Talon Therapeutics (TLON) 10-Q 2007 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, 2007

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 001-32626 

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, CA.	94080
(Address of principal executive offices)	(Zip Code)

(650) 588-6404

(Registrant's Telephone Number, Including Area Code)

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   o     Accelerated filer   x      Non-accelerated filer   o

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

Yes o No x

As of August 9, 2007, there were 32,032,511 shares of the registrant's common stock, $.001 par value, outstanding.

INDEX   ��

		Page
PART I	FINANCIAL INFORMATION	3
Item 1.	Unaudited Condensed Financial Statements	3
	Unaudited Condensed Balance Sheets	3
	Unaudited Condensed Statements of Operations and Other 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	16
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	27
Item 4.	Controls and Procedures	27
PART II	OTHER INFORMATION	28
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Submission of Matters to a Vote of Security Holders	44
Item 5.	Other Information	45
Item 6.	Exhibits	45
	Signatures	46
	Index of Exhibits Filed with this Report	47

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, including when we expect to undertake, initiate and complete clinical trials of our product 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 this Form 10-Q in Part II, Item 1A 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,
	2007			2006
ASSETS	(Unaudited)
Current assets:
Cash and cash equivalents	$	14,368,012		$	29,127,850
Available-for-sale securities		6,590,494			6,131,000
Prepaid expenses and other current assets		441,399			496,519
Total current assets		21,399,905			35,755,369
Property and equipment, net		417,885			424,452
Restricted cash		125,000			125,000
Total assets	$	21,942,790		$	36,304,821
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	3,193,112		$	2,739,956
Accrued expenses		570,007			1,547,459
Accrued personnel related expenses		742,738			1,050,657
Accrued research and development costs		366,984			596,927
Total current liabilities		4,872,841			5,934,999
Commitment and contingencies:
Stockholders' equity:
Common stock; $0.001 par value:
100,000,000 shares authorized, 29,485,283 and 29,210,627 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively		29,485			29,211
Additional paid-in capital		97,171,024			93,177,445
Accumulated other comprehensive income		—			20,000
Deficit accumulated during the development stage		(80,130,560	)		(62,856,834	)
Total stockholders' equity		17,069,949			30,369,822
Total liabilities and stockholders' equity	$	21,942,790		$	36,304,821

 See accompanying notes to unaudited condensed financial statements.

3

HANA BIOSCIENCES, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENTS OF OPERATIONS AND OTHER 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,
	2007			2006			2007			2006			2007
Operating expenses:
Selling, General and administrative	$	2,725,362		$	2,576,308		$	6,072,347		$	3,560,283		$	23,712,291
Research and development		6,473,793			18,368,374			11,711,697			20,946,506			58,373,740
Total operating expenses		9,199,155			20,944,682			17,784,044			24,506,789			82,086,031
Loss from operations		(9,199,155	)		(20,944,682	)		(17,784,044	)		(24,506,789	)		(82,086,031	)
Other income (expense):
Interest income, net		313,392			249,426			704,958			384,752			2,276,534
Other expense, net		(189,388	)		(8,800	)		(194,640	)		(16,692	)		(321,063	)
Total other income (expense)		124,004			240,626			510,318			368,060			1,955,471
Net loss	$	(9,075,151	)	$	(20,704,056	)	$	(17,273,726	)	$	(24,138,729	)	$	(80,130,560	)
Net loss per share, basic and diluted	$	(0.31	)	$	(0.81	)	$	(0.59	)	$	(1.00	)
Shares used in computing net loss per share, basic and diluted		29,383,420			25,640,398			29,334,829			24,037,103
Comprehensive loss:
Net loss	$	(9,075,151	)	$	(20,704,056	)	$	(17,273,726	)	$	(24,138,729	)
Unrealized gain (loss)		116,000			(156,000	)		(20,000	)		68,000
Comprehensive loss	$	(8,959,151	)	$	(20,860,056	)	$	(17,293,726	)	$	(24,070,729	)

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, 2007 to June 30, 2007

	Common stock				Additional paid-in			Accumulated other comprehensive income			Deficit accumulated during development			Total stockholders'
	Shares		Amount		capital			(loss)			stage			equity
Balance at January 1, 2007		29,210,627	$	29,211	$	93,177,445		$	20,000		$	(62,856,834	)	$	30,369,822
Issuance of shares upon exercise of warrants, options and restricted stock		263,234		263		26,736			—			—			26,999
Stock-based compensation of employees amortized over vesting period of stock options		—		—		4,173,679			—			—			4,173,679
Issuance of shares under employee stock purchase plan		11,422		11		61,834			—			—			61,845
Share-based compensation to nonemployees for services		—		—		(151,670	)		—			—			(151,670	)
Repurchase of employee stock options		—		—		(117,000	)		—			—			(117,000	)
Net loss		—		—		—			—			(17,273,726	)		(17,273,726	)
Unrealized loss on available-for-sale securities		—		—		—			(20,000	)		—			(20,000	)
Balance at June 30, 2007		29,485,283	$	29,485	$	97,171,024		$	—		$	(80,130,560	)	$	17,069,949

See accompanying notes to unaudited condensed financial statements.

5

HANA BIOSCIENCES, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	SixMonths Ended June 30,						Cumulative Period from December 6, 2002 (date of inception) to June 30,
	2007			2006			2007
Cash flows from operating activities:
Net loss	$	(17,273,726	)	$	(24,138,729	)	$	(80,130,560	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		83,322			29,500			263,042
Stock-based compensation of employees		4,173,679			2,636,905			14,251,309
Share-based compensation to nonemployees for services		(151,670	)		354,805			671,471
Shares issued to nonemployees - transaction fee		—			—			185,841
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		—			—			249,750
Issuance of shares in partial consideration for license agreement		—			10,279,640			10,929,640
Issuance of shares in partial consideration of milestone payment		—			—			493,620
Loss on sale of capital assets		—			—			41,759
Realized loss on available-for-sale securities		176,000			—			176,000
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses and other assets		55,119			(16,615	)		(441,400	)
Increase (decrease) in accounts payable		453,156			420,259			3,193,112
Increase (decrease) in accrued and other liabilities		(1,515,313	)		1,877,353			1,679,730
Net cash used in operating activities		(13,999,433	)		(8,556,882	)		(48,188,241	)
Cash flows from investing activities:
Purchase of property and equipment		(76,754	)		(276,900	)		(725,445	)
Proceeds from sale of equipment		—			—			2,760
Purchase of equity securities		—			—			(636,000	)
Purchase of marketable securities		(3,480,494	)		(1,750,000	)		(9,555,494	)
Sale of marketable securities		2,825,000			—			3,425,000
Restricted cash deposited in escrow		—			(125,166	)		(125,000	)
Net cash used in investing activities		(732,248	)		(2,152,066	)		(7,614,179	)
Cash flows from financing activities:
Proceeds from registered direct and private placements of preferred and common stock, net		—			37,118,550			67,927,272
Proceeds from issuances of notes payable to stockholders		—			—			801,619
Collection of subscription receivable		—			—			4,000
Repayment of notes payable to stockholders		—			—			(651,619	)
Repurchase of employee stock options		(117,000	)		—			(117,000	)
Proceeds from exercise of warrants and options and employee stock purchase plan		88,843			774,175			2,206,160
Net cash (used) provided in financing activities		(28,157	)		37,892,725			70,170,432
Net (decrease) increase in cash and cash equivalents		(14,759,838	)		27,183,777			14,368,012
Cash and cash equivalents, beginning of period		29,127,850			17,082,521			—
Cash and cash equivalents, end of period	$	14,368,012			44,266,298		$	14,368,012
Supplemental disclosures of cash flow data:
Cash paid for interest	$	2,668			932		$	43,698
Supplemental disclosures of noncash financing activities:
Common stock issued for repayment of debt		—			150,000
Unrealized loss on available-for-sale securities		20,000			68,000			—
Common stock issued to employees for services rendered in 2004		—			—			249,750
Common stock issued for services to be rendered		—			—			450,948
Common Stock issued to as partial consideration for license agreement		—			10,279,642			—
Common stock issued on conversion of preferred stock		—			—			2,395

 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

Business

Hana Biosciences, Inc. (“Hana” or the “Company”) is a biopharmaceutical company based in South San Francisco, California, which seeks to acquire, develop, and commercialize innovative products to enhance cancer care. The Company is committed to creating value by accelerating the development of its product candidates and expanding its product candidate pipeline by being the alliance partner of choice to universities, research centers and other institutions.

Basis of Presentation

The Company is a development stage enterprise since it has not generated revenue from the sale of its products and its efforts through June 30, 2007 have been principally devoted to identification, licensing and the clinical development of its products, as well as raising capital. Accordingly, the financial statements have been prepared in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 7, “Accounting and Reporting by Development Stage Enterprises.”

