**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe Quarterly Period Ended March 31, 2006**

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from                 to                 **

**Commissionfile number 0-27628**

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**SUPERGEN, INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                      | **91-1841574**                         |
|-------------------------------------------------------------------|----------------------------------------|
| (State or other  jurisdiction   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 x  No o

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          Acceleratedfiler x          Non-acceleratedfiler 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 ofthe registrant’s Common Stock, $.001 par value, outstanding as of May 5,2006 was 53,461,170.

 

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**TABLEOF CONTENTS**

|                  | ** ** | ** **                                                                                                                  | ** ** | **Page No.** |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------|
| **PART I**  | ** ** | **FINANCIAL INFORMATION**                                                                                                   | ** ** | ** **   | ** ** | ** ** |
|             |       | Item 1—Financial  Statements (Unaudited)                                                                               |       |         |   |   |
|             |       | Condensed  Consolidated Balance Sheets as of March 31, 2006 and December 31,  2005                                |       |         | 3 |   |
|             |       | Condensed  Consolidated Statements of Operations for the three month periods ended  March 31, 2006 and 2005  |       |         | 4 |   |
|             |       | Condensed  Consolidated Statements of Cash Flows for the three month periods ended  March 31, 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               |       |         | 14 |   |
|             |       | Item  3—Quantitative and Qualitative Disclosures About Market Risk                                                |       |         | 21 |   |
|             |       | Item  4—Controls and Procedures                                                                                        |       |         | 22 |   |
| **PART II** | ** ** | **OTHER  INFORMATION**                                                                                                      |       |         |   |   |
|             |       | Item 1A—Risk  Factors                                                                                                  |       |         | 23 |   |
|             |       | Item 6—Exhibits                                                                                                        |       |         | 37 |   |
| **SIGNATURES**   |       |                                                                                                                        | 38         |         |

 

2

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

| ** **                                                                                                                                                                                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                    | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                                                    | ** ** | **(Unaudited)**    | ** ** | **(Note 1)**     | ** ** |
| **ASSETS**                                                                                                                                                                                    | ** ** |               | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Current assets:                                                                                                                                                                               |       |               |       |                  |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                                    |       |               | $          | 48,422                |       |   |   | $ | 47,664 |   |   |
| Accounts receivable, net                                                                                                                                                                      |       |               | 675        |                  |       |   | 5,576 |   |   |
| Development revenue  receivable from MGI PHARMA, Inc                                                                                                                                          |       |               | —     |                  |       |   | 550 |   |   |
| Inventories                                                                                                                                                                                   |       |               | 1,320      |                  |       |   | 1,439 |   |   |
| Prepaid expenses and  other current assets                                                                                                                                                    |       |               | 1,796      |                  |       |   | 1,407 |   |   |
| Total current assets                                                                                                                                                                          |       |               | 52,213     |                  |       |   | 56,636 |   |   |
| Marketable securities,  non-current                                                                                                                                                           |       |               | 238        |                  |       |   | 147 |   |   |
| Investment in stock of  related parties                                                                                                                                                       |       |               | 880        |                  |       |   | 673 |   |   |
| Due from related  parties, non-current                                                                                                                                                        |       |               | 52         |                  |       |   | 52 |   |   |
| Property, plant and  equipment, net                                                                                                                                                           |       |               | 2,760      |                  |       |   | 2,907 |   |   |
| Goodwill                                                                                                                                                                                      |       |               | 731        |                  |       |   | 731 |   |   |
| Other intangibles, net                                                                                                                                                                        |       |               | 194        |                  |       |   | 290 |   |   |
| Restricted cash and  investments, non-current                                                                                                                                                 |       |               | 20,455     |                  |       |   | 11,805 |   |   |
| Other assets                                                                                                                                                                                  |       |               | 30         |                  |       |   | 30 |   |   |
| Total assets                                                                                                                                                                                  |       |               | $          | 77,553                |       |   |   | $ | 73,271 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                | ** ** |               | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Current liabilities:                                                                                                                                                                          |       |               |       |                  |       |   |   |   |   |
| Accounts payable and  accrued liabilities                                                                                                                                                     |       |               | $          | 2,532                 |       |   |   | $ | 3,391 |   |   |
| Derivative liability                                                                                                                                                                          |       |               | 8,143      |                  |       |   | 1,817 |   |   |
| Payable to AVI  BioPharma, Inc.                                                                                                                                                          |       |               | 565        |                  |       |   | 565 |   |   |
| Accrued payroll and  employee benefits                                                                                                                                                        |       |               | 2,421      |                  |       |   | 2,269 |   |   |
| Total current  liabilities                                                                                                                                                                    |       |               | 13,661     |                  |       |   | 8,042 |   |   |
| Deferred rent                                                                                                                                                                                 |       |               | 965        |                  |       |   | 972 |   |   |
| Total liabilities                                                                                                                                                                             |       |               | 14,626     |                  |       |   | 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; 51,825,544 and 51,710,912 shares issued  and outstanding at March 31, 2006 and December 31, 2005,  respectively |       |               | 52         |                  |       |   | 52 |   |   |
| Additional paid in  capital                                                                                                                                                                   |       |               | 410,577    |                  |       |   | 409,365 |   |   |
| Accumulated other comprehensive  gain                                                                                                                                                         |       |               | 12,496     |                  |       |   | 2,850 |   |   |
| Accumulated deficit                                                                                                                                                                           |       |               | (360,198   | )                     |       |   | (348,010 | ) |   |
| Total stockholders’  equity                                                                                                                                                              |       |               | 62,927     |                  |       |   | 64,257 |   |   |
| Total liabilities and stockholders’ equity                                                                                                                                               |       |               | $          | 77,553                |       |   |   | $ | 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** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                         | ** ** | **March 31,**               | ** ** |
| ** **                                                                                         | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Revenues:                                                                                          |       |                             |       |   |   |
| Net product revenue                                                                                |       | $                                | 2,884      |   | $ | 1,015 |   |
| Development and license revenue from MGI PHARMA,  Inc.                                             |       | —                           |       | 3,225 |   |
| Distribution agreement revenue                                                                     |       | —                           |       | 167 |   |
| Total revenues                                                                                     |       | 2,884                            |       | 4,407 |   |
| Costs and  operating expenses:                                                                     |       |                             |       |   |   |
| Cost of product revenue                                                                            |       | 548                              |       | 300 |   |
| Research and development                                                                           |       | 3,021                            |       | 5,124 |   |
| Selling, general, and administrative                                                               |       | 6,493                            |       | 6,258 |   |
| Total costs and operating expenses                                                                 |       | 10,062                           |       | 11,682 |   |
| Loss from operations                                                                               |       | (7,178                           | )          | (7,275 | ) |
| Interest income                                                                                    |       | 536                              |       | 372 |   |
| Gain on  disposition of investment in AVI BioPharma stock resulting from exercise of  warrant |       | 780                              |       | — |   |
| Change in  valuation of derivatives                                                                |       | (6,326                           | )          | — |   |
| Net loss                                                                                           |       | $                                | (12,188    | ) | $ | (6,903 | ) |
| Basic and diluted  net loss per common share                                                       |       | $                                | (0.24      | ) | $ | (0.13 | ) |
| Weighted average shares  used in basic and diluted net loss per common share calculation           |       | 51,758                           |       | 51,142 |   |

