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Article by DailyStocks_admin    (07-28-08 05:20 AM)

Filed with the SEC from July 10 to July 16:

SGX Pharmaceuticals (SGXP)
BVF intends to explore, with SGX and others, alternatives to SGX's proposed acquisition by Eli Lilly (LLY). BVF said that the alternatives may include the continued independence of SGX, possibly financed through a non-dilutive rights offering with existing shareholders. BVF also may explore strategic collaborations with third parties or a sale of SGX, in whole or in part, under terms other than those that Lilly has proposed. Eli Lilly has agreed to buy the San Diego biotech outfit for $3 a share, or $64 million, subject to the approval of SGX shareholders. BVF owns 5,905,274 shares (28.6%).

BUSINESS OVERVIEW

Overview

SGX Pharmaceuticals, Inc. is a biotechnology company focused on the discovery, development and commercialization of novel, targeted therapeutics directed at addressing unmet medical needs in oncology. We were incorporated in Delaware in July 1998. Our most advanced drug development programs target the c-MET receptor tyrosine kinase (or MET), an enzyme implicated in a broad array of cancers, and the BCR-ABL tyrosine kinase enzyme, for treatment of Chronic Myelogenous Leukemia, or CML, a cancer of the bone marrow. Our earlier stage drug discovery activities are focused on a portfolio of other protein and enzyme targets that have been implicated in human cancers.

Our drug discovery and development strategy aims to design new chemical entities with substantial commercial potential resulting from selective inactivation of validated targets in cancer patients that we believe are more likely to experience clinical benefit. We are taking an integrated approach to the discovery and development of innovative therapeutic agents for oncology by seeking to identify small molecules that selectively target and block (or inhibit) the actions of the proteins responsible, either wholly or in part, for the uncontrolled growth of malignant cells in human cancers. Generally, we have selected targets for which there is strong scientific evidence that DNA abnormalities activate the target protein and in turn contribute to uncontrolled cellular growth and replication. Uncontrolled cellular growth and replication are both typically associated with cancer. We have chosen indications for which we believe there are widely recognized unmet medical needs. Our strategy for the clinical development of such targeted inhibitors is to design and execute directed proof-of-concept clinical trials involving patients, who appear to have the requisite activating DNA abnormality. We believe this directed, targeted therapy approach increases the potential for demonstrating clinical benefit, potentially decreases the time required to conduct the clinical trial, reduces the number of patients enrolled in a clinical trial, and reduces the cost of the clinical trial compared to conventional more inclusive large-scale clinical trials. We believe this approach could reduce the time required to obtain necessary regulatory approvals.

Our approach to drug discovery combines a number of powerful tools designed to enable the identification of high quality development candidates. At the core is FAST, our fragment based, protein structure-guided drug discovery technology, underpinned by a state-of-the-art X-ray crystallographic platform for the determination of protein structures. We utilize small molecule scaffolds, drawing upon detailed three-dimensional information predicting how they will bind to the target protein. This approach typically provides multiple opportunities for lead optimization from which to choose. Careful selection of starting scaffolds in our compound library optimizes the drug-like properties of the leads we generate. The three-dimensional structural information is combined with biological data to facilitate the design and subsequent optimization of our lead compounds. We seek to maximize the potency and selectivity of our lead compounds while, maintaining the beneficial drug-like properties of the small molecule lead compounds.

MET Development Program

Our MET program is focused on the development of compounds that inhibit both wild-type and activated mutant forms of the protein target, MET. MET is a cellular signaling enzyme known as a receptor tyrosine kinase, which has been implicated in a wide range of cancers. Extensive laboratory studies of MET have yielded a growing body of evidence suggesting that uncontrolled stimulation/activation of MET plays a key role in various effects associated with cancer, including uncontrolled cellular growth and replication, increased cell movement and invasion, and an increased ability of cancer cells to metastasize, or spread beyond the organ of origin. Other observations have implicated MET in increased angiogenesis, a process by which tumors recruit new blood vessels to supply their increasing nutritional needs. Studies of tumors in humans have associated MET with more aggressive forms of cancer, such as lung and renal cancers, and activating MET mutations have been observed in a wide range of cancer types.

Conservative estimates based on scientific publications suggest that in the US more than 130,000 new cancers diagnosed during 2007 have the potential to respond to therapy with a MET inhibitor. Such cancers exhibit unusually high levels of MET activation or signaling and are, therefore, thought to be dependent on MET for their uncontrolled growth and proliferation. MET inhibitors have potential applications in both single-agent therapy and in combination with other anti-cancer agents. In some of the estimated 130,000 cancer patients newly diagnosed with MET-dependent tumors in 2007, our current scientific understanding suggests that single-agent treatment with a MET inhibitor may prove sufficient to control tumor growth (e.g., those patients with hereditary papillary renal cell carcinoma). In the majority of cases, however, growth of the cancer is thought to be driven by multiple DNA abnormalities and the appropriate role for a MET inhibitor is more likely to be in combination with other anti-cancer agents. Combination use of MET inhibitors may prove to be particularly significant in the setting of emerging resistance to standard-of-care drug regimens. Two examples provide evidence for this opportunity. First, a recently published scientific study demonstrated that non-small cell lung (NSCL) cancer cells resistant to treatment with an epidermal growth factor receptor (EGFR) inhibitor displayed MET gene amplification (i.e., an increased number of copies of the MET gene). Inhibition of MET activity in these cells in vitro restored their sensitivity to the EGFR inhibitor, suggesting that a MET inhibitor could be combined with either Tarceva ® (erlotinib) or Iressa ® (gefitinib) for treatment of drug resistant NSCL cancer. Second, increased MET protein signaling has also been observed in pancreatic cancer cells resistant to gemcitabine. Both EGFR resistance and gemcitabine resistance are accompanied by changes in the behavior of tumor cells that increase the likelihood of cell movement and cell invasion of surrounding tissues, both of which are thought to be controlled by MET.

We have identified a number of low molecular weight, selective MET inhibitors, including SGX523 and SGX126, which have demonstrated potency in cell based assays, oral bioavailability in multiple animal species and potent anti-tumor effects in multiple in vivo mouse models of human cancer.

SGX523

SGX523 is an internally developed, small molecule inhibitor of MET. In January 2008, we initiated two parallel, multi-center Phase I clinical trials to establish the safety and tolerability of an oral, twice daily dosing of SGX523 in patients with solid tumor cancers. The first trial has been designed to examine twice daily, oral dosing on a continuous 28-day cycle and the second trial has been designed to examine interrupted dosing (a repeating 21 day cycle of 14 days on therapy followed by 7 days off).