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 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 financial statements for the year ended December 31, 2006, included in the Company's Annual Report on Form 10-K for the year ended December 31, 2006 (the “Form 10-K”) filed with the Securities and Exchange Commission (“SEC”) on April 2, 2007. The accompanying condensed balance sheet as of December 31, 2006 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 reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Examples include provisions for deferred taxes and assumptions related to share-based compensation expense. Actual results may differ materially from those estimates.

Segment Reporting

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

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 and restricted 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, 2007 and 2006 upon exercise or conversion that were not included in the computation of net loss per share totaled 7,719,348 and 6,291,518, respectively.

7

HANA BIOSCIENCES, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

Cash and Cash Equivalents and Concentration of Risk

The Company considers all highly-liquid investments with a maturity of three months or less when acquired to be cash equivalents. Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, and available-for-sale securities. The Company maintains its cash and cash equivalents with high credit quality financial institutions and available-for-sale securities consist of U.S. government and government agency securities, corporate notes, bonds and commercial paper.

Available-for-sale Securities

Available-for-sale securities consist of investments acquired with maturities exceeding three months. All available-for-sale securities are reported at fair value, based on quoted market price, with unrealized gains or losses included in other comprehensive income (loss). For available-for-sale securities, a loss is recognized in the period an investment is considered to have an other-than-temporary impairment. The recognized loss is equal to the difference between the cost basis of the security and the fair value of the securities at the balance sheet date of the reporting period for which the assessment is made. The new cost basis of the security will become the fair value of the security at this same period.

The Company owns certain auction rate securities in its managed money accounts. These are highly liquid, investment-grade securities. Auction rate securities generally have stated maturities of 20 to 30 years. However, these securities have economic characteristics of short-term investments due to a rate-setting mechanism and the ability for holders to liquidate them through a Dutch auction process that occurs on pre-determined intervals of less than 90 days. As such and because of management's intent regarding these securities, the Company classifies these securities as short-term investments. There were no material unrealized gains or losses associated with these investments as of June 30, 2007.

Income Taxes

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the recognition, measurement, accounting and disclosure for uncertainty in tax positions. The Company is subject to the provisions of FIN 48 as of January 1, 2007, and has analyzed filing positions in federal and state jurisdictions where it has filed income tax returns, as well as all open tax years in these jurisdictions. The Company is subject to US and California taxes for tax jurisdictions, as defined. The only periods subject to examination for the Company’s federal return are the 2003 through 2006 tax years. The periods subject to examination for the Company’s state returns in California are years 2002 through 2006. There are currently no ongoing examinations by the relevant tax authorities.

At the adoption date and as of June 30, 2007, we had no material unrecognized tax benefits and no adjustments to liabilities or operations were required. There was no interest or penalties recognized related to uncertain tax positions. The Company will account for any interest related to uncertain tax positions as interest expense, and for penalties as tax expense.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

On September 15, 2006 FASB issued Statement No. 157, Fair Value Measurements.  The Statement provides guidance for using fair value to measure assets and liabilities.  This Statement references fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. The Statement applies whenever other standards require (or permit) assets or liabilities to be measured at fair value.  The Statement does not expand the use of fair value in any new circumstances.  It is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The adoption of SFAS No. 157 is not expected to have a material impact on the Company’s financial statements.

8

HANA BIOSCIENCES, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115”. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. This statement provides entities the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply the hedge accounting provisions as prescribed by SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Management is currently evaluating the impact of adopting this Statement.

NOTE 3. LIQUIDITY AND CAPITAL RESOURCES

The Company reported a net loss of $17.3 million for the six months ended June 30, 2007. The net loss from date of inception, December 6, 2002 to June 30, 2007 amounted to $80.1 million. The Company's operating activities have used $48.2 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, 2007, the Company had a net decrease of $14.8 million in cash and cash equivalents. This decrease primarily resulted from net cash used in operating activities of $14.0 million for the six months ended June 30, 2007. Total cash and cash equivalents and marketable securities as of June 30, 2007 were $21.0 million compared to $35.3 million at December 31, 2006.

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 products that have reached FDA approval. Through June 30, 2007, a significant portion of the Company's financing has been through private placements of common stock. The Company will continue to fund operations from cash on hand and through the potential sale of similar sources of capital previously described.

At the current and desired pace of clinical development of the Company’s current product candidates, over the next 12 months the Company expects to be able to fund research and development (including milestone payments that are expected to be triggered under the license agreements relating to the Company’s product candidates, all of which can be satisfied through the issuance of new shares the Company’s common stock), and general corporate and administrative expenses.

The Company believes that its cash, cash equivalents and marketable securities, which totaled $21.0 million as of June 30, 2007, will be sufficient to meet its anticipated operating needs through the first half of 2008 based upon current and desired pace of clinical development. However, the actual amount of funds needed to operate is subject to many factors, some of which are beyond the Company’s control. The Company expects to incur substantial expenses as it continues its drug development efforts, particularly to the extent the Company advances its lead candidate Marqibo through a pivotal clinical study. The Company cannot assure that future financing will be available in amounts or on terms acceptable to it, if at all. If the Company is unable to raise additional capital when it needs to or in sufficient amounts, it will be forced to curtail the development of its product candidates, which would delay the time by which any of our product candidates could receive regulatory approval.

NOTE 4. STOCKHOLDERS' EQUITY

Stock Incentive Plans. The Company has two stockholder approved stock incentive plans under which it grants or has granted options to purchase shares of its common stock and restricted stock awards to employees: the 2003 Stock Option Plan (the “2003 Plan”) and the 2004 Stock Incentive Plan (the “2004 Plan”). The Board of Directors or the chief executive officer, when designated by the Board, is responsible for administration of the Company’s employee stock incentive plans and determines the term, exercise price and vesting terms of each option. In general, stock options issued under the 2003 Plan and 2004 Plan have a vesting period of three years and expire ten years from the date of grant.

9

HANA BIOSCIENCES, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

The 2003 Plan was adopted by the Company's Board of Directors in October 2003. The 2003 Plan authorizes a total of 1,410,068 shares of common stock for issuance. In May 2006, the Company's stockholders ratified and approved the 2003 Plan. The Company may make future stock option issuances from this plan.

In September 2004, the Company's Board of Directors approved and adopted the 2004 Plan, which initially authorized 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 there under to 4,000,000. At the Company’s May 2006 Annual Meeting, the Company's stockholders ratified and approved the 2004 Plan, as amended. At the 2007 Annual Meeting on June 22, 2007, the Company's stockholders approved an additional increase of shares authorized for issuance from 4,000,000 to 7,000,000. The Company may make future stock option issuances from this plan.

 At the May 2006 Annual Meeting, the Company's Stockholders also ratified and approved the Company's 2006 Employee Stock Purchase Plan (the “2006 Plan”), which had been approved by the Company’s Board of Directors on March 31, 2006. The 2006 Plan provides the Company's eligible employees with the opportunity to purchase shares of Company common stock through lump sum payments or payroll deductions. The 2006 Plan is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. As adopted, the 2006 Plan authorized the issuance of up to a maximum of 750,000 shares of common stock. As of June 30, 2007, there have been 11,422 shares issued under the 2006 Plan, with an additional 38,032 shares issued on July 1, 2007.

Restricted Stock Awards The Company's Board of Directors has awarded, under the 2004 Plan, 524,264 shares of restricted stock as of June 30, 2007, at no cost to the Company's executive officers and directors.

A summary of the status of the Company's restricted stock awards as of June 30, 2007 and changes during the six months ended June 30, 2007 is as follows:

Nonvested Restricted Stock Awards	Number of Shares			Weighted Average Grant-Date Fair Value
Nonvested at January 1, 2007		460,764		$	10.65
Granted		—			—
Vested		(246,568	)		10.49
Cancelled/Forfeited		—			—
Nonvested at June 30, 2007		214,196		$	10.84

Stock Options. The Company currently awards stock option grants under its 2003 and 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 7,000,000 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.

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, 2007 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  (in years)		Aggregate Intrinsic Value
Outstanding January 1, 2007		5,123,917		$	4.27
Options granted		1,158,000			2.67
Options cancelled		(776,001	)		6.09
Options exercised		16,664			1.62
Outstanding June 30, 2007		5,489,252			3.68		8.42	$	1,583,393
Exercisable at June 30, 2007		2,210,808		$	2.09		7.22	$	1,457,484

Total stock-based compensation was approximately $1.8 million and $4.2 million related to employee stock options and restricted stock recognized in the operating results for the three and six months ended June 30, 2007 compared to $2.1 million and $2.6 million stock-based compensation for the three and six months ended June 30, 2006, respectively.