 

See accompanying notes to condensed consolidated financial statements

4

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

| ** **                                                                                 | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                 | ** ** | **March 31,**               | ** ** |
| ** **                                                                                 | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Operating activities:                                                                      |       |                             |       |   |   |
| Net loss                                                                                   |       | $                                | (12,188    | ) | $ | (6,903 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                             |       |   |   |
| Depreciation                                                                               |       | 156                              |       | 218 |   |
| Amortization of intangible assets                                                          |       | 96                               |       | 96 |   |
| Amortization of deferred revenue                                                           |       | —                           |       | (2,476 | ) |
| Change in valuation of derivatives                                                         |       | 6,326                            |       | — |   |
| Stock compensation expense                                                                 |       | 671                              |       | 298 |   |
| Gain on disposition of investment in AVI BioPharma  stock                                  |       | (780                             | )          | — |   |
| Cash option paid in termination of distribution  agreement                                 |       | —                           |       | (1,500 | ) |
| Changes in  operating assets and liabilities:                                              |       |                             |       |   |   |
| Accounts receivable and development revenue  receivable                                    |       | 5,451                            |       | 15,973 |   |
| Inventories                                                                                |       | 119                              |       | 27 |   |
| Prepaid expenses and other assets                                                          |       | (389                             | )          | (670 | ) |
| Due from related parties                                                                   |       | —                           |       | 4 |   |
| Restricted cash and investments                                                            |       | (22                              | )          | (14 | ) |
| Accounts payable and other liabilities                                                     |       | (714                             | )          | (1,020 | ) |
| Deferred revenue                                                                           |       | —                           |       | (167 | ) |
| Net cash provided  by (used in) operating activities                                       |       | (1,274                           | )          | 3,866 |   |
| Investing activities:                                                                      |       |                             |       |   |   |
| Purchases of marketable securities                                                         |       | —                           |       | (10,290 | ) |
| Sales or maturities of marketable securities                                               |       | 1,500                            |       | 10,146 |   |
| Purchases of property and equipment                                                        |       | (9                               | )          | (35 | ) |
| Net cash provided  by (used in) investing activities                                       |       | 1,491                            |       | (179 | ) |
| Financing activities:                                                                      |       |                             |       |   |   |
| Proceeds from issuance of common stock, net of  issuance costs                             |       | 541                              |       | 63 |   |
| Net cash provided  by financing activities                                                 |       | 541                              |       | 63 |   |
| Net increase in  cash and cash equivalents                                                 |       | 758                              |       | 3,750 |   |
| Cash and cash  equivalents at beginning of period                                          |       | 47,664                           |       | 38,394 |   |
| Cash and cash  equivalents at end of period                                                |       | $                                | 48,422     |   | $ | 42,144 |   |

 

See accompanying notes to condensed consolidated financial statements

5

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2006 (Unaudited)**

**NOTE1.**   BASIS OF PRESENTATION

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

**NOTE2.   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 months ended March 31, 2006includes: (a) compensation cost for all stock-based payments granted, butnot yet vested as of January 1, 2006, based on the grant-date fair valueestimated in accordance with the original provisions of Statement of FinancialAccounting Standards No. 123, “Accountingfor 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 offorfeitures of all unvested awards. Results for prior periods have not beenrestated.

*StockOption Plans.**  *Wehave 12,263,000 shares of common stock authorized for issuance upon the grantof incentive stock options or nonstatutory stock options to employees,directors, and consultants under our stock option plans, including our 2003Stock Plan and 1996 Directors’ Stock Option Plan. The number of shares to bepurchased, their price, and the terms of payment are determined by our Board ofDirectors, provided that the exercise price for incentive stock options cannotbe less than the fair market value on the date of grant. The options grantedgenerally expire ten years after the date of grant and become exercisable atsuch times and under such conditions as determined by the Board of Directors(generally over a four or five year period).

*Employee Stock PurchasePlan*   We also have an employee stock purchaseplan (“ESPP”) that allows eligible employees to purchase common stock at aprice per share equal to 85% of the lower of the fair market value of thecommon stock at the beginning or end of each six month period during the termof the ESPP. The current offering period began November 15, 2005 and isscheduled to end on May 12, 2006. Under Accounting Principles BoardOpinion No. 25, “Accounting forStock Issued to Employees” (“APB 25”), we were not required torecognize stock-based compensation expense for the cost of stock 

6

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) MARCH 31, 2006 (Unaudited)**

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

options or sharesissued under the Company’s ESPP. Upon adoption of SFAS 123R, we began recordingstock-based compensation expense related to the ESPP.

As a result of the January 1, 2006 adoption ofSFAS 123R, we recognized $690,000 in stock based compensation expense for thethree months ended March 31, 2006. Had we continued to account for share-basedcompensation under APB 25, our basic and diluted net loss per common share forthe three months ended March 31, 2006 would have been $(0.22), compared toreported basic and diluted net loss per common share of $(0.24).

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  March 31,** | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **  2006  **                 | ** ** | **  2005  ** | ** ** |
| Risk-free  interest rate |       |                                             | 4.60       | % |   |   | 4.18 | % |   |
| Dividend yield           |       |                                             | —     |   |   |   | — |   |   |
| Expected  volatility     |       |                                             | 64.58      | % |   |   | 82.40 | % |   |
| Expected life (in years) |       |                                             | 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 behavior amongour 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 annual forfeiturerate of 12.02% to all unvested options as of March 31, 2006. This analysiswill be re-evaluated quarterly and the forfeiture rate will be adjusted asnecessary. Ultimately, the actual expense recognized over the vesting periodwill only be for those shares that vest.

7

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) MARCH 31, 2006 (Unaudited)**

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

A summary of the Company’s stock option activity as ofMarch 31, 2006, and changes during the three months then ended ispresented 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                                            |       |                     | 447,500    |                                   |       |                                                | $          | 5.07                            |       |   |   |   |   |   |   |   |
| Exercised                                          |       |                     | (114,632   | )                                      |       |                                                | $          | 4.72                            |       |   |   |   |   |   |   |   |
| Forfeited                                          |       |                     | (514,938   | )                                      |       |                                                | $          | 6.48                            |       |   |   |   |   |   |   |   |
| Balance at  March 31, 2006                    |       |                     | 6,367,655  |                                   |       |                                                | $          | 9.08                            |       |   |   | 6.55 |   |   | $ | 3,347,000 |   |
| Vested or expected to  vest at March 31, 2006 |       |                     | 6,193,139  |                                   |       |                                                | $          | 9.13                            |       |   |   | 6.48 |   |   | $ | 3,280,000 |   |
| Exercisable at March 31, 2006                 |       |                     | 4,491,751  |                                   |       |                                                | $          | 9.53                            |       |   |   | 5.77 |   |   | $ | 2,772,000 |   |

 

The weighted-averagegrant-date fair value of options granted during the three months ended March 31,2006 was $3.02. The total intrinsic value of options exercised (i.e. thedifference between the market price at exercise and the price paid to exercisethe options) during the three months ended March 31, 2006 was $45,000 andthe total amount of cash received from exercise of these options was $541,000.