In both trials we have observed dose limiting toxicity (DLT) earlier than anticipated. The toxicity is of a nature that was not anticipated based on the preclinical profile of SGX523. In the continuous dosing trial, patients are continuing to be treated at a lower dose level, and we are evaluating the safety and efficacy of treatment at that dose level. The interrupted dosing trial started at a higher dose than the continuous dosing trial. No patients are currently receiving treatment in the interrupted dosing trial.

With this early identification of DLT, we are reassessing the clinical profile of SGX523 and its future development path is uncertain. We may consider exploring alternate dosing levels and/or schedules in both trials to seek to identify a safe and efficacious dose.

SGX126

In November 2007, we announced the nomination of a second MET development candidate, SGX126, for IND-enabling preclinical development, to broaden our MET program. SGX126 is an internally developed, orally bioavailable small molecule inhibitor of MET, with potent in vitro and in vivo activity. Pending successful completion of IND-enabling studies, we are targeting filing an IND for SGX126 in the fourth quarter of 2008. We are assessing whether to conduct any supplemental preclinical studies of SGX126 in light of the recent developments in our SGX523 clinical studies.

BCR-ABL Development Program

Our BCR-ABL development program is focused on a compound that inhibits both wild-type and drug-resistant mutant forms of the BCR-ABL kinase, the target for second-line treatment of Chronic Myelogenous Leukemia.

Chronic Myelogenous Leukemia (CML)

CML is a bone marrow cancer characterized by rapid and abnormal growth of white blood cells. The disease has an incidence of between 1 and 2 new patients per 100,000 individuals in the general population. In the US, this represents approximately 4,600 new patients a year. CML accounts for approximately 20 percent of adult leukemias in the US. All patients with CML possess an abnormal chromosome, known as the Philadelphia chromosome, in their leukemia cells.

Prior to the introduction of Gleevec ® (imatinib mesylate), a large majority of CML patients failed other treatments and inevitably succumbed to their disease. In 2001, Gleevec was approved by the FDA and has become the standard of care for patients with CML.

Gleevec works by targeting leukemic cells and inhibiting the activity of the BCR-ABL tyrosine kinase protein, the enzyme responsible for their uncontrolled growth. Data from a five-year clinical study of Gleevec published in the New England Journal of Medicine documents the life-saving impact of this therapy for CML patients. Specifically, this study demonstrated that following five years of continuous daily therapy, 83% of patients remained in clinical remission with an overall survival rate of 89%. This level of efficacy contributes to the clinical and commercial success of Gleevec, which had sales of approximately $3.1 billion in 2007, and the market is anticipated to continue to increase. Not all patients will, however, benefit indefinitely from single agent treatment with Gleevec. Over time, drug resistance emerges, with approximately 17% of patients relapsing within five years, and 4% of patients intolerant of Gleevec or discontinuing therapy due to adverse events. The New England Journal of Medicine publication further documented that 31% of patients receiving Gleevec failed to eliminate leukemic cells from their bone marrow within 12 months of commencing therapy. These patients are at significantly higher risk of relapse versus those patients who do eliminate leukemic cells from the bone marrow in this time. In approximately two-thirds of cases, patient relapse has been linked to the emergence of mutant forms of BCR-ABL that are not inhibited by Gleevec. A large number of drug-resistant BCR-ABL mutants have been described, and the single mutant that has proved the most challenging is known as the T315I mutant. None of the currently approved BCR-ABL inhibitors, including Gleevec and Tasigna ® (nilotinib), both marketed by Novartis Pharmaceuticals Corporation, and Sprycel ® (dasatinib), marketed by Bristol Meyers Squibb Corporation, inhibit the T315I mutant form of BCR-ABL. Although there are a number of compounds being developed to address this mutant, to our knowledge there is no oral drug presently on the market that inhibits the T315I mutant form of BCR-ABL.

SGX393 — Relapsed/Refractory CML

The goal of this program is to develop an oral therapy for the second-line treatment of CML, that is patients that relapse while on Gleevec and those intolerant of Gleevec. Our development candidate, SGX393, is currently in IND-enabling preclinical development. SGX393 is an internally developed, potent, selective, orally bioavailable small molecule that inhibits wild-type BCR-ABL and many drug-resistant mutant forms of BCR-ABL, including the T315I mutant. Pending successful completion of IND-enabling activities, including formulation studies, we are targeting filing an IND application for SGX393 in the second quarter of 2008.

At present, we plan to conduct a Phase I dose escalation trial in relapsed/refractory CML patients to assess safety and tolerability and establish the maximum tolerated dose (MTD) or biologically effective dose (BED; i.e., the dose at which BCR-ABL enzyme activity is reduced by more than 90%) followed by administration of SGX393 to a cohort of pre-qualified CML patients possessing the T315I mutation. Subsequent clinical trials will be designed once the results of the initial trial are available, but they likely would involve pre-qualified CML patients bearing the T315I mutation, other relapsed/refractory CML patients and those intolerant of Gleevec.

SGX393 initially fell within the purview of our collaboration with the Novartis Institute for Biomedical Research (Novartis). We obtained the right to further develop and commercialize SGX393 following an amendment to our agreement with Novartis that was signed in September 2007, and it is subject to a reacquisition right of Novartis which may be exercisable at a future date.

Oncology Drug Discovery Portfolio

The SGX drug discovery technologies are being applied to a broad portfolio of oncology targets, including JAK2, RAS, and three undisclosed tyrosine kinases. During 2008, our objective is to nominate two new development candidates, which could lead to IND submission in 2009.

BCR-ABL

We have been collaborating with Novartis under a license and collaboration agreement that we entered into in March 2006, to discover, develop and commercialize oral BCR-ABL inhibitors for the front-line treatment of CML. The research term of this agreement concluded in late March 2008. Novartis remains responsible for the further preclinical and clinical development of the BCR-ABL inhibitors identified under the collaboration, other than SGX393. A number of compounds discovered within the collaboration are now undergoing further evaluation at Novartis. At this time, an IND for a drug candidate under the collaboration is not anticipated in 2008.

JAK2

JAK2 is a non-receptor tyrosine kinase involved in cytokine-induced signaling and growth regulation, survival, and differentiation of cells. Enhanced JAK2 activation has been implicated in various blood disorders. A particular JAK2 mutation, V617F, has been strongly correlated with a group of blood diseases known as myeloproliferative disorders (MPDs), such as Polycythemia Vera, Essential Thrombocythemia, and Chronic Idiopathic Myelofibrosis. We have identified JAK2 inhibitors that have good potency against both wild-type and mutant JAK2 in cell-based assays. Oral bioavailability and selectivity versus JAK3 have also been demonstrated, and current studies are aimed at optimizing the potency and drug-like properties of these compounds. This program is in the lead optimization stage. Lead optimization is the stage at which lead compounds are further modified to improve their potency, specificity, in vivo efficacy and safety.

