Cell Genesys 10Q 2006 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2006


o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Period From to

Commission File Number: 0-19986

CELL GENESYS, INC.

(Exact name of registrant as specified in its charter)


Delaware		94-3061375
(State or other jurisdiction of		(I.R.S. employer identification
incorporation or organization)		number)

500 Forbes Boulevard, South San Francisco, California 94080
(Address of principal executive offices and zip code)

(650) 266-3000
(Registrant’s telephone number, including area code)

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. Yesþ Noo

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


Large accelerated filero		Accelerated filerþ		Non-accelerated filero

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

As of July 31, 2006, the number of outstanding shares of the Registrant’s Common Stock was 49,587,794.

CELL GENESYS, INC.
TABLE OF CONTENTS


	Page
PART I. FINANCIAL INFORMATION		3
Item 1. Financial Statements:		3
a. Condensed Consolidated Balance Sheets – June 30, 2006 and December 31, 2005		3
b. Condensed Consolidated Statements of Operations – Three and Six Months Ended June 30, 2006 and 2005		4
c. Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2006 and 2005		5
d. Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3. Quantitative and Qualitative Disclosures about Market Risk		19
Item 4. Controls and Procedures		20
PART II. OTHER INFORMATION		21
Item 1. Legal Proceedings		21
Item 1A. Risk Factors		21
Item 4. Submission of Matters to a Vote of Security Holders		34
Item 6. Exhibits		35
SIGNATURES		36
EXHIBIT 12.1
EXHIBIT 31.1
EXHIBIT 32.1

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Cell Genesys, Inc.

Condensed Consolidated Balance Sheets

(In thousands)


	June 30,			December 31,
	2006			2005
	(Unaudited)			(Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	77,315		$	54,221
Short-term investments		85,880			72,483
Investment in Abgenix, Inc. common stock		—			63,824
Prepaid expenses and other current assets		3,243			2,104
Asset held for sale		137			—

Total current assets		166,575			192,632
Restricted cash and investments		2,894			2,894
Property and equipment, net		135,831			142,225
Deferred income tax assets		—			24,430
Unamortized debt issuance costs and other assets		4,384			4,794

Total assets	$	309,684		$	366,975


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,089		$	1,902
Accrued compensation and benefits		3,984			4,399
Other accrued liabilities		6,526			4,947
Accrued income taxes		33,885			32,612
Deferred income tax liabilities		—			24,430
Current portion of capital lease obligation		1,264			1,095

Total current liabilities		46,748			69,385
Other liabilities		2,522			2,174
Capital lease obligation, less current portion		49,225			49,919
Convertible senior notes		145,000			145,000
Commitments and contingencies
Stockholders’ equity:
Common stock		50			46
Additional paid-in capital		399,456			375,700
Accumulated other comprehensive income (loss)		(527	)		33,663
Accumulated deficit		(332,790	)		(308,912	)

Total stockholders’ equity		66,189			100,497

Total liabilities and stockholders’ equity	$	309,684		$	366,975

See accompanying notes

Cell Genesys, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
	(in thousands, except per share data)
Revenue	$	1,046		$	2,782		$	1,222		$	4,428
Operating expenses:
Research and development		23,203			23,199			48,517			48,042
General and administrative		4,114			3,945			9,159			7,708
Impairment of long-lived asset		194			—			194			—
Restructuring charges		(40	)		853			(57	)		853

Total operating expenses		27,471			27,997			57,813			56,603

Loss from operations		(26,425	)		(25,215	)		(56,591	)		(52,175	)
Other income (expense):
Gain on sale of Abgenix, Inc. common stock		—			—			62,677			—
Interest and other income		1,765			804			3,325			1,532
Interest expense		(2,622	)		(2,651	)		(5,244	)		(5,410	)

Income (loss) before income taxes		(27,282	)		(27,062	)		4,167			(56,053	)
Income tax provision		(610	)		(354	)		(28,045	)		(674	)

Net loss	$	(27,892	)	$	(27,416	)	$	(23,878	)	$	(56,727	)

Basic and diluted net loss per common share	$	(0.60	)	$	(0.60	)	$	(0.52	)	$	(1.25	)

Weighted average shares of common stock outstanding — basic and diluted		46,629			45,411			46,127			45,342

See accompanying notes

Cell Genesys, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Six Months Ended
	June 30,
	2006			2005
	(in thousands)
Cash flows from operating activities:
Net loss	$	(23,878	)	$	(56,727	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		7,226			8,831
Gain on disposal of property and equipment		—			(43	)
Stock-based compensation expense		2,932			—
Gain on sale of Abgenix, Inc. common stock		(62,677	)		—
Deferred income tax provision		26,808			—
Impairment of long-lived assets		194			—
Changes in operating assets and liabilities:
Prepaid expenses and other assets		(770	)		(445	)
Accounts payable		(813	)		556
Accrued compensation and benefits		(415	)		(1,229	)
Deferred revenue		—			(2,031	)
Accrued facility exit costs		—			(2,770	)
Accrued restructuring charges		(184	)		353
Other accrued liabilities		2,170			(1,124	)
Accrued income taxes		1,273			675

Net cash used in operating activities		(48,134	)		(53,954	)

Cash flows from investing activities:
Purchases of short-term investments		(68,463	)		(74,448	)
Maturities of short-term investments		30,622			38,030
Sales of short-term investments		24,521			51,872
Capital expenditures		(1,181	)		(1,314	)
Proceeds from disposal of property and equipment		—			43
Proceeds from sale of Abgenix, Inc. common stock		65,425			—

Net cash provided by investing activities		50,924			14,183

Cash flows from financing activities:
Proceeds from issuances of common stock		768			909
Payments under capital lease obligation		(524	)		(374	)
Proceeds from committed equity financing facility, net		20,060			—

Net cash provided by financing activities		20,304			535

Net increase (decrease) in cash and cash equivalents		23,094			(39,236	)
Cash and cash equivalents at the beginning of the period		54,221			58,324

Cash and cash equivalents at the end of the period	$	77,315		$	19,088

See accompanying notes

Cell Genesys, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006 or for any other future period.

The condensed consolidated balance sheet at December 31, 2005 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. All significant intercompany balances and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Report on Form 10-K for the year ended December 31, 2005.

Segment Reporting

Our operations are treated as one operating segment, as it reports profit and loss information only on an aggregate basis to the chief operating decision-makers.

Recent Accounting Pronouncements

On July 13, 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”—an interpretation of FASB Statement No. 109. Interpretation 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FAS 109 and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Additionally, Interpretation 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Interpretation 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted. We are currently evaluating whether the adoption of Interpretation 48 will have a material effect on our consolidated financial position, results of operations or cash flows.

2. Net Loss Per Share

Basic loss per share is calculated using the weighted average number of shares of common stock outstanding during the period. Diluted loss per share includes the impact of potentially dilutive securities. As our potentially dilutive securities were anti-dilutive for all periods presented, they have been excluded from the computation of shares used in computing diluted loss per share. These outstanding securities consisted of the following:


	June 30,
	2006		2005
	(in thousands)
Convertible senior notes		15,934		15,934
Options to purchase common stock		8,424		8,729
Warrants to purchase common stock		375		—

3. Comprehensive Loss

Comprehensive loss is comprised of net loss and other comprehensive loss. Other comprehensive loss includes certain changes to our stockholders’ equity that are excluded from net loss. Other comprehensive loss includes solely unrealized gains or losses on our available-for-sale securities, including our holdings of Abgenix, Inc. common stock, net of related tax. The following table presents the calculation of comprehensive loss:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
	(in thousands)
Net loss	$	(27,892	)	$	(27,416	)	$	(23,878	)	$	(56,727	)
Other comprehensive income (loss):
Change in unrealized gain/loss on investments, net of tax		56			10,769			1,026			(11,418	)
Reclassification adjustment for gains/losses recognized in net loss, net of tax		—			(47	)		(35,216	)		50

Comprehensive loss	$	(27,836	)	$	(16,694	)	$	(58,068	)	$	(68,095	)

4. Stock-Based Compensation

On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (or “FAS 123R”), which supersedes our previous accounting under APB Opinion No. 25, “Accounting for Stock Issued to Employees” (or “APB 25”). FAS 123R requires the recognition of compensation expense, using a fair-value based method, for costs related to all share-based payments including stock options and stock issued under our employee stock plans. FAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods in our Condensed Consolidated Statements of Operations. We adopted FAS 123R using the modified prospective transition method, which requires that compensation expense be recognized in the financial statements for all awards granted after the date of adoption as well as for existing awards for which the requisite service has not been rendered as of the date of adoption. The modified prospective transition method does not require restatement of prior periods to reflect the impact of FAS 123R.

In November 2005, the FASB issued FSP No. 123R-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” We have adopted the simplified method to calculate the beginning balance of the additional paid-in-capital (or “APIC”) pool of the excess tax benefit, and to determine the subsequent impact on the APIC pool and Condensed Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that were outstanding upon our adoption of FAS 123R.

Prior to the adoption of FAS 123R, we accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under FAS No. 123, “Accounting for Stock-Based Compensation” (or “FAS 123”). Under the intrinsic value method, no employee stock-based compensation expense had been recognized in our Condensed Consolidated Statements of Operations for any period prior to our adoption of FAS 123R on January 1, 2006, as the exercise price of the stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant.

Stock Option Plans:

Prior to May 2005, we had five approved stock option plans: the 1989, 1992 and 1998 Incentive Stock Option Plans, the 2001 Nonstatutory Option Plan and the 2001 Non-Employee Directors Stock Option Plan (collectively, “the Prior Plans”). Under the Prior Plans, incentive stock options and non-qualified stock options were granted to eligible employees, directors and consultants to purchase shares of our common stock at no less than the fair market value of the underlying common stock as of the date of grant. Options granted under these plans have a maximum term of 10 years and generally vest over four years at the rate of 25 percent one year from the date of grant date and 1/48 monthly thereafter. The 1998 Incentive Stock Option Plan replaced the 1989 and 1992 Incentive Stock Option Plans which expired and were retired in 1999 and 2002, respectively.

2005 Equity Incentive Plan:In May 2005, our stockholders approved the 2005 Equity Incentive Plan (“the 2005 Plan”) at which time 1,000,000 new shares of common stock were authorized for issuance. The 2005 Plan replaced our 1998 Incentive Stock Option Plan, the 2001 Nonstatutory Option Plan and the 2001 Non-Employee Directors Stock Option Plan. Upon approval of the 2005 Plan, shares in the Prior Plans that had been reserved but not issued were rolled over into and reserved for issuance under the 2005 Plan. In the future, shares that would otherwise return to the Prior Plans as a result of option cancellations will also be rolled over into and reserved for issuance under the 2005 Plan. No additional grants will be made from the Prior Plans.

The 2005 Plan permits the granting of incentive and non-statutory stock options, restricted stock, stock appreciation rights, performance units and performance shares and other stock awards to eligible employees, directors and consultants. We generally grant options to purchase shares of common stock under the 2005 Plan at no less than the fair market value of the underlying common stock as of the date of grant. Options granted under the 2005 Plan have a maximum term of ten years and generally vest over four years at the rate of 25 percent one year from the date of grant date and 1/48 monthly thereafter.