As of March 31, 2006,there was $5,982,000 of total unrecognized compensation cost related tounvested share based awards. This cost is expected to be recognized over aweighted average period of 2.47 years. The total fair value of sharesvested during the three months ended March 31, 2006 was $504,000. Weexpect approximately 1,701,000 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.

The following table illustrates the effect on net lossand net loss per share had we applied the fair value recognition provisions ofSFAS 123R in the first quarter of 2005. For purposes of this pro-formadisclosure, the value of the options is estimated using a Black-Scholesoption-pricing model and amortized to expense over the options’ vestingperiods.

| ** **                                                                                                                                                                            | ** ** | **Three months  ended  March 31, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **(Revised)**                                          | ** ** |
| Net loss, as reported                                                                                                                                                                 |       |                                                   | $          | (6,903 | ) |   |
| 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 |       |                                                   | (3,244     | ) |   |
| Pro forma net loss                                                                                                                                                                    |       |                                                   | $          | (9,879 | ) |   |
| Basic and diluted net loss per common share:                                                                                                                                          |       |                                                   |       |   |   |
| As reported                                                                                                                                                                           |       |                                                   | $          | (0.13 | ) |   |
| Pro forma                                                                                                                                                                             |       |                                                   | $          | (0.19 | ) |   |

 

8

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) MARCH 31, 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-forma netloss 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 were understated by$76,000, $82,000, $120,000, and $120,000, respectively, or $398,000 for theyear ended December 31, 2005. These revisions had no effect on our previouslyreported consolidated results of operations or financial condition.

**NOTE 3.**   CASH,CASH EQUIVALENTS, 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 March 31, 2006 (in thousands):

| ** **                      | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|---------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| U.S. corporate  debt securities |       |                | $          | 45,163                       |       |                          |       | $                   | 9          |   |   |   | $ | (1 | ) |   |   | $ | 45,171 |   |   |
| Marketable equity  securities   |       |                | 5,846      |                         |       |                          | 12,488     |                |       |   | — |   |   |   | 18,334 |   |   |
| Total                           |       |                | $          | 51,009                       |       |                          |       | $                   | 12,497     |   |   |   | $ | (1 | ) |   |   | $ | 63,505 |   |   |

 

9

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) MARCH 31, 2006 (Unaudited)**

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

The available-for-salesecurities are classified on the balance sheet as of March 31, 2006 asfollows (in thousands):

| ** **                                                  | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-------------------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| Amounts included  in cash and cash equivalents              |       |                | $          | 45,163                       |       |                          |       | $                   | 9          |   |   |   | $ | (1 | ) |   |   | $ | 45,171 |   |   |
| Amounts included in  investment in stock of related parties |       |                | 120        |                         |       |                          | 260        |                |       |   | — |   |   |   | 380 |   |   |
| Amounts included  in restricted cash and investments        |       |                | 5,602      |                         |       |                          | 12,114     |                |       |   | — |   |   |   | 17,716 |   |   |
| Marketable  securities, non-current                         |       |                | 124        |                         |       |                          | 114        |                |       |   | — |   |   |   | 238 |   |   |
| Total                                                       |       |                | $          | 51,009                       |       |                          |       | $                   | 12,497     |   |   |   | $ | (1 | ) |   |   | $ | 63,505 |   |   |

 

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

| ** **                               | ** ** | **Fair Value**      | ** ** |
|------------------------------------------|------------|--------------------------|------------|
| ** **                               | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
| Debt securities  due in one year or less |       |                     | $          | 45,171 |   |   |   | $ | 44,690 |   |   |
| Marketable equity  securities            |       |                     | 18,334     |   |   |   | 9,407 |   |   |
| Total                                    |       |                     | $          | 63,505 |   |   |   | $ | 54,097 |   |   |

 

**NOTE 4.   INVENTORIES**

Inventoriesconsist of the following (in thousands):

| ** **      | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials   |       |                     | $          | 67                          |       |   |   | $ | 67 |   |   |
| Work in process |       |                     | 463        |                        |       |   | 197 |   |   |
| Finished goods  |       |                     | 790        |                        |       |   | 1,175 |   |   |
|            |       |                     | $          | 1,320                       |       |   |   | $ | 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 March 31, 2006, we recorded a change in the value of thisderivative of $6,326,000. There was no change in the value of this derivative 

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) MARCH 31, 2006 (Unaudited)**

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

during the three monthsended March 31, 2005. During the three months ended March 31, 2006,one of the warrant holders exercised 300,000 warrants. As part of thistransaction, we received $1,500,000 in cash and transferred 300,000 of the AVIShares to the warrant holder. We recognized a gain on disposition of the sharesof $780,000, representing the difference between our carrying value of theshares and the proceeds 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.

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

In August 2004, we entered into three agreementswith MGI PHARMA, Inc., a Minnesota corporation (“MGI”): (1) a commonstock purchase agreement, (2) a license agreement relating to DacogenTM(decitabine), and (3) an investor rights agreement. The agreements becameeffective on September 21, 2004. Dacogen is our investigationalanti-cancer therapeutic which was recently approved by the United States FoodDrug Administration (“FDA”) for the treatment of patients with myelodysplasticsyndrome (“MDS”). Pursuant to the terms of the license agreement, MGI receivedexclusive worldwide rights to the development, commercialization anddistribution of Dacogen for all indications.

In accordance with the stock purchase agreement, weissued 4,000,000 shares of our common stock to MGI at $10.00 per share, foraggregate proceeds totaling $40,000,000. We paid the placement agent $3,200,000in cash and issued the placement agent a warrant exercisable for 400,000 sharesof our common stock at an exercise price of $10.00 per share. We calculated thefair value of the warrant at $1,436,000. We allocated the aggregate proceedsand related costs of the placement agent fee and warrant valuation betweenequity, for the portion attributable to the stock purchase agreement, anddeferred revenue, for the portion attributable to the license agreement. Therefore,we allocated $23,662,000, the fair value of 4,000,000 shares of our commonstock at the time of the transaction, net of related offering costs, to equity,and allocated $12,625,000 to deferred revenue. The deferred revenue wasamortized to license revenue over 15 months, which is the period of time inwhich our development obligations for Dacogen transferred to MGI. During thethree months ended March 31, 2005, we recorded amortization of deferredrevenue of $2,476,000. The deferred revenue was fully amortized at December 31,2005, so we had no amortization during the three months ended March 31,2006.

Under the terms of thelicense agreement, MGI was obligated to reimburse us for certain developmentand allocated overhead costs of Dacogen until we received marketingauthorization. In the three months ended March 31, 2005, we recognized$749,000 of development revenue relating to the 

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) MARCH 31, 2006 (Unaudited)**

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

reimbursementunder this agreement. We had no similar revenue during the three months ended March 31,2006.