RAS

RAS is a protein that regulates cell growth. RAS activating mutations, which result in a cancer causing form of RAS, have been found in 20-30% of all cancers. As a result, RAS has been implicated in a large number of diseases. However, RAS has proven a challenging target for the pharmaceutical industry and thus far, to our knowledge, there are currently no drugs on the market that directly target RAS. Applying our FAST platform, we have taken a novel approach to the modulation of RAS activity and we have identified inhibitors that have demonstrated cell-based activity. Our RAS program is currently in the lead identification stage. Lead identification is the stage at which compounds are identified and further characterized in preparation for the lead optimization stage.

Additional Drug Discovery Targets

In addition to BCR-ABL, JAK2 and RAS, we are pursuing lead identification/lead optimization for three additional undisclosed oncology targets, all of which are tyrosine kinases. Like MET, BCR-ABL, JAK2, and RAS, these targets have been chosen on the basis of their potential roles in human cancers. In each case, we believe there is strong scientific evidence that DNA abnormalities activate the target protein and in turn contribute to uncontrolled cellular growth and replication, both of which are associated with cancer. Our structural biology technologies are used to support all aspects of SGX drug discovery, including assessment of target suitabilitiy, X-ray crystallographic screening, lead identification, and lead optimization.

Our Drug Discovery Platform

FAST is our proprietary approach to drug discovery that uses X-ray crystallography and complementary biophysical and biochemical methods, combined with medicinal and computational chemistry for the rapid discovery and optimization of novel, potent and selective small molecule inhibitors of drug targets with good drug-like properties. Through the application of FAST, we are building a pipeline of oncology drug candidates. FAST addresses many of the limitations of traditional approaches to identify and optimize lead compounds, making it an attractive technology for a broad range of drug discovery targets, particularly those that have not yielded promising leads from high-throughput screening. Unlike traditional lead discovery approaches, which require ultra high-throughput screening of very large numbers of compounds, FAST focuses on a much smaller number of diverse, low molecular weight, water-soluble fragments, or scaffolds, as starting points for optimization. Rapid synthesis and optimization using protein structure-guided design enables the delivery of novel, potent and selective modulators of drug targets.

FAST encompasses the integration of the following technologies:


• a high-throughput capability to generate many different crystals of a target protein in parallel;

• the crystallographic screening of our library of scaffolds and elaborated scaffolds bound to the target protein of interest by direct visualization of bound compounds utilizing X-ray crystallography;

• the use of additional screening methods to characterize the scaffolds and elaborated scaffolds in terms of potency, selectivity, pharmacokinetics, and physicochemical properties;

• the use of novel computational design methods and iterative synthetic chemistry to optimize these scaffolds into drug-like lead compounds; and

• the use of protein structure guided drug design to enable the rapid optimization of lead compounds into drug candidates with low molecular weight, high ligand efficiency, and good drug-like properties

Supporting FAST is an extensive X-ray crystallography platform. We have invested significant resources in the development and optimization of the technologies required to produce large numbers of protein variants and to evaluate their ability to provide high quality protein crystals. We have developed customized, robotic technologies for setup, storage, retrieval and imaging of protein crystallization experiments and our current instrumentation supports in excess of 40,000 crystallization experiments per day. We generate protein structures through our proprietary beamline facility, housed at the Advanced Photon Source at the Argonne National Laboratory, a national synchrotron-radiation facility funded by the U.S. Department of Energy, Office of Science, and Office of Basic Energy Sciences, located in Argonne, Illinois. This facility produces an extremely intense, highly focused X-ray beam to generate high-resolution data from approximately 50 crystals per day. This platform allows very rapid screening of our scaffold library, typically within 3-5 days.


License and Collaboration Agreement

Novartis Institutes for Biomedical Research, Inc.

In March 2006, we entered into a License and Collaboration Agreement with Novartis Institutes for Biomedical Research, Inc., (“Novartis”) focused on the development and commercialization of BCR-ABL inhibitors for the treatment of CML. Under the agreement, the parties are collaborating to develop one or more BCR-ABL inhibitors and Novartis will have exclusive worldwide rights to such compounds, subject to our commercialization option in the United States and Canada. Pursuant to an amendment to our agreement with Novartis signed in September 2007, we have the right, but not the obligation, to develop and commercialize SGX393 outside of the collaboration, subject to a reacquisition right of Novartis that may be exercisable at a future date. We have also granted Novartis rights to include certain compounds that we do not pursue under the collaboration in Novartis’ screening library and we will be entitled to receive royalties on sales of products based on those compounds. The research term under this agreement concluded in late March 2008 and Novartis remains responsible for further development of BCR-ABL inhibitors identified pursuant to the collaboration, other than SGX393.

Under the terms of the agreement, we received $25.0 million of upfront payments, including $5.0 million for the purchase by Novartis Pharma AG of shares of our common stock. We were also entitled to receive research funding over the first two years of the collaboration of $9.1 million. With payments for achievement of specified development, regulatory and commercial milestones, including $9.5 million for events up to and including commencement of the first Phase I clinical trial, total payments to us could exceed $515 million. To date, under the collaboration, we have not received any milestone payments. At this time, an IND for a drug candidate under the collaboration is not anticipated in 2008.

Novartis is responsible for funding 100% of the development costs of product candidates from the collaboration, other than SGX393. The research and development activities of the parties are overseen by committees with equal representation of the parties, with Novartis having the right to make the final decision on certain matters. We are also eligible to receive royalties based on net sales. In addition, we retain an option to co-commercialize in the United States and Canada oncology products developed under the agreement through a sales force trained and funded by Novartis.

While the research term of the agreement ended in late March 2008, the agreement will continue until the expiration of all of Novartis’ royalty payment obligations, unless the agreement is terminated earlier by either party. Novartis and we each have the right to terminate the agreement early if the other party commits an uncured material breach of its obligations. If Novartis terminates the agreement for material breach by us, Novartis’ licenses under the agreement will continue subject to certain milestone and royalty payment obligations. If we terminate the agreement for material breach by Novartis, all rights to compounds developed under the collaboration will revert to us. Further, Novartis may terminate the agreement without cause if it reasonably determines that further development of compounds or products from the collaboration is not viable, in which event all rights to the compounds and products revert to us. In the event of a change in control of our company, in certain circumstances Novartis may terminate only the joint committees and co-commercialization option, with all other provisions of the agreement remaining in effect, including Novartis’ licenses and its obligations to make milestone and royalty payments.

Cystic Fibrosis Foundation Therapeutics, Inc.

