MMRGlobal 10Q 2008 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-51134

Favrille, Inc.

(Exact name of registrant as specified in its charter)

Delaware		33-0892797
(State or other jurisdiction of incorporation or		(I.R.S. Employer Identification No.)
organization)

10445 Pacific Center Court, San Diego, CA		92121
(Address of principal executive offices)		(Zip Code)

(858) 526-8000

(Registrant’s telephone number, including area code)

N/A

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

Indicate by check mark whether the registrant (1) has 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 registrant 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, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer x

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

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

The number of shares of the Registrant’s common stock outstanding as of April 30, 2008 was 41,299,598.

FAVRILLE, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2008

TABLE OF CONTENTS

		PAGE
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Balance Sheets as of March 31, 2008 (Unaudited) and December 31, 2007	3
	Statements of Operations (Unaudited) for the three months ended March 31, 2008 and 2007 and the period from January 21, 2000 (inception) to March 31, 2008	4
	Statements of Cash Flows (Unaudited) for the three months ended March 31, 2008 and 2007 and the period from January 21, 2000 (inception) to March 31, 2008	5
	Notes to Condensed Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15
Item 4.	Controls and Procedures	15

PART II.	OTHER INFORMATION	15
Item 1.	Legal Proceedings	15
Item 1A.	Risk Factors	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 6.	Exhibits	32

SIGNATURES		34

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

FAVRILLE, INC.

(a development stage company)

BALANCE SHEETS

(in thousands, except share and per share data)

	March 31, 2008			December 31, 2007
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	16,089		$	26,362
Short-term investments	3,569			3,577
Other current assets	1,007			806
Total current assets	20,665			30,745
Property and equipment, net	32,276			33,293
Restricted cash	3,571			3,451
Other assets	423			466
Total assets	$	56,935		$	67,955
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued liabilities	$	3,106		$	3,551
Current portion of debt	5,046			5,275
Warrants liability	2,403			2,492
Total current liabilities	10,555			11,318
Debt, less current portion	5,097			6,342
Deferred rent	15,596			15,415
Commitments and contingencies
Stockholders’ equity:

Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively	—			—
Common stock, $0.001 par value; 75,000,000 shares authorized; 41,299,598 and 41,168,432 issued and outstanding at March 31, 2008 and December 31, 2007, respectively	41			41
Additional paid-in capital	235,101			233,807
Accumulated other comprehensive income	2			7
Deficit accumulated during the development stage	(209,457		)	(198,975		)
Total stockholders’ equity	25,687			34,880
Total liabilities and stockholders’ equity	$	56,935		$	67,955

See accompanying notes.

FAVRILLE, INC.

(a development stage company)

STATEMENTS OF OPERATIONS

(in thousands, except per share data)

Unaudited

	Three Months ended March 31,						Period from January 21, 2000 (inception) to March 31,
	2008			2007			2008
Operating expenses:
Research and development	$	8,063		$	7,997		$	142,833
Marketing, general and administrative	2,556			2,912			43,417
Total operating expenses	10,619			10,909			186,250
Interest income	281			565			7,124
Interest expense	(233		)	(187		)	(4,127		)
Other expense	—			—			(447		)
Change in valuation of warrants	89			—			2,403
Total other income, net	137			378			4,953
Net loss	(10,482		)	(10,531		)	(181,297		)
Deemed dividend and accretion of Series C redeemable convertible preferred stock	—			—			(28,160		)
Net loss applicable to common stockholders	$	(10,482	)	$	(10,531	)	$	(209,457	)
Net loss per share:
Basic and diluted	$	(0.25	)	$	(0.34	)
Weighted-average shares—basic and diluted	41,182			30,690

See accompanying notes.

FAVRILLE, INC.

(a development stage company)

STATEMENTS OF CASH FLOWS

(in thousands)

Unaudited

							Period from
							January 21,
							2000
	Three Months ended						(inception) to
	March 31,						March 31,
	2008			2007			2008
Operating activities:
Net loss	$	(10,482	)	$	(10,531	)	$	(181,297	)

Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,080			659			11,020
Stock-based compensation	1,117			1,054			15,161
Amortization of premium/discount on short-term investments	(29		)	(177		)	(1,074		)
Change in valuation of warrants	(89		)	—			(2,403		)
Other	1			36			312
Changes in operating assets and liabilities:
Other assets	(163		)	(420		)	(915		)
Accounts payable and accrued liabilities	(315		)	(1,178		)	3,088
Deferred rent	181			466			4,396
Net cash used in operating activities	(8,699		)	(10,091		)	(151,712		)
Investing activities:
Purchases of property and equipment	(187		)	(3,990		)	(32,193		)
Purchases of short-term investments	(468		)	(6,263		)	(113,241		)
Maturities of short-term investments	500			14,900			110,749
Other assets	—			—			(70		)
Restricted cash	(120		)	—			(3,571		)
Net cash provided by (used in) investing activities	(275		)	4,647			(38,326		)
Financing activities:
Proceeds from debt	—			4,362			29,854
Payments on debt	(1,476		)	(1,186		)	(19,764		)
Issuance of preferred stock, net	—			—			76,144
Proceeds from issuance of convertible promissory note	—			—			650
Issuance of common stock and warrants	177			10,207			119,287
Repurchase of restricted common stock	—			—			(44		)
Net cash provided by (used in) financing activities	(1,299		)	13,383			206,127
Net increase (decrease) in cash and cash equivalents	(10,273		)	7,939			16,089
Cash and cash equivalents at beginning of period	26,362			14,249			—
Cash and cash equivalents at end of period	$	16,089		$	22,188		$	16,089

Supplemental non-cash activities:
Capitalized interest recorded as property, plant and equipment	$	63		$	127		$	559
Accrued asset acquisitions	$	(130	)	$	238		$	19
Leasehold improvements acquired under tenant improvement allowance	$	—		$	3,669		$	11,200
Conversion of Series C to common stock	$	—		$	—		$	43,678

See accompanying notes.

FAVRILLE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2008

UNAUDITED

1. Basis of Presentation

The accompanying unaudited interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles and with the rules and regulations of the Securities and Exchange Commission related to a quarterly report on Form 10-Q. Accordingly, they do not include all of the information and disclosures required by U.S. generally accepted accounting principles for complete financial statements. The balance sheet at December 31, 2007 has been derived from the audited financial statements at that date but does not include all information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The interim financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial condition and results of operations for the periods presented. Except as otherwise disclosed, all such adjustments are of a normal recurring nature.

Operating results for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. These financial statements should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 and management’s discussion and analysis of financial condition and results of operations included elsewhere herein.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, we review our estimates based on information currently available, and changes in facts and circumstances may cause us to revise these estimates.

Going Concern

The accompanying condensed financial statements have been prepared assuming the Company will continue as a going concern. The basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business. From inception through March 31, 2008, the Company has incurred net losses of approximately $181.3 million and has a deficit accumulated during the development stage of approximately $209.5 million.

At March 31, 2008, we had $19.7 million in cash, cash equivalents and short-term investments that we believe should fund our operations through the middle of 2008 but will not enable us to fund our operations through fiscal year 2008. We are seeking additional financing to continue our clinical development activities and prepare for commercialization of Specifid. We expect to meet our cash needs and fund our working capital requirements from additional capital sources, which may include an equity offering. If we are unable to complete an equity offering, or otherwise obtain sufficient financing, we may be required to reduce, defer, or discontinue our clinical development activities or may not be able to continue as a going concern entity. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, including any of our noncurrent assets, or amounts and classification of liabilities that might be necessary if the Company were not able to continue as a going concern.

Stock-Based Compensation

Total stock-based compensation expense recognized for the three months ended March 31, 2008 and 2007 was as follows (in thousands):

	Three Months ended March 31,
	2008		2007
Research and development	$	555	$	399
General and administrative	562		655
Stock-based compensation expense	$	1,117	$	1,054

At March 31, 2008, the total compensation cost related to unvested stock-based awards granted to employees under the Company’s stock award plans but not yet recognized, excluding performance-based options (see below), was approximately $3.7 million, net of estimated forfeitures of approximately $420,000. This cost will be amortized using the straight-line method over a weighted-average

period of approximately 2.4 years and will be adjusted for subsequent changes in estimated forfeitures.

The recognition of compensation expense associated with performance-based grants requires judgment in assessing the probability of meeting the performance milestones. This may result in significant expense recognition in the period in which the performance goals are met or when achievement of the goals is deemed probable.

Of the performance-based stock option awards granted during 2008, approximately 500,000 of these options will vest over 24 months, from the date of grant, contingent upon certain performance conditions. At March 31, 2008, management has assessed the likelihood of meeting all of the performance conditions as less than probable as they are dependent upon many factors which are not determinable. As such, no compensation expense was recorded. The compensation cost related to the outstanding options of approximately $500,000 will be recognized, over their respective expected terms, when achievement of the milestones is deemed probable.

Of the approximately 1.4 million remaining performance-based stock option awards granted during 2008, 50% of these options will vest immediately upon FDA approval of Specifid and the remaining 50% will vest monthly over the following 24 months. Management cannot assess the likelihood of the FDA’s approval of Specifid as it is dependent upon many factors including the outcome of pivotal Phase 3 clinical trial data analysis. The compensation costs related to these options of approximately $1.5 million will be recognized, over their respective vesting terms, upon achievement of the milestone.

As of March 31, 2008, an aggregate total of 2.7 million performance-based options remained outstanding. Management has assessed the likelihood of meeting all of the performance conditions as less than probable as they are dependent upon many factors which are not determinable. The compensation cost related to the outstanding options of approximately $3.7 million will be recognized, over their respective expected terms, when achievement of the milestones is deemed probable.

Net Loss per Common Share

Net loss per share is calculated in accordance with SFAS No. 128, Earnings Per Share, and SAB No. 98. Basic loss per share is calculated using the weighted average number of common shares outstanding during each period, without consideration for common stock equivalents. Diluted loss per share includes the dilutive effect of common equivalent shares outstanding for the period determined using the treasury-stock method. For purposes of this calculation, common stock subject to repurchase by the Company, preferred stock, options and warrants are considered to be common stock equivalents and are only included in the calculation of diluted earnings per share when their effect is dilutive.

	As of March 31,
	(in thousands)
	2008	2007
Historical outstanding anti-dilutive securities not included in diluted net loss per share calculation:

Common stock equivalents:
Stock warrants	7,822	3,372
Options to purchase common stock	6,547	3,183
Common stock subject to repurchase	3	81
	14,372	6,636

Adoption of Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company has adopted the provisions of SFAS 157 as of January 1, 2008, for financial instruments. Although the adoption of SFAS 157 did not materially impact its financial condition, results of operations, or cash flow, the Company is now required to provide additional disclosures as part of its financial statements. In accordance with the guidance of FASB Staff Position No. 157-2, the Company has postponed adoption of the standard for non-financial assets and liabilities that are measured at fair value on a non-recurring basis, until the fiscal year beginning after November 15, 2008. The Company does not anticipate adoption will have a material impact on its financial position, results of operations or liquidity.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, which permits an entity to measure certain financial assets and financial liabilities at fair value. The objective of SFAS 159 is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting provisions. Under SFAS 159, entities that elect the fair value option (by instrument) will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option election is irrevocable, unless a new election date occurs. SFAS 159 establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity’s election on its earnings, but does not eliminate disclosure requirements of other accounting standards. Assets and liabilities that are measured at fair value must be displayed on the face of the balance sheet. The Company chose not to elect the fair value option for its financial assets and liabilities existing at January 1, 2008, and did not elect the fair value option on financial assets and liabilities transacted in the three months ended March 31, 2008. Therefore, the adoption of SFAS 159 had no impact on the Company’s financial statements.

2. Comprehensive Loss

Components of comprehensive loss were as follows (in thousands):

	Three Months ended March 31,
	2008			2007

Net loss	$	(10,482	)	$	(10,531	)
Change in unrealized gain/(loss) on short-term investments	(5		)	(2		)
Comprehensive loss	$	(10,487	)	$	(10,533	)

Accumulated other comprehensive income totaled approximately $2,000 and $7,000 at March 31, 2008 and December 31, 2007, respectively, and was attributed to net unrealized gains on short-term investments.

3. Stockholders’ Equity

Registration Statement

On June 20, 2006, the Company filed a shelf registration statement on Form S-3 with the Securities Exchange Commission (the “SEC”). The shelf registration statement on Form S-3 permits the Company to sell, in one or more public offerings, shares of its common stock, debt securities or warrants, or any combination of such securities, for proceeds in an aggregate amount of up to $60 million. The shelf registration statement was declared effective by the SEC on July 11, 2006. The registration statement expired on February 29, 2008.

