Favrille, Inc (FVRL) - Description of business

We are a biopharmaceutical company focused on the development and commercialization of targeted immunotherapies for the treatment of cancer and other diseases of the immune system. We have developed a proprietary technology that enables us to manufacture active immunotherapy products that are designed to stimulate a patient’s immune system to mount a specific and sustained response to disease. Our lead product candidate, FavId, is an active immunotherapy for the treatment of B-cell non-Hodgkin’s lymphoma, or NHL. We completed enrollment in a pivotal Phase 3 clinical trial of FavId in patients with follicular B-cell NHL in January 2006.

The American Cancer Society estimates that approximately 56,000 people were diagnosed with NHL in the United States in 2005, and the National Cancer Institute, or NCI, has estimated that approximately 332,000 patients suffer from this disease. Approximately 85% of NHL patients have B-cell NHL. We believe that approximately half of these patients have the slow-growing, or indolent, form of the disease. The majority of the remaining patients have a faster growing form of the disease, commonly referred to as aggressive NHL. Only half of these are cured with currently available standards of care. A number of therapies are used to treat indolent B-cell NHL, including the current standard of care, Rituxan ® , which had sales in the United States of approximately $1.8 billion in 2005 for indolent B-cell NHL and other indications. Despite the benefits of current therapies, patients with indolent B-cell NHL still relapse following treatment, and the disease is considered to be incurable.

FavId is being developed for use following treatment with existing standards of care to extend time to disease progression, or TTP, in patients with B-cell NHL. Our Phase 3 clinical trial is designed to evaluate FavId’s ability to extend TTP in patients with follicular B-cell NHL following treatment with Rituxan. Follicular B-cell NHL is the most common form of the indolent disease. We anticipate an analysis of the secondary endpoint, response improvement, during the fourth quarter of 2006. Analysis of the primary endpoint of the trial, TTP, is expected during the second half of 2007. In January 2006 we announced that we received Fast Track designation from the U.S. Food and Drug Administration, or FDA, for FavId.

In addition to our Phase 3 clinical trial, FavId has been evaluated in several multi-center, open-label Phase 2 clinical trials involving more than 130 patients. We presented long-term follow-up data from our Phase 2 clinical trial of FavId following Rituxan therapy in patients with follicular B-cell NHL at the American Society of Hematology, or ASH, Annual Meeting in Atlanta in December 2005. These data suggest that the administration of FavId following Rituxan may improve response over Rituxan alone and extend TTP compared to historical data of Rituxan alone.

Researchers have been conducting clinical trials of active immunotherapies in patients with B-cell NHL for more than a decade. The results of clinical trials at the Stanford University Medical Center and the NCI suggest that active immunotherapies similar to FavId, when used following chemotherapy, may induce long-term remission and improve survival time among indolent B-cell NHL patients. Despite the promising results of these trials, we believe manufacturing limitations have hindered commercialization of these immunotherapies. We believe that our proprietary technology will enable us to manufacture FavId in a timely and cost-effective manner and will therefore allow us to offer a treatment option not currently available to physicians and patients.

We believe FavId may be effective in treating other types of B-cell NHL as well. Five additional Phase 2 clinical trials of FavId are either ongoing or expected to begin during 2006. One of these clinical trials is being conducted under a separate physician-sponsored Investigational New Drug, or IND, application in the United States. A second of these is being conducted as a physician-sponsored



clinical trial in Switzerland. Moreover, we believe our active immunotherapy expertise and proprietary manufacturing technology will enable us to develop additional product candidates for other oncology indications, such as T-cell lymphoma, and for autoimmune diseases, with an initial focus on multiple sclerosis. We are currently developing a second product candidate, FAV-201, for the treatment of T-cell lymphoma and intend to file an IND and initiate a Phase 1/2 clinical trial evaluating the safety and immune response of FAV-201 in the first half of 2006. We have retained exclusive worldwide commercialization rights to all of our product candidates.

We were incorporated in Delaware in January 2000.

The Immune System

The immune system is the body’s major defense against foreign pathogens, such as viruses and bacteria. The principal cells that make up the immune system are termed white blood cells. A subset of white blood cells known as lymphocytes is essential in generating an effective immune response to disease-causing agents. Lymphocytes consist primarily of B-cells and T-cells, which normally recognize and respond to antigens found within proteins derived from foreign pathogens. The B-cell receptor that recognizes an antigen is called an antibody. Once B-cells recognize antigens, they initiate a sequence of events that results in the immune system’s production of large amounts of antibodies specific to that antigen. These antibodies then circulate throughout the body and bind to their target antigen, thereby flagging pathogens for destruction. This type of immune response is known as the antibody-based, or humoral, immune response.

T-cells are responsible for carrying out what is known as the cell-mediated immune response. T-cell receptors recognize antigens presented on the surface of other cells. When a T-cell recognizes its target, it responds in one of two ways. Either it destroys the target directly, or it produces a variety of proteins that cause the growth and activation of itself and other T-cells and B-cells, which can then destroy the target.

Although any one B-cell or T-cell can recognize and respond to only a single antigen, the human immune system has evolved such that the collective B-cell and T-cell populations can respond to virtually every possible foreign pathogen that a person may encounter in his or her lifetime. Furthermore, the humoral and cell-mediated immune responses have an additional feature of “memory,” which enables B-cells and T-cells to recall an interaction with a foreign antigen and to respond to this antigen in a more rapid and aggressive fashion in the future.

The immune system is generally very effective in destroying pathogens-viruses, bacteria, or other foreign microorganisms that it recognizes as foreign. For this reason, a properly functioning immune system is highly regulated to ensure that its destructive power is not directed against normal tissue. If this regulation breaks down, an immune response may be generated against normal tissue, which can lead to autoimmune diseases, such as multiple sclerosis, rheumatoid arthritis and lupus. In the case of cancer, this strict regulation of the immune system may prevent an effective immune response from being mounted because of the body’s inability to distinguish the cancer as foreign. Researchers believe that teaching the immune system to recognize the proteins associated with cancer cells as foreign will enable the immune system to identify and eliminate cancers, such as lymphoma.

Immunotherapy

Immunotherapy is designed to use a person’s immune system to fight diseases, including cancer. Immunotherapy enables the immune system to target and destroy diseased cells and has far fewer side effects than other therapies, such as surgery, chemotherapy and radiation therapy. There are two types of immunotherapy used to treat cancer: passive immunotherapy and active immunotherapy.

Passive immunotherapy utilizes large doses of infused antibodies that bind to antigens primarily expressed by a tumor cell and by few or no normal cells. These antibodies circulate throughout the bloodstream, binding to antigens on targeted cells, thereby flagging them for destruction. One of the most widely used passive immunotherapies for the treatment of B-cell NHL is Rituxan. Rituxan has demonstrated the ability to induce a clinical response – at least a 50% reduction in tumor burden – in approximately 50% of patients with indolent B-cell NHL with few side effects. In patients who respond to Rituxan, this response lasts on average approximately 12 months. Despite their widespread use in fighting cancer, passive immunotherapies such as Rituxan suffer from significant limitations, including a limited duration of efficacy and the development of resistance. Additional passive immunotherapies have attempted to overcome the shortcomings of Rituxan by linking antibodies to radioactive molecules that can directly destroy the cell to which the antibody is bound. However, improvements in time to disease progression, if any, have been modest.

Active immunotherapy teaches the patient’s own immune system to recognize and fight cancer. Active immunotherapy is designed to program the immune system to generate a sustained and robust humoral (B-cell) and cell-mediated (T-cell) immune response. Idiotype immunotherapy, including our product candidate, FavId, for the treatment of B-cell NHL, is an example of active immunotherapy. In the case of B-cell NHL, the antibody protein made by a person’s B-cell NHL is used as a target for immune attack. The unique antigens in this antibody protein are referred to as the idiotype. The immune system can differentiate between lymphoma cells and normal B-cells based on their idiotype. As a result, following successful idiotype immunotherapy, a patient’s immune response is



specific to their B-cell lymphoma.

Development of Active Idiotype Immunotherapy

Active idiotype immunotherapy has been studied in patients with B-cell NHL since the late 1980’s and has shown substantial promise in clinical trials. Trials conducted at the Stanford University Medical Center and the NCI evaluated the use of active idiotype immunotherapy in treating patients with indolent B-cell NHL. The results suggest that active idiotype immunotherapy significantly increases the duration of response in patients previously placed into remission with chemotherapy. Remission is defined as at least a 50% reduction in tumor burden. The immunotherapy administered in both the Stanford and NCI trials was similar to FavId in that it involved the combination of an idiotype protein derived from a patient’s tumor with a foreign protein, keyhole limpet hemocyanin, or KLH. KLH is a protein derived from shellfish that elicits a strong immune response.

In the Stanford trial, 21 of 41 patients treated with idiotype immunotherapy mounted an immune response to their idiotype protein. The median TTP in these patients was calculated to be 7.9 years, compared to a median TTP of 1.3 years for the patients who failed to mount an immune response. For purposes of this trial, TTP was defined as the interval between the date of last dose of chemotherapy and the recurrence of disease. The median TTP for the responding patients was calculated based on available data using a statistical method known as Kaplan-Meier analysis, which allows for the estimation of a median time when not all of the patients have reached the event being measured at the time of analysis. The results from this trial were published in the medical journal Blood in May 1997.