In July 2005, we entered into a drug discovery collaboration agreement with Cystic Fibrosis Foundation Therapeutics, Inc., or CFFT, the drug discovery and development arm of the Cystic Fibrosis Foundation. Under the collaboration, we are continuing our structural biology work and have employed our proprietary FAST lead generation technology with the objective of generating novel small molecule therapies that function as “correctors” of the F508 deletion mutation found in the cystic fibrosis transmembrane conductance regulator, or CFTR. No such correctors have yet been identified. The F508 deletion mutation is the most commonly observed mutation in patients with cystic fibrosis. Individuals with the mutation fail to transport the CFTR protein to the cell surface, resulting in impaired function of the lung epithelium. Correctors of the mutant protein are expected to increase the amount of the mutant protein that is transported to the cell surface, resulting in more rapid clearing of lung infections and improved lung function. The research term of this collaboration agreement continues until July 2008. Our drug discovery agreement with CFFT may be terminated earlier by either party in the event of a material breach by the other party, subject to prior notice and the opportunity to cure. In addition, CFFT has the right to terminate the drug discovery agreement at any time upon 60 days notice.

NIH Cooperative Agreement Award

In July 2005, we received a $48.5 million National Institutes of Health Cooperative Agreement Award from the National Institute of General Medical Sciences, or NIGMS. The award is part of the NIH Protein Structure Initiative, which aims to facilitate discovery of three dimensional structures of proteins to help reveal their role in disease and aid in the design of new medicines. The award provides five years of funding for a consortium administered by us. We anticipate retaining approximately 50% of the funding under the award, with the remainder being distributed to academic collaborators.

Eli Lilly & Company

In April 2003, we entered into a research and technology agreement with Eli Lilly, which was extended in April 2005. Within this agreement, we apply our target-to-structure technology to key Eli Lilly drug targets to determine their three-dimensional structures. Our researchers subsequently generate data on Eli Lilly compounds that bind to the drug targets, providing input for their lead generation and optimization efforts. In parallel with the first two years of research under the agreement, we conducted a comprehensive program of technology transfer involving installation of components of our technology in a high-throughput structural biology facility for Eli Lilly, which includes modular automation systems and process technology we developed for protein engineering, crystallization and structure determination.

In December 2007, the research term of this agreement was extended until June 2010. The general terms of this commercial agreement continue until the later of the expiration of the last to expire of the patent rights covering technology developed under the agreement or April 2018, unless the agreement is earlier terminated. Either party may terminate the agreement in the event of material breach by the other party, subject to prior notice and the opportunity to cure. In addition, Eli Lilly may terminate the agreement if certain of our key employees leave our employment and significantly curtail participation in the project, or in the event we are acquired by one of the top 25 pharmaceutical companies ranked by worldwide sales.

In December 2003, we also expanded our research and technology agreement with Eli Lilly to provide Eli Lilly with long-term access to our beamline facility at the Advanced Photon Source in Argonne, Illinois, to support Eli Lilly drug discovery programs. Under the terms of our beamline services agreement with Eli Lilly, we generate crystal structure data on Eli Lilly drug targets and compounds in exchange for upfront access fees and maintenance fees paid by Eli Lilly. Eli Lilly also has the option to extend the term of its access to our beamline facility in the future for additional payments. The term of this beamline agreement continues until January 2012, unless Eli Lilly exercises its option to extend the term of its access to our beamline facility or the agreement is earlier terminated. Either party may terminate the agreement in the event of a material breach by the other party, subject to prior notice and the opportunity to cure. In addition, Eli Lilly may terminate the agreement at any time, subject to prior notice.

CEO BACKGROUND

Karin Eastham, C.P.A.

Ms. Eastham, 58, has served as a member of our board of directors since August 2005. Since May 2004, Ms. Eastham has been Executive Vice President, Chief Operating Officer and a member of the board of trustees of the Burnham Institute for Medical Research, an independent not-for-profit biomedical research institute. Prior to joining the Burnham Institute for Medical Research, Ms. Eastham was Senior Vice President, Finance, Chief Financial Officer and Secretary of Diversa Corporation from April 1999 to May 2004. She previously held similar positions with CombiChem, Inc. and Cytel Corporation. Ms. Eastham also held several positions, including Vice President, Finance, at Boehringer Mannheim Corporation. She serves as a director of Illumina, Inc., Tercica, Inc. and Amylin Pharmaceuticals, Inc., all public biotechnology companies. Ms. Eastham received B.S. and M.B.A. degrees from Indiana University and is a Certified Public Accountant and a Certified Director.

Christopher S. Henney, Ph.D., D.Sc.

Dr. Henney, 67, became our Chairman in December 2003 and has served as a member of our board of directors since May 2000. From 1995 to January 2003, he served as the Chairman and Chief Executive Officer of Dendreon Corporation, a publicly held biotechnology company. Dr. Henney co-founded ICOS Corporation, another publicly held biotechnology company, where he served as Executive Vice President, Scientific Director and a director from 1989 to 1995. He also co-founded Immunex Corporation, which was a publicly held biotechnology company until its acquisition by Amgen Corporation in May 2002, where he held various positions, including Director, Vice Chairman and Scientific Director from 1981 to 1989. Dr. Henney is also a former academic immunologist. He currently serves as Vice-Chairman of Cyclacel Pharmaceuticals, Inc., and as Chairman of Oncothyreon (formerly Biomira), Inc. Dr. Henney received a D.Sc. for his contributions to Immunology, a Ph.D. in Experimental Pathology and a B.Sc. with Honors, from the University of Birmingham, United Kingdom.

Joseph Turner

Mr. Turner, 56, joined our Board of Directors in December 2007. From December 1999 to November 2006, Mr. Turner served in various capacities at Myogen, Inc., a publicly held biopharmaceutical company, which was acquired by Gilead Sciences, Inc., or Gilead, in November 2006. From November 2006, to January 2007, Mr. Turner served in a transition capacity at Myogen following Myogen’s acquisition by Gilead. Prior to Myogen’s acquisition by Gilead, from December 1999 to November 2006, Mr. Turner served initially as Myogen’s acting Chief Financial Officer in a part-time capacity, and, from September 2000, as the Chief Financial Officer of Myogen. Mr. Turner also served as Senior Vice President of Finance and Administration of Myogen from December 2003 to November 2006, and as Vice President of Finance and Administration from September 2000 to November 2003. From July 1999 to May 2000, Mr. Turner was an independent strategic consultant to emerging companies. From November 1997 to June 1999, Mr. Turner worked at Centaur Pharmaceuticals, a biopharmaceutical company, where he served in several positions, including Vice President of Finance and Chief Financial Officer. From March 1992 to October 1997, Mr. Turner served as Vice President, Finance and Chief Financial Officer of Cortech, Inc., a biopharmaceutical company. Previously, Mr. Turner spent 12 years with Eli Lilly and Company, where he held a variety of financial management positions both within the United States and abroad. He currently serves on the Board of Directors of Sequel Pharmaceuticals and Kythera Biopharmaceuticals. Mr. Turner holds an M.A. in molecular, cellular and developmental biology from the University of Colorado and an M.B.A. from the University of North Carolina at Chapel Hill and a B.A. in chemistry from Swarthmore College.