The following table summarizes information about stock options outstanding at June 30, 2007:

	Options Outstanding						Options Exercisable
	Number of Shares Subject to Options		Weighted Average		Weighted Average Remaining Contractual Life of Options		Number of Options		Weighted Average Exercise
Exercise Price	Outstanding		Exercise Price		Outstanding		Exercisable		Price
$0.07 - $  1.69		2,440,003	$	1.01		7.9 yrs		1,420,147	$	0.63
$2.17 - $  4.75		1,238,249		4.08		8.2 yrs		672,662		4.00
$4.97 - $  7.42		1,606,500		6.62		9.4 yrs		39,499		6.00
$8.08 - $11.81		204,500		10.10		8.0 yrs		78,500		10.12
$0.07 - $11.81		5,489,252	$	3.68		8.4 yrs		2,210,808	$	2.09

Employee Stock Purchase Plan. The 2006 Plan allows employees to contribute a percentage of their gross salary toward the semi-annual purchase of shares of common stock of the Company. The price of each share will not be less than the lower of 85% of the fair market value of the Company’s common stock on the last trading day prior to the commencement of the offering period or 85% of the fair market value of the Company’s common stock on the last trading day of the purchase period. A total of 750,000 shares of common stock were initially reserved for issuance under the 2006 Plan.

Through June 30, 2007, the Company had issued 11,422 shares under the 2006 Plan, with an additional 38,032 shares issued on July 1, 2007. For the three and six months ended June 30, 2007, the total stock-based compensation expense recognized related to the 2006 Plan under SFAS 123(R) was approximately $21,000 and $89,000, respectively. There was no stock-based compensation realized for the same period in 2006 as the Company had not initiated the 2006 Plan until July 1, 2006.

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HANA BIOSCIENCES, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

Assumptions. The following table summarizes the assumptions used in applying the Black-Scholes-Merton option pricing model to determine the fair value of awards granted during the three and six months ended June 30, 2007 and June 30, 2006, respectively:

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Employee stock options
Risk-free interest rate		4.5	%		5.01	%		4.5	%		5.01	%
Expected life (in years)		5.75 - 6.0			5.0 - 6.0			5.5 - 6.0			5.0 - 6.0
Volatility		0.8			0.7			0.8			0.7
Dividend Yield		0	%		0	%		0	%		0	%
Employee stock purchase plan
Risk-free interest rate		4.82 - 4.91	%		—			4.82 - 5.09	%		—
Expected life (in years)		0.5 - 2.0			—			0.5 - 2.0			—
Volatility		0.73 - 0.93			—			0.55 - 1.03			—
Dividend Yield		0	%		—			0	%		—

The Company's computation of expected volatility of employee stock options 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 two and a half years as of June 30, 2007. In selecting the peer companies, the Company considered the following factors: industry, stage of life cycle, size, and financial leverage. For the 2006 Plan, the Company used actual volatilities as the Company had sufficient historical data for the volatilities used in the Black-Scholes-Merton calculation. To determine the expected term of the Company's employee stock options granted upon adoption of SFAS 123(R) 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 5.5 to 6 years for options granted during the six months ended June 30, 2007. 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. 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-Merton option pricing model to determine the fair value of such awards.  For the three and six months ended June 30, 2007, the Company recognized a credit of $0.1 million and $0.2 million of stock-based compensation expense related to awards held by non-employee consultants, respectively, due to the decline in the Company’s stock price at June 30, 2007 compared to December 31, 2006. During the three and six months ended June 30, 2006, the Company recognized $0.4 million in stock-based compensation related to awards held by non-employee consultants.

Warrants. The following table summarizes the warrants outstanding as of June 30, 2007 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, 2007		2,015,901	$	3.42
Warrants exercised		—		—
Warrants cancelled		—		—
Warrants outstanding June 30, 2007		2,015,901	$	3.42

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HANA BIOSCIENCES, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NOTE 5. AVAILABLE FOR SALE SECURITIES

On June 30, 2007, the Company had $6,590,494 in total marketable securities which consisted of shares of NovaDel Pharma, Inc (“NovaDel”) purchased in conjunction with the Zensana license agreement, and other short-term investments.

At June 30, 2007, the Company had $6,130,494 of marketable securities invested in auction rate securities and other short-term investments and no material unrealized gains or lossed were recognized as of June 30, 2007 related to these investments.

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, 2007 was $460,000, and for the six months ended June 30, 2007, the Company realized a loss of $176,000 since the original purchase in October 2004. These securities were written down to their fair market value on June 30, 2007, as the decline in value, in the opinion of management, is considered other than temporary. On June 30, 2006, the market value of these shares was $540,000 and the Company had an unrealized loss of $96,000 since the original purchase in October 2004.

NOTE 6. RESTRICTED CASH

On May 31, 2006, the Company entered into a sublease agreement relating to its South San Francisco, CA offices. 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 letter 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 letter 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

Employment Agreements.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 minimum aggregate amount of gross salary compensation to be provided over the remaining term of the agreement amounted to approximately $460,000 at June 30, 2007.

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 minimum aggregate amount of gross salary compensation to be provided over the remaining term of the agreement amounted to approximately $333,000 at June 30, 2007.

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HANA BIOSCIENCES, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

On May 6, 2007, the Company entered into a written three year employment agreement with its Executive Vice President, Development and Chief Medical Officer, whose employment commenced May 21, 2007. This agreement provides for an employment term that expires in May 2010. The minimum aggregate amount of gross salary compensation and guaranteed bonuses to be provided for over the remaining term of the agreement amounted to approximately $1,245,000 at June 30, 2007.

The Company entered into a written an employment agreement with its Vice President and Chief Financial Officer on December 18, 2006. This agreement provides for an employment term that expires in November 2008. The minimum aggregate amount of gross salary compensation to be provided for over the remaining term of the agreement amounted to approximately $233,000 at June 30, 2007.

Lease. 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’s executive offices are located. The total cash payments due for the duration of the sublease equaled approximately $1.1 million on June 30, 2007.

NOTE 8. SUBSEQUENT EVENTS

On July 31, 2007, the Company entered into a sublicense agreement with Par Pharmaceutical, Inc. (“Par”) and NovaDel, pursuant to which the Company granted to Par and its affiliates, and NovaDel consented to such grant, a royalty-bearing exclusive right and license to develop and commercialize Zensana within the United States and Canada. The Company previously had acquired such exclusive, sublicensable rights from NovaDel and commenced development of Zensana™, a pharmaceutical product that contains ondansetron, pursuant to a License Agreement with NovaDel dated October 24, 2004, as amended. As agreed by the Company and NovaDel, Par assumed primary responsibility for the development, regulatory approval by the U.S. Food and Drug Administration (the “FDA”), and sales and marketing of Zensana.

In consideration for the license grant to Par, and upon execution of the Sublicense Agreement, Par purchased 2,500,000 newly-issued shares of the Company’s common stock at a price per share of $2.00 per share for aggregate consideration of $5,000,000. The share purchase price reflected a 25% premium to the volume-weighted average sale price of the Company’s common stock during the 10 trading days ending July 30, 2007. The purchase of the shares was made pursuant to a separate subscription agreement between the Company and Par dated July 31, 2007. Under the terms of the subscription agreement, Par agreed that it will not sell, transfer or otherwise dispose of all or any such shares for one year following the effective date of the Sublicense Agreement or, if earlier, the filing of a new drug application with the FDA or the termination of the Sublicense Agreement (the “Lock-Up Period”). For a one-year period following the expiration of the Lock-Up Period, Par further agreed not to sell more than 50% of the shares in any 90-day period. The offer and sale of the Company’s shares to PAR was registered under the Securities Act of 1933 and made pursuant to the Company’s Form S-3 registration statement, SEC File. No. 333-138138.

As additional consideration for the sublicense, following regulatory approval of Zensana, the Sublicense Agreement, Par is required to pay the Company an additional one-time payment of $6,000,000, of which $5,000,000 is payable by the Company to NovaDel under the License Agreement. In addition, the Sublicense Agreement provides for an additional aggregate of up to $44,000,000 in commercialization milestone payments based upon actual net sales of Zensana in the United States and Canada, which amounts are not subject to any corresponding obligations to NovaDel. The Company will also be entitled to royalty payments based on net sales of Zensana by Par or any of its affiliates in such territory, however, the amount of such royalty payments is generally equal to the same amount of royalties that the Company will owe NovaDel under the License Agreement, except to the extent that aggregate net sales of Zensana exceed a specified amount in the first 5 years following FDA approval of an NDA, in which case the royalty rate payable to the Company increases beyond its royalty obligation to NovaDel.