On February 12, 2007, the Company entered into common stock purchase agreements with certain investors relating to a registered direct offering of an aggregate 3,333,334 shares of our common stock at $3.00 per share to the investors for gross proceeds of approximately $10 million. The common stock was issued pursuant to a prospectus supplement filed with the SEC on February 13, 2007, in connection with a shelf takedown from our shelf registration statement.

On November 2, 2007, the Company entered into definitive agreements with primarily institutional investors relating to a registered direct offering of an aggregate 7.4 million shares of common stock and warrants to purchase 4.4 million shares of our common stock for gross proceeds of approximately $21.1 million, before deducting placement agent fees and estimated offering expenses. The investors purchased the shares of common stock and warrants to purchase common stock (together, a “unit”) at a price of $2.845 per unit, each unit consisting of one share and a warrant to purchase 0.6 shares of common stock. The warrants are exercisable at any time prior to November 7, 2012. The exercise price of the warrants is $2.77 per share. The common stock was issued pursuant to a prospectus supplement filed with the SEC on November 2, 2007, in connection with the takedown from our shelf registration statement.

Certain of the Company’s existing stockholders, including three members of our board of directors, Ivor Royston, M.D., Fred Middleton and Antonio Grillo-Lopez, M.D., and funds affiliated with Forward Ventures and Sanderling Ventures, invested in the registered direct offering. Dr. Royston and Mr. Middleton, members of our board of directors on November 2, 2007, are associated with Forward Ventures and Sanderling Ventures, respectively.

On March 11, 2008, the Company filed a shelf registration statement on Form S-3 with the Securities Exchange Commission (the “SEC”). The shelf registration statement on Form S-3 permits the Company to sell, in one or more public offerings, up to 13 million shares of its common stock, inclusive of securities convertible into or exchangeable for shares of common stock, and/or debt securities and warrants to purchase common stock up to a total dollar amount of $25 million. The shelf registration statement was declared

effective by the SEC on March 17, 2008.

Committed Equity Financing Facility

On December 19, 2006, the Company entered into a Committed Equity Financing Facility (CEFF) with Kingsbridge Capital Limited (Kingsbridge) pursuant to which Kingsbridge committed to purchase, subject to certain conditions, up to the lesser of 5.8 million shares of the Company’s common stock or an aggregate of $40 million during the next three years. The Company may require Kingsbridge to purchase newly-issued shares of the Company’s common stock at a price between 90% and 94% of the volume-weighted average price on each trading day during an eight-day pricing period. The maximum dollar amount of shares that the Company may require Kingsbridge to purchase in any such pricing period is the lesser of $10 million or 1.75% of the Company’s market capitalization at the time of a draw down under the CEFF. The Company is not obligated to sell any of the $40 million of common stock available under the CEFF, and there are no minimum commitments or minimum use penalties.

In connection with the CEFF, the Company issued a warrant to Kingsbridge to purchase 250,000 shares of the Company’s common stock at an exercise price of $3.98 per share (the Warrant). The Warrant is exercisable through May 2012.

On February 15, 2007, the Company filed a resale registration statement with the SEC with respect to resale shares of common stock pursuant to the CEFF and underlying warrant. The registration statement was declared effective by the SEC on May 2, 2007.

In accordance with the CEFF, on July 17, 2007 and July 23, 2007, the Company issued an aggregate of approximately 462,000 shares of our common stock to Kingsbridge at an aggregate purchase price of $1.4 million. The common stock was issued pursuant to a prospectus supplement filed with the SEC on July 24, 2007. On September 17, 2007 and September 21, 2007, the Company issued an aggregate of approximately 673,000 shares of our common stock to Kingsbridge at an aggregate purchase price of $1.9 million. The common stock was issued pursuant to a prospectus supplement filed with the SEC on September 25, 2007.

Private Placement of Common Stock and Warrants

On March 6, 2006, the Company entered into a securities purchase agreement relating to a private placement in which the Company issued and sold to certain investors, for an aggregate purchase price of approximately $45.4 million, 8.6 million shares of its common stock and warrants to purchase up to 3 million shares of its common stock at an exercise price of $5.26 per share. At the closing, investors in the private placement paid $5.26 per share of common stock and an additional purchase price equal to $0.125 per warrant.

Certain of the Company’s existing stockholders, including two members of our board of directors, Ivor Royston, M.D. and Fred Middleton, and funds affiliated with Forward Ventures, Sanderling Ventures, Alloy Ventures and William Blair Capital Partners, invested in the private placement. Dr. Royston, Mr. Middleton, Doug Kelly, M.D. and Arda Minocherhomjee, Ph.D., members of our board of directors on March 6, 2006, are associated with Forward Ventures, Sanderling Ventures, Alloy Ventures and William Blair Capital Partners, respectively.

The Company filed a registration statement with the SEC on March 31, 2006 covering the resale of the shares of common stock issued in the private placement and the shares of common stock issuable upon exercise of the warrants issued in the private placement.

4. Fair Value Measurement

The Company adopted SFAS 157 effective January 1, 2008 for financial assets and liabilities measured at fair value. SFAS 157 defines fair value, expands disclosure requirements around fair value and specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1: Quoted prices in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Determination of fair value

The Company measures fair value using the procedures set out below for all assets and liabilities measured at fair value. When available, the Company generally uses quoted market prices to determine fair value, and classifies such items in Level 1. If quoted market prices are not available, fair value is based upon internally developed valuation techniques that use, where possible, current market-based or independently sourced market parameters. Items valued using such internally generated valuation techniques are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be some significant inputs that are readily observable.

Following is a description of the Company’s valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy. Where appropriate, the description includes details of the valuation models, the key inputs to those models, as well as any significant assumptions.

Assets and liabilities measured at fair value on a recurring basis

Short-term investments

The short-term investments category on the Company’s balance sheets includes available-for-sale debt securities. The Company uses quoted market prices to determine the fair value of all investment securities; such items are classified in Level 1 of the fair value hierarchy.

Warrants liability

The warrants liability category on the Company’s balance sheets includes the outstanding warrants issued in connection with the November 2007 registered direct offering described in Note 3. The Company uses model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; such items are classified in Level 2 of the fair value hierarchy.

The following table presents the financial instruments carried at fair value, by caption on the balance sheet and by SFAS 157 valuation hierarchy (as described above) as of March 31, 2008 (in thousands):

			Fair Value Measurements at Reporting Date Using
Description	Balance at March 31, 2008		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Short-term investments	$	3,569	$	3,569	$	—	$	—
Warrants liability	2,403		—		2,403		—

5. Commitments and Contingencies

As of March 31, 2008, we had financed the purchase of equipment and leasehold improvements through debt totaling approximately $29.9 million. Total debt of $10.1 million was outstanding at that date. These obligations are secured by our existing and future assets excluding intellectual property and are due in monthly installments through January 2011. Borrowings under the line of credit bear interest at effective rates ranging from 11.45% to 12.17% per annum. The debt agreements subject us to certain financial and non-financial covenants. As of March 31, 2008, we were in compliance with the terms of the debt agreements. The agreements contain a restrictive financial covenant requiring the Company to maintain a minimum of $15 million in available cash, cash equivalents and short-term investments (available cash balances). If the available cash balances drop below $15 million, the lenders could require the Company to execute a letter of credit (LOC) for their benefit equal to the outstanding loan balances at that time. The Company would be required to use a significant amount of its available cash balance to collateralize the LOC which would reduce the cash available to fund operations of the Company. In addition, the Agreements subject the Company to certain non-financial covenants.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Note Regarding Forward-Looking Statements

This Form 10-Q contains certain forward-looking statements including expectations of market conditions, challenges and plans, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the Safe Harbor provisions created by that statute. The words “anticipate”, “expect”, “believe”, “plan”, “intend”, and similar expressions are intended to identify such statements. Although the forward-looking statements in this Form 10-Q reflect the good faith judgment of our management, such statements are subject to various risks and uncertainties, including but not limited to those discussed herein and, in particular, the risks described in Item 1A of Part II and throughout our Annual Report on Form 10-K for the year ended

December 31, 2007. Actual results and the timing of selected events may differ materially from those anticipated in these forward-looking statements. Except as required by applicable law, we disclaim any duty to update any forward-looking statement to reflect events or circumstances that occur after the date on which such statement is made.

Overview

We are a biopharmaceutical company focused on the development and commercialization of targeted immunotherapies for the treatment of cancer and other diseases of the immune system. We have developed a proprietary technology that enables us to manufacture active immunotherapy products that are designed to stimulate a patient’s immune system to mount a specific and sustained response to disease. Our lead product candidate, Specifid, is an active immunotherapy for the treatment of B-cell non-Hodgkin’s lymphoma, or NHL. We initiated a Phase 3 registration trial of Specifid in patients with follicular B-cell NHL in July 2004 and randomized the last of 349 patients into the trial in June 2006. In addition, Specifid has been evaluated in several multi-center, open-label Phase 2 clinical trials involving more than 200 patients.

We believe Specifid may be effective in treating other types of B-cell NHL. Four additional Phase 2 clinical trials of Specifid are ongoing. One of these clinical trials is being conducted under a separate physician-sponsored Investigational New Drug, or IND, application in the United States. Moreover, we believe our active immunotherapy expertise and proprietary manufacturing technology may enable us to develop additional product candidates for other oncology indications, such as T-cell lymphoma, and for autoimmune diseases. In June 2006, we received an allowance from the FDA for an IND for our second product candidate, FAV-201, for the treatment of cutaneous T-cell lymphoma. We have retained exclusive worldwide commercialization rights to all of our product candidates.

We were incorporated in Delaware in January 2000. As of March 31, 2008, we had not generated any revenues, and we had financed our operations and internal growth through private placements and public offerings of our stock and warrants, and equipment and leasehold debt financings. We are a development stage company and have incurred significant losses since our inception in 2000, as we have devoted substantially all of our efforts to research and development activities, including clinical trials. As of March 31, 2008, our deficit accumulated during the development stage was approximately $209.5 million. We expect to incur substantial and increasing losses for the next several years as we:

· continue to develop and prepare for the commercialization of our lead product candidate, Specifid;

· expand our research and development programs;

· expand our current manufacturing capabilities to support commercial manufacturing of Specifid; and

· acquire or in-license oncology products that are complementary to our own.

Going Concern

As more fully described in the Risk Factors and Note 1 of the Notes to Condensed Financial Statements, our independent registered public accounting firm has included an explanatory paragraph in their report on our 2007 financial statements included with our Annual Report on Form 10-K for the year ended December 31, 2007 filed with the SEC on February 29, 2008, related to the uncertainty of our ability to continue as a going concern. At March 31, 2008, we had $19.7 million in cash, cash equivalents and short-term investments that we believe will allow us to complete analysis of the primary endpoint in our Phase 3 registration trial, which is anticipated to occur in the second quarter of 2008, but we will need to raise additional financing to continue operations beyond such time. Although we may seek additional financing prior to that time, potential equity investors may not be willing and other capital resources may not be available to provide funding before our Phase 3 results are available. If the results of our Phase 3 trial are negative or inconclusive, we may not be able to raise the necessary funds to continue as a going concern entity. Even if the results of our Phase 3 trial are positive, we will need to raise additional financing within a very short period after completion of our analysis of such results in order to continue the clinical development activities necessary for completion of a BLA and prepare for commercialization, and we may not be able to complete a financing, either on favorable terms or at all, within such period. If we are unable to complete an equity offering, or otherwise obtain sufficient financing, we may be required to reduce, defer, or discontinue our clinical development activities or may not be able to continue as a going concern entity. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, including any of our noncurrent assets, or amounts and classification of liabilities that might be necessary if the Company were not able to continue as a going concern.

Financial Operations Overview

Research and Development Expense. Research and development expense consists primarily of costs associated with clinical trials of our product candidates, including the costs of manufacturing our product candidates, compensation and other expenses related to research and development personnel, facilities costs and depreciation. We charge all research and development expenses to operations as they are incurred. Our research and development activities are primarily focused on the development of Specifid. We completed enrollment in our Phase 3 registration trial of Specifid following Rituxan in patients with follicular B-cell NHL in January 2006. We anticipate that the analysis of the primary endpoint in the trial will be completed and made available in the second quarter of 2008. We have also completed enrollment in two Phase 2 clinical trials and continue to evaluate the results. Four additional Phase 2 clinical

trials of Specifid are ongoing.

From inception through March 31, 2008, we incurred costs of approximately $142.8 million associated with the research and development of Specifid, which represents substantially all of our research and development costs to date. We expect our research and development costs to increase as we advance Specifid and new product candidates into later stages of clinical development. While difficult to predict, we estimate that research and development costs required to complete the development of and file a Biologics Licensing Application, or BLA, for Specifid will be an additional $30 million. We are unable to estimate with any certainty the costs we will incur in the continued development of other product candidates for commercialization. On an ongoing basis, we expect to expand our research and development activities to include clinical development of FAV-201 and preclinical research of treatments for autoimmune diseases, initially multiple sclerosis.