Louis C. Bock

Mr. Bock, 43, has served as a member of our board of directors since September 2000. Mr. Bock is a Managing Director of Scale Venture Partners. Mr. Bock joined Scale Venture Partners (formerly BA Venture Partners) in September 1997 from Gilead Sciences, Inc., a biopharmaceutical company, where he held positions in research, project management, business development and sales from September 1989 to September 1997. Prior to Gilead, Mr. Bock was a research associate at Genentech, Inc. from November 1987 to September 1989. He currently serves on the Board of Directors of Ascenta Therapeutics, Inc., diaDexus Inc., Horizon Therapeutics, Inc., Orexigen Therapeutics, Inc., and Zogenix Inc. Mr. Bock received his B.S. in Biology from California State University, Chico and an M.B.A. from California State University, San Francisco.

Michael Grey , joined us in September 2001 as our Executive Vice President and Chief Business Officer and as a member of our board of directors. He became our President in June 2003 and our Chief Executive Officer in January 2005. Prior to joining us, Mr. Grey served as a director of Trega Biosciences, Inc., a biopharmaceutical company acquired by Lion bioscience AG in 2001, from December 1998 to March 2001. He was also the President and Chief Executive Officer of Trega Biosciences, Inc. from January 1999 to March 2001. Prior to joining Trega, Mr. Grey was the President of BioChem Therapeutic, Inc., the pharmaceutical operating division of BioChem Pharma Inc., from 1994 to 1998. In that role, he was responsible for all company operations including research, development, sales and marketing, finance and human resources. During 1994, Mr. Grey was the President and Chief Operating Officer for Ansan, Inc. From 1974 to 1993, Mr. Grey served in various roles with Glaxo Inc. and Glaxo Holdings, plc, culminating in his position as Vice President, Corporate Development. Mr. Grey serves as a director of Achillion Pharmaceuticals, Inc., and BioMarin Pharmaceutical, Inc., and Non-Executive Chairman of IDM Pharma, Inc. (formerly known as Epimmune Inc.). Mr. Grey received a B.Sc. in Chemistry from the University of Nottingham, United Kingdom.

Stephen K. Burley, M.D., D.Phil. , joined us in January 2002 as our Chief Scientific Officer and Senior Vice President, Research and presently serves as our Chief Scientific Officer and Senior Vice President. Dr. Burley has been an Adjunct Professor at The Rockefeller University since February 2002, where he was also the Richard M. and Isabel P. Furlaud Professor from June 1997 to January 2002. He was an Investigator at the Howard Hughes Medical Institute from September 1994 to January 2002. He was previously the Principal Investigator of the New York Structural Genomics Research Consortium. Dr. Burley is a Fellow of the Royal Society of Canada and of the New York Academy of Sciences. His research focused on the macromolecular machines responsible for mRNA transcription, splicing and translation in eukaryotes and on the problem of antibiotic resistance. Dr. Burley received an M.D. degree from Harvard Medical School and, as a Rhodes Scholar, he received a D.Phil. in Molecular Biophysics from Oxford University. His clinical training combined a residency in Internal Medicine at the Brigham and Women’s Hospital with postdoctoral work in protein crystallography under the direction of William N. Lipscomb at Harvard University. He received a B.Sc. in Physics from the University of Western Ontario. In 1999, Dr. Burley co-founded Prospect Genomics, Inc., a San Francisco-based drug discovery company that we acquired in May 2001.

W. Todd Myers, C.P.A. , joined us as our Chief Financial Officer in December 2005. Prior to joining us, Mr. Myers provided senior-level financial consulting services to publicly traded and privately held life science companies from October 2004 to December 2005. From March 2000 to June 2004, Mr. Myers was Chief Financial Officer, Secretary and Treasurer of FeRx Incorporated, a clinical development stage company dedicated to the development of oncology products based on a patented drug-delivery technology. In June 2004, FeRx Incorporated filed for protection under Chapter 7 of the bankruptcy code. From June 1997 to February 2000, he was Director of Finance at CombiChem, Inc., a publicly traded computational drug discovery company that was acquired by DuPont in 1999. Mr. Myers has also held positions with Premier Inc., a national consortium of health care providers, and with Ernst & Young LLP. Mr. Myers received his B.S. in Accounting from the University of Illinois.

Annette North, Esq. , joined us in November 2000 as our Corporate Counsel, was appointed Vice President, Legal Affairs in January 2004 and currently serves as our General Counsel. Prior to joining us, she was Senior Director of Operations and Legal at Axys Pharmaceuticals, Inc., a small molecule drug discovery company, from 1998 to 1999 and Legal Counsel and Director of Legal Affairs at Sequana Therapeutics, Inc., a biotechnology company, from 1995 to 1998. From 1991 to 1994, Ms. North was employed by Nabarro Nathanson plc, a national law firm in London, England, with her practice focusing primarily on commercial litigation, and from 1989 to 1990 she worked at Corrs, Chambers, Westgarth, a national law firm in Melbourne, Australia. She is a member of the State Bar of California, a Solicitor of the Supreme Court of England and Wales and a Barrister and Solicitor of the Supreme Court of Victoria, Australia. Ms. North currently serves on the board of Villa Musica, a not-for-profit entity. Ms. North received both her Bachelor of Commerce and her Bachelor of Laws from the University of Melbourne, Australia.

Siegfried Reich, Ph.D. , joined us in January 2006 as Vice President of Drug Discovery. Prior to joining us, from 2001 to December 2005, Dr. Reich was Vice President, Head of Viral and Ophthalmic Diseases Therapeutic Zone in Discovery at Pfizer, Inc. (Global Research and Development, La Jolla), overseeing the development of multiple clinical candidates in antivirals and ophthalmology. Prior to that, Dr. Reich held the position of Director, Head of Medicinal Chemistry at Agouron Pharmaceuticals, Inc., from 1997 to 2001 (through its acquisitions by Warner Lambert and Warner Lambert’s subsequent acquisition by Pfizer, Inc.). He began work at Agouron as a research scientist in 1988, and served as a project chemist and co-project leader of the HIV Protease Project, which identified Viracept ® , Agouron’s first approved drug for the treatment of AIDS, for which he is also an inventor. Dr. Reich received his B.S. in Chemistry in 1982 from San Diego State University and his Ph.D. in Chemistry in 1986 from the University of California, Irvine.

