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EX-4.9 - Talon Therapeutics, Inc.v164071_ex4-9.htm
EX-4.8 - Talon Therapeutics, Inc.v164071_ex4-8.htm
EX-23.1 - Talon Therapeutics, Inc.v164071_ex23-1.htm
EX-4.11 - Talon Therapeutics, Inc.v164071_ex4-11.htm
EX-4.10 - Talon Therapeutics, Inc.v164071_ex4-10.htm
EX-5.1 - Talon Therapeutics, Inc.v164071_ex5-1.htm

As filed with the Securities and Exchange Commission on November 3, 2009
Registration No. 333-  
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM S-1
 
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
 

 
HANA BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
2834
 
32-0064979
(State or other jurisdiction of incorporation or 
organization)
 
(Primary Standard Industrial Classification 
Code Number)
 
(I.R.S. Employer
Identification No.)
 

 
7000 Shoreline Court, Suite 370
South San Francisco 94080
(650) 588-6404
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 

 
John P. Iparraguirre
Vice President, Chief Financial Officer
Hana Biosciences, Inc.
7000 Shoreline Court, Suite 370
South San Francisco, CA 94080
(650) 588-6404
 (Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Christopher J. Melsha, Esq.
Fredrikson & Byron, P.A.
200 South Sixth Street, Suite 4000
Minneapolis, MN 55402-1425
Telephone: (612) 492-7000
Facsimile: (612) 492-7077
 

 
Approximate date of commencement of proposed sale to the public:  From time to time after the effective date of this registration statement, as shall be determined by the selling stockholders identified herein.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.  þ
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. o
 
If this Form is a post effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
If this Form is a post effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company þ
 
CALCULATION OF REGISTRATION FEE
 
Title of Each Class of Securities to be Registered
 
Amount to be 
Registered (1)
   
Proposed 
Maximum Offering 
Price Per Share (2)
   
Proposed Maximum 
Aggregate
Offering Price (2)
   
Amount of
Registration Fee
 
Common stock, par value $0.001 per share
    43,562,142     $ 0.46     $ 20,038,585.32     $ 1,118.15  
Common stock, par value $0.001 per share (3)
    16,491,104     $ 0.46       7,585,907.84       423.29  
Total
    60,053,246             $ 27,624,493.16     $ 1,541.45  
 

(1)
There is also being registered hereunder an indeterminate number of additional shares of common stock as shall be issuable pursuant to Rule 416 to prevent dilution resulting from stock splits, stock dividends or similar transactions.
(2)
Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(c) of the Securities Act of 1933, as amended, based upon the average of the high and low price of our common stock on October 28, 2009.
(3)
Represents shares of common stock issuable upon exercise of outstanding warrants.
 
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.

 
 

 

A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.

Subject to completion, dated November 3, 2009
 
OFFERING PROSPECTUS


60,053,246 Shares
Common Stock

The selling stockholders identified on pages 21-22 of this prospectus are offering on a resale basis a total of 60,053,246 shares of our common stock, including 16,491,104 shares issuable upon the exercise of outstanding warrants.  We will not receive any proceeds from the sale of these shares by the selling stockholders.

Our common stock is quoted on the OTC Bulletin Board under the symbol “HNAB.OB.”  On _____________, 2009, the last sale price of our common stock as reported on the OTC Bulletin Board was $______.

The securities offered by this prospectus involve a high degree of risk.
See “Risk Factors” beginning on page 6.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined that this prospectus is truthful or complete.  A representation to the contrary is a criminal offense.

The date of this prospectus is ______________, 2009.

 
 

 

TABLE OF CONTENTS

PROSPECTUS SUMMARY
  3
RISK FACTORS
  6
NOTE REGARDING FORWARD-LOOKING STATEMENTS
  20
USE OF PROCEEDS
  21
SELLING STOCKHOLDERS
  21
PLAN OF DISTRIBUTION
  23
DESCRIPTION OF CAPITAL STOCK
  25
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
  26
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  28
DESCRIPTION OF BUSINESS
  35
MANAGEMENT AND BOARD OF DIRECTORS
  51
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  57
TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS
  58
WHERE YOU CAN FIND MORE INFORMATION
  58
VALIDITY OF COMMON STOCK
  58
EXPERTS
  59
TRANSFER AGENT
  59
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
  59
INDEX TO FINANCIAL STATEMENTS
F-1

 
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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. Because it is a summary, it may not contain all of the information that is important to you. Accordingly, you are urged to carefully review this prospectus in its entirety, including the risks of investing in our securities discussed under the caption “Risk Factors” and the financial statements and other information that is contained in or incorporated by reference into  this prospectus or the registration statement of which this prospectus is a part before making an investment decision. References to the “Company,” “Hana,” “we,” “us,” or “our” in this prospectus refer to Hana Biosciences, Inc., a Delaware corporation, unless the context indicates otherwise.

Company Overview
 
We are a biopharmaceutical company dedicated to developing and commercializing new, differentiated cancer therapies designed to improve and enable current standards of care.  We currently have four product candidates in various stages of development:
 
·
Marqibo® (vincristine sulfate liposomes injection), a novel, targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug vincristine, being developed for the treatment of adult acute lymphoblastic leukemia.
 
·
Menadione Topical Lotion, a novel supportive care product candidate, being developed for the prevention and/or treatment of the skin toxicities associated with the use of epidermal growth factor receptor inhibitors (EGFRI), a type of anti-cancer agent used in the treatment of certain cancers.
 
·
Brakiva™ (topotecan liposomes injection), a novel targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug topotecan, being developed for the treatment of solid tumors including small cell lung cancer and ovarian cancer.
 
·
Alocrest™ (vinorelbine liposomes injection), a novel, targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug vinorelbine, being developed for the treatment of solid tumors such as non-small-cell lung cancer.

            Our executive offices are located at 7000 Shoreline Court, Suite 370, South San Francisco, California 94080. Our telephone number is (650) 588-6404 and our Internet address is www.hanabiosciences.com. Information contained in, or accessible through, our website does not constitute a part of this prospectus. We were originally incorporated under Delaware law in 2002 under the name Hudson Health Sciences, Inc. In July 2004, we acquired Email Real Estate.com, Inc., a Colorado corporation and public shell company in a reverse acquisition.  In September 2004, we reincorporated under Delaware law under the name Hana Biosciences, Inc.

 
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Risk Factors

As with most pharmaceutical product candidates, the development of our product candidates is subject to numerous risks, including the risk of being unable to obtain necessary regulatory approvals to market the products, unforeseen safety issues relating to the products, dependence on third party collaborators to conduct research and development of the products, and a lack of adequate capital needed to develop the product candidates. Because we have only a limited history of operations, we are also subject to many risks associated with early-stage companies. For a more detailed discussion of some of the risks you should consider before purchasing shares of our common stock, you are urged to carefully review and consider the section entitled “Risk Factors” beginning on page 6 of this prospectus.

The Offering

The selling stockholders identified on pages 21-22 of this prospectus are offering on a resale basis a total of 60,053,246 shares of our common stock, including 16,491,104 shares issuable upon the exercise of outstanding warrants.

Common stock offered
60,053,246 shares
   
Common stock outstanding before the offering(1)
76,145,146 shares
   
Common stock outstanding after the offering(2)
92,636,250 shares
   
Use of Proceeds
We will receive none of the proceeds from the sale of the shares by the selling stockholders, except for the warrant exercise price upon exercise of the warrants, which would be used for working capital and other general corporate purposes
   
OTC Bulletin Board Symbol
HNAB.OB


 
(1)
Based on the number of shares outstanding as of October 29, 2009, not including 23,422,453 shares issuable upon exercise of various warrants and options to purchase our common stock.
 
(2)
Assumes the issuance of all shares offered hereby that are issuable upon exercise of warrants.

Recent Developments

Private Placement Offering

On October 7, 2009, we entered into a securities purchase agreement with a number of accredited investors pursuant to which we agreed to sell in a private placement an aggregate of 54,593,864 units of our securities.  At the election of the investor and in order to maintain such investor’s beneficial ownership of our common stock at a level not to exceed 9.99%, each unit consisted of either of the following securities:
 
 
·
one share of our common stock plus a seven-year warrant (referred to in the purchase agreement as a Series B Warrant) to purchase one-tenth of one additional share of our common stock at an exercise price of $0.60 per share; or
 
 
·
a seven-year warrant to purchase, at an exercise price of $0.01 per share, one share of common stock (referred to in the purchase agreement as a Series A Warrant), plus a Series B Warrant to purchase one-tenth of one share of our common stock at an exercise price of $0.60 per share.
 
The purchase price per unit was $0.30, except that to the extent an investor purchased units that included the Series A Warrants, the purchase price was reduced to $0.29 to give effect to the additional $0.01 that would be paid upon exercise of the Series A Warrants.  Pursuant to the purchase agreement, we sold an aggregate of 43,562,142 units consisting of an equal number of shares of our common stock and Series B Warrants to purchase 4,356,212 additional shares of common stock, and 11,031,722 units consisting of Series A Warrants to purchase an equal number of shares of common stock and Series B Warrants to purchase 1,103,170 additional shares of common stock.  The aggregate purchase price for all of the securities sold under the purchase agreement was approximately $16.27 million, before deducting expenses.  Of this total amount, we received approximately $12.4 million in cash and approximately $3.87 million represented the satisfaction of an outstanding obligation that we owed to one of the investors, as discussed below.  Additionally, we incurred approximately $0.7 million of expenses related to the financing transaction including legal fees and placement agent fees. Pursuant to the purchase agreement, we agreed to use the proceeds from the sale of these securities solely for the clinical and regulatory development of our Marqibo program.

 
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Among the investors who participated in the private placement were Deerfield Private Design Fund, L.P., Deerfield Special Situations Fund, L.P., Deerfield Special Situations Fund International Limited and Deerfield Private Design International, L.P., which we collectively refer to as Deerfield.   Pursuant to an October 2007 loan facility agreement, we had issued to Deerfield warrants which, prior to the redemption of these warrants, represented the right to purchase 6,142,754 shares of our common stock at a price of $1.31 per share.  Deerfield had the right to require us to redeem these warrants upon the occurrence of certain events, including the delisting of our common stock from the Nasdaq Stock Market or another national securities exchange.  Following our delisting from the Nasdaq Capital Market in September 2009, Deerfield exercised its right to have us redeem the warrants at a redemption price equal to the then Black-Scholes value of the warrants in accordance with a formula described in the warrants.  At the effective date of the redemption, the redemption price totaled approximately $3.87 million.  However, pursuant to a subsequent agreement, in lieu of cash, Deerfield agreed to accept as payment of the warrant redemption price the same type of securities as issued by us in a future financing transaction.   Accordingly, pursuant to our October 2009 securities purchase agreement, Deerfield purchased approximately 12,906,145 units consisting of shares and Series B Warrants in full satisfaction of the warrant redemption price owed by us.

Pursuant to the terms of the securities purchase agreement, we agreed to file a registration statement under the Securities Act of 1933, as amended, covering the resale of the shares of our common stock sold in our October 2009 private placement, including the shares issuable upon exercise of the Series A and Series B Warrants.  We further agreed to use our reasonable efforts to cause such registration statement to be declared effective within 90 days following the closing, or 120 days in the event the staff of the Securities and Exchange Commission reviews and provides comments to the registration statement. The registration statement of which this prospectus is a part registers the shares of our common stock we sold pursuant to our October 2009 securities purchase agreement. If such registration statement is not declared effective by the SEC within such 90 or 120-day period, as applicable, we agreed to pay liquidated damages to the investors in the amount of 1% of such investor’s aggregate investment amount for each 30-day period until the registration statement is declared effective.

In connection with the private placement, we engaged Piper Jaffray & Co. to serve as our placement agent. In consideration for its services, we paid Piper Jaffray a placement fee of approximately $620,000, plus reimbursed its out-of-pocket expenses of approximately $29,000. Piper Jaffray did not receive any placement fee in connection with the securities sold to Deerfield in satisfaction of its warrant redemption obligation.

Changes in Management

On October 30, 2009, John P. Iparraguirre submitted his resignation as our Vice President, Chief Financial Officer and Secretary, effective as of November 16, 2009.
 
 
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RISK FACTORS

Investment in our common stock involves significant risk. You should carefully consider the information described in the following risk factors, together with the other information appearing elsewhere in this prospectus, before making an investment decision regarding our common stock. If any of these risks actually occur, our business, financial conditions, results of operation and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or a part of your investment in our common stock. Moreover, the risks described below are not the only ones that we face. Additional risks not presently known to us or that we currently deem immaterial may also affect our business, operating results, prospects or financial condition.

Risks Related to Our Business
 
We need to raise additional capital to fund our planned operations beyond mid-2010. If we are unable to raise additional capital when needed, we will have to discontinue our product development programs or relinquish our rights to some or all of our product candidates. The manner in which we raise any additional funds may affect the value of your investment in our common stock.

After giving effect to our October 2009 private placement and together with our existing cash, cash equivalents, available for sale securities and lending commitments, we believe that our currently available capital is only sufficient to fund our operations into mid-2010.  Given our desired clinical development plans for the next 12 months, our financial statements reflect a going concern uncertainty, which is also stated in the report from our auditors on the audit of our financial statements as of and for the year ended December 31, 2008.  Accordingly, we need additional capital to fund our operations beyond such point.  Further, our available capital may be consumed sooner than we anticipate depending on a variety of factors, including:

        ·      costs associated with conducting our ongoing and planned clinical trials;

        ·      costs, timing and outcome of regulatory reviews;

        ·      costs of establishing arrangements for manufacturing our product candidates;

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

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

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

        ·      costs of acquiring any new drug candidates.

Since we do not generate any recurring revenue, the most likely sources of such additional capital include private placements of our equity securities, including our common stock, debt financing or from a potential strategic licensing or collaboration transaction involving the rights to one or more of our product candidates.  To the extent that we raise additional capital by issuing equity securities, our stockholders will likely experience significant dilution. We may also grant future investors rights superior to those of our current stockholders. If we raise additional funds through collaborations and licensing arrangements, it may be necessary to relinquish some rights to our technologies, product candidates or products, or grant licenses on terms that are not favorable to us. If we raise additional funds by incurring debt, we could incur significant interest expense and become subject to covenants in the related transaction documentation that could affect the manner in which we conduct our business.
  
However, we have no committed sources of additional capital and our access to capital funding is always uncertain. This uncertainty is exacerbated due to the current global economic turmoil, which has severely restricted access to the U.S. and international capital markets, particularly for biopharmaceutical and biotechnology companies. Accordingly, despite our ability to secure adequate capital in the past, there is no assurance that additional equity or debt financing will be available to us when needed, on acceptable terms or even at all. If we fail to obtain the necessary additional capital when needed, we will be forced to significantly curtail our planned research and development activities, which will cause a delay in our drug development programs.  If we do not obtain additional capital before we have consumed our currently available resources, we may be forced to cease our operations altogether, in which case you will lose your entire investment in our company.
 
Our business is substantially dependent on the results of our ongoing rALLy study of Marqibo and our ability to obtain accelerated approval of Marqibo.

A substantial portion of our current human and financial resources is focused in the development of Marqibo, our lead product candidate.  We are currently evaluating Marqibo in a global, registration-enabling Phase 2 clinical trial in adult Philadelphia chromosome negative ALL patients in second relapse or those who have progressed following two prior lines of therapy.  We refer to this Phase 2 clinical trial as the rALLy study.  The primary outcome measure of the rALLy study is complete remission, or CR, or CR without full hematological recovery, or CRi.  Our target enrollment for the rALLy study is 56 patients, which we achieved in August 2009.  In June 2009, we announced preliminary data indicating that of the first 33 patients does in the study, 10 patients had achieved a CR or CRi and that the estimated median overall survival was 6.4 months.  Subject to the results of the rALLy study, we plan to file a new drug application, or NDA, with the FDA seeking accelerated approval of Marqibo for the treatment of ALL in the first half of 2010.  See “Description of Business – Product Pipeline – Marqibo (vincristine sulfate liposomes injection).”

We expect to obtain and release topline data from the rALLy study in December 2009.  We believe that if the data are consistent with the preliminary data that we announced in June 2009 concerning the first 33 patients, the results of the rALLy study will be sufficient to support our planned NDA submission.  If either the final data in sufficient to support the submission of an NDA for accelerated approval, or if the FDA accepts our NDA for review but subsequently denies approval, our business would be substantially and adversely affected and we would be forced to significantly curtail or even cease our operations.
 

 
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We have a limited operating history and may not be able to commercialize any products, generate significant revenues or attain profitability.
 
We have not generated significant revenue and have incurred significant net losses in each year since our inception. We expect to incur substantial losses and negative cash flow from operations for the foreseeable future, and we may never achieve or maintain profitability. For the years ended December 31, 2008 and December 31, 2007, we had net losses of $22.2 million and $26.0 million, respectively.  For the six months ended June 30, 2009, we had a net loss of $13.5 million.

We expect our cash requirements to increase substantially in the foreseeable future as we:
 
·           continue to undertake clinical development of our current product candidates;
 
·           seek regulatory approvals for our product candidates at the appropriate time in the future;
  
·           implement additional internal systems and infrastructure;
 
·           seek to acquire additional technologies to develop; and
 
·           hire additional personnel.
 
We expect to incur losses for the foreseeable future as we fund our operations and capital expenditures. As a result, we will need to generate significant revenues in order to achieve and maintain profitability. Even if we succeed in developing and commercializing/partnering one or more of our product candidates, which success is not assured, we may not be able to generate significant revenues. Even if we do generate significant revenues, we may never achieve or maintain profitability. Our failure to achieve or maintain profitability could negatively impact the trading price of our common stock.
 
If we are unable to successfully manage our growth, our business may be harmed.
 
 In the future, if we are able to advance Marqibo or our other product candidates to the point of, and thereafter through, clinical trials, we may need to expand our development, regulatory, manufacturing, marketing and sales capabilities or contract with third parties to provide these capabilities. Any future growth will place a significant strain on our management and on our administrative, operational and financial resources. Our future financial performance and our ability to commercialize Marqibo and our product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively. We must manage our development efforts and clinical trials effectively, and hire, train and integrate additional management, administrative and sales and marketing personnel. We may not be able to accomplish these tasks, and our failure to accomplish any of them could prevent us from successfully growing.
 
If we are unable to hire additional qualified personnel, our ability to grow our business may be harmed.
 
We will need to hire additional qualified personnel with expertise in preclinical testing, clinical research and testing, government regulation, formulation and manufacturing and sales and marketing. We compete for qualified individuals with numerous biopharmaceutical companies, universities and other research institutions. Competition for such individuals, particularly in the San Francisco Bay Area where we are headquartered, is intense, and we cannot be certain that our search for such personnel will be successful. Our ability to attract and retain qualified personnel is critical to our success.
 
We may incur substantial liabilities and may be required to limit commercialization of our products in response to product liability lawsuits.
 
The testing and marketing of pharmaceutical products entail an inherent risk of product liability. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates, if approved. Even successful defense would require significant financial and management resources. Regardless of the merit or eventual outcome, liability claims may result in:
 
·         decreased demand for our product candidates;
 
·         injury to our reputation;

·         withdrawal of clinical trial participants;

 
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·         withdrawal of prior governmental approvals;
 
·         costs of related litigation;
 
·         substantial monetary awards to patients;
 
·         product recalls;
 
·         loss of revenue; and
 
·         the inability to commercialize our product candidates.
 
Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of pharmaceutical products we develop, alone or with collaborators. We currently do not carry product liability insurance but instead maintain a $10 million clinical trial insurance policy for our ongoing clinical trials of our product candidates. Even if our agreements with any future collaborators entitle us to indemnification against damages from product liability claims, such indemnification may not be available or adequate should any claim arise.

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

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

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

We expect that any product candidate to which we acquire rights will require significant additional development and other efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are subject to the risks of failure inherent in pharmaceutical product development, including the possibility that the product candidate will not be shown to be sufficiently safe or effective for approval by regulatory authorities. Even if our product candidates are approved, they may not be manufactured or produced economically or commercialized successfully.
 
Risks Related to the Clinical Testing, Regulatory Approval and Manufacturing of Our Product Candidates
 
If we are unable to obtain regulatory approval to sell our lead product candidate, Marqibo, or any of our other product candidates, our business will suffer.
 
In May 2006, we licensed Marqibo from Inex, which was succeeded by Tekmira Pharmaceuticals Corp. in April 2007. Marqibo is not currently permitted to be commercially used. Inex submitted an NDA pursuant to Section 505(b)(2) of the FDCA for accelerated marketing approval of Marqibo primarily based upon a single arm, Phase II clinical trial, which was reviewed by the FDA in 2004 and 2005. In January 2005, the FDA issued a not approvable letter to Inex for the Marqibo NDA for the treatment of patients with relapsed refractory NHL previously treated with at least two chemotherapy regimens. The FDA’s not approvable letter cited a variety of reasons for not approving the NDA, including the following:
 
·
The information presented by Inex was inadequate and contained clinical deficiencies;
 
·
The information presented by Inex failed to provide evidence of an effect on a surrogate that is reasonably likely to predict clinical benefit;

 
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·
The information presented by Inex contained chemistry, manufacturing and control deficiencies;
 
·
A supportive study in NHL patients and ALL patients was not well conducted or well controlled; and
 
·
The information presented by Inex did not demonstrate an improvement over available therapy.
 
In rejecting the NDA, the FDA recommended that, if Inex planned to pursue development of Marqibo for the treatment of relapsed refractory NHL, Inex should conduct additional studies, including but not limited to randomized controlled studies comparing Marqibo to other chemotherapy regimens. Even if such studies are successfully performed, Marqibo may not receive FDA approval.
 
With respect to Marqibo and any of our other product candidates, additional FDA regulatory risks exist which may prevent FDA approval of these drug candidates and thereby prevent their commercial use. Additionally, if Marqibo or any of our product candidates are approved by the FDA, such approval may be withdrawn by the FDA for a variety of reasons, including:
 
·
that clinical or other experience, tests, or other scientific data show that the drug is unsafe for use;
 
·
that new evidence of clinical experience or evidence from new tests, evaluated together with the evidence available to the FDA when the NDA was approved, shows that the drug is not shown to be safe for use under the approved conditions of use;
 
·
that on the basis of new information presented to the FDA, there is a lack of substantial evidence that the drug will have the effect it purports or is represented to have under the approved conditions of use;
 
·
that an NDA contains any untrue statement of a material fact; or
 
·
for a drug approved under the FDA’s accelerated approval regulations or as a fast track drug, if any required post-approval study is not conducted with due diligence or if such study fails to verify the clinical benefit of the drug.    
 