Adoption of FAS 123R

Stock-based compensation expense recognized during the three and six months ended June 30, 2006 was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. FAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Stock-based compensation expense recognized under FAS 123R was as follows:


	Three Months		Six Months
	Ended		Ended
	June 30, 2006		June 30, 2006
	(in thousands, except per share data)
Research and development	$	1,216	$	2,279
General and administrative		336		653

Total stock-based compensation expense	$	1,552	$	2,932

Effect on earnings per share-basic and diluted	$	0.03	$	0.06

As of June 30, 2006, total compensation cost related to nonvested stock options not yet recognized was $9.4 million, which is expected to be allocated to expense over a weighted-average period of 30 months.

Pro Forma Information for Period Prior to Adoption of FAS 123R

The following pro forma net loss and net loss per share were determined as if we had accounted for employee stock-based compensation for our employee stock plans under the fair value method prescribed by FAS 123:


	Three Months			Six Months
	Ended			Ended
	June 30, 2005			June 30, 2005
	(in thousands, except per share data)
Net loss, as reported	$	(27,416	)	$	(56,727	)
Deduct:
Stock-based compensation expense determined under FAS 123, net of related taxes		(2,443	)		(4,980	)

Pro forma net loss	$	(29,859	)	$	(61,707	)

Basic and diluted loss per share, as reported	$	(0.60	)	$	(1.25	)

Basic and diluted pro forma loss per share	$	(0.66	)	$	(1.36	)

Valuation Assumptions

The employee stock-based compensation expense recognized under FAS 123R and presented in the pro forma disclosure required under FAS 123 was determined using the Black-Scholes option valuation model. Option valuation models require the input of subjective assumptions and these assumptions can vary over time. The weighted-average assumptions used are as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Dividend yield		0.00	%		0.00	%		0.00	%		0.00	%
Annual risk free rate of return		5.10	%		3.68	%		4.85	%		3.76	%
Expected volatility		0.56			0.60			0.57			0.60
Expected term (years)		5.08			3.80			5.08			3.84

In estimating the expected term, we considered our historical stock option exercise experience, post vesting termination pattern and term of the options outstanding. We based our determination of expected volatility on our historical stock price volatility over the expected term.

Stock Option Activity

A summary of the status of our stock option plans at June 30, 2006 and changes during the periods then ended are presented in the table below (share numbers and aggregate intrinsic value in thousands):


						Weighted
						Average
				Weighted		Remaining
				Average		Contractual		Aggregate
				Exercise		Term		Intrinsic
	Shares			Price		(Years)		Value
Options outstanding at December 31, 2005		8,087		$	11.18		6.48	$	1,149
Options granted		1,227			6.16
Options exercised		(31	)		5.61
Options forfeited		(153	)		8.43
Options expired		(444	)		14.55

Options outstanding at March 31, 2006		8,686		$	10.36		6.71	$	8,000
Options granted		138			5.77
Options exercised		(43	)		4.27
Options forfeited		(87	)		9.17
Options expired		(270	)		12.14

Options outstanding at June 30, 2006		8,424		$	10.27		6.57	$	379

Options vested at June 30, 2006 and expected to vest		8,072		$	10.42		0.39	$	375

Options exercisable at June 30, 2006		5,667		$	11.69		5.46	$	341

During the three and six months ended June 30, 2006, we granted stock options to purchase approximately 0.1 million and 1.4 million shares of common stock, respectively, with an estimated weighted-average grant-date fair value of $3.12 and $3.32, per share, respectively. The total fair value of options that vested during the three and six months ended June 30, 2006 was $0.6 million and $2.2 million, respectively. The total intrinsic value of options exercised during the three and six months ended June 30, 2006 was $0.1 million. Net cash proceeds from the exercise of stock options were $0.3 million and $0.5 million for the three and six months ended June 30, 2006. As of June 30, 2006, there were 2.3 million shares available for grant.

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


	Options Outstanding
			Weighted-				Options Exercisable
			Average
			Remaining		Weighted-				Weighted-
	Number		Contractual		Average		Number		Average
Range of	Outstanding		Life		Exercise		Exercisable		Exercise
Exercise Price	(in thousands)		(in years)		Price		(in thousands)		Price
$3.50-$5.75		971		4.6	$	4.87		814	$	4.86
$5.80-$6.02		480		6.8	$	5.87		223	$	5.87
$6.07-$6.07		1,045		9.6	$	6.07		104	$	6.07
$6.19-$6.73		1,124		8.7	$	6.63		387	$	6.67
$6.75-$9.14		1,365		5.4	$	8.33		1,115	$	8.41
$9.50-$12.58		845		6.2	$	10.84		731	$	10.85
$12.79-$14.04		845		7.4	$	13.88		571	$	13.84
$14.07-$17.00		867		5.6	$	15.78		840	$	15.83
$17.37-$30.81		878		4.7	$	21.74		878	$	21.74
$42.62-$42.63		4		3.7	$	42.63		4	$	42.63

		8,424						5,667

Employee Stock Purchase Plan (“ESPP”):

The 2002 Employee Stock Purchase Plan (“the Purchase Plan”) was approved by the stockholders in June 2002. The Purchase Plan allows eligible employees to purchase our common stock at 85 percent of the fair value at certain specified dates. Employee contributions are limited to 10 percent of compensation or $25,000, whichever is less. On June 20, 2006, our stockholders approved the amendment to the Purchase Plan to increase the maximum number of shares of common stock by which the total number of shares

authorized for issuance under the plan automatically increases each year from 0.1 million to 0.3 million shares, effective immediately. As of June 30, 2006, a total of 0.8 million shares of common stock have been authorized for issuance under the Purchase Plan. The Purchase Plan allows for annual increases in the number of shares authorized for issuance under the Purchase Plan to be added on the first day of each of our fiscal years beginning in 2006, equal to the lesser amount of (a) 0.3 million shares, (b) 1/2 percent of the outstanding additional shares on such date, or (c) an amount determined by the Board of Directors. As of June 30, 2006, 0.6 million shares have been issued pursuant to the Purchase Plan. On February 1, 2006, 77,316 shares were sold under the plan for a total price of $0.4 million. The compensation expense related to the plan for the three and six months ended June 30, 2006 was $51,000 and $93,000, respectively. The Black-Scholes pricing model was used to value the employee stock purchase rights, using the following assumptions:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Dividend yield		0.00	%		0.00	%		0.00	%		0.00	%
Annual risk free rate of return		3.75	%		2.51	%		3.15	%		2.51	%
Expected volatility		0.51			0.60			0.54			0.60
Expected term (years)		1.14			0.50			0.91			0.50

5. Restructuring Charges

In June 2005, we commenced the implementation of a strategic restructuring of our business operations to focus resources on our most advanced and most promising product development programs. At June 30, 2006, $52,000 of restructuring costs related to a building lease remained accrued for but had not yet been paid. During the three and six months ended June 30, 2006, we decreased the restructuring accrual by $40,000 and $57,000, respectively, due to the extension of a sublease. We expect to pay the accrual in full by the end of 2006.

6. Impairment of Long-Lived Assets

During the second quarter of 2006, we committed to a plan to sell a piece of equipment which had a carrying value of $0.3 million. We determined that the plan for sale criteria contained in SFAS 144, “Accounting for Impairment or Disposal of Long-Lived Assets” (“FAS 144’) had been met. Accordingly, the carrying value of the equipment was adjusted to its fair value less costs to sell, amounting to $0.1 million, which was determined based on a quoted market price. The resulting $0.2 million impairment loss has been recorded as a separate line item, “Impairment of long-lived asset”, in the three and six months ended June 30, 2006 “Condensed Consolidated Statements of Operations”. The adjusted carrying value of the equipment that is held for sale is separately presented in “Asset held for sale” in current assets on the Condensed Consolidated Balance Sheets. The equipment will not be depreciated while it is classified as held for sale.

7. Related Parties

Transactions with related parties are under terms no less favorable to us than those with other customers.

Ceregene:Ceregene, Inc. (“Ceregene”) was previously our majority-owned subsidiary. In August 2004, July 2005, and April 2006, respectively, Ceregene announced an initial, second and third closing of its Series B preferred stock financing. We participated through the pro rata conversion of an outstanding bridge loan to Ceregene and related accrued interest into shares of Ceregene’s Series B preferred stock. As of June 30, 2006, our ownership percentage was approximately 25% of Ceregene’s capital stock on a fully diluted basis. As of June 30, 2006, there was no remaining principal balance of the bridge loan outstanding to Ceregene.

We account for our investment in Ceregene under the equity method of accounting for investments. For the three and six months ended June 30, 2006, we recorded revenue of $30,000 and $61,000, respectively, and for the three and six months ended June 30, 2005, we recorded revenue of $10,000 and $64,000, respectively, from Ceregene. During the periods presented, we did not recognize losses from Ceregene, nor do we expect to recognize future losses from Ceregene, as the net book value of our investment in Ceregene is zero.

We have guaranteed certain secured indebtedness of Ceregene totaling $66,000 until May 2007. We have accrued approximately $15,000 related to this guarantee as of June 30, 2006.

Xenogen:During the six months ended June 30, 2006 and June 30, 2005, we paid approximately $23,000 and $15,000, respectively, for license fees to Xenogen Corporation. The Chairman and CEO of Xenogen is also a member of our Board of Directors.

8. Income Taxes

The tax provision recorded in the three and six months ended June 30, 2006 is primarily related to the realized gain on the sale of 3.0 million shares of Abgenix common stock and interest recorded for tax contingencies. The tax provision for the three and six months ended June 30, 2005 related to accrued interest for tax contingencies.

In July 2005, the Internal Revenue Service (“IRS”) issued a Notice of Proposed Adjustment (“NOPA”) seeking to disallow $48.7 million of net operating losses that we deducted for the 2000 fiscal year and seeking a $3.4 million penalty for substantial underpayment of tax in fiscal 2000. We responded to the NOPA in September 2005, disagreeing with the conclusions reached by the IRS in the NOPA and seeking to resolve this matter at the appeals level. We had a liability of $32.6 million for this and other federal and state tax contingencies, including estimated interest expenses at December 31, 2005, and during the six months ended June 30, 2006, we accrued an additional $1.3 million of interest related to these tax contingencies. If we are unsuccessful in defending the tax filing positions, then potentially the liability for federal and state tax contingencies could be significantly higher than the $33.9 million that has been recorded as of June 30, 2006. We continue to believe that our tax positions comply with all applicable tax laws, and continue to vigorously defend against the NOPA using all administrative and legal processes available.

The nature of these matters is uncertain and subject to change. As a result, the amount of our liability for certain of these matters could exceed or be less than the amount of our current estimates, depending on the outcome of these matters. An outcome of such matters different than previously estimated could materially impact our financial position or results of operations in the year of resolution.

9. Committed Equity Financing Facility

On March 14, 2006, we 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 8.7 million shares of our common stock or an aggregate of $75.0 million during the next three years. We can draw down the CEFF in tranches of up to a maximum of 2.5 percent of the closing market value of Cell Genesys on the last trading day prior to the commencement of the drawdown, or $15.0 million, whichever is less, subject to certain conditions. The purchase price of these shares will be at a 6 to 10 percent discount from the volume weighted average price of our common stock for each of the eight trading days following the election to sell shares. Kingsbridge is not obligated to purchase shares at prices below $3.00 per share or at a price below 85% of the closing share price of our stock on the trading day immediately preceding the commencement of the draw down.

In connection with the CEFF, we issued a warrant to Kingsbridge to purchase 375,000 shares of our common stock at a price of $9.12 per share. This warrant is exercisable on September 14, 2006 and for a period of five years thereafter. The fair value of the warrant was valued on the date of issuance using the Black-Scholes method using the following assumptions: a risk-free rate of 4.68%, a life of 5.5 years, no dividend yield and a volatility of 57%. The estimated fair value of this warrant was $1.3 million and was recorded as a contra-equity amount in additional paid-in capital in March 2006.