Terry Rugg, M.D. , joined us in August 2006 as Chief Medical Officer and Vice President of Development. Prior to joining us, from 2004 to 2006, Dr. Rugg was Head of Oncology, U.S. Medical Affairs at Sanofi-Aventis, leading a department of approximately 60 Regional and National Liaisons and MDs. Prior to that, from 2002 to 2004, he held the position of Vice President, Head of Oncology, Global Medical Affairs at Aventis. Dr. Rugg served in senior roles in several biotechnology and pharmaceutical companies, including Ilex Oncology, Inc., from 1999 to 2002, Eli Lilly and Company, Zeneca Pharmaceuticals, Inc., and British Biotech Ltd. Dr. Rugg has broad oncology drug development experience involving over 30 compounds, including at least 10 different classes of anti-cancer agents. He played a key role in the development of Gemzar ® (gemcitabine) while at Eli Lilly and Campath ® and Clolar ® (clofarabine), while at Ilex Oncology. Dr. Rugg received his M.D. from the University of Rhodesia, Godfrey Higgins School of Medicine and Surgery.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

We are a biotechnology company focused on the discovery, development and commercialization of novel, targeted therapeutics directed at addressing unmet medical needs in oncology. Our most advanced drug development programs target the c-MET receptor tyrosine kinase (or MET), an enzyme implicated in a broad array of solid and blood tumors, and the BCR-ABL tyrosine kinase enzyme, for treatment of Chronic Myelogenous Leukemia, or CML, a cancer of the bone marrow. Our earlier stage drug discovery and development activities are focused on a portfolio of other protein and enzyme targets that have been implicated in human cancers.

We generated approximately $34.7 million, $27.8 million, and $21.6 million in revenues from collaborations, commercial agreements and grants during the years ended December 31, 2007, 2006 and 2005, respectively. We have incurred significant losses since our inception in 1998, as we have devoted substantially all of our efforts to research and development activities. As of December 31, 2007, our accumulated deficit was approximately $179.7 million. We expect to incur substantial and possibly increasing losses for the next several years as we develop and expand our oncology pipeline.

We were incorporated in Delaware in July 1998. To date, we have not generated any revenues from the sale of therapeutic drugs. We have financed our operations and internal growth through private placements of our equity securities, our initial public offering, our collaboration, commercial agreement and grant revenue and debt financings.

Financial Operations Overview

Collaboration, Commercial Agreement and Grant Revenue

Collaboration, commercial agreement and grant revenue has primarily been a result of various contractual agreements with pharmaceutical companies and biotechnology companies, as well as government and other agencies. We also periodically receive non-refundable payments for achieving certain milestones during the term of our agreements.

Research and Development Expense

Research and development expense consists primarily of costs associated with our internal research programs and certain clinical trial costs, compensation, including stock-based, and other expenses related to research and development personnel, facilities costs and depreciation. We charge all research and development expenses to operations as they are incurred.

Our research activities are focused on building an internal oncology pipeline and generating lead compounds for ourselves and our potential partners through application of our FAST drug discovery platform and related technologies. Our most advanced programs are focused on compounds that inhibit MET and BCR-ABL.

We incurred $3.6 million, $2.8 million, and $1.9 million of internal research expenses in connection with our NIH grants in 2007, 2006 and 2005, respectively. We also incurred $3.7 million, $5.1 million, and $5.1 million of expenses to subcontractors in connection with our research under NIH grants in 2007, 2006, and 2005, respectively.

We incurred $11.3 million and $3.3 million in expenses related to the research and development of our MET and BCR-ABL programs, respectively, during 2007. We incurred $0.6 million, $9.5 million, and $6.5 million of expenses related to the development of Troxatyl in 2007, 2006 and 2005 respectively, for a total of $22.1 million cumulatively expended on Troxatyl, a drug development program which we discontinued in 2006.

All other research and development expenses are for various programs in the preclinical and research and discovery stages. For these preclinical programs, we use our internal resources, including our employees and discovery infrastructure, across several projects, and many of our costs are not attributable to a specific project but are directed to broadly applicable research projects. Accordingly, we do not account for our internal research costs on a project basis. Research and development expense also includes stock-based compensation expense associated with employees performing research and development activities.

We anticipate that our existing level of expenditures will support our planned research and development activities. However, drug discovery and development outcomes and timelines and associated costs are uncertain and therefore vary widely. We anticipate that we will make determinations as to which research and development projects to pursue and how much funding to direct toward each project on an on-going basis in response to the scientific and clinical success in each program.

General and Administrative Expense

General and administrative expense consists primarily of compensation, including stock-based, and other expenses related to our corporate administrative employees, legal fees and other professional services expenses. We anticipate that we will maintain our existing level of general and administrative expenditures. However, we will make determinations as to the necessary levels of general and administrative expenditures on an on-going basis relative to our research and development activities and regulatory obligations.

Interest Income

Interest income consists of interest earned on our cash and cash equivalents and short-term investments.

Interest Expense

Interest expense in 2007 and 2006 includes interest charges associated with the line of credit and equipment financing facility which we entered into with Silicon Valley Bank and Oxford Finance Corporation in September 2005. Interest expense in 2005 represents interest on our debt and secured promissory notes in an aggregate principal amount of $13.4 million that we issued in two tranches in a secured bridge financing in July and September 2004, which were converted into redeemable convertible preferred stock in April 2005.

Critical Accounting Policies and Estimates

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

Revenue Recognition

Our collaboration agreements and commercial agreements contain multiple elements, including non-refundable upfront fees, payments for reimbursement of research costs, payments for ongoing research, payments associated with achieving specific milestones and, in the case of our collaboration agreements, development milestones and royalties based on specified percentages of net product sales, if any. We apply the revenue recognition criteria outlined in Staff Accounting Bulletin No. 104, Revenue Recognition and Emerging Issues Task Force Issue 00-21, Revenue Arrangements with Multiple Deliverables , or EITF 00-21. In applying these revenue recognition criteria, we consider a variety of factors in determining the appropriate method of revenue recognition under these arrangements, such as whether the elements are separable, whether there are determinable fair values and whether there is a unique earnings process associated with each element of a contract.

Cash received in advance of services being performed is recorded as deferred revenue and recognized as revenue as services are performed over the applicable term of the agreement.

When a payment is specifically tied to a separate earnings process, revenues are recognized when the specific performance obligation associated with the payment is completed. Performance obligations typically consist of significant and substantive milestones pursuant to the related agreement. Revenues from milestone payments may be considered separable from funding for research services because of the uncertainty surrounding the achievement of milestones for products in early stages of development. Accordingly, these payments could be recognized as revenue if and when the performance milestone is achieved if they represent a separate earnings process as described in EITF 00-21.

In connection with certain research collaborations and commercial agreements, revenues are recognized from non-refundable upfront fees, which we do not believe are specifically tied to a separate earnings process, ratably over the term of the agreement. Research services provided under some of our collaboration agreements and commercial agreements are on a fixed fee basis. Revenues associated with long-term fixed fee contracts are recognized based on the performance requirements of the agreements and as services are performed.