In order to give effect to and accommodate the terms of the Sublicense Agreement, on July 31, 2007, the Company and NovaDel also entered into an Amended and Restated License Agreement. The primary modifications to the Amended and Restated License Agreement are as follows:

·   The Company relinquished its right under the original License Agreement to reduced royalty rates to NovaDel until such time as the Company recovered one-half of its costs and expenses incurred in developing Zensana from sales of Zensana or payments or other fees from a sublicensee;

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·   NovaDel will surrender for cancellation all 73,121 shares of the Company’s common stock that it acquired upon the execution of the original License Agreement;

·   The Company will have the right, but not the obligation, to exploit the licensed product in Canada;

·   The Company or its sublicensee must consummate the first commercial sale of the licensed product within 9 months of regulatory approval by the FDA of such product; and

·   If the Sublicense Agreement is terminated, the Company may elect to undertake further development of Zensana.

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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 to those statements included elsewhere in this Quarterly Report on 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 development-stage biopharmaceutical company focused on acquiring, developing, and commercializing innovative products to advance cancer care. We seek to license novel, late preclinical and early clinical oncology product candidates, primarily from academia and research institutes.

We currently have rights to six product candidates in various stages of development:

· Marqibo^® (vincristine sulfate injection, OPTISOME™) - We acquired our rights to Marqibo from Tekmira Pharmaceuticals Corporation (formerly Inex Pharmaceuticals Corporation) in May 2006. Marqibo has been evaluated in more than 600 patients in 13 clinical trials, including Phase 2 clinical trials in patients with non-Hodgkin’s lymphoma, or NHL, and acute lymphoblastic leukemia, or ALL. We recently initiated a multi-center, multi-national Phase 2 clinical trial of Marqibo in adult patients with relapsed ALL, also known as the rALLy study. The patient population is defined as Philadelphia chromosome-negative adult patients in second relapse or those patients who relapsed following two lines of anti-leukemia chemotherapy, including those who have previously undergone stem cell transplantation. We expect to enroll up to 56 evaluable patients in this clinical trial. We also plan to conduct a Phase 3 first-line, clinical trial in newly diagnosed, elderly adults with Philadelphia chromosome-negative ALL. This Phase 3 randomized trial will compare Marqibo to vincristine in the induction, consolidation, and maintenance phases of treatment. We plan to conduct this study in collaboration with three major U.S. and European oncology cooperative groups. Pending finalization of the protocol and final review by the cooperative groups, we anticipate this study will potentially commence in 2007. We are also planning a single-center pilot Phase 2 clinical trial of Marqibo in patients with metastatic malignant uveal melanoma. The patient population is defined as adults with uveal melanoma and confirmed metastatic disease that is untreated or that has progressed following one prior therapy. We expect to enroll up to 30 patients in this clinical trial. Additionally, Marqibo has been granted Orphan Drug Designation by the FDA for the treatment of adult ALL. 

· Alocrest™ (vinorelbine tartrate injection, OPTISOME™) - In August 2006, we initiated a Phase 1 clinical trial to assess the safety, tolerability and preliminary efficacy of Alocrest in patients with advanced solid tumors. The trial is being conducted at the Cancer Therapy and Research Center in San Antonio, Texas,McGill University in Montreal, Canada; and South Texas Accelerated Research Therapeutics, San Antonio. We expect to complete the Phase 1 trial in 2007 and potentially launch additional trials in 2007.

· Optisomal Topotecan - Following completion of preclinical development, we expect to file an investigational new drug application, or IND, and to initiate a Phase 1 clinical trial in 2007.

· Talvesta™ (talotrexin) for Injection - In April 2004, we commenced an NCI-sponsored Phase 1 clinical trial to evaluate the safety of Talvesta when administered intravenously on days 1, 8 and 15 of a 28-day cycle to patients with solid tumors. In March 2007, this clinical trial was discontinued due to toxicity. Fifty subjects received doses of Talvesta with one drug related patient death being reported during this clinical trial. We commenced a Phase 1/2 clinical trial of Talvesta in non-small cell lung cancer in February 2005. In the Phase 1 portion of this clinical trial, which is now closed for enrollment, Talvesta was administered to patients to ascertain the maximum tolerated dose of the drug. We have suspended enrollment in this clinical trial for additional safety analysis. In May 2005, we commenced a Phase 1/2 clinical trial of Talvesta in ALL. The Phase 1 portion of this clinical trial is closed for enrollment.  While we have not seen issues related to toxicity in the ALL trial, we proactively suspended enrollment in the Phase 2 portion of the ALL trial as a safety precaution.  Subsequent to our postponement of initiating new clinical trials, the FDA notified us that it had placed the Talvesta studies on clinical hold. We anticipate meeting with the FDA upon the completion of our safety analysis, which we anticipate to be completed in the fourth quarter of 2007. After evaluation of the final safety and efficacy analysis of the completed trials and our meeting with the FDA, we will determine our next steps for the drug candidate.

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· Menadione - We acquired the rights to Menadione in October 2006 pursuant to a license agreement with the Albert Einstein College of Medicine, or AECOM. We expect to complete formulation of Menadione by the end of 2007 and to file an IND in 2008.

· Zensana™ (ondansetron HCI) Oral Spray- In June 2006, we submitted our new drug application, or NDA, for Zensana for the prevention of chemotherapy-induced, radiation-induced and post-operative nausea and vomiting, referred to as CINV, RINV and PONV, respectively, under Section 505(b)(2) of the Food, Drug and Cosmetic Act, or FDCA, a form of registration that relies, at least in part, on data in previously approved NDAs for which we do not have a right of reference or published literature or both. While our NDA was pending with the FDA, long-term stability studies revealed small amounts of precipitated material in scale-up batches of Zensana. Through further investigation, we determined that the precipitation is caused by an issue with the original formulation, and was not related to the manufacturing process. As a result, we withdrew our NDA without prejudice in March 2007. Since then, we have developed an alternate formulation. The alternate formulation is currently under active investigation. On July 31, 2007, we entered into a definitive agreement providing for the sublicense of all of our rights to develop and commercialize Zensana to Par Pharmaceutical, Inc. Under the terms of our agreement, Par is now responsible for all regulatory, development and commercialization activities for Zensana. Accordingly, we do not expect to incur additional expenses relating to Zensana. See “- Off Balance Sheet Arrangements - License Agreements - Zensana.”

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.

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. 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. 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.

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.

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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 accounting and general legal activities. 

Critical Accounting Policies

The accompanying discussion and analysis of our financial condition and results of operations are based on our condensed unaudited financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We believe there are certain accounting policies that are critical to understanding our condensed unaudited financial statements, as these policies affect the reported amounts of expenses and involve management’s judgment regarding significant estimates. We have reviewed our critical accounting policies and their application in the preparation of our financial statements and related disclosures with our Audit Committee of the Board of Directors. Our critical accounting policies and estimates are described below.

Share Based Compensation

Effective January 1, 2006, we 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-Merton option pricing model, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity award). We adopted SFAS No.123R using the modified prospective method for share-based awards granted after we became a public entity and the prospective method for share-based awards granted prior to the time we became 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, we estimated the fair value of each option award on the date of grant using the Black-Scholes-Merton 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 us, including industry, stage of life cycle, size and financial leverage. As we have so far only awarded “plain vanilla options” as described by the SEC’s Staff Accounting Bulletin No. 107, we used the “simplified method” for determining the expected life of the options granted. This method is allowed until December 31, 2007, after which we will be required to adopt another method to determine expected life of the option awards granted after this date. 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, we currently estimate that 10% annually of our stock options awarded will be forfeited. For options granted while we were a nonpublic entity, we applied the prospective method in which the awards that were valued under the minimum value method for pro forma disclosure purposes will continue to be expensed using the intrinsic value method of APB 25.

Prior to January 1, 2006, we 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,” or 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, we were 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 common stock underlying the option over the exercise price.

If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods or if we decide to use a different valuation model, the future periods may differ significantly from what we have recorded in the current period and could materially affect our operating loss, net loss and net loss per share.

The Black-Scholes-Merton option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics not present in our option grants and employee stock purchase plan shares. Existing valuation models, including the Black-Scholes-Merton and lattice binomial models, may not provide reliable measures of the fair values of our stock-based compensation. Consequently, there is a risk that our estimates of the fair values of our stock-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those stock-based payments in the future. Certain stock-based payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly higher than the fair values originally estimated on the grant date and reported in our financial statements. There currently is no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values.

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The guidance in SFAS 123R and SAB 107 is relatively new. The application of these principles may be subject to further interpretation and refinement over time. There are significant differences among valuation models, and there is a possibility that we will adopt different valuation models in the future. This may result in a lack of consistency in future periods and materially affect the fair value estimate of stock-based payments. It may also result in a lack of comparability with other companies that use different models, methods and assumptions.

