Talon Therapeutics (TLON) 10-Q 2006 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 2006

OR

o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period to .

Commission file number 000-50782 

Hana Biosciences, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware (State or other jurisdiction of incorporation or organization)	32-0064979 (I.R.S. Employer Identification No.)
7000 Shoreline Ct., Suite 370, South San Francisco	94080
(Address of principal executive offices)	(Zip Code)

(650) 588-6404

(Registrant's Telephone Number, Including Area Code)

400 Oyster Point Blvd, Suite 215, South San Francisco, CA 94080

(Former Name, Former Address and Former Fiscal Year, if changed since last report)

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

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

Large accelerated filer   oAccelerated filer   oNon-accelerated filer   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes oNo x

As of August 10, 2006, there were 28,742,784 shares of the registrant's common stock, $.001 par value, outstanding.

INDEX

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Financial Statements	3
	Unaudited Condensed Balance Sheets	3
	Unaudited Condensed Statements of Operations and Comprehensive Loss	4
	Unaudited Condensed Statement of Changes in Stockholders' Equity	5
	Unaudited Condensed Statements of Cash Flows	6
	Notes to Unaudited Condensed Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	23
Item 4.	Controls and Procedures	23
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Submission of Matters to a Vote of Security Holders	40
Item 5.	Other Information	41
Item 6.	Exhibits	41
	Signatures	42
	Index of Exhibits Filed with this Report	43

1

Forward-Looking Statements

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These forward-looking statements include, but are not limited to, statements about:

· the development of our drug candidates;

· the regulatory approval of our drug candidates;

· our use of clinical research centers and other contractors;

· our ability to find collaborative partners for research, development and commercialization of potential products;

· acceptance of our products by doctors, patients or payors;

· our ability to market any of our products;

· our history of operating losses; our ability to compete against other companies and research institutions;

· our ability to secure adequate protection for our intellectual property; our ability to attract and retain key personnel;

· availability of reimbursement for our product candidates;

· the effect of potential strategic transactions on our business; our ability to obtain adequate financing; and

· the volatility of our stock price.

These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe” “intend” and similar words or phrases. Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. Discussions containing these forward-looking statements may be found throughout this Form 10-Q, including Part I, the section entitled “Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements involve risks and uncertainties, including the risks discussed below in Part II, Item 1A“Risk Factors,” that could cause our actual results to differ materially from those in the forward-looking statements. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document. The risks discussed below in Part II, Item 1A “Risk Factors” and elsewhere in this report should be considered in evaluating our prospects and future financial performance.

2

PART I - FINANCIAL INFORMATION

Item 1. Unaudited Condensed Financial Statements

HANA BIOSCIENCES, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED BALANCE SHEETS

		June 30,			December 31,
		2006			2005
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	44,266,298		$	17,082,521
Short-term investments		2,332,051			472,000
Prepaid expenses and other current assets		69,744			74,729
Total current assets		46,668,093			17,629,250
Property and equipment, net		323,899			76,496
Other assets		--			20,453
Restricted cash		125,166			--
Total assets	$	47,117,158		$	17,726,199
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,091,750		$	671,491
Accrued expenses		2,742,488			865,135
Total liabilities		3,834,238			1,536,626
Commitments and contingencies
Stockholders' equity:
Common stock to be issued		185,841			--
Common stock; $0.001 par value 100,000,000 shares authorized; 28,742,784 and 22,348,655 shares issued and outstanding at June 30, 2006 and December 31, 2005, respectively		28,743			22,349
Additional paid-in capital		85,372,186			34,400,345
Accumulated other comprehensive loss		(96,000	)		(164,000	)
Deficit accumulated during the development stage		(42,207,850	)		(18,069,121	)
Total stockholders' equity		43,282,920			16,189,573
Total liabilities and stockholders' equity	$	47,117,158		$	17,726,199

 See accompanying notes to unaudited condensed financial statements.

3

HANA BIOSCIENCES, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

														Cumulative
														Period from
														December 6,
		Three Months Ended						Six Months Ended						2002 (date of inception) to
		June 30,						June 30,						June 30,
		2006			2005			2006			2005			2006
Operating expenses:
Selling, General and administrative	$	2,576,308		$	963,270		$	3,560,283		$	1,670,483		$	10,393,865
Research and development		18,368,374			1,150,447			20,946,506			2,872,172			32,360,602
Total operating expenses		20,944,682			2,113,717			24,506,789			4,542,655			42,754,467
Loss from operations		(20,944,682	)		(2,113,717	)		(24,506,789	)		(4,542,655	)		(42,754,467	)
Other income (expense):
Interest income, net		249,426			30,495			384,752			50,062			583,533
Other expense, net		(8,800	)		(2,633	)		(16,692	)		(10,137	)		(36,916	)
Total other income (expense)		240,626			27,862			368,060			39,925			546,617
Net loss	$	(20,704,056	)	$	(2,085,855	)	$	(24,138,729	)	$	(4,502,730	)	$	(42,207,850	)
Net loss per share, basic and diluted	$	(0.81	)	$	(0.13	)	$	(1.00	)	$	(0.29	)
Shares used in computing net loss per share, basic and diluted		25,640,398			15,726,776			24,037,103			15,402,248
Comprehensive loss:
Net loss	$	(20,704,056	)	$	(2,085,855	)	$	(24,138,729	)	$	(4,502,730	)
Unrealized gain (loss)		(156,000	)		-			68,000			-
Comprehensive loss	$	(20,860,056	)	$	(2,085,855	)	$	(24,070,729	)	$	(4,502,730	)

See accompanying notes to unaudited condensed financial statements.

4

HANA BIOSCIENCES, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

Period from January 1, 2006 to June 30, 2006

	Common stock
	Shares		Amount		Additional				Accumulated			Deficit			Total
					paid-in				other			accumulated			stockholders'
					capital		Common		comprehensive			during			equity
							stock to be		income (loss)			development
							issued					stage
Balance at January 1, 2006	22,348,655	$	22,349	$	34,400,345		--	$	(164,000	)		(18,069,121	)	$	16,189,573
Issuance of shares upon exercise of warrants, options and restricted stock	574,461		574		773,601		--		--			--			774,175
Stock-based compensation of employees amortized over vesting period of stock options	--		--		2,636,905		--		--			--			2,636,905
Proceeds from registered direct placement, net of $2,881,611 in fees	4,701,100		4,701		37,113,850		--		--			--			37,118,551
Stock-based compensation of non-employees	--		--		168,964		--		--			--			168,964
Shares to be issued	--		--		--		185,841		--			--			185,841
Inex license agreement - 1,118,568 shares issued	1,118,568		1,119		10,278,521		--		--			--			10,279,640
Net loss	--		--		--		--		--			(24,138,729	)		(24,138,729	)
Unrealized gain on marketable securities	--		--		--		--		68,000			--			68,000
Balance at June 30, 2006	28,742,784	$	28,743	$	85,372,186	$	185,841	$	(96,000	)	$	(42,207,850	)	$	43,282,920

See accompanying notes to unaudited condensed financial statements.

5

HANA BIOSCIENCES, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended   June 30,						Cumulative Period from December 6, 2002 (date of inception)
	2006			2005			to June 30, 2006
Cash flows from operating activities:
Net loss	$	(24,138,729	)	$	(4,502,730	)	$	(42,207,850	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		29,500			14,998			101,484
Stock-based compensation of employees		2,636,905			414,912			4,000,724
Issuance of stock and options to nonemployees for services		354,805			20,587			909,503
Services rendered for satisfaction of unearned consulting fee		--			--			212,445
Services rendered in lieu of payment of subscription receivable		--			--			36,000
Shares to be issued to employees for services rendered		--			34,913			249,750
Issuance of shares in partial consideration for license agreement		10,279,640			--			10,779,640
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses and other assets		(16,615	)		968			(111,795	)
Increase (decrease) in accounts payable		420,259			(317,822	)		1,091,750
Increase (decrease) in accrued and other current liabilities		1,877,353			(166,304	)		2,742,488
Net cash used in operating activities		(8,556,882	)		(4,500,478	)		(22,195,861	)
Cash flows from investing activities:
Purchase of property and equipment		(276,900	)		(6,016	)		(425,382	)
Purchase of equity securities		--			--			(636,000	)
Purchase of marketable securities		(1,750,000	)		--			(1,750,000	)
Restricted cash		(125,166	)		--			(125,166	)
Net cash used in investing activities		(2,152,066	)		(6,016	)		(2,936,548	)
Cash flows from financing activities:
Proceeds from issuances of notes payable to stockholders		--			--			801,619
Collection of subscription receivable		--			--			4,000
Repayment of notes payable to stockholders		--			--			(651,619	)
Proceeds from private placements of preferred and common stock, net		37,118,550			4,678,066			67,927,517
Proceeds from exercise of warrants and options		774,175						1,317,190
Net cash provided by financing activities		37,892,725			4,678,066			69,398,707
Net increase in cash and cash equivalents		27,183,777			171,572			44,266,298
Cash and cash equivalents, beginning of period		17,082,521			6,584,361			--
Cash and cash equivalents, end of period	$	44,266,298		$	6,755,933		$	44,266,298
Supplemental disclosures of cash flow data:
Cash paid for interest	$	932		$	--		$	40,385
Supplemental disclosures of noncash financing activities:
Common stock issued for repayment of debt	$	--		$	--		$	150,000
Unrealized gain/(loss) on marketable securities	$	68,000		$	--		$	(96,000	)
Common stock issued to employees for services rendered in 2004	$	--		$	249,750		$	249,750
Common stock issued to as partial consideration for license agreement	$	10,279,642		$	--			10,779,642

 See accompanying notes to unaudited condensed financial statements.  

6

HANA BIOSCIENCES, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information of “publicly held companies” and, accordingly, they do not include all required disclosures for complete annual financial statements. These interim financial statements include all adjustments that the management of Hana Biosciences, Inc. (“Hana,” the “Company,” “we,” “us” or “our”) believes are necessary for a fair presentation of the periods presented. These interim financial results are not necessarily indicative of results to be expected for the full fiscal year.

The accompanying condensed financial information should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2005, included in the Company's Annual Report on Form 10-K for the year ended December 31, 2005 (the “Form 10-K”) filed with the Securities and Exchange Commission (“SEC”) on March 16, 2006. The accompanying condensed balance sheet as of December 31, 2005 has been derived from the audited balance sheet as of that date included in the Form 10-K.

Use of Management's Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates based upon current assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual conditions may differ materially from our current assumptions of liabilities, assets, share-based compensation and expenses.  This may result in our estimates being incorrect and may require us to record additional charges or benefits in operations.

Segment Reporting

The Company has determined that it operates in only one segment currently, which is the research and development of oncology therapeutics and supportive care for use in humans.

Loss Per Share

Basic net loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding for the period. Diluted net loss per common share is the same as basic net loss per common share, since potentially dilutive securities from stock options, stock warrants, restricted stock and convertible preferred stock would have an antidilutive effect because the Company incurred a net loss during each period presented. The number of shares potentially issuable at June 30, 2006 and 2005 upon exercise or conversion that were not included in the computation of net loss per share totaled 6,291,518 and 4,387,105, respectively.

Cash and Cash Equivalents

The Company considers all highly-liquid investments with an original maturity of three months or less to be cash equivalents. Short-term investments consist of investments acquired with maturities exceeding three months and are classified as available-for-sale. Short-term investments are reported at fair value, based on quoted market price, with unrealized gains or losses included in other comprehensive income (loss).

Concentration of Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, and short-term investments. The Company maintains its cash and cash equivalents with high credit quality financial institutions and short-term investments consist of U.S. government and government agency securities, corporate notes, bonds and commercial paper.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”) requiring that the compensation cost relating to all share-based payment transactions including employee stock options, be recognized in financial statements. As explained in Note 4, the Company adopted SFAS No. 123R on January 1, 2006. Prior to the adoption of SFAS 123R, the Company used the intrinsic value method to account for employee stock options and only recorded compensation expense if the option’s fair market value exceeded the exercise price at the date of grant.

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” This Interpretation defines the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the effect that the adoption of FIN 48 will have on our financial position and results of operations.

7

HANA BIOSCIENCES, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NOTE 3. LIQUIDITY AND CAPITAL RESOURCES

The Company reported a net loss of $20.7 million and $24.1 million, respectively, for the three and six months ended June 30, 2006. The net loss from date of inception, December 6, 2002 to June 30, 2006 amounted to $42.2 million. The Company's operating activities have used $22.1 million in cash since its inception.

The Company has financed its operations since inception primarily through equity and debt financing. During the six months ended June 30, 2006, the Company had a net increase of $27.2 million in cash and cash equivalents. This increase primarily resulted from net proceeds of $37.1 million raised through the sale of common stock in May 2006, and $0.8 million in proceeds from stock option and warrant exercises, offset by net cash used in operating activities of $8.6 million and net cash used in investing activities of $2.2 million for the six months ended June 30, 2006. Total capital resources as of June 30, 2006 were $44.3 million compared to $17.1 million at December 31, 2005.

The Company’s continued operations will depend on whether it is able to continue the progression of clinical compounds, identify and acquire new and innovative oncology focused products, and whether the Company is able to successfully commercialize and sell Zensana. Through June 30, 2006, a significant portion of the Company’s financing has been through private placements of common stock, preferred stock and debt financing. The Company will continue to fund operations from cash on hand and through the similar sources of capital previously described. The Company can give no assurances that any additional capital that it is able to obtain will be sufficient to meet its needs. On May 6, 2006, the Company entered into a License Agreement with Inex Pharmaceuticals Corporation pursuant to which the Company licensed the worldwide rights to develop and commercialize three additional product candidates from Inex (See Note 8). Given the current and desired pace of clinical development of our six product candidates, the Company estimates that it will have sufficient cash on hand to fund clinical development into 2007. The Company may, however, choose to raise additional capital before in order to fund its future development activities, likely by selling shares of its common stock or other securities. If the Company is unable to raise additional capital, it will likely be forced to curtail its desired development activities beyond 2007, which will delay the development of the Company’s product candidates. There can be no assurance that such capital will be available to the Company on favorable terms or at all. The Company will need additional financing thereafter until it can achieve profitability, if ever.

NOTE 4. STOCKHOLDERS' EQUITY

Stock Option Plans The Company has several stockholder approved stock option plans under which it grants or has granted options to purchase shares of its common stock to employees

In October 2003, the Company’s Board of Directors approved and adopted the 2003 Stock Option Plan (the “2003 Plan”). The 2003 Plan authorizes a total of 1,410,068 shares of common stock for issuance. Following the adoption of the Company’s 2004 Stock Incentive Plan (the “2004 Plan”) in September 2004, no grants or awards have been made under the 2003 Plan. The Company has no current intention of issuing future awards under the 2003 Plan. Instead, the Company intends to make equity incentive awards only under the 2004 Plan. At the May 9, 2006 Annual Meeting, the Company’s Stockholders also ratified and approved the 2003 Plan.

In September 2004, the Company’s Board of Directors approved and adopted the 2004 Plan, which initially reserved 2,500,000 shares of common stock for issuance. On March 31, 2006, the board approved, subject to stockholder approval, an amendment to the 2004 Plan to increase the total number of shares authorized for issuance thereunder to 4,000,000. At the May 9, 2006 Annual Meeting, the Company’s Stockholders also ratified and approved the 2004 Plan and the amendment to the 2004 Plan.

At the May 9, 2006 Annual Meeting, the Company’s Stockholders also ratified and approved the Company’s 2006 Employee Stock Purchase Plan (the “2006 Plan”). The 2006 Plan was adopted, subject to stockholder approval, by the Company’s Board of Directors on March 31, 2006. The purpose of the 2006 Plan is to advance the interests of the Company by furnishing an additional tool to attract and retain talented employees, who will be necessary for the Company’s continued growth and success. The 2006 Plan provides the Company’s eligible employees with the opportunity to purchase shares of Company common stock through payroll deductions. The 2006 Plan is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. There will be a maximum of 750,000 shares of common stock available for purchase under the 2006 Plan.