Clinical development timelines, likelihood of success and total costs vary widely. Although we are currently focused primarily on Specifid, we anticipate that we will make determinations as to which research and development projects to pursue and how much funding to direct toward each project on an ongoing basis in response to the scientific and clinical success of each product candidate.

At this time, due to the risks inherent in the clinical trial process, clinical trial completion dates and costs vary significantly for each product candidate and are difficult to estimate. The lengthy process of seeking regulatory approvals and the subsequent compliance with applicable regulations require the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals for our product candidates could cause our research and development expenditures to increase and, in turn, have a material adverse effect on our results of operations. We cannot be certain when, if ever, any cash flows from our current product candidates will commence.

Marketing, General and Administrative Expense. Marketing, general and administrative expenses consist primarily of compensation and other expenses related to our marketing and corporate administrative employees, legal fees and other professional services expenses. We anticipate increases in marketing, general and administrative expenses as we add personnel and continue to develop and prepare for commercialization of our product candidates.

Interest Income. Interest income primarily consists of interest earned on our cash reserves, cash invested in money market funds, government securities, corporate notes and bonds and certificates of deposit.

Interest Expense. Interest expense represents interest on our debt, including capital leases.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures. Actual results could differ from those estimates. While our significant accounting policies are described in more detail in Note 1 of the Notes to Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2007, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements:

Stock-Based Compensation. We account for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (SFAS 123(R)). Under SFAS 123(R), stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite service period.

During the three months ended March 31, 2008, we granted to employees performance-based stock options for the purchase of approximately 1.9 million shares of common stock under the 2001 Amended and Restated Equity Incentive Plan (the “Equity Incentive Plan”). Vesting of such options is tied to achievement of certain milestones. For purposes of measuring compensation expense, the amount of awards ultimately expected to vest is estimated at each reporting date based on management’s expectations regarding the relevant performance criteria. Management has initially assessed the likelihood of achieving all of the milestones as less than probable as they are dependent upon many factors which are not determinable at this time. As such, the compensation cost related to the options of approximately $2 million will be recognized, over their respective expected terms, when achievement of the milestones is deemed probable.

Lease Obligation. We recognize rent expense on a straight-line basis over the reasonably assured lease term. Our lease agreements

provide for scheduled rent increases during the lease terms or for rental payments commencing at a date other than the date of initial occupancy. We include any rent escalations and other rent holidays in our straight-line rent expense. In addition, tenant improvements paid by the landlord are capitalized as leasehold improvements and amortized over the shorter of their estimated useful lives or the remaining lease term, while the tenant improvement allowance is recorded as deferred rent and recovered ratably over the remaining term of the lease.

Capitalized Software. Software developed for internal use, whether purchased or developed, is capitalized and amortized using the straight-line method over an estimated useful life of five years. Costs incurred until the point the project has reached development stage are expensed in accordance with Statement of Position (“SOP”) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Determining when a project has reached the development stage, requires the use of judgment. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software maintenance and training costs are expensed in the period in which they are incurred.

Fair Value Measurement. As discussed in Notes 1 and 4 to the condensed financial statements, the Company adopted the provisions of SFAS No. 157 and SFAS No. 159 effective January 1, 2008.

Management has discussed the development and selection of these critical accounting policies with the Audit Committee of our Board of Directors and the Audit Committee has reviewed the disclosures presented above relating to them.

Results of Operations

Comparison of the Three Months Ended March 31, 2008 and 2007

Research and Development. Research and development expense increased from approximately $8 million during the three months ended March 31, 2007 to $8.1 million during the three months ended March 31, 2008. The increase of $100,000, or 1%, is primarily due to approximately $300,000 of additional operating expenses associated with the commercial-scale manufacturing facility; an increase of approximately $100,000 in stock-based compensation; an increase of approximately $100,000, for additional personnel including our Chief Medical Officer and Statistical Programming staff; and an increase of $100,000 in consulting expense related to our Phase 3 registration trial data collection and analysis; offset by a decrease of approximately $400,000 in manufacturing supplies related to the completion of patient enrollment in our Phase 3 registration trial; and a decrease in cash bonus expense of approximately $200,000 as possible payment of the Company’s cash bonus plan is contingent upon meeting certain milestones during 2008 which are considered less than probable.

Marketing, General and Administrative. Marketing, general and administrative expense decreased from approximately $2.9 million during the three months ended March 31, 2007 to $2.6 million during the three months ended March 31, 2008. The decrease of $300,000, or 10%, primarily reflects a decrease in cash bonus expense of approximately $100,000 as possible payment of the Company’s cash bonus plan is contingent upon meeting certain milestones during 2008 which are considered less than probable;

a decrease of approximately $100,000 in stock-based compensation; and a decrease of approximately $100,000 in travel expenses.

Interest Income. Interest income decreased from approximately $565,000 during the three months ended March 31, 2007 to $280,000 during the three months ended March 31, 2008. The decrease of $285,000, or 50%, was primarily the result of the reduction in the average balance of cash, cash equivalents and short-term investments and a lower average interest rate.

Change in Valuation of Warrants. In November 2007, the Company issued warrants to purchase 4.4 million shares of Common Stock in conjunction with the registered direct offering of Common Stock and warrants. These warrants were recorded as a liability of $4.8 million utilizing the Black-Scholes valuation model, or Black-Sholes, for estimating the fair value as of the closing date, November 7, 2007. Utilizing Black-Scholes, on December 31, 2007, the warrants were revalued at approximately $2.5 million and on March 31, 2008, the warrants were again revalued at approximately $2.4 million. The change in valuation was recorded as other income during the three months ended March 31, 2008.

Liquidity and Capital Resources

Sources of Liquidity

We have historically funded our operations primarily through the sale of our equity securities and equipment and leasehold debt financing. As of March 31, 2008, we had received proceeds of approximately $76.1 million, net of stock issuance costs from the sale of preferred stock which was converted to common stock; proceeds from the sale of common stock in our IPO of approximately $39.5 million, net of underwriters’ discounts and commissions and offering expenses; proceeds of approximately $74.9 million from the sale of common stock and warrants to purchase common stock to certain investors, in a private placement and in registered direct offerings, net of offering expenses; and proceeds of $3.3 million from the sale of common stock to certain investors, in a committed equity financing facility.

As of March 31, 2008 we had financed the purchase of equipment and leasehold improvements through debt totaling approximately $29.9 million. Total debt of $10.1 million was outstanding at that date. These debt obligations are secured by our existing and future assets excluding intellectual property and are due in monthly installments through January 2011. Borrowings under the line of credit bear interest at effective rates ranging from 11.45% to 12.17% per annum. The debt agreements subject us to certain financial and non-financial covenants. As of March 31, 2008, we were in compliance with the terms of the debt agreements. The debt agreements contain a restrictive financial covenant requiring the Company to maintain a minimum of $15 million in available cash, cash equivalents and short-term investments (available cash balances). If the available cash balances drop below $15 million, the lenders could require the Company to execute a letter of credit (LOC) for their benefit equal to the outstanding loan balances at that time. The Company would be required to use a significant amount of its available cash balance to collateralize the LOC which would reduce the cash available to fund operations of the Company.

Cash Flows

As of March 31, 2008, cash, cash equivalents and short-term investments were approximately $19.7 million as compared to $29.9 million at December 31, 2007, a decrease of approximately $10.2 million. The decrease resulted primarily from the net cash used to fund ongoing operations.

Net cash used in operating activities was approximately $8.7 million for the three months ended March 31, 2008, compared to approximately $10.1 million for the same period in 2007. The decrease of approximately $1.4 million is primarily due to a decrease in cash bonus payments as possible payment of the Company’s cash bonus plan is contingent upon meeting certain milestones in 2008 which are currently considered less than probable.

Net cash used in investing activities for the three months ended March 31, 2008 was approximately $275,000 compared to net cash provided by investing activities of $4.6 million for the same period in 2007.�� The increased use of cash of approximately $4.9 million is due to a decrease of $14.4 million in maturities of short-term investments offset by a decrease of approximately $5.8 million in purchases of short-term investments and approximately $3.8 million in property and equipment purchases.

Net cash used in financing activities for the three months ended March 31, 2008 was approximately $1.3 million, reflecting primarily debt repayments of approximately $1.5 million. Net cash provided by financing for the same period in 2007 totaled approximately $13.4 million, reflecting primarily the gross proceeds of approximately $10 million from our registered direct offering of common stock in February 2007 and approximately $4.4 million of gross proceeds from our credit facility, offset by approximately $1.2 million of debt repayments.

Funding Requirements

Our future capital uses and requirements depend on numerous forward-looking factors. These factors include but are not limited to the following:

· the results of our ongoing pivotal Phase 3 clinical trial of Specifid;

· magnitude and cost of our product development efforts and other research and development activities;

· rate of progress toward obtaining regulatory approval for our product candidates;

· costs of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights;

· our ability to establish and maintain collaborative, licensing or other arrangements for the development, sale, marketing or distribution of our product candidates and the terms of those arrangements;

· effects of competing technological and market developments; and

· the success of the commercialization of Specifid.

Until we can generate significant cash from our operations, we expect to continue to fund our operations with existing cash resources that were primarily generated from the proceeds of offerings of our equity securities and from equipment and leasehold improvement debt financing. In addition, we may finance future cash needs through the sale of other equity securities, strategic collaboration agreements and debt financing. However, we may not be successful in obtaining collaboration agreements, or in receiving milestone or royalty payments under those agreements. In addition, we cannot be sure that our existing cash, cash equivalents and short-term investments will be adequate or that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or our stockholders. Having insufficient funds may require us to delay, scale back or eliminate some or all of

our research or development programs or to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. Failure to obtain adequate financing may also adversely affect our ability to operate as a going concern. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.

As of March 31, 2008, we have not invested in any variable interest entities. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships. We do not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties other than what is disclosed in Note 8 of the Notes to Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2007.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Quantitative and Qualitative Disclosures About Market Risk

The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Some of the securities in which we invest may be subject to market risk. This means that a change in prevailing interest rates may cause the market value of the investment to fluctuate. To minimize this risk, we may maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds and direct or guaranteed obligations of the United States government. The risk associated with fluctuating interest rates is limited to our investment portfolio and we do not believe that a 1% change in interest rates over the next year would have a significant impact on our interest income. As of March 31, 2008, all of our short-term investments were corporate bonds and notes and asset-backed securities, and our cash equivalents were held in checking accounts and money market funds.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

During the quarter ended March 31, 2008, there have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - - OTHER INFORMATION.

Item 1. Legal Proceedings.

We are currently not a party to any material legal proceeding. We may be subject to various claims and legal actions arising in the ordinary course of business from time to time.

Item 1A. Risk Factors

You should consider carefully the risk factors described below, together with the other information contained in this report. If any of the following risks actually occur, our business, financial condition, results of operations 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 part of your investment in our common stock.

We have marked with an asterisk those risk factors that reflect substantive changes from the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2007.

Going Concern—See “Going Concern” in Note 1 of Notes to Condensed Financial Statements and page 18 of this Risk Factors section, in which we discuss the need to obtain additional financing in 2008.

Risks Related to the Development of Our Product Candidates

Failure to obtain product approvals by the FDA could harm our business.

We are subject to rigorous and extensive regulation by the FDA. In the United States, our biologic product candidates, currently in the preclinical and clinical stages of development, cannot be marketed until they are approved by the FDA. Obtaining FDA approval involves the submission of the results of preclinical studies and clinical trials of the product candidates, among other information. We may not be able to obtain FDA approval, and, even if we are able to do so, the approval process typically takes many years and requires the commitment of substantial effort and financial resources. The FDA can delay, limit or deny approval of a biologic product candidate for many reasons, including:

· the FDA may not find that the biologic product candidate is sufficiently safe or effective;

· FDA officials may interpret data from preclinical testing and clinical trials differently than we do; and

· the FDA may not find our manufacturing processes or facilities satisfactory.

In addition, the specific active immunotherapy technology on which Specifid is based is a relatively new form of cancer therapy that presents novel issues for the FDA to consider, which may make the regulatory process especially difficult.

We cannot assure you that any of our product candidates in development will be approved in the United States in a timely fashion, or at all. Failure to obtain regulatory approval of our product candidates in a timely fashion, or at all, would prevent or delay us from marketing or selling any products and, therefore, from generating revenues from their sale. If this occurs, we may be unable to generate sufficient revenues to attain or maintain profitability, our ability to raise additional capital will be impaired and our stock price may be negatively affected. In addition, both before and after approval, we are subject to numerous FDA requirements covering, among other things, testing, manufacturing, quality control, labeling, advertising, promotion and export of biologics. Failure to comply with the law, including statutes and regulations, administered by the FDA, could result in, among others, any of the following actions:

· warning letters;

· fines and other civil penalties;

· unanticipated expenditures;

· delays in approving or refusal to approve a product candidate;

· product recall or seizure;

· interruption of production;

· operating restrictions;

· injunctions; and

· criminal prosecution.