Other regulatory risks may arise as a result of a change in applicable law or regulation or the interpretation thereof, and may result in material modification or withdrawal of prior FDA approvals.

Many of our product candidates are in early stages of clinical trials, which are very expensive and time-consuming. Any failure or delay in completing clinical trials for our product candidates could harm our business.
 
Other than Marqibo, the other product candidates that we are developing, Alocrest, Brakiva, and Menadione, are in early stages of development and will require extensive clinical and other testing and analysis before we will be in a position to consider seeking FDA approval to sell such product candidates. In addition to the risks set forth above for Marqibo, which also apply to Alocrest, Brakiva and Menadione, these product candidates also have additional risks as each is in an earlier stage of development and review.
 
Conducting clinical trials is a lengthy, time consuming and very expensive process and the results are inherently uncertain. The duration of clinical trials can vary substantially according to the type, complexity, novelty and intended use of the product candidate. We estimate that clinical trials of our product candidates will take at least several years to complete. The completion of clinical trials for our product candidates may be delayed or prevented by many factors, including:
 
·
delays in patient enrollment, and variability in the number and types of patients available for clinical trials;
 
·
difficulty in maintaining contact with patients after treatment, resulting in incomplete data;
 
·
poor effectiveness of product candidates during clinical trials;
 
·
safety issues, side effects, or other adverse events;
 
·
results that do not demonstrate the safety or effectiveness of the product candidates;
 
·
governmental or regulatory delays and changes in regulatory requirements, policy and guidelines; and 

 
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·
varying interpretation of data by the FDA.
  
In conducting clinical trials, we may fail to establish the effectiveness of a compound for the targeted indication or discover that it is unsafe due to unforeseen side effects or other reasons. Even if our clinical trials are commenced and completed as planned, their results may not support our product candidate claims. Further, failure of product candidate development can occur at any stage of the clinical trials, or even thereafter, and we could encounter problems that cause us to abandon or repeat clinical trials. These problems could interrupt, delay or halt clinical trials for our product candidates and could result in FDA, or other regulatory authorities, delaying approval of our product candidates for any or all indications. The results from preclinical testing and prior clinical trials may not be predictive of results obtained in later or other larger clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in clinical trials, even in advanced clinical trials after showing promising results in earlier clinical trials. Our failure to adequately demonstrate the safety and effectiveness of any of our product candidates will prevent us from receiving regulatory approval to market these product candidates and will negatively impact our business.
 
In addition, we or the FDA may suspend or curtail our clinical trials at any time if it appears that we are exposing participants to unacceptable health risks or if the FDA finds deficiencies in the conduct of these clinical trials or in the composition, manufacture or administration of the product candidates. Accordingly, we cannot predict with any certainty when or if we will ever be in a position to submit an NDA for any of our product candidates, or whether any such NDA would ever be approved.
 
If we do not obtain the necessary U.S. or foreign regulatory approvals to commercialize our product candidates, we will not be able to market and sell our product candidates.
 
None of our product candidates have been approved for commercial sale in any country. FDA approval is required to commercialize all of our product candidates in the United States and approvals from the FDA equivalent regulatory authorities are required in foreign jurisdictions in order to commercialize our product candidates in those jurisdictions. We possess world-wide rights to develop and commercialize Marqibo and our other product candidates.

In order to obtain FDA approval of any of our product candidates, we must submit to the FDA an NDA, demonstrating that the product candidate is safe for humans and effective for its intended use and otherwise meets the requirements of existing laws and regulations governing new drugs. This demonstration requires significant research and animal tests, which are referred to as preclinical studies, and human tests, which are referred to as clinical trials, as well as additional information and studies. Satisfaction of the FDA’s regulatory requirements typically takes many years, depending on the type, complexity and novelty of the product candidate and requires substantial resources for research, development and testing as well as for other purposes. To date, none of our product candidates have been approved for sale in the United States or in any foreign market. We cannot predict whether our research and clinical approaches will result in drugs that the FDA considers safe for humans and effective for indicated uses. Historically, only a small percentage of all drug candidates that start clinical trials are eventually approved by the FDA for sale. After clinical trials are completed, the FDA has substantial discretion in the drug approval process and may require us to conduct additional preclinical and clinical testing or to perform post-marketing studies. The approval process may also be delayed by changes in government regulation, future legislation or administrative action or changes in FDA policy that occur prior to or during our regulatory review. Delays in obtaining regulatory approvals may:
 
·
delay or prevent commercialization of, and our ability to derive product revenues from, our product candidates; 
 
·
impose costly procedures on us;
  
·
reduce the potential prices we may be able to charge for our product candidates, assuming they are approved for sale; and
 
·
diminish any competitive advantages that we may otherwise enjoy.
 
Even if we comply with all FDA requests, the FDA may ultimately reject one or more of our NDAs. We cannot be sure that we will ever obtain regulatory approval for any of our product candidates. Additionally, a change in applicable law or regulation, or the interpretation thereof, may result in material modification or withdrawal of prior FDA approvals.
 
Failure to obtain FDA approval of any of our product candidates will severely undermine our business by reducing our number of saleable products and, therefore, corresponding product revenues. If we do not complete clinical trials and obtain regulatory approval for a product candidate, we will not be able to recover any of the substantial costs invested by us in the development of the product candidate.

 
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In foreign jurisdictions, we must receive approval from the appropriate regulatory authorities before we can commercialize our drugs. Foreign regulatory approval processes generally include all of the risks associated with the FDA approval procedures described above. We cannot assure you that we will receive the approvals necessary to commercialize any of our product candidates for sale outside the United States.
 
Our competitive position may be harmed if a competitor obtains orphan drug designation and approval for the treatment of ALL for a clinically superior drug.
 
Orphan drug designation is an important element of our competitive strategy because the latest of our licensors’ patents for Marqibo expires in November 2021. In 2007, the FDA granted orphan drug designation for the use of Marqibo in treating adult ALL and adult metastatic uveal melanoma. The company that obtains the first FDA approval for a designated orphan drug for a rare disease generally receives marketing exclusivity for use of that drug for the designated condition for a period of seven years. However, even though we obtained orphan drug status for Marqibo in the treatments noted, the FDA may permit other companies to market a drug for the same designated and approved condition during our period of orphan drug exclusivity if it can be demonstrated that the drug is clinically superior to our drug. This could create a more competitive market for us.

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

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

 
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In order to market any products outside of the United States, we must establish and comply with the numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. Regulatory approval in one country does not ensure regulatory approval in another, but failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others.
 
Because we are dependent on clinical research institutions and other contractors for clinical testing and for research and development activities, the results of our clinical trials and such research activities are, to a certain extent, beyond our control.
 
We depend upon independent investigators and collaborators, such as universities and medical institutions, to conduct our preclinical and clinical trials under agreements with us. These parties are not our employees and we cannot control the amount or timing of resources that they devote to our programs. These investigators may not assign as great a priority to our programs or pursue them as diligently as we would if we were undertaking such programs ourselves. If outside collaborators fail to devote sufficient time and resources to our drug-development programs, or if their performance is substandard, the approval of our FDA applications, if any, and our introduction of new drugs, if any, will be delayed. These collaborators may also have relationships with other commercial entities, some of whom may compete with us. If our collaborators assist our competitors at our expense, our competitive position would be harmed.
 
Our reliance on third parties to formulate and manufacture our product candidates exposes us to a number of risks that may delay the development, regulatory approval and commercialization of our products or result in higher product costs.
 
We have no experience in drug formulation or manufacturing and do not intend to establish our own manufacturing facilities. We lack the resources and expertise to formulate or manufacture our own product candidates. We contract with one or more manufacturers to manufacture, supply, store and distribute drug supplies for our clinical trials. If any of our product candidates receive FDA approval, we will rely on one or more third-party contractors to manufacture our drugs. Our anticipated future reliance on a limited number of third-party manufacturers exposes us to the following risks:
 
·
We may be unable to identify manufacturers on acceptable terms or at all because the number of potential manufacturers is limited and the FDA must approve any replacement contractor. This approval would require new testing and compliance inspections. In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our products after receipt of FDA approval, if any. 
 
·
Our third-party manufacturers might be unable to formulate and manufacture our drugs in the volume and of the quality required to meet our clinical and/or commercial needs, if any.
 
·
Our future contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required to supply our clinical trials or to successfully produce, store and distribute our products.
 
·
Drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA and corresponding state agencies to ensure strict compliance with good manufacturing practice and other government regulations and corresponding foreign standards. We do not have control over third-party manufacturers’ compliance with these regulations and standards, but we will be ultimately responsible for any of their failures.
 
·
If any third-party manufacturer makes improvements in the manufacturing process for our products, we may not own, or may have to share, the intellectual property rights to the innovation. This may prohibit us from seeking alternative or additional manufacturers for our products.   
 
Each of these risks could delay our clinical trials, the approval, if any, of our product candidates by the FDA, or the commercialization of our product candidates or result in higher costs or deprive us of potential product revenues.

Risks Related to Our Ability to Commercialize Our Product Candidates
 
Our success depends substantially on our most advanced product candidate, Marqibo, which is still under development and requires further regulatory approvals. If we are unable to obtain regulatory approval of and commercialize Marqibo alone or with a strategic partner, or experience significant delays in doing so, our ability to generate product revenue and our likelihood of success will be significantly diminished.

 
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In 2007, we commenced a multi-center, multi-national Phase 2 registration-enabling clinical trial of Marqibo in adult patients with relapsed ALL, which we refer to as the rALLy study. We intend to use the results of the rALLy study to file a new drug application, or NDA, with the FDA under an “accelerated approval” pathway.  We also plan to conduct a confirmatory Phase 3 clinical trial to commence in 2010.  The design of this registrational study is still under review.  A significant portion of our time and financial resources for at least the next twelve months will be used in the development of our Marqibo program. We anticipate that our ability to generate revenues in the near term will depend solely on the successful development, regulatory approval and commercialization of Marqibo or our ability to enter into a partnership or licensing agreement wherein we receive cash payments.  We currently do not have sufficient funds to continue operations through the time period required to obtain NDA approval for Marqibo and will need to obtain significant additional capital before we obtain FDA approval for an NDA in Marqibo.
 
All of our other product candidates are in the very early stages of development. Any of our product candidates could be unsuccessful if they:

·
do not demonstrate acceptable safety and efficacy in preclinical studies or clinical trials or otherwise do not meet applicable regulatory standards for approval; 
 
·
do not offer therapeutic or other improvements over existing or future therapies used to treat the same conditions; 
 
·
are not capable of being produced in commercial quantities at acceptable costs or pursuant to applicable rules and regulations; or 
 
·
are not accepted in the medical community and by third-party payors.
 
If we are unable to commercialize our product candidates, we will not generate product revenues. The results of our clinical trials to date do not provide assurance that acceptable efficacy or safety will be shown.
 
If we are unable either to create sales, marketing and distribution capabilities or enter into agreements with third parties to perform these functions, we will be unable to commercialize our product candidates successfully.
 
We currently have no sales, marketing or distribution capabilities nor do we currently have funds sufficient to develop these capabilities. To commercialize our product candidates, we must either develop internal sales, marketing and distribution capabilities, which will be expensive and time consuming, or make arrangements with third parties to perform these services. If we decide to market any of our products directly, we must commit financial and managerial resources to develop marketing capabilities and a sales force with technical expertise and with supporting distribution capabilities. Other factors that may inhibit our efforts to commercialize our product candidates, if approved, directly and without strategic partners include:
 
·
our inability to recruit and retain adequate numbers of effective sales and marketing personnel;  
 
·
the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe our products;
 
·
the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and
 
·
unforeseen costs and expenses associated with creating an independent sales and marketing organization.
 
If we are not able to partner with a third party and are not successful in recruiting sales and marketing personnel or in building a sales and marketing infrastructure, we will have difficulty commercializing our product candidates, which would harm our business. If we rely on pharmaceutical or biotechnology companies with established distribution systems to market our products, we will need to establish and maintain partnership arrangements, and we may not be able to enter into these arrangements on acceptable terms or at all. To the extent that we enter into co-promotion or other arrangements, any revenues we receive will depend upon the efforts of third parties which may not be successful and which will be only partially in our control. Our product revenues would likely be lower than if we marketed and sold our products directly.

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

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

If physicians and patients do not accept and use our product candidates, our ability to generate revenue from sales of our products will be materially impaired.
 
Even if the FDA approves Marqibo or any of our product candidates, if physicians and patients do not accept and use them, our business will be adversely affected. Acceptance and use of our products will depend upon a number of factors including:
 
·
perceptions by members of the health care community, including physicians, about the safety and effectiveness of our drugs; 
 
·
pharmacological benefit and cost-effectiveness of our products relative to competing products;
 
·
availability of reimbursement for our products from government or other healthcare payors;
 
·
effectiveness of marketing and distribution efforts by us and our licensees and distributors, if any; and
 
·
the price at which we sell our products.
 
Adequate coverage and reimbursement may not be available for our product candidates, which could diminish our sales or affect our ability to sell our products profitably.

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

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

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

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

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

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

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

If we cannot compete successfully for market share against other drug companies, we may not achieve sufficient product revenues and our business will suffer.
 
The market for our product candidates is characterized by intense competition and rapid technological advances. If our product candidates receive FDA approval, they will compete with a number of existing and future drugs and therapies developed, manufactured and marketed by others. If approved, Marqibo will compete with unencapsulated vincristine, which is generic, other cytotoxic agents such as antimetabolites, alkylating agents, cytotoxic antibiotics, vinca alkyloids, platinum compounds and taxanes, and other cytotoxic agents that use different encapsulation technologies. These or other future competing products and product candidates may provide greater therapeutic convenience or clinical or other benefits for a specific indication than our products, or may offer comparable performance at a lower cost. If our products fail to capture and maintain market share, we may not achieve sufficient product revenues and our business will suffer.
 
We will compete against fully integrated pharmaceutical companies and smaller companies that are collaborating with larger pharmaceutical companies, academic institutions, government agencies and other public and private research organizations. In addition, many of these competitors, either alone or together with their collaborative partners, operate larger research and development programs and have substantially greater financial resources than we do, as well as significantly greater experience in:
 
·
developing drugs;
 
·
undertaking preclinical testing and human clinical trials;
 
·
obtaining FDA and other regulatory approvals of drugs;
 
·
formulating and manufacturing drugs; and 
 
·
launching, marketing and selling drugs.

 
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Developments by competitors may render our products or technologies obsolete or non-competitive.
 
Alternative technologies are being developed to treat cancer and immunological disease, several of which are in advanced clinical trials. In addition, companies pursuing different but related fields represent substantial competition. Many of these organizations have substantially greater capital resources, larger research and development staffs and facilities, longer drug development history in obtaining regulatory approvals and greater manufacturing and marketing capabilities than we do. These organizations also compete with us to attract qualified personnel, parties for acquisitions, joint ventures or other collaborations.
 
Risks Related to Our Intellectual Property
 
If we fail to adequately protect or enforce our intellectual property rights or secure rights to patents of others, the value of our intellectual property rights would diminish.
 
Our success, competitive position and future revenues will depend in large part on our ability and the abilities of our licensors to obtain and maintain patent protection for our products, methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties.
 
We have licensed from third parties rights to numerous issued patents and patent applications. To date, through our license agreements for Marqibo, Alocrest, Brakiva and Menadione, we hold certain exclusive patent rights, including rights under U.S. patents and U.S. patent applications. We also have patent rights to applications pending in several foreign jurisdictions. We have filed and anticipate filing additional patent applications both in the United States and internationally, as appropriate.
 
The rights to product candidates that we acquire from licensors or collaborators are protected by patents and proprietary rights owned by them, and we rely on the patent protection and rights established or acquired by them. We generally do not unilaterally control, or do not control at all, the prosecution of patent applications licensed from third parties. Accordingly, we are unable to exercise the same degree of control over this intellectual property as we may exercise over internally developed intellectual property.
 
The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. Even if we are able to obtain patents, any patent may be challenged, invalidated, held unenforceable or circumvented. The existence of a patent will not necessarily protect us from competition. Competitors may successfully challenge our patents, produce similar drugs or products that do not infringe our patents or produce drugs in countries where we have not applied for patent protection or that do not respect our patents. Under our license agreements, we generally do not unilaterally control, or do not control at all, the enforcement of the licensed patents or the defense of third party suits of infringement or invalidity.

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

The degree of future protection for our proprietary rights is uncertain in part because legal means afford only limited protection and may not adequately protect our rights, and we will not be able to ensure that:
 
·
we or our licensors or collaborators were the first to make the inventions described in patent applications;
 
·
we or our licensors or collaborators were the first to file patent applications for inventions;
 
·
others will not independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;
 
·
any of our pending patent applications will result in issued patents;
 
·
any patents licensed or issued to us will provide a basis for commercially viable products or will provide us with any competitive advantages or will not be challenged by third parties;

 
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·
we will ultimately be able to enforce our owned or licensed patent rights pertaining to our products;
 
·
any patents licensed or issued to us will not be challenged, invalidated, held unenforceable or circumvented;
 
·
we will develop or license proprietary technologies that are patentable; or
 
·
the patents of others will not have an adverse effect on our ability to do business.
 
Our success also depends upon the skills, knowledge and experience of our scientific and technical personnel, our consultants and advisors as well as our licensors and contractors. To help protect our proprietary know-how and our inventions for which patents may be unobtainable or difficult to obtain, we rely on trade secret protection and confidentiality agreements. To this end, we require all of our employees to enter into agreements which prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business. These agreements may not provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure or the lawful development by others of such information. If any of our trade secrets, know-how or other proprietary information is disclosed, the value of our trade secrets, know-how and other proprietary rights would be significantly impaired and our business and competitive position would suffer.

Our license agreements relating to our product candidates may be terminated in the event we commit a material breach, the result of which would harm our business and future prospects.
 
In the event any of our license agreements relating to our product candidates are terminated, we could lose all of our rights to develop and commercialize the applicable product candidate covered by such license, which would harm our business and future prospects. Our license agreement with Albert Einstein College of Medicine, or AECOM, provides that AECOM may terminate the agreement, after providing us with notice and an opportunity to cure, for our material breach or default, or upon our bankruptcy.  Our license to Marqibo, Alocrest and Brakiva are governed by a series of agreements which may be individually or collectively terminated, not only by Tekmira, but also by M.D. Anderson Cancer Center, British Columbia Cancer Agency or University of British Columbia under the underlying agreements governing the license or assignment of technology to Tekmira. Tekmira may terminate these agreements for our uncured material breach, for our involvement in a bankruptcy, for our assertion or intention to assert any invalidity challenge on any of the patents licensed to us for these products or for our failure to meet our development or commercialization obligations, including the obligations of continuing to sell each product in all major market countries after its launch. In the event that these agreements are terminated, not only will we lose all rights to these products, we will also have the obligation to transfer all of our data, materials, regulatory filings and all other documentation to our licensor, and our licensor may on its own exploit these products without any compensation to us, regardless of the progress or amount of investment we have made in the products.
 
Third party claims of intellectual property infringement would require us to spend significant time and money and could prevent us from developing or commercializing our products.
 
In order to protect or enforce patent rights, we may initiate patent litigation against third parties. Similarly, we may be sued by others. We also may become subject to proceedings conducted in the U.S. Patent and Trademark Office, including interference proceedings to determine the priority of inventions, or reexamination proceedings. In addition, any foreign patents that are granted may become subject to opposition, nullity, or revocation proceedings in foreign jurisdictions having such proceedings opposed by third parties in foreign jurisdictions having opposition proceedings. The defense and prosecution, if necessary, of intellectual property actions are costly and divert technical and management personnel from their normal responsibilities.

No patent can protect its holder from a claim of infringement of another patent. Therefore, our patent position cannot and does not provide any assurance that the commercialization of our products would not infringe the patent rights of another. While we know of no actual or threatened claim of infringement that would be material to us, there can be no assurance that such a claim will not be asserted.
 
If such a claim is asserted, there can be no assurance that the resolution of the claim would permit us to continue marketing the relevant product on commercially reasonable terms, if at all. We may not have sufficient resources to bring these actions to a successful conclusion. If we do not successfully defend any infringement actions to which we become a party or are unable to have infringed patents declared invalid or unenforceable, we may have to pay substantial monetary damages, which can be tripled if the infringement is deemed willful, or be required to discontinue or significantly delay commercialization and development of the affected products.

 
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Any legal action against us or our collaborators claiming damages and seeking to enjoin developmental or marketing activities relating to affected products could, in addition to subjecting us to potential liability for damages, require us or our collaborators to obtain licenses to continue to develop, manufacture or market the affected products. Such a license may not be available to us on commercially reasonable terms, if at all.
 
An adverse determination in a proceeding involving our owned or licensed intellectual property may allow entry of generic substitutes for our products.

Risks Related to Our Securities
 
Because our common stock is primarily traded on the OTC Bulletin Board, the volume of shares traded and the prices at which such shares trade may result in lower prices than might otherwise exist if our common stock was traded on a national securities exchange.

We were delisted from the Nasdaq Capital Market in September 2009 and trading in our common stock has since been conducted on the OTC Bulletin Board.  Stocks traded on the OTC Bulletin Board are often less liquid than stocks traded on national securities exchanges, not only in terms of the number of shares that can be bought and sold at a given price, but also in terms of delays in the timing of transactions and reduced coverage of us by security analysts and the media. This may result in lower prices for our common stock than might otherwise be obtained if our common stock were traded on a national securities exchange, and could also result in a larger spread between the bid and asked prices for our common stock.

Our stock price has, and we expect it to continue to, fluctuate significantly, and the value of your investment may decline.
 