8

HANA BIOSCIENCES, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

Restricted stock awards The Company’s Board of Directors has issued 524,264 restricted stock awards as of June 30, 2006 at no cost to the Company’s executive officers and directors pursuant to the 2004 Plan. Of these awards 514,264 remain unvested at June 30, 2006.

10,000 restricted stock awards were granted to a board member and vested immediately upon the approval of the award by shareholders during the Annual Meeting held on May 9, 2006.

484,887 restricted stock awards were granted to the Company’s Chief Executive Officer in 2006. Of the restricted stock awards granted 85,000 shares vest in equal increments of 42,500 shares each on November, 1 2006 and November, 1 2007, 325,000 shares vest in equal increments of 162,500 shares each on May 19, 2007 and May 19, 2008 and 57,613 shares vest on January 1, 2007, 4,313 vest on February 15, 2007, 3,765 vest on February 26, 2007 and 9,196 vest on July 20, 2007.

In 2006 the Board of Directors granted 22,000 restricted stock awards to the Company’s senior vice president and Chief Medical Officer of which 11,000 shares vest on November, 1 2006 and November, 1 2007.

In 2006 the Board of Directors granted 7,377 restricted stock awards to the Company’s vice president and Chief Business Officer of which 100% vest on January 1, 2007.

A summary of the status of the Company’s restricted stock awards as of December 31, 2005 and changes during the six months ended June 30, 2006 is as follows:

Nonvested Restricted Stock Awards	Number of Shares			Weighted Average Grant-Date Fair Value
Nonvested at December 31, 2005	-		$	-
Granted	524,264			10.68
Vested	(10,000	)		10.90
Cancelled/Forfeited	-			-
Nonvested at June 30, 2006	514,264		$	10.68

As of June 30, 2006, we estimate that there is $5.0 million in total, unrecognized compensation costs related to employee nonvested restricted stock awards, which is expected to be recognized over a weighted average period of 1.57 years.

Adoption of SFAS 123(R) Effective January 1, 2006, the Company adopted the provisions of SFAS No.123R requiring that compensation cost relating to all share-based employee payment transactions be recognized in the financial statements. The cost is measured at the grant date, based on the fair value of the award using the Black-Scholes option pricing model, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity award). The Company adopted SFAS No.123R using the modified prospective method for share-based awards granted after the Company became a public entity and the prospective method for share-based awards granted prior to the Company becoming a public entity and, accordingly, financial statement amounts for prior periods presented in this Form 10-Q have not been restated to reflect the fair value method of recognizing compensation cost relating to stock options.

In applying the modified prospective transition method of SFAS No. 123R, the Company estimated the fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. As allowed by SFAS No. 123R for companies with a short period of publicly traded stock history, our estimate of expected volatility is based on the average expected volatilities of a sampling of five companies with similar attributes to our Company, includingindustry, stage of life cycle, size and financial leverage. As the Company have so far only awarded “plain vanilla options” as described by the SEC's Staff Accounting Bulletin No. 107, the Company used the “simplified method” for determining the expected life of the options granted. This method is allowed until December 31, 2007, after which the Company will be required to adopt another method to determine expected life of the option awards. The risk-free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at the time of grant valuation. SFAS No. 123R does not allow companies to account for option forfeitures as they occur. Instead, estimated option forfeitures must be calculated upfront to reduce the option expense to be recognized over the life of the award and updated upon the receipt of further information as to the amount of options expected to be forfeited. Based on our historical information, the Company currently estimates that 10% annually of our stock options awarded will be forfeited. For options granted while the Company was a nonpublic entity, the Company applied the prospective method in which the awards that were valued under the minimum value method for proforma disclosure purposes will continue to be expensed using the intrinsic value method of APB 25.

9

HANA BIOSCIENCES, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

Prior to January 1, 2006, the Company accounted for option grants to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related interpretations. The Company also followed the disclosure requirements of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”. Under the guidelines of APB No. 25, the Company was only required to record a charge for grants of options to employees if on the date of grant they had an “intrinsic value” which was calculated based on the excess, if any, of the market value of the option over the exercise price.

Share-based Compensation. The Company currently awards stock option grants under its 2003 Plan and its 2004 Plan. Under the 2003 Plan, the Company may grant incentive and non-qualified stock options to employees, directors, consultants and service providers to purchase up to an aggregate of 1,410,068 shares of its common stock. Under the 2004 Plan, the Company may grant incentive and non-qualified stock options to employees, directors, consultants and service providers to purchase up to an aggregate of 4,000,000 shares. Historically, stock options issued under these plans primarily vest ratably on an annual basis over the vesting period, which has generally been three years.

The following table summarizes information about stock options outstanding at June 30, 2006 and changes in outstanding options in the six months then ended, all of which are at fixed prices:

	NUMBER OF SHARES SUBJECT TO OPTIONS OUTSTANDING			WEIGHTED AVERAGE EXERCISE PRICE PER SHARE	WEIGHTED AVERAGE REMAINING CONTRACTUAL TERM		AGGREGATE INTRINSIC VALUE
Outstanding January 1, 2006	2,452,887		$	1.01
Options granted	1,524,179			5.49
Options cancelled	--			--
Options exercised	(309,760	)		0.98
Outstanding June 30, 2006	3,667,306			3.07	8.5	$	22,221,585
Exercisable at June 30, 2006	1,177,649		$	1.20	7.8	$	9,272,511

The total aggregate intrinsic value of stock options exercised during the three and six months ended June 30, 2006 was $2.1 million and $2.6 million, respectively. Under SFAS No. 123R, there was approximately $2.5 million and $2.6 million of compensation cost related to employee stock options and restricted stock recognized in the operating results for the three and six months ended June 30, 2006, compared to approximately $206,000 and $415,000 of share-based compensation expense recognized in the same periods for 2005. As of June 30, 2006, we estimate that there was $17.0 million in total, unrecognized compensation costs related to non-vested employee share based compensation arrangements, which is expected to be recognized over a weighted average period of 2.15 years.

10

HANA BIOSCIENCES, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

The following table summarizes information about stock options outstanding at June 30, 2006:

	Number of Shares Subject to Options	Weighted Average Remaining Contractual Life of Options	Number of Options
Exercise Price	Outstanding	Outstanding	Exercisable
$   0.07 - $ 0.83	753,284	7.5 yrs.	527,258
$   1.01 - $ 1.69	1,092,440	8.3 yrs.	542,257
$  2.17 - $ 3.70	347,403	0.9 yrs.	98,134
$ 4.32 - $ 5.10	1,132,679	9.3 yrs	10,000
$ 5.53 - $ 7.11	137,000	9.5 yrs	-
$ 8.08 - $ 9.30	109,500	8.8 yrs	-
$ 10.73 - $ 11.81	95,000	9.3 yrs	-
$ 0.07 - $ 11.81	3,667,306	8.5 yrs	1,177,649

For purposes of comparison, we calculated the pro forma net loss for the three and six months ended June 30, 2005 as if all options had originally been calculated consistent with the requirements of SFAS No. 123R, adding back to the net loss all compensation expense recognized using the intrinsic value method, as described in APB No. 25 except for options granted while the Company was a nonpublic entity. Under SFAS 12 these options are excluded from proforma disclosures.

	Three Months Ended June 30, 2005			Six Months Ended June 30, 2005
Net loss, as reported	$	(2,085,855	)	$	(4,502,730	)
Add: Total stock-based employee compensation cost determined under intrinsic value method for stock options granted under APB No.25		126,256			252,511
Deduct: Total stock-based employee compensation expense determined under the fair value method under SFAS No.123R		(230,936	)		(432,603	)
Pro forma net loss	$	(2,190,535	)	$	(4,682,822	)
Loss per share of common stock:	$	(0.14	)	$	(0.30	)
Basic - as reported	$	(0.13	)	$	(0.29	)

The following table summarizes share-based compensation expense related to employee stock options and restricted stock units for the three and six months ended June 30, 2006 which was allocated as follows (in thousands):

		Three Months Ended June 30, 2006		Six Months Ended June 30, 2006
Research and development		1,088		1,188
Selling, general and administrative		1,363		1,449
Total share-based compensation expense related to employee stock options	$	2,451	$	2,637

11

HANA BIOSCIENCES, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

The following table summarizes the assumptions used in applying the Black-Scholes option pricing model to determine the fair value of options granted during the three and six months ended June 30, 2006 and June 30, 2005, respectively:

	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Employee stock options
Risk-free interest rate		5.01	%		3.5% -4.00	%		5.01	%		3.5%-4.00	%
Expected life (in years)		5.0 - 6.0			8.0			5.0 - 6.0			8.0
Volatility		0.7			0.87-1.06			0.7			0.87-1.06
Dividend Yield		0	%		0	%		0	%		0	%

The Company’s computation of expected volatility for the six months ended June 30, 2006 is based on historical volatilities of peer companies. Peer companies’ historical volatilities are used in the determination of expected volatility due to the short trading history of the Company’s common stock, which is approximately one and a half years as of June 30, 2006. In selecting the peer companies, the Company considered the following factors: industry, stage of life cycle, size, and financial leverage. To determine the expected term of the Company’s employee stock options granted in fiscal 2006 we utilized the simplified approach as defined by SEC Staff Accounting Bulletin No. 107, “Share-Based Payment” (SAB 107). This approach resulted in expected terms of 5 to 6 years for options granted during the three and six months ended June 30 2006. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.

Non-Employee Stock Options. The Company has also granted stock options to non-employee consultants. For the three and six months ended June 30, 2006, the Company recognized $0.2 million of stock-based compensation expense related to stock options held by non-employee consultants. In accordance with Emerging Issues Task Force Issue 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services” (EITF 96-18), compensation cost for options issued to non-employee consultants is measured at each reporting period and adjusted until the commitment date is reached, being either the date that a performance commitment is reached or the performance of the consultant is complete. The Company utilized a Black-Scholes option pricing model to determine the fair value of such awards. 

During the three and six months ended June 30, 2006, the Company issued 254,614 and 574,461 shares of common stock, respectively, upon the exercise of warrants, stock options and restricted stock grants issuances. Of these shares issued, 199,760 and 319,760 related to the exercise of stock options and restricted stock grants during the three and six months ended June 30, 2006, respectively including the issuance of 10,000 shares of common stock upon vesting. The exercises of these derivative securities resulted in aggregate net proceeds of $774,175.

Warrants. The following table summarizes the warrants outstanding as of June 30, 2006 and the changes in outstanding warrants in the six months then ended:

	NUMBER OF SHARES SUBJECT TO WARRANTS OUTSTANDING			WEIGHTED-AVERAGE EXERCISE PRICE
Warrants outstanding January 1, 2006		2,448,982		$	3.31
Warrants exercised		(254,701	)		1.91
Warrants cancelled		(2,069	)		1.85
Warrants outstanding June 30, 2006		2,192,212		$	3.48

Financings On May 16, 2006, the Company entered into definitive agreements to sell 4,701,100 shares of its common stock to private investors. The transaction was completed on May 19, 2006. Of the total number of shares sold, 4,629,500 shares were sold at a price of $8.50 per share and 71,600 shares were sold to affiliates of the Company at a price of $9.07 per share, or the fair market value of the Company’s common stock on May 16, 2006, which resulted in total gross proceeds to the Company of approximately $40.0 million. In connection with the sale, the Company paid an aggregate of approximately $2.4 million in commissions to placement agents. The Company also incurred approximately $0.5 million of legal and other expenses paid related to the financing.

12

HANA BIOSCIENCES, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

On April 22, 2005, we completed a private placement of 3,916,082 shares of our common stock at a price of $1.28 per share, resulting in gross proceeds to us of approximately $5.0 million. In connection with the private placement, we issued to the investors and placement agents five-year warrants to purchase an aggregate of 1,525,629 shares of common stock at an exercise price of $1.57 per share, of which warrants to purchase an aggregate of 997,791 shares remain outstanding.  The terms of the warrants provide that we may, at our option, redeem the warrants after such time that the average closing price of our common stock exceeds $3.14 per share for a 30-day period, which condition was satisfied in August 2005.  Accordingly, we may, at our election, redeem the warrants, at a redemption price of $0.01 per warrant share, at any time upon 30 days’ prior written notice to the warrant holders.  The warrants remain exercisable by the holders until the expiration of such 30-day notice period. In connection with the private placement, we paid an aggregate of approximately $321,000 in commissions to placement agents.  Included in the amounts paid to placement agents were $52,500 in commissions and warrants to purchase 58,593 shares of common stock to Paramount BioCapital, Inc., a related party. We also incurred approximately $14,000 of legal expenses for the private placement.

NOTE 5. SHORT-TERM INVESTMENTS

On June 30, 2006, the Company had $2,332,051 in total marketable securities which consisted of shares of NovaDel Pharma, Inc (NovaDel) purchased in conjunction with the Zensana license agreement, and auction rate securities.

In October 2004, the Company acquired 400,000 shares of common stock from NovaDel for $2.50 a share. The Company paid a premium of $0.91 per share over the market value of the NovaDel shares, which was $1.59 on the purchase date. Of the $1.0 million paid for the 400,000 shares, the premium of $0.91 per share, or $364,000, was expensed upon acquisition. The remaining fair market value of $636,000 was recorded as an available-for-sale security. As a result of restrictions on its ability to sell the shares, the Company was required by SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” to account for those shares using the cost method through October 2005 and thereafter as marketable equity securities. Since October 2005, the Company has classified the shares as available-for-sale and recorded changes in their value as part of its comprehensive income. The market value of these shares on June 30, 2006, was $540,000 and for the six months ended June 30, 2006, the Company had an unrealized gain of $68,000.

At June 30, 2006, the Company had $1,792,051 of marketable securities invested in auction rate securities. These are highly liquid, investment-grade securities. All auction rate securities have effective maturity dates within sixty days and as of June 30, 2006, there were no unrealized gains or losses associated with these securities.

NOTE 6. RESTRICTED CASH

On May 31, 2006, the Company entered into a sublease agreement. The sublease required the Company to issue a security deposit in the amount of $125,000. To satisfy this obligation the Company opened a $125,000 line of credit, with the sublessor as the beneficiary in case of default or failure to comply with the sublease requirements. In order to fund the line of credit, the Company was required to deposit a compensating balance of $125,000 into a restricted money market account with our financial institution. This compensating balance for the line of credit will be restricted for the entire period of the sub-lease or three years.

NOTE 7. COMMITMENTS

The Company entered into a written three year employment agreement with its President and Chief Executive Officer dated November 1, 2003. This agreement was amended in December 2005 to provide for an employment term that expires in November 2008. The aggregate amount of compensation to be provided over the remaining term of the agreement amounted to approximately $618,250 at June 30, 2006.

The Company entered into a written two year employment agreement with its Vice President, Chief Business Officer on January 25, 2004. This agreement was amended in December 2005 and now provides for an employment term that expires in November 2008. The aggregate amount of compensation to be provided over the remaining term of the agreement amounted to approximately $450,000 at June 30, 2006.

The Company entered into a written three year employment agreement with its Senior Vice President and Chief Medical Officer on October 21, 2004. The aggregate amount of compensation to be provided for over the remaining term of the agreement amounted to approximately $320,000 at June 30, 2006.

13

HANA BIOSCIENCES, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

The Company entered into a three year sublease, which commenced on May 31, 2006, for property at 7000 Shoreline Court in South San Francisco, California, where the Company has relocated its executive offices. The total cash payments due for the duration of the sublease equaled approximately $1.8 million on June 30, 2006. The Company will also make total cash payments of approximately $60,000 for the six months remaining on a lease for the previous headquarters at 400 Oyster Point Boulevard in South San Francisco, California. The Company ceased to use the 400 Oyster Point property in the third quarter of fiscal 2006.