We are dependent on the success of our lead product candidate, Specifid, and we cannot be certain that it will be commercialized.

We have expended significant time, money and effort in the development of our lead product candidate, Specifid, which is still in clinical development, has not yet received regulatory approval and may never be commercialized. In order to commercialize Specifid, we will need to demonstrate to the FDA and other regulatory agencies that it satisfies rigorous standards of safety and effectiveness. We completed enrollment of patients in a registrational, double-blind, placebo controlled Phase 3 clinical trial of Specifid for the treatment of follicular B-cell NHL in January 2006 and randomized the last of the 349 patients June 2006.

We are also evaluating Specifid for use in other B-cell NHL indications. However, even if we were to receive regulatory approval of Specifid for the treatment of follicular B-cell NHL or the other indications we are exploring, our ability to successfully commercialize Specifid could be jeopardized by the emergence of a competitive product that exhibits greater efficacy, longer duration of response or other benefits. In addition, because our initial regulatory and marketing strategy contemplates the administration of Specifid to patients following treatment with Rituxan, the commercial opportunity for Specifid may be limited by the degree to which oncologists continue to use Rituxan to treat indolent B-cell NHL. Furthermore, to the extent Specifid fails to gain market acceptance for its initial

indication, it may be more difficult for us to generate sufficient credibility with physicians and patients to commercialize Specifid for other indications.

Other than Specifid, we have only three other product development programs, which are at significantly earlier stages of development. In June 2006, we received an allowance from the FDA for an IND for a product candidate, FAV-201, for the treatment of cutaneous T-cell lymphoma. We have ongoing preclinical studies to assess the applicability of our technology to autoimmune diseases, with an initial focus on multiple sclerosis. In June 2007, we acquired a series of optimized anti-CD20 antibodies from Diversa Corporation (now Verenium Corporation). We are currently initiating a plan to select a preferred candidate for preclinical studies. We cannot be certain that we will be able to successfully develop any product candidate from these development programs. We cannot be certain that the clinical development of Specifid or any other product candidate in preclinical testing or clinical trials will be successful, that it will receive the regulatory approvals required to commercialize it, or that any of our other research programs will yield a product candidate suitable for entry into clinical trials. If we are unable to commercialize Specifid or our other product candidates, we may be unable to generate sufficient revenues to attain or maintain profitability, our ability to raise additional capital will be impaired and our stock price may be negatively affected.

*Before we can seek regulatory approval of any of our product candidates, we must successfully complete clinical trials, which are uncertain.

Conducting clinical trials is a lengthy, time-consuming and expensive process, and the results of these trials are inherently uncertain. We have completed enrollment of patients in several Phase 2 clinical trials of Specifid involving more than 200 indolent B-cell NHL patients and are currently conducting follow-up evaluation of those patients. We completed registration of patients in a double-blind, placebo controlled Phase 3 registrational trial of Specifid for the treatment of follicular B-cell NHL in January 2006 and randomized the last of the 349 patients in June 2006. During the week of November 6, 2006, our independent Data Monitoring Board, or DMB, completed a planned interim analysis of data from the secondary endpoint, overall response improvement, in the first 226 patients enrolled in the trial. The DMB concluded that the interim analysis did not demonstrate a statistically significant difference between treatment and control groups in the secondary endpoint. On October 25, 2007, we announced that the DMB was convened to assess TTP for patients in the control group of our Phase 3 trial. The DMB assessment, which was conducted in accordance with the clinical protocol under our SPA, indicated that the control group behavior is consistent with data reported in the published literature on which we based our assumptions for trial design and statistical analysis. Based in part on the guidance provided by the DMB, we determined April 2008 to be the appropriate time for data cutoff of the Phase 3 trial. We anticipate that the analysis of the data will be completed and made available in the second quarter of 2008. However, we cannot guarantee when the necessary data from the trial will be available, and accordingly, we may not be able to complete final analysis of the TTP data within the projected timeframe. Moreover, we cannot guarantee that the control group behavior will ultimately be consistent with data reported in the published literature on which we based our assumptions for trial design and statistical analysis.

Four additional Phase 2 clinical trials of Specifid are ongoing. In June 2006, we received an allowance from the FDA for an IND for our second product candidate, FAV-201, for the treatment of cutaneous T-cell lymphoma.

We have received a Special Protocol Assessment, or SPA, from the FDA for our pivotal Phase 3 clinical trial of Specifid. In the SPA process, the FDA reviewed the design, size and planned analysis of our Phase 3 clinical trial and provided comments regarding the trial’s adequacy to form a basis with respect to effectiveness for approval of a Biologics Licensing Application, or BLA, if the trial meets its predetermined objectives. We will not be able to file a BLA for Specifid until after we complete the analysis of the primary endpoint, TTP, of our ongoing Phase 3 registration trial. We anticipate the analysis of the primary endpoint to be completed and made available in the second quarter of 2008. The FDA’s written agreement is binding, except in limited circumstances, such as when a substantial scientific issue essential to determining the safety or effectiveness of a product candidate is identified after the Phase 3 clinical trial has commenced. Despite having received an SPA, we may be required to conduct an additional Phase 3 clinical trial of Specifid for the treatment of follicular B-cell NHL before we can apply for regulatory approval. Although the FDA typically requires successful results in two Phase 3 clinical trials to support marketing approval, the FDA has, on several occasions, approved products based on a single Phase 3 clinical trial that demonstrates a high level of statistical significance where there is an unmet need for a life-threatening condition. We currently plan to seek FDA approval of Specifid based on our ongoing pivotal Phase 3 clinical trial alone. In the event that the FDA requires the results of a second Phase 3 clinical trial before accepting a BLA or before granting marketing approval of Specifid, our launch of Specifid would be delayed, possibly by several years, and we would incur significant costs in conducting the additional trial.

The preliminary, blinded clinical data reported from time to time prior to the release of the final results of our Phase 3 registration trial and the preliminary clinical data from our Phase 2 clinical trials have not been fully audited and have been taken from databases that have not been reconciled against medical records kept at the clinical sites or that may not include the most current information on patient disease progressions. The data released may not be indicative of the final results of our Phase 3 registration trial or any other clinical trial of Specifid. Failure can occur at any stage of testing. We do not know whether our Phase 3 clinical trial or any future clinical trials will demonstrate safety and efficacy sufficient to result in marketable products. Our failure to adequately demonstrate the safety and efficacy of Specifid will prevent us from obtaining regulatory approval for, or commercializing, Specifid.

Completion of necessary clinical trials may take several years or more. Our commencement and rate of completion of clinical trials may be delayed by many factors, including:

· ineffectiveness of the product candidate, or perceptions by physicians that the product candidate is not safe or effective for a particular indication;

· inability to manufacture sufficient quantities of the product candidate for use in clinical trials;

· delay or failure in obtaining approval of our clinical trial protocols from the FDA;

· slower than expected rate of patient recruitment and enrollment;

· inability to adequately follow and monitor patients after treatment;

· difficulty in managing multiple clinical sites;

· unforeseen safety issues; and

· government or regulatory delays.

Even if we achieve positive interim results in clinical trials, these results do not necessarily predict final results, and positive results in early trials may not be indicative of success in later trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. Negative or inconclusive results or adverse medical events during a clinical trial could cause us to repeat or terminate a clinical trial or require us to conduct additional trials. Our clinical trials may be suspended at any time for a variety of reasons, including if the FDA or we believe the patients participating in our trials are exposed to unacceptable health risks or if the FDA finds deficiencies in the conduct of these trials.

Failures or perceived failures in our clinical trials will directly delay our product development and regulatory approval process, damage our business prospects, make it difficult for us to establish collaboration and partnership relationships, and negatively affect our reputation and competitive position in the pharmaceutical community.

*Failure to enroll patients in our clinical trials may cause delays in developing Specifid or any other product candidate.

We may encounter delays in development and commercialization, or fail to obtain marketing approval, of Specifid or any other product candidate that we may develop if we are unable to enroll enough patients to complete clinical trials. Our ability to enroll sufficient numbers of patients in our clinical trials depends on many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites, the eligibility criteria for the trial and competing clinical trials. Although we completed patient enrollment in our Phase 3 registration trial of Specifid in January 2006, we have from time to time experienced slower-than-expected patient enrollment in our clinical trials and may do so in the future if additional clinical trials of Specifid are required or if we clinically develop any of our other product candidates. Delays in planned patient enrollment may result in increased costs and harm our ability to complete our clinical trials and obtain regulatory approval.

The development of Specifid requires the continued availability of two FDA-approved drugs: GM-CSF and Rituxan, and if either of those drugs becomes unavailable we may not be able to continue development of, or commercialize, Specifid.

Administration of Specifid requires an adjuvant, which is a substance that is used to enhance the immune response. We use a white blood cell growth factor known as GM-CSF, which is commercially available solely from Bayer HealthCare Pharmaceuticals (formerly Berlex Laboratories, Inc.), as an adjuvant for Specifid. GM-CSF is an FDA-approved and commercially available drug that may be purchased by physicians. In February 2007, we entered into a clinical supply and study agreement with Berlex for clinical trials of Specifid performed in the United States, prior to which time we relied on purchase orders to purchase GM-CSF from Berlex. If we require GM-CSF for use in clinical trials outside the United States, or for use in other clinical trials not covered by our agreement with Berlex, we will need to rely on purchase orders for such purchases. Our current strategy for the initial commercialization of Specifid involves the administration of Specifid following treatment with Rituxan. Rituxan is a passive immunotherapy for patients with NHL, which is also FDA-approved and is commercially available solely from Genentech, Inc. and Biogen Idec Inc. We currently rely on physicians to order and administer Rituxan to patients prior to the administration of Specifid in our registration trial. If GM-CSF or Rituxan were to become unavailable as a result of regulatory actions, supply constraints or other reasons, our ability to continue the clinical development of Specifid would be jeopardized.

Risks Related to Our Financial Results and Need for Financing

*We may not be able to continue as a going concern and will need to raise funds in the very near future. We will need substantial additional funds to continue operations, which we may not be able to raise on favorable terms, or at all.

We will need substantial additional funds for existing and planned preclinical studies and clinical trials, to continue research and development activities, for lease and debt obligations related to our manufacturing and headquarter facilities, and to establish manufacturing and marketing capabilities for any products we may develop. In addition, because we do not expect to generate revenues from the sale of our product candidates for several years, if at all, we will also need to raise additional capital to fund our operations.

As more fully described in Note 1 of the Notes to Condensed Financial Statements, our independent registered public accounting firm has included an explanatory paragraph in their report on our 2007 financial statements related to the uncertainty of our ability to continue as a going concern. We believe that our cash, cash equivalents and short-term investments, which were approximately $19.7 million at March 31, 2008, will allow us to complete analysis of the primary endpoint in our Phase 3 registration trial, which is anticipated to occur in the second quarter of 2008, but we will need to raise additional financing to continue operations beyond such time. Although we may seek additional financing prior to that time, potential equity investors or other capital resources may not be willing to provide funding before our Phase 3 results are available. If the results of our Phase 3 trial are negative or inconclusive, we may not be able to raise the necessary funds to continue as a going concern entity. Even if the results of our Phase 3 trial are positive, we will need to raise additional financing within a very short period after completion of our analysis of such results in order to continue the clinical development activities necessary for completion of a BLA and prepare for commercialization, and we may not be able to complete a financing, either on favorable terms or at all, within such period. If we are unable to complete an equity offering, or otherwise obtain sufficient financing, we will be required to reduce, defer, or discontinue our clinical development activities and will likely not be able to continue as a going concern entity.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in these risk factors. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

Our future capital requirements or the adequacy of our available funds will depend on many factors, including, but not limited to:

· the results of our ongoing Phase 3 registration trial of Specifid;

· magnitude and cost of our product development efforts and other research and development activities;

· rate of progress toward obtaining regulatory approval for Specifid and our other product candidates;

· costs of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights;

· effects of competing technological and market developments;

· the cost of expansion of our current facility for commercial production or the construction of a large separate commercial-scale production facility; and

· the success of the commercialization of Specifid.

Future capital requirements will also depend on the extent to which we acquire or invest in businesses, products and technologies, but we currently have no commitments or agreements relating to any of these types of transactions.