From January 1, 2007 to June 30, 2009, the market price of our common stock has ranged from a high of $6.38 per share to a low of $0.08 per share. The volatile price of our stock makes it difficult for investors to predict the value of their investment, to sell shares at a profit at any given time, or to plan purchases and sales in advance. You might not be able to sell your shares of common stock at or above the offering price due to fluctuations in the market price of the common stock arising from changes in our operating performance or prospects. In addition, the stock markets in general, and the markets for biotechnology and biopharmaceutical companies in particular, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. A variety of factors may affect our operating performance and cause the market price of our common stock to fluctuate. These include, but are not limited to: 
 
·
announcements by us or our competitors of regulatory developments, clinical trial results, clinical trial enrollment, regulatory filings, product development updates, new products and product launches, significant acquisitions, strategic partnerships or joint ventures;
 
·
any intellectual property infringement, product liability or any other litigation involving us;
 
·
developments or disputes concerning patents or other proprietary rights;
 
·
regulatory developments in the United States and foreign countries;  
 
·
market conditions in the pharmaceutical and biotechnology sectors and issuance of new or changed securities analysts’ reports or recommendations;
 
·
economic or other crises and other external factors;
 
·
actual or anticipated period-to-period fluctuations in our results of operations;
 
·
departure of any of our key management personnel; or
 
·
sales of our common stock.
 
These and other factors may cause the market price and demand of our common stock to fluctuate substantially, which may limit investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity or value of our common stock.

 
18

 

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

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

Our common stock is considered a “penny stock.”

The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. Because the market price of our common stock is currently less than $5.00 per share, and none of the specific exemptions are applicable, our common stock is considered a “penny stock” according to SEC rules. This designation requires any broker or dealer selling our common stock to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase our common stock. These rules may restrict the ability of brokers or dealers to sell shares of our common stock.

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

There may be issuances of shares of blank check preferred stock in the future.

Our certificate of incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock, none of which are issued or currently outstanding. Our board of directors will have the authority to fix and determine the relative rights and preferences of preferred shares, as well as the authority to issue such shares, without further stockholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that is senior to our common stock and that would grant to holders preferred rights to our assets upon liquidation, the right to receive dividends, additional registration rights, anti-dilution protection, the right to the redemption to such shares, together with other rights, none of which will be afforded holders of our common stock.

 
19

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These forward-looking statements include, but are not limited to, statements about:
 
·
the development of our drug candidates, including when we expect to undertake, initiate and complete clinical trials of our product candidates;
 
·
the regulatory approval of our drug candidates;
 
·
our use of clinical research centers and other contractors;
 
·
our ability to find collaborative partners for research, development and commercialization of potential products;
 
·
acceptance of our products by doctors, patients or payors and the availability of reimbursement for our product candidates;
 
·
our ability to market any of our products;
 
·
our history of operating losses;
 
·
our ability to secure adequate protection for our intellectual property;

·
our ability to compete against other companies and research institutions
 
·
the effect of potential strategic transactions on our business;

·
our ability to attract and retain key personnel;
 
·
the volatility of our stock price; and

·
other risks and uncertainties detailed in “Risk Factors.”

These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe” “intend” and similar words or phrases. For such statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. Readers of this prospectus are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this prospectus. These forward-looking statements are based largely on our expectations and projections about future events and future trends affecting our business, and are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. These forward-looking statements involve risks and uncertainties, including the risks discussed under “Risk Factors,” that could cause our actual results to differ materially from those in the forward-looking statements. Except as required by law, we undertake no obligation to publicly revise our forward-looking statements, whether resulting from new information, future events or otherwise. The risks discussed in this prospectus should be considered in evaluating our prospects and future financial performance.

In addition, past financial or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or future period trends. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition.

 
20

 

USE OF PROCEEDS

We will receive none of the proceeds from the sale of the shares by the selling stockholders, except for the warrant exercise price upon exercise of the warrants, which would be used for working capital and other general corporate purposes.

SELLING STOCKHOLDERS

This prospectus covers the resale by the selling stockholders identified below of 60,053,246 shares of common stock, including 16,491,104 shares issuable upon the exercise of outstanding warrants, all of which were issued to the investors in our October 2009 private placement.  The following table sets forth the number of shares of our common stock beneficially owned by the selling stockholders as of October 29, 2009 and after giving effect to this offering, except as otherwise referenced below.

Selling Stockholder
 
Shares 
beneficially 
owned 
before 
offering (1)
   
Number of 
outstanding 
shares 
offered by 
selling 
stockholder
   
Number of 
shares offered 
by selling 
stockholder 
upon exercise 
of warrants
   
Percentage 
beneficial 
ownership 
after 
offering(1)
 
   
Antecip Capital LLC (2)
    1,466,666       1,333,333       133,333       -  
BAM Opportunity Fund, L.P. (3)
    2,724,563       2,000,000       200,000       *  
Brian Wornow
    1,100,000       1,000,000       100,000       -  
Caduceus Capital II, L.P. (4)
    11,090,578       1,900,000       850,000       -  
Caduceus Capital Master Fund Limited (4)
    11,090,578       2,700,000       1,260,000       -  
Deerfield Private Design Fund, L.P. (5)
    5,111,588       4,646,899       464,689       -  
Deerfield Private Design International, L.P. (5)
    8,234,595       7,485,997       748,598       -  
Deerfield Special Situations Fund International Limited (5)
    3,608,798       1,570,000       156,999       2.03 %
Deerfield Special Situations Fund, L.P. (5)
    2,009,974       856,580       85,658       1.15 %
Perceptive Life Sciences Master Fund Ltd. (6)
    13,935,406       7,612,000       6,323,406       -  
PW Eucalyptus Fund, Ltd. (4)
    11,090,578       180,000       84,000       -  
Quogue Capital LLC (7)
    12,128,510       6,612,000       4,516,510       1.08 %
Straus Healthcare Partners, L.P. (8)
    3,116,666       773,500       77,350       -  
Straus Partners, L.P. (8)
    3,116,666       1,235,900       123,590       -  
Straus-GEPT Partners, L.P. (8)
    3,116,666       823,933       82,393       -  
Summer Street Life Sciences Hedge Fund Investors LLC (4)
    11,090,578       932,000       434,578       -  
UBS Eucalyptus Fund, L.L.C. (4)
    11,090,578       1,900,000       850,000       -  
                                 
TOTAL
            43,562,142       16,491,104          
 

* denotes less than 1%

(1)
Based on 92,636,250 shares of outstanding common stock, which assumes the issuance of all shares offered hereby that are issuable upon exercise of warrants. Beneficial ownership is determined in accordance with Rule 13d-3 under the Securities Act, and  includes any shares as to which the security or stockholder has sole or shared voting power or investment power, and also any shares which the security or stockholder has the right to acquire within 60 days of the date hereof, whether through the exercise or conversion of any stock option, convertible security, warrant or other right. The indication herein that shares are beneficially owned is not an admission on the part of the security or stockholder that he, she or it is a direct or indirect beneficial owner of those shares.
   
(2)
Herriot Tabuteau, managing member of the selling stockholder, holds voting and/or dispositive power over the shares held by the selling stockholder.
 
(3)
BAM Capital, LLC is the general partner of the selling stockholder, and BAM Management, LLC is the investment manager of the selling stockholder.  Ross Berman and Hal Mintz are the managing members of BAM Capital, LLC and BAM Management, LLC.  As such, each of BAM Capital, LLC; BAM Management, LLC; and Messrs. Berman and Mintz have the power to vote and otherwise direct the disposition of investments held by the selling stockholder and thereby may be deemed beneficial owners.  Each of the foregoing disclaims beneficial ownership except to the extent of his/its pecuniary interest.

 
21

 

(4)
Beneficial ownership includes (i) 1,900,000 shares of our common stock and warrants to purchase 850,000 shares of our common stock held by Caduceus Capital II, L.P.; (ii) 2,700,000 shares of our common stock and warrants to purchase 1,260,000 shares of our common stock held by Caduceus Capital Master Fund Limited; (iii) 180,000 shares of our common stock and warrants to purchase 84,000 shares of our common stock held by PW Eucalyptus Fund, Ltd.; (iv) 932,000 shares of our common stock and warrants to purchase 434,578 shares of our common stock held by Summer Street Life Sciences Hedge Fund Investors LLC; and (v) 1,900,000 shares of our common stock and warrants to purchase 850,000 shares of our common stock held by UBS Eucalyptus Fund, L.L.C.  OrbiMed Advisors LLC is the investment advisor to Caduceus Capital II, L.P., UBS Eucalyptus Fund, L.L.C., and PW Eucalyptus Fund, Ltd.  OrbiMed Capital LLC is the investment advisor to Caduceus Capital Master Fund Limited and Summer Street Life Sciences Hedge Fund Investors LLC.  Samuel D. Isaly, managing member of OrbiMed Advisors LLC and OrbiMed Capital LLC, holds voting and/or dispositive power over the shares held by the selling stockholders.
 
(5)
Beneficial ownership includes (i) 4,646,899 shares of our common stock and warrants to purchase 464,689 shares of our common stock held by Deerfield Private Design Fund, L.P.; (ii) 7,485,997 shares of our common stock and warrants to purchase 748,598 shares of our common stock held by Deerfield Private Design International, L.P.; (iii) 3,451,799 shares of our common stock and warrants to purchase 156,999 shares of our common stock held by Deerfield Special Situations Fund International Limited; and (iv) 1,924,316 shares of our common stock and warrants to purchase 85,658 shares of our common stock held by Deerfield Special Situations Fund, L.P. Deerfield Capital, L.P. is the general partner of Deerfield Private Design Fund, L.P., Deerfield Private Design International, L.P., and Deerfield Special Situations Fund, L.P.  Deerfield Management Company, L.P. is the investment manager of Deerfield Special Situations Fund International Limited.  James E. Flynn, managing member of Deerfield Capital, L.P. and Deerfield Management Company, L.P., holds voting and dispositive power over the shares held by these selling stockholders, which we collectively refer to as Deerfield.  In October 2007, we entered into a Facility Agreement with Deerfield pursuant to which Deerfield agreed to loan us up to $30 million. As of the date of this prospectus, we have drawn down a total of $27.5 million under the Facility Agreement.  Our ability to draw down the remaining $2.5 million is subject to the achievement of a milestone relating to the clinical development of our Menadione product candidate.  Deerfield’s obligation to disburse loan proceeds expires October 30, 2010, and we must repay all outstanding principal and interest owing under the loan no later than October 30, 2013. We are also required to make quarterly interest payments on outstanding principal, at a stated annual rate of 9.85%. In accordance with and upon execution of the Facility Agreement, we paid a loan commitment fee of $1.1 million to an affiliate of Deerfield.  Our obligations under the Facility Agreement are secured by all assets owned (or that will be owned in the future) by us, both tangible and intangible.
   
(6)
Joseph Edelman holds voting and/or dispositive power over the shares held by the selling stockholder.
 
(7)
Wayne Rothbaum, president of the selling stockholder, holds voting and/or dispositive power over the shares held by the selling stockholder.
   
(8)
Beneficial ownership includes (i) 773,500 shares of our common stock and warrants to purchase 77,350 shares of our common stock held by Straus Healthcare Partners, L.P.; (ii) 1,235,900 shares of our common stock and warrants to purchase 123,590 shares of our common stock held by Straus Partners, L.P.; and (iii) 823,933 shares of our common stock and warrants to purchase 82,393 shares of our common stock held by Straus-GEPT Partners, L.P.  Ravinder Holder, general partner of each of the selling stockholders, holds voting and/or dispositive power over the shares held by the selling stockholders.

 
22

 

PLAN OF DISTRIBUTION

We are registering the shares offered by this prospectus on behalf of the selling stockholders. The selling stockholders, which as used herein includes donees, pledgees, transferees or other successors-in-interest selling shares of common stock or interests in shares of common stock received after the date of this prospectus from a selling stockholder as a gift, pledge, partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of common stock or interests in shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices. To the extent any of the selling stockholders gift, pledge or otherwise transfer the shares offered hereby, such transferees may offer and sell the shares from time to time under this prospectus, provided that this prospectus has been amended under Rule 424(b)(3) or other applicable provision of the Securities Act to include the name of such transferee in the list of selling stockholders under this prospectus.

The selling stockholders may use any one or more of the following methods when disposing of shares or interests therein:

·
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

·
block trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction;

·
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

·
an exchange distribution in accordance with the rules of the applicable exchange;

·
privately negotiated transactions;

·
short sales;

·
through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

·
broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;

·
a combination of any such methods of sale; and

·
any other method permitted pursuant to applicable law.

The selling stockholders may, from time to time, pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus.

In connection with the sale of our common stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling stockholders may also sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

The aggregate proceeds to the selling stockholders from the sale of the common stock offered by them will be the purchase price of the common stock less discounts or commissions, if any. Each of the selling stockholders reserves the right to accept and, together with their agents from time to time, to reject, in whole or in part, any proposed purchase of common stock to be made directly or through agents. We will not receive any of the proceeds from this offering. Upon any exercise of the warrants by payment of cash, however, we will receive the exercise price of the warrants.

 
23

 

The selling stockholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act of 1933, provided that they meet the criteria and conform to the requirements of that rule.

The selling shareholders might be, and any broker-dealers that act in connection with the sale of securities will be, deemed to be “underwriters” within the meaning of Section 2(11) of the Securities Act, and any commissions received by such broker-dealers and any profit on the resale of the securities sold by them while acting as principals will be deemed to be underwriting discounts or commissions under the Securities Act.

To the extent required, the shares of our common stock to be sold, the names of the selling stockholders, the respective purchase prices and public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement that includes this prospectus.

In order to comply with the securities laws of some states, if applicable, the common stock may be sold in these jurisdictions only through registered or licensed brokers or dealers. In addition, in some states the common stock may not be sold unless it has been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with.

We have advised the selling stockholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares in the market and to the activities of the selling stockholders and their affiliates. In addition, we will make copies of this prospectus (as it may be supplemented or amended from time to time) available to the selling stockholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The selling stockholders may indemnify any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act.

We have agreed to indemnify the selling stockholders against liabilities, including liabilities under the Securities Act and state securities laws, relating to the registration of the shares offered by this prospectus.  The selling stockholders have agreed to indemnify us in certain circumstances against certain liabilities, including liabilities under the Securities Act.

We have agreed with the selling stockholders to keep the registration statement that includes this prospectus effective until the earlier of (1) such time as all of the shares covered by this prospectus have been disposed of pursuant to and in accordance with the registration statement or (2) the date on which the shares may be sold pursuant to Rule 144 of the Securities Act.  We have agreed to pay all expenses in connection with this offering, but not including underwriting discounts, concessions, commissions or fees of the selling stockholders or any fees and expenses of counsel or other advisors to the selling stockholders.
 
Shares Eligible For Future Sale
 
Upon completion of this offering and assuming the issuance of all of the shares covered by this prospectus that are issuable upon the exercise of warrants, there will be 92,636,250 shares of our common stock issued and outstanding. The shares purchased in this offering will be freely tradable without registration or other restriction under the Securities Act, except for any shares purchased by an “affiliate” of our company (as defined in the Securities Act).

The selling stockholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act, provided they meet the criteria and conform to the requirements of such Rule.  Rule 144 governs resale of “restricted securities” for the account of any person (other than us), and restricted and unrestricted securities for the account of an “affiliate” of ours.  Restricted securities generally include any securities acquired directly or indirectly from us or our affiliates, which were not issued or sold in connection with a public offering registered under the Securities Act.  An affiliate of ours is any person who directly or indirectly controls us, is controlled by us, or is under common control with us.  Our affiliates may include our directors, executive officers, and persons directly or indirectly owing 10% or more of our outstanding common stock.  In general, under Rule 144, a person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of ours at the time of, or at any time during the three months preceding, a sale, and who has beneficially owned restricted securities for at least six months would be entitled to sell those shares, subject to the requirements of Rule 144 regarding publicly available information about us.  Accordingly, the shares held by the selling stockholders will become eligible for sale under Rule 144 in April 2010.  Affiliates may only sell in any three month period that number of shares that does not exceed the greater of 1 percent of the then-outstanding shares of our common stock or the average weekly trading volume of our shares of common stock in the over-the-counter market during the four calendar weeks preceding the sale.

 
24

 
 
Following the date of this prospectus, we cannot predict the effect, if any, that sales of our common stock or the availability of our common stock for sale will have on the market price prevailing from time to time. Nevertheless, sales by existing stockholders of substantial amounts of our common stock could adversely affect prevailing market prices for our stock.

DESCRIPTION OF CAPITAL STOCK

General

Our certificate of incorporation authorizes us to issue 110 million shares of capital stock, par value $0.001 per share, comprised of 100 million shares of common stock, and 10 million shares of preferred stock.

We have no shares of preferred stock issued or outstanding. Following the October 2009 private placement, we have issued and outstanding approximately:

 
·
76,145,146 shares of our common stock,
 
·
options to purchase 5,174,371 shares of our common stock at exercise prices ranging from $0.07 to $10.98 per share, and
 
·
warrants to purchase 18,248,082 shares of our common stock at exercise prices ranging from $0.01 to $5.80 per share.
 
The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders and do not have cumulative voting rights. Upon our liquidation, dissolution or winding down, holders of our common stock will be entitled to share ratably in all of our assets that are legally available for distribution, after payment of all debts and other liabilities. The holders of our common stock have no preemptive, subscription, redemption or conversion rights.
 
Holders of our common stock are entitled to receive such dividends, as the board of directors may from time to time declare out of funds legally available for the payment of dividends. We seek growth and expansion of our business through the reinvestment of profits, if any, and do not anticipate that we will pay dividends in the foreseeable future.

Authority to Issue Stock  

Our board of directors has the authority to issue the authorized but unissued shares of our common stock without action by the shareholders. The issuance of such shares would reduce the percentage ownership held by current shareholders.

Our board of directors also has the authority to issue up to 10 million shares of preferred stock, none of which are issued or currently outstanding. The board of directors has the authority to fix and determine the relative rights and preferences of preferred shares, as well as the authority to issue such shares, without further stockholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that is senior to the common stock and that would grant to holders preferred rights to our assets upon liquidation, the right to receive dividends, additional registration rights, anti-dilution protection, the right to the redemption to such shares, together with other rights, none of which will be afforded holders of our common stock. See “Risk Factors – Risks Related to Our Securities – There may be  issuances of shares of blank check preferred stock in the future.”

 
25

 

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market for Common Stock

From September 22, 2005 through April 13, 2006, our common stock traded on the American Stock Exchange under the symbol “HBX.”  From April 17, 2006 to June 2, 2008 our common stock traded on the NASDAQ Global Market under the symbol “HNAB.”  From June 3, 2008 to September 9, 2009, our common stock traded on the NASDAQ Capital Market under the same symbol.  Since September 11, 2009, our common stock has traded on the OTC Bulletin Board under the symbol “HNAB.OB.”

The following table lists the high and low sale price for our common stock as quoted, in U.S. dollars, by the NASDAQ Global Market, the NASDAQ Capital Market, and the OTC Bulletin Board, as applicable, during each quarter within the last two fiscal years and during each of the first three quarters of fiscal 2009.
  
   
Price Range
 
Quarter Ended
 
High
   
Low
 
             
March 31, 2007
  $
6.38
    $
1.82
 
June 30, 2007
   
2.42
     
1.45
 
September 30, 2007
   
1.89
     
1.03
 
December 31, 2007
   
1.69
     
0.96
 
March 31, 2008
   
1.48
     
0.74
 
June 30, 2008
   
1.10
     
0.70
 
September 30, 2008
   
0.79
     
0.50
 
December 31, 2008
   
0.63
     
0.15
 
March 31, 2009
   
0.33
     
0.08
 
June 30, 2009
   
1.00
     
0.13
 
September 30, 2009
   
0.94
     
0.42
 

Record Holders

As of October 29, 2009, we had approximately 98 holders of record of our common stock, one of which was Cede & Co., a nominee for Depository Trust Company, or DTC. Shares of common stock that are held by financial institutions as nominees for beneficial owners are deposited into participant accounts at DTC, and are considered to be held of record by Cede & Co. as one stockholder.

Dividends

We have not paid or declared any dividends on our common stock and we do not anticipate paying dividends on our common stock in the foreseeable future.

26

 
Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information on the Company's equity based compensation plans as of December 31, 2008:

Plan category
 
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
(a)
   
Weighted average
exercise price of
outstanding
options, warrants
and rights
(b)
   
Number of
Securities
remaining
available for
future issuance
(excluding
securities
reflected in
column (a)
(c)
 
  
                 
Equity compensation plans not approved by stockholders-outside any plan(1)
   
239,713
   
$
0.65
     
N/A
 
Equity compensation plans approved by stockholders-2003 Plan Stock Option Plan
   
410,497
     
3.53
     
730,893
 
Equity compensation plans approved by stockholders-2004 Plan Stock Incentive Plan
   
3,820,661
     
2.34
     
2,711,743
 
Equity compensation plans approved by stockholders-2006 Employee Stock Purchase Plan
   
N/A
   
$
0.20
     
618,378
 
Total
   
4,470,871
             
 4,061,014
 
 

(1)
Represents shares of common stock issuable outside of any stock option plan.

On October 2, 2009, our Board of Directors adopted amendments to the 2003 Stock Option Plan, or 2003 Plan, and 2004 Stock Incentive Plan, or 2004 Plan.  Pursuant to the amendments, the number of shares of common stock authorized for issuance under the 2003 Plan was reduced from 1,410,068 to 668,342, of which 399,664 shares are reserved for issuance pursuant to the exercise of outstanding stock options, and 268,678 shares have previously been issued under the 2003 Plan.  Similarly, the number of shares of common stock authorized for issuance under the 2004 Plan was reduced from 7,000,000 to 5,013,257, of which 4,545,661 shares are reserved for issuance pursuant to the exercise of outstanding stock options, and 467,596 shares have previously been issued under the 2004 Plan.

For additional information concerning our equity compensation plans, please see Note 4 of our audited financial statements as of and for the year ended December 31, 2008, and Note 5 of our unaudited condensed financial statements as of and for the interim period ended June 30, 2009, included in this prospectus.

 
27

 

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included in this prospectus. This discussion includes forward-looking statements that involve risk and uncertainties. As a result of many factors, such as those set forth in this prospectus under “Risk Factors,” actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We are a biopharmaceutical company dedicated to developing and commercializing new, differentiated cancer therapies designed to improve and enable current standards of care.  We currently have four product candidates in various stages of development:
 
·
Marqibo® (vincristine sulfate liposomes injection), a novel, targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug vincristine, being developed for the treatment of adult acute lymphoblastic leukemia.
 