On March 16, 2006, we filed a shelf registration statement with the Securities and Exchange Commission (“SEC”) with respect to the resale of up to 9.1 million shares of common stock pursuant to the CEFF and underlying warrant. This registration statement was declared effective by the SEC on March 27, 2006.

During the second quarter, we received net proceeds of $20.1 million from the sale of 3.9 million shares of common stock to Kingsbridge.

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

Statements made in this Item other than statements of historical fact, including statements about us and our subsidiaries and our respective clinical trials, research programs, product pipelines, current and potential corporate partnerships, licenses and intellectual property, the adequacy of capital reserves and anticipated operating results and cash expenditures, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. As such, they are subject to a number of uncertainties that could cause actual results to differ materially from the statements made, including risks associated with the success of research and product development programs, the issuance and validity of patents, the development and protection of proprietary technologies, the ability to raise capital, operating expense levels and the ability to establish and retain corporate partnerships. Reference is made to discussions about risks associated with product development programs, intellectual property and other risks that may affect us under “Other Factors Affecting Future Operations” below. We do not undertake any obligation to update forward-looking statements. The following should be read in conjunction with our condensed consolidated financial statements located elsewhere in this Quarterly Report onForm 10-Q and the consolidated financial statements in our Annual Report onForm 10-K for the year ended December 31, 2005 and in other documents filed by us from time to time with the Securities and Exchange Commission.

Overview

We are a biotechnology company focused on the development and commercialization of novel biological therapies for patients with cancer. We are currently developing cell-based cancer immunotherapies and oncolytic virus therapies to treat different types of cancer. Our clinical stage cancer programs involve cell- or viral-based products that have been modified to impart disease-fighting characteristics that are not found in conventional chemotherapeutic agents. As part of our GVAX^® cancer immunotherapy programs, we are conducting two Phase 3 clinical trials in prostate cancer and Phase 2 trials in each of pancreatic cancer and leukemia. We initiated our international Phase 3 clinical trials for GVAX immunotherapy for prostate cancer in July 2004 and June 2005, each under a Special Protocol Assessment (“SPA”) with the United States Food and Drug Administration (“FDA”). In our oncolytic virus therapies program, which we are developing in part through a global alliance with Novartis AG (“Novartis”), we are conducting a multiple dose Phase 1 clinical trial of CG0070 in recurrent bladder cancer. We also have other preclinical oncolytic virus therapy programs, including CG5757, evaluating potential therapies for multiple types of cancer.

Second Quarter 2006 and Other Recent Highlights

	•		Announced that the FDA has granted Fast Track designation for GVAX immunotherapy for prostate cancer. Fast track designation, which was mandated by the FDA Modernization Act of 1997, can potentially facilitate development and expedite the review of Biologics License Applications (“BLAs”). Fast track designation is reserved for products that demonstrate the potential to treat a serious or life-threatening condition and demonstrate the potential to address unmet medical needs for that condition.

	•		Announced encouraging interim data from a Phase 1 clinical trial of GVAX immunotherapy for prostate cancer, administered in combination with ipilimumab (MDX-010), a fully human antibody to CTLA-4 being jointly developed by Medarex and Bristol-Myers Squibb. Twelve patients with advanced prostate cancer have been treated to date, including six patients who received the combination therapy at the therapeutic doses currently being evaluated in both GVAX and ipilimumab Phase 3 clinical trials. Antitumor activity was observed in five of these six patients, including greater than 50% reductions in prostate-specific antigen (“PSA”) levels that are ongoing at two months or longer with two patients having greater than 95% reductions. Moreover, clinical evidence of antitumor activity was observed in three of these five PSA responders. All five patients with PSA partial responses have experienced immune-mediated endocrine which were similar in type to those previously reported for ipilimumab and were successfully treated with standard hormone replacement therapy.

	•		Reported encouraging long-term follow-up data from a Phase 2 trial of GVAX immunotherapy for chronic myelogenous leukemia (“CML”). A total of 19 CML patients with molecular evidence of persistent leukemia following at least one year of Gleevec^® (imatinib mesylate) therapy were treated with GVAX immunotherapy while continuing to receive Gleevec. Updated results showed that the addition of GVAX immunotherapy to Gleevec therapy reduced persistent leukemic disease in 10 of 19 patients as demonstrated by a complete disappearance (five patients) or a greater than one log (90%) reduction (five patients) in bcr-abl, which is a validated genetic marker found on the leukemic cells. The responses were ongoing in all but one of the remaining ten responders, with a median follow-up from treatment initiation of 14 months. Of the remaining nine patients, only one patient has developed cytogenetic progression on therapy. Treatment with GVAX immunotherapy for leukemia was well tolerated.

	•		Announced that enrollment has been opened for an expanded multi-center Phase 1 clinical trial of CG0070 to evaluate escalating multiple-dose regimens of CG0070 and to include up to 45 additional patients who have failed previous therapy with Bacillus Calmette-Guerin (“BCG”), the current standard therapy for recurrent bladder cancer. The expansion of the trial from single-dose to multiple-dose regimens was prompted by data reported for the single-dose trial at the May 2006 meeting of the American Urological Association including a complete anti-tumor response at follow-up cystoscopy at approximately three months in three of the nine patients evaluable to date. The duration of the complete responses after just a single administration of CG0070 were six, nine, and three plus months respectively. Treatment was generally tolerable and the majority of treatment-related side effects were local bladder toxicities.

	•		Announced that the results from an initial clinical trial of GVAX immunotherapy for prostate cancer in patients with early-stage disease have been published in a June issue ofClinical Cancer Research. The Phase 1/2 trial enrolled 21 patients with rising PSA levels following prostatectomy and who had not received any other treatment for their prostate cancer, including hormone therapy. The results showed that 16 of 21 (76%) patients showed a statistically significant decrease in the rate of rise of PSA (PSA slope) after only eight weeks of treatment compared with the remaining five patients (p<0.001). One patient had a partial PSA response (>50% reduction of PSA) of seven month duration. GVAX cancer immunotherapy was generally well tolerated and there were no dose-limiting toxicities observed.

Critical Accounting Policies

We consider certain accounting policies related to revenue recognition, income taxes and stock-based compensation to be critical policies.

Revenue recognition

Our revenues are derived principally from research and licensing agreements with collaborators. Revenue under such collaboration agreements typically includes upfront payments, cost reimbursements, milestone payments and license fees. We evaluate whether the delivered element under these arrangements has value to our customer on a stand-alone basis and whether objective and reliable evidence of fair value of the undelivered item exists. Deliverables that do not meet these criteria are treated as one unit of accounting for the purposes of revenue recognition.

Up-front payments:Up-front payments from our research collaborations include payments for technology transfer and access rights. Non-refundable upfront license fees and other payments under collaboration agreements where we continue involvement throughout development are deferred and recognized on a straight-line or ratable method, unless we determine that another methodology is more appropriate. During 2005, we recognized revenue from a non-refundable upfront payment under our global alliance with Novartis AG for the development of certain oncolytic virus therapies based upon when the underlying development expenses were incurred, rather than a ratable method, as we determined that the expense method was more appropriate for this agreement. The revenues recorded under the Novartis alliance approximated the related development expenses that were incurred in the respective periods. We recognize cost reimbursement revenue under collaborative agreements as the related research and development costs are incurred, as provided for under the terms of these agreements. Deferred revenue represents the portion of upfront payments received that has not been earned.

Milestones:Payments for milestones that are based on the achievement of substantive and at risk-performance criteria are recognized in full upon achievement of the incentive milestone events in accordance with the terms of the agreement. Incentive milestone payments are triggered either by the results of our research efforts or by events external to us, such as regulatory approval to market a product or the achievement of specified sales levels by a marketing partner. As such, the incentive milestones are substantially at risk at the inception of the contract, and the amounts of the payments assigned thereto are commensurate with the milestone achieved. Upon the achievement of an incentive milestone event, we have no future performance obligations related to that payment.

License fees:Non-refundable license fees where we have completed all future obligations are recognized as revenue upon execution of the technology licensing agreement when delivery has occurred, collectibility is reasonably assured and the price is fixed and determinable.

Income taxes

We account for income taxes in accordance with the provision of Financial Accounting Standards No. 109, or SFAS No. 109, “Accounting for Income Taxes”. SFAS 109 requires recognition of deferred taxes to provide for temporary differences between financial reporting and tax basis of assets and liabilities. Deferred taxes are measured using enacted tax rates expected to be in effect in the year in which the basis difference is expected to reverse. We record a valuation allowance against deferred income tax assets, when the realization of such deferred income tax assets cannot be determined to be more likely than not.

We establish accruals for tax contingencies when we believe that certain tax positions may be challenged and that our positions may not be fully sustained. We adjust our tax contingency accruals in light of changing facts and circumstances, such as the progress of tax audits, case law and emerging legislation. In July 2005, the IRS issued to us a Notice of Proposed Adjustment (“NOPA”) seeking to disallow $48.7 million of net operating losses which were deducted for the 2000 fiscal year and seeking a $3.4 million penalty for substantial underpayment of tax in fiscal 2000. We responded to the NOPA in September 2005, disagreeing with the conclusions reached by the IRS in the NOPA and seeking to resolve this matter at the appeals level. We had a liability of $32.6 million for this and other federal and state tax contingencies, including estimated interest expense, at December 31, 2005 and during the six months ended June 30, 2006, we accrued an additional $1.3 million of interest related to these tax contingencies.

The nature of these tax matters is uncertain and subject to change. As a result, the amount of our liability for certain of these matters could exceed or be less than the amount of our current estimates, depending on the outcome of these matters. If we are unsuccessful in defending the tax filing positions that were previously taken, then potentially the liability for federal and state tax contingencies could be significantly higher than the $33.9 million that has been recorded as of June 30, 2006. An outcome of such matters different than previously estimated could materially impact our financial position or results of operations in the year of resolution. We continue to believe that our tax positions comply with all applicable tax laws, and we continue to vigorously defend against the NOPA using all administrative and legal processes available.

Income tax benefits previously recorded have been based on a determination of deferred tax assets and liabilities and any valuation allowances that might be required against these deferred tax assets. We recorded a valuation allowance to reduce deferred tax assets to the amounts that are more likely than not to be realized. We have considered anticipated future taxable income, including taxable income from sales of Abgenix common stock, and potential tax planning strategies in assessing the need for valuation allowances. Certain of these determinations require judgment on the part of management. If we determine that we will be able to realize deferred tax assets in the future in excess of the carrying value of our net deferred tax assets, adjustments to the deferred tax assets will increase income by reducing tax expense in the period that such determination is reached. Likewise, if we determine that we will not be able to realize all or part of the carrying value of our net deferred tax assets in the future, adjustments to the deferred tax assets will decrease income by increasing tax expense in the period that such determination is reached. Significant estimates are required in determining our income tax benefits. Various internal and external factors may have favorable or unfavorable effects on our future effective tax rate. These factors include, but are not limited to, changes in tax laws and regulations, our future levels of spending for research and development, and changes in our overall level of pre-tax earnings or losses.

Stock-Based Compensation

Beginning January 1, 2006, we account for employee stock-based compensation in accordance with FAS 123R. Under the provisions of FAS 123R, we estimate the fair value of our employee stock awards at the date of grant using the Black-Scholes option-pricing model, which requires the use of certain subjective assumptions. When establishing an estimate of the expected term of an award, we consider the vesting period for the award, our historical experience of employee stock option exercises (including forfeitures), post vesting termination pattern and the expected volatility. As required under the accounting rules, we review our valuation assumptions at each grant date and, as a result, we are likely to change our valuation assumptions used to value employee stock-based awards granted in future periods.