NOTE 8. LICENSE AGREEMENT WITH INEX PHARMACEUTICALS CORPORATION

On May 6, 2006, the Company entered into a series of related agreements with Inex Pharmaceuticals Corporation, a Vancouver, British Columbia-based biotechnology company. Pursuant to a license agreement with Inex, the Company received an exclusive, worldwide license to patents, technology and other intellectual property relating to three product candidates held by Inex: Marqibo (vincristine sulfate) Sphingosomal Injection, sphingosome encapsulated vinorelbine and sphingosome encapsulated topotecan. Under the license agreement, the Company also received an exclusive, worldwide sublicense to other patents and intellectual property relating to these product candidates held by the University of Texas M.D. Anderson Cancer Center, or MDACC. In addition, the Company entered into a sublicense agreement with Inex and the University of British Columbia, or UBC, which licenses to Inex other patents and intellectual property relating to the technology used in Marqibo, sphingosome encapsulated vinorelbine and sphingosome encapsulated topotecan. Further, Inex assigned to the Company its rights under a license agreement with Elan Pharmaceuticals, Inc., from which Inex had licensed additional patents and intellectual property relating to the three sphingosomal product candidates. The Company also acquired certain laboratory equipment having a fair value of approximately $153,000 pursuant to an asset purchase agreement which were capitalized and are included in the Company’s property and equipment on the condensed balance sheet. Consistent with the Company’s policy, all acquired technology will be expensed in the period of the transaction unless the Company concludes that there is a possible alternative future use for the acquired technology in the Company’s R&D projects or otherwise.

In consideration for the rights and assets acquired from Inex, the Company paid to Inex aggregate consideration of $11.5 million, consisting of $1.5 million in cash and 1,118,568 shares of its common stock. The number of shares of common stock issued was determined by dividing $10 million by $8.94, which was the weighted average price of the Company's common stock during the 20 trading days prior to the parties' March 16, 2006 letter of intent relating to the transaction.  Upon signing the March 16, 2006 letter of intent, the Company and Inex entered into an escrow agreement in which the Company deposited with the Escrow Agent $500,000 in cash and 111,857 shares of its common stock and Inex deposited with the Escrow Agent $200,000 in cash. The date of this escrow agreement was determined to be the commitment date for the Inex agreement as the Company considered the escrow agreement to be a performance commitment under EITF 96-18. Accordingly, the 1,118,568 shares given as partial payment for the license agreement were valued as the closing price of Hana common stock on March 16, 2006 of $9.19. Accordingly, the Company recorded an additional $280,000 of transaction expense, net of fixed assets acquired, as the fair market value of the share price on the commitment date was higher than the weighted average price of the Company's common stock during the 20 trading days prior to the parties' March 16, 2006 letter of intent relating to the transaction. The Company also agreed to pay to Inex a royalty on net sales of the licensed products as well as upon the achievement of specified development and regulatory milestones and up to a maximum aggregate amount of $30.5 million for all product candidates. At the Company's election, the future milestone payments may be paid in shares of our common stock.  In addition, the Company assumed all of Inex's royalty, milestone and other payment obligations owing to its licensors relating to the intellectual property underlying the three product candidates. The milestones and other payments may include annual license maintenance fees of up to $155,000, as well as $2.5 million in milestone payments.

14

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes accompanying those statements included elsewhere in this Form 10-Q. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” in Item 1A of Part II of this Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We are a South San Francisco, California based development stage biopharmaceutical company focused on the acquisition, development and commercialization of innovative products to enhance cancer care. We aim to acquire proprietary rights to these products, by license or otherwise, fund their research and development and bring the products to market. Since our inception in December 2002, our efforts and resources have been focused primarily on acquiring and developing our pharmaceutical technologies, raising capital and recruiting personnel.

We currently have six products in development:

· Zensana^TM (ondansetron HCI) Oral Spray - Bioequivalent to 8mg Oral Zofran Tablet with Multidose Convenience and Desirable Route of Administration. We believe that Zensana, which we licensed from NovaDel Pharma, Inc. in October 2004, is the only multidose oral spray product candidate currently in development which utilizes a micro mist spray technology to deliver full doses of ondansetron to patients experiencing chemo- and radiotherapy-induced nausea and vomiting. Ondansetron, a selective blocking agent of the hormone serotonin, is an FDA-approved drug that is commonly used in tablet form to prevent chemotherapy- and radiation-induced and post-operative nausea and vomiting. Many patients receiving chemo and radiation therapy have difficulty swallowing and are potentially unable to tolerate other forms of ondansetron and other therapies intended to prevent nausea and vomiting, known as antiemetics. We believe that the convenience of drug delivery via a spray may offer a desirable alternative to tablets and other forms of ondansetron. In addition, we believe that drug delivery via a spray to the oral mucosa may avoid degradation of the drug in the gastrointestinal tract and metabolism by liver enzymes. All spray pump components used in our clinical trials for Zensana are standard components, and with the exception of the oral applicator, are currently being used for DDAVP® Nasal Spray manufactured for Aventis Pharmaceuticals Inc. by Ferring AB. The oral applicator is currently being used for Lamisil® Spray marketed by Novartis AG. We completed certain limited clinical trials of Zensana related to bioequivalence and bioavailability in early 2006, and in June we filed a new drug application, or NDA, under Section 505(b)(2) of the Food, Drug and Cosmetic Act, or FDCA. If approved by the FDA, we intend to commercially launch Zensana in the United States in 2007.

· Marqibo (vincristine sulfate) Liposomes Injection - A Novel Targeted Anti-Cancer Compound for Non-Hodgkin's Lymphoma and Acute Lymphocytic Leukemia. Marqibo, which we licensed from Inex Pharmaceuticals Corporation, or Inex, in May 2006, is a novel, targeted sphingosome encapsulated formulation of the FDA-approved cancer drug vincristine. Sphingosomal drug delivery consists of using an FDA-approved cancer agent (such as vincristine) encapsulated in a lipid envelope. The encapsulated agent is carried through the bloodstream and delivered to disease sites where it is released to carry out its therapeutic action. We believe sphingosomal encapsulation of vincristine significantly increases drug delivery to tumors and provides prolonged drug exposure for cell-cycle specific agents. Targeted sphingosomal drugs are designed to spare healthy tissues, selectively accumulate inside the tumor, and sustain cytotoxic drug levels for a longer period of time at the tumor site. Therefore, we believe that Marqibo possesses a potential pharmacologic advantage over vincristine in terms of dose intensity and toxicity. Based on clinical trials in over 500 patients to date, we intend to request regulatory authorization to commence a Phase III clinical trial of Marqibo in hematological malignancies in the second half of 2006.

· Talvesta (talotrexin)- A Novel Antifolate for Solid and Hematological Malignancies. Talvesta, which we licensed from Dana-Farber Cancer Institute, Inc., or DFCI, and Ash Stevens, Inc. in December 2002, is a novel antifolate drug candidate under development for treatment of various types of tumors. Antifolates, also known as folic acid analogs, are a class of cytotoxic or antineoplastic agents which inhibit or prevent the maturation and proliferation of malignant cells. Antifolates have been used for more than 30 years to treat both solid and hematological cancers such as breast cancer and acute lymphocytic leukemia, or ALL, as well as inflammatory diseases such as rheumatoid arthritis. Talvesta has demonstrated enhanced antitumor activity in a broad spectrum of cancer models by targeting the enzyme DHFR to prevent DNA synthesis in tumor cells and inhibit tumor growth. Preclinical studies performed by the DFCI and the National Cancer Institute, or NCI, suggest that Talvesta, as compared to methotrexate, the most widely used antifolate, enters into cells up to 10 times more efficiently and demonstrates 10- to 100-fold more potency in overcoming polyglutamation, a well-established mechanism of antifolate resistance. Talvesta also binds more tightly to its anti-tumor target DHFR, which we believe may further inhibit tumor growth. We commenced a Phase I clinical trial in solid tumors in February 2005, a Phase I/II clinical trial in NSCLC in March 2004, and a Phase I/II clinical trial in ALL in May 2005. In May 2006, the FDA approved our application for orphan drug status of Talvesta for the treatment of ALL.

15

· Ropidoxuridine(IPdR) - Oral Prodrug to Enhance Radiation Therapy for Brain and Other Cancers. Ropidoxuridine, which we licensed from Yale University and the Research Foundation of State University of New York in February 2004, is a novel oral prodrug of the radiation sensitizer IUdR. Data from Phase II clinical trials performed by the NCI on IUdR suggested a potential survival advantage in patients with anaplastic astrocytoma, a type of brain tumor. Due to its toxicity profile, however, IUdR was never developed beyond Phase II. In preclinical studies conducted at Yale University and the NCI, ropidoxuridinesuggested improved activity with a significantly lower toxicity profile, including lower gastrointestinal and hematological side effects. Preclinical studies have also demonstrated that ropidoxuridinehas a dose responsive and synergistic effect when combined with radiation in human glioblastoma models. We have commenced a Phase I clinical trial assessing the safety, toxicity and pharmacokinetics of ropidoxuridinein patients with solid tumors undergoing radiation therapy. In June 2006, the FDA approved our application for orphan drug status of Ropidozuridine for the treatment of glioblastoma, the most common type of brain cancer.

· Sphingosome Encapsulated Vinorelbine - A Novel Targeted Anti-Cancer Compound for Breast and Lung Cancer. Sphingosome encapsulated vinorelbine is our proprietary formulation of vinorelbine, a microtubule inhibitor that is FDA-approved for use as a single agent or in combination with cisplatin for the first-line treatment of unresectable, advanced NSCLC. We obtained the rights to develop and commercialize sphingosome encapsulated vinorelbine from Inex in May 2006. Sphingosome encapsulated vinorelbine is in preclinical development and we plan to request regulatory authorization to commence Phase I clinical trials in the July of 2006. In August 2006 we initiated a Phase I study to assess the safety, tolerability and preliminary efficacy of sphingosome encapsulated vinorelbine in patients with advanced solid tumors. We are developing this compound for patients with non-small cell lung cancer and breast cancer, among others. The study is being conducted at the Cancer Therapy and Research Center, San Antonio and McGill University, Montreal.

· Sphingosome Encapsulated Topotecan - A Novel Targeted Anti-Cancer Compound for Small-Cell Lung Cancer and Ovarian Cancer. Sphingosome encapsulated topotecan is our proprietary formulation of topotecan, a topoisomerase I inhibitor that is FDA-approved for use in relapsed small-cell lung cancer and in relapsed ovarian cancer. We obtained the rights to develop and commercialize sphingosome encapsulated topotecan from Inex in May 2006. Sphingosome encapsulated topotecan is in preclinical development and we plan to we expect to file an IND in the second half of 2006 and to initiate clinical trials in 2007.

To date, we have not received approval for the sale of any drug candidates in any market and, therefore, have not generated any revenues from our drug candidates. The successful development of our product candidates is highly uncertain. Product development costs and timelines can vary significantly for each product candidate and are difficult to accurately predict. Various laws and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of each product. The lengthy process of seeking these approvals, and the subsequent compliance with applicable statutes and regulations, require the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals could materially adversely affect our business.

Since our inception in December 2002, we have completed five financings resulting in total gross proceeds of $72.4 million, before selling commissions and related offering expenses. We are a development stage company and have no product sales to date and we will not receive any product sales until we receive approval from the FDA or equivalent foreign regulatory bodies to begin selling our pharmaceutical candidates. Developing pharmaceutical products, however, is a lengthy and very expensive process. Assuming we do not encounter any unforeseen safety issues during the course of developing our product candidates, we do not expect to complete the development of a product candidate until approximately 2007, when we expect to commercially launch Zensana. In addition, as we continue the development of our remaining product pipeline, our research and development expenses will further increase. To the extent we are successful in acquiring additional product candidates for our development pipeline, our need to finance further research and development will continue increasing. Accordingly, our success depends not only on the safety and efficacy of our product candidates, but also on our ability to finance the development of these product candidates. Our major sources of working capital have been proceeds from various private financings, primarily private sales of our common stock and other equity securities.

Research and development expenses consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers for laboratory development, legal expenses resulting from intellectual property protection, business development and organizational affairs and other expenses relating to the acquiring, design, development, testing, and enhancement of our product candidates, including milestone payments for licensed technology. We expense our research and development costs as they are incurred.

Selling, general and administrative expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, recruitment expenses, professional fees and other corporate expenses, including general legal activities.

Our results for the quarter ended June 30, 2006 include share-based compensation for awards that were granted to employees and nonemployees in from September 2005 to May 1, 2006, but were not measured for accounting purposes until these awards were approved by shareholders on May 9^th, 2006, in accordance with SFAS 123(R). The Company will take the entire expense in 2006 for the shares that would have been expensed in 2005 had the share-based awards been approved at the time of original issuance.

16

Critical Accounting Policies

As of the date of the filing of this quarterly report, we believe there have been no material changes to our critical accounting policies and estimates during the six months ended June 30, 2006, compared to those discussed in our Annual Report on Form 10-K for the year ended December 31, 2005, except for the adoption of Financial Accounting Standards Board Statement FAS 123(R) as discussed below.

Share-Based Compensation

On January 1, 2006, we adopted the fair value recognition provisions of SFAS 123(R), which requires the measurement and recognition of compensation expenses for all share-based payment awards made to employees and directors including stock options based on estimated fair values. SFAS 123(R) supersedes the Company's previous accounting for employee stock options using the intrinsic-value method in accordance APB No. 25, FIN No. 44, “Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB No. 25,” and related to interpretations, and the disclosure-only provisions of SFAS No. 123.

We adopted SFAS 123(R) using the modified-prospective-transition method. Under this method, compensation costs recognized as of June 30, 2006 include: a) compensation costs for all share-based payment awards granted prior to, but not yet vested as of January 1, 2006, based on grant-date fair value estimated in accordance with the original provisions of FAS 123, b) compensation costs for all share-based payment awards granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R) and c) compensation cost for share-based awards granted by the Company prior to becoming a public entity which are accounted for under the prospective transition method. In accordance with the modified-prospective-transition method, our Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).

The compensation expense is calculated in accordance with the guidance in SFAS No. 123R, using the Black-Scholes option pricing model to estimate the fair value of the share based compensation. For the six months ended June 30, 2006, share based compensation expense was approximately $2.3 million, which consisted entirely of the amortization of the fair value of employee stock options and restricted stock granted in prior periods, or granted in the six months ended June 30, 2006, over the vesting periods. We expect to record additional future share based employee compensation expense of $17.0 million over a weighted average period of 1.96 years for the portion of the share-based compensation that had not been recognized as of June 30, 2006. We have not recognized, and do not expect to recognize in the near future, any tax benefit related to employee stock-based compensation costs as a result of the full valuation allowance on the Company's net deferred tax assets and our net operating loss carryforwards. We expect quarterly stock-based compensation expense to increase for the remainder of 2006.

Licensed In-Process Research and Development

Licensed in-process research and development relates primarily to technology, intellectual property and know-how acquired from another entity. We evaluate the stage of development as well as additional time, resources and risks related to development and eventual commercialization of the acquired technology. As we historically have acquired non-FDA approved technologies, the nature of the remaining efforts for completion and commercialization generally include completion of clinical trials, completion of manufacturing validation, interpretation of clinical and preclinical data and obtaining marketing approval from the FDA and other regulatory bodies. The cost in resources, probability of success and length of time to commercialization are extremely difficult to determine. Numerous risks and uncertainties exist with respect to the timely completion of development projects, including clinical trial results, manufacturing process development results and ongoing feedback from regulatory authorities, including obtaining marketing approval. Additionally, there is no guarantee that the acquired technology will ever be successfully commercialized due to the uncertainties associated with the pricing of new pharmaceuticals, the cost of sales to produce these products in a commercial setting, changes in the reimbursement environment or the introduction of new competitive products. Due to the risks and uncertainties noted above, the Company will expense such licensed in-process research and development projects when incurred. However, the cost of acquisition of technology is capitalized if there are alternative future uses in other research and development projects or otherwise based on internal review. All milestone payments will be expensed in the period the milestone is reached.

