalents, marketable securities and other investments will satisfy ourcash requirements through 2007. However, it is our intention to pursueadditional financing options, including the selling of additional shares ofstock in a public or private offering and/or exploring marketing partnershipopportunities for Orathecin and Nipent.

In addition to the contractual obligations disclosedin Management's Discussion and Analysis included in our annual report onForm 10-K for the year ended December 31, 2005, effectiveApril 4, 2006, the Company has $22.0 million in future contingentregulatory milestone payments due to the Montigen stockholders, which would bepayable in shares of SuperGen stock.

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On June 21, 2006, we announced that we haveentered into an Asset Acquisition Agreement with Mayne Pharma (USA), Inc.(“Mayne”), pursuant to which Mayne will acquire the North American rights toNipent and SurfaceSafe® cleaning system from SuperGen for a total maximumconsideration of $34 million, including approximately $14 million upon theclosing of the transaction. The remaining payments, other than the $1.0 millionescrow, are contingent upon the occurrence of certain key events andachievement of specified revenue milestones. The transaction has been approvedby both companies’ board of directors, and is subject to a number of closingconditions, including the execution of a Transition Services Agreement and aSupply Agreement. Subject to the satisfactory completion of all closingconditions, the transaction is anticipated to close in the third quarter of2006.

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 currentlyunanticipated cash requirements, we could require additional capital muchsooner than presently anticipated. We may raise money by the sale of our equitysecurities or debt, or the exercise of outstanding warrants and stock optionsby the holders of such warrants or options. However, given uncertain marketconditions and the volatility of our stock price, we may not be able to sellour securities in public offerings or private placements at prices and on termsthat are favorable to us, if at all. We may also choose to obtain fundingthrough licensing and other contractual agreements. Such arrangements mayrequire us to relinquish our rights to our technologies, products or marketingterritories, or to grant licenses on terms that are not favorable to us. If wefail to obtain adequate funding in a timely manner, or at all, we will beforced to scale back our product development activities or our operations in amanner that will ensure we can discharge our obligations as they come due inthe ordinary course of business at least through the end of 2007.

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

Due to the short-term nature of our interestbearing assets, which consist primarily of certificates of deposit, U.S.corporate obligations, and U.S. government obligations, we believe that ourexposure to interest rate market risk would not significantly affect ouroperations.

Our investment policy is tomanage our marketable securities portfolio to preserve principal and liquiditywhile maximizing the return on the investment portfolio. Our marketablesecurities portfolio is primarily invested in corporate debt securities with anaverage maturity of under one year and a minimum investment grade rating of Aor A-1 or better to minimize credit risk. Although changes in interestrates may affect the fair value of the marketable securities portfolio andcause unrealized gains or losses, such gains or losses would not be realizedunless the investments were to be sold prior to maturity.

As part of our June 2003 convertible debttransaction, we issued to the note holders warrants to purchase 2,634,211shares of common stock of AVI at $5.00 per share. These warrants are considereda derivative and are valued each period using the Black-Scholes method. On June 30,2006, the value of the derivative had decreased to $1.1 million, based on2,334,211 warrants still outstanding. Asthe fair value of the common stock of AVI has fluctuated significantly in thepast two years, the valuation of the derivative may have a significant impacton our results of operations.

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

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**Item 4.**                        ControlsAnd Procedures

(a)           Evaluation of disclosure controls and procedures.

Our management evaluated, with the participation of our chief executiveofficer and our chief financial officer, the effectiveness of our disclosurecontrols and procedures as of the end of the period covered by this quarterlyreport on Form 10-Q. Based on this evaluation, our chief executiveofficer and our chief financial officer have concluded that our disclosurecontrols and procedures are effective to ensure that information we arerequired to disclose in reports that we file or submit under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in Securities and Exchange Commission rules andforms.

(b)          Changesin internal control over financial reporting.

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

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**SUPERGEN, INC.**

**PART II—OTHERINFORMATION**

**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 hasrecently been approved in the United States and even if it receives regulatoryapproval in Europe at a future date, patients and physicians may not readilyaccept it, which would result in lower than projected sales and causesubstantial harm to our business through the receipt of lower royalty revenuefrom MGI. In addition, pursuant to our license agreement with MGI, we areexpecting to receive payments from MGI in connection with the achievement ofcertain commercialization milestones. If these commercialization milestones arenot met, we will not receive these payments and our financial condition andbusiness would be harmed.