In an attempt to increase the idiotype-specific immune response, the NCI trial supplemented the idiotype immunotherapy with granulocyte macrophage colony stimulating factor, or GM-CSF, a white blood cell growth factor designed to enhance the immune response. Lymphoma-specific immune responses were reported for 19 of the 20 patients in the trial, and the most recent update from this trial in December 2005 indicates that with a median follow-up time of 9.2 years, 45% of patients remain in continuous complete remission with an overall survival rate of 90%. The trial also showed that the immunotherapy converted eight of 11 patients tested to a molecular remission, which means no evidence of tumor could be seen even at the more sensitive level of DNA detection. The preliminary results from the NCI trial were published in the medical journal Nature Medicine in October 1999, and the most recent update from this trial was published in the medical journal Blood in November 2003.

Barriers to Commercialization

Although the Stanford and NCI clinical trials demonstrated favorable results, substantial manufacturing difficulties have limited further development of an active idiotype immunotherapeutic approach to the treatment of B-cell NHL. The manufacturing process used to produce the idiotype immunotherapies studied at Stanford and the NCI has lengthy and inconsistent production timelines and is labor-intensive, with a reported manufacturing failure rate as high as 15%. As a result, we believe this process would make active idiotype immunotherapies produced using this process difficult to commercialize.

Our Solution for the Commercial Production of Active Idiotype Immunotherapy

We have developed a proprietary technology that we believe enables us to overcome historical limitations to the manufacturing and commercialization of active idiotype immunotherapies. Our technology utilizes an insect-cell virus that carries genetic information that is identical to a patient’s lymphoma. By introducing this virus into an insect cell line, we can produce sufficient quantities of idiotype protein for our immunotherapy. We believe our manufacturing process has the following benefits:

• Rapid Production Cycle. We manufacture FavId and deliver it to the patient in eight weeks. We believe our production cycle time is a number of months shorter than previously reported cycle times for manufacturing idiotype immunotherapies for B-cell NHL. Our production timeline allows us to administer FavId at what we believe is the optimal time following treatment with Rituxan.

• Reliable Manufacturing. Our underlying production method for each patient will not change regardless of the number of units of FavId produced. This small-scale unit operation is easily replicated to produce multiple patient therapies simultaneously without the risks associated with traditional scale-up for commercial production.

• Automation. This small-scale unit operation is amenable to automation. The time required to identify the genetic information used to construct the insect-cell expression vector has been reduced by technological advances, including automation, some of which are the result of the human genome project. We believe that many other steps in the production of FavId can be automated.

Our production process requires standardized small volumes, is readily reproducible, and requires limited production time. As a result, we believe our cost of production can allow for a commercially viable product with gross margins similar to those seen for other biopharmaceuticals and enable physicians to use FavId in concert with all existing standards of care for indolent B-cell NHL,



including Rituxan.

Our Development Programs

The chart below summarizes the status of ongoing, recently completed and currently planned clinical and preclinical development programs. We have retained exclusive worldwide commercialization rights to all of our product candidates.

 

Product		Indication		Patient Population		Status
FavId
Following Rituxan		Follicular B-cell NHL		Treatment-naïve or relapsed/refractory patients(1)		Phase 3 trial enrollment complete: analysis of secondary endpoint, response improvement, fourth quarter 2006; analysis of primary endpoint, TTP, second half of 2007
Following Rituxan		Follicular B-cell NHL		Treatment-naïve or relapsed/refractory patients		Phase 2 trial enrollment complete: patients in long-term follow-up
Single agent		Indolent B-cell NHL		Relapsed/refractory patients		Phase 2 trial enrollment complete: patients in long-term follow-up
Following autologous stem cell transplant		Indolent B-cell NHL		Patients eligible for autologous stem cell transplant		Phase 2 trial enrolling patients(2)
With maintenance Rituxan		Indolent B-cell NHL		Treatment-naïve patients		Phase 2 trial enrolling patients
Single agent		Non-follicular B-cell NHL		Treatment-naïve or relapsed/refractory patients		Phase 2 trial enrolling patients(2)
Following prior therapy		Follicular B-cell NHL		Patients who progressed in our Phase 3 trial without receiving FavId		Phase 2 trial enrolling patients
Following chemotherapy/Rituxan in patients with aggressive NHL		Aggressive B-cell NHL		Treatment-naïve patients		Randomized double-blind controlled Phase 2/3 trial open for enrollment
FAV-201		T-cell lymphoma		Previously treated patients		Phase 1/2 trial expected start: first half 2006
Autoimmune Disease Candidate		Multiple sclerosis		Not applicable		Preclinical development

(1) Patients are considered relapsed if their lymphoma has returned after a response to prior therapy. Patients are considered refractory if they have not responded to prior treatments.

(2) This trial is physician-sponsored, which means that a physician, rather than Favrille, is responsible for managing the conduct of the trial and the resulting data. The responsible physician has filed an IND with the FDA or similar regulatory authority in Switzerland for the study and is the owner of that IND. We will provide FavId at our own expense for use in physician-sponsored trials and, in some cases, funding.

FavId for B-Cell NHL

Overview

Our lead product candidate, FavId, is an active immunotherapy that is based upon unique genetic information extracted from a patient’s tumor. We completed enrollment in a pivotal Phase 3 clinical trial evaluating FavId in treatment-naïve or relapsed or refractory follicular B-cell NHL patients following treatment with Rituxan in January 2006. Follicular lymphoma accounts for the majority of all indolent B-cell NHL cases. To date, we have conducted several multi-center, open-label Phase 2 clinical trials of FavId involving more than 130 indolent B-cell NHL patients. Five additional Phase 2 clinical trials of FavId are either ongoing or expected to begin during 2006. One of these clinical trials is being conducted under a separate physician-sponsored IND in the United States. A second is being conducted as a physician-sponsored clinical trial in Switzerland. We currently retain exclusive worldwide commercialization rights to FavId.

Market Opportunity

The American Cancer Society cites NHL as the sixth most common form of cancer and the sixth leading cause of death among cancers in the United States. The American Cancer Society estimated that approximately 56,000 people were diagnosed with NHL in the United States in 2005, and the NCI has estimated that approximately 332,000 patients suffer from this disease. B-cell NHL is a cancer of B-cell lymphocytes, the body’s white blood cells principally responsible for fighting disease. Approximately 85% of NHL patients in the United States have B-cell NHL. We believe that approximately half of these patients have the indolent form of the disease. Although indolent B-cell NHL is slow-growing, it is incurable with existing therapies and inevitably fatal. The median survival time for patients diagnosed with advanced stages of indolent B-cell NHL is estimated to be between seven and ten years.

Current Treatments

Overview.   B-cell NHL is composed of a diverse group of malignancies with varying patterns of behavior and responses to treatment. Both the prognosis for patients with this disease, and the treatment that they are likely to receive, depend on the histologic type and stage. B-cell NHL is commonly divided into two groups: indolent NHL and aggressive NHL. Indolent B-cell NHL has a relatively good prognosis, with a median survival as long as 10 years. Early-stage indolent B-cell NHL can be effectively treated and often cured with radiation therapy alone. Patients with advanced stage indolent B-cell NHL are not considered curable but generally respond to treatment with a remission. These remissions are generally temporary, however, and patients require additional treatments when they relapse. Aggressive B-cell NHL has a shorter natural history. Only 50% of these patients can be cured with chemotherapy alone or with combinations of chemotherapy and Rituxan. If patients relapse after treatment, the vast majority of relapses occur in the first two years following therapy.

Chemotherapy.  Prior to Rituxan’s availability, chemotherapy was traditionally used as the primary therapy for most patients with B-cell NHL. Chemotherapy is typically administered in repeated cycles over three to eight months and can substantially reduce the amount of lymphoma and often achieve remission. Patients receiving chemotherapy generally experience a number of side effects, including fatigue, nausea, hair loss and increased risk of infection. These side effects may result in the need for supportive care, including additional therapies and hospitalization. Patients also experience late side effects such as sterility, myelodysplastic syndromes, second cancers, and heart dysfunction. The toxicity and inconvenience of chemotherapy can impose a heavy strain on a patient’s overall quality of life.

Passive Immunotherapy.  Several passive immunotherapy products have been approved for the treatment of B-cell NHL, including Rituxan, Zevalin and Bexxar. Rituxan is the leading passive immunotherapy approved for the treatment of B-cell NHL and is being used for both indolent and aggressive B-cell NHL. Standard treatment with Rituxan alone involves four weekly intravenous infusions over a 22-day period. Rituxan is considered to be significantly less toxic to the bone marrow than chemotherapy. Rituxan is a monoclonal antibody that can induce a remission in approximately 50% of patients with indolent B-cell NHL. In these responding patients, the remission lasts approximately 12 months. Unfortunately, as with patients with indolent B-cell NHL who receive chemotherapy, patients treated with Rituxan eventually relapse. Several clinical trials have suggested that additional doses of Rituxan as a maintenance therapy can improve the time before patients with follicular B-cell NHL relapse. In addition, combinations of Rituxan and chemotherapeutic or immunostimulatory drugs at various doses and schedules may provide patients with an increase in TTP over that expected with Rituxan alone. When administered with chemotherapy to patients with aggressive B-cell NHL, Rituxan can increase the cure rate and the TTP.