Clinical Study Activities and Other Expenses from Third-Party Contract Research Organizations

All of our research and development activities related to clinical study activity are conducted by various third parties, including contract research organizations, which may also provide contractually defined administration and management services. Expense incurred for these contracted activities are based upon a variety of factors, including actual and estimated patient enrollment rates, clinical site initiation activities, labor hours and other activity-based factors. On a regular basis, our estimates of these costs are reconciled to actual invoices from the service providers, and adjustments are made accordingly.

17

Results of Operations

Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005

Selling, General and administrative expenses. For the three ended June 30, 2006, selling, general and administrative (“SG&A”) expense was $2.6 million as compared to $1.0 million for the three months ended June 30, 2005. For the three months ended June 30, 2006 the increase in G&A of $1.6 million is due primarily to an increase in salaries, other employee benefits and personnel related costs of approximately $1.2 million, specifically relating to employee share-based compensation under SFAS 123R. For the three months ended June 30, 2006, we also incurred an increase of approximately $0.2 million in associated professional fees and outside services, mainly due to an increase of $0.1 million in share-based compensation for consultants and an increase of approximately $0.2 million in legal fees and other consulting and professional fees, due mainly to the May 2006 Inex Pharmaceuticals licensing transaction.

Research and development expenses. For the three months ended June 30, 2006, research and development (“R&D”) expense was $18.4 million as compared to $1.2 million for the three months ended June 30, 2005. For the three months ended June 30, 2006, the increase of approximately $17.2 million is due primarily to an increase of $15.5 million in expenses for the clinical development of our product pipeline, including $11.9 million in license fees related to the Inex license agreement and a $1.0 million payment in expense for milestones reached in our license agreements. These clinical costs included the physical manufacturing of drug compounds, payments to our contract research organization and legal expenses associated with our continued patent protection and other professional fees and outside services. For the three months ended June 30, 2006, the Company incurred increased salary, employee benefits and other personnel related costs of approximately $1.5 million as compared to the three months ended June 30, 2005, including an increase of $1.0 million in employee related stock-based compensation expense due to the implementation of SFAS No. 123R, and an increase of $0.5 million in salary and other benefits expense due to increased headcount. Other allocable operating expenses including travel, conferences and insurance increased by approximately $0.1 million for the three months ended June 30, 2006 compared to the three months ended June 30, 2005. 

We anticipate that research and development expenses will continue gradually increasing in 2006 and substantially in subsequent years as we increase our research and development efforts and as our existing product candidates proceed through preclinical studies and more costly clinical studies. In particular, we expect our research and development expenses to increase through the later half of 2006 and beyond if Marqibo enters a Phase III clinical trial in late 2006. Actual expenses may vary considerably based upon timing of program initiation, study enrollment rates, and the timing and structure of any collaboration in which a partner may incur a portion of these expenses.

Interest income, net. For the three months ended June 30, 2006, net interest income was $249,426, compared to net interest income of $30,495 for the three months ended June 30, 2005. The increase of approximately $219,000 resulted from increased cash balance in our interest bearing accounts due to our May 2006 financing which raised gross proceeds of $40.0 million plus rising interest rates .

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Selling, General and administrative expenses. For the six months ended June 30, 2006, SG&A expense was $3.6 million, as compared to $1.7 million for the six months ended June 30, 2005. For the six months ended June 30, 2006 the increase of $1.9 million is due primarily to an increase in salaries, other employee benefits and personnel related costs of approximately $1.3 million, including an increase of $1.3 million in employee related share-based compensation expense due to the implementation of SFAS No.123R, salaries and other employee benefits. For the six months ended June 30, 2006, we also incurred an increase of approximately $0.3 million in associated professional fees and outside services, mainly due to an increase of $0.1million in share-based compensation for consultants and an increase of approximately $0.1 million in legal fees due to the May Inex license agreement, and an increase of approximately $0.1 million in other outside services, including payments to members of the Board of Directors, investor relations services, marketing expenses and public filing and exchange listing fees.

Research and development expenses. For the six months ended June 30, 2006, R&D expense was $20.9 million as compared to $2.9 million for the six months ended June 30, 2005. For the six months ended June 30, 2006, the increase of approximately $18.0 million is due primarily to an increase in of $16.1 million in expenses for the clinical development of our product pipeline, including $11.9 million in license fees and transaction services related to the Inex license agreement. Also included in the clinical costs is an increase of $1.1 million in clinical milestone expense related to Zensana and Talvesta clinical progress, and an increase of clinical costs of $3.1 million for research and development costs related to the development costs of our six drug candidates. These clinical costs included the physical manufacturing of drug compounds, payments to our contract research organization and legal expenses associated with our continued patent protection and other professional fees and outside services. For the six months ended June 30, 2006, we incurred increased salary, employee benefits and other personnel related costs of approximately $1.8 million as compared to the six months ended June 30, 2005, including an increase of $1.0 million in employee related stock-based compensation expense specifically related to implementation of SFAS No. 123R, and an increase of $0.8 million in salary, bonus and other benefit expenses due to increased headcount. Other allocable operating expenses increased by approximately $0.2 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 travel and conference expenses, insurance and other costs.

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We anticipate that research and development expenses will continue gradually increasing in 2006 and substantially in subsequent years as we increase our research and development efforts and as our existing product candidates proceed through preclinical studies and more costly clinical studies. In particular, we expect our research and development expenses to increase through the later half of 2006 and beyond if Marqibo enters a Phase III clinical trial in late 2006. Actual expenses may vary considerably based upon timing of program initiation, study enrollment rates, and the timing and structure of any collaboration in which a partner may incur a portion of these expenses.

Interest income, net. For the six months ended June 30, 2006, net interest income was $384,752, compared to net interest income of $50,062 for the six months ended June 30, 2005. The increase of approximately $335,000, respectively, resulted from increased cash balance due to our May 2006 financing which raised gross proceeds of $40.0 million plus rising interest rates.

Liquidity and Capital Resources

From inception to June 30, 2006, we have incurred an aggregate net loss of $42.2 million, primarily as a result of expenses incurred through a combination of research and development activities related to the various technologies under our control and expenses supporting those activities.

We have financed our operations since inception primarily through equity and debt financing. From inception through June 30, 2006, we have raised a net increase in cash and cash equivalents of $44.3 million. This increase primarily resulted from net cash provided by financing activities of $69.4 million from inception through June 30, 2006, substantially all of which was derived from our four private placements which resulted in aggregate net proceeds to us of $67.9 million. The increase in cash provided by financing activities was offset by net cash used in operating activities of $22.2 million and net cash used in investing activities of $2.9 million for the cumulative period from inception to June 30, 2006.

Our continued operations will depend on whether we are able to raise additional funds through various potential sources, such as equity and debt financing. Through June 30, 2006, a significant portion of our financing has been through private placements of common stock, preferred stock and debt financing. We will continue to fund operations from cash on hand and through future placements of capital stock or debt financings. We can give no assurances that any additional capital that we are able to obtain will be sufficient to meet our needs. Given the current and desired pace of clinical development of our six product candidates, including three to be developed under the Inex license agreement dated May 6, 2006, we anticipate that research and development expenses will continue to increase in 2006 and substantially in subsequent years as we increase our efforts and as our existing product candidates proceed through preclinical studies and more costly clinical studies. In particular, because we plan to initiate a Phase III clinical trial of Marqibo in hematological malignancies by the end of 2006, we expect our research and development expenses to increase significantly in the second half of 2006 and beyond. We estimate that we will have sufficient cash on hand to fund clinical development into 2007. However, we may seek to raise additional capital before in order to fund our future development activities, likely by selling shares of our capital stock or other securities. There can be no assurance that such capital will be available to us on favorable terms or at all. In April 2006, we filed a shelf registration statement with the SEC. The registration statement provides for the offering of up to $75 million of our common stock. In May 2006, we completed a private offering in which we sold 4.7 million shares of common stock which were part of the filed shelf registration, for gross proceeds of $40.0 million. We may offer the remaining securities on the shelf registration statement from time to time and at such times as we believe a plan of financing is in our best interests.

Financings. In February 2004, we received gross proceeds of approximately $4.7 million through the sale of 2,802,989 shares of our common stock. In connection with this offering, we paid commissions and other offering-related expenses consisting of $341,979 in cash and issued a 5-year warrant to purchase 277,331 shares of our common stock to Paramount BioCapital, Inc., who served as placement agent, for their services rendered.

Immediately prior to the EMLR - Hana Biosciences merger in July 2004, we received gross proceeds of $8.0 million through the sale of 2,395,210 shares of our Series A Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock was convertible at the holder's election into 1.410068 common shares. On January 18, 2005, the effective date of the registration statement covering the resale of the common shares issuable upon conversion of the Series A Preferred Stock, the Series A Preferred Stock automatically converted into 3,377,409 shares of common shares.

On April 22, 2005, we completed a private placement of 3,916,082 shares of our common stock at a price of $1.28 per share, resulting in gross proceeds to us of approximately $5.0 million. In connection with the private placement, we issued to the investors and placement agents five-year warrants to purchase an aggregate of 1,525,629 shares of common stock at an exercise price of $1.57 per share, of which warrants to purchase an aggregate of 997,791 shares remain outstanding.  The terms of the warrants provide that we may, at our option, redeem the warrants after such time that the average closing price of our common stock exceeds $3.14 per share for a 30-day period, which condition was satisfied in August 2005.  Accordingly, we may, at our election, redeem the warrants, at a redemption price of $0.01 per warrant share, at any time upon 30 days' prior written notice to the warrant holders.  The warrants remain exercisable by the holders until the expiration of such 30-day notice period. In connection with the private placement, we paid an aggregate of approximately $321,000 in commissions to placement agents.  Included in the amounts paid to placement agents were $52,500 in commissions and warrants to purchase 58,593 shares of common stock to Paramount BioCapital, Inc., a related party. We also incurred approximately $14,000 of legal expenses for the private placement.

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On October 19, 2005, we completed a private placement of 3,686,716 shares of our common stock. Of the total number of shares sold, 3,556,000 shares were sold at a price of $4.00 per share and 130,716 shares were sold to executive officers and affiliates of a director of our company at a price of $4.59 per share, which resulted in total gross proceeds to us of approximately $14.8 million. In addition to the shares of common stock, the investors also received 5-year warrants to purchase an aggregate of 737,343 shares at an exercise price of $5.80 per share. In connection with the private placement, we paid an aggregate of approximately $1.0 million in commissions to placement agents and issued 5-year warrants to purchase an aggregate of 253,306 shares at an exercise price of $5.80 per share. We also incurred approximately $77,500 of legal and other expenses paid to placement agents.

On May 19, 2006, we completed a registered direct placement of 4,701,100 shares of our common stock. Of the total number of shares sold, 4,629,500 shares were sold at a price of $8.50 per share and 71,600 shares were sold to executive officers and affiliates of a director of the Company at a price of $9.07 per share, which resulted in total gross proceeds to us of approximately $40.0 million. In connection with the purchase agreement, we paid an aggregate of approximately $2.4 million in commissions to placement agents. We also incurred approximately $535,000 of legal and other expenses paid to placement agents

Current and Future Financing Needs. We have incurred negative cash flow from operations since we started our business. We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including our planned product development efforts, our clinical trials, and our research and discovery efforts. Given the current and desired pace of clinical development of our six product candidates, over the next 12 months we estimate that we will need approximately $29.5 million in order to fund our research and development activities, including amounts to milestone payments that we expect to be triggered under the license agreements relating to our product candidates. The remaining amount of costs are devoted to salaries associated with those individuals in the research and development department as well as and the manufacturing and clinical trial costs for our six product candidates. We estimate that we will have sufficient capital to fund our research and development activities through 2006 and into 2007.

However, the actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control. These factors include the following:

· costs associated with conducting preclinical and clinical testing;

· costs associated with commercializing our lead programs, including establishing sales and marketing functions;

· costs of establishing arrangements for manufacturing our product candidates;

· costs of acquiring new drug candidates;

· payments required under our current and any future license agreements and collaborations;

· costs, timing and outcome of regulatory reviews;

· costs of obtaining, maintaining and defending patents on our product candidates; and

· costs of increased selling, general and administrative expenses.

We have based our estimate on assumptions that may prove to be wrong. We may need to obtain additional funds sooner or in greater amounts than we currently anticipate. Potential sources of financing include strategic relationships, public or private sales of our stock or debt and other sources. We may seek to access the public or private equity markets when conditions are favorable due to our long-term capital requirements. We do not have any committed sources of financing at this time, and it is uncertain whether additional funding will be available when we need it on terms that will be acceptable to us, or at all. If we raise funds by selling additional shares of common stock or other securities convertible into common stock, the ownership interest of our existing stockholders will be diluted. If we are not able to obtain financing when needed, we may be unable to carry out our business plan. As a result, we may have to significantly limit our operations and our business, financial condition and results of operations would be materially harmed.

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Plan of Operation

Our plan of operation for the year ending December 31, 2006 is to continue implementing our business strategy, including the clinical development of our six product candidates. We also intend to expand our drug candidate portfolio by acquiring additional drug technologies for development. We expect our principal expenditures during the next 12 months to include:

· operating expenses, including expanded research and development and selling, general and administrative expenses; and

· product development expenses, including the costs incurred with respect to applications to conduct clinical trials in the United States for our six product candidates.

As part of our planned expansion, we intend to use clinical research organizations and third parties to perform our clinical studies and manufacturing. As indicated above, at our current and desired pace of clinical development of our six product candidates, over the next 12 months we expect to spend approximately $29.5 million on clinical development (including milestone payments of $6.3 million that we expect to be triggered under the license agreements relating to our product candidates), $1.8 million on general corporate and administrative expenses, and $600,000 on facilities and rent. We expect to have completed the remaining Phase I clinical trials in Talvesta. These clinical trials include those in solid tumors and acute lymphocytic leukemia, or ALL. In addition we expect to initiate a Phase II clinical trial in relapsed or refractory gastric cancer as well as a Phase I clinical trial in pediatric solid tumors. In addition, we plan to initiate at least one registrational clinical trial for Marqibo in hematological malignancies. We also expect to complete our Phase I clinical trial in sphingosome encapsulated vinorelbine, as well as ropidoxuridine, and with the potential launch of Zensana scheduled in the first half of 2007 we will continue to evaluate and manage our launch efforts.

Research and Development Projects

The discussion below describes for each of our development projects the research and development expenses we have incurred to date and, to the extent we are able to reasonable ascertain, the amounts we estimate we will have to expend in order to complete development of each project and the time we estimate it will take to complete development of each project. Our assumptions relating the expected costs of development and timeframe for completion are dependent on numerous factors, including the availability of capital, unforeseen safety issues, lack of effectiveness, and significant unforeseen delays in the clinical trial and regulatory approval process, any of which could be extremely costly. In addition, our estimates assume that we will be able to enroll a sufficient number of patients in clinical trials.

Since our business does not currently generate any cash flow, however, we may need to raise additional capital to continue development of our product candidates beyond 2006. If we are to raise such capital, we expect to raise it primarily by selling shares of our capital stock. To the extent additional capital is not available when we need it, we may be forced to discontinue or scale-back our development efforts relating to one or more of our product candidates our out-license our rights to our product candidates to a third party, any of which would have a material adverse effect on the prospects of our business.

Zensana (ondansetron HCl) Oral Spray. Since acquiring our rights to Zensana in October 2004, we have incurred $3.6 million of project costs related to our development through June 30, 2006, of which $1.3 million and $2.3 million was incurred in the three and six months ended June 30, 2006 and $0.9 million was incurred in fiscal 2005. We completed our pivotal clinical trials of Zensana in early 2006, and filed an NDA under Section 505(b)(2) of the Food, Drug and Cosmetic Act in the second quarter of 2006. If approved by the FDA, we intend to commercially launch Zensana in the United States in 2007. We estimate that we will need to expend at least an additional $6.3 million before we receive FDA approval for Zensana, if ever, which amount includes a milestone payment that would be owed to our licensor upon FDA approval.