*If Dacogen does notreceive regulatory approval in Europe, our future revenues may be limited andour 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 in futuremilestone payments as they are achieved for Dacogen globally. Janssen-Cilagcompanies will be responsible for conducting regulatory and commercialactivities related to Dacogen in all territories outside North America, whileMGI retains all commercialization rights and responsibility for all activitiesin the United States, Canada and Mexico. However, if Dacogen is never approvedin Europe, we will not receive any of the expected royalty payments forcommercial sales by Janssen-Cilag and our business will be harmed.

*If the proposedsale of Nipent and Surface Safe to Mayne Pharma is not consummated, ourbusiness may suffer.*

We recently entered intoan agreement to sell the North American rights to Nipent and Surface Safe toMayne Pharma (USA) Inc. We have expended, and will continue to expend,significant efforts on closing this transaction. Such efforts are costly fromboth a personnel and financial perspective, distract key personnel from theirordinary responsibilities, and may or may not ultimately result in theconsummation of the transaction. The closing of the transaction is subject tonumerous variables, some of which are 

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beyondour control. If the transaction is not consummated for any reason, ourcustomers, suppliers and distributors may question our commitment to continueto develop and commercialize both products and cease doing business with us. Similarly,our employees may believe we are not committed to the two products and may seekemployment elsewhere. Failure to close the transaction may negatively affectour financial results, investor confidence, and ultimately our stock price.

*If EuroGen cannotset up the infrastructure to distribute and sell Nipent in Europe in a timelymanner, our business will be harmed.*

Effective June 1,2006, we amended our supply and distribution agreement with Wyeth to providefor the termination of distribution of Nipent by Wyeth and transition thedistribution to EuroGen. During the transition period, which is expected to becomplete by December 1, 2006, EuroGen will work to set up theinfrastructure necessary to sell and distribute Nipent throughout Europe. Wyethwill determine, in its sole discretion, whether and when the appropriateinfrastructure is in place and the distribution can be fully transitioned. EuroGenmay not complete the set up by December 1, 2006, and even if this timingis met, Wyeth may not approve of it. If the infrastructure is not completeand/or approved by December 1, 2006, we will have to negotiate with Wyethto extend the transition period. If Wyeth agrees to extend, the distributionand transfer fees payable to Wyeth increase from 5% to 20%, which will have anadverse financial impact on us. If Wyeth does not extend the transition period,EuroGen will be unable to sell and distribute Nipent and our revenues withrespect to sales in Europe will cease unless and until Wyeth approves of thedistribution infrastructure.

*If we are unable toexpand our clinical support for use of Nipent to treat additional diseases ourrevenues will not expand as planned.*

Historically, our strategyinvolved expanding the market opportunities for our approved drugs, includingNipent, by seeking clinical support of their use for treatment of patients withadditional diseases. We are currently marketing Nipent for the treatment ofpatients with hairy cell leukemia, and revenues from selling Nipent hasprovided the majority of our annual product revenues over the past three years.We are currently conducting a series of clinical trials with Nipent, includingPhase IV trials for CLL, NHL, cutaneous and peripheral T-cell lymphomas andPhase II/III studies for GvHD. If our Nipent clinical trials are notsuccessful, we will not be able to increase our revenue from Nipent.

***Risks Related toOur Financial Condition and Common Stock***

*We have a history of operating losses and we expect tocontinue to incur losses for the foreseeable future.*

Since inception, we havefunded our research and development activities primarily from privateplacements and public offerings of our securities, milestone payments andrevenues generated primarily from sales of Nipent, which is marketed in theUnited States for the treatment of patients with hairy cell leukemia. Oursubstantial research and development expenditures and limited revenues haveresulted in significant net losses. We have incurred cumulative losses of$355.9 million from inception through June 30, 2006, and our products havenot generated sufficient revenues to support our business during that time. Weexpect to continue to incur substantial operating losses at least through 2007and may never achieve profitability.