FAS 123R requires that employee stock-based compensation costs be recognized over the requisite service period, or the vesting period, in a manner similar to all other forms of compensation paid to employees. Accordingly, in three and six months ended June 30, 2006, we recognized stock-based compensation as part of our operating expenses with an allocation of $1.2 million and $2.3 million, respectively, to research and development and $0.3 million and $0.6 million, respectively, to general and administrative. We adopted FAS 123R on a modified prospective basis. The allocation of employee stock-based compensation costs to each operating expense line is estimated based on specific employee headcount information at each grant date and revised, if necessary, in future periods if actual employee headcount information differs materially from those estimates. As a result, the amount of employee stock-based compensation costs we record in future periods in each operating expense line may differ significantly from what we have recorded in the current period. As of June 30, 2006, total compensation cost related to nonvested stock options not yet recognized was $9.4 million, which is expected to be allocated to expense over a weighted-average period of 30 months.

There was no stock-based compensation expense related to employee stock options and employee stock purchases recognized during the six months ended June 30, 2005.

Results of Operations

Revenue

We have derived substantially all of our revenues from collaborative and license agreements, as shown in the following table:


	Three Months				Six Months
	Ended June 30,				Ended June 30,
	2006		2005		2006		2005
	(in thousands)
Novartis AG	$	—	$	657	$	—	$	2,031
sanofi-aventis Group		1,000		2,000		1,000		2,000
Ceregene, Inc.		30		10		61		64
Other		16		115		161		333

	$	1,046	$	2,782	$	1,222	$	4,428

Revenue was $1.0 million and $1.2 million for the three and six months ended June 30, 2006, respectively, compared to $2.8 million and $4.4 million for the comparative periods in 2005, respectively. Revenue for the three and six months ended June 30, 2006 included $30,000 and $61,000 of revenue from our previously majority owned subsidiary, Ceregene, Inc., as compared to $10,000 and $64,000 for the corresponding period in 2005, respectively. Revenue for the three and six months ended June 30, 2006 did not include any revenue from Novartis recognized in connection with our global alliance for the development and commercialization of oncolytic virus therapies compared to $0.7 million and $2.0 million for the three and six months ended June 30, 2005, respectively. Revenues for both the three and six months ended June 30, 2006 also includes $1.0 million from sanofi-aventis Group in connection with our gene activation technology license agreement compared to $2.0 million for both the three and six months ended June 30, 2005.

Research and development expenses

Research and development expenses were $23.2 million and $48.5 million for the three and six months ended June 30, 2006, respectively, compared to $23.2 million and $48.0 million for the corresponding periods in 2005, respectively. Research and development expenses were primarily due to ongoing Phase 3 clinical trials for the company’s lead product development program, GVAX immunotherapy for prostate cancer. In addition, expenses included $1.2 million and $2.3 million, for the three and six months ended June 30, 2006, respectively, in non-cash stock-based compensation expense related to FAS 123R. These FAS 123R expenses were offset by decreases in compensation costs and other expenses due to the restructuring program announced in June 2005.

We continue to deploy the majority of our resources to advance GVAX immunotherapy for prostate cancer, which is currently in Phase 3 development, as well as GVAX immunotherapy for leukemia and GVAX immunotherapy for pancreatic cancer, both of which are in Phase 2 development. Our priorities in the oncolytic virus therapy area include CG0070 and CG5757, both of which could be evaluated in multiple types of cancer in the future.

We expect that our research and development expenditures and headcount will increase in future periods to support our most advanced clinical trials, including our two Phase 3 clinical trials of GVAX immunotherapy for prostate cancer as well as additional product development activities. Additional information concerning our product candidates and their phases of development can be found in our Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission on March 13, 2006 and in theSecond Quarter 2006 and Other Recent Highlightssection included under Item 2 of this Quarterly Report on Form 10-Q.

General and administrative expenses

General and administrative expenses were $4.1 million and $9.2 million for the three and six months ended June 30, 2006, respectively, compared to $3.9 million and $7.7 million in the corresponding periods in 2005, respectively. The increases in the three and six months ended June 30, 2006 compared to the corresponding periods in 2005 are primarily due to costs related to the

implementation of procedures required for compliance with Section 404 of the Sarbanes-Oxley Act and new financial accounting standards as well as $0.3 million and $0.6 million for the three and six months ended June 30, 2006, respectively, of non-cash stock-based compensation expense related to FAS123R. Future spending for general and administrative costs may increase in order to support our growing infrastructure needs.

Impairment of long-lived asset

Restructuring charges

In June 30, 2005, we implemented a strategic restructuring of our business operations to focus resources on our most advanced and most promising product development programs and recorded personnel related restructuring charges of $0.9 million. During the three and six months ended June 30, 2006, we decreased the restructuring accrual by $40,000 and $57,000, respectively, due to the extension of a sublease.

Gain on sale of Abgenix common stock

During the three months ended March 31, 2006, we sold all of our remaining 3.0 million shares of Abgenix common stock for a net gain of $62.7 million. There were no Abgenix shares sold during the six months ended June 30, 2005.

Interest and other income

Interest and other income was $1.8 million and $3.3 million for the three and six months ended June 30, 2006 compared to $0.8 million and $1.5 million for the corresponding periods in 2005. The increase in six months ended June 30, 2006 compared to six months ended June 30, 2005 is due to higher average cash and investment balances and higher interest rates.

Interest expense

Interest expense was $2.6 million and $5.2 million for the three and six months ended June 30, 2006 compared to $2.7 million and $5.4 million for the corresponding periods in 2005. The interest expense is attributed to the interest expense associated with our $145.0 million convertible senior notes issuances and our capital leases.

Income taxes

We recorded a tax provision of $0.6 million and $28.0 million for the three and six months ended June 30, 2006 compared to $0.4 million and $0.7 million for the corresponding periods in 2005. The tax provision for the three months ended June 30, 2006 primarily relates to additional interest recorded for tax contingencies. The tax provision for the six months ended June 30, 2006 relates primarily to the realized gain on the sale of 3.0 million shares of Abgenix common stock and $1.3 million related to additional interest recorded for tax contingencies. The tax provision for the three and six months ended June 30, 2005 related to accrued interest for tax contingencies.

Liquidity and Capital Resources

At June 30, 2006, we had approximately $166.1 million in cash, cash equivalents and short-term investments, of which $2.9 million is classified as restricted and is related to letters of credit on our corporate headquarters facility in South San Francisco, California and our cGMP manufacturing facility in Hayward, California. We have maintained our financial position through strategic management of our resources including the sale of Abgenix common stock, funding from various corporate collaborations and licensing agreements and the availability of debt and equity financing.

In February 2003, our shelf registration statement was declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended, which allowed us to offer up to $150.0 million of securities in one or more public offerings. We used this shelf registration in March 2004 to complete a public offering of 4.9 million shares of our common stock, resulting in gross proceeds of $61.1 million. Although up to $88.9 million may still be offered under the shelf registration, there can be no assurance that we will be able to issue any of the remaining securities under this shelf registration on acceptable terms, or at all.

On March 14, 2006, we entered into a CEFF with Kingsbridge, pursuant to which Kingsbridge committed to purchase, subject to certain conditions, up to 8.7 million shares of our common stock or up to an aggregate of $75.0 million during the next three years. We can draw down under the CEFF in tranches of up to a maximum of 2.5 percent of our closing market value on the last trading day prior to the commencement of the drawdown, or $15.0 million, whichever is less, subject to certain conditions. The purchase price of these shares will be at a 6 to 10 percent discount from the volume weighted average price of our common stock for each of the eight trading days following the election to sell shares. Kingsbridge is not obligated to purchase shares at prices below $3.00 per share or at a price below 85% of the closing share price of our stock in the trading day immediately preceding the commencement of the draw down. In the second quarter of 2006, we received net proceeds of $20.1 million from the sale of 3.9 million shares of our common stock to Kingsbridge.

Net cash used in operating activities was $48.1 million and $54.0 million for the six months ended June 30, 2006 and 2005, respectively, and is comprised primarily of expenses from product development activities. The timing of cash requirements may vary from period to period depending on our research and development activities, including our planned clinical trials, obligations related to our existing manufacturing and headquarter facilities, and future requirements to establish commercial capabilities for any products that we may develop.

Net cash provided by investing activities was $50.9 million for the six months ended June 30, 2006. During the six months ended June 30, 2006, we sold 3.0 million shares of our Abgenix common stock, resulting in net proceeds of $65.4 million and short-term investment purchases were $68.5 million, net of sales and maturities of $55.1 million. Net cash provided in investing activities was $14.2 million for the six months ended June 30, 2005 related primarily to proceeds from the sales and maturities of investments, net of purchases of investments.

Net cash provided by financing activities was $20.3 million for the six months ended June 30, 2006. During the six months ended June 30, 2006, we received net proceeds of $20.1 million from the sale of 3.9 million shares of our common stock to Kingsbridge. Net cash provided in financing activities was $0.5 million for the six months ended June 30, 2005, primarily related to our employee stock plans.

In October and November 2004, we issued and sold a total of $145.0 million aggregate principal amount of 3.125% Convertible Senior Notes due 2011 in a private placement. We received approximately $139.9 million in net proceeds after deducting the initial purchasers’ discount and estimated offering expenses. Under certain circumstances, we may redeem some or all of the convertible senior notes on or after November 1, 2009 at a redemption price equal to 100% of the principal amount of the notes. Holders of the notes may require us to repurchase some or all of their notes if a fundamental change (as defined in the indenture) occurs, at a repurchase price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest (and additional amounts, if any) to, but not including, the repurchase date. The notes are convertible into our common stock, initially at the conversion price of $9.10 per share, equal to a conversion rate of approximately 109.8901 shares per $1,000 principal amount of notes, subject to adjustment.

Our capital requirements depend on numerous factors, including: the progress and scope of our internally funded research, development, clinical, manufacturing and commercialization activities; our ability to establish new collaborations and the terms of those collaborations; our ability to reach a favorable resolution with the IRS with respect to their audit of our fiscal 2000 federal tax return, or to other potential tax assessments; competing technological and market developments; the time and cost of regulatory approvals; and various other factors. Our ongoing development programs and any increase in the number and size of programs and trials will reduce our current cash resources and potentially create further need to raise additional capital. Therefore, we will continue to consider financing alternatives, including collaborative ventures and potential equity and debt financings.

While we believe that our current liquidity position will be sufficient to meet our cash needs for at least the next year, we will need to raise substantial additional funds in order to complete our pending and planned trials over their multi-year course before we will obtain product revenue, if any, from such products. Accordingly, we may entertain the possibility of raising additional capital to preserve our liquidity, depending on a number of conditions, including conditions in the capital markets. The sources of liquidity available to us include payments from potential partners and/or licensees of our potential products and technologies, and private or public placement of our equity securities, warrants, debt securities, potential proceeds from the CEFF or depositary shares. We

regularly consider the conditions of capital markets, dilution, stockholder value and tax consequences of each type of financing on stockholders. Certain of the financing options available to us may have negative consequences to stockholders, such as dilution. Given the volatile nature of the capital markets, decisions to raise capital may require actions that would impose a negative consequence in order to reduce or minimize a more significant negative consequence to stockholders.

Off-Balance Sheet Arrangements

As of June 30, 2006, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC.