Marqibo®.Since acquiring the exclusive world-wide rights to develop and commercialize Marqibo in May 2006 we have incurred $437,000 in project costs related to our development of Marqibo through June 30, 2006. We plan to initiate a Phase III clinical trial in the second half of 2006 and believe we will need to spend approximately $2.1 million in 2006 to fund our research and development efforts. We estimate that we will need to expend at least an aggregate of approximately $47 million in order for us to obtain FDA approval for Marqibo, if ever, which amount includes a milestone payment that would be owed to our licensor upon FDA approval.  We expect that it will take approximately three to four years until we will have completed development and obtained FDA approval of Marqibo, if ever.

Talvesta. From inception through June 30, 2006, we have incurred $3.4 million of costs related to our development of Talvesta, of which $1.3 million, $1.0 million and $272,205 was incurred in fiscal 2005, 2004 and 2003, respectively. For the three and six months ended June 30, 2006, we incurred $423,000 and $872,000, respectively, of costs in the development of Talvesta. We believe we currently have sufficient capital to fund our planned development activities of Talvesta through 2006. We estimate that we will need to expend an aggregate of approximately $65 million in order to complete development of Talvesta, should we opt to continue development. Costs incurred are a direct result of ensuring proper study conduct in accordance with local regulations. Should we choose to continue development we expect that it will take an additional four to five years before we complete development and obtain FDA approval of Talvesta, if ever.

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Ropidoxuridine (IPdR). Since acquiring our rights to ropidoxuridine in February 2004, we have incurred $1.7 million of project costs related to our development of ropidoxuridine through June 30, 2006, of which $834,900 and $656,251 were incurred in fiscal 2005 and2004 respectively. For the three and six months ended June 30, 2006, we incurred approximately $85,000 and $156,000, respectively, of project costs related to the development of ropidoxuridine. Currently, we estimate that we will need to expend at least an additional $45 million until we receive FDA approval for ropidoxuridine, should we opt to continue development. Should we choose to continue, we expect that it will take an additional 5 or 6 years until we will have completed development and obtained FDA approval of ropidoxuridine, if ever. We believe we currently have sufficient capital to fund our development activities of ropidoxuridine through 2006.

Sphingosome Encapsulated Vinorelbine and Sphingosome Encapsulated Topotecan. Along with our rights to Marqibo, we acquired our rights to develop and commercialize sphingosome encapsulated vinorelbine and sphingosome encapsulated topotecan in May 2006 in connection with our license transaction with Inex Pharmaceuticals Corporation. Since acquiring the exclusive world-wide rights to develop and commercialize sphingosome encapsulated vinorelbine and sphingosome encapsulated topotecan in May 2006, we have incurred $440,000 and $177,000, respectively, in project costs related to our development of these drugs through June 30, 2006. As these drugs are early in their clinical development, the registrational strategy is still being evaluated.

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Item 3.  Quantitative and Qualitative Disclosure About Market Risk

Our exposure to market risk is confined to our cash, cash equivalents, auction rate securities and our investment in NovaDel Pharma, Inc. We have attempted to minimize risk by investing in high-quality financial instruments, primarily money market funds with no security having an effective duration longer than 90 days. We are subject to risk due to general market conditions, which may adversely impact the carrying value of our auction rate securities and our investment in NovaDel. If the market interest rate decreases by 100 basis points or 1%, the fair value of our cash and cash equivalents portfolio would have minimal to no impact on the carrying value of our portfolio. We did not hold any derivative instruments as of June 30, 2006, and we have never held such instruments in the past.

Item 4. Controls and Procedures

Based on their evaluation as of June 30, 2006, our Chief Executive Officer and Chief Financial Officer, with the participation of management, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

During the quarter ended June 30, 2006, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are not involved in any legal proceeding.

Item 1A. Risk Factors

You should carefully consider all of the risks described below, together with all of the other information included in this report, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations.

Except as described below, there have been no material changes in the risk factors included under Item 1A of Part II of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, other than changes resulting from the following:

· our operating results and financial condition for and as of the three months ended June 30, 2006;

· our sale of approximately 4.7 million shares of our common stock resulting in gross proceeds of $40 million on May 19, 2006;

· our receipt in May 2006 and June 2006 of orphan drug designation for our product candidates Talvesta and Ropidoxuridine (IPdR), respectively; and

· the submission on June 30, 2006 of our new drug application for Zensana.

As a result of these events, the risk factors identified by the following captions have been updated or otherwise revised from those included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006:

· We are a development stage company with a limited operating history and may not be able to commercialize any products, generate significant revenues or attain profitability.

· If we are not able to successfully develop and commercialize Zensana in the United States, we may not generate sufficient revenues to continue our business operations.

· We may need to raise additional capital to fund our operations. If we are unable to raise additional capital when needed, we may have to discontinue our product development programs or relinquish our rights to some or all of our product candidates. The manner in which we raise any additional funds may affect the value of your investment in our common stock.

Risks Related to Our Business

We are a development stage company with a limited operating history and may not be able to commercialize any products, generate significant revenues or attain profitability.

We are a development stage company with a limited operating history. We have never generated revenue and have incurred significant net losses in each year since our inception. We expect to incur substantial losses and negative cash flow from operations for the foreseeable future, and we may never achieve or maintain profitability. For the year ended December 31, 2005 and the six months ended June 30, 2006, we had net losses of $10.0 million and $24.0 million, respectively. From our inception in December 2002 through June 30, 2006, we have incurred a net loss of $42.1 million.

We expect our cash requirements to increase substantially in the foreseeable future as we:

· continue to undertake preclinical development and, if and when permitted by appropriate regulatory agencies, clinical trials for our current and new product candidates;

· seek regulatory approvals for our product candidates at the appropriate time in the future;

· implement additional internal systems and infrastructure;

· seek to acquire additional technologies to develop; and

· hire additional personnel.

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We expect to incur losses for the foreseeable future as we fund our operations and capital expenditures. As a result, we will need to generate significant revenues in order to achieve and maintain profitability. Even if we succeed in developing and commercializing one or more of our product candidates, which success is not assured, we may not be able to generate significant revenues. Even if we do generate significant revenues, we may never achieve or maintain profitability. Our failure to achieve or maintain profitability could negatively impact the trading price of our common stock.

If we are not able to successfully develop and commercialize Zensana in the United States, we may not generate sufficient revenues to continue our business operations.

None of our product candidates have been approved for commercial sale in any country. The process to develop, obtain regulatory approval for and commercialize potential drug candidates is long, complex and costly. We submitted a New Drug Application, or NDA, for our lead product candidate Zensana, to the U.S. Food and Drug Administration, or FDA, in June 2006. We licensed Zensana from NovaDel Pharma, Inc., or NovaDel, in October 2004. If approved, we expect to commercially launch Zensana in the United States in the first half of 2007. Another of our product candidates, Marqibo, is currently only in Phase II clinical trials. We anticipate requesting authorization to commence a Phase III clinical trial of Marqibo in relapsed acute lymphocytic leukemia, or ALL, in the second half of 2006. We licensed Marqibo from Inex Pharmaceuticals, or Inex, in May 2006. Our other four product candidates are in early stages of clinical development.

We have no internal discovery capabilities and rely solely on our ability to license or acquire product candidates. As a result, our ability to generate revenues from product sales in the foreseeable future depends on our ability to complete development, obtain regulatory approval for and successfully commercialize Zensana in the United States in a timely manner. If we are unable to successfully commercialize Zensana in the United States, we may not be able to earn sufficient revenues to continue our business without raising significant additional capital, which may not be available. Pursuant to our license agreement with NovaDel, we do not have the right to develop and commercialize Zensana outside the United States and Canada.

If we fail to acquire and develop other product candidates we may be unable to grow our business.

We intend to acquire rights to develop and commercialize additional product candidates. Because we currently neither have nor intend to establish internal research capabilities, we are dependent upon pharmaceutical and biotechnology companies and academic and other researchers to sell or license us their product candidates. The success of our strategy depends upon our ability to identify, select and acquire pharmaceutical product candidates.

Proposing, negotiating and implementing an economically viable product acquisition or license is a lengthy and complex process. We compete for partnering arrangements and license agreements with pharmaceutical, biopharmaceutical and biotechnology companies, many of which have significantly more experience than us and have significantly more financial resources than we do. Our competitors may have stronger relationships with certain third parties with whom we are interested in partnering, such as academic research institutions, and may, therefore, have a competitive advantage in entering into partnering arrangements with those third parties. We may not be able to acquire rights to additional product candidates on terms that we find acceptable, or at all.

We expect that any product candidate to which we acquire rights will require significant additional development and other efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are subject to the risks of failure inherent in pharmaceutical product development, including the possibility that the product candidate will not be shown to be sufficiently safe or effective for approval by regulatory authorities. Even if our product candidates are approved, they may not be manufactured or produced economically or commercialized successfully.

If we are unable to successfully manage our growth, our business may be harmed.

In the future, if we are able to advance our product candidates to the point of, and thereafter through, clinical trials, we will need to expand our development, regulatory, manufacturing, marketing and sales capabilities or contract with third parties to provide these capabilities. Any future growth will place a significant strain on our management and on our administrative, operational and financial resources. Our future financial performance and our ability to commercialize our product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively. We are actively evaluating additional product candidates to acquire for development. Such additional product candidates, if any, could significantly increase our capital requirements and place further strain on the time of our existing personnel, which may delay or otherwise adversely affect the development of our existing product candidates. We must manage our development efforts and clinical trials effectively, and hire, train and integrate additional management, administrative and sales and marketing personnel. We may not be able to accomplish these tasks, and our failure to accomplish any of them could prevent us from successfully growing Hana.

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We rely on key executive officers and their experience and knowledge of our business would be difficult to replace in the event any of them left Hana.

We are highly dependent on Mark Ahn, our president and chief executive officer, Fred Vitale, our vice president and chief business officer, Gregory Berk, our senior vice president and chief medical officer, and John Iparraguirre, our vice president and chief financial officer. Dr. Ahn’s, Mr. Vitale’s and Dr. Berk’s employment are governed by written employment agreements. Dr. Ahn’s and Mr. Vitale’s employment agreements each provide for terms that expire in November 2008. Dr. Berk’s employment term under his agreement expires in November 2007. Mr. Iparraguirre does not have a written employment agreement with us. Dr. Ahn, Mr. Vitale, Dr. Berk and Mr. Iparraguirre may terminate their employment with us at any time, subject, however, to certain non-compete and non-solicitation covenants. The loss of the technical knowledge and management and industry expertise that would result in the event Dr. Ahn left Hana could result in delays in the development of our product candidates, and divert management resources. The loss of Mr. Vitale could impair our ability to expand our product development pipeline and commercialize our product candidates, which may harm our business prospects. The loss of Dr. Berk could impair our ability to initiate new and sustain existing clinical trials, as well as identify potential product candidates. The loss of Mr. Iparraguirre could impair our ability to obtain additional financing. We do not carry “key person” life insurance for any of our officers or key employees.

If we are unable to hire additional qualified personnel, our ability to grow our business may be harmed.

We will need to hire additional qualified personnel with expertise in preclinical testing, clinical research and testing, government regulation, formulation and manufacturing and sales and marketing. We compete for qualified individuals with numerous biopharmaceutical companies, universities and other research institutions. Competition for such individuals, particularly in the San Francisco Bay Area where we are headquartered, is intense, and we cannot be certain that our search for such personnel will be successful. Our ability to attract and retain qualified personnel is critical to our success.

We may experience difficulty integrating our newly acquired sphingosomal product candidates into our business.

In May 2006, we licensed the rights to develop and commercialize three sphingosomal product candidates, including Marqibo, from Inex Pharmaceuticals Corporation, which doubled the size of our product candidate pipeline. If all necessary regulatory approvals are obtained, we plan to initiate a Phase III clinical trial in ALL in Marqibo in the second half of 2006, and Phase I clinical trials in two of our other product candidates, sphingosome encapsulated vinorelbine and sphingosome encapsulated topotecan, in 2007. We need FDA and other approvals before we can pursue our clinical trials and there is no assurance we will be able to obtain such approvals. Moreover, we will be required to devote substantial capital and personnel resources to our newly-acquired product candidates in order to attempt to successfully continue their development. If we fail to devote sufficient resources to the development of these product candidates, or if our focus on the new sphingosomal product candidates diverts our attention from the development of Zensana and other product candidates, we will not realize the intended benefits from the recently-completed transaction and our business will suffer.

We may need to raise additional capital to fund our operations. If we are unable to raise additional capital when needed, we may have to discontinue our product development programs or relinquish our rights to some or all of our product candidates. The manner in which we raise any additional funds may affect the value of your investment in our common stock.

We expect to incur losses at least until we can successfully commercialize one or more of our product candidates. We may require additional financing to fund our development programs and to expand our infrastructure and commercialization activities. Net cash used in operating activities was $8.5 million for the six months ended June 30, 2006 and $8.5 million in 2005. We do not know whether additional financing will be available on terms favorable to us when needed, if at all. Our future capital requirements depend on many factors, including:

·       costs associated with conducting preclinical and clinical testing;

·       costs associated with commercializing our lead programs, including establishing sales and marketing functions;

·       costs of establishing arrangements for manufacturing our product candidates;

·       costs of acquiring new drug candidates;

·       payments required under our current and any future license agreements and collaborations;

·       costs, timing and outcome of regulatory reviews;

·       costs of obtaining, maintaining and defending patents on our product candidates; and

·       costs of increased general and administrative expenses.

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To the extent that we raise additional capital by issuing equity securities, our stockholders may experience dilution. We may grant future investors rights superior to those of our current common stockholders. If we raise additional funds through collaborations and licensing arrangements, it may be necessary to relinquish some rights to our technologies, product candidates or products, or grant licenses on terms that are not favorable to us. If we raise additional funds by incurring debt, we could incur significant interest expense and become subject to covenants in the related transaction documentation that could affect the manner in which we conduct our business.

We may incur substantial liabilities and may be required to limit commercialization of our products in response to product liability lawsuits.

The testing and marketing of pharmaceutical products entail an inherent risk of product liability. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates, if approved. Even successful defense would require significant financial and management resources. Regardless of the merit or eventual outcome, liability claims may result in:

·       decreased demand for our product candidates;

·       injury to our reputation;

·       withdrawal of clinical trial participants;

·       withdrawal of prior governmental approvals;

·       costs of related litigation;

·       substantial monetary awards to patients;

·       product recalls;

·       loss of revenue; and

·       the inability to commercialize our product candidates.

Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of pharmaceutical products we develop, alone or with collaborators. We currently do not carry product liability insurance but instead maintain a $5 million clinical trial insurance policy for our ongoing Phase I and Phase I/II clinical trials of one of our product candidates, Talvesta (talotrexin). Even if our agreements with any future collaborators entitle us to indemnification against damages from product liability claims, such indemnification may not be available or adequate should any claim arise.

Risks Related to the Clinical Testing, Regulatory Approval and Manufacturing of Our Product Candidates

If we are unable to obtain regulatory approval to sell our lead product candidate, Zensana, or another product candidate, Marqibo, our business will suffer.

We believe we have completed or may otherwise rely upon all required clinical trials, whether conducted by us or others, relating to Zensana and submitted our NDA for Zensana to the FDA in June 2006 pursuant to Section 505(b)(2) of the U.S. Food, Drug and Cosmetic Act, or FDCA. Section 505(b)(2) of the FDCA is the section describing NDAs for which at least some of the investigations relied upon by the applicant for approval of the application were not conducted by or for the applicant and for which the applicant has not obtained a right of reference or use from the person by or for whom the investigations were conducted. While we believe Section 505(b)(2) is applicable to Zensana, it is possible that the FDA could disagree and require us to submit a “stand-alone” or “full” Section 505(b)(1) NDA, which would require significantly more clinical studies and/or other data collection or analysis. Additionally, in reviewing our NDA, the FDA may require us to conduct additional extensive clinical or non-clinical trials or other analysis or may reject our NDA for a variety of other reasons. If the FDA requires us to complete additional clinical trials relating to Zensana before it will consider approving our NDA, or if non-clinical or other information is requested, the timing of our planned commercial launch for Zensana may be significantly delayed or even precluded and we may be required to incur substantial additional expenses. Depending on the types of studies or other analysis required by the FDA, we may never be able to establish that Zensana is safe for use or effective in use and, thus, may never be able to sell Zensana. Furthermore, because the oral ondansetron formulation on which our Section 505(b)(2) application is based is protected by two unexpired patents and pediatric exclusivity, it is possible that the approval, if any, of our Section 505(b)(2) application may be delayed as a result of patent infringement litigation. Finally, even if Zensana is approved by the FDA, such approval may be materially modified or withdrawn by the FDA for a variety of reasons.