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

In February 2004, weentered into a Purchase and Sale Agreement with Pfizer Inc. to acquire Europeanmarketing rights for Nipent®, our drug that is currently approved for marketingin the United States for hairy cell leukemia. We paid Pfizer $1,000,000 underthis agreement and have classified this amount in Other intangibles in theaccompanying balance sheet. This amount is being amortized over 31 months, theestimated life of the benefit period. Accumulated amortization was $806,000 and$420,000 at March 31, 2006 and March 31, 2005, respectively.

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

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

In March 2003, weentered into an agreement with Abbott that allowed us to terminate the Nipentdistribution agreement, for a stated fee that decreased over time to $1,500,000at March 2005. As part of the agreement, we paid Abbott $500,000 for theright to terminate the Nipent distribution agreement at our option. The$500,000 was recorded as a reduction of the deferred revenue we initiallyreceived from Abbott for the distribution rights, and we stopped amortizing theremaining balance of deferred revenue, which was $1,667,000 at that time. In February 2005, we exercised our optionand paid Abbott $1,500,000 to terminate the Nipent distribution agreement. Thisamount was charged against deferred revenue. The remaining balance in deferredrevenue of $167,000 was recorded as distribution agreement revenue in the threemonth period ending March 31, 2005. We had no similar revenue during thethree month period ending March 31, 2006.

**NOTE 9.   COMPREHENSIVELOSS**

For the three months endedMarch 31, 2006 and 2005, total comprehensive losses amounted to $2,542,000and $6,470,000, respectively. Comprehensive losses consisted primarily of thenet losses and changes in unrealized gains or losses on investments. Werecorded unrealized gains on investments of $9,646,000 and $433,000 for thethree months ended March 31, 2006 and 2005, respectively.

**NOTE 10.   BASIC ANDDILUTED NET LOSS PER SHARE**

Basic and diluted net loss per common share iscomputed by dividing net loss by the weighted average number of sharesoutstanding during the quarter. As we have reported operating losses in eachperiod, the 

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**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) MARCH 31, 2006 (Unaudited)**

**NOTE 10.**   BASIC AND DILUTED NET LOSS PER SHARE (Continued)

effect of assuming theexercise of options and warrants would be anti-dilutive and, therefore, basicand diluted net loss per share are the same.

Thecomputation of diluted net loss per share for the three months ended March 31,2006 and 2005 excludes the impact of the following (in thousands):

| ** **                         | ** ** | **March 31,** | ** ** |
|------------------------------------|------------|--------------------|------------|
| ** **                         | ** ** | **2006**           | ** ** | **2005** | ** ** |
| Options to  purchase common stock  |       | 6,368              |       | 6,828 |   |
| Warrants to purchase  common stock |       | 6,725              |       | 7,183 |   |

 

**NOTE 11.   SUBSEQUENTEVENTS**

**Acquisition OfMontigen Pharmaceuticals, Inc.**

On January 27, 2006, weannounced that 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 discoverytechnology platform and optimization process, CLIMBTM, and late-stagepre-clinical compounds targeting aurora-A kinase and members of the tyrosinekinase receptor family. One of the Montigen compounds is expected to be thesubject of a pre-IND meeting with the FDA later this year.

The transaction closed on April 4,2006. Pursuant to the terms of the agreement, we paid the Montigen stockholdersa total of $18.0 million upon the closing of the transaction, consisting of$9.0 million in cash and 1,625,626 shares of SuperGen common stock at anaverage price of $5.50 per share. We will pay the Montigen stockholders anadditional $22.0 million in shares of SuperGen common stock, contingent uponachievement of specific regulatory milestones. We received a permit from theCommissioner of Corporations for the State of California so that the issuanceof the shares of SuperGen common stock are exempt from registration under theSecurities Act of 1933.

**FDA Approval ofDacogen**

On May 3, 2006, the FDA approved Dacogen for thetreatment of patients with MDS. In accordance with our license agreement withMGI (see Note 6 above), MGI is obligated to pay us a milestone payment of $20.0million upon first commercial sales of Dacogen in the United States.

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**Item 2.**

**MANAGEMENT’S DISCUSSIONAND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

*You should read the following discussion together withour condensed consolidated financial statements and related notes includedelsewhere in this report. The results discussed below are not necessarilyindicative of the results to be expected in any future periods. Our disclosure and analysis in this section of thereport also contain forward-looking statements. When we use the words “anticipate,”“estimate,” “project,” “intend,” “expect,” “plan,” “believe,” “should,” “likely”and similar expressions, we are making forward-looking statements.Forward-looking statements provide our current expectations or forecastsof future events. In particular, these statements include statements such as: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 pharmaceuticalcompany dedicated 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 tyrosine kinaseinhibitors and DNA methyltransferase preclinical products under development. Our strategy is to commercialize products byminimizing the time, expense and technical risk associated with drug researchthrough identifying and acquiring pharmaceutical compounds. Our primaryobjective is to become a leading supplier of 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.Currently we have three key compounds, Dacogen, Orathecin, and Nipent, thathave been the focus of our efforts.

*Dacogen.**  *Our original submissionfor Dacogen was accepted for filing by the United States Food and DrugAdministration (“FDA”) on December 31, 2004. On September 1, 2005, wereceived an Approvable Letter for Dacogen from the FDA, which provided thatDacogen was approvable pending the FDA’s review of a requested analysis of thetransfusion requirements of patients enrolled in the completed Phase III trial,submission of certain other information, and completion of labeling discussions.We completed the collection and analysis of the data requested by the FDA andsubmitted our response to the Approvable Letter on November 15, 2005. On December 15,2005, the FDA accepted our resubmission as a complete response to theApprovable Letter. The resubmission was classified by the FDA as a Class 2response, and the FDA established a user fee goal date to review the responseby May 15, 2006.   On May 3,2006, the FDA approved Dacogen for the treatment of patients withmyelodysplastic syndromes (“MDS”).

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Our European subsidiary, EuroGen Pharmaceuticals Ltd.,submitted a Marketing Approval Authorization (“MAA”) for Dacogen to theEuropean Medicines Agency (“EMEA”), which submission was accepted for review onOctober 25, 2004. Our partner MGI PHARMA, Inc. (“MGI”) and SuperGendetermined that additional clinical data will be required to continue thereview of Dacogen in Europe. Therefore, we withdrew the MAA for Dacogen in November 2005.MGI is continuing to evaluate the registration strategy for Dacogen in Europe.

In September 2004, weexecuted a definitive agreement granting 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 $12.5 million of these milestones. Nowthat Dacogen is approved, we will receive a royalty on worldwide net salesstarting at 20% and escalating to a maximum of 30%. In accordance with ourlicense agreement with MGI, they are obligated to pay us a milestone payment of$20.0 million upon first commercial sale of Dacogen in the U.S. MGI also committed to fund furtherdevelopment costs associated with Dacogen at a minimum of $15.0 million over athree year period.

*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 concluded a PhaseII clinical trial to study Orathecin plus gemcitabine as a first-linecombination therapy for advanced pancreatic cancer patients who have notundergone chemotherapy. The protocol included a prospectively defined interimanalysis to estimate median survival. The study did not meet the pre-specifiedthreshold for median survival in order to proceed to a Phase III randomizedstudy. We are working with clinical advisors, investigators, and potentialpartners to evaluate the best options for Orathecin that will maximize theproduct’s potential to help patients in need and realize its commercial valuefor our stockholders.