·
Menadione Topical Lotion, a novel supportive care product candidate, being developed for the prevention and/or treatment of the skin toxicities associated with the use of epidermal growth factor receptor inhibitors (EGFRI), a type of anti-cancer agent used in the treatment of certain cancers.
 
·
Brakiva™ (topotecan liposomes injection), a novel targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug topotecan, being developed for the treatment of solid tumors including small cell lung cancer and ovarian cancer.
 
·
Alocrest™ (vinorelbine liposomes injection), a novel, targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug vinorelbine, being developed for the treatment of solid tumors such as non-small-cell lung cancer.
   
Revenues

We do not expect to generate any significant revenue from product sales or royalties in the foreseeable future. We anticipate that any revenues that we may recognize in the near future will be related to upfront, milestone development funding payments received pursuant to strategic license agreements or partnerships and that we may have large fluctuations of revenue recognized from quarter to quarter as a result of the timing and the amount of these payments. We may be unable to control the development of commercialization of these products and may be unable to estimate the timing and amount of revenue to be recognized pursuant to these agreements. Revenue from these agreements and partnerships helps us fund our continuing operations. Our revenues may increase in the future if we are able to develop and commercialize our products, license our technology and/or enter into strategic partnerships. If we are unsuccessful, our future revenues will decrease and we may be forced to limit our development of our product candidates.
 
Research and Development Expenses

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

While expenditures on current and future clinical development programs are expected to be substantial, particularly in light of our available resources, they are subject to many uncertainties, including the results of clinical trials and whether we develop any of our drug candidates with a partner or independently. As a result of such uncertainties, we cannot predict with any significant degree of certainty the duration and completion costs of our research and development projects or whether, when and to what extent we will generate revenues from the commercialization and sale of any of our product candidates. The duration and cost of clinical trials may vary significantly over the life of a project as a result of unanticipated events arising during clinical development and a variety of factors, including:

·     the number of trials and studies in a clinical program;

 
28

 

·     the number of patients who participate in the trials;

·     the number of sites included in the trials;

·     the rates of patient recruitment and enrollment;

·     the duration of patient treatment and follow-up;

·     the costs of manufacturing our drug candidates; and

·     the costs, requirements, timing of, and the ability to secure regulatory approvals.
 
General and Administrative Expenses

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

Share-based Compensation

Share-based compensation expenses consist primarily of expensing the fair-market value of a share-based award over the vesting term.  This expense is included in our operating expenses for each reporting period.

Results of Operations

Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
 
General and administrative expenses. For the six months ended June 30, 2009, general and administrative, or G&A, expense was $2.0 million, as compared to $3.7 million for the six months ended June 30, 2008.  The decrease of $1.7 million is due to decreased personnel related expenses of $1.1 million, decreased costs for outside services and professional services of $0.4 million and decreased allocable expenses of $0.2 million.

The $1.1 million decrease in employee-related expenses includes:

·
a decrease of $0.9 million in employee related share-based compensation expense due to decreased valuation of stock options issued to employees as a result of the decrease in value of the Company’s stock price and

·
a decrease of $0.2 million in salary and benefits, due mainly to the reduction in headcount and decreased compensation measures.  

The $0.4 million decrease in outside services and professional fees includes:

·
a decrease of $0.2 million in market research on our leading product candidates and

·
a decrease of $0.2 million in legal, accounting and other consulting fees.

The $0.2 million decrease of allocable expenses is mainly a result of cost reduction measures undertaken by the Company to decelerate our cash burn.

Research and development expenses. The following table summarizes our R&D expenses incurred for preclinical support, contract manufacturing for clinical supplies and clinical trial services provided by third parties, as well as milestone payments for in-licensed technology for each of our current major product development programs for the six months ended June 30, 2009 and 2008.  The table also summarizes unallocated costs, which consist of personnel, facilities and other costs not directly allocable to development programs.

 
29

 

   
For the Six Months
Ended June 30,
       
   
2009
   
2008
   
Annual %
 
Product candidates ($ in thousands) for the six months
ended June 30
 
($ in thousands)
   
Change
 
Marqibo
 
$
2,579
   
$
1,992
     
29
%
Menadione
   
573
     
816
     
-30
%
Brakiva
   
224
     
852
     
-74
%
Alocrest
   
(7
)
   
420
   
NA
 
Discontinued/out-licensed product candidates
   
3
     
(10
)
 
NA
 
Total third party costs
   
1,048
     
1,467
     
-29
%
Allocable costs and overhead
   
603
     
731
     
-18
%
Personnel related expense
   
2,439
     
2,208
     
10
%
Share-based compensation expense
   
263
     
208
     
26
%
Total research and development expense
 
$
7,725
   
$
8,684
     
-11
%

Marqibo.   For the six months ended June 30, 2009, Marqibo costs increased by $0.6 million compared to the same period in 2008, mostly related to increased spending on the rALLy and uveal melanoma trials .

Menadione.   For the six months ended June 30, 2009, Menadione costs decreased by $0.2 million.  The decrease was due to lower spending on the Phase 1 clinical trial as we reduced our costs to outside service providers for the study and decreased manufacturing expenses.

Brakiva.   For the six months ended June 30, 2009, Brakiva costs decreased by $0.6 million.  The decrease was due to lower spending on manufacturing the drug as most manufacturing for the Phase 1 trial was performed in 2008.

Alocrest.   For the three months ended June 30, 2009, Alocrest costs decreased by $0.4 million.  The decrease was due to the decreased cost of the Phase 1 clinical trail that finished enrollment in 2008

Discontinued/Out-licensed projects.   We did not pursue development on our discontinued/out-licensed product candidates in the six months ended June 30, 2009, which includes Zensana which was out-licensed in 2007, and IPdR and Talvesta, which were terminated in 2006 and 2007, respectively.  We may incur only incidental expenses in 2009 related to the continued disposition of these terminated products.

Other R&D expenses.   Third-party costs related to indirect support of our clinical trials and product candidates decreased by $0.4 million in the three months ended June 30, 2009.  These costs are not directly allocable to an individual product candidate and primarily relate to outside services and professional fees related to indirect support of our R&D functions including data management, regulatory and clinical development.  We expect these costs to remain low in 2009 compared to 2008 as we seek to reduce external costs in order to reduce our cash burn rate.  If we are able to obtain our desired funding, we expect these costs to rise in the next twelve months as we finish the rALLy study in Marqibo and prepare for the confirmatory study for Marqibo as well as prepare for a possible NDA submission for Marqibo in the ALL indication.  Allocable costs decreased by $0.1 million as a result of cost-cutting measures that we have pursued.  We expect these costs to continue to decrease in 2009 compared to 2008.  Personnel related costs increased slightly in the six months ended June 30, 2009 and we expect these costs to remain slightly higher in 2009 due to certain executive positions that have been filled in later 2008 and early 2009.  Stock compensation expense increased slightly due to a large credit to expense when certain key executives terminated last year and a portion of their previously expensed stock compensation expense previously taken was reversed.  This is partially off-set by the decrease in the value of options issued in recent periods compared to those issued in previous periods.  We expect share-based compensation will decrease in the future until our stock price increases or the amount of options issued increases.

Interest income. For the six months ended June 30, 2009, interest income was approximately $12,000 compared to interest income of $0.2 million for the six months ended June 30, 2008. The change is a result of decreased cash balances in our interest bearing accounts as well as decreasing interest rates.

Interest expense. For the six months ended June 30, 2009, interest expense was $1.6 million as compared to interest expense of $0.5 million for the six months ended June 30, 2008. The increase resulted from a larger average balance outstanding on our loan facility with Deerfield.  We originally entered into this loan agreement in October 2007.   

 
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Gain or loss on change in fair market value of warrant liabilities. For the six months ended June 30, 2009, we recognized a loss related to the change in fair market value of the warrant liabilities, pursuant to the warrants issued to Deerfield as part of the Facility Loan Agreement (see Note 4) of $2.2 million.  In six months ended June 30, 2008, we recognized a gain on this warrant liability of approximately $1.8 million.  The value of these warrants is largely dependent on the price of our common stock, and as the stock price increases, the value of these warrants will increase and our loss on the change in market value will increase. 

Impairment on investments.  For the six months ended June 30, 2009, we did no recognize any impairments on our available-for-sale securities.  For six months ended June 30, 2008, we recognized an other-than-temporary impairment in the available-for-sale securities of $108,000

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
  
General and administrative expenses. For the year ended December 31, 2008, general and administrative, or G&A, expense was $5.8 million, as compared to $8.0 million for the year ended December 31, 2007.  The decrease of $2.2 million is due to decreased personnel related expenses of $1.3 million, decreased costs for outside services and professional services of $0.7 million and decreased allocable expenses of $0.2 million.

The $1.3 million decrease in employee-related expenses includes:

·
a decrease of $0.7 million in employee related share-based compensation expense is due to decreased valuation of stock options issued to employees as a result of the decrease in value of the Company’s stock price and

·
a decrease of $0.6 million in salary and benefits, due mainly to the reduction in headcount after our rights to Zensana were out-licensed in mid 2007.  

The $0.7 million decrease in outside services and professional fees includes:

·
a decrease of $0.4 million for advertising, market research and other professional fees mostly related to fees incurred in 2007 for Zensana and

·
a decrease of $0.3 million for legal, accounting and consulting fees in 2008.

The $0.2 million decrease of allocable expenses includes a decrease of costs related to Zensana commercialization in 2007 prior to out-licensing the program.

Research and development expenses The following table summarizes our R&D expenses incurred for preclinical support, contract manufacturing for clinical supplies and clinical trial services provided by third parties, as well as milestone payments for in-licensed technology for each of our current major product development programs for the years ended December 31, 2008 and 2007, plus the cumulative amounts for the last five years or since we began development of a product candidate if it has not been in development for five years.  The table also summarizes unallocated costs, which consist of personnel, facilities and other costs not directly allocable to development programs.

Product candidates ($ in thousands)
 
2008
   
2007
   
Annual %
Change
   
(5 years) Jan.
1, 2004 to Dec
31, 2008
 
Marqibo
 
$
4,248
   
$
2,849
     
49
%
 
$
8,420
 
Menadione
   
2,929
     
2,488
     
18
%
   
5,681
 
Brakiva
   
953
     
1,416
     
-33
%
   
3,319
 
Alocrest
   
699
     
1,877
     
-63
%
   
3,413
 
Discontinued/out-licensed product candidates
   
(17
)
   
1,439
     
N/A
     
12,372
 
Total third party costs
   
3,222
     
2,222
     
45
%
   
24,644
 
Allocable costs and overhead
   
1,421
     
1,927
     
-26
%
   
5,517
 
Personnel related expense
   
4,309
     
4,540
     
-5
%
   
15,112
 
Share-based compensation expense
   
663
     
2,535
     
-74
%
   
7,452
 
Total research and development expense
 
$
18,427
   
$
21,293
     
-13
%
 
$
85,930
 

 
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Marqibo.   In 2008, we continued enrollment in our Phase 2, registration-enabling, open-label trial in relapsed adult ALL and our pilot Phase 2 trial in metastic uveal melanoma. We achieved target enrollment for both trials in 2009.  We plan to initiate a confirmatory trial in 2010 and we also intend to seek accelerated approval in the ALL indication in 2010, pending the results of our Phase 2 study in relapsed adult ALL.  We expect to spend approximately $5.0 million on external project costs relating to Marqibo in 2009. We estimate that we will need to expend at least an additional aggregate of approximately $45 million in order for us to obtain full FDA approval for Marqibo, if ever, which includes milestone payments that would be owed to our licensor upon FDA approval.  We expect that it will take approximately three to four years until we will have completed development and obtained full FDA approval of Marqibo, if ever.

Menadione. In 2008, we initiated two Phase 1 clinical trials in Menadione including one in healthy volunteers and one in cancer patients.  We completed the healthy volunteer trial and are continuing to enroll in the cancer patient trial. As this drug is early in its clinical development, both the registrational strategy and total expenditures to obtain FDA approval are still being evaluated. However, we expect to spend approximately $0.8 million on external project costs relating to Menadione in 2009, and we estimate that we will need to expend at least an aggregate of approximately $40 million of additional funds in order for us to obtain full FDA approval for Menadione, if ever, which includes milestone payments that would be owed to our licensor upon FDA approval.  We expect that it will take approximately four to five years until we will have completed development and obtained FDA approval, if ever. Per the terms of the securities purchase agreement completed in October 2009, we agreed to use the proceeds of the sale of those securities solely for the clinical and regulatory development of our Marqibo program. As such, future development of Menadione is contingent on obtaining additional funding, if any such funding is available in the future.
 
Brakiva.   We initiated a Phase 1 clinical trial in November 2008. We plan to complete enrollment in this clinical trial in 2010 and expect that we will expend approximately $0.5 million in 2009.  We are exploring options for further development of Brakiva beyond the phase 1 trial.  As this drug is early in its clinical development, both the registrational strategy and total expenditures to obtain FDA approval are still being evaluated.

Alocrest.   We completed enrollment in a Phase 1 clinical trial in early 2008. This Phase 1 trial was designed to assess safety, tolerability and preliminary efficacy in patients with advanced solid tumors. We are currently exploring options for the continued development of Alocrest and do not expect to incur significant project costs in 2009.

Discontinued/Out-licensed projects.  We did not pursue development on our discontinued/out-license product candidates in 2008.  These include Zensana which was out-licensed in 2007, IPdR and Talvesta, which were terminated in 2006 and 2007, respectively.  We may incur only incidental expenses in 2009 related to the continued disposition of these terminated products.

Other R&D expenses.  Third-party costs related to indirect support of our clinical trials and product candidates increased in 2008.  These costs are not directly allocable to an individual product candidate.  We expect these costs to remain flat in 2009 as we finish the rALLy study in Marqibo and prepare for the confirmatory study for Marqibo.  Allocable costs decreased as a result of cost-cutting measures pursued by the Company.  We expect these costs to stay flat in 2009.  Personnel related costs decreased in 2008 and we expect these costs to continue to decrease.  Our headcount at the end of 2008 was lower than at the end of 2007 and we expect the average headcount in 2009 to be lower than 2008.  We expect stock-based compensation will continue to decrease until our stock price increases or the amount of options issued increases.

Interest income. For the year ended December 31, 2008, interest income was $0.3 million as compared to interest income of $1.2 million for the year ended December 31, 2007. The decrease of $0.9 million resulted from decreased cash balance in our interest bearing accounts and lower yields on our deposits.

Interest expense. For the year ended December 31, 2008, interest expense was $1.4 million as compared to interest expense of $0.2 million for the year ended December 31, 2007. The increase resulted from a larger average balance outstanding on our loan facility with Deerfield.  We originally entered into this loan agreement in October 2007.

Other expense, net. For the year ended December 31, 2008, net other expense was $0.1 million as compared to net other expense of $0.5 million for the year ended December 31, 2007.  The decrease of $0.4 million is due mainly to realized losses of $0.4 million due to impairment of our available-for-sale securities in 2007 compared to a loss of only $0.1 million in 2008.  

 
32

 

Gain on change in fair market value of warrant liabilities. For the year ended December 31, 2008, we recognized a gain related to the change in fair market value of the warrant liabilities, pursuant to the warrants issued to Deerfield as part of the Facility Loan Agreement (see Note 3) of $3.2 million.  In 2007, our gain on this warrant liability was $1.6 million.  The value of these warrants is largely dependant the price of our common stock, and as the stock price is reduced, the value of these warrants will decrease and our gain on the change in market value will increase.

Income tax expense. There was no current or deferred income tax expense (other than state minimum tax) for the years ended December 31, 2008 and 2007 because of our operating losses. A 100% valuation allowance has been recorded against our $46.3 million of deferred tax assets as of December 31, 2008. Historical performance leads management to believe that realization of these assets is uncertain. As a result of the valuation allowance, our effective tax rate differs from the statutory rate.

Liquidity and Capital Resources
 
As of June 30, 2009, we had aggregate cash and cash equivalents and available-for-sale securities of $8.3 million. In connection with our October 2009 private placement, we received net cash proceeds of approximately $11.7 million after expenses. In addition, pursuant to the Deerfield loan facility, we have $2.5 million that may become available to us if we achieve a certain milestone in the development of our product candidate Menadione.  We do not anticipate that we will achieve this milestone by the middle of 2010.  We have drawn down $27.5 million of the total $30 million available under the agreement.

Through June 30, 2009, we have an accumulated deficit of $124.5 million.  Management expects this deficit to increase in future periods as we continue to develop our product candidates.  We expect to incur sizeable expenses in our Marqibo development program as we expect to complete enrollment in the Phase 2 registration-enabling study by the end of 2009.  Our continued operations will depend on whether we are able to raise additional funds through various potential sources, such as equity and debt financing. Through June 30, 2009, a significant portion of our financing has been and will continue to be through private placements of common stock, preferred stock and debt financing.

We can give no assurances that any additional capital that we are able to obtain will be sufficient to meet our needs which raises substantial doubt about our ability to continue operating as a going concern.  Given the current and desired pace of clinical development of our product candidates, we estimate that we only have sufficient cash on hand to fund clinical development into mid-2010.  We will be forced to raise additional capital in 2010 in order to fund our future development activities, likely by selling shares of our capital stock or through debt financing. If we are unable to raise additional capital or enter into strategic partnerships and/or license agreements, we will be required to cease operations or curtail our desired development activities, which will delay the development of our product candidates.  There can be no assurance that such capital will be available to us on favorable terms or at all, particularly in light of the general economic conditions, which have severely limited our access to the capital markets. We will need additional financing thereafter until we can achieve profitability, if ever.
 
Current and Future Financing Needs. We currently do not have enough capital resources to fund our entire development plan through 2010. Our plan of operation for the year ending December 31, 2009 is to continue implementing our business strategy, including the continued development of our four product candidates that are currently in various clinical phases.  We expect our principal expenditures during the next 12 months to include:
 
·
operating expenses, including expanded research and development and general and administrative expenses;
 
·
 product development expenses, including the costs incurred with respect to applications to conduct clinical trials in the United States, as well as outside of the United States, for our product candidates, including manufacturing, intellectual property prosecution and regulatory compliance.
 
As part of our planned research and development, we intend to use clinical research organizations and third parties to help perform our clinical studies and manufacturing. As indicated above, at our current and desired pace of clinical development of our product candidates, over the next 12 months we expect to spend approximately between $16.0 million and $18.0 million on clinical development (including milestone payments of $0.3 million that we expect to be triggered under the license agreements relating to our product candidates, half of which can be satisfied through the issuance of new shares of our common stock at our discretion).  We expect to spend approximately $4.0 million on general corporate and administrative expenses as well as $0.6 million on facilities and rent.

We believe that our cash, cash equivalents and marketable securities, which totaled $12.9 million after giving effect to our October 2009 private placement, will be sufficient to meet our anticipated operating needs through the first half of 2010 based upon current operating and spending assumptions. However, we expect to incur substantial expenses as we continue our drug development efforts, particularly to the extent we advance our lead candidate Marqibo through a pivotal clinical study. As part of the October 2009 private placement, we agreed to use those proceeds solely for the clinical and regulatory development of our Marqibo program. Future development of our other products, including Menadione, is contingent on obtaining additional financing. We cannot guarantee that future financing will be available in amounts or on terms acceptable to us, if at all.

 
33

 

The actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control. These factors include the following:
 
·
costs associated with conducting clinical testing;
 
·
costs of establishing arrangements for manufacturing our product candidates;
 
·
payments required under our current and any future license agreements and collaborations;
 
·
costs, timing and outcome of regulatory reviews;
 
·
costs of obtaining, maintaining and defending patents on our product candidates; and
 
·
costs of increased general and administrative expenses.
 
We have based our estimate on assumptions that may prove to be wrong. We may need to obtain additional funds sooner or in greater amounts than we currently anticipate. Potential sources of financing include strategic relationships, public or private sales of our stock or debt and other sources. We may seek to access the public or private equity markets when conditions are favorable due to our long-term capital requirements. We do not have any committed sources of financing at this time, and it is uncertain whether additional funding will be available when we need it on terms that will be acceptable to us, or at all.  If we raise funds by selling additional shares of common stock or other securities convertible into common stock, the ownership interest of our existing stockholders will be diluted.  If we are not able to obtain financing when needed, we will be unable to carry out our business plan. As a result, we will have to significantly limit our operations and our business, financial condition and results of operations would be materially harmed. 

Off-Balance Sheet Arrangements
 
We do not have any “off-balance sheet agreements,” as that term is defined by SEC regulation. 

 
34

 

DESCRIPTION OF BUSINESS

Overview

We are a South San Francisco, California-based biopharmaceutical company dedicated to developing and commercializing new and differentiated cancer therapies designed to improve and enable current standards of care.  Our two lead product candidates target large markets and are in pivotal and/or proof-of-concept clinical trials.  We are developing Marqibo® for the treatment of acute lymphoblastic leukemia and lymphomas.  Menadione topical lotion is a first-in-class compound that we are developing for the potential prevention and/or treatment of skin toxicity associated with epidermal growth factor receptor inhibitors.  We have additional pipeline opportunities that, like Marqibo, we believe may improve delivery and enhance the therapeutic benefits of well characterized, proven chemotherapies and enable high potency dosing without increased toxicity.
  
Our executive offices are located at 7000 Shoreline Court, Suite 370, South San Francisco, California 94080. Our telephone number is (650) 588-6404 and our Internet address is www.hanabiosciences.com. We were originally incorporated under Delaware law in 2002 under the name Hudson Health Sciences, Inc. In July 2004, we acquired Email Real Estate.com, Inc., a Colorado corporation and public shell company in a reverse acquisition.  In September 2004, we reincorporated under Delaware law under the name Hana Biosciences, Inc.

Our Research and Development Programs
  
We currently have rights to the following product candidates in various stages of development.
 
·
Marqibo® (vincristine sulfate liposomes injection), our lead product candidate, is a novel, targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug vincristine, currently in development for the treatment of adult acute lymphoblastic leukemia, or ALL, and metastatic uveal melanoma.
 
·
Menadione Topical Lotion, a novel supportive care product candidate being developed for the prevention and/or treatment of the skin toxicities associated with the use of epidermal growth factor receptor inhibitors (EGFRI), a type of anti-cancer agent used in the treatment of lung, colon, head and neck and pancreatic cancer.
 