Rituxan used either alone or in combination with another therapy is the current standard of care for the treatment of B-cell NHL patients. Sales of Rituxan in the United States have grown from $162 million in 1998 to approximately $1.8 billion in 2005. Our clinical registration strategy involves the administration of FavId to the group of patients who would receive Rituxan, that is combine active and passive immunotherapies. Since Rituxan is the current standard of  care, we believe this approach of FavId used in combination with Rituxan treatment will allow the largest number of patients with B-cell NHL to benefit.

Clinical Development

Pivotal Phase 3 Clinical Trial – FavId Following Rituxan.   We completed enrollment in a Phase 3 clinical trial of FavId in patients with follicular B-cell NHL in January 2006. This trial was initiated in July 2004 with an enrollment target of 342 eligible patients. The randomized, double-blind, placebo-controlled trial is being conducted at 67 oncology centers and more than 100 sites across the U.S. Approximately 80 percent of the patients enrolled are treatment-naïve, with the remainder either relapsed from or refractory to prior therapies.

We obtain tumor cells via biopsy from each patient to establish the genetic profile of the tumor for our use in manufacturing the patient’s FavId. In addition, a CT scan is conducted in order to measure tumor burden before Rituxan treatment. Each patient then receives the standard four doses of Rituxan alone at one-week intervals while the patient’s FavId is being manufactured. Five weeks after the last dose of Rituxan is administered, the patient is re-evaluated and a CT scan is conducted to assess the patient’s response to Rituxan. A patient whose disease remains stable or improves following treatment with Rituxan is randomized to receive either FavId

with GM-CSF or placebo with GM-CSF. During the induction phase, randomized patients receive monthly injections of FavId or placebo for six months. If a patient’s lymphoma remains under control after the induction phase, the patient receives maintenance injections of FavId or placebo given every other month for a year and then every third month until the time of disease progression. Throughout the trial, patients receive CT scans every three months to determine whether their lymphoma is under control. During the trial, patients do not receive any cancer therapy other than that administered in the trial. However, once a patient’s disease progresses, the patient’s participation in the trial terminates.

The primary endpoint of the trial is TTP, which in this protocol is the time that elapses between randomization and disease progression. The trial is designed to demonstrate a statistically significant improvement in median TTP in those patients treated with FavId compared to those patients treated with placebo. We expect an analysis of the TTP data during the second half of 2007. The trial will also include an analysis based on a secondary endpoint, response improvement, which we anticipate will occur during the fourth quarter of 2006.

We have a Special Protocol Assessment, or SPA, from the FDA for our Phase 3 clinical trial. In the SPA process, the FDA reviewed the design, size and planned analysis of our Phase 3 clinical trial and provided comments regarding the trial’s adequacy to form a basis for approval of a Biologics Licensing Application, or BLA, if the trial is successful in meeting its predetermined objectives. The FDA’s written agreement is binding, except in limited circumstances, such as when a substantial scientific issue essential to determining the safety or effectiveness of a product candidate is identified after the Phase 3 clinical trial is commenced.

In January 2006 we announced that we received Fast Track designation from the FDA for FavId. Fast Track designation is granted for a new drug that is intended to treat a serious or life-threatening condition and demonstrates the potential to address an unmet medical need and as a result is eligible for priority review by the FDA. This action by the FDA has the potential to save Favrille valuable time in the regulatory approval process and serves as an acknowledgement of the potential for FavId in the treatment of follicular B-cell NHL.

Phase 2 Clinical Trial – FavId Following Rituxan.   We initiated a Phase 2 clinical trial of FavId in patients with follicular B-cell NHL who were candidates for Rituxan therapy in June 2002. Initially, this trial was limited to relapsed or refractory patients who had previously undergone treatment with Rituxan, chemotherapy or both. In April 2003, we expanded the entry criteria for this trial to include patients with no prior treatment for their lymphoma. The open-label Phase 2 trial was conducted at 20 sites. Enrollment in this trial was completed in December 2003. A total of 103 patients were enrolled in the trial, of which 89 had stable disease or a better response to Rituxan and received FavId, including 55 who were relapsed from or refractory to prior treatments and 34 who were treatment-naïve.

We obtained tumor cells via biopsy from each patient to establish the genetic profile of the tumor for our use in manufacturing the patient’s FavId. In addition, a CT scan was conducted in order to measure tumor burden before Rituxan treatment. Each patient then received four doses of Rituxan alone at one-week intervals while the patient’s FavId was being manufactured. Approximately eight weeks after the last dose of Rituxan, the patient was re-evaluated and a CT scan was conducted to assess the patient’s response to Rituxan. Patients whose disease remained stable or improved following Rituxan treatment received monthly injections of FavId and GM-CSF for six months. If a patient remains progression free after this induction period, the patient continues to receive maintenance injections of FavId given every other month for a year and then every third month until the time of disease progression. Throughout the trial, patients receive CT scans every three months to determine whether their lymphoma is under control. During the trial, patients do not receive any cancer therapy other than that administered in the trial. However, once a patient’s disease progresses, the patient’s participation in the trial terminates.

Long-term follow-up data from this Phase 2 trial were reported at the ASH Annual Meeting in Atlanta in December 2005. In an oral presentation entitled “Extended Follow-Up and Analysis with Central Radiological Review of Patients Receiving FavId (Id/KLH) Vaccine Following Rituximab,” Omer Koc, M.D., a clinical trial principal investigator and Staff Physician, Hematology/Oncology, at the Cleveland Clinic Foundation, reported that the administration of FavId following Rituxan appears to improve response over Rituxan alone and extend TTP compared to historical data of Rituxan alone. The data also compare favorably with previous immunotherapy clinical trials in patients with B-cell NHL that have used chemotherapy to induce remissions.

Treatment-naïve patients who responded to an initial course of Rituxan with a partial or complete remission, or Rituxan responder population, demonstrated the longest TTP, with only 4 of 23 or 17% of patients in this subpopulation having progressed as of December 2005 at a median observation period of approximately 22 months. In addition, only 10 of 35, or 29% of the total treatment-naïve population and 10 of 44, or 23%, of the Rituxan-responder population (including those that were not treatment-naïve) had progressed as of December 2005.

As this Phase 2 clinical trial enrolled both patients that were relapsed or refractory from prior treatment and patients who had received no prior treatment for their lymphoma, we can only compare our preliminary results for these subsets of our patient population with available published data. One clinical trial published by Dr. Thomas E. Witzig in the Journal of Clinical Oncology in May 2002 reported results for 58 follicular B-cell NHL patients relapsed from or refractory to chemotherapy who were subsequently treated with

Rituxan alone. In our Phase 2 clinical trial we treated 23 follicular B-cell NHL patients relapsed from chemotherapy whom we believe to be comparable with respect to the patient characteristics in the Witzig clinical trial. The median TTP for the subset of follicular patients in the Witzig trial was 10.2 months. The median TTP of the 23 patients relapsed from chemotherapy in our Phase 2 clinical trial is projected at 24.2 months. We believe these data show a positive trend to a longer TTP in patients treated with Rituxan followed by FavId compared to patients treated with Rituxan alone.

A secondary endpoint in our clinical trial was response improvement. Response improvement attempts to measure the additional responses that occur as a result of FavId. In this trial, response improvement was defined as the improvement in responses that occurred after three months from the start of Rituxan. Improvement in response can be seen in three different ways. Patients who have stable disease at month three can go on to have a response (either a complete or partial remission) sometime after month three. Partial remission is defined as reduction in tumor size of at least 50% and complete remission is defined as no detectable tumor by CT scan.  In addition, a patient with a partial remission at month three can go on to have a complete remission at some time following month three. Using this definition, we reported that 23 of 85, or 27%, of our patients experienced an improvement in their response category after month three, including 12 of 42, or 29%, from stable disease to partial response, 2 of 42, or 5%, from stable disease to complete response, and 9 of 43, or 21%, from partial remission to complete remission.

The overall clinical response rate in the Phase 2 trial increased from 49% at month 3 following Rituxan alone to 65% following the initiation of FavId.

The positive interim results found in this Phase 2 clinical trial do not guarantee final results, and our positive assessment of FavId in this clinical trial could differ from our assessment of FavId following completion of this trial or the pending Phase 3 clinical trial. We believe an analysis of the characteristics of those patients in our trial whose disease relapsed compared to those whose disease had not allowed us to optimize the design of our pivotal Phase 3 clinical trial.