Whetherwe achieve profitability depends primarily on the following factors:

·       thesuccessful commercialization of Dacogen in North America by MGI;

·       ourability to obtain regulatory approval in Europe and the successfulcommercialization of Dacogen outside of North America by the Janssen-Cilagcompanies;

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

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

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

·       ourability to sell and distribute Nipent in Europe;

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

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

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

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

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

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 requireadditional funding to expand our product pipeline, strengthen ourcommercialization efforts and expand our European operations, and if we areunable to raise the necessary capital or to do so on acceptable terms, ourplanned expansion and continued chances of survival could be harmed.*

We will continue to spendsubstantial resources on expanding our product pipeline, strengthening ourcommercialization efforts for our existing products, scaling-up of Europeanoperations, selling and distributing our existing and future products, andconducting research and development, including clinical trials for otherproducts and product candidates. We anticipate that our capital resources willbe adequate to fund operations and capital expenditures through 2007. However,if we experience unanticipated cash requirements during this period, we couldrequire additional funds much sooner. We may raise money by the sale of ourequity securities or debt, or the exercise of outstanding warrants and stockoptions by the holders of such warrants and options. However, given uncertainmarket conditions and the volatility of our stock price, we may not be able tosell our securities in public offerings or private placements at prices and/oron terms that are favorable to us, if at all. Also, the dilutive effect ofadditional financings could adversely affect our per share results. We may alsochoose to obtain funding through licensing and other contractual agreements.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 collaborativerelationship with MGI may not produce the financial benefits that we areanticipating, which could cause our business 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 and commercializationmilestones. However, we may fail to achieve these milestones, either because weare unable to secure regulatory approval of Dacogen in Europe or Asia or due toMGI’s inability to expend the resources to commence sales of Dacogen asprescribed by the license agreement. In addition, the license agreementprovides that MGI will pay us (i) a certain portion of revenues payable toMGI as a result of MGI sublicensing the rights to market, sell and/ordistribute Dacogen, to the extent such revenues are in excess of the milestonepayments, and (ii) a 20% royalty increasing to a maximum of 30% on annualworldwide net sales of Dacogen. We cannot guarantee that we 

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willever receive these payments, as we cannot be assured that MGI will expend theresources to sell Dacogen in North America, or that the Janssen-Cilag companieswill expend the resources to sell it in Europe and elsewhere, or that eithercompany be successful in doing so.

*Our equityinvestment in AVI exposes us to equity price risk and any impairment chargewould affect our results of operations.*

We are exposed to equity price risk on our equityinvestment in AVI. Currently we own 2,384,211 shares of AVI. During theyear ended December 31, 2004, we recorded a write-down of $7.9 millionrelated to an other than temporary decline in the value of our equityinvestment in AVI, resulting in a reduction of our cost basis in the AVIshares. Under our accounting policy, marketable equity securities are presumedto be impaired if their fair value is less than their cost basis for more thansix months, absent compelling evidence to the contrary. As of June 30,2004, the AVI shares had been trading below our original cost basis for morethan six months. Since there was no compelling evidence to the contrary, werecorded the impairment charge of $7.9 million in our results ofoperations. The amount of the charge was based on the difference between themarket price of the shares as of June 30, 2004 and our adjusted costbasis. The public trading prices of the AVI shares have fluctuatedsignificantly since we purchased them and could continue to do so. If thepublic trading prices of these shares continue to trade below their new costbasis in future periods, we may incur additional impairment charges relating tothis investment, which in turn will affect our results of operations.

In addition, in connectionwith the restructuring of our February Notes and the issuance of the June Notes,we issued three-year warrants to the June Note holders exercisable into2,634,211 of our AVI shares at an exercise price of $5.00 per share, andwe pledged the AVI shares to secure our obligation under the June Notes.In January 2006, 300,000 of these warrants were exercised. The remainingwarrants expire on December 31, 2006.

***Product Development and Regulatory Risks***

*Before we can seekregulatory approval of any of our product candidates, we must complete clinicaltrials, which are expensive and have uncertain outcomes.*

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

We have a portfolio of cancer drugs in various stagesof development, including Nipent (Phase IV for indications other than hairycell leukemia), Partaject busulfan (Phase I/II), and we have been conductingpre-clinical studies for VEGF and Cremophor-free paclitaxel. In addition, weexpect to commence new clinical trials from time to time in the course of ourbusiness as our product development work continues. Conducting clinical trialsis a lengthy, time consuming and expensive process and the results areinherently uncertain. We have incurred and will continue to incur substantialexpense for, and we have devoted and expect to continue to devote a significantamount of time to, pre-clinical testing and clinical trials. However,regulatory authorities may not permit us to undertake any additional clinicaltrials for our product candidates. If we are unable to complete our clinicaltrials, our business will be severely harmed and the price of our stock willlikely decline.