Pursuant to an effective shelf registration statement on Form S-3, in February 2007, we sold $10 million of common stock and in November 2007, we sold $21.1 million of common stock and warrants. Additionally, we have entered into the CEFF pursuant to which Kingsbridge committed to purchase, subject to certain conditions, up to $40 million of our common stock. In July 2007, we sold 462,195 shares of common stock to Kingsbridge pursuant to the CEFF for gross proceeds totaling $1.4 million. In September 2007, we issued an aggregate of 673,395 shares of our common stock to Kingsbridge at an aggregate purchase price of $1.9 million. On March 11, 2008, we filed a shelf registration statement with the SEC on Form S-3 pursuant to which we may periodically sell up to 13 million shares of common stock and/or up to $25 million of debt securities and warrants to purchase common stock. The registration statement was declared effective by the SEC on March 17, 2008. Additional funding may not be available to us, and, if available, may not be available on acceptable terms. If we raise additional funds by issuing equity securities, stockholders will incur immediate dilution. If adequate funds are not available to us, we may be required to delay, reduce the scope of, or eliminate one or more of our research, development and clinical activities. Alternatively, we may need to seek funds through arrangements with collaborative partners or others that require us to relinquish rights to technologies or product candidates that we would otherwise seek to develop or commercialize ourselves. Any of these events could have a material adverse effect on our business, results of operations, financial condition or cash flow.

*We have incurred significant operating losses since inception and anticipate that we will continue to incur substantial losses and negative cash flow from operations for the foreseeable future.

We are a development stage company with a limited operating history. We have financed our operations through private placements of common stock and warrants, public offerings of our common stock and warrants to purchase our common stock, equipment and leasehold debt financing, and our Committed Equity Financing Facility, or CEFF, through Kingsbridge Capital Limited. We have incurred losses in each year since our inception in 2000. For the three months ended March 31, 2008, the Company reported a net loss of $10.5 million, or $0.25 per share, compared to a net loss of $10.5 million, or $0.34 per share, for the same period in 2007. These losses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity and working capital. We expect to incur substantial operating losses for at least the next several years. This is due primarily to the expansion of our clinical

trials and research and development programs, preparations to manufacture Specifid on a commercial scale, and marketing, general and administrative expenses. We also have substantial lease and debt obligations related to our new manufacturing and headquarters facilities impacting our operating expenses. We expect that our losses will fluctuate from quarter to quarter and year to year and that these fluctuations may be substantial. We cannot guarantee that we will successfully develop, manufacture, commercialize or market any products. As a result, we cannot guarantee that we will ever achieve or sustain product revenues or profitability.

We currently have no source of revenue and may never become profitable.

Our ability to become profitable will depend upon our ability to generate revenue. To date, Specifid has not generated any revenue, and we do not know when or if Specifid will generate revenue. Our ability to generate revenue depends on a number of factors, including our ability to:

· successfully complete clinical trials for Specifid;

· obtain regulatory approval for Specifid, including regulatory approval for our commercial scale manufacturing facility and process;

· manufacture commercial quantities of Specifid at acceptable cost levels; and

· successfully market and sell Specifid.

We do not anticipate that we will generate revenues until 2009, at the earliest. Further, we do not expect to achieve profitability for at least several years after generating material revenues. If we are unable to generate revenue, we will not become profitable, and we may be unable to continue our operations.

*Our credit facilities with Oxford Finance Corporation and GE Capital Corporation include a restrictive financial covenant, violation of which could restrict a significant amount of our available cash balances.

Our loan and security agreements with Oxford Finance Corporation and GE Capital Corporation, or the lenders, contain a restrictive financial covenant requiring us to maintain a minimum of $15 million in available cash, cash equivalents and short-term investments, or available cash balances. If our available cash balances drop below $15 million, which is likely to occur in the second quarter of 2008 unless we are able to raise additional financing, the lenders could require us to execute a letter of credit, or LOC, for their benefit equal to the outstanding loan balances at that time. We would be required to use a significant amount of our available cash balance to collateralize the LOC which would reduce the cash available to fund operations of the Company.

Our committed equity financing facility with Kingsbridge may not be available to us if we elect to make a draw down, may require us to make additional “blackout” or other payments to Kingsbridge and may result in dilution to our stockholders.

In December 2006, we entered into the CEFF with Kingsbridge. The CEFF entitles us to sell and obligates Kingsbridge to purchase, from time to time over a period of 36 months, shares of our common stock for cash consideration up to an aggregate of $40 million, subject to specified conditions and restrictions. Kingsbridge will not be obligated to purchase shares under the CEFF unless specified conditions are met, which include a minimum price for our common stock; the accuracy of representations and warranties made to Kingsbridge; compliance with laws; and the effectiveness of a registration statement registering for resale the shares of common stock to be issued in connection with the CEFF. In addition, among other termination rights, Kingsbridge is permitted to terminate the CEFF by providing written notice to us within 10 business days after it obtains actual knowledge that an event has occurred resulting in a material and adverse effect on our business, operations, properties or financial condition (subject to specified exceptions, including conditions or events that are reasonably expected to occur in the ordinary course of our business). If we are unable to access funds through the CEFF, or if Kingsbridge terminates the CEFF, we may be unable to access capital on favorable terms, or at all. In July 2007, we issued an aggregate of 462,195 shares of our common stock to Kingsbridge at an aggregate purchase price of $1.4 million. In September 2007, we issued an aggregate of 673,395 shares of our common stock to Kingsbridge at an aggregate purchase price of $1.9 million.

We are entitled, in certain circumstances, to deliver a “blackout” notice to Kingsbridge to suspend the use of the prospectus included in the resale registration statement and prohibit Kingsbridge from selling shares under such prospectus for a certain period of time. If we deliver a blackout notice in the 60 trading days following the settlement of a draw down and the volume weighted average price on the trading day immediately preceding the related blackout period is greater than the volume weighted average price on the first trading day following such blackout period, or if such registration statement is not effective in circumstances not permitted by our registration rights agreement with Kingsbridge, then we must make a payment to Kingsbridge, or issue Kingsbridge additional shares in lieu of this payment, calculated on the basis of a specified number of shares held by Kingsbridge immediately prior to the blackout period and the change in the market price of our common stock during the period in which the use of the registration statement is suspended. If the trading price of our common stock declines during a suspension of the resale registration statement, the blackout or other payment could be significant.

Should we sell shares to Kingsbridge under the CEFF, or issue shares in lieu of a blackout payment, it will have a dilutive effect on

the holdings of our current stockholders and may result in downward pressure on the price of our common stock. If we draw down amounts under the CEFF, we will issue shares to Kingsbridge at a discount of up to 10% from the volume weighted average price of our common stock. If we draw down amounts under the CEFF when our stock price is decreasing, we will need to issue more shares to raise the same amount than if our stock price was higher. Issuances in the face of a declining stock price will have an even greater dilutive effect than if our stock price were stable or increasing and may further decrease our stock price.

Future changes in financial accounting standards or practices or existing taxation rules or practices may cause adverse unexpected revenue or expense fluctuations and affect our reported results of operations.

A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation practice have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

Other Risks Related to Our Business and Industry

We currently depend on single source suppliers for critical raw materials for manufacturing. The loss of these suppliers could delay our clinical trials or prevent or delay commercialization of Specifid.

We currently depend on single source suppliers for critical raw materials used in the manufacture of Specifid. In particular, our manufacturing process for Specifid requires a foreign protein derived from shellfish that is known as keyhole limpet hemocyanin, or KLH. We purchase KLH from biosyn Arzneimittel GmbH, or biosyn, which is currently the only supplier of KLH that has submitted the required filing, known as a drug master file, to the FDA. In November 2004, we entered into an eight-year supply and license agreement with biosyn under which biosyn has agreed to supply us with KLH and we have agreed to make payments upon the achievement of certain milestones and committed to annual KLH purchase requirements during the commercialization of Specifid. Either party may terminate the supply agreement upon a breach by the other party that is not cured within 60 days or other events relating to insolvency or bankruptcy. If we identify another supplier of KLH of suitable quality for our purposes, we will not be able to use the supplier as a second source of KLH for the commercial manufacture of Specifid unless the KLH is tested to be comparable to the existing KLH.

In addition, we depend on a single source supplier for the cell growth media we use to produce Specifid. We purchase this material from Expression Systems LLC, which in turn obtains several of the components used in the cell growth media from sole suppliers. In April 2007, we executed five-year supply and non-exclusive license agreements with Expression Systems. Each agreement is renewable for one three-year period at our option. Under the terms of the agreements, we have the right to purchase raw material components from Expression Systems and manufacture the cell growth media in-house.

Establishing additional or replacement suppliers for these materials may take a substantial amount of time. In addition, we may have difficulty obtaining similar materials from other suppliers that are acceptable to the FDA. If we have to switch to a replacement supplier, we may face additional regulatory delays and the manufacture and delivery of Specifid, or any other product candidates that we may develop, could be interrupted for an extended period of time, which may delay completion of our clinical trials or commercialization. If we are unable to obtain adequate amounts of these materials, our clinical trials will be delayed. In addition, we will be required to obtain regulatory clearance from the FDA to use different materials that may not be as safe or as effective. As a result, regulatory approval of Specifid, or any other product candidates that we may develop, may not be received at all.

*We rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be delayed or may not be able to obtain regulatory approval for or commercialize Specifid or any other product candidates that we may develop.

Our Phase 3 registration trial of Specifid for the treatment of follicular B-cell NHL is being conducted at 67 centers in the United States and will require long-term follow up of at least 342 patients randomized into the trial. One clinical trial of Specifid is being conducted under the direction of a physician sponsor, rather than under our supervision. We do not have the ability to independently conduct clinical trials for Specifid, or any other product candidate that we may develop, and we must rely on third parties, such as medical institutions and clinical investigators, including physician sponsors, to conduct our clinical trials. In particular, we will rely on these parties to recruit and enroll patients in our clinical trials. We also rely on third-party couriers to transport patient tissue samples and Specifid. If any of the third parties upon whom we rely to conduct our clinical trials or transport patient tissue samples and immunotherapies do not comply with applicable laws, successfully carry out their obligations or meet expected deadlines, and need to be replaced, our clinical trials may be extended, delayed or terminated.

If the quality or accuracy of the clinical data obtained by medical institutions and clinical investigators, including physician sponsors and other third-party vendors involved in data management, is compromised due to their failure to adhere to applicable laws or our clinical protocols or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize Specifid, or

any other product candidates that we may develop. If any of our relationships with any of these organizations or individuals terminates, we believe that we would be able to enter into arrangements with alternative third parties. However, replacing any of these third parties would delay our clinical trials and could jeopardize our ability to commercialize Specifid and our other product candidates on a timely basis, or at all.

Even if we obtain regulatory approval, we will continue to be subject to extensive government regulation that may cause us to delay the introduction of our products or withdraw our products from the market.

Even if we obtain regulatory approval for Specifid or our other product candidates, we will still be subject to extensive regulation. These regulations will impact many aspects of our operations, including production, record keeping, quality control, adverse event reporting, storage, labeling, advertising, promotion and personnel. In addition, the later discovery of previously unknown problems may result in restrictions of the product candidates, including their withdrawal from the market. Furthermore, regulatory approval may subject us to ongoing requirements for post-marketing studies. If we or any third party that we involve in our operations fail to comply with any continuing regulations, we may be subject to, among other things, product seizures, recalls, fines or other civil penalties, injunctions, suspensions or revocations of marketing licenses, operating restrictions and criminal prosecution.

Before we can obtain marketing approval for or commercially distribute Specifid, we must have a commercial-scale facility for the manufacture of Specifid. In addition, the FDA and the California Department of Health Services must find our manufacturing facility and process satisfactory.

Our manufacturing methods, equipment and processes must comply with the FDA’s current Good Manufacturing Practices, or cGMP, requirements. We may also need to perform extensive audits of vendors, contract laboratories and suppliers. The cGMP requirements govern, among other things, record keeping, production processes and controls, personnel and quality control. We have only undertaken initial steps towards achieving compliance with these regulatory requirements. Additional steps will require expenditure of significant time, money and effort. We cannot predict the likelihood that the FDA will find our facility satisfactory, even if we believe that we have taken the necessary steps to achieve compliance. If we fail to comply with these requirements or fail to pass a pre-approval inspection of our manufacturing facility in connection with an application to obtain marketing approval for Specifid or another product candidate, we would not receive regulatory approval, and we would be subject to possible regulatory action.

We manufacture Specifid for our ongoing Phase 3 registration trial and for the planned and ongoing Phase 2 clinical trials at our facility in San Diego, California. We currently lease an 80,000 square foot facility in San Diego under a long-term lease agreement. Our facility was inspected and licensed by the California Department of Health Services. Our facility is subject to re-inspection at any time. Failure to maintain a license from the California Department of Health Services or to meet the inspection criteria of the California Department of Health Services would disrupt our manufacturing processes and prevent us from supplying Specifid to patients. If an inspection by the California Department of Health Services indicates that there are deficiencies in our manufacturing process, we could be required to take remedial actions at potentially significant expense, and our facility may be temporarily or permanently closed.