·
Brakiva™ (topotecan liposomes injection), a novel targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug topotecan, being developed for the treatment of solid tumors including small cell lung cancer and ovarian cancer.
   
·
Alocrest™ (vinorelbine liposomes injection), a novel, targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug vinorelbine.
 
Pursuant to a license agreement originally entered into with NovaDel, Inc. in October 2004, we also maintain certain rights to Zensana (ondansetron HCI) Oral Spray, which is being developed to alleviate chemotherapy and radiation-induced and post-operative nausea and vomiting.  In July 2007, we sublicensed our rights to develop and commercialize Zensana to Par Pharmaceutical, Inc. in exchange for upfront payment and other future consideration, including royalties.
 
Industry Background and Market Opportunity
 
Cancer is a group of diseases characterized by either the uncontrolled growth of cells or the failure of cells to function normally. Cancer is caused by a series of mutations, or alterations, in genes that control cells’ ability to grow and divide. These mutations cause cells to rapidly and continuously divide or lose their normal ability to die. There are more than 100 different varieties of cancer, which can be divided into six major categories. Carcinomas, the most common category, include breast, lung, colorectal and prostate cancer. Sarcomas begin in tissue that connects, supports or surrounds other tissues and organs. Lymphomas are cancers of the lymphatic system, a part of the body’s immune system. Leukemias are cancers of blood cells, which originate in the bone marrow. Brain tumors are cancers that begin in the brain, and skin cancers, including melanomas, originate in the skin. Cancers are considered metastatic if they spread via the blood or lymphatic system to other parts of the body to form secondary tumors.
 
According to the American Cancer Society, nearly 1.4 million new cases of cancer were expected to be diagnosed in 2008 in the United States alone. Cancer is the second leading cause of death, after heart disease, in the United States, and was expected to account for more than 565,000 deaths in 2008.    Major cancer treatments include surgery, radiotherapy and chemotherapy. Supportive care, such as blood cell growth factors, represents another major segment of the cancer treatment market. There are many different drugs that are used to offer supportive care and to treat cancer, including cytotoxics or antineoplastics, hormones and biologics. Major categories include:

 
35

 

·
Chemotherapy. Cytotoxic chemotherapy refers to anticancer drugs that destroy cancer cells by stopping them from multiplying. Healthy cells can also be harmed with the use of cytotoxic chemotherapy, especially those that divide quickly. Cytotoxic agents act primarily on macromolecular synthesis, repair or activity, which affects the production or function of DNA, RNA or proteins. Our product candidates Marqibo, Alocrest and Brakiva are liposome encapsulated cytotoxic agents that we are currently evaluating for the treatment of solid tumor and hematological malignancies.
 
·
Supportive care. Cancer treatment can include the use of chemotherapy, radiation therapy, biologic response modifiers, surgery or some combination of these or other therapeutic options. All of these treatment options are directed at killing or eradicating the cancer that exists in the patient’s body. Unfortunately, the delivery of many cancer therapies adversely affects the body’s normal organs. These complications of treatment or side effects not only cause discomfort, but may also prevent the optimal delivery of therapy to a patient at its maximal dose and time.  Our product candidate Menadione is a supportive care product candidate designed to treat and prevent skin rash associated with the use of epideral growth factor receptor inhibitors, or EGFRIs, a class of anti-cancer agents.
 
Our Strategy
 
We are a committed to developing and commercializing new, differentiated cancer therapies designed to improve and enable current standards of care. Key aspects of our strategy include:
 
·    
Focus on developing innovative cancer therapies. We focus on oncology product candidates in order to capture efficiencies and economies of scale. We believe that drug development for cancer markets is particularly attractive because relatively small clinical trials can provide meaningful information regarding patient response and safety.  Because of our limited resources and the advanced development stage of Marqibo, we intend to focus substantially all of our resources on the clinical and regulatory development of Marqibo over the next several months.
 
·
Build a sustainable pipeline by employing multiple therapeutic approaches and disciplined decision criteria based on clearly defined proof of principle goals. We seek to build a sustainable product pipeline by employing multiple therapeutic approaches and by acquiring product candidates belonging to known drug classes. In addition, we employ disciplined decision criteria to assess product candidates. By pursuing this strategy, we seek to minimize our clinical development risk and accelerate the potential commercialization of current and future product candidates.  For a majority of our product candidates, we intend to pursue regulatory approval in multiple indications.

Product Pipeline
  
Background of Optisomal Targeted Drug Delivery   
  
Optisomal encapsulation is a novel method of liposomal drug delivery, which is designed to significantly increase tumor targeting and duration of exposure for cell-cycle specific anticancer agents. Optisomal drug delivery consists of using a generic FDA-approved cancer agent, such as vincristine, encapsulated in a lipid envelope composed of a unique, sphingomyelin/cholesterol composition. The encapsulated agent is carried through the bloodstream and delivered to disease sites where it is released to carry out its therapeutic action. When used in unencapsulated form, chemotherapeutic drugs diffuse indiscriminately throughout the body, diluting drug effectiveness and potentially causing toxic side effects in the patient’s healthy tissues. Our proprietary Optisomal formulation technology is designed to permit loading higher concentrations of therapeutic agent inside the lipid envelope, which promotes accumulation of the drug in tumors and prolongs the drug’s release at disease sites. Non-clinical studies have demonstrated the Optisomal formulation technology’s ability to deliver dose intensification to the tumor, which we believe has the potential to increase the therapeutic benefit of the drug.
 
·
Targeted delivery with improved pharmacokinetics. In normal tissues, a continuous endothelial (blood vessel) lining constrains liposomes within capillaries, preventing accumulation of the drug in the healthy tissues. In contrast, the immature blood vessel system within tumors is created during tumor growth and has numerous gaps up to 800 nanometers in size. With an average diameter of approximately 100 nanometers, Optisomes can pass through these gaps.  Once lodged within the tumor interstitial space, these Optisomes slowly release the encapsulated drug. We believe that slow release of the drug from Optisomes increases drug levels within the tumor, extends drug exposure through multiple cell cycles, and significantly increases tumor cell killing. A limited fraction of a patient’s tumor cells are in a particular drug-sensitive phase at any point in time, which we believe indicates that duration of drug exposure is critical to increased drug efficacy.

 
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·
Increased drug concentration. The link between drug exposure and anti-tumor efficacy is especially pronounced for cell cycle-specific agents such as vincristine, vinorelbine and topotecan, which destroy tumor cells by interfering in one specific phase in cell division (e.g., the mitosis, synthesis and/or rapid growth phases).
 
·
Prolonged exposure. The advanced liposomal technology of the capsule which protects the active drug increases the circulating half-life and is designed to extend the duration of drug release.

Unmet Medical Needs in ALL and Uveal Melanoma
  
ALL is a type of cancer of the blood and bone marrow, the spongy tissue inside bones where blood cells are made. Acute leukemias progress rapidly and are characterized by the accumulation of immature blood cells. ALL affects a group of white blood cells, called lymphocytes, which fight infection and constitute our immune systems. Normally, bone marrow produces immature cells or stem cells, in a controlled way, and they mature and specialize into the various types of blood cells, as needed. In people with ALL, this production process breaks down. Abnormally large numbers of immature, abnormal lymphocytes called lymphoblasts are produced and released into the bloodstream. These abnormal cells are not able to mature and perform their usual functions. Furthermore, they multiply rapidly and can crowd out healthy blood cells like neutrophils and platelets, leaving an adult or child with ALL vulnerable to infection or bleeding. Leukemic cells can also collect in certain areas of the body, including the central nervous system and spinal cord, which can cause serious problems. According to the American Cancer Society, over 5,000 people in the United States were expected to be diagnosed with ALL in 2008, and over 1,400 people were expected to die. ALL accounts for 72% of all leukemia cases amount children (ages 0 – 19).  Multiple clinical trials have suggested the overall survival rate for adults diagnosed with ALL is approximately 20% to 50%, underscoring the need for new therapeutic options.
 
Uveal melanoma is a relatively rare cancer arising out of the colored part of the eye and the surrounding areas, called the uvea.  Uveal melanoma is the most common primary intraocular malignant tumor in adults and represents 5-6% of all melanoma diagnoses.  The incidence of uveal melanoma in the U.S is reported to be 3,500-4,000 per year.  The disease metastasizes via the blood stream, and approximately 40-50% and up to 80% of patients with primary uveal melanoma will ultimately develop distant metastases.  At the time of diagnosis, over 95% of patients have disease limited to the eye, but at least 30% of these patients will die of systemic metastases at 5 years and 45% at 15 years.  The liver is involved in up to 90% of individuals who develop metastatic disease. Lung tissue and bone are the other major sites of disease spread. In general, metastatic uveal melanoma is unresponsive to systemic chemotherapy and immunotherapy.
 
Marqibo ® (vincristine sulfate liposomes injection)
 
 Marqibo is a novel, targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug vincristine that we are developing for the treatment of adult ALL and metastatic uveal melanoma. This encapsulation is designed to provide prolonged circulation of the drug in the blood and accumulation at the tumor site. These characteristics are intended to increase the effectiveness and reduce the side effects of the encapsulated drug. Vincristine, a microtubule inhibitor, is FDA-approved for ALL and is widely used as a single agent and in combination regimens for treatment for hematologic malignancies such as lymphomas and leukemias.
 
Marqibo has been evaluated in 15 clinical trials with over 600 patients, including Phase 2 clinical trials in patients with non-Hodgkin’s lymphoma, or NHL and ALL. Based on the results from these studies, we are conducting a global, registration-enabling Phase 2 clinical trial of Marqibo in adult Philadelphia chromosome negative ALL patients in second relapse, or those who have progressed following two prior lines of therapy.  We refer to this clinical trial as the rALLy study.  The primary outcome measure is complete remission or CR, or complete remission without full hematologic recovery, or CRi.  The sample size is 56 evaluable subjects from up to 50 sites. In August 2009, we announced achievement of our enrollment goal of 56 evaluable subjects.  In June 2009, we announced preliminary data indicating that of the first 33 patients dosed, 10 patients, or 30%, had achieved a CR or CRi.  The estimated median overall survival in responders was 10.5 months compared to 5.1 months in non-responders at the time of the data cutoff.   Because six of the nine CRs were still alive at that time of the data cutoff, the median overall survival in this group may prove to be longer.  Subject to the final results of the rALLy study, we plan to file an NDA seeking accelerated approval of Marqibo for the treatment of ALL in the first half of 2010. We also plan to conduct a confirmatory Phase 3 study with Marqibo.  Certain aspects of this planned Phase 3 trial, including the study design and patient population, are still under review.

 
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In September 2009 we entered into a five-year clinical trial agreement with the Center for Cancer Research at the National Cancer Institute for the co-development of Marqibo in refractory pediatric cancer. Pursuant to this agreement, development will initially focus on a Phase 1 trial to evaluate the safety, preliminary efficacy, pharmacokinetic profile, and optimal dose of weekly Marqibo in children and adolescents with refractory cancer. Following this Phase I trial, we plan a Phase 2 trial in pediatric ALL, the most common cancer of childhood.  We anticipate that this Phase 2 trial will facilitate subsequent studies of Marqibo in combination with standard chemotherapy regimens.
 
In addition, we are conducting a Phase 2 study to assess the efficacy of Marqibo in patients with metastatic malignant uveal melanoma as determined by Disease Control Rate (CR, partial response or durable stable disease).  Secondary objectives are to assess the safety and antitumor activity of Marqibo as determined by response rate, progression free survival and overall survival. The patient population is defined as adults with uveal melanoma and confirmed metastatic disease that is untreated or that has progressed following one prior therapy.  We plan to enroll up to approximately 50 subjects in this clinical trial.
 
Marqibo received a U.S. orphan drug designation in January 2007 as well as a European Commission orphan drug designation in June 2008 for the ALL indication. Marqibo also received a U.S. orphan drug designation in July 2008 for metastatic uveal melanoma. Marqibo received a fast track designation from the FDA in August 2007 for the treatment of adult ALL.   
  
Menadione Topical Lotion (Supportive Care Product)
  
Menadione Topical Lotion (menadione), which we licensed from the Albert Einstein College of Medicine, or AECOM, in October 2006, is a novel product candidate under development for the treatment and/or prevention of skin rash associated with the use of EGFR inhibitors in the treatment of certain cancers. EGFR inhibitors, which include Tarceva, Erbitux, Ivessa and Vectibix, are currently approved to treat non-small cell lung cancer, pancreatic, colorectal, and head and neck cancer. EGFR inhibitors are associated with significant skin toxicities presenting as acne-like rash on the face, neck and upper-torso of the body in approximately 75% of patients.  Fifty percent of patients who manifest skin toxicity experience significant discomfort. This results in discontinuation or dose reduction in at least 10% and up to 30% of patients that receive the EGFR inhibitor.  Menadione, a small organic molecule, has been shown to activate the EGFR signaling pathway by inhibiting phosphatase activity which is an important enzyme in the EGFR pathway. In vivo studies have suggested that topically-applied Menadione may restore EGFR signaling specifically in the skin of patients treated systemically with EGFR inhibitors. Currently, there are no FDA-approved products or therapies available to treat these skin toxicities. We initiated a Phase 1 clinical trial in cancer patients in April 2008 and another Phase 1 study in healthy volunteers in September 2008. Pursuant to the securities purchase agreement, we agreed to use the proceeds from the sale of the securities solely for the clinical and regulatory development of our Marqibo program. As such, future development of Menadione is contingent on obtaining additional funding, if any such funding is available in the future.
 
Brakiva™ (topotecan liposomes injection)
  
Brakiva is our proprietary product candidate comprised of the anti-cancer drug topotecan encapsulated in Optisomes. Topotecan is FDA-approved for the treatment of metastatic carcinoma of the ovary after failure of initial or subsequent chemotherapy, and small cell lung cancer sensitive disease after failure of first-line chemotherapy.  In November 2008, we initiated a Phase 1 dose-escalation clinical trial of Brakiva, which is primarily designed to assess the safety, tolerability and maximum tolerated dose.

Alocrest™ (vinorelbine liposomes injection)
  
Alocrest is a novel Optisomal encapsulated formulation product candidate of the FDA-approved drug vinorelbine, a microtubule inhibitor for use as a single agent or in combination with cisplatin for the first-line treatment of unresectable, advanced non-small cell lung cancer. In February 2008, we completed enrollment in a Phase 1 study of Alocrest. The trial enrolled 30 adult subjects with confirmed solid tumors refractory to standard therapy or for which no standard therapy was known to exist. The objectives of the Phase 1 clinical trial were: (1) to assess the safety and tolerability of Alocrest; (2) to determine the maximum tolerated dose of Alocrest; (3) to characterize the pharmacokinetic profile of Alocrest; and (4) to explore preliminary efficacy of Alocrest. The study was conducted at the Cancer Therapy and Research Center and South Texas Accelerated Research Therapeutics (START), both located in San Antonio, Texas and at McGill University in Montreal.  The majority of study subjects had heavily pretreated disease. Reversible neutropenia, a low white blood cell count, was the dose-limiting toxicity. The results of this study indicated promising anti-cancer activity and expected toxicity, and a 50% disease control rate was achieved across a broad range of doses.

License Agreements
  
Marqibo, Alocrest and Brakiva
  
In May 2006, we completed a transaction with Tekmira Pharmaceuticals Corporation, formerly Inex Pharmaceuticals Corporation, pursuant to which we acquired exclusive, worldwide rights to develop and commercialize Marqibo, Alocrest and Brakiva, which we collectively refer to as the Optisome products. The following is a summary of the various agreements entered into to consummate the transaction.

 
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Tekmira License Agreement
 
Pursuant to the terms of a license agreement dated May 6, 2006, which was amended and restated on April 30, 2007, and amended on June 2, 2009, between us and Tekmira, Tekmira granted us:
 
·
an exclusive license under certain patents held by Tekmira to commercialize the Optisome products for all uses throughout the world;
 
·
an exclusive license under certain patents held by Tekmira to commercialize the Optisome products for all uses throughout the world under the terms of certain research agreements between Tekmira and the British Columbia Cancer Agency, or BCCA; and
 
·
an exclusive license to all technical information and know-how relating to the technology claimed in the patents held exclusively by Tekmira and to all confidential information possessed by Tekmira relating to the Optisome products, including all data, know-how, manufacturing information, specifications and trade secrets, collectively called the Tekmira Technology, to commercialize the Optisome products for all uses throughout the world.

We have the right to grant sublicenses to third parties and in such event we and Tekmira will share sublicensing revenue received by us at varying rates for each Optisome product depending on such Optisome product’s stage of clinical development.  Under the license agreement, we also granted back to Tekmira a limited, royalty-free, non-exclusive license in certain patents and technology owned or licensed to us solely for use in developing and commercializing liposomes having an active agent encapsulated, intercalated or entrapped therein.

We agreed to pay to Tekmira up to an aggregate of $37.0 million upon the achievement of various clinical and regulatory milestones relating to all Optisome products. At our option, the milestones may be paid in cash or, subject to certain restrictions, shares of our common stock. In addition to the milestone payments, we agreed to pay royalties to Tekmira in the range of 5% to 10% based on net sales of the Optisome products, against which we may offset a portion of the research and development expenses we incur. In addition to our obligations to make milestone payments and pay royalties to Tekmira, we also assumed all of Tekmira’s obligations to its licensors and collaborators relating to the Optisome products, which include aggregate milestone payments of up to $2.5 million, annual license fees and additional royalties.

The license agreement provides that we will use our commercially reasonable efforts to develop each Optisome product, including causing the necessary and appropriate clinical trials to be conducted in order to obtain and maintain regulatory approval for each Optisome product and preparing and filing the necessary regulatory submissions for each Optisome product. We also agreed to provide Tekmira with periodic reports concerning the status of each Optisome product.

We are required to use commercially reasonable efforts to commercialize each Optisome product in each jurisdiction where an Optisome product has received regulatory approval. We will be deemed to have breached our commercialization obligations in the United States, or in Germany, the United Kingdom, France, Italy or Spain, if for a continuous period of 180 days at any time following commercial sales of an Optisome product in any such country, no sales of an Optisome product are made in the ordinary course of business in such country by us (or a sublicensee), unless the parties agree to such delay or unless we are prohibited from making sales by a reason beyond our control. If we breach this obligation, then Tekmira is entitled to terminate the license with respect to such Optisome product and for such country.

Under the license agreement, Tekmira will be the owner of patents and patent applications claiming priority to certain patents licensed to us, and we have an obligation to assign to Tekmira our rights to inventions covered by such patents or patent applications, and, when negotiating any joint venture, collaborative research, development, commercialization or other agreement with a third party, to require such third party to do the same.

The prosecution and maintenance of the licensed patents will be overseen by an IP committee having equal representation from us and Tekmira. We will have the right and obligation to file, prosecute and maintain most of the licensed patents, although Tekmira maintained primary responsibility to prosecute certain of the licensed patents.  The parties agreed to share the expenses of prosecution at varying rates.  We also have the first right, but not the obligation, to enforce such licensed patents against third party infringers, or to defend against any infringement action brought by any third party.

 
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We agreed to indemnify Tekmira for all losses resulting from our breach of our representations and warranties, or other default under the license agreement, our breach of any regulatory requirements, regulations and guidelines in connection with the Optisome products, complaints alleging infringement against Tekmira with respect to our manufacture, use or sale of an Optisome product, and any injury or death to any person or damage to property caused by any Optisome product provided by us or our sublicensee, except to the extent such losses are due to Tekmira’s breach of a representation or warranty, Tekmira’s default under the agreement, and the breach by Tekmira of any regulatory requirements, regulations and guidelines in connection with licensed patent and related know-how. Tekmira has agreed to indemnify us for losses arising from Tekmira’s breach of representation or warranty, Tekmira’s default under the agreement, and the breach by Tekmira of any regulatory requirements, regulations and guidelines in connection with licensed patent and related know-how, except to the extent such losses are due to our breach of our representations and warranties, our default under the agreement, our breach of any regulatory requirements, regulations and guidelines in connection with the Optisome products, complaints alleging infringement against Tekmira with respect to our manufacture, use or sale of an Optisome product, and any injury or death to any person or damage to property caused by any Optisome product provided by us or our sublicensee.
  
Unless terminated earlier, the license grants made under the license agreement expire on a country-by-country basis upon the later of (i) the expiration of the last to expire patents covering each Optisome product in a particular country, (ii) the expiration of the last to expire period of product exclusivity covered by an Optisome product under the laws of such country, or (iii) with respect to the Tekmira Technology, on the date that all of the Tekmira Technology ceases to be confidential information. The covered issued patents are scheduled to expire between 2014 and 2021.

Either we or Tekmira may terminate the license agreement in the event that the other has materially breached its obligations thereunder and fails to remedy such breach within 90 days following notice by the non-breaching party. If such breach is not cured, then the non-breaching party may, upon 6 months’ notice to the breaching party, terminate the license in respect of the Optisome products or countries to which the breach relates. Tekmira may also terminate the license if we assert or intend to assert any invalidity challenge on any of the patents licensed to us. The license agreement also provides that either party may, upon written notice, terminate the agreement in the event of the other’s bankruptcy, insolvency, dissolution or similar proceeding. In the event Tekmira validly terminates the license agreement, all data, materials, regulatory filings and all other documentation reverts to Tekmira.
 
In April 2007, Tekmira assigned to us its right and interest in and to a Patent and Technology License Agreement dated February 14, 2000 between Tekmira and M.D. Anderson Cancer Center.  As assigned to us, this agreement grants to us a royalty-bearing license to certain patents relating to Marqibo that are owned by M.D. Anderson.  As consideration for the license, we are required to pay to M.D. Anderson royalties on net sales of Marqibo, as well as an annual maintenance fee.  The M.D. Anderson license provides that we have the first right to prosecute and maintain the licensed patents at our expense.  In addition, we also have the first right to control any infringement claims against third parties. The M.D. Anderson license will be automatically terminated in the event we become bankrupt or insolvent, and may be terminated by M.D. Anderson in the event we default on our obligations under the agreement.