Recent Accounting Pronouncements

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We are exposed to interest rate sensitivity on our investments in debt securities and our outstanding fixed rate debt. The objective of our investment activities is to preserve principal, while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in highly liquid, investment grade and government debt securities. Our investments in debt securities are subject to interest rate risk. To minimize the exposure due to an adverse shift in interest rates, we invest in short-term securities and our goal is to maintain an average maturity of less than one year. The following table provides information about our financial instruments that are sensitive to changes in interest rates.

Interest Rate Sensitivity
Principal Amount by Expected Maturity and Average Interest Rate
(Dollars in thousands)


																			Fair Value
													2010						June 30,
As of June 30, 2006	2006			2007			2008			2009			Thereafter			Total			2006
Total Investment Securities Excluding Asset Backed	$	115,210		$	10,194		$	603		$	—		$	—		$	126,007		$	125,954
Average Interest Rate		5.12	%		4.92	%		4.63	%		—			—			5.10	%		—
Asset Backed Securities(i)																$	12,756		$	12,742
Average Interest Rate																	4.60	%		—
Fixed Interest Rate Convertible Senior Notes	$	3,021		$	4,531		$	4,531		$	4,531		$	154,063		$	169,921		$	111,380
Average Interest Rate		3.125	%		3.125	%		3.125	%		3.125	%		3.125	%		3.125	%		—


																			Fair Value
													2010						December 31,
As of December 31, 2005	2006			2007			2008			2009			Thereafter			Total			2005
Total Investment Securities Excluding Asset Backed	$	79,040		$	9,661		$	—		$	—		$	—		$	88,701		$	88,586
Average Interest Rate		3.27	%		4.23	%		—			—			—			3.38	%		—
Asset Backed Securities(ii)																$	25,761		$	25,696
Average Interest Rate																	4.08	%		—
Fixed Interest Rate Convertible Senior Notes	$	4,531		$	4,531		$	4,531		$	4,531		$	154,063		$	172,187		$	121,500
Average Interest Rate		3.125	%		3.125	%		3.125	%		3.125	%		3.125	%		3.125	%		—


(i)		Asset backed securities have various contractual maturity dates ranging from 2007 to 2010. The expected maturity dates for these securities range from 2006 to 2008 and differ from the contractual maturity dates because the issuers of these securities have, in some circumstances, the right to prepay the obligations.

(ii)		Asset backed securities have various contractual maturity dates ranging from 2006 to 2035. The expected maturity dates for these securities range from 2006 to 2007 and differ from the contractual maturity dates because the issuers of these securities have, in some circumstances, the right to prepay the obligations.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management team, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures were effective as of June 30, 2006 to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Controls over Financial Reporting

There were no significant changes made to our internal control over financial reporting during the quarter ended June 30, 2006 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

None.

Item 1A. RISK FACTORS

OTHER FACTORS AFFECTING FUTURE OPERATIONS

Investors in Cell Genesys should carefully consider the risks described below before making an investment decision. The risks described below may not be the only ones facing our company. This description includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Item 1A of our Annual Report onForm 10-K for the year ended December 31, 2005. Additional risks that we currently believe are immaterial may also impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline, and our ability to repay our convertible notes could be impaired, due to any of these risks, and investors may lose all or part of their investment. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this Quarterly Report onForm 10-Q and our Annual Report onForm 10-K for the year ended December 31, 2005, including our consolidated financial statements and related notes.

Risks Related to Our Company

Our products are in developmental stage, are not approved for commercial sale and might not ever receive regulatory approval or become commercially viable.

All of our potential cancer immunotherapies and oncolytic virus therapies are in research and development. We have not generated any revenues from the sale of products. We do not expect to generate any revenues from product sales for at least the next several years. Our products currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercial use. Our research and development efforts may not be successful, and any of our future products may not be ultimately commercially successful. Even if developed, our products may not receive regulatory approval or be successfully introduced and marketed at prices that would permit us to operate profitably.

Our cancer immunotherapies and oncolytic virus therapies must undergo exhaustive clinical testing and may not prove to be safe or effective. If any of our proposed products are delayed or fail, we may have to curtail our operations.

There are many reasons that potential products that appear promising at an early stage of research or development do not result in commercially successful products. Clinical trials may be suspended or terminated if safety issues are identified, if our investigators or we fail to comply with regulations governing clinical trials or for other reasons. Although we and our investigators are testing some of our proposed products and therapies in human clinical trials, we cannot guarantee that we, the FDA, foreign regulatory authorities or the Institutional Review Boards at our research institutions will not suspend or terminate any of our clinical trials, that we will be permitted to undertake human clinical trials for any of our products or that adequate numbers of patients can be recruited for our clinical trials. Also, the results of this testing might not demonstrate the safety or efficacy of these products. Even if clinical trials are successful, we might not obtain regulatory approval for any indication. Preclinical and clinical data can be interpreted in many different ways, and FDA or foreign regulatory officials could interpret data that we consider promising differently, which could halt or delay our clinical trials or prevent regulatory approval. Finally, even if our products proceed successfully through clinical trials and receive regulatory approval, there is no guarantee that an approved product can be manufactured in commercial quantities at reasonable cost or that such a product will be successfully marketed.

Our programs utilize new technologies. Existing preclinical and clinical data on the safety and efficacy of our programs are limited. Our GVAX cancer immunotherapies and oncolytic virus therapies are currently being tested in human clinical trials to determine their safety and efficacy. The results of preclinical or earlier stage clinical trials do not necessarily predict safety or efficacy in humans. Our products in later stage clinical trials may fail to show desired safety and efficacy, despite having progressed through preclinical or early clinical trials. Serious and potentially life-threatening side effects may be discovered during preclinical and clinical testing of our potential products or thereafter, which could delay, halt or interrupt clinical trials of our products, and could result in the FDA or other regulatory authorities denying approval of our drugs for any or all indications.

Clinical trials are very costly and time-consuming, especially the typically larger Phase 3 clinical trials, such as the VITAL-1 and VITAL-2 trials of our GVAX immunotherapy for prostate cancer. The VITAL-1 and VITAL-2 trials of our GVAX immunotherapy for prostate cancer are our first Phase 3 clinical trials. We cannot exactly predict if and when any of our current clinical trials will be completed. Many factors affect patient enrollment in clinical trials, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, competing clinical trials and new therapies approved for the conditions that we are investigating. In addition to delays in patient enrollment, other unforeseen developments, including delays in obtaining regulatory approvals to commence a study, delays in identifying and reaching agreement on acceptable terms with prospective clinical trial sites, lack of effectiveness during clinical trials, unforeseen safety issues, uncertain dosing issues, inability to monitor patients adequately during or after treatment, our or our investigators’ failure to comply with FDA or other health authority regulations governing clinical trials, and an inability or unwillingness of medical investigators to follow our clinical protocols, could prevent or delay completion of a clinical trial and increase our costs, which could also prevent or delay any eventual commercial sale of the therapy that is the subject of the trial. Each of our two Phase 3 clinical trials of GVAX immunotherapy for prostate cancer involves a comparison to a Taxotere chemotherapy regimen, which is the currently approved standard of care for this patient group. However, there can be no assurance that this chemotherapy regimen will continue to be commonly used to treat these patients in the future. Should another chemotherapy regimen be shown to be more effective than the Taxotere chemotherapy regimen, we may need to conduct additional comparative clinical trials in the future.

We have not been profitable absent the gains on sales of Abgenix common stock and certain upfront or non-recurring license fees. We expect to continue to incur substantial losses and negative cash flow from operations and may not become profitable in the future.

We have incurred an accumulated deficit since our inception. At June 30, 2006, our accumulated deficit was $332.8 million. Our accumulated deficit would be substantially higher absent the gains we have realized on sales of our Abgenix common stock. We expect to incur substantial operating losses for at least the next several years and potentially longer. This is due primarily to the expansion of development programs, clinical trials and manufacturing activities and, to a lesser extent, general and administrative expenses, at a time when we have yet to realize any product revenues. We also have substantial lease obligations related to our manufacturing and headquarter facilities. We expect that losses will fluctuate from quarter to quarter and that these fluctuations may be substantial. We cannot guarantee that we will successfully develop, manufacture, commercialize or market any products, or that we will ever achieve profitability.

We will need substantial additional funds to continue operations, and our ability to generate funds depends on many factors beyond our control.

We will need substantial additional funds for existing and planned preclinical and clinical trials, to continue research and development activities, for lease obligations related to our manufacturing and headquarter facilities, for principal and interest payments related to our debt financing obligations, for potential settlements to the IRS and other tax authorities and to establish marketing capabilities for any products we may develop. At some point in the future, we will need to raise additional capital to further fund our operations.

In July 2005, the IRS issued to us a Notice of Proposed Adjustment (“NOPA”) seeking to disallow $48.7 million of net operating losses which we deducted for the 2000 fiscal year and seeking a $3.4 million penalty for substantial underpayment of tax in fiscal 2000. We responded to the NOPA in September 2005, disagreeing with the conclusions reached by the IRS in the NOPA and seeking to resolve this matter at the appeals level. We had previously recorded a liability for this and other federal and state tax contingencies, including estimated interest expense. If we are unsuccessful in defending the tax filing positions that we have previously taken, then potentially our liability for federal and state tax contingencies could be significantly higher than the $33.9 million that we have recorded as of June 30, 2006. We continue to believe that our tax positions comply with all applicable tax laws, and we continue to vigorously defend against the NOPA using all administrative and legal processes available to us.

Our future capital requirements will depend on, and could increase as a result of, many factors, such as:

	•		the progress and scope of our internally funded research, development, clinical, manufacturing and commercialization activities;

	•		our ability to establish new collaborations and the terms of those collaborations;

	•		our ability to reach a favorable resolution with the IRS with respect to their audit of our fiscal 2000 federal tax return, or to other potential tax assessments;

	•		competing technological and market developments;

	•		the time and cost of regulatory approvals;

	•		the extent to which we choose to commercialize our future products through our own sales and marketing capabilities;

	•		the costs we incur in obtaining, defending and enforcing patent and other proprietary rights or gaining the freedom to operate under the patents of others;

	•		our success in acquiring and integrating complementary products, technologies or businesses; and

	•		the extent to which we choose to expand and develop our manufacturing capacities, including manufacturing capacities necessary to meet potential commercial requirements.

If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our research, development, manufacturing or clinical activities.

We plan to raise additional funds through collaborative business relationships, additional equity or debt financings, or otherwise, but we may not be able to do any of the foregoing on favorable terms, or at all.

Because of our long-term capital requirements, we may seek to access the public or private debt and equity markets and/or sell our own debt or equity securities. Additional funding may not be available to us, and, if available, may not be on acceptable terms. Opportunities for outlicensing technologies or for third-party collaborations may not be available to us on acceptable terms, or at all. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our research, development, manufacturing or clinical activities. In addition, we may decide to raise additional capital when conditions are favorable, even when we do not have an immediate need for additional capital at that time. If we raise additional funds by issuing equity securities, stockholders will incur immediate dilution.

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. Either of these events could have a material adverse effect on our business, results of operations, financial condition or cash flow. Currently, we do not have collaborative partners for the further development of our GVAX cancer immunotherapies. Although we are in active discussions with potential partners for our GVAX immunotherapy for prostate cancer, we may not be successful in entering into collaborative partnerships on favorable terms, if at all. Certain of our oncolytic virus therapy products are being developed under our global strategic alliance with Novartis, and Novartis has future commercialization rights for these products. Also, we can give no assurance that our alliance with Novartis will continue, as Novartis periodically has the option of terminating the alliance at its discretion. We announced in 2005 the development of a novel technology for the production of monoclonal antibody products which is outside our core business focus and which therefore may represent an outlicensing opportunity. There can be no assurance that we will be successful in our efforts to raise capital through such outlicensing activities. Failure to enter into new corporate relationships may limit our future success.