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

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*Our clinical trialsmay be delayed or terminated, which would prevent us from seeking necessaryregulatory 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 requiredto suspend, repeat or terminate our clinical trials if they are not conductedin compliance with regulatory requirements.*

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 certain aspectsof our research and development activities to contract research organizations (“CROs”).We have agreements with these CROs for certain of our clinical programs. We andour CROs are required to comply with good clinical practices (“GCPs”),regulations and guidelines enforced by the FDA for all of our products inclinical development. The FDA enforces GCPs through periodic inspections ofstudy sponsors, principal investigators, and study sites. If our CROs or wefail to comply with applicable GCPs, the clinical data generated in our studiesmay be deemed unreliable and the FDA may require us to perform additionalstudies before approving our applications. In addition, our clinical trialsmust be conducted with product candidates produced under current goodmanufacturing practices (“GMPs”), and may require a large number of testsubjects. Our failure to comply with these regulations may require us to repeatclinical studies, which would delay the regulatory approval process.

*We may be requiredto suspend, repeat or terminate our clinical trials if later trial results failto demonstrate safety and efficacy, or if the results are negative,inconclusive or if they fail to demonstrate safety or efficacy.*

Our clinical trials may be suspended at any time if weor the FDA believe the patients participating in our studies are exposed tounacceptable health risks or if we or the FDA find deficiencies in the conductof these trials. Adverse medical events during a clinical trial could cause usto terminate or repeat a clinical trial.

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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.

*Our failure toobtain regulatory approvals to market our product candidates in foreigncountries would adversely affect our anticipated revenues.*

Sales of our products inforeign jurisdictions will be subject to separate regulatory requirements andmarketing approvals. Approval in the United States, or in any one foreignjurisdiction, does not ensure approval in any other jurisdiction. The processof obtaining foreign approvals may result in significant delays, difficultiesand expenses for us, and may require additional clinical trials. We haveapplied through our subsidiary EuroGen for regulatory approval to market mitomycinand paclitaxel in the United Kingdom and in other countries within the EuropeanUnion. Although many of the regulations applicable to our products in theseforeign countries are similar to those promulgated by the FDA, many of theserequirements also vary widely from country to country, which could delay theintroduction of our products in those countries. Failure to comply with theseregulatory requirements or to obtain required approvals would impair ourability to commercialize our products in foreign markets.

Nipent is currently soldin Europe, and in early 2004 we acquired the rights to market Nipent theredirectly. We plan to directly commercialize and market Nipent in Europe during2006. However, our revenue from sales of Nipent in Europe is currently lessthan 10% of our total sales, and there is no guarantee that our marketingefforts will result in significantly increased revenues. Our strategy is toobtain regulatory approvals to sell our products in Europe and elsewhere, andwe intend to contract with third-party licensees or distributors forsales outside the United States. Delays in obtaining regulatory approval fromforeign jurisdictions will impair the commercialization of our products andwould delay anticipated revenues.

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

Even if regulatoryapproval of our products is obtained, later discovery of previously unknownproblems may result in restrictions of a product, including withdrawal of thatproduct from the market. Further, governmental approval may subject us toongoing requirements for post-marketing studies. For example, despite receiptof governmental approval, the facilities of our third-party manufacturersare still subject to unannounced inspections by the FDA and must continue tocomply with GMPs and other regulations. These regulations govern all areas ofproduction, record keeping, personnel and quality control. In the past, ourthird-party manufacturers have experienced delayed FDA approval, whichadversely affected our ability to supply Nipent in 2002. If we or our third-partymanufacturers fail to comply with any of the manufacturing regulations, we maybe subject to, among other things, product seizures, recalls, fines,injunctions, suspensions or revocations of marketing licenses, operatingrestrictions and criminal prosecution.