In July 2004, we submitted a MAA to the EMEAseeking 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”).

*OtherProducts.**  *Ourportfolio of other products includes Partaject-delivered busulfan. Wealso market Surface Safe. We have also received regulatory approval to marketMitozytrex (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. Moreover, we hold United States sales and marketingrights to the cancer vaccine Avicine. We are continually evaluating our productportfolio to determine whether it is appropriate for us to dedicate theresources needed to commercialize these products ourselves or whether we wouldbe better served selling or licensing the rights to develop these products tothird parties.

*MontigenAcquisition.**  *On January 27, 2006, we announced that we had entered into adefinitive agreement to acquire Montigen Pharmaceuticals, Inc. (“Montigen”),a privately-held oncology-focused drug discovery and development companyheadquartered in Salt Lake City, Utah. Montigen’s assets include its research anddevelopment team, a proprietary drug discovery technology platform andoptimization process, CLIMBTM, and late-stage pre-clinical compounds targetingaurora-A kinase and 

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members of the tyrosinekinase receptor family. We expect one of the Montigen compounds to be thesubject of a pre-IND meeting 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$18.0 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.

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 will requiresubstantial additional investments in research and development, clinicaltrials, regulatory and in sales and marketing activities to commercializecurrent and future product candidates. Conducting clinical trials is a lengthy,time-consuming, and expensive process involving inherent uncertainties andrisks, and our studies may be insufficient to demonstrate safety and efficacyto 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 $360.2 million through March 31, 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.

**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 

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policies,among others, affect our more significant judgments and estimates used in thepreparation of our condensed consolidated financial statements.

*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 three 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 amountshave been reduced by our estimate of forfeitures of all unvested awards. Resultsfor prior 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 now 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 March 31, 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

As of March 31, 2006,there was $5,982,000 of total unrecognized compensation cost related tounvested share based awards. This cost is expected to be recognized over aweighted average period of 2.47 years. We expect approximately 1,701,000in unvested options to vest at some point in the future. Options expected tovest is calculated by applying an estimated forfeiture rate to the unvestedoptions.

*Revenue Recognition*

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

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

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

*Intangible Assets*

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

*Valuation ofInvestments in Financial Instruments*

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

Investments in 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 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. In January 2006, 300,000of these warrants were exercised. As of March 31, 2006, we owned 2,334,211shares of AVI to cover the remaining outstanding warrants. These warrants areconsidered to be a derivative and have been recorded on the balance sheet atestimated fair value. The accounting for derivatives is complex, and requiressignificant judgments and estimates involved in determining the estimated fairvalue in the absence of quoted market values. These estimates are based onvaluation methodologies and assumptions deemed appropriate in thecircumstances. The estimated fair value of the warrants is based on variousassumptions input into the Black-Scholes pricing model. These assumptionsinclude the estimated market volatility and interest rates used in thedetermination of fair value. The use of different assumptions may have amaterial effect on the estimated fair value amount and the results ofoperations.

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**Results ofOperations**

*Three months ended March 31, 2006 compared tothree months ended March 31, 2005:*

| ** **                       | ** ** | **Three months ended**     | ** ** | ** **                                               | ** ** |
|----------------------------------|------------|--------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                       | ** ** | **March 31,**                   | ** ** | **Change**                                               | ** ** |
| **Revenues**                     | ** ** | ** **                           | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                       | ** ** | **(Dollars in thousands)** | ** ** |
| Net product  revenue             |       |                                 | $          | 2,884                                                    |       |   |   | $ | 1,015 |   |   | $ | 1,869 |   | 184.1 | % |
| Development and  license revenue |       |                                 | —     |                                                     |       |   | 3,225 |   |   | (3,225 | ) | (100.0 | ) |
| Distribution agreement  revenue  |       |                                 | —     |                                                     |       |   | 167 |   |   | (167 | ) | (100.0 | ) |
|                                  |            |                                      |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in net product revenue for the periodended March 31, 2006 was due primarily to higher unit sales of Nipent, ourdrug currently approved for the treatment of hairy cell leukemia. Net Nipentsales increased to $2,483,000 in the three months ended March 31, 2006,compared to $838,000 in the three months ended March 31, 2005. Neitherperiod included sales to Europe. Unlike our Nipent sales efforts in the U.S.market where we call on clinicians directly, our role in Europe has beenlimited to that of a supplier. As such, we have not had a direct influence onNipent sales at the clinical level, making the timing and magnitude of Europeansales difficult to predict and dependent on the efforts of our Europeandistributor.

Development and license revenue for the period ended March 31,2005 relates to our license agreement entered into with MGI in September 2004.Development and license revenue included $2,476,000 related to the amortizationof deferred revenue in connection with the upfront payment received from MGI,and $749,000 related to reimbursement of Dacogen development and allocatedoverhead costs. We had no similar revenue during the period ended March 31,2006.

Distributionagreement revenue for the period ended March 31, 2005 relates to thetermination of our Nipent distribution agreement with Abbott Laboratories. Uponsigning this agreement in 1999, we received $5.0 million from Abbott, which wasrecorded as deferred revenue and was being amortized over a five-year period. InFebruary 2005, we paid Abbott $1,500,000 to terminate this agreement, andthis amount was charged against the unamortized balance of deferred revenue of$1,667,000. The remaining $167,000 was recorded as distribution agreementrevenue in the three months ended March 31, 2005 as a result of thetermination of the distribution agreement.

| ** **                                      | ** ** | **Three months ended**     | ** ** | ** **                                               | ** ** | ** **                                               | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                      | ** ** | **March 31,**                   | ** ** | **Change**                                               | ** ** |
| **Costs and operating expenses** | ** ** | ** **                           | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands)** | ** ** |
| Cost of product  revenue                        |       |                                 | $          | 548                                                      |       |                                                     |       | $ | 300 |   |   | $ | 248 |   |   | 82.7 | % |   |
| Research and  development                       |       |                                 | 3,021      |                                                     |       |                                                     | 5,124      |   |   | (2,103 | ) |   | (41.0 | ) |   |
| Selling, general and  administrative            |       |                                 | 6,493      |                                                     |       |                                                     | 6,258      |   |   | 235 |   |   | 3.8 |   |   |
|                                                 |            |                                      |            |                                                          |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Cost of product revenue as a percentage of net productrevenue was 19% in the first quarter of 2006 compared to 30% in the same periodin 2005. The decrease for the period ended March 31, 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.