We plan to use potential future operating losses and our federal and state net operating loss carryforwards to offset taxable income from revenue generated from operations or from the sale of Abgenix common stock. However, our ability to use net operating loss carryforwards could be limited as a result of potential future issuances of equity securities.

We plan to use our current year operating losses to offset taxable income from any revenue generated from operations, corporate collaborations or from the sale of Abgenix common stock. To the extent that our taxable income exceeds any current year operating losses, we plan to use our net operating loss carryforwards to offset income that would otherwise be taxable. However, our use of federal net operating loss carryforwards could be limited in the future by the provisions of Section 382 of the Internal Revenue Code depending upon the timing and amount of additional equity securities that we might potentially issue. State net operating loss carryforwards may be similarly limited.

Our ability to manufacture our products is uncertain, which may delay or impair our ability to develop, test and commercialize our products.

We have built our own manufacturing facility to operate according to the FDA’s current Good Manufacturing Practices (“cGMP”) regulations for the manufacture of products for clinical trials and to support the potential commercial launch of our GVAX cancer immunotherapy product candidates. We are under significant lease obligations for our manufacturing facility. We may be unable to establish and maintain our manufacturing facility for increased scale within our planned timelines and budget, which could have a material adverse effect on our product development commercialization timelines. Our manufacturing facility will be subject to ongoing, periodic inspection by the FDA and other regulatory bodies to ensure compliance with cGMP. Our failure to follow and document our adherence to such cGMP regulations or other regulatory requirements may lead to significant delays in the availability of products for commercial use or clinical study, may result in the termination or hold on a clinical study, or may delay or prevent filing or approval of marketing applications for our products. We have at times encountered and may in the future encounter problems with the following:

	•		achieving consistent and acceptable production yield and costs;

	•		meeting product release specifications;

	•		shortages of qualified personnel;

	•		shortages of raw materials;

	•		shortages of key contractors or contract manufacturers;

	•		ongoing compliance with cGMP regulations and other expectations from FDA and other regulatory bodies;

	•		equipment shortage or malfunction; and

	•		inability to validate new equipment or processes in a timely manner.

Failure to comply with applicable regulations could also result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our products, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could harm our business.

Developing advanced manufacturing techniques and process controls is required to fully utilize our facility. The manufacturing techniques and process controls, as well as the product release specifications, required for our GVAX cancer immunotherapies and oncolytic virus therapies are more complex and less well-established than those required for other biopharmaceutical products, including small molecules, therapeutic proteins and monoclonal antibodies. We may not be able to develop these techniques and process controls to manufacture and evaluate our products effectively to meet the demands of regulatory agencies, clinical testing and commercial production. Advances in manufacturing techniques may render our facility and equipment inadequate or obsolete.

In addition, during the course of the development and testing of our products, we may make and have made improvements to processes, formulations or manufacturing methods or employ different manufacturing facilities. Such changes may be made to improve the product’s potential efficacy, make it easier to manufacture at scale, reduce variability or the chance of contamination of the product, or for other reasons. As a result, certain of the products we are currently testing in clinical trials, including our most advanced products, are not identical to those used in previous clinical trials from which we have reported clinical data or may vary throughout the course of a clinical trial. We may be required to conduct certain studies to demonstrate the comparability of our products if we introduce additional manufacturing changes. We cannot guarantee that the results of studies using the current versions of our products will be as successful as the results of earlier studies conducted using different versions of our products.

If we are unable to manufacture our products for any reason, our options for outsourcing manufacturing are currently limited. We are unaware of available contract manufacturing facilities on a worldwide basis in which our GVAX product candidates can be manufactured under cGMP regulations, a requirement for all pharmaceutical products. It would take a substantial period of time for a contract manufacturing facility that has not been producing our particular products to begin successfully producing them under cGMP regulations.

Our manufacturing facility is subject to the licensing requirements of the United States Drug Enforcement Administration (“DEA”), the California Department of Health Services and foreign regulatory authorities. While not yet subject to license by the FDA, our facility is subject to inspection by the FDA, as well as by the DEA and the California Department of Health Services. Failure to obtain or maintain these licenses or to meet the inspection criteria of these agencies would disrupt our manufacturing processes and have a material adverse effect on our business, ongoing clinical trials, results of operations, financial condition and cash flow.

In order to produce our products in the quantities that we believe will be required to meet anticipated market demand, we will need to increase, or “scale up,” the production process by a significant factor over the current level of production. If we are unable to do so, are delayed, or if the cost of this scale up is not economically feasible for us, we may not be able to produce our products in a sufficient quantity to meet the requirements for product launch or future demand. Logistical arrangements for wide-spread distribution of our products for clinical and commercial purposes may prove to be impractical or prohibitively expensive which could hinder our ability to commercialize our products.

We depend on clinical trial arrangements with public and private medical institutions to advance our technology, and the loss of these arrangements could impair the development of our products.

We have arrangements with a number of public and private medical institutions, and individual investigators, for the conduct of human clinical trials for our GVAX cancer immunotherapy programs and oncolytic virus therapies. In some cases, trials may be conducted by institutions without our direct control or monitoring. The early termination of any of these clinical trial arrangements, the failure of these institutions to comply with the regulations and requirements governing clinical trials, or reliance upon results of trials that we have not directly conducted or monitored could hinder the progress of our clinical trial programs or our development decisions. If any of these relationships are terminated, the clinical trials might not be completed, and the results might not be evaluable.

Failure to comply with foreign regulatory requirements governing human clinical trials and marketing approval for drugs and devices could prevent us from conducting our clinical trials or selling our products in foreign markets, which may adversely affect our operating results and financial condition.

For development and marketing of drugs and biologics outside the United States, the requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country and may require us to perform additional testing and expend additional resources. The time required to obtain approvals outside the United States may differ from that required to obtain FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other countries or by the FDA. Failure to comply with these regulatory requirements or obtain required approvals could impair our ability to conduct clinical trials in foreign markets or commercially develop foreign markets for our products and may have a material adverse effect on our results of operations and financial condition.

If our proposed products are not effectively protected by issued patents or if we are not otherwise able to protect our proprietary information, we will be more vulnerable to competitors, and our business could be adversely affected.

We rely heavily on the development and protection of our intellectual property portfolio. The patent positions of pharmaceutical and biotechnology firms, including ours, are generally uncertain and involve complex legal and factual questions. As of June 30, 2006, we had approximately 374 U.S. and foreign patents issued or granted to us or available to us based on licensing arrangements and approximately 314 U.S. and foreign applications pending in our name or available to us based on licensing arrangements. Although we are prosecuting patent applications, we cannot be certain whether any given application will result in the issuance of a patent or, if any patent is issued, whether it will provide significant proprietary protection or whether it will be invalidated. Also, depending upon their filing date, patent applications in the United States are confidential until patents are published or issued. Publication of discoveries in scientific or patent literature tends to lag behind actual discoveries by several months. Accordingly, we cannot be sure that we were the first creator of inventions covered by pending patent applications or that we were the first to file patent applications for these inventions. In addition, to the extent we license our intellectual property to other parties, we may incur expenses as a result of contractual agreements in which we indemnify these licensing parties against losses incurred if practicing our intellectual property infringes upon the rights of others.

Our intellectual property and freedom to operate may be challenged by others, which, if such a challenge were successful, could have a material adverse effect on our business, results of operations, financial condition and cash flow.

The patent positions and proprietary rights of pharmaceutical and biotechnology firms, including ours, are generally uncertain and involve complex legal and factual questions. Our commercial success depends in part on not infringing the patents or proprietary rights of others, not breaching licenses granted to us and ensuring that we have the necessary freedom to operate and commercialize our products. We are aware of competing intellectual property relating to both our GVAX cancer immunotherapy and oncolytic virus therapy. While we believe we have freedom to operate for both of these programs and are aware of no issued patents that could prevent us from commercializing the products we are currently developing, others may challenge that position, and from time to time we have received communications from third parties claiming to have conflicting rights relating to components of our products. We periodically review the status of our products in development in response to these communications and more generally to ensure that we maintain freedom to operate with respect to all patents and proprietary rights of others. Nonetheless, if any such claim were successful, we could be required to obtain licenses to a third party’s technologies or biological or chemical reagents in order to market our products. Moreover, we may choose to voluntarily seek such a license in order to avoid the expense and uncertainty of fully defending our position. In either such event, the failure to license any technologies or biological or chemical reagents required to commercialize our technologies or products at reasonable cost may have a material adverse effect on our business, results of operations, financial condition and cash flow.

We may have to engage in litigation, which could result in substantial cost, to enforce our patents or to determine the scope and validity of other parties’ proprietary rights.

To determine the priority of inventions, the United States Patent and Trademark Office (“USPTO”) frequently declares interference proceedings. In Europe, patents can be revoked through opposition proceedings. These proceedings could result in an adverse decision as to the priority of our inventions.

We are currently involved in an interference proceeding related to one of our technologies. We have filed an appeal of the final decision from the USPTO relating to an interference proceeding pending since 1996 with Applied Research Systems Holding N.V. (ARS) concerning a patent and patent application related to gene activation technology. ARS has also appealed the decision. The result of the appeal is uncertain at this time. We are not currently involved in any other interference proceedings. Certain of our patents for gene activation technology have been denied in appeal proceedings in Europe, which adversely affects our ability to receive royalties on sales of products employing this technology under certain of our license agreements which can otherwise be terminated at the discretion of the licensee.

We cannot predict the outcome of these proceedings. An adverse result in any of these proceedings could have an adverse effect on our intellectual property position in these areas and on our business as a whole. If we lose in any such proceeding, our patents or patent applications that are the subject matter of the proceeding may be invalidated or may not be permitted to issue as patents. Consequently, we may be required to obtain a license from the prevailing party in order to continue the portion of our business that relates to the proceeding. Such license may not be available to us on acceptable terms or on any terms, and we may have to discontinue that portion of our business. We may be involved in other interference and/or opposition proceedings in the future. We believe that there will continue to be significant litigation in the industry regarding patent and other intellectual property rights.

Our competitive position may be adversely affected by our limited ability to protect and control unpatented trade secrets, know-how and other technological innovation.

Our competitors may independently develop similar or better proprietary information and techniques and disclose them publicly. Also, others may gain access to our trade secrets, and we may not be able to meaningfully protect our rights to our unpatented trade secrets.

We require our employees and consultants to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed by or made known to an individual during the course of the employment or consulting relationship generally must be kept confidential. In the case of employees, the agreements provide that all inventions relating to our business conceived by the employee while employed by us are our exclusive property. These agreements may not provide meaningful protection for our trade secrets in the event of unauthorized use or disclosure of such information.

Our competitors may develop therapies for the diseases that we are targeting that are more advanced or more effective than ours, which could adversely affect our competitive position, or they may commercialize products more rapidly than we do, which may adversely affect our competitive position.

There are many companies pursuing programs for the treatment of cancer. Some of these competitors are large biotechnology or pharmaceutical companies, such as Amgen, Bristol-Myers Squibb, Genentech, Novartis, Roche and sanofi-aventis Group, which have greater experience and resources than we do in developing products, in undertaking preclinical testing and human clinical trials of new pharmaceutical products, in obtaining FDA and other regulatory approvals of products, and in manufacturing and marketing new therapies. We are also competing with other biotechnology companies which have prostate cancer immunotherapy products in various stages of clinical development, such as Dendreon Corporation, Therion Biologics Corporation and Onyvax, Ltd.