Phase 2 Clinical Trial – FavId as a Single Therapeutic Agent in Relapsed or Refractory NHL Patients.    In September 2002, we completed enrollment of a Phase 2 clinical trial evaluating FavId as a single therapeutic agent in indolent B-cell NHL patients who were either relapsed from, or refractory to, prior treatments. The trial was conducted at multiple sites and was designed to determine whether use of FavId alone could stimulate an immune response and whether this response would result in a clinical benefit. We obtained tumor cells via biopsy from each patient to establish the genetic profile of the tumor for our use in manufacturing the patient’s FavId. In addition, a CT scan was conducted in order to measure tumor burden before FavId treatment. Each patient received monthly injections of FavId and GM-CSF for six months. If a patient’s lymphoma remains under control after the induction period, the patient receives maintenance injections of FavId given every other month for a year and then every third month until TTP. Throughout the trial, patients receive CT scans every three months to determine whether their lymphoma is under control. During the trial, patients do not receive any cancer therapy other than that administered in the trial. However, once a patient’s disease progresses, the patient’s participation in the trial terminates.

Results from the 27 evaluable patients in the trial showed one patient with a complete remission and three patients with partial remissions, meaning at least a 50% reduction in tumor size, for an overall response rate of 15%. In addition, four patients demonstrated a 25% to 50% reduction in their total lymphoma burden, a minor response, and 15 patients demonstrated stable disease. The other four patients demonstrated disease progression. The median TTP for the 27 patients was 13.5 months using a Kaplan-Meier analysis. As of March 2006, one patient has remained progression free for 46 months and is continuing with FavId injections.

These results are encouraging compared to results from similar patients treated with other lymphoma biologic therapies. In a clinical trial conducted by Witzig and reported in the May 2002 issue of the Journal of Clinical Oncology , patients with follicular NHL treated with Rituxan alone had a median TTP of 10.2 months and a median duration of response of 12.1 months. In addition, patients with follicular NHL treated with Zevalin had a median TTP of 12.6 months with a median duration of response of 18.5 months. Similarly, in a trial conducted by McLaughlin and reported in the August 1998 issue of the Journal of Clinical Oncology , patients treated with Rituxan alone had a TTP of 9.0 months. Median duration of response in that trial was 11.2 months.

 

		Single Agent FavId		Witzig Rituxan		McLaughlin Rituxan		Witzig Zevalin
Patients		27		58		166		55
TTP (months)		13.5		10.2		9.0		12.6

This clinical trial demonstrated that FavId as a single agent is well tolerated and has activity in pretreated patients with relapsed indolent B-cell NHL. Patients with two or fewer prior therapies and with tumor burdens of less than 50 square centimeters at initiation of the trial appeared more likely to respond to administration of FavId than more heavily pretreated patients or patients with larger tumors.

Phase 2 Clinical Trial – FavId Following Autologous Stem Cell Transplantation.    Patient enrollment for a physician-sponsored Phase 2 clinical trial evaluating FavId in patients with indolent B-cell NHL following autologous stem cell transplantation began in November 2000. Autologous stem cell transplantation involves the removal of important blood cells from a patient before the patient receives large doses of chemotherapy. After chemotherapy, the blood cells are returned to the patient to speed recovery from the chemotherapy treatment. This trial is currently being conducted at two sites.

This trial is designed to evaluate the ability of FavId to induce humoral and cell-mediated immune responses, and to induce or maintain complete clinical or molecular remission, following autologous stem cell transplantation. In addition, the trial will evaluate the correlation of specific T-cell populations with immune responsiveness to FavId, as well as the safety of FavId following autologous stem cell transplantation. After we obtain tumor cells via biopsy from each patient to establish the genetic profile of the tumor for our use in manufacturing the patient’s FavId, patients undergo autologous stem cell transplantation using standard regimens. At three months following transplantation, patients receive the first of five monthly injections of FavId. Patients are assessed at fixed intervals for safety, development of immune responses to their tumor idiotype, and for evidence of molecular remissions.

Interim data from this trial were presented at the American Society of Clinical Oncology Annual Meeting in Orlando in May 2005. The data demonstrated that patients developed a rapid immune response to both KLH and their idiotype with T-cell responses to both KLH and idiotype, often measured following a single FavId injection. As of May 2005, 10 out of 13 patients remain in complete remission, ranging from 10 to 43 months since autologous stem cell transplantation.

Phase 2 Clinical Trial – FavId Combined with a Maintenance Rituxan Schedule.   Patient enrollment for a multi-center, physician-sponsored Phase 2 clinical trial evaluating FavId in combination with maintenance Rituxan for the treatment of indolent B-cell NHL began in May 2004. We assumed sponsorship of the IND in August 2004. The trial is open to treatment-naïve patients with indolent B-cell NHL and is designed to enroll a total of 56 patients over a two-year period.

This trial is intended to demonstrate an improvement over the results of prior trials using maintenance Rituxan for the treatment of indolent B-cell NHL. These prior trials demonstrated a median TTP of 34 months for patients with indolent B-cell NHL treated with maintenance Rituxan. Despite this long TTP, patients still experienced a high relapse rate and do not appear to be cured of their disease. We believe that by incorporating FavId into a schedule of maintenance Rituxan, patients may experience an increased TTP beyond what would be expected from maintenance Rituxan alone.

This trial is designed to evaluate the safety of this regimen, and to assess its efficacy, based on the endpoints of response rate and event-free survival. Event-free survival is defined as the time period from the start of Rituxan to the time of disease progression or death. We obtain tumor cells via biopsy from each patient to establish the genetic profile of the tumor for our use in manufacturing the patient’s FavId. In addition, a CT scan is conducted in order to measure tumor burden before the start of Rituxan treatment. Patients receive the same dose and schedule of maintenance Rituxan as was administered in the prior trials of maintenance Rituxan. FavId is incorporated into this treatment regimen starting on the third month and is administered monthly for the first 12 months, every other month for the second 12 months, and every three months thereafter. FavId is not administered during those months when patients receive Rituxan. With each FavId administration, GM-CSF is administered on four consecutive days beginning on the day of such FavId administration. Throughout the trial, patients receive CT scans every three months to determine whether their lymphoma is under control. During the trial, patients do not receive any cancer therapy other than that administered in the trial. However, once a patient’s disease progresses, the patient’s participation in the trial terminates.

Phase 2 Clinical Trial – FavId in Non-follicular B-cell NHL.   Patient enrollment for a physician-sponsored Phase 2 clinical trial evaluating FavId in patients with non-follicular B-cell NHL was initiated in Europe in June 2005. The trial is open to patients with various non-follicular lymphomas who are either treatment-naïve for their lymphoma, relapsed or refractory following prior chemotherapy for their lymphoma, or relapsed following a prior response to Rituxan. The trial is expected to enroll 15 patients, but enrollment may be expanded if activity is seen in any specific patient subset.

This trial is designed to evaluate the efficacy of FavId in patients with non-follicular indolent NHL, based on overall response rate, duration of response, time to progression and event-free survival. We will obtain tumor cells via biopsy from each patient to establish the genetic profile of the tumor for our use in manufacturing the patient’s FavId. In addition, a CT scan will be conducted in order to measure tumor burden before FavId treatment. FavId will be administered monthly for the first six months, every other month for the next 12 months, and every three months thereafter until disease progression. With each FavId administration, GM-CSF will be administered on four consecutive days beginning on the day of such FavId administration. Patients in the trial who need immediate therapy may receive Rituxan prior to administration of FavId and GM-CSF, while patients with more indolent disease that is not in need of immediate treatment may receive FavId and GM-CSF administered as a single agent. Throughout the trial, patients will receive CT scans every three months to determine whether their lymphoma is under control. During the trial, patients will not receive any cancer therapy other than that administered in the trial. However, once a patient’s disease progresses, the patient’s participation in the trial will terminate.

Phase 2 Clinical Trial – FavId Following Prior Therapy.   We continue to enroll patients in our Phase 2 clinical trial of FavId in patients who have received prior therapy for their follicular B-cell NHL. This trial was designed primarily to provide FavId to those patients in our pivotal Phase 3 clinical trial who did not receive FavId. This would include patients who progressed after receiving Rituxan, and those patients who were randomized to placebo and later progressed. This trial is being conducted at sites participating in our Phase 3 clinical trial.

Prior to receiving FavId, these patients will be evaluated by their treating physician. If the physician feels that the patient is a candidate for receiving FavId alone, then we will provide the FavId previously manufactured for them in the registration trial for use as a single agent. In those patients who may require a more immediate reduction in the amount of their lymphoma, the treating physician will have the option of administering salvage treatment such as chemotherapy prior to the administration of FavId. We expect that many of these patients will be candidates for retreatment with Rituxan prior to starting FavId. In these patients we will be able to compare the TTP which occurs following their receipt of Rituxan on the registration trial with their TTP following the receipt of both Rituxan and FavId on this Phase 2 trial. We believe that this comparison will provide further insight into any contribution by FavId to extending TTP following treatment with Rituxan.

Phase 2/3 Clinical Trial – Following Chemotherapy/Rituxan in Patients with Aggressive B-cell NHL.   In the first half of 2006, we expect to begin enrolling patients in a randomized double-blind controlled Phase 2/3 clinical trial of FavId in patients with aggressive B-cell NHL who have received prior treatment with a chemotherapy/Rituxan combination. This trial will evaluate the ability of FavId to increase the cure rate of this disease. The trial will require the enrollment of approximately 480 patients over the course of three years.