See Note 4 of our condensed unaudited financial statements included elsewhere in this Quarterly Report for further information regarding the SFAS 123R disclosures.

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, we 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.

Recent Accounting Pronouncements

On September 15, 2006, FASB issued Statement No. 157, Fair Value Measurements.  This Statement provides guidance for using fair value to measure assets and liabilities.  This Statement references fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. The Statement applies whenever other standards require (or permit) assets or liabilities to be measured at fair value.  The Statement does not expand the use of fair value in any new circumstances.  It is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The adoption of SFAS No. 157 is not expected to have a material impact on the Company’s financial statements.

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On February 15, 2007, FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS 159. The statement provides companies with an option to report selected financial assets and liabilities at fair value. SFAS 159 also establishes presentation and disclosure requirements to facilitate comparisons between companies using different measurement attributes for similar types of assets and liabilities. The statement is effective as of the beginning of the first fiscal year that begins after November 15, 2007. Earlier adoption is permitted provided the company also elects to apply the provisions of SFAS 157, Fair Value Measurement. The Company is currently evaluating the impact that this standard may have on our financial statements.

Results of Operations

Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006

General and administrative expenses. For the three months ended June 30, 2007, general and administrative, or G&A, expense was $2.7 million, as compared to $2.6 million for the three months ended June 30, 2006. There was an increase of $0.3 million increase in salaries, other employee benefits and personnel related costs which were offset by a decrease of $0.2 million in employee related share-based compensation expense. For the three months ended June 30, 2007, we also incurred a minimal increase in outside services and professional service fees related to increased audit, legal, consulting fees as well as outside services. Also for the three months ended June 30, 2007, there was a minimal increase in allocable expenses, including rent, insurance and other expenses.

Research and development expenses. For the three months ended June 30, 2007, research and development, or R&D, expense was $6.5 million, as compared to $18.4 million for the three months ended June 30, 2006. The decrease of $11.9 million is due primarily to a decrease of $12.3 million in costs related to the acquisition and development of our six product candidates. These include a decrease in costs of $11.9 million in 2007 related to acquisition costs related to the Inex Agreement, completed in May 2006, of which $10.1 million was a non-cash charge for stock issued as consideration to Inex, as well as an additional decrease of $1.0 million relates to a payment made for milestones reached in our license agreements in June 2006. Costs related to the development of our six drug candidates increased by $0.3 million in 2007 over the same period as 2006. There was also an increase in outside services, consultants and professional fees related to research and development projects of $0.3 million in 2007 compared to the 2006. These development costs included the physical manufacturing of drug compounds, payments to our contract research organizations. Costs for Marqibo increased by $0.5 million, as the Phase 2 clinical trial in adult patients with relapsed ALL started to initiate sites. Costs related to the development of Zensana decreased by $1.1 million in the three months ended June 30, 2007 compared to June 30, 2006, due mainly to a decrease in manufacturing costs and clinical costs. As a result of our July 2007 sublicense agreement with Par Pharmaceutical, we do not expect to incur additional costs relating to the development of Zensana. Development costs for Topotecan, Alocrest and Menadione increased by $1.0 million due mainly to manufacturing costs for these drugs as well as clinical costs for Alocrest related to the Phase 1 study in advanced solid tumors. Costs related to IPdR and Talvesta decreased by $0.2 million  in the three months ended June 30, 2007 compared to the same period in 2006 as IPdR was halted in January 2007 and Talvesta clinical trials were halted in May 2007. Employee related expenses decreased by $0.1 million and other allocable operating expenses increased by approximately $0.6 million for the three months ended June 30, 2007 compared to the three months ended June 30, 2006. This includes a $0.4 million increase in conference and printing expenses as well as an increase of $0.2 million in rent, insurance and other allocable costs as head count increased in 2007 over 2006.

Interest income (expense), net. For the three months ended June 30, 2007, net interest income was $0.3 million as compared to net interest income of $0.2 million for the three months ended June 30, 2006. The increase of $0.1 million resulted from an increase of $0.1 million in interest income, due to increased cash balance in our interest bearing accounts due to our May 2006 financing which resulted in net proceeds of $37.1 million, plus rising interest rates.

Other income (expense), net. For the three months ended June 30, 2007, net other expense was $0.2 million as compared to net other expense of approximately $9,000 for the three months ended June 30, 2006. The increase of approximately $176,000 resulted primarily due to a write-down on available-for-sale securities for an other than temporary loss.

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Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

General and administrative expenses. For the six months ended June 30, 2007, general and administrative, or SG&A, expense was $6.1 million, as compared to $3.6 million for the six months ended June 30, 2006. The increase of $2.5 million is due primarily to an increase in salaries, other employee benefits and personnel related costs of approximately $1.6 million, including an increase of $0.9 million in employee related share-based compensation expense due to increased employee stock options and restricted stock issued in subsequent quarters of 2006 and in 2007 as well as increased salary, bonus and benefits of $0.7 due to increased wages and headcount in 2007 compared to 2006. For the six months ended June 30, 2007, we also incurred an increase of approximately $0.6 million in outside services and professional service fees mainly related to increased audit, consulting and outside services related to sales and marketing. The increase in accounting and consulting fees related mainly to increased cost of complying with Section 404 of the Sarbanes-Oxley Act, including increased external audit fees, consulting fees for management’s assessment of internal controls, which costs occurred mainly at the end of 2006 and in the first three months of 2007. Also for the six months ended June 30, 2007, there was an increase of approximately $0.3 million in allocable expenses, including an increase of $0.1 million in marketing costs related to the launch of Zensana and an increase of $0.2 million in rent, insurance and other allocable expenses.

Research and development expenses. For the six months ended June 30, 2007, research and development, or R&D, expense was $11.7 million, as compared to $20.9 million for the six months ended June 30, 2006. The decrease of $9.2 million is due primarily to a decrease of $11.6 million in research and development costs related to the acquisition and development of our six product candidates. These include a decrease in costs of $11.9 million in 2007 related to acquisition costs related to the Inex Agreement, completed in May 2006, of which $10.1 million was a non-cash charge for stock issued as consideration to Inex, as well as an additional decrease of $1.1 million relates to a payment made for milestones reached in our license agreements in June 2006. The decrease of costs was partially offset by an increase of $1.0 million for costs related to the development on our six drugs, as well as an increase in outside services, consultants and professional fees related to research and development projects increased of $0.4 million for the six months ended June 30, 2007 compared to the six months ended June 30, 2006. These development costs included the physical manufacturing of drug compounds, payments to our contract research organizations. Costs for Marqibo increased by $1.2 million, as the Phase 2 clinical trial in adult patients with relapsed ALL started to initiate sites. Costs related to the development of Zensana decreased by $1.4 million in the six months ended June 30, 2007 compared to June 30, 2006, due mainly to a decrease in manufacturing costs and clinical costs. As a result of our July 2007 sublicense agreement with Par Pharmaceutical, we do not expect to incur additional costs relating to the development of Zensana. Development costs for Topotecan, Alocrest and Menadione increased by $1.6 million due mainly to manufacturing costs for these early stage drugs as well as clinical costs for Alocrest related to the Phase 1 study in advanced solid tumors. Costs related to IPdR and Talvesta decreased by $0.5 million as IPdR was halted in January 2007 and Talvesta clinical trials were halted in May 2007. Other outside services, consultants and professional fees related to research and development projects increased by $0.1 million in the six months ended June 30, 2007 compared to the six months ended June 30, 2006. Employee related expenses increased by $1.6 million in 2007, including an increase in salaries, other employee benefits and personnel related costs of approximately $1.0 million and an increase of $0.6 million in employee related share-based compensation expense due to increased employee stock options issued in subsequent quarters 2006 and in 2007. The increase in salary, bonus and benefits was due to increased wages and headcount in 2007 compared to 2006 as the research and development teams expanded with the acquisition of 4 additional drugs in 2006. Other allocable operating expenses increased by approximately $0.8 million for the six months ended June 30, 2007 compared to the six months ended June 30, 2006. This includes a $0.4 million increase in conference costs, a $0.1 million increase in travel expenses, as well as an increase of $0.3 million in rent, insurance and other allocable costs as head count increased in 2007 over 2006.

Interest income (expense), net. For the six months ended June 30, 2007, net interest income was $0.7 million as compared to net interest income of $0.4 million for the six months ended June 30, 2006. The increase of $0.3 million resulted from an increase of $0.3 million in interest income, due to increased cash balance in our interest bearing accounts due to our May 2006 financing which resulted in net proceeds of $37.1 million, plus rising interest rates.