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We recently licensed Marqibo from Inex. Marqibo is not currently permitted to be commercially used. Inex submitted an NDA pursuant to Section 505(b)(2) for accelerated marketing approval of Marqibo primarily based upon a single arm, Phase II clinical trial, which was reviewed by the FDA in 2004 and 2005. In January 2005, the FDA issued a not approvable letter to Inex for the Marqibo NDA for the treatment of patients with relapsed refractory NHL previously treated with at least two chemotherapy regimens. The FDA’s not approvable letter cited a variety of reasons for not approving the NDA, including the following:

·       The information presented by Inex was inadequate and contained clinical deficiencies;

·       The information presented by Inex failed to provide evidence of an effect on a surrogate that is reasonably likely to predict clinical benefit;

·       The information presented by Inex contained chemistry, manufacturing and control deficiencies;

·       A supportive study in NHL patients and ALL patients was not well conducted or well controlled; and

·       The information presented by Inex did not demonstrate an improvement over available therapy.

In rejecting the NDA, the FDA recommended that, if Inex planned to pursue development of Marqibo for the treatment of relapsed refractory NHL, Inex should conduct additional studies, including but not limited to randomized controlled studies comparing Marqibo to other chemotherapy regimens. Even if such studies are successfully performed, Marqibo may not receive FDA approval.

With respect to Zensana and Marqibo, additional FDA regulatory risks exist which may prevent FDA approval of these drug candidates and thereby prevent their commercial use. Additionally, if Zensana or Marqibo, or any of our product candidates are approved by the FDA, such approval may be withdrawn by the FDA for a variety of reasons, including:

· that clinical or other experience, tests, or other scientific data show that the drug is unsafe for use;

· that new evidence of clinical experience or evidence from new tests, evaluated together with the evidence available to the FDA when the NDA was approved, shows that the drug is not shown to be safe for use under the approved conditions of use;

· that on the basis of new information presented to the FDA, there is a lack of substantial evidence that the drug will have the effect it purports or is represented to have under the approved conditions of use;

· that an NDA contains any untrue statement of a material fact; or

· for a drug approved under FDA’s accelerated approval regulations or as a fast track drug, if any required post-approval study is not conducted with due diligence or if such study fails to verify the clinical benefit of the drug.

Other regulatory risks may arise as a result of a change in applicable law or regulation or the interpretation thereof, and may result in material modification or withdrawal of prior FDA approvals.

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Many of our product candidates are in early stages of clinical trials, which are very expensive and time-consuming. Any failure or delay in completing clinical trials for our product candidates could harm our business.

Our four other product candidates, Talvesta, ropidoxuridine (IPdR), sphingosome encapsulated vinorelbine and sphingosome encapsulated topotecan, are in early stages of development and will require extensive clinical and other testing and analysis before we will be in a position to consider seeking FDA approval to sell such product candidates. In addition to the risks set forth above for Zensana and Marqibo, which also apply to Talvesta, ropidoxuridine, sphingosome encapsulated vinorelbine and sphingosome encapsulated topotecan, these product candidates also have additional risks as each is in an earlier stage of development and review.

In 2003, we filed our Investigational New Drug Application, or IND, for Talvesta and in March 2004 we initiated a Phase I clinical trial at Dana-Farber Cancer Institute, Inc., Massachusetts General Hospital and Beth-Israel Deaconess Hospital. We have also recently completed an open-label multicenter, multinational Phase I and II study of Talvesta in the treatment of relapsed or refractory non-small cell lung cancer, or NSCLC, and in June 2005, we commenced an open-label, multicenter Phase I and II clinical trial of Talvesta in the treatment of refractory leukemia. We also commenced an initial Phase I clinical trial of our product candidate ropidoxuridine in September 2005. We do not expect to request regulatory and other approvals to initiate clinical trials on sphingosome encapsulated vinorelbine and sphingosome encapsulated topotecan until 2007, if at all.

Conducting clinical trials is a lengthy, time consuming and very expensive process and the results are inherently uncertain. The duration of clinical trials can vary substantially according to the type, complexity, novelty and intended use of the product candidate. We estimate that clinical trials of our product candidates will take at least several years to complete. The completion of clinical trials for our product candidates may be delayed or prevented by many factors, including:

·       delays in patient enrollment, and variability in the number and types of patients available for clinical trials;

·       difficulty in maintaining contact with patients after treatment, resulting in incomplete data;

·       poor effectiveness of product candidates during clinical trials;

·       safety issues, side effects, or other adverse events;

·       results that do not demonstrate the safety or effectiveness of the product candidates;

·       governmental or regulatory delays and changes in regulatory requirements, policy and guidelines; and

·       varying interpretation of data by the FDA.

In conducting clinical trials, we may fail to establish the effectiveness of a compound for the targeted indication or discover that it is unsafe due to unforeseen side effects or other reasons. Even if our clinical trials are commenced and completed as planned, their results may not support our product candidate claims. Further, failure of product candidate development can occur at any stage of the clinical trials, or even thereafter, and we could encounter problems that cause us to abandon or repeat clinical trials. These problems could interrupt, delay or halt clinical trials for our product candidates and could result in FDA, or other regulatory authorities, delaying approval of our product candidates for any or all indications. The results from preclinical testing and prior clinical trials may not be predictive of results obtained in later or other larger clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in clinical trials, even in advanced clinical trials after showing promising results in earlier clinical trials. Our failure to adequately demonstrate the safety and effectiveness of any of our product candidates will prevent us from receiving regulatory approval to market these product candidates and will negatively impact our business.

In addition, we or the FDA may suspend or curtail our clinical trials at any time if it appears that we are exposing participants to unacceptable health risks or if the FDA finds deficiencies in the conduct of these clinical trials or in the composition, manufacture or administration of the product candidates. Accordingly, we cannot predict with any certainty when or if we will ever be in a position to submit an NDA for any of our product candidates, or whether any such NDA would ever be approved.

If we do not obtain the necessary U.S. or foreign regulatory approvals to commercialize our product candidates, we will not be able to market and sell our product candidates.

None of our product candidates have been approved for commercial sale in any country. FDA approval is required to commercialize all of our product candidates in the United States and approvals from the FDA equivalent regulatory authorities are required in foreign jurisdictions in order to commercialize our product candidates in those jurisdictions. We only possess the right to attempt to develop and commercialize Zensana within the United States and Canada. We possess world-wide rights to develop and commercialize Marqibo and our other product candidates.

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In order to obtain FDA approval of any of our product candidates, we must submit to the FDA an NDA, demonstrating that the product candidate is safe for humans and effective for its intended use and otherwise meets the requirements of existing laws and regulations governing new drugs. This demonstration requires significant research and animal tests, which are referred to as preclinical studies, and human tests, which are referred to as clinical trials, as well as additional information and studies. Satisfaction of the FDA’s regulatory requirements typically takes many years, depending on the type, complexity and novelty of the product candidate and requires substantial resources for research, development and testing as well as for other purposes. To date, none of our product candidates has been approved for sale in the United States or in any foreign market. We cannot predict whether our research and clinical approaches will result in drugs that the FDA considers safe for humans and effective for indicated uses. Historically, only a small percentage of all drug candidates that start clinical trials are eventually approved by the FDA for sale. After clinical trials are completed, the FDA has substantial discretion in the drug approval process and may require us to conduct additional preclinical and clinical testing or to perform post-marketing studies. The approval process may also be delayed by changes in government regulation, future legislation or administrative action or changes in FDA policy that occur prior to or during our regulatory review. Delays in obtaining regulatory approvals may:

·       delay or prevent commercialization of, and our ability to derive product revenues from, our product candidates;

·       impose costly procedures on us;

·       reduce the potential prices we may be able to charge for our product candidates, assuming they are approved for sale; and

·       diminish any competitive advantages that we may otherwise enjoy.

Even if we comply with all FDA requests, the FDA may ultimately reject one or more of our NDAs. We cannot be sure that we will ever obtain regulatory approval for any of our product candidates. Additionally, a change in applicable law or regulation, or the interpretation thereof, may result in material modification or withdrawal of prior FDA approvals.

Failure to obtain FDA approval of any of our product candidates will severely undermine our business by reducing our number of saleable products and, therefore, corresponding product revenues. If we do not complete clinical trials and obtain regulatory approval for a product candidate, we will not be able to recover any of the substantial costs invested by us in the development of the product candidate.

In foreign jurisdictions, we must receive approval from the appropriate regulatory authorities before we can commercialize our drugs. Foreign regulatory approval processes generally include all of the risks associated with the FDA approval procedures described above. We cannot assure you that we will receive the approvals necessary to commercialize any of our product candidates for sale outside the United States.

Our competitive position may be harmed if a competitor obtains orphan drug designation and approval for the treatment of ALL for a clinically superior drug.

Orphan drug designation is an important element of our competitive strategy because the latest of our licensors’ patents for Talvesta expires in 2023. In May 2006, the FDA approved our application for orphan drug designation for the use of Talvesta in treating ALL. The company that obtains the first FDA approval for a designated orphan drug for a rare disease generally receives marketing exclusivity for use of that drug for the designated condition for a period of seven years. However, even though we obtained orphan drug status for Talvesta in the treatment of ALL, the FDA may permit other companies to market a drug for the same designated and approved condition during our period of orphan drug exclusivity if it can be demonstrated that the drug is clinically superior to our drug. This could create a more competitive market for us.

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Even if we obtain regulatory approvals for our products, the terms of approvals and ongoing monitoring and regulation of our products may limit how we manufacture and market our products, which could materially impair our ability to generate revenue.

Even if regulatory approval is granted in the United States or in a foreign country, the approved product and its manufacturer, as well as others involved in the manufacturing and packaging process, remain subject to continual regulatory review and monitoring. Any regulatory approval that we receive for a product candidate may be subject to limitations on the indicated uses for which the product may be marketed, or include requirements for potentially costly post-approval clinical trials. In addition, if the FDA and/or foreign regulatory agencies approve any of our product candidates, the labeling, packaging, storage, advertising, promotion, recordkeeping and submission of safety and other post-marketing information on the product will be subject to extensive regulatory requirements which may change over time. We and the manufacturers of our products, their ingredients, and many aspects of the packaging are also required to comply with current good manufacturing practice regulations, which include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Further, regulatory agencies must approve these manufacturing facilities before they can be used to manufacture our products or their ingredients or certain packagings, and these facilities are subject to ongoing regulatory inspection. Discovery of problems with a product or manufacturer may result in restrictions or sanctions with respect to the product, manufacturer and relevant manufacturing facility, including withdrawal of the product from the market. If we fail to comply with the regulatory requirements of the FDA and other applicable foreign regulatory authorities, or if problems with our products, manufacturers or manufacturing processes are discovered, we could be subject to administrative or judicially imposed sanctions, including:

·       restrictions on the products, manufacturers or manufacturing process;

·       warning letters or untitled letters;

·       civil or criminal penalties or fines;

·       injunctions;

·       product seizures, detentions or import bans;

·       voluntary or mandatory product recalls and publicity requirements;

·       suspension or withdrawal of regulatory approvals;

·       total or partial suspension of production and/or sale; and

·       refusal to approve pending applications for marketing approval of new drugs or supplements to approved applications.

In order to market any products outside of the United States, we must establish and comply with the numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. Regulatory approval in one country does not ensure regulatory approval in another, but failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others.

Because we are dependent on clinical research institutions and other contractors for clinical testing and for research and development activities, the results of our clinical trials and such research activities are, to a certain extent, beyond our control.

We depend upon independent investigators and collaborators, such as universities and medical institutions, to conduct our preclinical and clinical trials under agreements with us. For example, our current Phase I clinical trial for Talvesta is being conducted by Dana-Farber Cancer Institute, Inc., Massachusetts General Hospital and Beth-Israel Deaconess Hospital. These parties are not our employees and we cannot control the amount or timing of resources that they devote to our programs. These investigators may not assign as great a priority to our programs or pursue them as diligently as we would if we were undertaking such programs ourselves. If outside collaborators fail to devote sufficient time and resources to our drug-development programs, or if their performance is substandard, the approval of our FDA applications, if any, and our introduction of new drugs, if any, will be delayed. These collaborators may also have relationships with other commercial entities, some of whom may compete with us. If our collaborators assist our competitors at our expense, our competitive position would be harmed.

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Our reliance on third parties to formulate and manufacture our product candidates exposes us to a number of risks that may delay the development, regulatory approval and commercialization of our products or result in higher product costs.

We have no experience in drug formulation or manufacturing and do not intend to establish our own manufacturing facilities. We lack the resources and expertise to formulate or manufacture our own product candidates. We contract with one or more manufacturers to manufacture, supply, store and distribute drug supplies for our clinical trials. If any of our product candidates receive FDA approval, we will rely on one or more third-party contractors to manufacture our drugs. Ferring AB supplied us with our clinical supplies of Zensana, including the spray pump and oral applicator used to deliver the drug. We have not entered into an agreement with Ferring AB or any other third party for the commercial manufacture of Zensana but expect to do so with Ferring AB prior to commercialization. Our anticipated future reliance on a limited number of third-party manufacturers exposes us to the following risks:

· We may be unable to identify manufacturers on acceptable terms or at all because the number of potential manufacturers is limited and the FDA must approve any replacement contractor. This approval would require new testing and compliance inspections. In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our products after receipt of FDA approval, if any.

· Our third-party manufacturers might be unable to formulate and manufacture our drugs in the volume and of the quality required to meet our clinical and/or commercial needs, if any.

· Our future contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required to supply our clinical trials or to successfully produce, store and distribute our products.

· Drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA and corresponding state agencies to ensure strict compliance with good manufacturing practice and other government regulations and corresponding foreign standards. We do not have control over third-party manufacturers’ compliance with these regulations and standards, but we will be ultimately responsible for any of their failures.

· If any third-party manufacturer makes improvements in the manufacturing process for our products, we may not own, or may have to share, the intellectual property rights to the innovation. This may prohibit us from seeking alternative or additional manufacturers for our products.

Each of these risks could delay our clinical trials, the approval, if any, of our product candidates by the FDA, or the commercialization of our product candidates or result in higher costs or deprive us of potential product revenues.

Risks Related to Our Ability to Commercialize Our Product Candidates

Our success depends substantially on Zensana and Marqibo, which are still under development and require further regulatory approvals. If we are unable to commercialize either or both of Zensana or Marqibo, or experience significant delays in doing so, our ability to generate product revenue and our likelihood of success will be diminished.

We concluded bioavailability and bioequivalent clinical trials of Zensana, our most advanced product candidate, in early 2006, and in June 2006, we filed an NDA with the FDA. If approved, we expect to commercially launch Zensana in the United States in the first half of 2007. We anticipate requesting authorization to commence a Phase III clinical trial of Marqibo, our second most advanced product candidate, in the second half of 2006. We have invested a significant portion of our time and financial resources in the development of these two programs. We anticipate that our ability to generate revenues in the near term will depend solely on the successful development, regulatory approval and commercialization of Zensana.

All of our other product candidates are in the very early stages of development. Any of our product candidates could be unsuccessful if they:

· do not demonstrate acceptable safety and efficacy in preclinical studies or clinical trials or otherwise do not meet applicable regulatory standards for approval;

· do not offer therapeutic or other improvements over existing or future therapies used to treat the same conditions;

· are not capable of being produced in commercial quantities at acceptable costs or pursuant to applicable rules and regulations; or

· are not accepted in the medical community and by third-party payors.