The decrease in research and development expenses wasdue to lower clinical study and clinical supply costs for Orathecin andDacogen, as those clinical studies have wound down after the completion of ourFDA and European submissions for Orathecin and Dacogen during the latter halfof 2004. We conduct research internally and also through collaborations withthird parties, and we intend to maintain our strong 

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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 increase in selling, general and administrativeexpenses for the period ended March 31, 2006 relates primarily to highergeneral and administrative expenses relating to the recording of stockcompensation expense, offset by lower sales and marketing costs.

| ** **                                                                                    | ** ** | **Three months ended**     | ** ** | ** **                                               | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **March 31,**                   | ** ** | **Change**                                               | ** ** |
| **Other income (expense)**                                                          | ** ** | ** **                           | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                                                                    | ** ** | **(Dollars in thousands)** | ** ** |
| Interest income                                                                               |       |                                 | $          | 536                                                      |       |   |   | $ | 372 |   |   | $ | 164 |   |   | 44.1 | % |   |
| Gain on  disposition of investment in AVI BioPharma stock resulting from exercise of  warrant |       |                                 | 780        |                                                     |       |   | — |   |   | 780 |   |   | — |   |   |
| Change in valuation of  derivatives                                                           |       |                                 | (6,326     | )                                                        |       |   | — |   |   | (6,326 | ) |   | — |   |   |
|                                                                                               |            |                                      |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in interest income was due to higheravailable cash and marketable securities balances and an increase in interestrates for the period ended March 31, 2006, compared to the same period in2005.

As part of our June 2003 convertible debttransaction, we issued to the note holders warrants to purchase 2,634,211shares of AVI at $5.00 per share. During the three months ended March 31,2006, one of the warrant holders exercised 300,000 warrants. As part of thistransaction, we received $1,500,000 in cash and transferred 300,000 of the AVIShares to the warrant holder. We recognized a gain on disposition of the sharesof $780,000, representing the difference between our $2.40 per share adjustedcost basis of the shares and the exercise price.

The warrants issued in theJune 2003 convertible debt transaction represent a derivative instrumentand are revalued each quarter using the Black-Scholes pricing model. During thefirst quarter of 2006, the value of this derivative had increased by$6,326,000, due to an increase in the market value of the underlying shares ofAVI at March 31, 2006. In the first quarter of 2005, there was no changein the value of this derivative.

**Liquidity andCapital Resources**

Our cash, cash equivalents, and both short andlong-term marketable securities totaled $48,660,000 at March 31, 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$18,096,000 at March 31, 2006, although if all the outstanding warrants topurchase AVI shares were exercised, we would only receive proceeds of$11,671,100 for the AVI shares we hold as security for these warrants,regardless of the market value of the AVI shares. The AVI shares are classifiedon the balance sheet under non-current Restricted cash and investments, as wellas Investment in stock of related parties.

Net cash used in operating activities was $1,274,000in the first quarter of 2006, and consisted primarily of the net loss of$12,188,000, offset by an increase in the valuation of derivatives of$6,326,000 

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and a decrease in accountsreceivable of $5,451,000. Net cash provided by operating activities was$3,866,000 in the first quarter of 2005, consisting primarily of the net lossof $6,903,000, plus non-cash amortization of deferred revenue of $2,476,000from the MGI payment received in September 2004, cash fee of $1,500,000paid to Abbott to terminate our U.S. Nipent distribution agreement, an increasein accounts payable and other liabilities of $1,020,000, offset by a decreasein accounts receivable of $15,973,000, primarily due to the receipt ofmilestone and development funds from MGI during the quarter.

Net cash provided by investing activities was$1,491,000 in the first quarter of 2006, and related primarily to the proceedsof $1,500,000 from disposition of shares of AVI BioPharma as a result of theexercise of warrants. Net cash used in investing activities was $179,000 in thefirst quarter of 2005, and consisted of $10,146,000 in proceeds from the saleor maturity of marketable securities, offset by $10,290,000 from the purchaseof marketable securities.

Net cash provided by financing activities was $541,000in the first quarter of 2006, and consisted of proceeds from the exercise ofstock options. Net cash provided by financing activities was $63,000 in thefirst quarter of 2005, and consisted of proceeds from exercises of stockoptions.

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

We believe that our needfor additional funding will increase in the future 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 2006.

**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.

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As part of our June 2003 convertible debttransaction, we issued to the note holders warrants to purchase 2,634,211shares of 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 March 31,2006, the value of the derivative had increased to $8.1 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.

**Item 4.**                        ControlsAnd Procedures

(a)           Evaluationof 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 substantialharm to our business through the receipt of lower royalty revenue from MGI. Inaddition, pursuant to our license agreement with MGI, we are expecting toreceive payments from MGI in connection with the achievement of certaincommercialization milestones. If these commercialization milestones are notmet, we will not receive these payments and our financial condition andbusiness would be harmed.

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

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

MGI and SuperGen willcontinue to work with European regulatory authorities to determine theinformation required to support a resubmission of the application, andanticipate resubmitting the application at a later date. MGI anticipates thatnext steps in the European regulatory strategy may be finalized incollaboration with a partner, but if this collaboration does not happen and/orDacogen is never approved in Europe, our business will be harmed.

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

Part of our strategyinvolves expanding the market opportunities for our approved drugs, includingNipent, by seeking clinical support of their use for treatment of patients withadditional diseases. We are currently marketing Nipent for the treatment ofpatients with hairy cell leukemia, and revenues from selling Nipent hasprovided the majority of our annual product revenues over the past three years.We are conducting a series of clinical trials with Nipent, including Phase IVtrials 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.

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

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

Since inception, we have funded our research anddevelopment activities primarily from private placements and public offeringsof our securities, milestone payments and revenues generated primarily fromsales of Nipent, which is marketed in the United States for the treatment ofpatients with hairy cell leukemia. Our substantial research and developmentexpenditures and limited revenues have resulted in significant net losses. Wehave incurred cumulative losses of $360.2 million from inception through March 31,2006, and our products have not generated sufficient revenues to support ourbusiness during that time. We expect to continue to incur substantial operatinglosses at least through 2007 and may never achieve profitability.

Whether we achieveprofitability depends primarily on the following factors:

·       ourability to obtain regulatory approval for Dacogen in Europe and the successfulcommercialization of Dacogen in the United States by MGI;

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

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

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

·       ourability to successfully market Nipent in Europe as planned;

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

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

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

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

·       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 require additional funding to expand ourproduct pipeline, strengthen our commercialization efforts and expand ourEuropean operations, and if we are unable to raise the necessary capital or todo so on acceptable terms, our planned expansion and continued chances ofsurvival could be harmed.*

We will continue to spendsubstantial resources on expanding our product pipeline, strengthening ourcommercialization efforts for our existing products, developing new avenues ofrevenue for Nipent, scaling-up of European operations, selling and distributingour existing and future products, and conducting research and development,including clinical trials for other products and product candidates. We anticipatethat our capital resources will be adequate to fund operations and capitalexpenditures through 2006. However, if we experience unanticipated cashrequirements during this period, we could require additional funds much sooner.We may raise money by the sale of our equity securities or debt, or theexercise of outstanding warrants and stock options by the holders of suchwarrants and options. However, given uncertain market conditions and thevolatility of our stock price, we may not be able to sell our securities inpublic offerings or private placements at prices and/or on terms that arefavorable to us, if 

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at all.Also, the dilutive effect of additional financings could adversely affect ourper share results. We may also choose to obtain funding through licensing andother contractual agreements. For example, we licensed the worldwide rights tothe development, commercialization and distribution of Dacogen to MGI. Sucharrangements may require us to relinquish our rights to our technologies, productsor marketing territories, or to grant licenses on terms that are not favorableto us. If we fail to obtain adequate funding in a timely manner, or at all, wewill be forced to scale back our product development activities, or be forcedto cease our operations.