Some competitors are pursuing product development strategies that are similar to ours, particularly with respect to our cancer immunotherapy and oncolytic virus therapy programs. Certain of these competitors’ products are in more advanced stages of product development and clinical trials. We compete with other clinical-stage companies and institutions for clinical trial participants, which could reduce our ability to recruit participants for our clinical trials. Delay in recruiting clinical trial participants could adversely affect our ability to bring a product to market prior to our competitors. Our competitors may develop technologies and products that are more effective than ours, or that would render our technology and products less competitive or obsolete.

Our competitive position and those of our competitors can vary based on the performance of products in clinical trials. In addition, our competitors may obtain patent protection or FDA or other regulatory approvals and commercialize products more rapidly than we do, which may impact future sales of our products. We also may not have the access that some of our competitors have to materials necessary to support the research, development or manufacturing of planned therapies. If we are permitted by the FDA or other regulatory agencies to commence commercial sales of products, we will also be competing with respect to marketing capabilities and manufacturing efficiency, areas in which we have limited or no experience. We expect that competition among products approved for sale will be based, among other things, on:

	•		product efficacy;

	•		price;

	•		safety;

	•		reliability;

	•		availability;

	•		reimbursement;

	•		patent protection; and

	•		sales, marketing and distribution capabilities.

Our competitive position also depends upon our ability to attract and retain qualified personnel, develop proprietary products or processes, and secure sufficient funding for the often-lengthy period between product conception and commercial sales.

To the extent we depend on strategic partners to sell, market or distribute our products, we will have reduced control over the success of the sales, marketing and distribution of our future products.

We have no experience in sales, marketing or distribution of biopharmaceutical products. We may in the future rely on sales, marketing and distribution expertise of potential corporate partners for our initial products. The decision to market future products directly or through corporate partners will be based on a number of factors, including:

	•		market size and concentration;

	•		size and expertise of the partner’s sales force in a particular market; and

	•		our overall strategic objectives.

If we choose to rely on strategic partners for the sale, marketing or distribution of our future products, we will have less control over the success of our products and will depend heavily upon our partners’ abilities and dedication to our products. We cannot assure you that these future strategic partnerships will be available on favorable terms, if at all, nor can we assure you that they will enhance our business.

We may in the future be exposed to product liability claims, which could adversely affect our business, results of operations, financial condition and cash flow.

Clinical trials or marketing of any of our potential products may expose us to liability claims resulting from the use of our products. These claims might be made by clinical trial participants and associated parties, consumers, health care providers or sellers of our products. We currently maintain product liability insurance with respect to each of our clinical trials. We may not be able to maintain insurance or obtain sufficient coverage at a reasonable cost, given the increasing cost of insurance in today’s insurance market. An inability to maintain insurance at an acceptable cost, or at all, could result in a breach of terms of our product license agreements or could prevent or inhibit the clinical testing or commercialization of our products or otherwise affect our financial condition. A claim, particularly resulting from a clinical trial, on any of our insurance policies or a product recall could have a material adverse effect on our business, results of operations, financial condition and cash flow.

Our business, financial condition and results of operations could suffer as a result of future strategic acquisitions and investments.

We may engage in future acquisitions or investments that could dilute our existing stockholders or cause us to incur contingent liabilities, commitments, debt or significant expense. From time to time, in the ordinary course of business, we may evaluate potential acquisitions or investments in related businesses, products or technologies, although we currently have no commitments or agreements for any such acquisitions or investments. We may not be successful with any strategic acquisition or investment. Any future acquisition or investment could harm our business, financial condition and results of operations.

If we engage in future acquisitions, we may not be able to fully integrate the acquired companies and their intellectual property or personnel. Our attempts to do so may place additional burdens on our management and infrastructure. Future acquisitions will also subject us to a number of risks, including:

	•		the loss of key personnel and business relationships;

	•		difficulties associated with assimilating and integrating the new personnel and operations of the acquired companies;

	•		the potential disruption of our ongoing business;

	•		the expense associated with maintenance of diverse standards, controls, procedures, employees and clients;

	•		the diversion of resources from the development of our own proprietary technology; and

	•		our inability to generate revenue from acquired technology sufficient to meet our objectives in undertaking the acquisition or even to offset the associated acquisition and maintenance costs.

Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, terrorist activity and other events beyond our control, which could result in a material adverse effect on our business.

Our facilities in California have, in the past, been subject to electrical blackouts as a result of a shortage of available electrical power. Future blackouts could disrupt the operations of our facilities. In addition, we do not carry sufficient business interruption insurance to compensate us for actual losses from interruption of our business that may occur, and any losses or damages incurred by us could have a material adverse effect on our business. We are vulnerable to a major earthquake and other calamities. Most of our facilities are located in seismically active regions. We have not undertaken a systematic analysis of the potential consequences to our business and financial results from a major earthquake and do not have a recovery plan for fire, earthquake, power loss, terrorist activity or similar disasters. We are unable to predict the effects of any such event, but the effects could be seriously harmful to our business.

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

We rely and will continue to rely on our key management and scientific staff, all of whom are employed at-will. The loss of key personnel or the failure to recruit necessary additional qualified personnel could have a material adverse effect on our business and results of operations. There is intense competition from other companies, research and academic institutions and other organizations for qualified personnel. We may not be able to continue to attract and retain the qualified personnel necessary for the development of our business. We will need to continue to recruit experts in the areas of clinical testing, manufacturing, finance, marketing and distribution and to develop additional expertise in our existing personnel. If we do not succeed in recruiting necessary personnel or developing this expertise, our business could suffer significantly.

Various materials that we use are purchased from single qualified suppliers, which could result in our inability to secure sufficient materials to conduct our business.

Most of the materials which we purchase for use in our manufacturing operations are subject to a supplier qualification program. In the event that we or the supplier deems the proffered material or the supplier no longer appropriate to support our cGMP operations, we may face significant additional expenses to find and qualify alternate materials and/or suppliers. Depending on the magnitude of the potential difference between materials and/or suppliers currently used and alternate materials and/or suppliers which may be identified, there is no guarantee that FDA or other health authorities will deem the alternative materials and/or suppliers to be comparable, which may require us to perform additional and/or extended clinical studies and could delay product approval.

Some of the materials which we purchase for use in our manufacturing operations are sole-sourced, meaning only one known supplier exists or is qualified for our use. In the event of a significant interruption of sole-sourced supplies, the quantity of our inventory may not be adequate to complete our clinical trials or to launch our potential products.

Inventions or processes discovered by our outside scientific collaborators may not become our property, which may affect our competitive position.

We rely on the continued availability of outside scientific collaborators performing research. These relationships generally may be terminated at any time by the collaborator, typically by giving 30 days notice. These scientific collaborators are not our employees. As a result, we have limited control over their activities and can expect that only limited amounts of their time will be dedicated to our activities. Our arrangements with these collaborators, as well as those with our scientific consultants, provide that any rights we obtain as a result of their research efforts will be subject to the rights of the research institutions for which they work. In addition, some of these collaborators have consulting or other advisory arrangements with other entities that may conflict with their obligations to us. For these reasons, inventions or processes discovered by our scientific collaborators or consultants may not become our property.

The prices of our common stock and convertible senior notes are likely to continue to be volatile in the future.

The stock prices of biopharmaceutical and biotechnology companies, including ours, have historically been highly volatile. Since January 1, 2003, our stock price has fluctuated between a high closing price of $15.93 on March 4, 2004 and a low closing price of $4.48 on October 12, 2005. The market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. In addition, as our convertible senior notes are convertible into shares of our common stock, volatility or depressed prices of our common stock could have a similar effect on the trading price of the notes. Also, interest rate fluctuations can affect the price of our convertible senior notes. The following factors, among others, may affect the prices of our common stock and notes:

	•		announcements of data from, or material developments in, our clinical trials or those of our competitors, including delays in the commencement, progress or completion of a clinical trial;

	•		fluctuations in our financial results;

	•		the potential of an unfavorable future resolution with the IRS with respect to their audit of our fiscal 2000 federal tax return, or to other potential tax assessments;

	•		announcements of technological innovations or new therapeutic products by us or our competitors, including innovations or products by our competitors that may require us to redesign, and therefore delay, our clinical trials to account for those innovations or products;

	•		announcements of changes in governmental regulation affecting us or our competitors;

	•		announcements of regulatory approval, disapproval, delays or suspensions of our or our competitors’ products;

	•		announcements of new collaborative relationships by us or our competitors;

	•		developments in patent or other proprietary rights affecting us or our competitors;

	•		public concern as to the safety of products developed by us or other biotechnology and pharmaceutical companies;

	•		material developments related to our minority interest in Ceregene, Inc.;

	•		fluctuations in price and volume in the stock market in general, or in the trading of the stock of biopharmaceutical and biotechnology companies in particular, that are unrelated to our operating performance;

	•		issuances of securities in equity, debt or other financings or issuances of common stock upon conversion of our convertible senior notes;

	•		unforeseen litigation;

	•		sales of common stock by existing stockholders; and

	•		the perception that such issuances or sales could occur.

Our stockholders may be diluted by the conversion of outstanding convertible senior notes.

In October and November 2004 we issued and sold $145.0 million aggregate principal amount of notes which are convertible into our common stock, initially at the conversion price of $9.10 per share, equal to a conversion rate of approximately 109.8901 shares per $1,000 principal amount of notes, subject to adjustment. The holders of the notes may choose at any time to convert their notes into common stock. The number of shares of common stock issuable upon conversion of the notes, and therefore the dilution of existing common stockholders, could increase as a result of an event triggering the antidilution rights of the notes, including certain acquisitions in which 10% or more of the consideration paid for our common stock in the transaction is in the form of cash or securities that are not freely tradable. Conversion of our convertible senior notes would result in issuance of additional shares of common stock, diluting existing common stockholders.

Our stockholders may be diluted, or our common stock price may be adversely affected, by the exercise of outstanding stock options or other issuances of our common stock.

We may issue additional common stock, preferred stock, or securities convertible into or exchangeable for our common stock. Furthermore, substantially all shares of common stock for which our outstanding stock options are exercisable are, once they have been purchased, eligible for immediate sale in the public market. The issuance of common stock, preferred stock or securities convertible into or exchangeable for our common stock or the exercise of stock options would dilute existing investors and could adversely affect the price of our common stock.

We have adopted anti-takeover defenses that could make it difficult for another company to acquire control of us or could limit the price investors might be willing to pay for our stock.

Certain provisions of our certificate of incorporation, bylaws, debt instruments and Delaware law could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders. These provisions include the adoption of a Stockholder Rights Plan, commonly known as a “poison pill.” Under the Stockholder Rights Plan, we made a dividend distribution of one preferred share purchase right for each share of our common stock outstanding as of August 21, 1995 and each share of our common stock issued after that date. In July 2000, we made certain technical changes to amend the plan and extended the term of such plan

until 2010. The rights are exercisable only if an acquirer purchases 15 percent or more of our common stock or announces a tender offer for 15 percent or more of our common stock. Upon exercise, holders other than the acquirer may purchase our stock at a discount. Our Board of Directors may terminate the rights plan at any time or under certain circumstances redeem the rights. Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our Board of Directors, the plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our Board of Directors regarding such acquisition. These provisions and certain provisions of the Delaware General Corporation Law may have the effect of deterring hostile takeovers or otherwise delaying or preventing changes in our management or in the control of our company, including transactions in which our stockholders might otherwise receive a premium over the fair market value of our common stock.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results, maintain investor confidence or prevent fraud.