Revenues derived from reimbursement of direct out-of-pocket expenses for research costs associated with grants are recorded in compliance with EITF Issue 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent , and EITF Issue 01-14, Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred. According to the criteria established by these EITF Issues, in transactions where we act as a principal, with discretion to choose suppliers, bear credit risk and perform part of the services required in the transaction, we record revenue for the gross amount of the reimbursement. The costs associated with these reimbursements are reflected as a component of research and development expense in the statements of operations.

None of the payments that we have received from collaborators to date, whether recognized as revenue or deferred, is refundable even if the related program is not successful.

Results of Operations

Year Ended December 31, 2007 Compared to 2006

Collaboration, Commercial Agreement and Grant Revenue. Collaboration, commercial agreement and grant revenue increased to $34.7 million for the year ended December 31, 2007 from $27.8 million for the year ended December 31, 2006. The increase of $6.9 million, or 25%, was primarily due to reimbursement of overhead costs, which includes $3.5 million recognized as revenue during the three months ended March 31, 2007 arising from the agreement reached with the National Institute of Health in February 2007 for the reimbursement of overhead costs incurred on grant research efforts since the commencement of the grant in July 2005, and increased research efforts related to our grants, which increased by $1.0 million during 2007. Additionally, revenues related to our collaboration agreement with Novartis increased by $1.8 million during 2007. The $1.8 million increase associated with the Novartis collaboration, is comprised of an increase of $1.7 million related to the amortization into revenue of the $20 million upfront payment received in 2006, $0.8 million increase in research services, which concluded in March 2008, and a decrease of $0.7 million related to reimbursement of out of pocket expenditures. Revenue related to our beamline services increased by approximately $0.5 million during 2007, as a result of an increased customer base combined with an increase in rates over prior year.

Research and Development Expense. Research and development expense decreased to $42.2 million for the year ended December 31, 2007 from $46.9 million for the year ended December 31, 2006. The decrease of $4.7 million, or 10%, was primarily attributable to a $1.4 million decrease in depreciation expense, $1.4 million decrease in the use of outside services in connection with our MET and BCR-ABL programs, $1.3 million decrease in grant subcontractor expense, $0.4 million decrease in stock-based compensation expense and a $0.2 million decrease in external development costs. We anticipate that our existing level of expenditures will support our planned research and development activities in 2008. However, drug discovery and development outcomes, timelines and associated costs are uncertain and therefore vary widely. We anticipate that we will make determinations as to which research and development projects to pursue and how much funding to direct toward each project on an on-going basis in response to the scientific and clinical success of each program.

General and Administrative. General and administrative expense decreased to $8.6 million for the year ended December 31, 2007 from $9.6 million for the year ended December 31, 2006. The decrease of $1.0 million, or 10%, was primarily attributable to a decrease of $0.8 million in stock-based compensation expense, $0.3 million decrease in consulting expense, and $0.3 million decrease in legal and professional fees offset by an increase of $0.3 million in license and patent services and a $0.2 million increase in facilities and utilities expense. We anticipate that we will maintain our existing level of general and administrative expenditures in 2008. However, we will make determinations as to the necessary levels of general and administrative expenditures on an on-going basis relative to our research and development activities and regulatory obligations.

Interest Income. Interest income decreased to $1.0 million for the year ended December 31, 2007 from $1.8 million for the year ended December 31, 2006. The decrease of $0.8 million, or 44%, was due primarily to a realized loss of $0.5 million on a short-term investment in 2007 and lower cash balances during the majority of 2007 compared to 2006. Consistent with our investment policy guidelines, we purchased an auction rate security (ARS) during 2007. This security had an AAA/Aaa credit rating at the time of purchase, which remains unchanged. With the liquidity issues experienced in global credit and capital markets, the ARS held by us at December 31, 2007 has experienced multiple failed auctions. The estimated market value of this ARS at December 31, 2007 was $1.0 million, which reflects a $0.5 million adjustment to the par value of $1.5 million. Although the ARS continues to pay interest according to its stated terms, based on uncertainties surrounding this investment, continued failure of auctions and a downward trend on bid quotes through December 31, 2007, we recorded an impairment charge of $0.5 million in the fourth quarter of 2007, reflecting an other-than-temporary decline in value.

Interest Expense. Interest expense decreased to $0.8 million for the year ended December 31, 2007 from $1.1 million for the year ended December 31, 2006, due to the decrease in our debt obligations.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS
Three Months Ended March 31, 2008 and 2007
Collaboration, Commercial Agreement and Grant Revenue.
Collaboration, commercial agreement and grant revenues for the three months ended March 31, 2008 and 2007 were $17.0 million and $11.0 million, respectively. The increase of $6.0 million, or 55%, was primarily due to revenues recognized under our Novartis collaboration which increased by $9.1 million. The $9.1 million increase was primarily due to the conclusion of the research term of the collaboration in late March 2008, which led to the recognition of revenue related to that portion of the upfront payment which had not yet been recognized due to our prior estimate that we would substantially accomplish our contractual obligations in March 2010. The increase in collaborative revenue was offset by a decrease in revenues from our federal research grant. This decrease was primarily due to the recognition of $3.5 million of revenue during the first quarter of 2007 in connection with an agreement on the reimbursement of overhead costs incurred since the commencement of the grant in July 2005.
Research and Development Expense.
Research and development expenses for the three months ended March 31, 2008 and 2007 were $11.3 million and $10.0 million, respectively. The increase of $1.3 million, or 13%, was primarily attributable to a $1.6 million increase in preclinical and clinical development of our MET inhibitors in the first quarter of 2008 and was partially offset by a decrease of $0.2 million related to share-based compensation expense.
General and Administrative Expense.
General and administrative expenses for the three months ended March 31, 2008 and 2007 were $2.1 million and $2.2 million, respectively. The decrease of $0.1 million, or 5%, was primarily attributable to a $0.2 million decrease in share-based compensation expense.