Safety. In December 2005, our independent Data Monitoring Board met and reviewed safety data from our pivotal Phase 3 clinical trial of FavId and recommended that we continue the trial as planned.

FAV-201 for T-cell Lymphoma

Our product candidate FAV-201 is a patient-specific T-cell receptor-based immunotherapy. We intend to file an IND and initiate a Phase 1/2 clinical trial evaluating the safety and immune response of FAV-201 in patients with T-cell lymphoma during the first half of 2006. This trial builds upon preclinical data that suggest activity of an immunotherapy based on a T-cell receptor. Patients will be observed for evidence of specific cell-mediated and humoral immune responses to FAV-201, and any clinical responses will also be documented.

Autoimmune Disease Candidate

Autoimmune disease occurs when the body’s immune system mistakenly attacks and destroys body tissue that it believes to be foreign. In certain instances, autoimmune disease can result from an outgrowth of a limited number of disease-causing lymphocytes that recognize self antigens. Preclinical studies have shown that immunotherapies may prevent or treat autoimmune diseases. In the second half of 2005, we initiated preclinical studies to evaluate whether immunotherapies manufactured in a fashion similar to FAV-201 will be effective in preventing or treating autoimmune disease, with an initial focus on multiple sclerosis.

Strategy

Our goal is to become a leading biopharmaceutical company focused on the development and commercialization of targeted immunotherapies for the treatment of cancer and other diseases of the immune system. Key elements of our strategy for achieving this goal are to:

• Complete Clinical Development and Obtain Regulatory Approval for FavId. We have completed enrollment in a pivotal Phase 3 clinical trial evaluating FavId for the treatment of follicular B-cell NHL. The trial is under an SPA from the FDA. We also received Fast Track designation for FavId from the FDA, which may result in an expedited review by the FDA. We expect an analysis of the secondary endpoint, response improvement, in the fourth quarter of 2006 and an analysis of the primary endpoint, TTP, in the second half of 2007.

• Utilize Our Proprietary Technology to Develop Additional Product Candidates. We believe that active immunotherapy may have applications in a number of additional diseases beyond B-cell NHL, such as T-cell lymphoma and autoimmune diseases, including multiple sclerosis. For example, we are currently studying a second product candidate, FAV-201, for the treatment of T-cell lymphoma and intend to initiate a Phase 1/2 clinical trial in the first half of 2006. In addition, we initiated a preclinical development program to identify active immunotherapies for the treatment of multiple sclerosis in the second half of 2005.

• Retain Commercialization Rights to Our Oncology Products. We intend to focus our internal development efforts on FavId and other oncology product candidates. We hold exclusive worldwide commercialization rights to FavId without any obligation to pay royalties to any third party on sales. We plan to retain United States commercialization rights to these product candidates at least through completion of BLA filing. At that point, we will assess whether to market and sell FavId and future products in the United States directly through an internal sales force or together with a co-promotion partner. We intend to seek a commercialization and development partner outside of the United States. We intend to seek one or more collaborators to develop and commercialize our product candidates and programs for chronic autoimmune diseases, such as multiple sclerosis, in exchange for license fees, milestone payments and royalties.

• Expand our Product Portfolio Through In-Licensing and Acquisitions. We intend to capitalize upon our expertise in immunology, oncology, immunotherapy, clinical development and regulatory affairs to in-license or acquire complementary product candidates in various stages of development.

Manufacturing and Supply

Our Proprietary Manufacturing Process Our process begins upon receipt of a patient’s lymphoma biopsy, which the treating physician sends to our manufacturing facility. The process can be divided into the three phases described below.

Gene Identification and Cloning

First, we perform a genetic profile of a sample of the patient’s tumor to identify and isolate the unique antibody genes that correspond to the patient’s tumor idiotype. We then insert these antibody genes into our proprietary insect cell-specific expression vectors. Our insect-cell expression vectors are DNA fragments that have all the genetic instructions needed for directing the production of full-length, recombinant, monoclonal antibodies.

Cell Culture

The next step in the process involves the use of an insect cell-specific expression vector to produce the recombinant idiotype that forms the basis for FavId. We insert the expression vector into a continually growing insect cell line, which converts this genetic information into an insect cell virus, referred to as a baculovirus. We then add the baculovirus culture to a second insect cell line that

subsequently secretes high levels of idiotype protein. Within a few days, milligram quantities of this idiotype protein are harvested. The cell culture medium used to grow the insect cells is completely devoid of any animal products, which we believe enhances the safety of the final product.

Protein Purification and Formulation

Finally, we perform a multi-step process to purify the idiotype protein. Each step in this purification process results in idiotype protein that is progressively more purified. In order to enhance the immune response, purified idiotype protein is chemically linked to KLH. When the idiotype and KLH complex is injected subcutaneously, the patient’s immune system reacts to both the foreign KLH and the patient’s unique idiotype protein. We believe that, once activated, the patient’s immune system will be able to recognize the idiotype protein on the cancer cell and more effectively fight the tumor.

Manufacturing Facility

We currently manufacture FavId for our clinical trials in our state-of-the-art, multi-product cGMP manufacturing facility which consists of approximately 26,000 square feet of leased space in an 80,000 square-foot facility at our corporate headquarters. In September 2004, we received a manufacturing license from the California Department of Health Sciences. In November 2005, we signed an amended lease agreement to expand capacity within our existing manufacturing facility to support commercial-scale manufacturing of FavId ® . This 80,000-square foot facility will be devoted to manufacturing and research and development, and is intended to give us the capacity to produce FavId to meet commercial needs while continuing to support additional clinical trials. We anticipate that the expanded capacity of our manufacturing facility will be sufficient to supply FavId for up to 4,000 patients per year. In addition, we have committed to lease an adjacent 48,000-square foot facility to house our corporate headquarters and warehousing operations. We plan to begin construction for the expansion of capacity within our manufacturing facility in June 2006.

Key Suppliers

We currently depend on single source suppliers for critical raw materials used in the manufacture of FavId. We purchase KLH from biosyn Arzneimittel GmbH, or biosyn, which is currently the only supplier of KLH that has submitted the required filing, known as a drug master file, with the FDA. In November 2004, we entered into an eight-year supply agreement with biosyn under which biosyn has agreed to supply us with KLH. We have purchased the required initial minimum supply of KLH and we have committed to minimum annual KLH purchase requirements during commercialization of FavId. An additional aggregate of up to $300,000 will be due upon the achievement of certain milestones, the timing of which is not known at this time. Either party may terminate the supply agreement upon a breach by the other party that is not cured within 60 days or other events relating to insolvency or bankruptcy. There may be no other supplier of KLH of suitable quality for our purposes. In addition, we depend on a single source supplier for the cell growth media we use to produce FavId. We purchase this material from Expression Systems LLC. We currently rely on purchase orders to obtain this material and do not have a supply agreement with Expression Systems. We intend to qualify a second source for the cell growth media or manufacture the cell growth media in house from commercially available raw materials but may not be able to do so. The GM-CSF that we administer with FavId is commercially available only from Berlex Laboratories, Inc. We currently rely on purchase orders to purchase GM-CSF and do not have a supply agreement with Berlex. GM-CSF is an FDA-approved and commercially available drug that may be purchased by physicians. Our current strategy for initial commercialization of FavId involves the administration of FavId following treatment with Rituxan. Rituxan is a passive immunotherapy for patients with NHL, which is also FDA-approved and is commercially available solely from Genentech and Biogen Idec. We currently rely on physicians to order and administer Rituxan to patients prior to the administration of FavId in our registration trial.

Sales and Marketing

We intend to market and sell FavId and future products in the United States either directly through an internal sales force or together with a co-promotion partner. Because the community and institutional referral networks of cancer treatment physicians in the United States are relatively small and well-established, we believe that a small, focused sales and marketing organization will enable us to effectively penetrate our target markets. Outside of the United States, we plan to establish strategic collaborations for the development and marketing of FavId.

We may enter into collaboration agreements with third parties with respect to other product candidates we develop, which may include co-marketing or co-promotion arrangements. Alternatively, we may grant exclusive marketing rights to one or more strategic collaborators in exchange for upfront fees, future milestone payments and royalties on sales.

We are currently in the process of acquiring the resources and experience necessary to market FavId or our other product candidates ourselves. We currently have no arrangements for distribution of our product candidates. Our future commercial success will depend on our ability to establish our own sales and marketing infrastructure or to collaborate with third parties that have greater sales and marketing experience and resources than our own.

Competition

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

We are aware of a number of companies that are developing active immunotherapies to treat B-cell NHL. Genitope Corporation is evaluating idiotype immunotherapies in clinical trials. Genitope is conducting a Phase 3 clinical trial of its active idiotype immunotherapy product candidate in patients with follicular B-cell NHL who are in first remission following prior treatment with chemotherapy. Antigenics, Inc. completed a Phase 2 clinical trial evaluating its active immunotherapy candidate in indolent B-cell NHL patients. The NCI is also conducting a Phase 3 clinical trial of an active idiotype immunotherapy in collaboration with Accentia Biopharmaceuticals.