Other income (expense), net. For the six months ended June 30, 2007, net other expense was $0.2 million as compared to net other expense of approximately $17,000 for the six months ended June 30, 2006. The increase of approximately $183,000 resulted primarily from a write-down on available-for-sale securities for an other than temporary loss.

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Liquidity and Capital Resources

From inception to June 30, 2007, we have incurred an aggregate net loss of $80.1 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 financing. From inception through June 30, 2007, we had a net increase in cash and cash equivalents and marketable securities of $21.0 million. This increase primarily resulted from net cash provided by financing activities of $70.2 million, substantially all of which was derived from our five private placements which netted proceeds of $68.0 million. The increase in cash provided by financing activities was offset by net cash used in operating activities of $48.2 million and net cash used in investing activities of $7.6 million for the cumulative period from inception to June 30, 2007. 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, 2007, 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, we estimate that we will have sufficient cash on hand to fund clinical development through the first half of 2008. We may, however, choose to raise additional capital before 2008 in order to fund our future development activities, likely by selling shares of our capital stock or other securities. If we are unable to raise additional capital, we will likely be forced to curtail our desired development activities, which will delay the development of our product candidates. There can be no assurance that such capital will be available to us on favorable terms or at all. We will need additional financing thereafter until we can achieve profitability, if ever.

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., a related party, which served as placement agent, for its services rendered.

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, all of which converted into 3,377,409 shares of common stock in January 2005.

In April 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.

In October 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.

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In May 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 one of our directors at a price of $9.07 per share, which resulted in total gross proceeds to us of approximately $40.0 million. In connection with this offering, 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 Capital Requirements. Our plan of operation for the year ending December 31, 2007 is to continue implementing our business strategy, including the continued development of our six product candidates that are currently in clinical and preclinical phases. 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 general and administrative expenses; and

· product development expenses, including the costs incurred with respect to applications to conduct clinical trials in the United States, as well as outside of the United States, for our product candidates, including manufacturing, intellectual property prosecution and regulatory compliance.

As part of our planned research and development, 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 $18.0 million on clinical development (including milestone payments of $2.5 million that we expect to be triggered under the license agreements relating to our product candidates, all of which can be satisfied through the issuance of new shares our common stock at our discretion), $4.0 million on general corporate and administrative expenses, including $600,000 on facilities and rent. We recently initiated a multi-center, multi-national Phase 2 clinical trial of Marqibo in adult patients with relapsed ALL. We also plan to conduct a Phase 3 first-line, clinical trial in newly diagnosed, elderly adults with Philadelphia chromosome-negative ALL and a single-center pilot Phase 2 clinical trial of Marqibo in patients with metastatic malignant uveal melanoma . We also expect to complete our Phase 1 clinical trial and initiate additional trials of Alocrest in 2007. We expect to initiate a Phase 1 study of Optisomal Topotecan. We also plan to complete formulation and preclinical work on menadione, and anticipate filing an IND in 2007.

We believe that our cash, cash equivalents and marketable securities, which totaled $21.0 million as of June 30, 2007, will be sufficient to meet our anticipated operating needs through the first half of 2008 based upon our current and desired pace of clinical development. However, we expect to incur substantial expenses as we continue our drug discovery and development efforts, particularly to the extent we advance our lead candidate Marqibo through a pivotal clinical study. We cannot guarantee that future financing will be available in amounts or on terms acceptable to us, if at all.

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 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;

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

· costs of increased 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. 

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 reasonably 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. In addition to those risks identified under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006, our assumptions relating the expected costs of development and timeframe for completion are dependent on numerous risks and other 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 positive cash flow, we will likely need to raise additional capital to continue development of our product candidates beyond 2007. 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 or 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.

Marqibo.Since acquiring the exclusive world-wide rights to develop and commercialize Marqibo in May 2006, we have incurred $3.0 million in project costs related to our development of Marqibo through June 30, 2007, of which $1.7 million and $1.3 million was incurred in 2007 and 2006, respectively. In 2007, we plan to initiate a Phase 2, open-label trial in relapsed adult ALL and a Phase 2 trial in uveal melanoma. Pending finalization of the protocol with cooperative groups, we anticipate conducting a Phase 3 trial in front-line ALL potentially commencing in 2007. 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 includes a milestone payment that would be owed to our licensor upon FDA approval.  We believe we currently have sufficient capital to fund our planned development activities of Marqibo through 2007. 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.

Alocrest.Since acquiring the exclusive world-wide rights to develop and commercialize Alocrest in May 2006, we have incurred $2.0 million in project costs related to our development of Alocrest through June 30, 2007, of which $1.2 million and $0.8 million was incurred in 2007 and 2006, respectively. We initiated a Phase 1 clinical trial in August 2006. This Phase 1 trial is designed to assess safety, tolerability and preliminary efficacy in patients with advanced solid tumors. 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 Alocrest, if ever, which amount includes milestone payments that would be owed to our licensor upon FDA approval.  We believe we currently have sufficient capital to fund our planned development activities of Alocrest through 2007. We expect that it will take approximately five to six years until we will have completed development and obtained FDA approval of Alocrest, if ever.

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Optisomal Topotecan. Since acquiring the exclusive world-wide rights to develop and commercialize Optisomal topotecan in May 2006, we have incurred $1.5 million in project costs related to our development of this drug through June 30, 2007, of which $0.5 million and $1.0 million was incurred in 2007 and 2006, respectively. Following completion of additional preclinical development, we expect to file an IND and initiate clinical trials in 2007. As this drug is early in its clinical development, both the registrational strategy and total expenditures to obtain FDA approval are still being evaluated.

Talvesta. From inception through June 30, 2007, we have incurred $4.4 million of costs related to our development of Talvesta, of which $0.4 million and $1.7 million was incurred in 2007 and 2006, respectively. We believe we currently have sufficient capital to fund our planned development activities of Talvesta through 2007. 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.

Menadione. We licensed our rights to menadione from the Albert Einstein College of Medicine in October 2006 and have incurred approximately $0.7 million in project costs related to our development of this drug through June 30, 2007, of which $0.4 million and $0.3 million was incurred in 2007 and 2006, respectively. We expect to complete formulation of menadione in 2007 and to file an IND in 2008. We will incur approximately $1.3 million in costs to fund our research and development efforts for this drug during 2007. As this drug is early in its clinical development, both the registrational strategy and total expenditures to obtain FDA approval are still being evaluated.

Zensana (ondansetron HCl) Oral Spray.Since acquiring our rights to Zensana in October 2004, we have incurred $7.9 million of project costs related to our development through June 30, 2007, of which $0.9 million and $6.1 million was incurred in 2007 and 2006, respectively. In June 2006, we submitted our NDA for Zensana for the prevention of CINV, RINV and PONV under Section 505(b)(2) of the FDCA. While our NDA was pending with the FDA, long-term stability studies revealed small amounts of precipitated material in scale-up batches of Zensana. Through further investigation of this issue, we determined that the precipitation issue in long-term stability was not related to the manufacturing process, but was in fact an issue with the original formulation. As a result, in March 2007, we withdrew our NDA without prejudice. Since then, we have developed an alternate formulation. The alternate formulation is currently under active investigation.  On July 31, 2007, we entered into a definitive agreement providing for the sublicense all of our rights to develop and commercialize Zensana to Par Pharmaceutical, Inc. Accordingly, we do not expect to incur additional costs relating to the development of Zensana. See “- Off- Balance Sheet Arrangements - License Agreements - Zensana.”

Off-Balance Sheet Arrangements

We do not have any “off-balance sheet agreements,” as that term is defined by SEC regulation. We do, however, have various commitments under certain agreements, as follows:

License Agreements.

In the event we achieve certain milestones in connection with the development of our product candidates, we will be obligated to make milestone payments to our licensors in accordance with the terms of our license agreements, as discussed below. The development of pharmaceutical product candidates is subject to numerous risks and uncertainties, including, without limitation, the following: (1) risk of delays in or discontinuation of development from lack of financing, (2) our inability to obtain necessary regulatory approvals to market the products, (3) unforeseen safety issues relating to the products, (4) our ability to enroll a sufficient number of patients in our clinical trials, and (5) dependence on third party collaborators to conduct research and development of the products. Additionally, on a historical basis, only approximately 11 percent of all product candidates that enter human clinical trials are eventually approved for sale. Accordingly, we cannot state that it is reasonably likely that we will be obligated to make any milestone payments under our license agreements. Summarized below are our future commitments under our license agreements, as well as the amounts we have paid to date under such agreements.