Effective internal controls are necessary for us to provide reliable financial reports, maintain investor confidence and prevent fraud. As our operations have grown, as well as part of our examination of our internal systems in response to Sarbanes-Oxley requirements, we have discovered in the past, and may in the future discover, areas of our internal controls that could be improved. None of these issues have risen to the level that we were unable to attest to the effectiveness of our internal controls when we were required to do so. During fiscal 2005, we took a number of steps to improve our internal controls. Although we believe that all of these efforts have strengthened our internal controls, we continue to work to improve our internal controls. We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.

The Committed Equity Financing Facility (“CEFF”) that we entered into 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.

The CEFF entitles us to sell and obligates Kingsbridge to purchase, from time to time over a period of three years, shares of our common stock for cash consideration up to an aggregate of $75 million, subject to certain conditions and restrictions. Kingsbridge will not be obligated to purchase shares under the CEFF unless certain conditions are met, which include a minimum price for our common stock; the accuracy of representations and warranties made to Kingsbridge; compliance with laws; effectiveness of the registration statement filed by us with the SEC; and the continued listing of our stock on the NASDAQ Global Market. In addition, Kingsbridge is permitted to terminate the CEFF if it determines that a material and adverse event has occurred affecting our business, operations, properties or financial condition and if such condition continues for a period of 10 trading days from the date Kingsbridge provides us notice of such material and adverse event. If we are unable to access funds through the CEFF, or if the CEFF is terminated by Kingsbridge, we may be unable to access capital on favorable terms or at all.

We are entitled, in certain circumstances, to deliver a blackout notice to Kingsbridge to suspend the registration statement filed by us with the SEC and prohibit Kingsbridge from selling shares. If we deliver a blackout notice in the 15 trading days following the settlement of a draw down, or if the registration statement is not effective in circumstances not permitted by the agreement, then we must make a payment to Kingsbridge, or issue Kingsbridge additional shares in lieu of this payment, calculated on the basis of the number of shares held by Kingsbridge (exclusive of shares that Kingsbridge may hold pursuant to exercise of the Kingsbridge warrant) 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 registration statement, the blackout or other payment could be significant.

Should we continue to 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 under the CEFF, we will issue shares to Kingsbridge at a discount of up to 10 percent from the volume weighted average price of our common stock. If we draw down amounts under the CEFF when our share 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 share price will have an even greater dilutive effect than if our share price were stable or increasing, and may further decrease our share price.

Due to the potential value of our strategic investments, we could be determined to be an investment company, and if such a determination were made, we would become subject to significant regulation that would adversely affect our business.

Our non-controlling position in Ceregene, along with investments of our available cash resources in certain types of fixed-income securities, could be considered “investment securities” under the Investment Company Act of 1940, raising a question of whether we are an investment company required to register and be regulated under the Investment Company Act. Regulation under the Investment Company Act, or a determination that we failed to register when required to do so, could materially and adversely affect our business. We believe that we are primarily engaged in the research, development and commercialization of biological cancer therapies and that any investment securities are ancillary to our primary business. Nevertheless, possible required dispositions of non-controlling investments could adversely affect our future reported results.

Recent accounting pronouncements impacted our results of operations.

In December 2004, the Financial Accounting Standards Board, or FASB, issued a revision of Financial Accounting Standards No. 123, or FAS 123R, which requires all share-based payments to employees and directors, including grants of employee stock options, to be recognized in the income statement based on their values. We adopted FAS 123R on January 1, 2006, using the modified prospective method. As a result, we recorded $2.9 million of stock-based compensation expense in the six months ended June 30, 2006. The adoption of FAS 123R had a material impact on our results of operations in the six months ended June 30, 2006 and will in each subsequent period, although it will have no impact on our overall liquidity. We cannot reasonably estimate the future impact of FAS 123R because it will depend on levels of share-based payments granted in the future as well as certain assumptions that can materially affect the calculation of the value share-based payments to employees and directors. The adoption of FAS 123R may affect the way we compensate our employees or may cause other changes in the way we conduct our business.

Risks Related to Our Industry

In order for our products to be offered to the public, they must undergo extensive clinical testing and receive approval from the FDA and other regulatory agencies, which could delay or prevent the commercialization of our products.

Human therapeutic products must undergo rigorous preclinical and clinical testing and other premarket approval procedures by the FDA and similar authorities in foreign countries. Preclinical tests include laboratory evaluation of potential products and animal studies to assess the potential safety and efficacy of the product and its formulations. Initiation of clinical trials requires approval by health authorities. Clinical trials involve the administration of the investigational new drug to healthy volunteers or to patients under the supervision of a qualified principal investigator. Clinical trials must be conducted in accordance with FDA and ICH Good Clinical Practices and the European Clinical Trials Directive under protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Other national, foreign and local regulations may also apply. The developer of the drug must provide information relating to the characterization and controls of the product before administration to the patients participating in the clinical trials. This requires developing approved assays of the product to test before administration to the patient and during the conduct of the trial. In addition, developers of pharmaceutical products must provide periodic data regarding clinical trials to the FDA and other health authorities, and these health authorities or our Independent Data Monitoring Committees may issue a clinical hold upon a trial if they do not believe, or cannot confirm, that the trial can be conducted without unreasonable risk to the trial participants. We cannot assure you that U.S. and foreign health authorities will not issue a clinical hold with respect to any of our clinical trials in the future. The results of the preclinical testing and clinical testing, together with chemistry, manufacturing and controls information, are submitted to the FDA and other health authorities in the form of a new drug application for a pharmaceutical product, and in the form of a biologics license application for a biological product, requesting approval to commence commercial sales.

In responding to a new drug application or a biologics license application, the FDA or foreign health authorities may grant marketing approvals, request additional information or further research, or deny the application if it determines that the application does not satisfy its regulatory approval criteria. Regulatory approval of a new drug application, biologics license application, or supplement is never guaranteed, and the approval process can take several years and is extremely expensive. The FDA and foreign health authorities have substantial discretion in the drug and biologics approval processes. Despite the time and expense incurred, failure can occur at any stage, and we could encounter problems that cause us to abandon clinical trials or to repeat or perform additional preclinical, clinical or manufacturing-related studies. Approvals may not be granted on a timely basis, if at all, and if granted may not cover all the clinical indications for which we may seek approval. Also, an approval might contain significant limitations in the form of warnings, precautions or contraindications with respect to conditions of use.

Even if our products are approved by regulatory authorities, if we fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or withdrawal from the market.

Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval pre-clinical, manufacturing, clinical and safety data and promotional activities for such product, will be subject to continual review and periodic inspections by the FDA and other regulatory bodies. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Later discovery of previously unknown problems with our products including unanticipated adverse events of unanticipated severity or frequency, manufacturer or manufacturing problems, or failure to comply with regulatory requirements, may result in restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recall, fines, suspension of regulatory approvals, product seizures or detention, injunctions or the imposition of civil or criminal penalties.

We are subject to federal, state, local and foreign laws and regulations, and complying with these may cause us to incur significant costs.

We are subject to laws and regulations enforced by the FDA, the DEA, the California Department of Health Services, foreign health authorities and other regulatory statutes including:

	•		the Occupational Safety and Health Act;

	•		the Environmental Protection Act;

	•		the Toxic Substances Control Act;

	•		the Food, Drug and Cosmetic Act;

	•		the Resource Conservation and Recovery Act; and

	•		other current and potential federal, state, local or foreign laws and regulations.

In particular with respect to environmental laws, product development activities involve the use of hazardous materials, and we may incur significant costs as a result of the need to comply with these laws. Our research, development and manufacturing activities involve the controlled use of hazardous materials, chemicals, viruses and radioactive compounds. We are subject to federal, foreign, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of our products, materials used to develop and manufacture our products, and resulting waste products. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed by applicable laws and regulations, we cannot completely eliminate the risk of contamination or injury, by accident or as the result of intentional acts of terrorism, from these materials. In the event of an accident, we could be held liable for any damages that result, and any resulting liability could exceed our resources. We do not carry insurance for potential exposures which could result from these risks. We may also be required to incur significant costs to comply with environmental laws and regulations in the future.

Reimbursement from third-party payers may become more restricted in the future, which may reduce demand for our products.

There is uncertainty related to the extent to which third-party payers will cover and pay for newly approved therapies. Sales of our future products will be influenced by the willingness of third-party payers to provide reimbursement. In both domestic and foreign markets, sales of our potential products will depend in part upon coverage and payment amounts from third-party payers, including:

	•		government agencies;

	•		private health care insurers and other health care payers, such as health maintenance organizations; and

	•		self-insured employee plans.

There is considerable pressure to reduce the cost of biotechnology and pharmaceutical products. Reimbursement from government agencies, insurers and large health organizations may become more restricted in the future. Our potential products represent a new mode of therapy, and while the cost-benefit ratio of the products may be favorable, we expect that the costs associated with our products will be substantial. Our proposed products, if successfully developed, may not be considered cost-effective by third-party payers. Insurance coverage might not be provided by third-party payers at all or may be provided only after substantial delay. Even if such coverage is provided, the approved third-party payment amounts might not be sufficient to permit widespread acceptance of our products.

The continuing efforts of governmental and third-party payers to contain or reduce the costs of healthcare may impair our future revenues and profitability.

The pricing of our future products may be influenced in part by government controls. For example, in certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to government control. In the United States, there have been, and we expect that there will continue to be, a number of federal and state proposals to implement more rigorous provisions relating to government payment levels. While we cannot predict whether the government will adopt any such legislative or regulatory proposals, the announcement or adoption of these proposals could have a material adverse effect on our business, results of operations, financial condition and cash flow.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On June 20, 2006, during the annual stockholders’ meeting, a quorum of our stockholders approved the following proposals:

(i)

Election of Directors.


Director	For		Withheld
David W. Carter		36,682,864		508,436
Nancy M. Crowell		36,691,456		499,844
James M. Gower		36,685,456		505,844
John T. Potts, Jr., M.D.		33,047,081		4,144,219
Thomas E. Shenk, Ph.D.		36,619,399		571,901
Stephen A. Sherwin, M.D.		36,608,133		583,167
Eugene L. Step		36,636,063		555,237
Inder M. Verma, Ph.D.		36,623,942		567,358
Dennis L. Winger		36,700,033		491,267

(ii)

Proposal to approve the amendment of the 2002 Employee Stock Purchase Plan.


For	Against	Abstain
16,484,216	3,770,537	157,498

(iii)

Proposal to ratify the appointment of Ernst & Young LLP as our Independent Registered Public Accounting Firm for the fiscal year ending December 31, 2006.


For	Against	Abstain
36,886,561	245,780	58,958

Item 6. EXHIBITS


Exhibit
Number		Description

12.1		Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements

31.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished, not filed)

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 in South San Francisco, California, on August 4, 2006.


		CELL GENESYS, INC.

		By:		/s/ STEPHEN A. SHERWIN, M.D.
				Stephen A. Sherwin, M.D.
				Chairman of the Board and Chief Executive Officer

		By:		/s/ SHARON E. TETLOW
				Sharon E. Tetlow
				Senior Vice President and Chief Financial Officer
				(Principal Financial and Accounting Officer)

EXHIBIT INDEX


Exhibit
Number		Description

12.1		Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements

31.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished, not filed)

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

Cell Genesys (CEGE) Inactive 10-Q2006 Q3 Quarterly report

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