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Physicians may prescribedrugs for uses that are not described in a product’s labeling that differ fromthose tested by us and approved by the FDA. While such “off-label” uses arecommon and the FDA does not regulate physicians’ choice of treatments, the FDAdoes restrict a manufacturer’s communications on the subject of off-label use. Companiescannot actively promote FDA-approved drugs for off-label uses, but they maydisseminate to physicians articles published in peer-reviewed journals. To theextent allowed by law, we intend to disseminate peer-reviewed articles on ourproducts to our physician customers. If, however, our promotional activitiesfail to comply with the FDA’s regulations or guidelines, we may be subject toenforcement action by the FDA. For example, in June 2005 we received a WarningLetter from the FDA regarding certain promotional materials we disseminated forNipent. The FDA asserted that these materials were false or misleading becausethey failed to present any risk information, contained an unsubstantiated claimregarding the mechanism of action, and overstated the safety and efficacy ofthe drug. In response, we recalled these materials from the field and commencedmodifying our internal procedures to ensure that future Nipent marketingmaterials and promotional activities meet regulatory requirements. We sent acorrective communication to physicians who received the violative Nipentmaterials. The FDA has accepted our remedial actions, nonetheless, any furtherWarning Letters or enforcement actions by the FDA could harm our reputation inthe market, result in significant fines or have other affects that could harmour business.

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

Sales of our productsdepend in part upon the availability of reimbursement from third-partypayers, such as health administration authorities like Medicare/Medicaid,managed care providers and private health insurers. Third-party payersare increasingly challenging the price and examining the cost effectiveness ofmedical products and services, which may effectively limit physicians’ abilityto select products and procedures.

In addition, significantuncertainty exists as to the reimbursement status of newly approved healthcareproducts. For example, currently Medicare does not reimburse self-administeredproducts, which could cover some of our product candidates. Adequate third-partyreimbursement may not be available to enable us to maintain price levelssufficient to realize an appropriate return on our investment in a particularproduct. In addition, we believe government agencies will continue to proposeand pass legislation designed to reduce the cost of healthcare, which couldfurther limit reimbursement for pharmaceuticals, and we anticipate that therewill continue to be proposals in the United States to implement governmentcontrol over the pricing or profitability of prescription pharmaceuticals, asis currently the case in many foreign markets. If our current and proposedproducts are not considered cost-effective, reimbursement to the consumer maynot be available or be sufficient to allow us to sell products on a competitivebasis. The failure of the government and third-party payers to provideadequate coverage and reimbursement rates for our product candidates couldadversely affect the market acceptance of our products, our competitiveposition and our financial performance.

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

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

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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 development will benegatively affected.

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

*We recently acquired Montigen Pharmaceuticals, Inc.The integration of Montigen’s business and technology into ours could disruptour business and harm our financial condition, and the expected benefits of thecombination may never materialize.*

We recently acquiredMontigen Pharmaceuticals, Inc. for cash and shares of our common stockvalued at approximately $40.0 million, including $22.0 million contingent uponthe achievement of specific regulatory milestones. The Montigen acquisitioninvolves risks, including problems combining the purchased operations andtechnologies, unanticipated costs and diversion of management’s attention fromour core business. In addition, we may have to restructure aspects of ourbusiness in order to achieve anticipated synergies.  There can be no assurance that we will beable to successfully integrate Montigen and its technology and personnel intoour business. The failure to effectively manage the acquisition and integrationof Montigen could disrupt our business and harm our financial results.

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

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

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

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

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

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

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

Currently we store themajority of the unpurified, bulk form of Nipent at the manufacturer’s location.Improper storage, fire, natural disaster, theft or other conditions at thislocation may lead to the loss or destruction of the bulk concentrate. Even ifthe manufacturer’s and our insurance coverage is adequate, 

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suchevent would inevitably cause delays in distribution and sales of our productsand harm our operating results.

*Our business may beharmed if the manufacture of our products 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 develop substantiallyequivalent processes for the production of our products. We may not be able tocontract with any of these companies on acceptable terms, if at all. Forexample, the company that had been purifying Nipent filed for reorganizationunder Chapter 11 and ceased operations in late 2004. We have contracted withanother manufacturer for the purification of Nipent. If the new manufacturer isnot qualified by the FDA or if the new manufacturer should go out of business,we may not have adequate inventory levels to sustain our business while weidentify and contract with another manufacturer for the purification of Nipent.