We expanded and qualified our current facility for commercial scale manufacturing in order to commercialize Specifid or any other product candidates that we may develop. We completed construction to expand this facility during the second quarter of 2007. The entire 80,000 square foot facility will be dedicated to manufacturing. We cannot assure you that we would be able to meet commercial demand for Specifid in this facility. Additionally, we may require a larger production facility to meet the demand for Specifid if it is approved. We would need to raise additional debt or equity capital to finance construction of the larger facility. Such financing may not be available or, if available, may not be obtained on terms favorable to us or our stockholders.

Preparing a facility for commercial manufacturing may involve unanticipated delays and the costs of complying with FDA regulations may be significant. In addition, any material changes we make to the manufacturing process after approval may require approval by the FDA and state regulatory authorities. Obtaining these approvals is a lengthy, involved process, and we may experience delays that could limit our ability to manufacture commercial quantities, increase our costs and adversely affect our business.

We may experience difficulties in manufacturing Specifid or any other product candidates that we may develop, which could prevent us from completing our ongoing clinical trials and commercializing these product candidates.

Manufacturing Specifid is a complex, multi-step process that requires us to expend significant time, money and effort in production, record keeping and quality systems to assure that Specifid will meet product specifications and other regulatory requirements. To date, we have manufactured Specifid only for use in Phase 2 and Phase 3 clinical trials and have no experience in manufacturing Specifid for the commercial quantities that might be required if we receive regulatory approval. In particular, we cannot be sure that we will be able to manufacture Specifid at a cost that would enable commercial use. We may experience any of the following problems in our efforts to manufacture our product candidates for our expanding clinical trials or on a commercial scale:

· failure to obtain a sufficient supply of key raw materials;

· difficulties in completing the development and validation of the specialized assays required to ensure the consistency of

our product candidates, including Specifid;

· difficulties in obtaining adequate tumor samples from treating physicians and hospitals;

· difficulties in manufacturing Specifid for multiple patients simultaneously;

· difficulties in the timely shipping of tumor samples to us or in the shipping of Specifid to the treating physicians due to errors by third-party couriers, transportation restrictions or other reasons;

· failure to ensure adequate quality control and assurance in the manufacturing process as we increase the production quantities of Specifid;

· difficulties in establishing and effectively managing a commercial-scale manufacturing facility;

· failure to comply with regulatory requirements, such as FDA regulations and environmental laws;

· significant changes in regulatory requirements;

· damage to or destruction of our manufacturing facility or equipment;

· difficulty in qualifying a second-source supplier for certain critical equipment; and

· shortages of qualified personnel.

In addition, because our manufacturing process only begins upon our receipt of a patient’s tumor biopsy, we cannot produce inventory reserves of our product candidate to be stored in anticipation of any of these potential manufacturing problems. The failure to produce an adequate supply of Specifid could delay our clinical trials and, in turn, delay submission of a BLA for Specifid and commercial launch. Similarly, any difficulties we experience in the manufacture and supply of other product candidates, such as FAV-201, would delay the clinical trials of those product candidates.

If our manufacturing facility is damaged or destroyed, our ability to manufacture products will be significantly affected, which could delay or prevent completion of our clinical trials and commercialization of Specifid or any other product candidates that we may develop.

We currently rely on the availability and condition of our manufacturing facility in San Diego to manufacture Specifid. We lease the property where this facility is located under a lease agreement that expires June 30, 2025, but may be extended at our option for two additional five-year periods. After that time, we may not be able to negotiate a new lease for our facility. If our current facility or any additional facility we may construct or acquire, or our equipment in such facilities, is damaged or destroyed, we will not be able to quickly or inexpensively replace our manufacturing capacity. This would significantly affect our ability to complete clinical trials of, and to manufacture and commercialize, Specifid, or any other product candidates that we may develop.

In addition, our facilities have been subject to electrical blackouts as a result of a shortage of available electrical power. Although we have back-up emergency power generators to cover energy needs for key support systems, a lengthy outage could disrupt the operations of our facilities and clinical trials. While we carry business interruption insurance, this insurance may not be adequate. Any significant business interruption could cause delays in our product development and harm our business.

If we do not develop a sufficient sales and marketing force or enter into agreements with third parties to sell and market Specifid, we may not be able to successfully commercialize our products, which would limit our ability to earn product revenues.

We have exclusive worldwide rights to Specifid. If we are successful in obtaining BLA approval or foreign marketing approval for Specifid, we will need to establish sales and marketing capabilities. In the United States, we plan to do this either by establishing our own sales force or by entering into a co-promotion arrangement with a sales and distribution partner. Outside of the United States, we plan to establish strategic collaborations for the development and marketing of Specifid.

We do not presently possess the resources or experience necessary to market Specifid or our other product candidates ourselves, and we currently have no arrangements for the promotion or distribution of our product candidates. Our future commercial success will depend on our ability to establish our own sales and marketing infrastructure or to collaborate with third parties that have greater sales and marketing experience and resources. Developing effective internal sales and marketing capabilities, which would include the hiring of a sales force, would require a significant amount of our financial resources and time.

We may be unable to establish and manage an effective sales force in a timely or cost-effective manner, or at all, and any sales force we do establish may not be capable of generating demand for Specifid or any other product candidate we may develop. In addition, if we cannot enter into co-promotion arrangements in the United States, or other strategic collaborations for the development and marketing of Specifid in other countries, in a timely manner and on acceptable terms, we may not be able to successfully commercialize Specifid or any other product candidate that we may develop.

To the extent that we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenues are likely to be lower than if we directly marketed and sold Specifid, or any other product candidates that we may develop. If we are unable to establish adequate sales, marketing and distribution capabilities, independently or with others, we will not be able to

generate product revenue and will not become profitable.

If physicians and patients do not use any of our products that may be approved, our ability to generate revenue in the future will be limited.

If approved, Specifid and other product candidates that we may develop may not gain market acceptance among physicians, healthcare payors, patients and the medical community. Demand for any approved product that we may develop will depend on many factors, including:

· our ability to provide acceptable evidence of safety and efficacy;

· convenience and ease of administration;

· availability of alternative treatments;

· cost effectiveness;

· continuing widespread use of Rituxan to treat our initial target disease market;

· effectiveness of our regulatory and marketing strategies;

· prevalence and severity of adverse side effects;

· publicity concerning our products or competitive products; and

· our ability to obtain third-party coverage or reimbursement.

Furthermore, to the extent Specifid fails to gain market acceptance for its initial indication, it may be more difficult for us to generate sufficient credibility with physicians and patients to commercialize Specifid for other indications.

If we are unable to obtain acceptable prices or adequate coverage and reimbursement from third-party payors for Specifid, or any other product candidates that we may develop, our revenues and prospects for profitability will suffer.

Our ability to commercialize Specifid, or any other product candidates that we may develop, depends on the extent to which coverage and reimbursement for Specifid, or any other product candidates that we may develop, will be available from:

· governmental payors, such as Medicare and Medicaid;

· private health insurers, including managed care organizations; and

· other third-party payors.

Many patients will not be capable of paying for Specifid, and may be incapable of paying for any other product candidates that we may develop, themselves and will rely on third-party payors to pay for their medical needs. The federal and state governments, insurance companies, managed care organizations and other third-party payors are actively seeking to contain or reduce costs of health care in the United States and exert increasing influence on decisions regarding the use of, and reimbursement levels for, particular treatments. Such third-party payors, including Medicare, are scrutinizing newly approved medical products and services and may not cover or may limit coverage and reimbursement for our product candidates. In particular, third-party payors may limit the indications for which they will reimburse patients who use Specifid, or any other product candidates that we may develop. Cost-control initiatives could cause us to decrease the price we might establish for Specifid, or any other product candidates that we may develop, which would result in lower product revenues. If the prices for Specifid, or any other product candidates that we may develop, decrease or if governmental and other third-party payors do not provide adequate coverage and reimbursement levels for Specifid, or any other product candidates that we may develop, our revenue and prospects for profitability will suffer.

If we are unable to establish or manage strategic collaborations in the future, our revenue and product development may be limited.

Our strategy may include reliance on strategic collaborations for co-promotion of Specifid in the United States. In addition, we expect to rely on strategic collaborators for commercialization of Specifid outside of the United States and, to an even greater extent, for worldwide development and commercialization of product candidates and programs for chronic autoimmune diseases, such as multiple sclerosis. To date, we have not entered into any agreements with third parties for any of these services.

Establishing strategic collaborations is difficult and time-consuming. Our discussions with potential collaborators may not lead to the establishment of new collaborations on favorable terms, or at all. For example, potential partners may reject collaborations based upon their assessment of our financial, regulatory or intellectual property position. If we successfully establish new collaborations, these relationships may never result in the successful development or commercialization of our product candidates or the generation of sales revenue. To the extent that we enter into co-promotion or other collaborative arrangements, our product revenues are likely to be lower than if we directly marketed and sold any products that we may develop.

Management of any collaborative relationship we may establish in the future will require:

· significant time and effort from our management team;

· coordination of our research and development programs with the research and development priorities of our
collaborators; and

· effective allocation of our resources to multiple projects.

If we enter into development or commercialization collaborations, our success will in part depend on the performance of our corporate collaborators. We likely will not directly control the amount or timing of resources devoted by our corporate collaborators to activities related to our product candidates. Our corporate collaborators may not commit sufficient resources to our research and development programs or the commercialization, marketing or distribution of our product candidates. If any corporate collaborator fails to commit sufficient resources, our preclinical or clinical development related to the collaboration could be delayed or terminated. Also, our collaborators may pursue development or commercialization of other products, product candidates or alternative technologies in preference to our product candidates. Finally, our collaborators may terminate our relationships, and we may be unable to establish additional corporate collaborations in the future on acceptable terms, or at all.

Our efforts to discover, develop and commercialize new product candidates beyond Specifid are at an early stage and are subject to a high risk of failure.

Our strategy is focused on the research, development and commercialization of targeted immunotherapies for the treatment of cancer and other diseases of the immune system. The process of successfully developing product candidates is very time-consuming, expensive and unpredictable. We have only recently begun to direct significant effort toward the development of product candidates in addition to Specifid, such as FAV-201 for T-cell lymphoma and a preclinical product candidate for the treatment of multiple sclerosis. In addition, we acquired a series of optimized anti-CD20 antibodies in June 2007. We are currently initiating a plan to select a preferred candidate for initiating preclinical studies. Development of these product candidates will depend substantially upon the availability of funding for our research and development programs.

We do not know whether our planned preclinical studies or clinical trials for these other product candidates will begin on time or be completed on schedule, or at all. In addition, we do not know whether these clinical trials will result in marketable products. Typically, there is a high rate of attrition for product candidates in preclinical and clinical trials. We do not anticipate that any of our product candidates will reach the market for at least several years.

We may not identify, develop or commercialize any additional new product candidates from our proprietary active immunotherapy technology. Our ability to develop successfully any of these product candidates depends on our ability to demonstrate safety and efficacy in humans through extensive preclinical testing and clinical trials and to obtain regulatory approval from the FDA and other regulatory authorities.

*If our competitors develop and market products that are more effective than our existing product candidates or others we may develop, or obtain marketing approval before we do, our commercial opportunity may be reduced or eliminated.

The development and commercialization of new pharmaceutical products for the treatment of cancer and autoimmune diseases is competitive, and we will face competition from numerous sources, including major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. Many of our competitors have substantially greater financial and technical resources and development, production and marketing capabilities than we do. In addition, many of these companies have more experience than we do in preclinical testing, clinical trials and manufacturing of biologic therapeutics, as well as in obtaining FDA and foreign regulatory approvals. We will also compete with academic institutions, governmental agencies and private organizations that are conducting research in the fields of cancer and autoimmune disease. Competition among these entities to recruit and retain highly qualified scientific, technical and professional personnel and consultants is also intense.

We are aware of a number of companies that are developing active immunotherapies to treat B-cell NHL. Genitope Corporation, or Genitope, discontinued development of its idiotype immunotherapy product candidate, MyVax (Id-KLH), or MyVax, for patients with follicular B-cell NHL after announcing, in December 2007, that the trial was unable to show a statistical benefit in progression free survival for patients receiving MyVax plus GM-CSF versus KLH plus GM-CSF. Antigenics, Inc. completed a Phase 2 clinical trial evaluating its active immunotherapy candidate in indolent NHL patients. Biovest International Inc., or Biovest, a majority owned subsidiary of Accentia Biopharmaceuticals terminated patient enrollment in a Phase 3 clinical trial of an active idiotype immunotherapy in September 2007. In April 2008, it announced that an independent data monitoring board had performed an interim analysis of the data and recommended that Biovest unblind the data in August 2008..