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

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

Patents and Proprietary Rights

Our success will depend in large part on our ability to obtain and maintain patent protection for our products and technologies, preserve trade secrets and operate without infringing the intellectual property rights of others. We intend to prosecute and defend our intellectual property rights aggressively. Our policy is to seek patent protection for the inventions that we consider important to the development of our business. Currently we own U.S. Patent No. 6,911,204 together with four pending United States patent applications covering methods of treating immune system diseases, including B-cell and T-cell lymphomas, using our proprietary immunotherapy production methods, as well as methods for combining the idiotype immunotherapies with other therapies that are used to treat diseases of the immune system. We also have three issued patents and 19 patent applications pending outside of the United States, and have received notice that one of these applications will issue as a patent. Our intellectual property related to T-cell receptor-based immunotherapies includes an exclusive royalty-free license from the Sidney Kimmel Cancer Center to intellectual property developed by Dr. Daniel Gold while he was employed there prior to joining us. We have responsibility for the filing, prosecution and maintenance of patent rights associated with this license, but the intellectual property is jointly owned with the Sidney Kimmel Cancer Center which holds a license to use the technology for non-commercial research and educational purposes.

Although we believe these patent applications, if they issue as patents, will provide a competitive advantage, the patent positions of pharmaceutical and biotechnology companies are highly uncertain and involve complex legal and factual questions. We may not be able to develop patentable products or processes, and may not be able to obtain patents from pending applications. Even if patent claims are allowed, the claims may not issue, or in the event of issuance, may not be sufficient to protect our technology. In addition, any patents or patent rights we obtain may be circumvented, challenged or invalidated by our competitors.

While our product candidates are in clinical trials, and prior to commercialization, we believe our current activities in the United States fall within the scope of the exemptions against patent infringement provided by 35 U.S.C. Section 271(e) which covers activities related to developing information for submission to the FDA. As our product candidates progress toward commercialization, the possibility of an infringement claim against us increases. While we attempt to ensure that our product candidates and the methods we employ to manufacture them do not infringe other parties’ patents and proprietary rights, competitors or other parties may assert that we infringe on their patents or proprietary rights. Competitors or third parties may be issued patents that may cover subject matter that we use in developing, producing, or administering our products. In particular, we are aware of the following third party patents:

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

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

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

Additionally, because patent prosecution can proceed in secret prior to issuance of a patent, third parties may obtain other patents with claims of unknown scope prior to the issuance of patents relating to our product candidates which they could attempt to assert against us. Further, as we develop our products, we may infringe the current patents of third parties or patents that may issue in the future.

We believe that we have valid defenses to any assertion that our product candidates, or the methods that we employ to manufacture them, infringe the claims of the patent held jointly by Genentech and City of Hope National Medical Center relating to the expression of recombinant antibodies. We also believe that the patent may be invalid and/or unenforceable. The relevant patent was issued to Genentech in 2001 in connection with the settlement of a district court action and an interference proceeding in the United States Patent and Trademark Office between Genentech and Celltech R&D Ltd. We believe other biotechnology companies are aware of and are considering the possible impact of this patent and that other companies have negotiated license agreements for this patent. We note that in May 2005, a third party filed a request for reexamination of this patent with the U.S. Patent and Trademark Office, requesting that the claims of this patent be reexamined as to their patentability. We have not attempted to obtain a license to this patent because we believe that properly construed claims do not cover activities related to the manufacture of FavId and FAV-201. If we decide to attempt to obtain a license for this patent, we cannot guarantee that we would be able to obtain such a license on commercially reasonable terms, or at all.

We also believe that we have valid defenses to any assertion that our product candidates infringe the claims of the patent held by Genitope relating to immunotherapy using idiotype proteins produced using T-lymphoid cells for treatment of B-cell lymphoma, and the claims of the patent held by Schering Corp. relating to use of GM-CSF as a vaccine adjuvant for use against infectious diseases. The relevant Genitope patent issued in 1999. We believe that FavId and FAV-201 and the methods we use to manufacture them do not infringe the claims of the patent. The relevant Schering patent issued in 1997. We believe that FavId and FAV-201 and the methods we use to manufacture them do not infringe the claims of the patent and that the claims of the patent are invalid.

Although we believe that our product candidates, production methods and other activities do not currently infringe the intellectual property rights of these and other third parties, we cannot be certain that a third party will not challenge our position in the future. If a third party alleges that we are infringing its intellectual property rights, we may need to obtain a license from that third party, but there can be no assurance that any such license will be available on acceptable terms or at all. Any infringement claim that results in litigation could result in substantial cost to us and the diversion of management’s attention away from our core business and could also prevent us from marketing our products. To enforce patents issued to us or to determine the scope and validity of other parties’ proprietary rights, we may also become involved in litigation or in interference proceedings declared by the United States Patent and Trademark Office, which could result in substantial costs to us or an adverse decision as to the priority of our inventions. We may be involved in interference and/or opposition proceedings in the future. We believe there will continue to be significant litigation in the industry regarding patent and other intellectual property rights.

We are party to license agreements which provide us rights to use technologies in our research, development and commercialization of our product candidates. We obtained a non-exclusive license from Boyce Thompson Institute for Plant Research to use certain information and materials in the field of prevention and treatment of immune system diseases and disorders related to NHL. This party has sole responsibility for the prosecution, maintenance and enforcement of the licensed intellectual property.

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

Government Regulation

The testing, development, manufacturing, labeling, storage, record keeping, advertising, promotion, export and marketing, among other things, of our product candidates are subject to extensive regulation by governmental authorities in the United States and other countries. In the United States, pharmaceutical and biologic products are regulated by the FDA under the Federal Food, Drug, and Cosmetic Act, its implementing regulations and other laws, including, in the case of biologics, the Public Health Service Act. Our

product candidates are regulated by the FDA as biologics. Biologics require the submission of a Biologics License Application, or BLA, and approval by the FDA prior to being marketed in the United States. None of our product candidates have been approved by the FDA for marketing in the United States, and we currently have no BLAs pending. Manufacturers of biologics may also be subject to state regulation. Failure to comply with FDA requirements, both before and after product approval, may subject us to administrative or judicial sanctions, including, but not limited to, FDA refusal to approve pending applications, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, fines, injunction and criminal prosecution.

The steps required before a biologic may be approved for marketing in the United States generally include:

• completion of preclinical laboratory tests and animal tests;

• the submission to the FDA of an investigational new drug, or IND, application for human clinical testing, which must become effective before human clinical trials may commence;

• performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the product candidate for each proposed indication;

• the submission to the FDA of a BLA;

• FDA review of the BLA; and

• satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities at which the product candidate is made to assess compliance with the FDA’s current Good Manufacturing Practices, or cGMP, regulations.

The testing and approval process typically takes several years and requires the commitment of substantial effort and financial resources. Despite the time and expense committed, there can be no assurance that any approval will be granted on a timely basis, or at all.

Preclinical tests include laboratory evaluation and animal studies to assess the pharmacology and toxicology of the product candidate. The results of the preclinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND, which must become effective before human clinical trials may be commenced. The IND will automatically become effective 30 days after receipt by the FDA, unless the FDA before that time raises concerns or questions about the conduct of the trials as outlined in the IND, including concerns that human research subjects will be exposed to unreasonable risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can proceed. There can be no assurance that submission of an IND will result in FDA authorization to commence clinical trials. A separate submission to an existing IND must also be made for each successive clinical trial conducted during product development. Further, each clinical trial must be reviewed and approved by an independent Institutional Review Board, or IRB.

Clinical trials typically are conducted in three sequential phases, but the phases may overlap. In Phase 1, the initial introduction of the drug into human subjects, the drug is usually tested for safety (adverse effects), dosage tolerance, absorption, metabolism, distribution, excretion and pharmaocodynamics. Phase 2 usually involves studies in a limited patient population to (i) evaluate preliminarily the efficacy of the drug for specific, targeted indications, (ii) determine dosage tolerance and optimal dosage and (iii) identify possible adverse effects and safety risks. Phase 3 clinical trials generally further evaluate clinical efficacy and test further for safety within an expanded patient population. There can be no assurance that Phase 1, Phase 2 or Phase 3 testing will be completed successfully within any specific time period, if at all, with respect to any of our product candidates. Furthermore, we, the FDA or the relevant IRB may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

The results of the preclinical studies and clinical trials, together with other detailed information, including information on the manufacture and composition of the product, are submitted to the FDA in the form of a BLA requesting approval to market the product. Before approving a BLA, the FDA will inspect the facilities at which the product is manufactured and will not approve the product unless the facility cGMP compliance is satisfactory. The FDA may deny a BLA if applicable regulatory criteria are not satisfied, require additional testing or information or require postmarketing testing and surveillance to monitor the safety or efficacy of a product. Approval entails limitations on the indicated uses for which a product may be marketed. Also, if we seek to make certain changes to an approved product, such as promoting or labeling a product for a new indication, making certain manufacturing changes, or changing manufacturers or suppliers of certain ingredients or components, we will need FDA review and approval before the change can be implemented.