UBC Sublicense Agreement

In May 2006, we also entered into a sublicense agreement with Tekmira relating to Tekmira’s rights to certain patents it licensed from the University of British Columbia, or UBC. Under the UBC sublicense agreement, Tekmira granted to us an exclusive, worldwide sublicense under several patents relating to Alocrest and Brakiva, together with all knowledge, know-how, and techniques relating to such patents, called the UBC Technology. The UBC Technology is owned by UBC and licensed to Tekmira pursuant to a license agreement dated July 1, 1998. The UBC sublicense agreement provides that we will undertake all of Tekmira’s obligations contained in Tekmira’s license agreement with UBC, which includes the payment of royalties (in addition to the royalties owing to Tekmira under the license agreement between Tekmira and us) and an annual license fee. The provisions of the UBC sublicense agreement relating to our obligation to develop and commercialize the UBC Technology, termination and other material obligations are substantially similar to the terms of license agreement between Tekmira and us, as discussed above.

Assignment of Agreement with Elan Pharmaceuticals, Inc.

Pursuant to an Amended and Restated License Agreement dated April 3, 2003, between Tekmira (including two of its wholly-owned subsidiaries) and Elan Pharmaceuticals, Inc., Tekmira held a paid up, exclusive, worldwide license to certain patents, know-how and other intellectual property relating to vincristine sulfate liposomes. In connection with our transaction with Tekmira, Tekmira assigned to us all of its rights under the Elan license agreement pursuant to an Assignment and Novation Agreement dated May 6, 2006 among us, Tekmira and Elan.

 
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As assigned to us, the Elan license agreement provides that Elan will own all improvements to the licensed patents or licensed know-how made by us or our sublicensees, which will in turn be licensed to us as part of the technology we license from Elan. Elan has the first right to file, prosecute and maintain all licensed patents and we have the right to do so if Elan decides that it does not wish to do so only pertaining to certain portions of the technology. Elan also has the first right to enforce such licensed patents and we may do so only if Elan elects not to enforce such patents. In addition, Elan has the right but not the obligation to control any infringement claim brought against Elan.

We have indemnification obligations to Elan for all losses arising from the research, testing, manufacture, transport, packaging, storage, handling, distribution, marketing, advertising, promotion or sale of the products by us, our affiliates or sublicensees, any personal injury suits brought against Elan, any infringement claim, certain third party agreements entered into by Elan, and any acts or omissions of any of our sublicensees.

The Elan license agreement, unless earlier terminated, will expire on a country by country basis, upon the expiration of the life of the last to expire licensed patent in that country. Elan may terminate the Elan license agreement earlier for our material breach upon 60 days’ written notice if we do not cure such breach within such 60 day period (we may extend such cure period for up to 90 days if we propose a course of action to cure the breach within the initial 60 day period and act in good faith to cure such breach), for our bankruptcy or going into liquidation upon 10 days’ written notice, or immediately if we, or our sublicense, directly or indirectly disputes the ownership, scope or validity of any of the licensed technology or support any such attack by a third party.

Menadione

In October 2006, we entered into a license agreement with the Albert Einstein College of Medicine of Yeshiva University, a division of Yeshiva University, or the College. Pursuant to the agreement, we acquired an exclusive, worldwide, royalty-bearing license to certain patent applications, and other intellectual property relating to topical menadione. We are required to make milestone payments in the aggregate amount of $2.8 million upon the achievement of various clinical and regulatory milestones, as described in the agreement. We also agreed to pay annual maintenance fees, and to make royalty payments to the College on net sales of any products covered by a claim in any licensed patent. We may also grant sublicenses to the licensed patents and the proceeds resulting from such sublicenses will be shared with the College.

Zensana  (ondansetron HCI) Oral Spray

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

On July 31, 2007, we entered into a sublicense agreement with Par Pharmaceutical, Inc. and NovaDel, pursuant to which we granted to Par and its affiliates, and NovaDel consented to such grant, a royalty-bearing exclusive right and license to develop and commercialize Zensana within the United States and Canada. As agreed by us and NovaDel, Par assumed primary responsibility for the development, regulatory approval by the FDA, and sales and marketing of Zensana.
 
As additional consideration for the sublicense, following regulatory approval of Zensana, Par is required to pay us an additional one-time payment of $6.0 million, of which $5.0 million is payable by us to NovaDel pursuant to our obligations under our agreement with NovaDel. In addition, the sublicense agreement provides for an additional aggregate of $44.0 million in commercialization milestone payments based upon actual net sales of Zensana in the United States and Canada, which amounts are not subject to any corresponding obligations to NovaDel. We will also be entitled to royalty payments based on net sales of Zensana by Par or any of its affiliates in such territory, however, the amount of such royalty payments is generally equal to the same amount of royalties that we will owe NovaDel under the License Agreement, except to the extent that aggregate net sales of Zensana exceed a specified amount in the first 5 years following FDA approval of an NDA, in which case the royalty rate payable to us increases beyond its royalty obligation to NovaDel.

In order to give effect to and accommodate the terms of the sublicense agreement with Par, on July 31, 2007, we and NovaDel amended and restated our original October 2004 license agreement. The primary modifications to the amended and restated license agreement are as follows:

 
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·
We relinquished our right under the original license agreement to reduced royalty rates to NovaDel until such time as we have recovered one-half of our costs and expenses incurred in developing Zensana from sales of Zensana or payments or other fees from a sublicensee;
 
·
NovaDel surrendered for cancellation all 73,121 shares of our common stock that it acquired upon the execution of the original license agreement;
 
·
We will have the right, but not the obligation, to exploit the licensed product in Canada;
 
·
We or our sublicensee must consummate the first commercial sale of the licensed product within 9 months of regulatory approval by the FDA of such product; and
 
·
If the sublicense agreement is terminated, we may elect to undertake further development of Zensana.
 
Intellectual Property
  
General

Patents and other proprietary rights are very important to the development of our business. We will be able to protect our proprietary technologies from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. It is our intention to seek and maintain patent and trade secret protection for our product candidates and our proprietary technologies. As part of our business strategy, our policy is to actively file patent applications in the United States and internationally to cover methods of use, new chemical compounds, pharmaceutical compositions and dosing of the compounds and compositions and improvements in each of these. We also rely on trade secret information, technical know-how, innovation and agreements with third parties to continuously expand and protect our competitive position. We own, or license the rights to, a number of patents and patent applications related to our product candidates, but we cannot be certain that issued patents will be enforceable or provide adequate protection or that the pending patent applications will issue as patents.

The patent positions of biotechnology and pharmaceutical companies are highly uncertain and involve complex legal and factual questions. Therefore, we cannot predict with certainty the breadth of claims allowed in biotechnology and pharmaceutical patents, or their enforceability. To date, there has been no consistent policy regarding the breadth of claims allowed in biotechnology patents. Third parties or competitors may challenge or circumvent our patents or patent applications, if issued. If our competitors prepare and file patent applications in the United States that claim technology also claimed by us, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office to determine priority of invention, which could result in substantial cost, even if the eventual outcome is favorable to us. Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that before we commercialize any of our product candidates, any related patent may expire or remain in existence for only a short period following commercialization, thus reducing any advantage of the patent.

If patents are issued to others containing preclusive or conflicting claims and these claims are ultimately determined to be valid, we may be required to obtain licenses to these patents or to develop or obtain alternative technology. Our breach of an existing license or failure to obtain a license to technology required to commercialize our products may seriously harm our business. We also may need to commence litigation to enforce any patents issued to us or to determine the scope and validity of third-party proprietary rights. Litigation would create substantial costs. An adverse outcome in litigation could subject us to significant liabilities to third parties and require us to seek licenses of the disputed rights from third parties or to cease using the technology if such licenses are unavailable.

Optisomal product candidates

Pursuant to our license agreement with Tekmira and related sublicense with UBC, we have exclusive rights to 11 issued U.S. patents, 54 issued foreign patents, 7 pending U.S. patent applications and 28 pending foreign applications, covering composition of matter, method of use and treatment, formulation and process. These patents and patent applications cover sphingosome based pharmaceutical compositions including Marqibo, Alocrest and Brakiva, formulation, dosage, process of making the liposome compositions, and methods of use of the compositions in the treatment cancer, relapsed cancer, and solid tumors. The earliest of these issued patents expires in 2014 and the last of the issued patents expires in 2021.

 
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Menadione

We have exclusive, worldwide rights to a patent family consisting of 6 pending foreign patent applications and 1 pending U.S. patent application pursuant to our October 2006 license agreement with AECOM. These patent applications cover, pharmaceutical compositions and methods of use (e.g., methods of treating and preventing a skin rash secondary to an anti-epidermal growth factor receptor therapy). If any U.S. or foreign patent issues from these applications, such a patent would be scheduled to expire in 2026, excluding any patent term extensions.

In addition, we solely own 2 pending provisional U.S. patent applications.  These applications cover topical formulations of menadione and methods of use of the formulations. If any U.S. or foreign patent issues from these applications, such a patent would be scheduled to expire in 2029, excluding any patent term extensions.

Zensana

On July 31, 2007, we entered into a definitive agreement providing for the sublicense of all our rights to any patents related to Zensana to Par Pharmaceutical, Inc.  See “License Agreements – Zensana.”  Under this agreement, Par Pharmaceutical agreed to take on full responsibility to discharge patent prosecution and enforcement for all patents related to the Zensana product candidate.

Other Intellectual Property Rights

We also depend upon trademarks, trade secrets, know-how and continuing technological advances to develop and maintain our competitive position. To maintain the confidentiality of trade secrets and proprietary information, we require our employees, scientific advisors, consultants and collaborators, upon commencement of a relationship with us, to execute confidentiality agreements and, in the case of parties other than our research and development collaborators, to agree to assign their inventions to us. These agreements are designed to protect our proprietary information and to grant us ownership of technologies that are developed in connection with their relationship with us. These agreements may not, however, provide protection for our trade secrets in the event of unauthorized disclosure of such information.

In addition to patent protection, we may utilize orphan drug regulations to provide market exclusivity for certain of our product candidates. The orphan drug regulations of the FDA provide incentives to pharmaceutical and biotechnology companies to develop and manufacture drugs for the treatment of rare diseases, currently defined as diseases that exist in fewer than 200,000 individuals in the United States, or, diseases that affect more than 200,000 individuals in the United States but that the sponsor does not realistically anticipate will generate a net profit. Under these provisions, a manufacturer of a designated orphan drug can seek tax benefits, and the holder of the first FDA approval of a designated orphan product will be granted a seven-year period of marketing exclusivity for such FDA-approved orphan product. We believe that certain of the indications for our product candidates will be eligible for orphan drug designation; however, we cannot assure you that our drugs will obtain such orphan drug designation or will be the first to reach the market and provide us with such market exclusivity protection.    

Government Regulation and Product Approval

The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the testing (preclinical and clinical), manufacturing, labeling, storage, recordkeeping, advertising, promotion, import, export, marketing and distribution, among other things, of drugs and drug product candidates. If we do not comply with applicable requirements, we may be fined, the government may refuse to approve our marketing applications or allow us to manufacture or market our products, and we may be criminally prosecuted.  We and our manufacturers may also be subject to regulations under other United States federal, state, and local laws.

United States Government Regulation

In the United States, the FDA regulates drugs under the FDCA and implementing regulations. The process required by the FDA before our product candidates may be marketed in the United States generally involves the following (although the FDA is given wide discretion to impose different or more stringent requirements on a case-by-case basis):
 
·
completion of extensive preclinical laboratory tests, preclinical animal studies and formulation studies, all performed in accordance with the FDA’s good laboratory practice regulations and other regulations;
 
·
submission to the FDA of an IND application which must become effective before clinical trials may begin;
 
 
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·
performance of multiple adequate and well-controlled clinical trials meeting FDA requirements to establish the safety and efficacy of the product candidate for each proposed indication;
 
·
submission of an NDA to the FDA;
 
·
satisfactory completion of an FDA pre-approval inspection of the manufacturing facilities at which the product candidate is produced, and potentially other involved facilities as well, to assess compliance with current good manufacturing practice, or cGMP, regulations and other applicable regulations; and
 
·
the FDA review and approval of the NDA prior to any commercial marketing, sale or shipment of the drug.

The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our product candidates will be granted on a timely basis, if at all. Risks to us related to these regulations are described under “Risk Factors – Risks Related to the Clinical Testing, Regulatory Approval and Manufacturing of Our Product Candidates.”
  
Preclinical tests may include laboratory evaluation of product chemistry, formulation and stability, as well as studies to evaluate toxicity and other effects in animals. The results of preclinical tests, together with manufacturing information and analytical data, among other information, are submitted to the FDA as part of an IND application. Subject to certain exceptions, an IND becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, issues a clinical hold to delay a proposed clinical investigation due to concerns or questions about the conduct of the clinical trial, including concerns that human research subjects will be exposed to unreasonable health risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Our submission of an IND, or those of our collaboration partners, may not result in the FDA authorization to commence a clinical trial. A separate submission to an existing IND must also be made for each successive clinical trial conducted during product development. The FDA must also approve changes to an existing IND. Further, an independent institutional review board, or IRB, for each medical center proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences at that center and it must monitor the study until completed. The FDA, the IRB or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. Clinical testing also must satisfy extensive Good Clinical Practice requirements and regulations for informed consent.
  
Clinical Trials
  
For purposes of NDA submission and approval, clinical trials are typically conducted in the following three sequential phases, which may overlap (although additional or different trials may be required by the FDA as well):
 
·
Phase 1 clinical trials are initially conducted in a limited population to test the drug candidate for safety, dose tolerance, absorption, metabolism, distribution and excretion in healthy humans or, on occasion, in patients, such as cancer patients. In some cases, particularly in cancer trials, a sponsor may decide to conduct what is referred to as a “Phase 1b” evaluation, which is a second safety-focused Phase 1 clinical trial typically designed to evaluate the impact of the drug candidate in combination with currently FDA-approved drugs.
 
·
Phase 2 clinical trials are generally conducted in a limited patient population to identify possible adverse effects and safety risks, to determine the efficacy of the drug candidate for specific targeted indications and to determine dose tolerance and optimal dosage. Multiple Phase 2 clinical trials may be conducted by the sponsor to obtain information prior to beginning larger and more expensive Phase 3 clinical trials. In some cases, a sponsor may decide to conduct what is referred to as a “Phase 2b” evaluation, which is a second, confirmatory Phase 2 clinical trial that could, if positive and accepted by the FDA, serve as a pivotal clinical trial in the approval of a drug candidate.
 
·
Phase 3 clinical trials are commonly referred to as pivotal trials. When Phase 2 clinical trials demonstrate that a dose range of the drug candidate is effective and has an acceptable safety profile, Phase 3 clinical trials are undertaken in large patient populations to further evaluate dosage, to provide substantial evidence of clinical efficacy and to further test for safety in an expanded and diverse patient population at multiple, geographically dispersed clinical trial sites.
 
In some cases, the FDA may condition continued approval of an NDA on the sponsor’s agreement to conduct additional clinical trials with due diligence. In other cases, the sponsor and the FDA may agree that additional safety and/or efficacy data should be provided; however, continued approval of the NDA may not always depend on timely submission of such information. Such post-approval studies are typically referred to as Phase IV studies.

 
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New Drug Application
  
The results of drug candidate development, preclinical testing and clinical trials, together with, among other things, detailed information on the manufacture and composition of the product and proposed labeling, and the payment of a user fee, are submitted to the FDA as part of an NDA. The FDA reviews all NDAs submitted before it accepts them for filing and may request additional information rather than accepting an NDA for filing. Once an NDA is accepted for filing, the FDA begins an in-depth review of the application.
  
During its review of an NDA, the FDA may refer the application to an advisory committee for review, evaluation and recommendation as to whether the application should be approved. The FDA may refuse to approve an NDA and issue a not approvable letter if the applicable regulatory criteria are not satisfied, or it may require additional clinical or other data, including one or more additional pivotal Phase III clinical trials. Even if such data are submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data from clinical trials are not always conclusive and the FDA may interpret data differently than we or our collaboration partners interpret data. If the FDA’s evaluations of the NDA and the clinical and manufacturing procedures and facilities are favorable, the FDA may issue either an approval letter or an approvable letter, which contains the conditions that must be met in order to secure final approval of the NDA. If and when those conditions have been met to the FDA’s satisfaction, the FDA will issue an approval letter, authorizing commercial marketing of the drug for certain indications. The FDA may withdraw drug approval if ongoing regulatory requirements are not met or if safety problems occur after the drug reaches the market. In addition, the FDA may require testing, including Phase IV clinical trials, and surveillance programs to monitor the effect of approved products that have been commercialized, and the FDA has the power to prevent or limit further marketing of a drug based on the results of these post-marketing programs. Drugs may be marketed only for the FDA-approved indications and in accordance with the FDA-approved label. Further, if there are any modifications to the drug, including changes in indications, other labeling changes, or manufacturing processes or facilities, we may be required to submit and obtain FDA approval of a new NDA or NDA supplement, which may require us to develop additional data or conduct additional preclinical studies and clinical trials.

The Hatch-Waxman Act
  
Under the Hatch-Waxman Act, newly-approved drugs and new conditions of use may benefit from a statutory period of non-patent marketing exclusivity. The Hatch-Waxman Act provides five-year marketing exclusivity to the first applicant to gain approval of an NDA for a new chemical entity, meaning that the FDA has not previously approved any other new drug containing the same active entity. The Hatch-Waxman Act prohibits the submission of an abbreviated NDA, or ANDA, or a Section 505(b)(2) NDA for another version of such drug during the five-year exclusive period; however, submission of a Section 505(b)(2) NDA or an ANDA for a generic version of a previously-approved drug containing a paragraph IV certification is permitted after four years, which may trigger a 30-month stay of approval of the ANDA or Section 505(b)(2) NDA. Protection under the Hatch-Waxman Act does not prevent the submission or approval of another “full” 505(b)(1) NDA; however, the applicant would be required to conduct its own preclinical and adequate and well-controlled clinical trials to demonstrate safety and effectiveness. The Hatch-Waxman Act also provides three years of marketing exclusivity for the approval of new and supplemental NDAs, including Section 505(b)(2) NDAs, for, among other things, new indications, dosages, or strengths of an existing drug, if new clinical investigations that were conducted or sponsored by the applicant are essential to the approval of the application. Some of our product candidates may qualify for Hatch-Waxman non-patent marketing exclusivity.

In addition to non-patent marketing exclusivity, the Hatch-Waxman Act amended the FDCA to require each NDA sponsor to submit with its application information on any patent that claims the drug for which the applicant submitted the NDA or that claims a method of using such drug and with respect to which a claim of patent infringement could reasonably be asserted if a person not licensed by the owner engaged in the manufacture, use, or sale of the drug. Generic applicants that wish to rely on the approval of a drug listed in the Orange Book must certify to each listed patent, as discussed above. We intend to submit for Orange Book listing all relevant patents for our product candidates.

Finally, the Hatch-Waxman Act amended the patent laws so that certain patents related to products regulated by the FDA are eligible for a patent term extension if patent life was lost during a period when the product was undergoing regulatory review, and if certain criteria are met. We intend to seek patent term extensions, provided our patents and products, if they are approved, meet applicable eligibility requirements.
 
 
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Orphan Drug Designation and Exclusivity
 
The FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition, which generally is a disease or condition that affects fewer than 200,000 individuals in the United States. Orphan drug designation must be requested before submitting an NDA. If the FDA grants orphan drug designation, which it may not, the identity of the therapeutic agent and its potential orphan use are publicly disclosed by the FDA. Orphan drug designation does not convey an advantage in, or shorten the duration of, the review and approval process. If a product which has an orphan drug designation subsequently receives the first FDA approval for the indication for which it has such designation, the product is entitled to seven years of orphan drug exclusivity, meaning that the FDA may not approve any other applications to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity (superior efficacy, safety, or a major contribution to patient care). Orphan drug designation does not prevent competitors from developing or marketing different drugs for that indication. We received orphan drug status for Marqibo in January 2007, for the treatment of ALL.
 
Under European Union medicines laws, the criteria for designating a product as an “orphan medicine” are similar but somewhat different from those in the United States. A drug is designated as an orphan drug if the sponsor can establish that the drug is intended for a life-threatening or chronically debilitating condition affecting no more than five in 10,000 persons in the European Union or that is unlikely to be profitable, and if there is no approved satisfactory treatment or if the drug would be a significant benefit to those persons with the condition. Orphan medicines are entitled to ten years of marketing exclusivity, except under certain limited circumstances comparable to United States law. During this period of marketing exclusivity, no “similar” product, whether or not supported by full safety and efficacy data, will be approved unless a second applicant can establish that its product is safer, more effective or otherwise clinically superior. This period may be reduced to six years if the conditions that originally justified orphan designation change or the sponsor makes excessive profits.   
 
Fast Track Designation
 
The FDA’s fast track program is intended to facilitate the development and to expedite the review of drugs that are intended for the treatment of a serious or life-threatening condition and that demonstrate the potential to address unmet medical needs. Under the fast track program, applicants may seek traditional approval for a product based on data demonstrating an effect on a clinically meaningful endpoint, or approval based on a well-established surrogate endpoint.  The sponsor of a new drug candidate may request the FDA to designate the drug candidate for a specific indication as a fast track drug at the time of original submission of its IND, or at any time thereafter prior to receiving marketing approval of a marketing application. The FDA will determine if the drug candidate qualifies for fast track designation within 60 days of receipt of the sponsor’s request.

If the FDA grants fast track designation, it may initiate review of sections of an NDA before the application is complete. This so-called “rolling review” is available if the applicant provides and the FDA approves a schedule for the submission of the remaining information and the applicant has paid applicable user fees. The FDA’s PDUFA review clock for both a standard and priority NDA for a fast track product does not begin until the complete application is submitted. Additionally, fast track designation may be withdrawn by the FDA if it believes that the designation is no longer supported by emerging data, or if the designated drug development program is no longer being pursued.   

In some cases, a fast track designated drug candidate may also qualify for one or more of the following programs:
 
·
Priority Review.  As explained above, a drug candidate may be eligible for a six-month priority review. The FDA assigns priority review status to an application if the drug candidate provides a significant improvement compared to marketed drugs in the treatment, diagnosis or prevention of a disease. A fast track drug would ordinarily meet the FDA’s criteria for priority review, but may also be assigned a standard review. We do not know whether any of our drug candidates will be assigned priority review status or, if priority review status is assigned, whether that review or approval will be faster than conventional FDA procedures, or that the FDA will ultimately approve the drug.
 