Several companies are engaged in the development and commercialization of passive immunotherapy products for the treatment of B-cell NHL that may compete with Specifid. Genentech and Biogen Idec are co-marketing Rituxan for the treatment of relapsed or refractory, indolent B-cell NHL. Cell Therapeutics, Inc. is marketing Zevalin, a passive radioimmunotherapy product. GlaxoSmithKline plc currently markets Bexxar, a passive radioimmunotherapy product.

The most recent advances in the treatment of B-cell NHL have involved the combination of existing products and changes to approved schedules and doses, particularly for Rituxan. Numerous clinical trials reported in recent years have indicated that additional doses of Rituxan and maintenance dosing of Rituxan can improve TTP in patients who respond to therapy. Combination therapies involving chemotherapeutic or immunostimulatory drugs in combination with Rituxan at various doses and schedules may provide patients with an increase in TTP over that expected with Rituxan alone. Accordingly, we may face competition as a result of developments in this area.

We expect that our ability to compete effectively will depend upon our ability to:

· successfully and rapidly complete clinical trials and obtain all requisite regulatory approvals in a cost-effective manner;

· reliably and cost-effectively manufacture sufficient quantities of our products;

· maintain a proprietary position for our manufacturing process and other technology;

· price our products competitively;

· obtain appropriate reimbursement approvals for our products;

· establish an adequate sales and marketing force for our products; and

· attract and retain key personnel.

In addition, our ability to compete effectively will depend on the relative efficacy and safety of other active immunotherapy products approved for sale as compared to our own products.

We are subject to new legislation, regulatory proposals and managed care initiatives that may increase our costs of compliance and adversely affect our ability to market our products, obtain collaborators and raise capital.

There have been a number of legislative and regulatory proposals aimed at changing the healthcare system and pharmaceutical industry, including reductions in the cost of prescription products and changes in the levels at which consumers and healthcare providers are reimbursed for purchases of pharmaceutical products. For example, the Prescription Drug and Medicare Improvement Act of 2003 was recently enacted. This legislation provides for a Medicare prescription drug benefit which began in 2006 and mandates other reforms. Although we cannot predict the full effects on our business of the implementation of this new legislation, it is possible that the new benefit, which will be managed by private health insurers, pharmacy benefit managers and other managed care organizations, will result in decreased reimbursement for prescription drugs, which may further exacerbate industry-wide pressure to reduce the prices charged for prescription drugs. This could harm our ability to market our products and generate revenues. However, we expect that Specifid will be administered under the supervision of a physician and, therefore, fall outside of the prescription drug legislation.

*We depend on attracting and retaining key scientific and management personnel to advance our technology, and the loss of these personnel could impair the development of our products.

Our success depends on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel and on our ability to develop and maintain important relationships with leading academic institutions, clinicians and scientists. We are highly dependent upon our senior management and scientific staff, particularly John P. Longenecker, Ph.D., our President and Chief Executive Officer, and Daniel P. Gold, Ph.D., one of our co-founders and our Chief Scientific Officer. The loss of services of Dr. Longenecker or Dr. Gold, or one or more of our other members of senior management, could delay or prevent the successful completion of our Phase 3 registration trial or the commercialization of Specifid. Although we have employment agreements with each of our executives, their employment with us is “at will,” and each executive can terminate his or her agreement with us at any time. We do not carry “key person” insurance covering members of senior management, other than Drs. Longenecker and Gold. This insurance may not continue to be available on commercially reasonable terms and may prove inadequate to compensate us for the loss of their services.

The competition for qualified personnel in the biotechnology field is intense. In particular, our manufacturing process depends on our ability to attract and retain qualified manufacturing and quality control personnel. We will need to hire additional personnel as we continue to expand our manufacturing, research and development activities. We may not be able to attract and retain quality personnel on acceptable terms given the competition for such personnel among biotechnology, pharmaceutical and other companies. We are not aware of any key personnel planning to retire or terminate their employment in the near future.

*We may need to increase the size of our organization, and we may experience difficulties in managing growth.

As of March 31, 2008, we had 150 employees. Of these, 123 employees were in research and development which was comprised of 83 in manufacturing, quality control and quality assurance, 35 in research and process development, and five members of senior management. Of the remaining employees, three were members of senior management and 24 were in marketing, general and administration. If results of our Phase 3 registration trial are positive, we will need to expand our financial, managerial, operational and other resources in order to continue our clinical trials and commercialize Specifid, FAV-201, or any other product candidates that

we may develop. Future growth would impose significant added responsibilities on our management team, including the need to identify, recruit, maintain and integrate additional employees, and could impose significant added expenses to our operations. Our ability to commercialize Specifid, FAV-201, or any other product candidates that we may develop, and our future financial performance in general, will depend in part on our ability to manage any future growth effectively. In order to meet these challenges, we would need to:

· manage our clinical trials effectively;

· manage our research and development efforts effectively;

· develop our administrative, accounting and management information systems and controls; and

· hire, train and integrate additional management, administrative, manufacturing and sales and marketing personnel.

We may not be able to accomplish these tasks, and our failure to accomplish any of them could harm our business or future prospects.

If we use biological and hazardous materials in a manner that causes injury or violates laws, we may be liable for damages.

Our research and development and manufacturing activities involve the use of biological and hazardous materials that could be dangerous to human health, safety or the environment. Although we believe our safety procedures for handling and disposing of these materials comply with federal, state and local laws and regulations, we cannot entirely eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed our resources. We currently maintain property and casualty insurance coverage which covers liability for hazardous and controlled materials. However, this insurance coverage may not be sufficient to cover our liability and we may not be able to obtain sufficient coverage in the future at a reasonable cost. In addition, we may incur significant costs complying with both existing and future environmental laws and regulations. In particular, we are subject to regulation by the Occupational Safety and Health Administration, or OSHA, and the Environmental Protection Agency, or EPA, and to regulation under the Toxic Substances Control Act and the Resource Conservation and Recovery Act. OSHA, the EPA or other agencies may adopt regulations that adversely affect our research and development programs.

We face a risk of product liability claims and may not be able to obtain adequate insurance.

Our business exposes us to potential liability risks that may arise from the clinical testing of our product candidates and the manufacture and sale of any approved products. These risks will exist even with respect to those product candidates that are approved for commercial sale by the FDA and manufactured in facilities regulated by the FDA. Any product liability claim or series of claims brought against us could significantly harm our business by, among other things, reducing demand for our products, injuring our reputation and creating significant adverse media attention and costly litigation. Plaintiffs have received substantial damage awards in some jurisdictions against pharmaceutical companies based upon claims for injuries allegedly caused by the use of their products. Any judgment against us that is in excess of our insurance policy limits would have to be paid from our cash reserves, which would reduce our capital resources. We currently maintain clinical trial insurance. Although we believe our current insurance coverage is adequate, we cannot be certain that it will be sufficient. Furthermore, we cannot be certain that our current insurance coverage will continue to be available, or that increased coverage, which will be necessary if we are able to commercialize our products, will be available in the future on reasonable terms, or at all. Further, we may not have sufficient capital resources to pay a judgment, in which case our creditors could levy claims against our assets, including our intellectual property.

We could be negatively impacted by future interpretation or implementation of federal and state fraud and abuse laws, including anti-kickback laws and other federal and state anti-referral laws.

If we are able to commercialize Specifid or any other product candidates that we may develop, we will be subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and physician self-referral laws. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, imprisonment and exclusion from participation in federal and state healthcare programs, including Medicare, Medicaid and Veterans Administration health programs. Because of the far-reaching nature of these laws, we may be required to alter one or more of our practices to be in compliance with these laws. Healthcare fraud and abuse regulations are complex, and even minor, inadvertent irregularities can potentially give rise to claims that a statute or prohibition has been violated. Any violations of these laws, or any action against us for violation of these laws, even if we successfully defend against it, could result in a material adverse effect on our business, financial condition and results of operations. If there is a change in law, regulation or administrative or judicial interpretations, we may have to change our business practices or our existing business practices could be challenged as unlawful, which could have a material adverse effect on our business, financial condition and results of operations. In addition, some allegations under these laws have been claimed to violate the False Claims Act, discussed in more detail below.

In addition, if we are able to commercialize Specifid or any other product candidates that we may develop, we could become subject to false claims litigation under federal statutes, which can lead to civil money penalties, criminal fines and imprisonment, and exclusion from participation in Medicare, Medicaid and other federal and state healthcare programs. These false claims statutes

include the False Claims Act, which allows any person to bring suit on behalf of the United States federal government alleging the submission of false or fraudulent claims, or causing to present such false or fraudulent claims, under federal programs or contracts claims or other violations of the statute and to share in any amounts paid by the entity to the government in fines or settlement. These suits against biotechnology companies have increased significantly in recent years and have increased the risk that a healthcare company will have to defend a false claim action, pay fines or be excluded from the Medicare, Medicaid or other federal and state healthcare programs as a result of an investigation arising out of such action. We cannot assure you that we will not become subject to such litigation or, if we are not successful in defending against such actions, that such actions will not have a material adverse effect on our business, financial condition and results of operations. In addition, we cannot assure you that the costs of defending claims or allegations under the False Claims Act will not have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Intellectual Property and Potential Litigation

If we are unable to obtain and maintain protection for our intellectual property, the value of our technology and products may be adversely affected.

Our business and competitive positions are dependent upon our ability to protect our proprietary technology. Our success will depend in large part on our ability to obtain and maintain patent protection for our product and technologies, preserve trade secrets and operate without infringing the intellectual property right of others. Because of the substantial length of time and expense associated with development of new products, we, along with the rest of the biopharmaceutical industry, place considerable importance on obtaining and maintaining patent protection for new technologies, products and processes. The patent positions of pharmaceutical, biopharmaceutical and biotechnology companies, including us, are generally uncertain and involve complex legal and factual questions. Our patent applications may not protect our technologies and products because, among other things:

· there is no guarantee that any of our pending patent applications will result in issued patents;

· we may develop additional proprietary technologies that are not patentable;

· there is no guarantee that any patents issued to us, our collaborators or our licensors will provide a basis for a commercially viable product;

· there is no guarantee that any patents issued to us or our collaborators or our licensors will provide us with any competitive advantage;

· there is no guarantee that any patents issued to us or our collaborators or our licensors will not be challenged, circumvented or invalidated by third parties; and

· there is no guarantee that any patents previously issued to others or issued in the future will not have an adverse effect on our ability to do business.

We attempt to protect our intellectual property position by filing United States patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. Currently we own U.S. Patent No. 6,911,204 concerning the treatment of NHL with our technology together with five pending United States patent applications covering methods of treating immune system diseases, including B-cell and T-cell lymphomas, using our proprietary immunotherapy production methods, as well as methods for combining the idiotype immunotherapies with other therapies that are used to treat diseases of the immune system, as well as a panel of optimized anti-CD20 antibodies and their use in treating immune system diseases.

Outside of the United States, we have six issued patents and over twenty pending patent applications. Limitations on patent protection in some countries outside the United States, and the differences in what constitutes patentable subject matter in these countries, may limit the protection we have under patents issued to us outside of the United States. In addition, laws of foreign countries may not protect our intellectual property to the same extent as would laws of the United States. In determining whether or not to seek a patent or to license any patent in a particular foreign country, we weigh the relevant costs and benefits, and consider, among other things, the market potential of our product candidates in the jurisdiction, and the scope and enforceability of patent protection afforded by the law of the jurisdiction. Failure to obtain adequate patent protection for our proprietary product candidates and technology would impair our ability to be commercially competitive in these markets.

Although we believe our issued patents, as well as our patent applications if they issue as patents, will provide a competitive advantage, we may not be able to develop additional patentable products or processes. Further, we may not be able to obtain patents from any of the pending applications. Even if patent claims are allowed, the claims may not issue, or in the event of issuance, may not be sufficient to protect our technology. In addition, any patents or patent rights we obtain may be circumvented, challenged or invalidated by our competitors.

We are not able to prevent others, including potential competitors, from using certain types of patient-specific idiotype protein-KLH conjugates, like those we use in our lead product candidate, Specifid, for the treatment of indolent B-cell NHL.

Certain types of patient-specific idiotype-KLH conjugates, comprising single idiotype proteins, and their use for the treatment of indolent B-cell NHL are in the public domain and therefore cannot be patented. Consequently, we may only be able to seek patent protection for methods of treating immune system diseases, including B-cell and T-cell lymphomas, using our proprietary immunotherapy production methods for making idiotype protein conjugates and compositions comprising such conjugates, as well as methods for combining the idiotype or T-cell receptor-based immunotherapies with other therapies that are used to treat diseases of the immune system. As a result, we may not be able to prevent other companies using different manufacturing processes from developing active immunotherapies that directly compete with Specifid.