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

In addition to raisingmoney by selling our equity securities to MGI in connection with the license agreement,we also expect to record development and license revenue from payments made tous by MGI upon the achievement of regulatory and commercialization milestones. However,we may fail to achieve these milestones, either because we are unable to secureregulatory approval of Dacogen in Europe or Asia or due to MGI’s inability toexpend the resources to commence sales of Dacogen as prescribed by the licenseagreement. In addition, the license agreement contemplates that MGI will pay us(i) a certain portion of revenues payable to MGI as a result of MGIsublicensing the rights to market, sell and/or distribute Dacogen, to theextent such revenues are in excess of the milestone payments, and (ii) a20% royalty increasing to a maximum of 30% on annual worldwide net sales ofDacogen. We cannot guarantee that we will ever receive these payments, as MGImay choose not to sublicense Dacogen at all, nor can we be assured that MGIwill expend the resources to sell Dacogen worldwide, or be successful in doingso.

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

We are exposed to equity price risk on our equityinvestment in AVI. Currently we own 2,384,211 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 more thansix months. Since there was no compelling evidence to the contrary, we recordedthe impairment charge of $7.9 million in our results of operations. Theamount of the charge was based on the difference between the market price ofthe shares as of June 30, 2004 and our adjusted cost basis. The publictrading prices of the AVI shares have fluctuated significantly since wepurchased them and could continue to do so. If the public trading prices ofthese shares continue to trade below their new cost basis in future periods, wemay incur additional impairment charges relating to this investment, which inturn 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.These warrants expire on December 31, 2006.

***Product Development and Regulatory Risks***

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

Most of our products are in the developmental stageand, prior to their sale, will require regulatory approval and the commitmentof substantial resources. Before obtaining regulatory approvals for the 

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

We have a portfolio of cancer drugs in various stagesof development, 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 researchand pre-clinical projects that may lead to product candidates, but we have notbegun clinical trials for these projects. If we do not successfully completeour pre-clinical trials, we could not commence clinical trials as planned.

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

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

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

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

·       inabilityto obtain FDA approval of our clinical trial protocols;

·       slowerthan expected rate of patient recruitment;

·       inabilityto adequately follow patients after treatment;

·       difficultyin managing multiple clinical sites;

·       unforeseensafety issues;

·       lackof efficacy demonstrated during the clinical trials; or

·       governmentor regulatory delays.

If we are unable toachieve a satisfactory rate of completion of our clinical trials, our businesswill be significantly harmed.

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

Our clinical trials mustbe conducted in accordance with the FDA’s regulations and are subject tocontinuous oversight by the FDA and institutional review boards at the medicalinstitutions where the clinical trials are conducted. We outsource certainaspects of our research and development activities to contract researchorganizations (“CROs”). We have agreements with these CROs for certain of our 

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clinicalprograms. We and our 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 required to suspend, repeat or terminate ourclinical trials if later trial results fail to demonstrate safety and efficacy,or if the results are negative, inconclusive or if they fail to demonstratesafety 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.

We may encounter other problems and failures in ourstudies that would cause us or the FDA to delay or suspend the studies. Even ifwe achieve positive interim results in clinical trials, these results do notnecessarily predict final results, and acceptable results in early trials maynot be repeated in later trials. A number of companies in the pharmaceuticalindustry have suffered significant setbacks in advanced clinical trials, evenafter achieving promising results in earlier trials.

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 and clinicaltrials and further delay the commencement of the regulatory approval process. Further,the failures or perceived failures in our clinical trials would delay ourproduct development and the regulatory approval process, damage our businessprospects, make it difficult for us to establish collaboration and partnershiprelationships and negatively affect our reputation and competitive position inthe pharmaceutical industry. Finally, if we are required to conduct otherclinical trials for the product candidates, the additional trials would requiresubstantial funding and time, and we may be unable to obtain funding to conductsuch clinical trials.

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

Sales of our products in foreign jurisdictions will besubject to separate regulatory requirements and marketing approvals. Approvalin the United States, or in any one foreign jurisdiction, does not ensureapproval in any other jurisdiction. The process of obtaining foreign approvalsmay result in significant delays, difficulties and expenses for us, and mayrequire additional clinical trials. We have applied through our subsidiaryEuroGen for regulatory approval to market mitomycin and paclitaxel in theUnited Kingdom and in other countries within the European Union. Although manyof the regulations applicable to our products in these foreign countries aresimilar to those promulgated by the FDA, many of these requirements also varywidely from country to country, which could delay the introduction of ourproducts in those countries. Failure to comply with these regulatoryrequirements or to obtain required approvals would impair our ability tocommercialize our products in foreign markets.

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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 less than10% of our total sales, and there is no guarantee that our marketing effortswill result in significantly increased revenues. Our strategy is to obtainregulatory approvals to sell our products in Europe and elsewhere, and weintend to contract with third-party licensees or distributors for salesoutside the United States. Delays in obtaining regulatory approval from foreignjurisdictions will impair the commercialization of our products and would delayanticipated revenues.

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

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

Physicians may 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 aWarning Letter from the FDA regarding certain promotional materials wedisseminated for Nipent. The FDA asserted that these materials were false ormisleading because they failed to present any risk information, contained anunsubstantiated claim regarding the mechanism of action, and overstated thesafety and efficacy of the drug. In response, we recalled these materials fromthe field and commenced modifying our internal procedures to ensure that futureNipent marketing materials and promotional activities meet regulatory requirements.We sent a corrective communication to physicians who received the violativeNipent materials. The FDA has accepted our remedial actions, nonetheless, anyfurther Warning Letters or enforcement actions by the FDA could harm ourreputation in the market, result in significant fines or have other affectsthat could harm our business.

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

Sales of our products depend in part upon theavailability of reimbursement from third-party payers, such as healthadministration authorities like Medicare/Medicaid, managed care providers andprivate health insurers. Third-party payers are increasingly challengingthe price and examining the cost effectiveness of medical products andservices, which may effectively limit physicians’ ability to select productsand procedures.

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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 tocomply with environmental laws and regulations, our business may be harmed.*

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

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

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

*We recently acquired Montigen Pharmaceuticals, Inc.This transaction could disrupt our business and harm our financial condition ifwe are not able to integrate Montigen’s business and technology into ours, andthe expected benefits of the combination may not 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 numerous risks, including problems combining the purchased operationsor technologies, unanticipated costs and diversion of management’s attentionfrom our core business. In addition, we may have to restructure aspects of ourbusiness in order to achieve anticipated synergies. There can be no assurancethat we will be able to successfully integrate Montigen and its technology andpersonnel into our business. The failure to effectively manage the acquisitionand integration of Montigen could disrupt our business and harm our financialresults. Further, the transaction has diluted our existing stockholders’percentage ownership and decreased our cash position.