Interest Income (Expense), net
For the three months ended March 31, 2008 and March 31, 2007, we recorded net interest income of $0.2 million. During the three months ended March 31, 2008, our interest income decreased due to a lower average cash balance, but this was offset by a reduction in interest expense due to lower balances in our debt obligations.
Net Income (Loss)
Net income for the first quarter of 2008 was $3.7 million, or $0.18 per basic and diluted earnings per share, compared to a net loss of $1.1 million, or $0.07 per basic and diluted loss per share for the same period in 2007. Net income during the first quarter of 2008 is attributable to the recognition of deferred revenues related to the Novartis collaboration. However, we expect to incur a net loss in 2008 as we continue to fund our discovery and development pipeline.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
We have historically funded our operations primarily through the sale of our equity securities and funds received from our collaborations, commercial agreements, grants and debt financings.
We have recorded revenues from our collaborations, commercial agreements and grants totaling $17.0 million, $34.7 million, and $27.8 million for the three months ended March 31, 2008 and the years ended December 31, 2007 and 2006, respectively.
As of March 31, 2008, an aggregate of approximately $3.3 million was outstanding under our line of credit and equipment financing agreement with Silicon Valley Bank and Oxford Finance Corporation. The debt agreements subject us to certain financial and non-financial covenants. As of March 31, 2008, we were in compliance with these covenants. These obligations are secured by our assets, excluding intellectual property, and are due in monthly installments through 2010. They bear interest at effective rates ranging from approximately 9.95% to 11.03% and are subject to prepayment fees of up to 4% of the outstanding principal balance as of the prepayment date. We made principal payments on our debt of approximately $0.9 million in each of the three months ending March 31, 2008 and 2007, respectively.
In November 2007, we completed a private placement offering of an aggregate of 4,943,154 shares of our common stock, together with warrants to purchase an aggregate of 1,482,944 shares of our common stock, and raised net proceeds of approximately $23.2 million, after deducting offering expenses of approximately $1.8 million. In February 2006, we completed an initial public offering of an aggregate of 4,152,904 shares of our common stock and raised net proceeds of approximately $20.6 million, after deducting the underwriting discount and offering expenses, and including the underwriter’s over-allotment option which was exercised in March 2006. Upon the completion of our initial public offering in February 2006, all of our previously outstanding shares of preferred stock converted into an aggregate of 8,346,316 shares of our common stock and a convertible note of $6.0 million converted into 1,000,000 shares of our common stock.
In September 2005, we entered into a line of credit and equipment financing agreement with Silicon Valley Bank and Oxford Finance Corporation to provide $8.0 million of general purpose working capital financing and $2.0 million of equipment and leasehold improvements financing. The debt bears interest at a rate of approximately 10% per annum and is due in monthly installments over three years. In September and December 2005, we borrowed approximately $4.0 million and $4.9 million, respectively, of the funds available under this line of credit and equipment financing agreement for general purpose working capital needs and capital expenditures spending, and issued the lenders warrants to purchase an aggregate of 45,184 shares of our common stock, at an exercise price of $9.42 per share. In November and December of 2006, we borrowed the remainder of the available financing under this line of credit and equipment financing agreement of approximately $1.1 million, and issued the lenders warrants to purchase an aggregate of 5,771 shares of our common stock at an exercise price of $9.42 per share.
Cash Flows
Our cash flows for 2008 and beyond will depend on a variety of factors, some of which are discussed below.
As of March 31, 2008, cash, cash equivalents and short-term investments totaled $30.9 million compared to $39.0 million at December 31, 2007. The decrease of $8.1 million during the first quarter of 2008 is primarily due to cash used to fund ongoing operations and debt repayments, which were offset by cash received associated with our existing grant, collaborations and commercial arrangements.
Net cash used in operating activities was $6.9 million during the three months ended March 31, 2008 and is primarily comprised of net income for this period of $3.7 million, decrease in deferred revenue of $11.5 million, which is primarily related to the amortization of upfront fees into revenue from our Novartis collaboration, and non-cash expenses of $1.1 million. For the three months ended March 31, 2007, net cash used in operating activities was $2.4 million and is primarily comprised of a net loss for this period of $1.1 million, decrease in accounts payable and accrued liabilities of $2.1 million, non-cash expenses of $1.7 million, decrease in deferred revenues of $1.2 million and a net decrease in accounts receivable and other assets of $0.4 million.

Net cash used in investing activities was $0.3 million during the three months ended March 31, 2008 and was the result of capital equipment purchases. Net cash used in investing activities was $0.1 million during the three months ended March 31, 2007 and was the result of capital equipment purchases.
Net cash used by financing activities was $0.7 million during the three months ended March 31, 2008, and was attributable to $0.9 million in principal payments on debt offset by net proceeds from the issuance of common stock of $0.2 million. Net cash used by financing activities was $0.7 million for the three months ended March 31, 2007, reflecting $0.9 million in principal payments on debt, offset by net proceeds from the issuance of common stock of $0.2 million.
We are unable to estimate with certainty the costs we will incur in the preclinical and clinical development of product candidates we may develop. We expect our cash outflow to increase as we advance product candidates through preclinical and clinical development if such development is not funded by a collaborator, such as Novartis in the case of the BCR-ABL compounds, other than SGX393. We are funding the preclinical and any clinical development of SGX393. Our drug discovery program focuses on a portfolio of other protein and enzyme targets that have been implicated in human cancers. The most advanced of these discovery targets include JAK2, RAS, RON, ALK, and IKKε. We anticipate that we will make determinations as to which research and development projects to pursue, which to license to or partner with a third party, and how much funding to direct toward each project on an on-going basis in response to the scientific and clinical success of each product candidate and the potential terms associated with any particular licensing or partnering opportunity and other strategic and financial considerations.
Funding Requirements
Our future capital uses and requirements depend on numerous factors, including but not limited to the following:
• terms and timing of, and material developments under, any new or existing collaborative, licensing and other arrangements, including potentially partnering of our internal discovery and development programs, such as MET, or potentially retaining such programs through later stages of preclinical and clinical development;

• rate of progress and cost of our preclinical studies and clinical trials and other research and development activities;

• scope, prioritization and number of clinical development and research programs we pursue;

• costs and timing of preparing regulatory submissions and obtaining regulatory approval;

• costs of establishing or contracting for sales and marketing capabilities;

• costs of manufacturing;

• extent to which we acquire or in-license new products, technologies or businesses;

• effect of competing technological and market developments; and

• costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.
Historically, we have funded our operations through a combination of proceeds from offerings of our equity securities, collaborations, commercial agreements, grant revenue, and debt financing. As part of our business strategy, we expect to continue to pursue new collaborations and commercial agreements. We believe that our existing cash, cash equivalents and short-term investments, together with interest thereon and cash from existing and new collaborations, commercial agreements and grants, will be sufficient to meet projected operating requirements into the second half of 2009. We expect to continue to finance our future cash needs through the sale of equity securities, strategic collaboration agreements and debt financing. However, we may not be successful in obtaining additional collaboration agreements or commercial agreements, or in receiving milestone or royalty payments under existing agreements. In addition, we cannot be sure that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or our stockholders. Having insufficient funds may require us to delay, scale back or eliminate some or all of our research or development programs or to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. Many of our programs are at early stages of development and as a result we may note be able to generate significant revenue by partnering such programs. Failure to enter into new collaborations or otherwise obtain adequate financing may also adversely affect our ability to operate as a going concern. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders may result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.

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

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