*If our supplierscannot provide the components we require, our product sales and revenue couldbe 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 and aswe 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,product development 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. We relyon one manufacturer for Nipent, a sole source supplier for the processing ofpentostatin, which is used in the manufacturing of Nipent, and a sole sourcesupplier for the ingredient used in the purification of pentostatin. We alsorely on sole source suppliers for mitomycin products and Surface Safe.

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

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*We have limited sales and marketing capabilities andmay not be able to successfully commercialize our products.*

We currently have limited sales and marketingresources. Although we have 33 sales, marketing and sales support personnelfocusing on the sale of our products to hospitals and hospital buying groups,we must expand our sales and marketing organization to supportcommercialization of our new products. Building up our sales capabilities willrequire significant expenditures. We may not succeed in expanding and enhancingour sales and marketing capabilities or have sufficient resources to do so. Ifwe do develop such capabilities, we will compete with other companies that haveexperienced and well-funded sales and marketing operations. We may not be ableto upgrade our in-house sales expertise which may limit our ability to gainmarket acceptance for our products worldwide and generate revenues. If we failto establish successful sales and marketing capabilities, we will not be ableto market or sell our products effectively and our business, financialcondition and results of operations will be materially and adversely affected.

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

*If 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;

·       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 

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attractivetechnologies might have less incentive to enter into a collaboration agreementwith us. Moreover, disputes may arise with respect to the ownership of rights toany technology or products developed with any current or future collaborator.Lengthy negotiations with potential collaborators or disagreements between usand our collaborators may lead to delays in or termination of the research,development or commercialization of product candidates or result in timeconsuming and expensive litigation or arbitration.

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

From time to time we enter into collaborativerelationships with third parties to co-develop and market products. Forexample, we entered into an agreement with Peregrine Pharmaceuticals inFebruary 2001, pursuant to which we licensed a drug-targeting technologyknown as Vascular Targeting Agent, which is a proprietary platform designed tospecifically target a tumor’s blood supply and subsequently destroy the tumorwith various attached therapeutic agents. The licensed technology isspecifically related to VEGF. Under the agreement, we made an up-front equityinvestment in Peregrine of $600,000 and will be obligated to make subsequentmilestone payments that could ultimately total $8.25 million. In addition,we will pay royalties to Peregrine based on the net revenues of any drugs wecommercialize using the VEGF technology.

These relationshipsrequire substantial financial commitments from us, and at the same time theproduct developments are subject to the same regulatory requirements, risks anduncertainties associated with the development of our other product candidates.The compounds that are the subject of these collaborative agreements may proveto be ineffective, may fail to receive regulatory approvals, may beunprotectable by patents or other intellectual property rights, or may not beotherwise commercially viable. If these collaborative relationships are notsuccessful, our product developments will be adversely affected, and ourinvestments and efforts devoted to the product 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 our abilityto obtain patents, protect trade secrets, operate without infringing theproprietary rights of others and enforce our proprietary rights against accusedinfringers.

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, inventionsand improvements that are important to the development of our business. Todate, we have acquired licenses to or assignments of over 50 U.S. patentscovering various aspects of our proprietary drugs and technologies, including37 patents for various aspects of Orathecin and related products, six patentsunder our Nipent product portfolio, although none covers the use of Nipent forthe treatment of patients with hairy cell leukemia, seven patents for ourpaclitaxel related products, three patents for Dacogen used in combination withan anti-neoplastic agent for the treatment of cancer, and two patents forour Surface Safe product. These issued United States patents will begin toexpire in October 2012. We have been granted patents and have receivedpatent licenses relating to our proprietary formulation technology, non-oncologyand Partaject technologies, among which at least five patents are issued orlicensed to us. In addition, we are prosecuting a number of patent applicationsfor drug candidates that we are not actively developing at this time.

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

The pharmaceutical industry is characterized by alarge number of patent filings involving complex legal and factual questions,and therefore we cannot predict with certainty whether our patents will beenforced effectively. Competitors may have filed applications for, or beenissued patents on, products or processes that compete with or are similar 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, reasonablyexploit the underlying technology of the applicable patents, and comply withregulatory filings. If we fail to comply with these licenses and agreements, wecould lose the underlying rights to one or more of these potential products,which would adversely affect our product development and harm our business.