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Talvesta License. Our rights to Talvesta are governed by the terms of a December 2002 license agreement with Dana-Farber Cancer Institute and Ash Stevens, Inc. The agreement provides us with an exclusive worldwide royalty bearing license, including the right to grant sublicenses, to the intellectual property rights and know-how relating to Talvesta and all of its uses. Upon execution of the license agreement, we paid a $100,000 license fee and reimbursed our licensors for approximately $11,000 of patent-related expenses. The license agreement also requires us to make future payments totaling up to $6 million upon the achievement of certain milestones, including a $5 million payment upon approval by the FDA of a New Drug Application for Talvesta. To date, we have made two of these milestone payments totaling $200,000 following commencement of the Phase 1 clinical trial and upon reaching 50% enrollment of a Phase 1 clinical trial. Additionally, we are obligated to pay royalties in the amount of 3.5 percent of “net sales” (as defined in the license agreement) of Talvesta. We are also required to pay to the licensors 20 percent of fees or non-royalty consideration (e.g., milestone payments, license fees) received by us in connection with any sublicense of Talvesta granted prior to the start of a Phase 2 trial, and 15 percent of such fees after initiation of a Phase 2 clinical trial.

Zensana License. Our rights to Zensana are subject to the terms of an October 2004 license agreement with NovaDel Pharma, Inc. The license agreement grants us a royalty-bearing, exclusive right and license to develop and commercialize Zensana within the United States and Canada. The technology licensed to us under the license agreement currently covers one United States issued patent, which expires in March 2022. In consideration for the license, we issued 73,121 shares of our common stock to NovaDel and have agreed to make double-digit royalty payments to NovaDel based on a percentage of “net sales” (as defined in the agreement). In addition, we purchased from NovaDel 400,000 shares of its common stock at a price of $2.50 per share for an aggregate payment of $1 million.  

On July 31, 2007, we entered into a sublicense agreement with Par Pharmaceutical, Inc. and NovaDel , pursuant to which we granted to Par and its affiliates, and NovaDel consented to such grant, a royalty-bearing exclusive right and license to develop and commercialize Zensana within the United States and Canada. We previously had acquired such exclusive, sublicensable rights from NovaDel and commenced development of Zensana™, a pharmaceutical product that contains ondansetron, pursuant to a License Agreement with NovaDel dated October 24, 2004, as amended. As agreed by us and NovaDel, Par assumed primary responsibility for the development, regulatory approval by the FDA, and sales and marketing of Zensana.

In consideration for the license grant to Par, and upon execution of the Sublicense Agreement, Par purchased 2,500,000 newly-issued shares of our common stock at a price per share of $2.00 per share for aggregate consideration of $5,000,000. The share purchase price reflected a 25% premium to the volume-weighted average sale price of our common stock during the 10 trading days ending July 30, 2007. The purchase of the shares was made pursuant to a separate subscription agreement between us and Par dated July 31, 2007. Under the terms of the subscription agreement, Par agreed that it will not sell, transfer or otherwise dispose of all or any such shares for one year following the effective date of the Sublicense Agreement or, if earlier, the filing of a new drug application with the FDA or the termination of the Sublicense Agreement (the “Lock-Up Period”). For a one-year period following the expiration of the Lock-Up Period, Par further agreed not to sell more than 50% of the shares in any 90-day period.

As additional consideration for the sublicense, following regulatory approval of Zensana, the Sublicense Agreement, Par is required to pay us an additional one-time payment of $6,000,000, of which $5,000,000 is payable by us to NovaDel under the License Agreement. In addition, the Sublicense Agreement provides for an additional aggregate of $44,000,000 in commercialization milestone payments based upon actual net sales of Zensana in the United States and Canada, which amounts are not subject to any corresponding obligations to NovaDel. We will also be entitled to royalty payments based on net sales of Zensana by Par or any of its affiliates in such territory, however, the amount of such royalty payments is generally equal to the same amount of royalties that we will owe NovaDel under the License Agreement, except to the extent that aggregate net sales of Zensana exceed a specified amount in the first 5 years following FDA approval of an NDA, in which case the royalty rate payable to us increases beyond its royalty obligation to NovaDel.

In order to give effect to and accommodate the terms of the Sublicense Agreement, on July 31, 2007, we also entered into an Amended and Restated License Agreement with NovaDel. The primary modifications to the Amended and Restated License Agreement are as follows:

·   we relinquished our right under the original License Agreement to reduced royalty rates to NovaDel until such time as we have recovered one-half of our costs and expenses incurred in developing Zensana from sales of Zensana or payments or other fees from a sublicensee;

·   NovaDel will surrender for cancellation all 73,121 shares of our common stock that it acquired upon the execution of the original License Agreement;

·   We will have the right, but not the obligation, to exploit the licensed product in Canada;

·   We or our sublicensee must consummate the first commercial sale of the licensed product within 9 months of regulatory approval by the FDA of such product; and

·   If the Sublicense Agreement is terminated, we may elect to undertake further development of Zensana.

Inex License Agreement.In May 2006, we entered into a series of related agreements with Inex Pharmaceuticals Corporation. Pursuant to a license agreement with Inex, we received an exclusive, worldwide license to patents, technology and other intellectual property relating to our Marqibo, Alocrest and Optisomal Topotecan product candidates. Under the license agreement, we also received an exclusive, worldwide sublicense to other patents and intellectual property relating to these product candidates held by the M.D. Anderson Cancer Center. In addition, we 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 Optisomal Topotecan. Further, Inex assigned to us 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.

In consideration for the rights and assets acquired from Inex, we paid to Inex aggregate consideration of $11.8 million, which payment consisted of $1.5 million in cash and 1,118,568 shares of our common stock. We also agreed to pay to Inex royalties on 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. The milestones and other payments may include annual license maintenance fees and milestones. To date, we have made one milestone payment of $1.0 million to Inex upon initiation of a Phase 1 clinical trial in Alocrest.

Menadione License Agreement. In October 2006, we entered into a license agreement with the Albert Einstein College of Medicine of Yeshiva University, a division of Yeshiva University, or the College. Pursuant to the Agreement, we acquired an exclusive, worldwide, royalty-bearing license to certain patent applications, and other intellectual property relating to topical menadione. In consideration for the license, we agreed to issue the College $150,000 of our common stock, valued at $7.36 per share (representing the closing sale price on October 11, 2006). We also agreed to make an additional cash payment within 30 days of signing the agreement, and pay annual maintenance fees. Further, we agreed to make milestone payments in the aggregate amount of $2,750,000 upon the achievement of various clinical and regulatory milestones, as described in the agreement. We may also make annual maintenance fees as part of the agreement. We also agreed to make royalty payments to the College on net sales of any products covered by a claim in any licensed patent. We may also grant sublicenses to the licensed patents and the proceeds resulting from such sublicenses will be shared with the College.

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Lease Agreements. We 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 $1.1 million on June 30, 2007. 

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, 2007, and we have never held such instruments in the past. 

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Based on their evaluation as of June 30, 2007, 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, 2007, 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

Investment in our common stock involves significant risk. You should carefully consider the information described in the following risk factors, together with the other information appearing elsewhere in this report, before making an investment decision regarding our common stock. The risk factors set forth below that are marked with an asterisk (*) contain material changes to the similarly titled risk factor included in Item 1A to our Annual Report on Form 10-K. If any of these risks actually occur, our business, financial conditions, results of operation and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or a part of your investment in our common stock. Moreover, the risks described below are not the only ones that we face. Additional risks not presently known to us or that we currently deem immaterial may also affect our business, operating results, prospects or financial condition.

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, 2006, we had net losses of $44.8 million. From our inception in December 2002 through June 30, 2007, we have incurred an aggregate net loss of $80.1 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 any 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.

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.

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We 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 expect that we will require additional financing to fund our development programs and to expand our infrastructure and commercialization activities. Net cash used in operating activities was $20.5 million in the year ended December 31, 2006 and $14.0 million for the six months ended June 30, 2007. Together with our existing cash, cash equivalents and available for sale securities, we expect that the net proceeds from this offering will be sufficient to fund our operations into the second half of 2008. Accordingly, we will need additional capital to fund our operations beyond such point. If we fail to obtain the necessary financing, we will not be able to fund our operations. We have no committed sources of additional capital. We do not know whether additional financing will be available on terms favorable to us when needed, if at all. If we fail to advance our current product candidates to later stage clinical trials, successfully commercialize Marqibo or acquire new product candidates for development, we will have difficulty obtaining additional financing. 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.

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 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.

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.

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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.

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, Steven Deitcher, our executive vice president, development and chief medical officer, and John Iparraguirre, our vice president and chief financial officer. Dr. Ahn’s, Mr. Vitale’s, Dr. Deitcher’s and Mr. Iparraguirre’s employment are governed by written employment agreements, each of which have terms that expire in either November 2008 or, in Dr. Deitcher’s case, May 2010. Dr. Ahn, Mr. Vitale, Dr. Deitcher and Mr. Iparraguirre may terminate their employment with us at any time, subject, however, to certain 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. Deitcher 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 and to accurately and timely file our periodic and other reports with the SEC. We do not carry “key person” life insurance for any of our officers or key employees.