·
Accelerated Approval.  Under the FDA’s accelerated approval regulations, the FDA is authorized to approve drug candidates that have been studied for their safety and efficacy in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit to patients over existing treatments based upon either a surrogate endpoint that is reasonably likely to predict clinical benefit or on the basis of an effect on a clinical endpoint other than patient survival or irreversible morbidity. In clinical trials, surrogate endpoints are alternative measurements of the symptoms of a disease or condition that are substituted for measurements of observable clinical symptoms. A drug candidate approved on this basis is subject to rigorous post-marketing compliance requirements, including the completion of Phase IV or post-approval clinical trials to validate the surrogate endpoint or confirm the effect on the clinical endpoint. Failure to conduct required post-approval studies with due diligence, or to validate a surrogate endpoint or confirm a clinical benefit during post-marketing studies, may cause the FDA to seek to withdraw the drug from the market on an expedited basis. All promotional materials for drug candidates approved under accelerated regulations are subject to prior review by the FDA.
 
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When appropriate, we and our collaboration partners intend to seek fast track designation, accelerated approval or priority review for our product candidates. We cannot predict whether any of our product candidates will obtain fast track, accelerated approval, or priority review designation, or the ultimate impact, if any, of these expedited review mechanisms on the timing or likelihood of the FDA approval of any of our product candidates.
 
Satisfaction of the FDA regulations and approval requirements or similar requirements of foreign regulatory agencies typically takes several years, and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease. Typically, if a drug candidate is intended to treat a chronic disease, as is the case with some of the product candidates we are developing, safety and efficacy data must be gathered over an extended period of time. Government regulation may delay or prevent marketing of drug candidates for a considerable period of time and impose costly procedures upon our activities. The FDA or any other regulatory agency may not grant approvals for changes in dosage form or new indications for our product candidates on a timely basis, or at all. Even if a drug candidate receives regulatory approval, the approval may be significantly limited to specific disease states, patient populations and dosages. Further, even after regulatory approval is obtained, later discovery of previously unknown problems with a drug may result in restrictions on the drug or even complete withdrawal of the drug from the market. Delays in obtaining, or failures to obtain, regulatory approvals for any of our product candidates would harm our business. In addition, we cannot predict what adverse governmental regulations may arise from future United States or foreign governmental action.
 
We plan to pursue accelerated approval for our product candidate Marqibo, subject to the results of the rALLy trial.  There is no assurance that the FDA will grant accelerated approval of Marqibo based on the rALLy trial.  Instead, the FDA may require us to conduct the Phase 3 confirmatory study of Marqibo to obtain full approval.

Pediatric Studies and Exclusivity
 
The FDCA provides an additional six months of non-patent marketing exclusivity and patent protection for any such protections listed in the Orange Book for new or marketed drugs if a sponsor conducts specific pediatric studies at the written request of the FDA. The Pediatric Research Equity Act of 2003, or PREA, authorizes the FDA to require pediatric studies for drugs to ensure the drugs’ safety and efficacy in children. PREA requires that certain new NDAs or NDA supplements contain data assessing the safety and effectiveness for the claimed indication in all relevant pediatric subpopulations. Dosing and administration must be supported for each pediatric subpopulation for which the drug is safe and effective. The FDA may also require this data for approved drugs that are used in pediatric patients for the labeled indication, or where there may be therapeutic benefits over existing products. The FDA may grant deferrals for submission of data, or full or partial waivers from PREA. PREA pediatric assessments may qualify for pediatric exclusivity. Unless otherwise required by regulation, PREA does not apply to any drug for an indication with orphan designation. We may also seek pediatric exclusivity for conducting any required pediatric assessments.

Other Regulatory Requirements
 
Any drugs manufactured or distributed by us or our collaboration partners pursuant to future FDA approvals are subject to continuing regulation by the FDA, including recordkeeping requirements and reporting of adverse experiences associated with the drug. Drug manufacturers and their subcontractors are required to register with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with ongoing regulatory requirements, including cGMP, which impose certain procedural and documentation requirements upon us and our third-party manufacturers. Failure to comply with the statutory and regulatory requirements can subject a manufacturer to possible legal or regulatory action, such as warning letters, suspension of manufacturing, sales or use, seizure of product, injunctive action or possible civil penalties. We cannot be certain that we or our present or future third-party manufacturers or suppliers will be able to comply with the cGMP regulations and other ongoing FDA regulatory requirements. If our present or future third-party manufacturers or suppliers are not able to comply with these requirements, the FDA may halt our clinical trials, require us to recall a drug from distribution, or withdraw approval of the NDA for that drug.
 
The FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the Internet. A company can make only those claims relating to safety and efficacy that are approved by the FDA. Failure to comply with these requirements can result in adverse publicity, warning and/or untitled letters, corrective advertising and potential civil and criminal penalties.

 
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Foreign Regulation
  
In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our future products. Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.
  
Under European Union regulatory systems, marketing authorizations may be submitted either under a centralized or mutual recognition procedure. The centralized procedure provides for the grant of a single marking authorization that is valid for all European Union member states. The mutual recognition procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marking authorization may submit an application to the remaining member states. Within 90 days of receiving the applications and assessment report, each member state must decide whether to recognize approval.
  
In addition to regulations in Europe and the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial distribution of our future products.

Reimbursement
  
In many of the markets where we intend to commercialize a product following regulatory approval, the prices of pharmaceutical products are subject to direct price controls by law and to drug reimbursement programs with varying price control mechanisms.
  
In the United States, there has been an increased focus on drug pricing in recent years. Although there are currently no direct government price controls over private sector purchases in the United States, federal legislation requires pharmaceutical manufacturers to pay prescribed rebates on certain drugs to enable them to be eligible for reimbursement under certain public health care programs such as Medicaid. Various states have adopted further mechanisms under Medicaid and otherwise that seek to control drug prices, including by disfavoring certain higher priced drugs and by seeking supplemental rebates from manufacturers. Managed care has also become a potent force in the market place that increases downward pressure on the prices of pharmaceutical products. Federal legislation, enacted in December 2003, has altered the way in which physician-administered drugs covered by Medicare are reimbursed. Under the new reimbursement methodology, physicians are reimbursed based on a product’s “average sales price,” or ASP. This new reimbursement methodology has generally led to lower reimbursement levels. The new federal legislation also has added an outpatient prescription drug benefit to Medicare, effective January 2006. In the interim, Congress has established a discount drug card program for Medicare beneficiaries. Both benefits will be provided primarily through private entities, which will attempt to negotiate price concessions from pharmaceutical manufacturers.
  
Public and private health care payors control costs and influence drug pricing through a variety of mechanisms, including through negotiating discounts with the manufacturers and through the use of tiered formularies and other mechanisms that provide preferential access to certain drugs over others within a therapeutic class. Payors also set other criteria to govern the uses of a drug that will be deemed medically appropriate and therefore reimbursed or otherwise covered. In particular, many public and private health care payors limit reimbursement and coverage to the uses of a drug that are either approved by the FDA or that are supported by other appropriate evidence (for example, published medical literature) and appear in a recognized drug compendium. Drug compendia are publications that summarize the available medical evidence for particular drug products and identify which uses of a drug are supported or not supported by the available evidence, whether or not such uses have been approved by the FDA. For example, in the case of Medicare coverage for physician-administered oncology drugs, the Omnibus Budget Reconciliation Act of 1993, with certain exceptions, prohibits Medicare carriers from refusing to cover unapproved uses of an FDA-approved drug if the unapproved use is supported by one or more citations in the American Hospital Formulary Service Drug Information, the American Medical Association Drug Evaluations, or the U.S. Pharmacopoeia Drug Information. Another commonly cited compendium, for example under Medicaid, is the DRUGDEX Information System.
 

 
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Different pricing and reimbursement schemes exist in other countries. For example, in the European Union, governments influence the price of pharmaceutical products through their pricing and reimbursement rules and control of national health care systems that fund a large part of the cost of such products to consumers. The approach taken varies from member state to member state. Some jurisdictions operate positive and/or negative list systems under which products may only be marketed once a reimbursement price has been agreed. Other member states allow companies to fix their own prices for medicines, but monitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products, as exemplified by the National Institute for Clinical Excellence in the UK, which evaluates the data supporting new medicines and passes reimbursement recommendations to the government. In addition, in some countries cross-border imports from low-priced markets (parallel imports) exert a commercial pressure on pricing within a country.

Manufacturing
  
We currently rely on a number of third-parties, including contract manufacturing organizations and our collaborative partners, to produce our compounds. Marqibo requires three separate ingredients, sphingomyelin/cholesterol liposomes for injection (SCLI), vincristine sulfate injection (VSI), and sodium phosphate for injection (SPI), all of which are handled by separate suppliers.  SCLI is manufactured by Cangene Corporation, VSI is manufactured by Hospira and SPI is manufactured by Hollister-Steir Laboratories.  Alocrest and Brakiva are both manufactured by Gilead.  For Menadione, we have contracted with Dow Pharmaceuticals and Menadiona, a Spanish-based company, for its manufacturing.
 
Competition
 
We compete primarily in the segment of the biopharmaceutical market that addresses cancer and cancer supportive care, which is highly competitive. We face significant competition from many pharmaceutical, biopharmaceutical and biotechnology companies that are researching and selling products designed to address cancer this market. Many of our competitors have significantly greater financial, manufacturing, marketing and drug development resources than we do. Large pharmaceutical companies in particular have extensive experience in clinical testing and in obtaining regulatory approvals for drugs. These companies also have significantly greater research capabilities than we do. In addition, many universities and private and public research institutes are active in cancer research. We also compete with commercial biotechnology companies for the rights to product candidates developed by public and private research institutes. Smaller or early-stage companies are also significant competitors, particularly those with collaborative arrangements with large and established companies.

We believe that our ability to successfully compete will depend on, among other things:
 
·
our ability to develop novel compounds with attractive pharmaceutical properties and to secure and protect intellectual property rights based on our innovations;
 
·
the efficacy, safety and reliability of our product candidates;
 
·
the speed at which we develop our product candidates;
 
·
our ability to design and successfully complete appropriate clinical trials;
 
·
our ability to maintain a good relationship with regulatory authorities;
 
·
the timing and scope of regulatory approvals;
 
·
our ability to manufacture and sell commercial quantities of future products to the market or enter into strategic partnership agreements with others; and
 
·
acceptance of future products by physicians and other healthcare providers.
 
Research and Development Expenses
 
Research and development expenses, which include salaries and related personnel costs, fees paid to consultants and outside service providers for laboratory development, manufacturing, legal expenses resulting from intellectual property protection, business development and organizational affairs and other expenses relating to the acquiring, design, development, testing, and enhancement of our product candidates, including milestone payments for licensed technology, are the primary source of our overall expenses.  Research and development expenses totaled $18.4 million for the year ended December 31, 2008 and $21.3 million for the year ended December 31, 2007.
 
 
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Legal Proceedings
 
We are not a party to any material legal proceedings.

Description of Property
 
Our executive offices are located at 7000 Shoreline Court, Suite 370, South San Francisco, California 94080. We occupy this space, which consists of 18,788 square feet of office space, pursuant to a written sublease agreement under which we currently pay rent of approximately $46,000 per month, decreasing to approximately $36,600 per month beginning in June 2010. Our sublease currently expires on March 31, 2011. We believe that our existing facilities are adequate to meet our current requirements. We do not own any real property.

Employees
 
As of the date of this prospectus, we have 28 full-time employees and no part-time employees.  All employees are based at our South San Francisco office. None of our employees are covered by a collective bargaining agreement. We believe our relationship with our employees to be good.
 
 
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MANAGEMENT AND BOARD OF DIRECTORS

Directors and Executive Officers

The following table lists our executive officers and directors and their respective ages and positions as of the date of this prospectus:

Name
 
Age
 
Position(s) Held
Arie S. Belldegrun, M.D.
 
59
 
Director
Steven R. Deitcher, M.D.
 
45
 
President, Chief Executive Officer and Director
Anne E. Hagey, M.D.
 
42
 
Vice President, Chief Medical Officer
John P. Iparraguirre
 
33
 
Vice President, Chief Financial Officer and Secretary
Paul V. Maier
 
61
 
Director
Leon E. Rosenberg, M.D.
 
76
 
Chairman of the Board
Michael Weiser, M.D.
 
46
 
Director
Linda E. Wiesinger
 
56
 
Director

Arie S. Belldegrun, M.D., FACS has served on Hana’s Board of Directors since April 2004. Dr. Belldegrun is Director of the Institute of Urologic Oncology at UCLA, Professor of Urology and Chief of the Division of Urologic Oncology. He holds the Roy and Carol Doumani Chair in Urologic Oncology at the David Geffen School of Medicine at the University of California, Los Angeles (UCLA).  In 1997, Dr. Belldegrun founded Agensys, Inc., an early-stage privately-held biotechnology company based in Los Angeles, California, that is focused on the development of fully human monoclonal antibodies to treat solid tumor cancers in a variety of cancer targets.  Dr. Belldegrun served as founding Chairman of Agensys from 1997 to 2002 and then as a director until December 2007, when the company was acquired by Astellas Pharma.  Dr. Belldegrun also serves on the Board of Directors of Nile Therapeutics, Inc., a publicly-held biopharmaceutical company.  He is also Chairman and Partner of Two River Group Holdings LLC, a New York based venture capital firm.  Dr. Belldegrun’s prior experience also includes serving as principal investigator of more than 50 clinical trials of anti-cancer drug candidates and therapies.  Dr. Belldegrun completed his M.D. at the Hebrew University Hadassah Medical School in Jerusalem, his post graduate fellowship at the Weizmann Institute of Science and his residency in Urological Oncology at Harvard Medical School.  Prior to UCLA, Dr. Belldegrun was at the National Cancer Institute/NIH as a research fellow in surgical oncology under Steven A. Rosenberg, M.D., Ph.D.  He is certified by the American Board of Urology and is a Fellow of the American College of Surgeons and the American Association of Genitourinary Surgeons.

Steven R. Deitcher, M.D., has been President, Chief Executive Officer and a director of Hana since August 2007, and served as our Executive Vice President of Development and Chief Medical Officer from May 2007 to August 2007.  Prior to joining Hana, Dr. Deitcher served as Vice President and Chief Medical Scientist at Nuvelo, Inc. since 2004.  Prior to joining Nuvelo, from 1998 to 2004, Dr. Deitcher held a variety of positions in both the Department of Vascular Medicine and the Department of Hematology/Oncology while at The Cleveland Clinic Foundation, including Head of the Section of Hematology and Coagulation Medicine in the Department of Hematology/Oncology. Prior to that, he spent four years at The University of Tennessee in positions including Associate Chairman, Department of Medicine; Director, Combined Pediatric and Adult Thrombosis Clinic; and Director, Special Coagulation Laboratory. Dr. Deitcher earned his B.S. and M.D. in the Honors Program in Medical Education at Northwestern University Medical School.

Anne E. Hagey, M.D., was appointed Vice President, Chief Medical Officer of Hana in April 2008.  Prior to joining Hana, from August 2000 to November 2007, Dr. Hagey was employed at Abbott Laboratories, most recently serving as a Global Project Head overseeing clinical oncology drug development.  Before becoming a Global Project Head in 2005, Dr. Hagey was an associate medical director and a graduate of the Physician Development Program at Abbot Laboratories.  Dr. Hagey has been a clinical associate and attending physician at the University of Chicago in pediatric hematology/oncology since 2001.  She conducted her fellowship at the University of California, Los Angeles in the Department of Microbiology and Molecular Genetics and the Department of Pediatric Hematology-Oncology and Bone Marrow Transplant. She was also a Resident and Intern in pediatrics at Baylor College of Medicine, Texas Children’s Hospital.  Dr. Hagey has been a Research Assistant at Loyola University Medical School, a Research Intern at Case Western Reserve University Medical School, and a Research Intern at Abbot Laboratories in the Department of Corporate Molecular Biology.  Dr. Hagey earned a Doctor of Medicine from Loyola University Chicago Stritch School of Medicine and a Bachelor of Sciences degree in Biochemistry from University of Illinois, Urbana-Champaign.
 
 
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John P. Iparraguirre has been our Vice President, Chief Financial Officer and Secretary since January 2006. From May 2004 to January 2006, Mr. Iparraguirre served as our Controller and Assistant Secretary, and from August 2004 to November 2004, served as our interim Chief Financial Officer and Secretary.  Prior to joining Hana, Mr. Iparraguirre was the Accounting Manager at Discovery Toys, Inc., an educational and developmental toy company, where he held several roles of responsibility in Finance Management. From September 1998 to April 2002, Mr. Iparraguirre was a Senior Audit Associate at BDO Seidman, LLP, an international accounting firm. Mr. Iparraguirre received a B.S. degree in Business Economics with an Emphasis in Accounting from the University of California, Santa Barbara.

Paul V. Maier was appointed a director of Hana in March 2008.  Mr. Maier is currently an independent financial consultant. From October 1992 to January 2007, Mr. Maier served as Senior Vice President, Chief Financial Officer of Ligand Pharmaceuticals, Inc., a publicly-held biopharmaceutical company based in San Diego, CA. Prior to joining Ligand, Mr. Maier served as Vice President, Finance at DFS West, a division of DFS Group, L.P., a private multinational retailer from October 1990 to October 1992. From February 1990 to October 1990, Mr. Maier served as Vice President and Treasurer of ICN Pharmaceuticals, Inc., a pharmaceutical and biotechnology research products company. Mr. Maier held various positions in finance and administration at SPI Pharmaceuticals, Inc., a publicly held subsidiary of ICN Pharmaceuticals Group, from 1984 to 1988, including Vice President, Finance from February 1984 to February 1987. Mr. Maier also serves on the boards of directors of Pure Bioscience, Inc. and International Stem Cell Corp., both publicly-held companies. Mr. Maier received an M.B.A. from Harvard Business School and a B.S. from Pennsylvania State University.
 
Leon E. Rosenberg, M.D., has served on Hana’s Board of Directors since February 2004 and has been non-executive Chairman of the Board since March 2007. Dr. Rosenberg has been a Professor in the Princeton University Department of Molecular Biology and the Woodrow Wilson School of Public and International Public Affairs since September 1997. Since July 1999, he has also been Professor Adjunct of Genetics at Yale University School of Medicine. From January 1997 to March 1998, Dr. Rosenberg served as Senior Vice President, Scientific Affairs of Bristol-Myers Squibb, and from September 1991 to January 1997, Dr. Rosenberg served as President of the Bristol-Myers Squibb Pharmaceutical Research Institute. From July 1984 to September 1991, Dr. Rosenberg was Dean of the Yale University School of Medicine. Dr. Rosenberg also serves on the Boards of Directors of Lovelace Respiratory Research Institute, Karo Bio AB, and Medicines for Malaria Venture. Dr. Rosenberg received B.A. and M.D. degrees, both summa cum laude, from the University of Wisconsin. He completed his internship and residency training in internal medicine at Columbia Presbyterian Medical Center in New York City.

 Michael Weiser, M.D., Ph.D., has been a director of Hana since its inception. Since December 2006, Dr. Weiser has been the co-chairman of Actin Capital, LLC and Actin Biomed, a New York based healthcare investment firm that he founded. Prior to Actin, from July 1998 to December 2006, Dr. Weiser was the Director of Research at Paramount BioCapital where he was responsible for the scientific, medical and financial evaluation of biomedical technologies and pharmaceutical products under consideration for development. Dr. Weiser completed his Ph.D. in Molecular Neurobiology at Cornell University Medical College and received his M.D. from New York University School of Medicine. Dr, Weiser performed his post-graduate medical training in the Department of Obstetrics and Gynecology at New York University Medical Center and also completed a Postdoctoral Fellowship in the Department of Physiology and Neuroscience at New York University School of Medicine. Dr. Weiser received his B.A. in Psychology from the University of Vermont. Dr. Weiser is a member of The National Medical Honor Society, Alpha Omega Alpha. Dr. Weiser currently serves on the boards of directors of Manhattan Pharmaceuticals, Inc., Chelsea Therapeutics International Ltd., Emisphere Technologies Inc., ZIOPHARM Oncology Inc. and VioQuest Pharmaceuticals Inc., all publicly held biotechnology companies, as well as several privately held companies.

Linda E. Wiesinger, a director of Hana since February 2007, is currently the principal of Strategic Decisions, a pharmaceutical consulting company. From November 2003 to September 2005, Ms. Wiesinger was Senior Vice President, Marketing and Market Development at Vicuron Pharmaceuticals, Inc., a publicly held biopharmaceutical company that was acquired by Pfizer Inc. in September 2005. From May 2002 to February 2003, Ms. Wiesinger was Senior Vice President, U.S. Marketing of IMS Health Incorporated, a publicly-held company that provides market data to the pharmaceutical industry. Ms. Wiesinger has also held management positions with Bristol-Myers Squibb Company, from 1996 to 2000, and Armour Pharmaceutical Company, a subsidiary of Rhone-Poulenc Rorer, from 1992-1995. Ms. Wiesinger was employed by Pfizer Inc. where she held a series of positions in strategic planning, investor relations, and product planning, development and commercialization from 1981 to 1992. Ms. Wiesinger received a B.A. from the University of Pennsylvania and earned an M.B.A. at The Wharton School.

Independence of the Board of Directors
 
Our Board of Directors consults with our legal counsel to ensure that the Board’s determinations regarding director independence are consistent with all relevant securities and other laws and regulations regarding the definition of “independent,” including those set forth in the listing standards of the Nasdaq Stock Market. Consistent with these considerations, and after review of all relevant transactions or relationships between each director, or any of his or her family members, and Hana, its senior management and its independent registered public accounting firm, the Board has determined that all of our directors are independent directors within the meaning of the Nasdaq listing standards, except for Dr. Deitcher, our President and Chief Executive Officer.

 
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Executive Compensation

The following summary compensation table reflects cash and non-cash compensation for the 2007 and 2008 fiscal years awarded to or earned by (i) each individual serving as our principal executive officer during the fiscal year ended December 31, 2008; and (ii) each individual that served as an executive officer at the end of the fiscal year ended December 31, 2008 and who received in excess of $100,000 in total compensation during such fiscal year. We refer to these individuals as our “named executive officers.”