We are utilizing the procedure called “Special Protocol Assessment” for FavId. Under this procedure, a sponsor may seek the FDA’s agreement on the design and size of a clinical trial intended to form the primary basis of an effectiveness claim. If the FDA agrees in writing, its agreement may not be changed after the trial begins, except in limited circumstances. If the outcome of the trial is successful, the sponsor will ordinarily be able to rely on it as the primary basis for approval with respect to effectiveness. Although we received our SPA, there can be no assurance that any of our trials will have a successful outcome.

In December 2005, we received the FDA designation of FavId as a “fast track product” for treatment of patients with follicular B-cell NHL. We also intend to apply for “fast track” designation for FAV-201 for T-cell lymphoma. Fast track products are those which are intended for the treatment of a serious or life-threatening condition and which demonstrate the potential to address unmet medical needs for such conditions. Fast track products are eligible for two means of potentially expediting product development and FDA review of BLAs. First, a fast track product may be approved on the basis of either a clinical endpoint or a surrogate endpoint that is reasonably likely to predict clinical benefit. It is sometimes possible to demonstrate efficacy with respect to such endpoints in a shorter period of time than would be the case for other endpoints. Approvals of this kind may be subject to requirements for appropriate post-approval studies to validate the surrogate endpoint or otherwise confirm the effect of the clinical endpoint, and to certain other conditions. Second, if the FDA determines after review of preliminary clinical data submitted by the sponsor that a fast track product may be effective, it may begin review of portions of a BLA before the sponsor submits the complete BLA, thereby accelerating the date on which review of a portion of the BLA can begin. There can be no assurance that any of our product candidates in development will receive designation as fast track products, and even if they are designated as fast track products, there can be no assurance that our product candidates will be reviewed or approved more expeditiously than would otherwise have been the case.

We intend to request priority review of our BLA for FavId. A priority designation sets the target date for the FDA to complete review of a BLA within six months of the date of submission. Priority review of biologics is available for product candidates which, if approved, would be a significant improvement in the safety or effectiveness of the treatment of a serious or life-threatening disease. Even if priority review is granted, there can be no assurance that FDA review will be completed within six months or any other specific period of time, nor that the product candidate will be approved.

BLA holders must continue to comply with a number of FDA requirements both before and after approval. For example, BLA holders are required to report certain adverse reactions to the FDA and to comply with certain requirements concerning advertising and promotional labeling for their products. Also, quality control and manufacturing procedures must continue to conform to cGMP regulations after approval, and the FDA periodically conducts inspections of manufacturing facilities to assess compliance with cGMP. Accordingly, manufacturers must continue to expend time, monies and effort in the area of production and quality control to maintain cGMP compliance. In addition, discovery of problems, such as safety problems, may result in changes in labeling or restrictions on a product, manufacturer or BLA holder, including removal of the product from the market.

We have applied for orphan drug designation for the use of FavId for the treatment of certain forms of follicular B-cell NHL and plan to seek orphan drug designation for the use of FAV-201 for T-cell lymphoma. Under the Orphan Drug Act, 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 a BLA. After the FDA grants orphan drug designation, the generic identity of the therapeutic agent and its potential orphan use are publicly disclosed by the FDA. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory 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 orphan exclusivity, i.e., 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. Our products may not be eligible for orphan drug status or be designated as orphan drugs. Even if designated as orphan drugs, our products may not be approved before other applications or granted orphan drug exclusivity if approved.

Third-Party Reimbursement

We expect that sales volumes and prices of our products will be dependent in part on the availability of coverage and reimbursement from third-party payors. In the United States, such payors include governmental programs, including Medicare and Medicaid, private insurance plans and managed care programs. The Medicare program, a federally-funded and administered health insurance program, is the nation’s single largest payor, and provides for coverage for certain medical products and services for certain aged and disabled individuals and individuals with end-stage renal disease. Significantly, other third-party payors often model their coverage and reimbursement policies after Medicare. Medicare and other third-party payors may deny coverage and reimbursement if they determine that a medical product or procedure is not medically necessary or used for an unapproved indication, among other things. There can be no assurance that a new product will be considered medically necessary or otherwise eligible for coverage and reimbursement. Our ability to earn sufficient returns on our products may depend in part on the extent to which adequate third-party reimbursement is available for the costs of such products and related treatments. Significant uncertainty exists as to the coverage and reimbursement status of newly approved health care products, and there can be no assurance that adequate third-party coverage and reimbursement will be available.

Fraud and Abuse Laws

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

In addition, if we are able to commercialize FavId or any other product candidates that we may develop, we could become subject to false claims litigation under federal statutes, which can lead to civil money penalties, criminal fines and imprisonment, and exclusion from participation in Medicare, Medicaid and other federal and state healthcare programs. These false claims statutes include the False Claims Act, which any person to bring suit on behalf of the federal government alleging the submission of false or fraudulent claims, or causing to present such false or fraudulent claims, under federal programs or contracts claims or other violations of the statute and to share in any amounts paid by the entity to the government in fines or settlement. These suits against biotechnology companies have increased significantly in recent years and have increased the risk that a healthcare company will have to defend a false claim action, pay fines or be excluded from the Medicare, Medicaid or other federal and state healthcare programs as a result of an investigation arising out of such action.

Employees

As of December 31, 2005, we had 136 full-time equivalent employees . Of these, 115 employees were in research and development comprised of 77 in manufacturing, quality control and quality assurance, 33 in research and process development, and five members of senior management. Of the remaining employees, three were members of senior management and 18 were in administration. As of the same date, 18 of our employees had a Ph.D., M.D. or Pharm.D. degree. None of our employees is subject to a collective bargaining agreement. We consider our relationship with our employees to be good.

Reports

We make available free of charge through our website, www.favrille.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or to be furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.  Any information that is included on or linked to our Internet site is not a part of this report or any registration statement that incorporates this report by referenence.

Executive Officers and Directors of the Registrant

The following table sets forth information regarding our executive officers and directors as of December 31, 2005:

Name		Age		Positions
John P. Longenecker, Ph.D.		58		President, Chief Executive Officer and Director
Tamara A. Seymour		47		Chief Financial Officer and Vice President, Finance and Administration
Daniel P. Gold, Ph.D.		51		Chief Scientific Officer
David L.Guy		43		Chief Commercial Officer
Richard Murawski		57		Senior Vice President, Operations
John F. Bender, Pharm.D.		57		Vice President, Clinical Research
John C. Gutheil, M.D.		49		Vice President, Medical Affairs
Alice M. Wei		42		Vice President, Regulatory Affairs and Quality
Cam L. Garner		57		Chairman of the Board of Directors
Michael L. Eagle		58		Director
Antonio J. Grillo-Lopez, M.D.		66		Director
Peter Barton Hutt		71		Director
Douglas E. Kelly, M.D.		45		Director
Fred Middleton		56		Director
Arda Minocherhomjee, Ph.D.		52		Director
Wayne I. Roe		55		Director
Ivor Royston, M.D.		60		Director

John P. Longenecker, Ph.D. has served as a member of our board of directors and as our President and Chief Executive Officer since February 2002. From March 1999 to February 2002, he served as President of SkyePharma, Inc. and was a member of the Executive Committee of SkyePharma PLC. In 1992, Dr. Longenecker joined DepoTech Corporation as its Senior Vice President of Research, Development and Operations and then served as its President and Chief Operating Officer from February 1998 to March 1999. From 1982 to 1992, he was at Scios, Inc. (now a Johnson & Johnson subsidiary), and served as its Vice President and Director of Development from 1986 to 1992. Dr. Longenecker received a bachelor’s degree in Chemistry from Purdue University and a Ph.D. in Biochemistry from The Australian National University in Canberra, Australia.

Tamara A. Seymour has served as our Chief Financial Officer since May 2001 and also as our Vice President of Finance and Administration since February 2004. From 1991 to May 2001, she served as consulting chief financial officer for a number of biotechnology companies. Her client list included CancerVax Corporation, LXN Corporation, VitaGen Incorporated and Chromagen. From 1988 through 1991, Ms. Seymour was Director of Finance with Agouron Pharmaceuticals, Inc. between 1980 and 1988, she worked as an accountant with Deloitte & Touche LLP and Coopers & Lybrand, Inc. (now PricewaterhouseCoopers LLP). Ms. Seymour is a Certified Public Accountant and received a bachelor’s degree in Business Administration with an emphasis in Accounting from Valdosta State University and an M.B.A. with an emphasis in Finance from Georgia State University.

Daniel P. Gold, Ph.D. co-founded Favrille in January 2000, served as our Executive Vice President of Research and Development from January 2000 to July 2003 and has served as our Chief Scientific Officer since July 2003. He was an Associate Professor at the Sidney Kimmel Cancer Center in San Diego from 1992 through 2003.  Dr. Gold received a bachelor’s degree in Biology from the University of California, Los Angeles, and a Ph.D. in Immunology from Tufts Medical School.