We may have to engage in costly litigation to enforce our proprietary rights or to defend challenges to our intellectual property by our competitors, which may harm our business, results of operations, financial condition and cash flow.

The pharmaceutical field is characterized by a large number of patent filings involving complex legal and factual questions, and, therefore, we cannot predict with certainty whether our patents will be enforceable. Competitors may have filed applications for or have been issued patents and may obtain additional patents and proprietary rights related to products or processes that compete with or are similar to ours. We may not be aware of all of the patents potentially adverse to our interests that may have been issued to others.

Litigation may be necessary to protect our patent position, and we cannot be certain that we will have the required resources to pursue litigation or otherwise to protect our patent rights. In addition, our efforts to protect our patents may not be successful.

Our ability to market our products may be impaired by the intellectual property rights of third parties.

Our commercial success will depend in part on not infringing the patents or proprietary rights of third parties. We are aware of competing intellectual property relating to active idiotype immunotherapies for cancer. Competitors or third parties may be issued, or may currently hold, patents that may cover subject matter that we use in developing the technology required to bring our product candidates to market, that we use in producing our product candidates, or that we use in treating patients with our product candidates. In addition, from time to time we receive correspondence inviting us to license patents from third parties. While we currently believe we have freedom to operate in our area, others may challenge our position in the future. There has been, and we believe that there will continue to be, significant litigation in the pharmaceutical industry regarding patent and other intellectual property rights.

While we believe that our pre-commercialization activities fall within the scope of an available exemption against patent infringement provided by 35 U.S.C. §271(e), and that our subsequent manufacture of our commercial products will also not require the license of any patents, claims may be brought against us in the future based on these or other patents held by others. As our product candidates progress toward commercialization, competitors or other parties may assert that we infringe on their patents or proprietary rights.

In particular, we are aware of the following third party patents:

· Genentech and City of Hope National Medical Center hold patent rights related to the expression of recombinant antibodies;

· Genitope holds patent rights relating to immunotherapy using idiotype proteins produced using T-lymphoid cells for the treatment of B-Cell lymphoma; and

· Schering Corp. holds patent rights relating to the use of GM-CSF as a vaccine adjuvant for use against infectious diseases.

The first patent listed above was issued to Genentech in 2001. We do not believe that this patent covers our technology, and we note that in May 2005, a third party filed a request for reexamination of this patent with the U.S. Patent and Trademark Office, requesting that the claims of this patent be reexamined as to their patentability; the reexamination is currently pending. During reexamination the issued claims were rejected; proceedings before the U.S. Patent and Trademark Office continue. If this patent reissues and we decide to attempt to obtain a license for this patent, we cannot guarantee that we would be able to obtain such a license on commercially reasonable terms, or at all.

Additionally, because patent prosecution can proceed in secret prior to issuance of a patent, third parties may obtain other patents with claims of unknown scope relating to our product candidates, which they could attempt to assert against us. Further, as we develop our products, we may infringe the current patents of third parties or patents that may issue in the future. Third parties could bring legal actions against us claiming damages and seeking to enjoin clinical testing, manufacturing and marketing of the affected product or products. If we become involved in any litigation, it could consume a substantial portion of our resources, regardless of the outcome of the litigation. If any of these actions are successful, in addition to any potential liability for damages, we could be required to obtain a license to continue to manufacture or market the affected product, in which case we may be required to pay substantial royalties or grant cross-licenses to our patents. However, there can be no assurance that any such license will be available on acceptable terms or at all. To enforce patents issued to us or to determine the scope and validity of other parties’ proprietary rights, we may also become involved in litigation or in interference proceedings declared by the United States Patent and Trademark Office, which could result in substantial costs to us, regardless of the outcome of the litigation, or an adverse decision as to the priority of our inventions. Ultimately, as a result of patent infringement claims, our business could be harmed and we could be prevented from commercializing

a product, or forced to cease some aspect of our business operations.

If we are not able to protect and control unpatented trade secrets, know-how and other technological innovation, we may suffer competitive harm.

We also rely on trade secrets to protect our technology, particularly when we do not believe that patent protection is appropriate or available. However, trade secrets are difficult to protect. We attempt to protect our trade secrets by requiring each of our employees, consultants and advisors to execute a non-disclosure and assignment of invention agreement before beginning his or her employment, consulting or advisory relationship with us. We cannot guarantee that these agreements will provide meaningful protection, that these agreements will not be breached, that we will have an adequate remedy for any such breach, or that our trade secrets will not otherwise become known or independently developed by a third party. Our trade secrets, or those of our future collaborators, may become known or may be independently discovered by others, which could adversely affect the competitive position of our product candidates.

Risks Related to the Securities Markets and Ownership of Our Common Stock

*Until our initial public offering in February 2005, there was no public market for our common stock, and the price of our common stock may be volatile and could decline significantly.

Until our initial public offering, or IPO, in February 2005, there was no public market for our common stock, and despite our IPO, an active public market for these shares may not be sustained. Our stock price has traded in the range of $7.77- $1.20 from the commencement of our IPO on February 2, 2005 to April 30, 2008.

The stock market in general has been experiencing dramatic fluctuations that have often been unrelated to the operating performance of companies. The market prices for securities of biotechnology companies in general have been highly volatile and may continue to be highly volatile in the future. If market-based or industry-based volatility continues, the trading price of our common stock could decline significantly, independent of our actual operating performance, and you could lose all or part of your investment. The market price of our common stock could fluctuate significantly as a result of several factors, including:

· announcements of technological innovations or new products by us or our competitors;

· announcement of FDA approval or non-approval of Specifid or any other product candidates that we may develop, or delays in the FDA review process;

· actions taken by regulatory agencies with respect to Specifid and FAV-201, or any other product candidates that we may develop, or our clinical trials, manufacturing process or sales and marketing activities;

· regulatory developments in the United States and foreign countries;

· success of our research efforts and clinical trials;

· any intellectual property infringement lawsuit in which we may become involved;

· announcements concerning our competitors, or the biotechnology or biopharmaceutical industries in general;

· actual or anticipated fluctuations in our operating results;

· changes in financial estimates or recommendations by securities analysts;

· sales of large blocks of our common stock;

· sales of our common stock by our executive officers, directors and significant stockholders;

· changes in accounting principles; and

· loss of any of our key scientific or management personnel.

Specifically, you may not be able to resell your shares at or above the price you paid for such shares. In addition, class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Any such litigation brought against us could result in substantial costs and a diversion of management’s attention and resources, which could hurt our business, operating results and financial condition.

*Concentration of ownership among our existing officers, directors and principal stockholders may prevent other stockholders from influencing significant corporate decisions and depress our stock price.

As of April 30, 2008, our officers and directors and stockholders affiliated with our directors together beneficially held approximately 35.5% of our outstanding common stock on an as-converted basis. If some or all of these officers, directors and principal stockholders act together, they will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors, the merger, consolidation or sale of all or substantially all of our assets, and any other significant corporate transaction. The interests of this concentration of ownership may not always coincide with our interests or the interests of our other stockholders. For instance, officers, directors and principal stockholders, acting together, could cause us to enter into transactions or agreements that we would not otherwise consider. Similarly, this concentration of ownership may have the

effect of delaying or preventing a change in control of us otherwise favored by our other stockholders. This concentration of ownership also could depress our stock price.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws and applicable Delaware law may prevent or discourage third parties or our stockholders from attempting to replace our management or influencing significant decisions.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change in control of us or our management, even if doing so would be beneficial to our stockholders. These provisions include:

· dividing our board of directors into three classes serving staggered three-year terms;

· authorizing our board of directors to issue preferred stock without stockholder approval;

· prohibiting cumulative voting in the election of directors;

· prohibiting stockholder actions by written consent;

· limiting the persons who may call special meetings of stockholders;

· prohibiting our stockholders from making certain changes to our certificate of incorporation or bylaws except with 66.7% stockholder approval; and

· requiring advance notice for raising business matters or nominating directors at stockholders’ meetings.

We are also subject to provisions of the Delaware corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for five years unless the holder’s acquisition of our stock was approved in advance by our board of directors. Together, these charter and statutory provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.

Because we do not intend to pay any cash dividends on our shares of common stock, our stockholders will not be able to receive a return on their shares unless they sell them.

We have never paid or declared any cash dividends on our capital stock and intend to retain any future earnings to finance the development and expansion of our business. The payment of dividends by us on our common stock is limited by our debt agreements. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them.

We may incur increased costs as a result of recently enacted and proposed changes in laws and regulations.

Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules related to corporate governance and other matters subsequently adopted by the SEC and the Nasdaq Global Market, could result in increased costs to us. The new rules and any related regulations that may be proposed in the future could make it more difficult or more costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We are presently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs.

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

On April 8, 2008, in conjunction with a consulting agreement with Porter Novelli Life Sciences, LLC, the Company issued warrants to purchase up to 10,000 shares of the Company’s Common Stock at an exercise price of $1.80 per share. The warrants are exercisable through April 8, 2013. These warrants were issued in reliance upon the exemption from registration provided in section 4(2) of the Securities Act of 1933, as amended, and/or Regulation D promulgated thereunder pursuant to the consultant’s status as an accredited investor.

Item 6. Exhibits.

The exhibits listed on the accompanying index to exhibits are filed or incorporated by reference (as stated therein) as part of this Quarterly Report on Form 10-Q.

Exhibit Number		Description of Document

3.1		Registrant’s Amended and Restated Certificate of Incorporation.(1)

3.2		Registrant’s Amended and Restated Bylaws.(7)

4.1		Form of Common Stock Certificate of Registrant.(1)

4.2		Amended and Restated Investor Rights Agreement dated March 26, 2004 between the Registrant and certain of its stockholders.(1)

4.3		Amendment No. 1 to Amended and Restated Investor Rights Agreement dated April 6, 2004 between the Registrant and certain of its stockholders.(1)

4.4		Securities Purchase Agreement dated March 6, 2006, by and among Registrant and the individuals and entities identified on Exhibit A thereto (the “Securities Purchase Agreement”). (2)

4.5		Form of Warrant issued pursuant to the Securities Purchase Agreement. (2)

4.6		Securities Purchase Agreement dated February 12, 2007, by and among Registrant and certain investors.(3)

4.7		Warrant to purchase 250,000 shares of Common Stock dated December 19, 2006 issued to Kingsbridge Capital Limited.(4)

4.8		Registration Rights Agreement, dated December 19, 2006, by and between Registrant and Kingsbridge Capital Limited.(4)

4.9		Warrant to purchase 48,834 shares of Common Stock dated December 30, 2005 issued to General Electric Capital Corporation.(5)

4.10		Warrant to purchase 48,834 shares of Common Stock dated December 30, 2005 issued to Oxford Finance Corporation.(5)

4.11		Amendment No. 1 to Registration Rights Agreement dated December 19, 2006, by and between Registrant and Kingsbridge Capital Limited dated August 10, 2007.(6)

4.12		Form of Warrant issued to investors in November 2007 registered direct offering. (8)

4.13		Placement Agent Agreement dated November 2, 2007, by and between Registrant and Lazard Capital Markets, LLC. (8)

4.14		Warrant to purchase 10,000 shares of Common Stock dated April 8, 2008 issued to Porter Novelli Life Sciences, LLC.

31.1		Certification of principal executive officer required by Rule 13a-14(a) or Rule 15d-14(a).

31.2		Certification of principal accounting officer required by Rule 13a-14(a) or Rule 15d-14(a).

32		Certification by the Chief Executive Officer and Chief Financial Officer of Favrille, Inc., as required by Rule13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

(1)

Filed as an Exhibit to Registrant’s Registration Statement on Form S-1 (File No. 333-114299), as amended, and incorporated by reference herein.

(2)		Filed as an exhibit to Registrant’s Current Report on Form 8-K dated March 6, 2006 and incorporated herein by reference.

(3)		Filed as an exhibit to Registrant’s Current Report on Form 8-K dated February 13, 2007 and incorporated herein by reference.

(4)		Filed as an exhibit to Registrant’s Current Report on Form 8-K dated December 20, 2006 and incorporated herein by reference.

(5)		Filed as an exhibit to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference.

(6)		Filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 and incorporated herein by reference.

(7)		Filed as an exhibit to Registrant’s Current Report on Form 8-K dated October 4, 2007 and incorporated herein by reference.

(8)		Filed as an exhibit to Registrant’s Current Report on Form 8-K dated November 2, 2007 and incorporated herein by reference.

Favrille, Inc.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: May 12, 2008


		Favrille, Inc.

		/s/ Tamara A. Seymour

		Tamara A. Seymour

		Chief Financial Officer

		(On behalf of the registrant and as the registrant’s Principal Financial and Accounting Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Good

MMRGlobal (MMRF) Inactive 10-Q2008 Q1 Quarterly report

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