Summary Compensation Table

Name and
Principal
Position
 
Year
 
Salary
   
Bonus
   
Option
Awards (1)
   
Non-Equity
Incentive
Plan
Compensation(2)
   
All Other
Compensation (3)
   
Total
 
Steven R. Deitcher (4)
 
2008
  $ 420,000     $     $ 372,431     $ 150,000     $ 15,500     $ 957,931  
President & CEO
 
2007
    235,420       227,000 (5)     136,696             3,209       602,325  
                                                     
Anne E. Hagey (6)
 
2008
  $ 255,134     $ 25,000 (7)   $ 91,066     $ 65,000     $ 20,175 (8)   $ 456,375  
VP, Chief Medical Officer
 
2007
                                   
                                                     
John P. Iparraguirre
 
2008
  $ 200,000     $ 25,000     $ 339,744     $     $ 10,000     $ 574,744  
VP, CFO
 
2007
    175,000       65,000       347,125             8,750       595,875  
 

(1)
Amount reflects the compensation cost for the years ended December 31, 2007 and 2008 of the named executive officer’s options, calculated in accordance with SFAS 123(R) and using a Black-Scholes-Merton valuation model. Assumptions used in the calculation of these amounts are included in Note 4 to the Company’s audited financial statements for the fiscal year ended December 31, 2008, included in this prospectus. Forfeitures rates attributed to the calculation have been disregarded for the purposes of this table.
 
(2)
Amount reflects cash incentives both paid and accrued for services related to 2007 and 2008.  All accrued bonuses relating to performance in 2007 and 2008 included in totals were paid early in the first quarters of 2008 and 2009, respectively. Cash incentives relate to services performed during the fiscal year pursuant to performance incentives earned.
 
(3)
Except as otherwise noted for a named executive officer, these amounts consist solely of matching contributions made to the named executives’ respective 401(k) plan contributions.
 
(4)
Dr. Deitcher’s employment with us commenced in May 2007.  He first served as our Executive Vice President of Development and Chief Medical Officer, and was promoted to President and Chief Executive Officer in August  2007.
 
(5)
Consists of a signing bonus in the amount of $75,000 paid to Dr. Deitcher upon the commencement of his employment with us in May 2007, as well as an annual bonus of $152,000 payable pursuant to Dr. Deitcher’s previous employment agreement.  Under the terms of the agreement, Dr. Deitcher was eligible for an annual performance bonus of up to 40% of his base salary, which amount was guaranteed for fiscal 2007.  For a summary of the terms of Dr. Deitcher’s current employment agreement, see “–Employment Agreements and Post-Termination Benefits – Steven R. Deitcher.”
 
(6)
Dr. Hagey’s employment with us commenced in April 2008.
 
(7)
Consists of a signing bonus paid to Dr. Hagey upon the commencement of her employment with us in April 2008.
 
(8)
Consists of  $15,500 in matching contributions made to Dr. Hagey’s 401(k) plan and $4,675 paid to Dr. Hagey as reimbursement for certain relocation costs pursuant to Dr. Hagey’s offer letter signed in April 2008.

 
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Employment Agreements and Post-Termination Benefits

Steven R. Deitcher

Dr. Deitcher’s employment with us is governed by an employment agreement dated June 6, 2008.  The employment agreement, which replaced and superseded a prior agreement dated May 6, 2007, provides for Dr. Deitcher’s employment as Chief Executive Officer for a term ending December 31, 2010, unless terminated earlier. The agreement may be renewed for one or more additional one-year periods upon agreement by the parties. Dr. Deitcher will receive an initial annual base salary of $420,000, which amount will be reviewed by the board of directors at least annually and never decreased.  Dr. Deitcher may also, at the discretion of the board of directors, receive an annual bonus in an amount targeted at 50% of his base salary based upon the achievement of specified Company goals approved by the board of directors, except that the bonus shall be equal to 70% of his base salary in the event the Company satisfies all specified goals in their entirety. Dr. Deitcher is eligible to participate in all benefits offered to our employees.  Dr. Deitcher’s current annual base salary of $420,000 will not be increased for 2009.

In the event Dr. Deitcher is terminated upon a “change of control,” he will receive (i) his then-current annualized base salary and health insurance for a period of 12 months following the date of the termination, (ii) the maximum discretionary bonus (at the 70% targeted rate) for which he would have been eligible in the year of the termination, and (iii) an acceleration in the vesting of all options to purchase shares of our common stock then held by him. If Dr. Deitcher is terminated by us other than for “cause” or upon a change of control, or if Dr. Deitcher terminates his employment for “good reason,” or if we elect not to renew the employment agreement at the end of its term, then Dr. Deitcher will receive (x) his then-current annualized base salary and health insurance for a period of 12 months following the date of the termination, (y) the maximum discretionary bonus (at the 50% targeted rate) for which he would have been eligible in the year of the termination, prorated for the number of months Dr. Deitcher was employed by us in the year of termination, and (z) an acceleration in the vesting of all of his stock options to provide for 12 additional months of vesting.

The term “cause” under the employment agreement means the following conduct or actions taken by Dr. Deitcher: (i) his willful and repeated failure or refusal to perform his duties under the agreement that is not cured by within 30 days after written notice thereof is given by us; (ii) any willful, intentional or grossly negligent act having the effect of injuring, in a material way (whether financial or otherwise), our business or reputation; (iii) willful and material misconduct in respect of his duties or obligations; (iv) the conviction of any felony or a misdemeanor involving a crime of moral turpitude; (v) the determination by us that Dr. Deitcher engaged in material harassment or discrimination prohibited by law; (vi) any misappropriation or embezzlement of our property; (vii) a breach of the non-solicitation, invention assignment and confidentiality provisions of the employment agreement; or (viii) a material breach of any other material provision of the employment agreement that is not cured within 30 days after we provide written notice thereof.

The term “change of control” means any of the following: (A) the direct or indirect acquisition by a person in one or a series of related transactions of our securities representing more than 50% of our combined voting power; or (B) the disposition by us of all or substantially all of our business and/or assets in one or a series of related transactions, other than a merger effected to change our state of domicile.

The term “good reason” means (1) a material breach by us of the employment agreement, which we do not cure within 30 days after written notice thereof is given to us; (2) a change in the lines of reporting such that Dr. Deitcher no longer directly reports to our Board; (3) a reduction in Dr. Deitcher’s compensation or other benefits except such a reduction in connection with a general reduction in compensation or other benefits of all senior executives; (4) a material reduction in Dr. Deitcher’s authority, duties, responsibilities, or title; or (5) a relocation of Dr. Deitcher’s principal place of performance by more than 30 miles from our current South San Francisco office location.

Anne E. Hagey

Dr. Hagey’s employment with us is governed by the terms of a letter agreement dated March 16, 2008. The letter agreement provides that Dr. Hagey is entitled to an initial annual base salary of $335,000 and is eligible for an annual performance bonus targeted at 40% of her base salary.  In addition, Dr. Hagey received a signing bonus of $25,000 upon the commencement of her employment. We also agreed to pay relocation expenses on Dr. Hagey’s behalf in an amount up to $10,000. The relocation expenses must be repaid by Dr. Hagey if she voluntarily resigns from her employment or if we terminate her employment for cause prior to April 23, 2010. Pursuant to the terms of the letter agreement, Dr. Hagey also received a stock option to purchase 200,000 shares of our common stock pursuant to the 2004 Plan upon commencement of her employment. The option has a term of 10 years, vests in three equal annual installments commencing on April 23, 2009, and is exercisable at a price of $1.04 per share, the fair market value of our common stock as of the commencement of her employment.  Dr. Hagey’s current annual base salary of $350,000 will not be increased for 2009.

 
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The letter agreement further provides that if Hana terminates Dr. Hagey’s employment without cause, or if she terminates her employment for “good reason,” then she is entitled to continue receiving her then current annualized base salary for a period of six months following such termination and any obligation she may have to repay the signing bonus or relocation expenses will be forgiven. For purposes of the letter agreement, the term “cause” has substantially the same meaning as such term in Dr. Deitcher’s agreement, which is described above.  The term “good reason” means (i) a reduction in Dr. Hagey’s annual base salary or annual target bonus rate or a material reduction in the benefits provided to her, taken as a whole, in each case without her consent, but not if all senior executives also incur such reduction in compensation or other benefits, or (ii) a significant reduction in Dr. Hagey’s duties and responsibilities, but in each case after we have failed to correct such event after 30 days’ written notice from Dr. Hagey.

John P. Iparraguirre

Mr. Iparraguirre’s employment with us is governed by an employment agreement dated December 18, 2006, as amended on October 31, 2008.  The employment agreement provides for a term ending October 31, 2009, an annual base salary payable to Mr. Iparraguirre in the amount of $175,000 (which may be subject to annual increases at the discretion of our board of directors) and an annual discretionary bonus in an amount up to 30% of the then annual base salary.  For 2007, the amount of Mr. Iparraguirre’s annual discretionary bonus was $65,000, which exceeded his 30% target maximum amount.  Effective as of January 1, 2008, Mr. Iparraguirre’s annual base salary was increased to $200,000.  For 2008, Mr. Iparraguirre received a discretionary bonus of $25,000, which represented 12.5% of his annual base salary. Mr. Iparraguirre’s current annual base salary of $200,000 will not be increased for 2009.

In accordance with the terms of the agreement, in the event we terminate Mr. Iparraguirre’s employment prior to October 31, 2009 other than for “cause” or as a result of Mr. Iparraguirre’s death or disability, or if Mr. Iparraguirre terminates his employment for “good reason,” then Mr. Iparraguirre is entitled to continue receiving his annual base salary plus health insurance benefits for a period of six months; however, we are entitled to offset such amount to the extent Mr. Iparraguirre earns income from subsequent employment. In the event Mr. Iparraguirre’s employment is terminated by us upon a “change of control,” Mr. Iparraguirre is entitled to receive his base salary plus health insurance benefits for a six month period. Our obligation to pay any severance benefits to Mr. Iparraguirre upon the termination of his employment is subject to Mr. Iparraguirre’s release of all claims against us relating to his employment.  The terms “cause” and “change of control” in Mr. Iparraguirre’s agreement have substantially the same meaning as such term in Dr. Deitcher’s agreement, which is described above.  The term “good reason” means: (1) a material breach by us of Mr. Iparraguirre’s employment agreement which is not cured after 30 days’ written notice; (2) a change in the lines of reporting such that Mr. Iparraguirre no longer reports to either our CEO or Board; and (3) a reduction in Mr. Iparraguirre’s compensation or other benefits other than a reduction in connection with a general reduction in compensation or other benefits of all senior executives.

Outstanding Equity Awards at Fiscal Year-End
 
The following table sets forth information concerning stock options held by the named executive officers at December 31, 2008:
 
Name
 
Number of
Securities Underlying
Unexercised Options
Exercisable
   
Number of Securities
Underlying
Unexercised Options
Unexercisable
   
Option Exercise
Price ($)
 
Option
Expiration Date
 
Dr. Deitcher
    133,334       266,666       1.650  
05/21/2017
(1) 
      33,334       66,666       1.740  
08/24/2017
(2) 
      216,667       433,333       1.120  
12/14/2017
(3) 
Dr. Hagey
          200,000       1.04  
04/23/2018
(4) 
Mr. Iparraguirre
    28,201             1.684  
05/09/2014
(5) 
      40,000             1.330  
04/11/2015
(6) 
      50,000             4.750  
11/10/2015
(7) 
      83,333       41,667       6.820  
12/12/2016
(8) 
      36,667       73,333       1.120  
12/14/2017
(9) 
 

(1)
133,334 shares vested on May 21, 2008.  An additional 133,333 shares vest on each of May 21, 2009 and May 21, 2010.
 
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(2)
33,334 shares vested on August 24, 2008.  An additional 33,333 shares vest on each of August 24, 2009 and August 24, 2010.
(3)
216,667 shares vested on December 14, 2008.  An additional 216,667 and 216,666 shares vest on December 14, 2009 and December 14, 2010, respectively.
(4)
66,667 shares vested on April 23, 2009.  An additional 66,667 and 66,666 shares vest on April 23, 2010 and April 23, 2011, respectively.
(5)
100% of the shares subject to the option grant became vested on May 9, 2006.
(6)
13,334 shares vested on April 11, 2006.  An additional 13,333 shares vested on each of April 11, 2007 and April 11, 2008.
(7)
16,667 shares vested on each of November 10, 2006 and November 10, 2007.  An additional 16,666 shares vested on November 10, 2008.
(8)
41,666 and 41,667 shares vested on December 12, 2007 and December 12, 2008, respectively.  An additional 41,667 shares vest on December 12, 2009.
(9)
36,667 shares vested on December 14, 2008.  An additional 36,667 and 36,666 shares vest on December 14, 2009 and December 14, 2010, respectively.
 
Compensation of Directors

Our non-employee directors are entitled to receive the following in consideration for their service on the Board: (1) a cash fee of $2,500 for attendance at each regular quarterly meeting of the Board; (2) an annual fee of $20,000, as compensation for special Board and other meetings; and (3) an annual stock option grant relating to 40,000 shares of common stock, which option vests upon the first anniversary of the grant and accelerates upon a “change of control” of the Company. In lieu of the foregoing compensation, Dr. Rosenberg, as our non-executive chairman of the Board, is entitled to an annual retainer of $50,000, a meeting fee of $4,000 and an annual stock option grant of 75,000 shares. The following table sets forth the compensation paid to our directors for their service in 2008.
 
Name (1)
 
Fees Earned or
Paid in Cash
   
Option
Awards (2)
   
Total
 
Arie S. Belldegrun
 
$
30,000
   
$
154,931
   
$
184,931
 
Paul V. Maier
   
27,500
     
29,365
     
56,865
 
Leon E. Rosenberg
   
66,000
     
198,700
     
264,700
 
Michael Weiser
   
30,000
     
162,114
     
192,114
 
Linda Wiesinger
   
30,000
     
51,292
     
81,292
 
Isaac Kier (3)
   
22,500
     
     
22,500
 
 

(1)
Steven R. Deitcher, our President and Chief Executive Officer, has been omitted from this table since he receives no additional compensation for serving on our Board; his compensation is described above under “Summary of Compensation.”
(2)
These amounts reflect the stock−based compensation expense recognized for financial statement reporting purposes for the fiscal year ended December 31, 2008, in accordance with FAS 123(R) of stock option award granted from 2005 to 2008. Assumptions used in the calculation of these amounts are included in Note 4 to the Company’s audited financial statements for the fiscal year ended December 31, 2008, included in this prospectus. Forfeitures rates attributed to the calculation have been disregarded for the purposes of this table. The following are the aggregate number of option awards outstanding as of December 31, 2008 that have been granted to each of our non−employee directors: Dr. Belldegrun: 188,201; Mr. Maier: 0; Dr. Rosenberg: 258,201; Dr. Weiser: 160,000; Ms. Wiesinger: 80,000.
(3)
Mr. Kier’s service on our Board expired on May 28, 2008, the date of our 2008 annual meeting of stockholders, following his decision not to seek reelection as a director.
 
 
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the ownership of our common stock as of October 29, 2009 by: (i) each of our current directors and executive officers; (ii) all of our directors and executive officers as a group; and (iii) all those known by us to be beneficial owners of at least 5% of our common stock.  Beneficial ownership is determined under rules promulgated by the SEC.  Under those rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days of the date hereof, through the exercise or conversion of any stock option, convertible security, warrant or other right.  Inclusion of shares in the table does not, however, constitute an admission that the named stockholder is a direct or indirect beneficial owner of those shares.  Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares that power with that person’s spouse) with respect to all shares of capital stock listed as owned by that person or entity.  Unless otherwise indicated, the address of each of the following persons is c/o Hana Biosciences, Inc., 7000 Shoreline Court, Suite 370, South San Francisco, CA 94080.
 
Name
 
Shares
Beneficially Owned
   
Percent of Class
 
Steven R. Deitcher (1)
   
786,668
     
1.0%
 
Anne E. Hagey (2)
   
66,667
     
*
 
John P. Iparraguirre (3)
   
332,561
     
*
 
Arie S. Belldegrun (4)
   
188,201
     
*
 
Paul V. Maier (5)
   
57,000
     
*
 
Leon E. Rosenberg (6)
   
259,201
     
*
 
Michael Weiser (7)
   
750,963
     
*
 
Linda E. Wiesinger (8)
   
86,000
     
*
 
                 
All directors and officers as a group (8 persons)
   
2,527,261
     
3.2%
 
                 
James E. Flynn (9)
780 3rd Avenue, 37th Floor
New York, NY 10017
   
18,964,955
     
24.4%
 
OrbiMed Advisors LLC (10)
767 Third Avenue, 30th Floor
New York, NY 10017
   
11,090,578
     
9.9%
 
Perceptive Life Sciences Master Fund, Ltd. (11)
499 Park Ave., 25th Floor
New York, NY 10022
   
13,935,406
     
9.9%
 
Quogue Capital LLC (12)
1285 Avenue of the Americas, 35th Floor
New York, NY 10019
   
12,128,510
     
9.9%
 
 

*
represents less than 1%.
 
(1)
Includes 766,668 shares issuable upon the exercise of stock options.
 
(2)
Represents shares issuable upon the exercise of stock options.
 
(3)
Includes (i) 316,535 shares issuable upon the exercise of stock options, and (ii) 100 shares held by Mr. Iparraguirre’s spouse.
 
(4)
Represents shares issuable upon the exercise of stock options.
 
(5)
Includes 50,000 shares issuable upon the exercise of stock options.
 
(6)
Includes 258,201 shares issuable upon the exercise of stock options.
 
(7)
Includes (i) 160,000 shares issuable upon the exercise of stock options, and (ii) 29,296 shares issuable upon the exercise of warrants.
 
(8)
Includes 80,000 shares issuable upon the exercise of stock options.
 
57

 
(9)
Includes (i) 4,646,899 shares of our common stock and warrants to purchase 464,689 shares of our common stock held by Deerfield Private Design Fund, L.P.; (ii) 7,485,997 shares of our common stock and warrants to purchase 748,598 shares of our common stock held by Deerfield Private Design International, L.P.; (iii) 3,451,799 shares of our common stock and warrants to purchase 156,999 shares of our common stock held by Deerfield Special Situations Fund International Limited; and (iv) 1,924,316 shares of our common stock and warrants to purchase 85,658 shares of our common stock held by Deerfield Special Situations Fund, L.P. Deerfield Capital, L.P. is the general partner of Deerfield Private Design Fund, L.P., Deerfield Private Design International, L.P., and Deerfield Special Situations Fund, L.P.  Deerfield Management Company, L.P. is the investment manager of Deerfield Special Situations Fund International Limited. James E. Flynn, the managing member of Deerfield Capital, L.P. and Deerfield Management Company, L.P., holds voting and dispositive power over the shares held by these stockholders.
 
(10) 
Includes (i) 1,900,000 shares of our common stock and warrants to purchase 850,000 shares of our common stock held by Caduceus Capital II, L.P.; (ii) 2,700,000 shares of our common stock and warrants to purchase 1,260,000 shares of our common stock held by Caduceus Capital Master Fund Limited; (iii) 180,000 shares of our common stock and warrants to purchase 84,000 shares of our common stock held by PW Eucalyptus Fund, Ltd.; (iv) 932,000 shares of our common stock and warrants to purchase 434,578 shares of our common stock held by Summer Street Life Sciences Hedge Fund Investors LLC; and (v) 1,900,000 shares of our common stock and warrants to purchase 850,000 shares of our common stock held by UBS Eucalyptus Fund, L.L.C.  The provisions of the warrants restrict the exercise of such warrants to the extent that, upon such exercise, the number of shares that are beneficially owned by such holder and its affiliates and any other persons or entities with which such holder would constitute a Section 13(d) “group,” would exceed 9.99% of the total number of shares of our common stock then outstanding.  OrbiMed Advisors LLC is the investment advisor to Caduceus Capital II, L.P., UBS Eucalyptus Fund, L.L.C., and PW Eucalyptus Fund, Ltd.  OrbiMed Capital LLC is the investment advisor to Caduceus Capital Master Fund Limited and Summer Street Life Sciences Hedge Fund Investors LLC.  Samuel D. Isaly is the managing member of OrbiMed Advisors LLC and OrbiMed Capital LLC.
 
(11)
Includes 6,323,406 shares issuable upon the exercise of warrants, the provisions of which restrict the exercise of such warrants to the extent that, upon such exercise, the number of shares that are beneficially owned by such holder and its affiliates and any other persons or entities with which such holder would constitute a Section 13(d) “group,” would exceed 9.99% of the total number of shares of our common stock then outstanding.
 
(12)
Includes 4,516,510 shares issuable upon the exercise of warrants, the provisions of which restrict the exercise of such warrants to the extent that, upon such exercise, the number of shares that are beneficially owned by such holder and its affiliates and any other persons or entities with which such holder would constitute a Section 13(d) “group,” would exceed 9.99% of the total number of shares of our common stock then outstanding.
 
TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS

In connection with our May 2006 direct registered offering, Mark Ahn, Fred Vitale and Isaac Kier, each of whom are former executive officers and/or directors of the Company, purchased 5,500, 55,100 and 11,000 shares of our common stock, respectively. The purchase price paid by the non-affiliated investors in the offering was $8.50 per share; however, Dr. Ahn, Mr. Vitale and Mr. Kier each paid $9.07 per share, which represented the closing sale price of our common stock on the date prior to the entry into the purchase agreements relating to such transactions. Mr. Kier’s purchase was made through Kier Family, L.P., a limited partnership of which Mr. Kier is the general partner. Other than the purchase price, all terms of Dr. Ahn’s and Messrs. Vitale’s and Kier’s purchases were identical to the terms applicable to the non-affiliated purchasers in the offering.

WHERE YOU CAN FIND MORE INFORMATION

Federal securities laws require us to file information with the SEC concerning our business and operations.  Accordingly, we file annual, quarterly, and special reports, proxy statements and other information with the SEC.  You can inspect and copy this information at the Public Reference Facility maintained by the SEC at Judiciary Plaza, 100 F Street, N.E., Washington, D.C. 20549.  You can receive additional information about the operation of the SEC’s Public Reference Facilities by calling the SEC at 1-800-SEC-0330.  The SEC also maintains a web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding companies that, like us, file information electronically with the SEC.

VALIDITY OF COMMON STOCK

Legal matters in connection with the validity of the shares offered by this prospectus will be passed upon by Fredrikson & Byron, P.A., Minneapolis, Minnesota.
 
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