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We do not expect Zensana to be commercialized before the first half of 2007, if at all. If we are unable to commercialize our product candidates, we will not generate product revenues. The results of our clinical trials to date do not provide assurance that acceptable efficacy or safety will be shown.

If we are unable either to create sales, marketing and distribution capabilities or enter into agreements with third parties to perform these functions, we will be unable to commercialize our product candidates successfully.

We currently have no sales, marketing or distribution capabilities. To commercialize our product candidates, we must either develop internal sales, marketing and distribution capabilities, which will be expensive and time consuming, or make arrangements with third parties to perform these services. If we decide to market any of our products directly, we must commit financial and managerial resources to develop marketing capabilities and a salesforce with technical expertise and with supporting distribution capabilities. If approved by the FDA, we intend to market Zensana in the United States with our own specialized oncology salesforce of approximately 30 people. Factors that may inhibit our efforts to commercialize Zensana and our other product candidates, if approved, directly and without strategic partners include:

· our inability to recruit and retain adequate numbers of effective sales and marketing personnel;

· the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe our products;

· the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and

· unforeseen costs and expenses associated with creating an independent sales and marketing organization.

If we are not able to partner with a third party and are not successful in recruiting sales and marketing personnel or in building a sales and marketing infrastructure, we will have difficulty commercializing Zensana and our product candidates, which would harm our business. If we rely on pharmaceutical or biotechnology companies with established distribution systems to market our products, we will need to establish and maintain partnership arrangements, and we may not be able to enter into these arrangements on acceptable terms or at all. To the extent that we enter into co-promotion or other arrangements, any revenues we receive will depend upon the efforts of third parties which may not be successful and which will be only partially in our control. Our product revenues would likely be lower than if we marketed and sold our products directly.

The terms of our license agreements relating to intellectual property ownership rights may make it more difficult for us to establish collaborations for the development and commercialization of our product candidates.

The terms of our license agreements obligate us to include intellectual property assignment provisions in any sublicenses or collaboration agreements that may be unacceptable to our potential sublicensees and partners. These terms may impede our ability to enter into partnerships for some of our existing product candidates. Under our license agreement with Inex, Inex, either alone or jointly with M.D. Anderson Cancer Center, will be the owner of patents and patent applications claiming priority to certain patents licensed to us, and we not only have an obligation to assign to Inex our rights to inventions covered by such patents or patent applications, but also, when negotiating any joint venture, collaborative research, development, commercialization or other agreement with a third party, to require such third party to do the same. Our license agreement with Elan Pharmaceuticals, Inc., or Elan, relating to Marqibo, provides that Elan will own all improvements to the licensed patents or licensed know-how made by us or any of our sublicensees. Our license agreement with NovaDel for Zensana provides that all information and inventions made by or on behalf of us, our affiliates and sublicenses relating to the oral spray process or Zensana will be assigned to NovaDel. Potential collaboration and commercialization partners for these product candidates may not agree to such intellectual property ownership requirements and therefore not elect to partner with us for these product candidates.

If physicians and patients do not accept and use Zensana or our other product candidates, our ability to generate revenue from sales of our products will be materially impaired.

Even if the FDA approves Zensana or any of our other product candidates, physicians and patients may not accept and use them. Acceptance and use of our products will depend upon a number of factors including:

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·       perceptions by members of the health care community, including physicians, about the safety and effectiveness of our drugs;

·       pharmacological benefit and cost-effectiveness of our products relative to competing products;

·       availability of reimbursement for our products from government or other healthcare payors;

·       effectiveness of marketing and distribution efforts by us and our licensees and distributors, if any; and

·       the price at which we sell our products.

Because we expect sales of Zensana, if FDA-approved, to generate substantially all of our product revenues for the foreseeable future, the failure of Zensana to find market acceptance would harm our business and could require us to seek additional financing.

Adequate coverage and reimbursement may not be available for our product candidates, which could diminish our sales or affect our ability to sell our products profitably.

Market acceptance and sales of our product candidates will depend in significant part on the levels at which government payors and other third-party payors, such as private health insurers and health maintenance organizations, cover and pay for our products. We cannot provide any assurances that third-party payors will provide adequate coverage of and reimbursement for any of our product candidates. If we are unable to obtain adequate coverage of and payment levels for our product candidates from third-party payors, physicians may limit how much or under what circumstances they will prescribe or administer them and patients may decline to purchase them. This in turn could affect our ability to successfully commercialize our products and impact our profitability and future success.

In both the United States and certain foreign jurisdictions, there have been a number of legislative and regulatory policies and proposals in recent years to change the healthcare system in ways that could impact our ability to sell our products profitably. On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003, or the MMA, which contains, among other changes to the law, a wide variety of changes that impact Medicare reimbursement of pharmaceuticals to physicians and hospitals. The MMA requires that, as of January 1, 2005, payment rates for most drugs covered under Medicare Part B, including drugs furnished incident to physicians’ services, are to be based on manufacturer’s average sales price, or ASP, of the product. Implementation of the ASP payment methodology for drugs furnished in physician’s offices generally resulted in reduced payments in 2005, and could result in lower payment rates for drugs in the future.

The MMA requires that, beginning in 2006, payment amounts for most drugs administered in physician offices are to be based on either ASP or on amounts bid by vendors under the Competitive Acquisition Program, or CAP. Under the CAP, physicians who administer drugs in their offices will be offered an option to acquire drugs covered under the Medicare Part B benefit from vendors that are selected in a competitive bidding process. Winning vendors would be selected based on criteria that include their bid prices. Implementation of the CAP has been delayed until at least July 2006. Implementation of the ASP payment methodology and the CAP could negatively impact our ability to sell our product candidates.

The MMA also revised the method by which Medicare pays for many drugs administered in hospital outpatient departments beginning in 2005. In addition, the Centers for Medicare & Medicaid Services, or CMS, which administers the Medicare program, published a proposed rule on payment amounts for drugs administered in hospital outpatient departments for 2006. As a result of the changes in the MMA and, if the methods suggested by CMS in the proposed 2006 rule are implemented, certain newly introduced drugs administered in hospital outpatient departments, which we believe would include Zensana, will generally be reimbursed under an ASP payment methodology, except that during a short introductory period in which drugs have not been assigned a billing code a higher payment rate is applicable. As in the case of physician offices, implementation of the ASP payment methodology in the hospital outpatient department could negatively impact our ability to sell our product candidates.

The MMA created a new, voluntary prescription drug benefit for Medicare beneficiaries, Medicare Part D, which took effect in 2006. Medicare Part D is a new type of coverage that allows for payment for certain prescription drugs not covered under Part B. This new benefit will be offered by private managed care organizations and freestanding prescription drug plans, which, subject to review and approval by CMS, may, and are expected to, establish drug formularies and other drug utilization management controls based in part on the price at which they can obtain the drugs involved. The drugs that will be covered in each therapeutic category and class on the formularies of participating Part D plans may be limited, and obtaining favorable treatment on formularies and with respect to utilization management controls may affect the prices we can obtain for our products. If our product candidates are not placed on such formularies, or are subject to utilization management controls, this could negatively impact our ability to sell them. It is difficult to predict which of our candidate products will be placed on the formularies or subjected to utilization management controls and the impact that the Part D program, and the MMA generally, will have on us.

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There also likely will continue to be legislative and regulatory proposals that could bring about significant changes in the healthcare industry. We cannot predict what form those changes might take or the impact on our business of any legislation or regulations that may be adopted in the future. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize our products.

In addition, in many foreign countries, particularly the countries of the European Union, the pricing of prescription drugs is subject to government control. We may face competition for our product candidates from lower priced products in foreign countries that have placed price controls on pharmaceutical products. In addition, there may be importation of foreign products that compete with our own products which could negatively impact our profitability.

If we cannot compete successfully for market share against other drug companies, we may not achieve sufficient product revenues and our business will suffer.

The market for our product candidates is characterized by intense competition and rapid technological advances. If our product candidates receive FDA approval, they will compete with a number of existing and future drugs and therapies developed, manufactured and marketed by others. If approved, Zensana will compete with the currently available oral form of ondansetron, which is currently being manufactured and sold by GlaxoSmithKline Inc. under the name Zofran. In addition, the FDA may approve generic versions of ondansetron before and/or after any action on the Zensana marketing application with which we might compete. If approved, Marqibo will compete with unencapsulated vincristine, which is generic, other cytotoxic agents such as antimetabolites, alkylating agents, cytotoxic antibiotics, vinca alkyloids, platinum compounds and taxanes, and other cytotoxic agents that use different encapsulation technologies. If approved, Talvesta will compete with existing antifolate therapies currently being sold by Pfizer, Inc. (trimetrexate), Eli Lilly & Co. (pemetrexed) and Novartis AG (edatrexate). Although there are no FDA-approved radiation sensitizers currently on the market, there are several product candidates in development that will compete with our product candidate ropidoxuridine and which are significantly further along in development. For example, Allos Therapeutics, Inc. and Pharmacyclics, Inc. each have a radiation sensitizer in Phase III development. These or other future competing products and product candidates may provide greater therapeutic convenience or clinical or other benefits for a specific indication than our products, or may offer comparable performance at a lower cost. If our products fail to capture and maintain market share, we may not achieve sufficient product revenues and our business will suffer.

We will compete against fully integrated pharmaceutical companies and smaller companies that are collaborating with larger pharmaceutical companies, academic institutions, government agencies and other public and private research organizations. In addition, many of these competitors, either alone or together with their collaborative partners, operate larger research and development programs and have substantially greater financial resources than we do, as well as significantly greater experience in:

·       developing drugs;

·       undertaking preclinical testing and human clinical trials;

·       obtaining FDA and other regulatory approvals of drugs;

·       formulating and manufacturing drugs; and

·       launching, marketing and selling drugs.

Developments by competitors may render our products or technologies obsolete or non-competitive.

Companies that currently sell both generic and proprietary compounds for the treatment of cancer include, among others, Pfizer, Inc. (trimetrexate), Eli Lilly & Co. (pemetrexed), Novartis AG (edatrexate), and Allos Therapeutics, Inc. (PDX). Alternative technologies are being developed to treat cancer and immunological disease, several of which are in advanced clinical trials. In addition, companies pursuing different but related fields represent substantial competition. Many of these organizations have substantially greater capital resources, larger research and development staffs and facilities, longer drug development history in obtaining regulatory approvals and greater manufacturing and marketing capabilities than we do. These organizations also compete with us to attract qualified personnel, parties for acquisitions, joint ventures or other collaborations.

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Risks Related to Our Intellectual Property

If we fail to adequately protect or enforce our intellectual property rights or secure rights to patents of others, the value of our intellectual property rights would diminish.

Our success, competitive position and future revenues will depend in large part on our ability and the abilities of our licensors to obtain and maintain patent protection for our products, methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties.

We have licensed from third parties rights to numerous issued patents and patent applications. To date, through our license agreements for Talvesta, ropidoxuridine, Marqibo and Zensana, we hold certain exclusive patent rights, including rights under U.S. patents and U.S. patent applications. We also have patent rights to applications pending in several foreign jurisdictions. We have filed and anticipate filing additional patent applications both in the United States and internationally, as appropriate.

The rights to product candidates that we acquire from licensors or collaborators are protected by patents and proprietary rights owned by them, and we rely on the patent protection and rights established or acquired by them. We generally do not unilaterally control, or do not control at all, the prosecution of patent applications licensed from third parties. Accordingly, we are unable to exercise the same degree of control over this intellectual property as we may exercise over internally developed intellectual property. In particular, NovaDel, which licensed us Zensana, has the sole right to file, prosecute and maintain patent applications, patents and trademarks relating to the Zensana product, and we only have the right to comment on such filings and the rights to patent filing, prosecution and maintenance if NovaDel elects not to do so in a certain country.

The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. Even if we are able to obtain patents, any patent may be challenged, invalidated, held unenforceable or circumvented. The existence of a patent will not necessarily protect us from competition. Competitors may successfully challenge our patents, produce similar drugs or products that do not infringe our patents or produce drugs in countries where we have not applied for patent protection or that do not respect our patents. Under our license agreements, we generally do not unilaterally control, or do not control at all, the enforcement of the licensed patents or the defense of third party suits of infringement or invalidity. In particular, with respect to Zensana, NovaDel is the party who has the first right to enforce the licensed patents and we may only do so if NovaDel fails to enforce such patents. NovaDel is also the party who has the first right to defend third party infringement claims and who is in control of such proceedings, while we do not have clear contractual rights to defend such claims even if NovaDel fails to do so.

Furthermore, if we become involved in any patent litigation, interference or other administrative proceedings, we will incur substantial expense and the efforts of our technical and management personnel will be significantly diverted. As a result of such litigation or proceedings we could lose our proprietary position and be restricted or prevented from developing, manufacturing and selling the affected products, incur significant damage awards, including punitive damages, or be required to seek third-party licenses that may not be available on commercially acceptable terms, if at all.

The degree of future protection for our proprietary rights is uncertain in part because legal means afford only limited protection and may not adequately protect our rights, and we will not be able to ensure that:

· we or our licensors or collaborators were the first to make the inventions described in patent applications;

· we or our licensors or collaborators were the first to file patent applications for inventions;

· others will not independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;

· any of our pending patent applications will result in issued patents;

· any patents licensed or issued to us will provide a basis for commercially viable products or will provide us with any competitive advantages or will not be challenged by third parties;

· we will ultimately be able to enforce our owned or licensed patent rights pertaining to our products;

· any patents licensed or issued to us will not be challenged, invalidated, held unenforceable or circumvented;

· we will develop or license proprietary technologies that are patentable; or

· the patents of others will not have an adverse effect on our ability to do business.

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Our success also depends upon the skills, knowledge and experience of our scientific and technical personnel, our consultants and advisors as well as our licensors and contractors. To help protect our proprietary know-how and our inventions for which patents may be unobtainable or difficult to obtain, we rely on trade secret protection and confidentiality agreements. To this end, we require all of our employees to enter into agreements which prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business. These agreements may not provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure or the lawful development by others of such information. If any of our trade secrets, know-how or other proprietary information is disclosed, the value of our trade secrets, know-how and other proprietary rights would be significantly impaired and our business and competitive position would suffer.

Our license agreements relating to our product candidates may be terminated in the event we commit a material breach, the result of which would harm our business and future prospects.

Our license agreements relating to Talvesta, ropidoxuridine and Zensanaare subject to termination by our licensors in the event we materially breach those agreements. With respect to the Talvesta license, Dana-Farber Cancer Institute, Inc. and Ash Stevens, Inc. may terminate the agreement, after giving us notice and an opportunity to cure, if we commit a material breach, including failing to make a scheduled milestone or other payment when due, failing to meet our diligence obligations, ceasing to carry on our business with respect to the licensed products, or being convicted of a felony relating to the manufacture, use, sale or importation of the licensed products. The agreement also provides that it may be terminated if we become involved in a bankruptcy, insolvency or similar proceeding. Our license agreement for ropidoxuridine contains similar provisions, in that Yale University and the Research Foundation of State University of New York may terminate the agreement, after giving us notice and an opportunity to cure, if we commit a material breach, including failing to make scheduled payments, or terminate the agreement without giving us the opportunity to cure for our failure to obtain or maintain adequate insurance, or our involvement in a bankruptcy. Under the Zensana license, NovaDel may terminate our license, after giving us notice and an opportunity to cure, for our material breach or payment default. The license also terminates automatically if we are involved in a bankruptcy. In the event these license agreements are terminated, we will lose all of our rights to develop and commercialize the applicable product candidate covered by such license, which would harm our business and future prospects.