Our ability to realize any of the milestones and royalties payable under our Sublicense Agreement with Par is substantially dependent on Par’s ability to successfully develop and obtain FDA approval of Zensana.*

Our ability to realize any of the contingent milestones and other consideration under our Sublicense Agreement with Par is subject to Par’s ability to successfully develop and commercialize Zensana. Under the terms of the Sublicense Agreement, Par has responsibility for the development of Zensana. If the current formulation of Zensana proves to be scaleable, Par will need to reestablish bioequivalency through new clinical trials. Even if these studies are successful, Par may not be in a position to file an NDA until 2009 or later. If Par’s development of Zensana is not successful, we will be unable to commercialize Zensna. Since we have no products available for sale, the failure to commercialize Zensana may significantly harm our business.

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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 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 $10 million clinical trial insurance policy for our ongoing clinical trials of our product candidates. 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, Marqibo, or any of our other product candidates, our business will suffer.

 In May 2006, we licensed Marqibo from Inex, which was succeeded by Tekmira Pharmaceuticals Corp. in April 2007. 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:

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· 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 Marqibo and any of our other product candidates, additional FDA regulatory risks exist which may prevent FDA approval of these drug candidates and thereby prevent their commercial use. Additionally, if 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.

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.

Other than Marqibo, the other product candidates that we are developing, Alocrest, Talvesta, Optisomal Topotecan, and topical menadione, 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 Marqibo, which also apply to Alocrest, Optisomal Topotecan, Talvesta and topical menadione, these product candidates also have additional risks as each is in an earlier stage of development and review.

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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 possess world-wide rights to develop and commercialize Marqibo and our other product candidates.

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:

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· 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 Marqibo expires in September 2020. In 2007, the FDA granted orphan drug designation for the use of Marqibo in treating adult 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 Marqibo in the treatment of adult 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. 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. 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 Marqibo, which is still under development and requires further regulatory approvals. If we are unable to commercialize Marqibo, or experience significant delays in doing so, our ability to generate product revenue and our likelihood of success will be diminished.*

We intend to commence a multi-center, multi-national Phase 2 trial of Marqibo in adult patients with relapsed ALL. We also plan to conduct a Phase 3 first-line clinical trial in newly-diagnosed, elderly adults with Philadelphia chromosome-negative ALL. In addition, we are planning a single-center pilot Phase 2 clinical trial of Marqibo in patients with metastatic malignant uveal melanoma. See “Overview” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.A significant portion of our time and financial resources for at least the next twelve months will be used in the development of our Marqibo program. We anticipate that our ability to generate revenues in the near term will depend solely on the successful development, regulatory approval and commercialization of Marqibo.

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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.

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 sales force with technical expertise and with supporting distribution capabilities. Other factors that may inhibit our efforts to commercialize our 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 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.

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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. 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 our product candidates, our ability to generate revenue from sales of our products will be materially impaired.

Even if the FDA approves any of our product candidates, if physicians and patients do not accept and use them, our business will be adversely affected. Acceptance and use of our products will depend upon a number of factors including:

· 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.

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 U.S. 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.

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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 our therapeutics and supportive care product candidates, 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.

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, 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). 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.

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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.

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 Marqibo, Alocrest, Optisomal Topotecan,Talvesta and topical menadione, 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.

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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.

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.

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.

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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 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. 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. Our license agreement with Albert Einstein College of Medicine, or AECOM, similarly provides that AECOM may terminate the agreement, after providing us with notice and an opportunity to cure, for our material breach or default, upon our 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, Alocrest and Optisomal Topotecan are governed by a series of transaction agreements which may be individually or collectively terminated, not only by Inex, but also by 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.

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.

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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 Securities

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 June 30, 2007, 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 offering price 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, product development updates, 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.

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.

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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.

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

None

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 Radisson Sierra Point Hotel, 5000 Sierra Point Parkway in Brisbane, California on June 22, 2006. The stockholders took the following actions:

(i)    The stockholders elected six 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		21,028,815		315,195
Arie S. Belldegrun		19,975,706		1,368,304
Isaac Kier		19,998,189		1,345,821
Leon E. Rosenberg		21,039,098		304,912
Michael Weiser		16,530,614		4,813,396
Linda E. Wiesinger		21,012,864		331,146

(ii)    The stockholders approved an amendment to our 2004 Stock Incentive Plan increasing the number of shares common stock authorized for issuance thereunder to 7,000,000. There were 5,371,766 votes were cast for the proposal; 4,357,546 votes were cast against the proposal; 632,711 votes abstained; and there were 10,981,987 broker non-votes.

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Item 5. Other Information

On April 30, 2007, we entered into an assignment and novation agreement with Inex Pharmaceuticals Corporation, pursuant to which Inex assigned to us all of its rights, benefits and obligations of a Patent and Technology License Agreement dated February 14, 2000, as amended on August 15, 2000, between Inex and the University of Texas M.D. Anderson Cancer Center (the “M.D. Anderson License”). Pursuant the M.D. Anderson License and prior to the assignment, Inex held an exclusive, worldwide license to certain patents and other intellectual property owned by M.D. Anderson relating to Marqibo. Since May 2006, we have had an exclusive, worldwide sublicense to the same patents and intellectual property pursuant to pursuant to a License Agreement dated May 6, 2006 between us and Inex (the “Original Inex License Agreement”). As a result of the assignment of the M.D. Anderson License, we hold a direct license to such patents and intellectual property from M.D. Anderson. The M.D. Anderson License is attached to this Form 10-Q as Exhibit 10.3 and incorporated herein by reference.

On April 30, 2007, we amended and restated the Original Inex License Agreement. The terms of the Original Inex License Agreement were described under paragraph (1) of Item 1.01 of our Current Report on Form 8-K filed with the Commission on May 11, 2006, which is incorporated by reference herein. As a result of the assignment by Inex to us of its interest in the M.D. Anderson License, the purpose of the April 2007 amended and restated license agreement was to remove the sublicense granted to us by Inex covering certain patents and other intellectual property owned by the University of Texas M.D. Anderson Cancer Center that relate to our Marqibo, Alocrest and Optisomal Topotecan product candidates. The amended and restated license agreement with Inex is attached to this Form 10-Q as Exhibit 10.4 and incorporated herein by reference.

Item 6. Exhibits

Exhibit No.	Description
10.1	Employment Agreement dated May 6, 2007 between Hana Biosciences, Inc. and Steven R. Deitcher.
10.2	Hana Biosciences, Inc. 2004 Stock Incentive Plan, as amended through June 22, 2007 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed June 27, 2007).
10.3	Patent and Technology License Agreement dated February 14, 2000 (including amendment dated August 15, 2000) between the Board of Regents of the University of texas System on behalf of the University of Texas M.D. Anderson Cancer Center and Hana Biosciences, Inc., as successor in interest to Inex Pharmaceuticals Corp.**
10.4	Amended and Restated License Agreement dated April 30, 2007 between the Company and Tekmira Pharmaceuticals Corp., as successor in interest to Inex Pharmaceuticals Corp. **
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).

** Certain portions of this exhibit have been omitted pursuant to a request for confidential treatment. The entire exhibit has been separately filed with the Commission.

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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.
Dated: August 9, 2007	By:	/s/ Mark J. Ahn
		Mark J. Ahn
		President and Chief Executive Officer

Dated: August 9, 2007	By:	/s/ John P. Iparraguirre
		John P. Iparraguirre Vice President, Chief Financial Officer

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Index to Exhibits Filed with this Report

Exhibit No.	Description
10.1	Employment Agreement dated May 6, 2007 between Hana Biosciences, Inc. and Steven R. Deitcher.
10.2	Hana Biosciences, Inc. 2004 Stock Incentive Plan, as amended through June 22, 2007 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed June 27, 2007).
10.3	Patent and Technology License Agreement dated February 14, 2000 (including amendment dated August 15, 2000) between the Board of Regents of the University of texas System on behalf of the University of Texas M.D. Anderson Cancer Center and Hana Biosciences, Inc., as successor in interest to Inex Pharmaceuticals Corp.**
10.4	Amended and Restated License Agreement dated April 30, 2007 between the Company and Tekmira Pharmaceuticals Corp., as successor in interest to Inex Pharmaceuticals Corp. **
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).

** Certain portions of this exhibit have been omitted pursuant to a request for confidential treatment. The entire exhibit has been separately filed with the Commission.

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