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

Because we have nomanufacturing facilities, we rely on third parties for manufacturing activitiesrelated to all of our products. As we develop new products and increase salesof our existing products, we 

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mustestablish and maintain relationships with manufacturers to produce and packagesufficient supplies of our finished pharmaceutical products, including Nipent.Reliance on third party manufacturing presents the following risks:

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

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

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

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

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

Currently we store 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, such event wouldinevitably cause delays in distribution and sales of our products and harm ouroperating 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 

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production costs. Vendorlead times to supply us with ordered components vary significantly and canexceed six months or more. Both now and as we expand our need for manufacturingcapacity, we cannot be sure that our suppliers will furnish us with requiredcomponents when we need them. These factors could make it difficult for us toeffectively and efficiently manufacture our products, and could adverselyimpact our clinical trials, product development and sales of our products.

Some suppliers are 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.

*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 34 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.

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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 with ourcollaborative partners may not be successful.

In addition, ourcollaborators may undergo business combinations, which could have the effect ofmaking the collaboration with us less attractive to them for a number ofreasons. For example, if an existing collaborator purchases a company that isone of our competitors, that company may be less willing to continue itscollaboration with us. A company that has a strategy of purchasing companieswith attractive technologies might have less incentive to enter into acollaboration agreement with us. Moreover, disputes may arise with respect tothe ownership of rights to any technology or products developed with anycurrent or future collaborator. Lengthy negotiations with potentialcollaborators or disagreements between us and our collaborators may lead todelays in or termination of the research, development or commercialization ofproduct candidates or result in time consuming and expensive litigation orarbitration.

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

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

These 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.

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

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

We actively pursue a policy of seeking patentprotection when applicable for our proprietary products and technologies,whether they are developed in-house or acquired from third parties. Weattempt to protect our intellectual property position by filing United Statesand foreign patent applications related to our proprietary technology,inventions and improvements that are important to the development of ourbusiness. To date, we have acquired licenses to or assignments of over 50 U.S.patents covering various aspects of our proprietary drugs and technologies,including 37 patents for various aspects of Orathecin and related products, sixpatents under our Nipent product portfolio, although none covers the use ofNipent for the treatment of patients with hairy cell leukemia, seven patentsfor our paclitaxel related products, three patents for Dacogen used incombination with an anti-neoplastic agent for the treatment of cancer,and two patents for our Surface Safe product. These issued United Statespatents will begin to expire in October 2012. We have been granted patentsand have received patent licenses relating to our proprietary formulationtechnology, non-oncology and Partaject technologies, among which at leastfive patents are issued or licensed to us. In addition, we are prosecuting anumber of patent applications for drug candidates that we are not activelydeveloping at this time.

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 the protectionwe have on patents issued or licensed to us in these countries. In addition,laws of foreign countries may not protect our intellectual property to the sameextent as would laws in the United States. To minimize our costs and expensesand maintain effective protection, we focus our foreign patent and licensingactivities primarily in the European Union, Canada and Japan. In determiningwhether or not to seek patent protection or to license any patent in a foreigncountry, we weigh the relevant costs and benefits, and consider, among otherthings, the market potential and profitability, the scope of patent protectionafforded by the law of the jurisdiction and its enforceability, and the natureof terms with any potential licensees. Failure to obtain adequate patentprotection for our proprietary drugs and technology would impair our ability tobe 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 

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us in the future based onpatents held by others. These persons could bring legal actions against usclaiming damages and seeking to enjoin clinical testing, manufacturing andmarketing of the affected product. If we become involved in litigation, itcould consume a substantial portion of our resources, regardless of the outcomeof the litigation. If a lawsuit against us is successful, in addition to anypotential liability for damages, we could be required to obtain a license tocontinue to manufacture or market the affected product. We cannot assure youthat we would prevail in a lawsuit filed against us or that we could obtain anylicenses required under any patents on acceptable terms, if at all.

Our proprietary productsare dependent upon compliance with numerous licenses and agreements. Theselicenses and agreements require us to make royalty and other payments,reasonably exploit the underlying technology of the applicable patents, andcomply with regulatory filings. If we fail to comply with these licenses andagreements, we could lose the underlying rights to one or more of thesepotential products, which would adversely affect our product development andharm our business.

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

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

Many of our competitors and research institutions areaddressing the same diseases and disease indications and working on products totreat such diseases as we are, and have substantially greater financial,research and development, manufacturing and marketing experience and resourcesthan we do. Some of our competitors have received regulatory approval 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 potential competitionfrom Pharmion’s Vidaza, which was approved by the FDA in the first half of2004.

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.

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*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.

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

We developed, or are in the process of developing, andare planning to market several generic and proprietary formulation productsbased on existing compounds. Specifically, with respect to our genericproducts, we received approval of abbreviated 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 patient protection fromtissue ulceration. This technology may increase the relative solubility ofhard-to-dissolve anti-cancer drugs, hence increasing its stability orshelf life. However, each of these benefits must be supported by appropriatedata and approved by the FDA before we can make any claim in this regard. Ourfirst product utilizing our proprietary formulation technology, a formulationof generic mitomycin, was approved by the FDA in November 2002 asMitozytrex (mitomycin for injection) for use in the therapy of disseminatedadenocarcinoma of the stomach or pancreas in proven combinations with otherapproved chemotherapeutic agents and as palliative treatment when othermodalities have failed. We cannot promote Mitozytrex as providing any injectionsite ulceration protection, nor can we promote any increased stability,solubility or shelf life extension, as compared to generic mitomycin. We wouldbe required to develop and submit additional data to the FDA and receive FDAapproval before we could make these claims.

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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,formulation and manufacturing process patents held by third parties. Ourdevelopment of generic or proprietary products may also take place prior to,but in anticipation of, the expected expiration of existing patent protectionfor drugs 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 productliability claims. We have obtained limited product liability insurance coveragefor our products and clinical trials, under which the coverage limits are$10.0 million per occurrence and $10.0 million in the aggregate. Wedo not know whether this coverage will be adequate to protect us in the eventof a claim. We may not be able to obtain or maintain insurance coverage in thefuture at a reasonable cost or in sufficient amounts to protect us againstlosses. If third parties bring a successful product liability claim or seriesof claims against us for uninsured liabilities or in excess of insuredliabilities, we may not have sufficient financial resources to completedevelopment or commercialization of any of our product candidates and ourbusiness and results of operations will be adversely affected.

*If we are unable to attract and retain additional,highly skilled personnel required for the expansion of our activities, 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.

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*Provisions in our certificate of incorporation, bylawsand applicable Delaware law may prevent or discourage third parties orstockholders from attempting to replace our management.*

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

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

·       eliminationof cumulative voting; and

·       eliminationof stockholder action by written consent.

Our bylaws establish procedures, including noticeprocedures, with regard to the nomination, other than by or at the direction ofour board of directors, of candidates for election as directors or forstockholder proposals to be submitted at stockholder meetings.

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

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

**Item6.**   Exhibits

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

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

|     | SUPERGEN, INC. |
|----------|---------------------|
| Date:    | May 10,  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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