Our license to Marqibo, sphingosome encapsulated vinorelbine and sphingosome encapsulated topotecan are governed by a series of transaction agreements which may be individually or collectively terminated, not only by Inex, but also by University of Texas M.D. Anderson Cancer Center, British Columbia Cancer Agency or University of British Columbia under the underlying agreements governing the license or assignment of technology to Inex. Inex may terminate these agreements for our uncured material breach, for our involvement in a bankruptcy, for our assertion or intention to assert any invalidity challenge on any of the patents licensed to us for these products or for our failure to meet our development or commercialization obligations, including the obligations of continuing to sell each product in all major market countries after its launch. In the event that these agreements are terminated, not only will we lose all rights to these products, we will also have the obligation to transfer all of our data, materials, regulatory filings and all other documentation to our licensor, and our licensor may on its own exploit these products without any compensation to us, regardless of the progress or amount of investment we have made in the products.

Third party claims of intellectual property infringement would require us to spend significant time and money and could prevent us from developing or commercializing our products.

In order to protect or enforce patent rights, we may initiate patent litigation against third parties. Similarly, we may be sued by others. We also may become subject to proceedings conducted in the U.S. Patent and Trademark Office, including interference proceedings to determine the priority of inventions, or reexamination proceedings. In addition, any foreign patents that are granted may become subject to opposition, nullity, or revocation proceedings in foreign jurisdictions having such proceedings opposed by third parties in foreign jurisdictions having opposition proceedings. The defense and prosecution, if necessary, of intellectual property actions are costly and divert technical and management personnel from their normal responsibilities.

No patent can protect its holder from a claim of infringement of another patent. Therefore, our patent position cannot and does not provide any assurance that the commercialization of our products would not infringe the patent rights of another. While we know of no actual or threatened claim of infringement that would be material to us, there can be no assurance that such a claim will not be asserted.

If such a claim is asserted, there can be no assurance that the resolution of the claim would permit us to continue marketing the relevant product on commercially reasonable terms, if at all. We may not have sufficient resources to bring these actions to a successful conclusion. If we do not successfully defend any infringement actions to which we become a party or are unable to have infringed patents declared invalid or unenforceable, we may have to pay substantial monetary damages, which can be tripled if the infringement is deemed willful, or be required to discontinue or significantly delay commercialization and development of the affected products.

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We are aware of certain United States patents that relate to ondansetron compositions and uses therefor to treat nausea and vomiting.  These patents pertain to Zofran, an FDA-approved first generation 5-HT3 antagonist product upon which we based our NDA for Zensana under Section 505(b)(2) of the FDCA. Certain of these patents are due to expire in advance of our planned commercial launch of Zensana in the United States in the first half of 2007. Upon commercialization, if Zensana or its commercial use or production meets all of the requirements of any of the claims of the aforementioned patents or any other patents, or patents that may issue from related patent applications or any other patent applications, then we may need a license to one or more of these patents. If any licenses are required, there can be no assurance that we will be able to obtain any such license on commercially favorable terms, if at all, and if these licenses are not obtained, we might be prevented from commercializing Zensana.

Any legal action against us or our collaborators claiming damages and seeking to enjoin developmental or marketing activities relating to affected products could, in addition to subjecting us to potential liability for damages, require us or our collaborators to obtain licenses to continue to develop, manufacture or market the affected products. Such a license may not be available to us on commercially reasonable terms, if at all.

An adverse determination in a proceeding involving our owned or licensed intellectual property may allow entry of generic substitutes for our products.

Risks Related to Our Common Stock

Our stock price has, and we expect it to continue to, fluctuate significantly, and the value of your investment may decline.

From January 1, 2005 to August 11, 2006, the market price of our common stock has ranged from a high of $12.94 per share to a low of $1.25 per share. The volatile price of our stock makes it difficult for investors to predict the value of their investment, to sell shares at a profit at any given time, or to plan purchases and sales in advance. You might not be able to sell your shares of common stock at or above the price at which you purchased it due to fluctuations in the market price of the common stock arising from changes in our operating performance or prospects. In addition, the stock markets in general, and the markets for biotechnology and biopharmaceutical companies in particular, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. A variety of factors may affect our operating performance and performance and cause the market price of our common stock to fluctuate. These include, but are not limited to:

· announcements by us or our competitors of regulatory developments, clinical trial results, clinical trial enrollment, regulatory filings, new products and product launches, significant acquisitions, strategic partnerships or joint ventures;

· any intellectual property infringement, product liability or any other litigation involving us;

· developments or disputes concerning patents or other proprietary rights;

· regulatory developments in the United States and foreign countries;

· market conditions in the pharmaceutical and biotechnology sectors and issuance of new or changed securities analysts’ reports or recommendations;

· economic or other crises and other external factors;

· actual or anticipated period-to-period fluctuations in our revenues and other results of operations;

· departure of any of our key management personnel; or

· sales of our common stock.

These and other factors may cause the market price and demand of our common stock to fluctuate substantially, which may limit investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity or value of our common stock.

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If our results do not meet analysts’ forecasts and expectations, our stock price could decline.

While research analysts and others have published forecasts as to the amount and timing of our future revenues and earnings, we have stated that we will not be providing any forecasts of the amount and timing of our future revenues and earnings until after two quarters of our sales and marketing efforts. Analysts who cover our business and operations provide valuations regarding our stock price and make recommendations whether to buy, hold or sell our stock. Our stock price may be dependent upon such valuations and recommendations. Analysts’ valuations and recommendations are based primarily on our reported results and their forecasts and expectations concerning our future results regarding, for example, expenses, revenues, clinical trials, regulatory marketing approvals and competition. Our future results are subject to substantial uncertainty, and we may fail to meet or exceed analysts’ forecasts and expectations as a result of a number of factors, including those discussed under the section “Risks Related to Our Business.” If our results do not meet analysts’ forecasts and expectations, our stock price could decline as a result of analysts lowering their valuations and recommendations or otherwise.

Anti-takeover provisions in our charter documents and under Delaware law may make an acquisition of us, which may be beneficial to our stockholders, more difficult.

Provisions of our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders. These provisions:

· establish a classified board of directors so that not all members of our board may be elected at one time;

· authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and hinder a takeover attempt;

· limit who may call a special meeting of stockholders;

· prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; and

· establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at stockholder meetings.

In addition, Section 203 of the Delaware General Corporation Law, which prohibits business combinations between us and one or more significant stockholders unless specified conditions are met, may discourage, delay or prevent a third party from acquiring us.

We are at risk of securities class action litigation.

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology companies have experienced greater than average stock price volatility in recent years. If we faced such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

Because we do not expect to pay dividends, you will not realize any income from an investment in our common stock unless and until you sell your shares at profit.

We have never paid dividends on our common stock and do not anticipate paying any dividends for the foreseeable future. You should not rely on an investment in our stock if you require dividend income. Further, you will only realize income on an investment in our shares in the event you sell or otherwise dispose of your shares at a price higher than the price you paid for your shares. Such a gain would result only from an increase in the market price of our common stock, which is uncertain and unpredictable.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In the three months ended June 30, 2006, the Company sold an aggregate of 55,154 shares of its common stock pursuant to the exercise of outstanding warrants, as summarized below:

Date of Exercise	No. Shares		Exercise Price		Original Warrant Issuance Date
04/26/2006		11,718		1.57		04/22/2005
04/26/2006		5,000		5.80		10/24/2005
05/10/2006		5,859		1.57		04/22/2005
05/10/2006		5,859		1.57		04/22/2005
05/04/2006		15,000		5.80		10/24/2005
06/08/2006		11,718		1.57		04/22/2005

The shares identified above that were sold at a price of $1.57 per share resulted from exercises of warrants issued to the investors in the Company's April 2005 private placement; and the shares sold at $5.80 per share relate to warrants originally issued to the investors in the Company’s October 2005 private placement. The Company's sales of the shares in connection with the warrant exercises described above were done in reliance on the exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Section 4(2) of such act and/or Rule 506 promulgated thereunder. The Company had a reasonable basis to believe that each purchaser was an accredited investor and/or had knowledge and experience in financial and business matters sufficient to evaluate the merits and risks of their investment.

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Submission of Matters to a Vote of Securities Holders

We held our Annual Meeting of Stockholders at the Embassy Suites Hotel, 250 Gateway Boulevard in South San Francisco, California on May 9, 2006. The stockholders took the following actions:

(i)    The stockholders elected five directors to serve until the next Annual Meeting of Stockholders. The stockholders present in person or by proxy cast the following numbers of votes in connection with the election of directors, resulting in the election of all nominees:

Nominee	Votes For		Votes Withheld
Mark J. Ahn		14,636,771		5,265
Arie S. Belldegrun		14,635,771		6,265
Isaac Kier		14,499,092		142,944
Leon E. Rosenberg		14,635,703		6,333
Michael Weiser		14,637,868		4,168

(ii)    The stockholders ratified and approved our 2003 Stock Option Plan. There were 9,052,858 votes cast for the proposal; 259,082 votes were cast against the proposal; 653,423 votes abstained; and there were 4,676,673 broker non-votes.

(iii)    The stockholders ratified and approved our 2004 Stock Incentive Plan, as amended. There were 9,053,858votes were cast for the proposal; 258,082 votes were cast against the proposal; 653,423 votes abstained; and there were 4,676,673 broker non-votes.

(iv) The stockholders ratified and approved our 2006 Employee Stock Purchase Plan. There were 9,244,349 votes were cast for the proposal; 83,433 votes were cast against the proposal; 637,581 votes abstained; and there were 4,676,673 broker non-votes.

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Item 5. Other Information

On June 1, 2006, the Company entered into a sublease agreement with MJ Research Company as sub-lessor. Pursuant to the sublease agreement, the Company subleased from MJ Research Company 18,788 square feet of office space located at 7000 Shoreline Court in South San Francisco, California. The sublease agreement provides for a three-year term commencing June 1, 2006 and requires the Company to make average monthly payments of approximately $49,000 during the term, for an aggregate amount of $1.8 million.

On May 9, 2006, we granted 22,000 restricted shares of our common stock under our 2004 Stock Incentive Plan to Dr. Gregory I. Berk, our senior vice president, chief medical officer. The shares vest in two installments of 11,000 shares on each of November 1, 2006 and November 1, 2007. The restricted stock grant was authorized by our board of directors in November 2005, subject to the approval of our 2004 Stock Incentive Plan by our stockholders, which occurred on May 9, 2006.

Item 6. Exhibits

Exhibit No.	Description
10.1	2003 Stock Option Plan of Hana Biosciences, Inc. (incorporated by reference to Appendix B of the Company's Definitive Proxy Statement on Schedule 14A filed April 7, 2006).
10.2	2004 Stock Incentive Plan (as amended) of Hana Biosciences, Inc. (incorporated by reference to Appendix C of the Company's Definitive Proxy Statement on Schedule 14A filed April 7, 2006).
10.3	2006 Employee Stock Purchase Plan of Hana Biosciences, Inc. (incorporated by reference to Appendix D of the Company's Definitive Proxy Statement on Schedule 14A filed April 7, 2006).
10.4	License Agreement dated May 6, 2006 between the Company and Inex Pharmaceuticals Corporation.**
10.5	Sublicense Agreement dated May 6, 2006 among the Company, Inex Pharmaceuticals Corporation and the University of British Columbia.**
10.6	Registration Rights Agreement dated May 6, 2006 between the Company and Inex Pharmaceuticals Corporation.
10.7	Transaction Agreement dated May 6, 2006 between the Company and Inex Pharmaceuticals Corporation.
10.8	Amended and Restated License Agreement among Elan Pharmaceuticals, Inc., Inex Pharmaceuticals Corporation (for itself and as successor in interest to IE Oncology Company Limited), as assigned to the Company by Inex Pharmaceuticals Corporation on May 6, 2006.
10.9	Placement Agent Agreement by and among the Company, Lehman Brothers Inc., Jefferies & Company, and Oppenheimer & Co. Inc., dated as of May 16, 2006 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed May 17, 2006).
10.10	Form of common stock purchase agreement dated May 17, 2006 between the Company and certain investors (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed May 17, 2006).
10.11	Amendment No. 3 dated June 30, 2006 to Employment Agreement between the Company and Mark J. Ahn.
10.12	Restricted Stock Agreement dated June 30, 2006 between the Company and Mark J. Ahn.
10.13	Restricted Stock Agreement dated June 30, 2006 between the Company and Fred L. Vitale.
10.14	Restricted Stock Agreement dated May 9, 2006 between the Company and Gregory I. Berk.
10.15	Sublease Agreement dated May 31, 2006 between the Company and MJ Research Company, Inc., including amendment thereto dated May 31, 2006
10.16	Amendment to Stock Option Agreements between the Company and Mark J. Alan dated June 30, 2006.
10.17	Amendment to Stock Option Agreement between the Company and Fred L. Vitale dated June 30, 2006.
31.1	Certification of Chief Executive Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).
31.2	Certification of Chief Financial Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).
32.1	Certification of Chief Executive Officer and Chief Financial Officer, as required by Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

_______________

** Confidential treatment has been requested with respect to certain portions of this exhibit pursuant to Rule 24b-2.

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SIGNATURES

In accordance with the requirements of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	HANA BIOSCIENCES, INC.
Date: August 14, 2006	By:	/s/ Mark J. Ahn
		Mark J. Ahn President and Chief Executive Officer

Date: August 14, 2006	By:	/s/ John P. Iparraguirre
		John P. Iparraguirre Chief Financial Officer

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Index to Exhibits Filed with this Report

Exhibit No.	Description
10.1	2003 Stock Option Plan of Hana Biosciences, Inc. (incorporated by reference to Appendix B of the Company's Definitive Proxy Statement on Schedule 14A filed April 7, 2006).
10.2	2004 Stock Incentive Plan (as amended) of Hana Biosciences, Inc. (incorporated by reference to Appendix C of the Company's Definitive Proxy Statement on Schedule 14A filed April 7, 2006).
10.3	2006 Employee Stock Purchase Plan of Hana Biosciences, Inc. (incorporated by reference to Appendix D of the Company's Definitive Proxy Statement on Schedule 14A filed April 7, 2006).
10.4	License Agreement dated May 6, 2006 between the Company and Inex Pharmaceuticals Corporation.**
10.5	Sublicense Agreement dated May 6, 2006 among the Company, Inex Pharmaceuticals Corporation and the University of British Columbia.**
10.6	Registration Rights Agreement dated May 6, 2006 between the Company and Inex Pharmaceuticals Corporation.
10.7	Transaction Agreement dated May 6, 2006 between the Company and Inex Pharmaceuticals Corporation.
10.8	Amended and Restated License Agreement among Elan Pharmaceuticals, Inc., Inex Pharmaceuticals Corporation (for itself and as successor in interest to IE Oncology Company Limited), as assigned to the Company by Inex Pharmaceuticals Corporation on May 6, 2006.
10.9	Placement Agent Agreement by and among the Company, Lehman Brothers Inc., Jefferies & Company, and Oppenheimer & Co. Inc., dated as of May 16, 2006 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed May 17, 2006).
10.10	Form of common stock purchase agreement dated May 17, 2006 between the Company and certain investors (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed May 17, 2006).
10.11	Amendment No. 3 dated June 30, 2006 to Employment Agreement between the Company and Mark J. Ahn.
10.12	Restricted Stock Agreement dated June 30, 2006 between the Company and Mark J. Ahn.
10.13	Restricted Stock Agreement dated June 30, 2006 between the Company and Fred L. Vitale.
10.14	Restricted Stock Agreement dated May 9, 2006 between the Company and Gregory I. Berk.
10.15	Sublease Agreement dated May 31, 2006 between the Company and MJ Research Company, Inc., including amendment thereto dated May 31, 2006.
10.16	Amendment to Stock Option Agreements between the Company and Mark J. Alan dated June 30, 2006.
10.17	Amendment to Stock Option Agreement between the Company and Fred L. Vitale dated June 30, 2006.
31.1	Certification of Chief Executive Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).
31.2	Certification of Chief Financial Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).
32.1	Certification of Chief Executive Officer and Chief Financial Officer, as required by Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

_______________

** Confidential treatment has been requested with respect to certain portions of this exhibit pursuant to Rule 24b-2.

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