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

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

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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, Berlex Laboratories’ fludarabinecompetes with Nipent in the leukemia market, and Dacogen faces competition fromPharmion’s Vidaza.

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

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

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

We developed, or are in the process of developing, andare planning to market several generic and proprietary formulation productsbased on existing compounds. Specifically, with respect to our genericproducts, we received approval of abbreviated NDA’s for our generic mitomycinfor solid tumors for our generic paclitaxel.

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

Although no funds were spent in 2005 or 2006, we havepreviously spent approximately $6.4 million on developing and marketingour generic and proprietary formulation products. We have completed ourpre-commercial investment in developing Mitozytrex, and as of now we have notcommitted to an internal budget for additional proprietary formulationdevelopment programs. In addition, we have no further generic drug developmentcommitments, as we are focusing on developing our proprietary drug candidates.

We do not hold anyintellectual property rights as to the underlying compounds on which ourgeneric or proprietary formulation products are based. We may in the futureevaluate the generic drug market and develop additional generic or proprietaryproducts based on these compounds, which may also be the subject of method, formulationand manufacturing process patents held by third parties. Our development ofgeneric or proprietary products may also take place prior to, but inanticipation of, the expected expiration of existing patent protection fordrugs developed by third parties. However, if existing patent protection onsuch products is otherwise maintained, extended or expanded, it is unlikelythat we will be able to market our own generic or proprietary formulationproducts without obtaining a license from the patent owner, which may not beavailable on commercially acceptable terms, if at all.

*We may be subjectto product liability lawsuits and our insurance may be inadequate to coverdamages.*

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 product liabilityclaims. We have obtained limited product liability insurance coverage for ourproducts and clinical trials, under which the coverage limits are$10.0 million per occurrence and $10.0 million in the aggregate. Wedo not know whether this coverage will be adequate to protect us in the 

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event ofa 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, ourbusiness will suffer.*

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

*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 orstockholders from attempting to replace our management.*

Anti-takeover provisionsof our certificate of incorporation and bylaws make it more difficult for athird party to acquire us, even if doing so would be beneficial to ourstockholders. 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.

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

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

**Item 4.**                        Submissionof Matters to a Vote of Security Holders

The Company’s Annual Meeting of Stockholders was heldon June 9, 2006. The results of the voting were as follows:

Proposal1:                 Election of theBoard of Directors of the Company.

| ** **            | ** ** | ** ** | ** ** | **Votes**          | ** ** |
|-----------------------|------------|------------|------------|--------------------|------------|
| **Nominee**           | ** ** | ** ** | ** ** | **Votes For** | ** ** | **Withheld** | ** ** |
| James S.J. Manuso     |       | 37,974,938 |       | 4,349,667          |       |
| Charles J.  Casamento |       | 32,844,866 |       | 9,479,919          |       |
| Thomas V. Girardi     |       | 38,850,835 |       | 3,473,770          |       |
| Allan R. Goldberg     |       | 38,837,407 |       | 3,487,198          |       |
| Walter J. Lack        |       | 38,586,033 |       | 3,738,572          |       |
| Michael D. Young      |       | 38,662,134 |       | 3,662,471          |       |
|                       |            |            |            |                    |            |  |  |

 

Proposal2:                 Ratification ofErnst & Young LLP as independent auditors for the year endingDecember 31, 2006:

| Votes For:        |   | 41,537,263 |   |
|-------------------|--------|------------|--------|
| Votes Against:    |   | 700,539    |   |
| Votes Abstaining: |   | 86,803     |   |
| Broker Non-Votes: |   | —     |   |

 

**Item 5.**                        OtherInformation

On May 31, 2006, weentered into an Amended and Restated Supply and Distribution Agreement withWyeth to terminate the European distribution of Nipent by Wyeth and transitiondistribution to SuperGen. In connection with the execution of this agreement,we paid Wyeth $2.1 million in consideration for the acceleration of thetransfer of the Nipent European distribution rights.

**Item6.**                        Exhibits

| Exhibit No. | ** ** | **Description of Document**                                                                                                                                                                      |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1        |       | Amended and Restated Supply and Distribution  Agreement between SuperGen, Inc. and Wyeth, effective June 1, 2006.                                                                      |
| 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**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|        | SUPERGEN, INC.  |
|--------|----------------------|
| Date:  | August 9,  2006 |   | 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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