David L. Guy  joined Favrille as our Chief Commercial Officer in early December 2005.  Prior to joining Favrille, Mr. Guy served as Vice President, Global Strategic Marketing and Business Development, Oncology at Schering AG/Berlex from 2002 to 2005. Previously, he served as Director, Oncology Marketing at Genentech from 2000 to 2001.  Prior to Genentech, Mr. Guy spent six years at Sanofi-Aventis as U.S. Business Unit Head, Oncology (Sanofi) from 1994 to 2000 . Mr. Guy earned his Bachelor of Science degree in Biology with a specialization in Molecular Genetics from McMaster University in Hamilton, Ontario.

Richard Murawski has served as our Senior Vice President of Operations since June 2002. From June 1998 to May 2002, he was the Vice President of Global Biotech Operations of Baxter BioScience Corporation. In 1997 and 1998, he served as a consultant. Mr. Murawski was the Vice President of Operations of Cytogen from 1994 to 1997 and Director of Operations at Welgen (Wellcome) from 1990 to 1993. From 1971 to 1990, he served as Plant Manager for Schering-Plough. Mr. Murawski received a bachelor’s degree in Chemical Engineering from the Newark College of Engineering.

John F. Bender, Pharm.D. has served as our Vice President of Clinical Research since joining us in May 2001. From 1981 to 2001, he was at Pfizer Global Research and Development (formerly Parke-Davis), a division of Pfizer, Inc., and served as its Director of Clinical Research-Oncology from 1997 to 2001. At Pfizer, Dr. Bender was involved with the development of over 20 oncology and infectious disease compounds. He received a bachelor’s degree in Biology from Mount Saint Mary’s College, a bachelor’s degree in Pharmacy from the University of Maryland and a Pharm.D. from the University of Utah.

John C. Gutheil, M.D. has served as our Vice President of Medical Affairs since September 2002. From 1999 to September 2002, he served as Executive Director of Clinical Research and Development at Vical Incorporated. From 1997 to 1999, Dr. Gutheil served as Director of Clinical Research at the Sidney Kimmel Cancer Center in San Diego where he was the principal investigator on more than 50 clinical research studies. He received a bachelor’s degree in Biology from the University of California, San Diego, and an M.D. from the Medical College of Wisconsin and holds board certifications in both internal medicine and medical oncology.

Alice M. Wei has served as our Vice President of Regulatory Affairs and Quality since October 2002. From 1993 to September 2002, she was at IDEC Pharmaceuticals Corporation (now Biogen Idec), most recently as Department Head/Senior Director of Regulatory Affairs. Ms. Wei was Director of Regulatory Affairs, Quality Assurance and Quality Control at Anesta Corp. (now Cephalon, Inc.) from 1990 through 1993 and served in various regulatory positions at Immunetech Pharmaceuticals (now Elan Pharmaceuticals) and ICN Pharmaceuticals, Inc. (now Valeant Pharmaceuticals) from 1984 to 1990. She received a bachelor’s degree in Microbiology/Chemistry from the University of Texas at Arlington.

Cam L. Garner has served as a member of our board of directors since December 2000 and as Chairman of our board of directors since May 2001, and served as our acting Chief Executive Officer from August 2001 to February 2002. Mr. Garner recently co-founded specialty pharmaceutical companies, Verus Pharmaceuticals, Inc. and Cadence Pharmaceuticals, Inc.  He serves as Chairman and Chief Executive Officer of Verus Pharmaceuticals, Inc. and Chairman of Cadence Pharmaceuticals, Inc.  He was Chief Executive Officer of Dura Pharmaceuticals, Inc. from 1989 to 1995 and its Chairman and Chief Executive Officer from 1995 to 2000. In 1998, Mr. Garner co-founded DJ Pharma, Inc., and he served as its Chairman until 2000, when it was sold to Biovail Corporation. In 2001, he co-founded a specialty pharmaceutical company, Xcel Pharmaceuticals, Inc., which was acquired by Valeant Pharmaceuticals in 2005.  Mr. Garner also serves on the boards of directors of Somaxon Pharmaceuticals, Inc., a specialty pharmaceutical company and

Pharmion Corporation, a pharmaceutical company, as well as a number of privately-held companies. He received a bachelor’s degree in Biology from Virginia Wesleyan and an M.B.A. from Baldwin-Wallace College.

Michael L. Eagle has served as a member of our board of directors since September 2003. He was Vice President-Manufacturing for Eli Lilly and Company from 1993 to April 2001. Mr. Eagle is a founding member of Barnard Life Sciences and currently serves as a member of the board of a number of privately-held companies.  Mr. Eagle received a bachelor’s degree in Engineering from Kettering University and an M.B.A. from the Krannert School of Management at Purdue University.

Antonio J. Grillo-Lopez, M.D. has served as a member of our board of directors since January 2001. He was Chief Medical Officer and Senior Vice President of Medical and Regulatory Affairs at IDEC Pharmaceuticals Corporation (now Biogen Idec) from 1992 to January 2001. Prior to 1992, Dr. Grillo-Lopez served as Executive Medical Director for International Clinical Research Development at DuPont Merck Pharmaceutical Co. and as Vice President of Clinical Therapeutics and Director of Clinical Oncology Research at Parke-Davis (now Pfizer). From 1980 to 1990, he was at the University of Michigan, most recently as an Associate Professor of Medicine. Dr. Grillo-Lopez currently serves as a director of Onyx Pharmaceuticals, Inc., a biopharmaceutical company. He received a bachelor’s degree in Natural Sciences from the University of Puerto Rico, College of Natural Sciences, and an M.D. from the University of Puerto Rico School of Medicine.

Peter Barton Hutt has served as a member of our board of directors since November 2003. Mr. Hutt has been a partner or senior counsel specializing in food and drug law in the Washington, D.C. law firm of Covington & Burling since 1968, except when he served as Chief Counsel for the FDA from 1971 to 1975. He is the co-author of a casebook used to teach food and drug law throughout the country and teaches a full course on this subject each year at Harvard Law School. Mr. Hutt currently serves on the board of directors of CV Therapeutics, Inc., a biopharmaceutical company, ISTA Pharmaceuticals, Inc., a specialty pharmaceutical company, Momenta Pharmaceuticals, Inc., a biotechnology company, Xoma, a biotechnology company, Introgen Therapeutics, Inc., a biopharmaceutical company, and privately-held biopharmaceutical companies and on venture capital advisory boards, including Polaris Venture Partners and the Sprout Group. Mr. Hutt received a bachelor’s degree in Economics and Political Science from Yale University, an LL.B. from Harvard Law School and an L.L.M. in Food and Drug Law from New York University Law School.

Douglas E. Kelly, M.D. has served as a member of our board of directors since May 2000. He is a General Partner of Alloy Ventures, an affiliate of certain holders of our capital stock. Prior to joining Alloy Ventures in 1993, Dr. Kelly worked with the European venture capital firms 3i Ventures and TVM Techno Venture Management. He was an early employee at Ligand Pharmaceuticals, Inc. from 1990 to 1991, and also worked as an independent consultant. Dr. Kelly is also a director of Pharsight, Inc., a clinical trials simulation company, and a number of privately-held companies. He received a bachelor’s degree in Biochemistry and Molecular Biology from the University of California, San Diego, an M.D. from the Albert Einstein College of Medicine and an M.B.A. from the Stanford University Graduate School of Business.

Fred Middleton has served as a member of our board of directors since May 2002. Since 1987, he has been a General Partner/Managing Director of Sanderling Ventures, a firm specializing in biomedical venture capital, and an affiliate of certain holders of our capital stock. From 1984 through 1986, he was Managing General Partner of Morgan Stanley Ventures, an affiliate of Morgan Stanley & Co. Prior to that, from 1978 to 1984, Mr. Middleton served as Vice President of Finance and Corporate Development, Chief Financial Officer, and President of Genentech Development Corporation for Genentech, Inc. He currently serves as Chairman of the Board of Stereotaxis, Inc., a biotechnology company, and also as a director of several privately-held companies. Mr. Middleton received a bachelor’s degree in Chemistry from the Massachusetts Institute of Technology and an M.B.A. with distinction from Harvard Business School.

Arda Minocherhomjee, Ph.D. has served as a member of our board of directors since March 2004. He is currently a partner of Chicago Growth Partners. Since 1992, Dr. Minocherhomjee has served in various capacities for William Blair & Company, L.L.C, an affiliate of certain holders of our capital stock, including, most recently, as a Principal. Since September 1998, Dr. Minocherhomjee has also served as a managing member of William Blair Capital Partners, an affiliate of William Blair & Company, L.L.C. He currently serves on the board of directors of CryoCor. Inc., a medical device company, as well as several privately-held pharmaceutical and medical device companies. Dr. Minocherhomjee received a master’s degree in Pharmacology from the University of Toronto and a Ph.D. and an M.B.A. from the University of British Columbia, and was a post-doctoral fellow in Pharmacology at the University of Washington Medical School.

Wayne I. Roe has served as a member of our board of directors since February 2001. He was the founding Chief Executive Officer and Chairman of Covance Health Economics and Outcomes Services, Inc. from 1988 to 1999 and previously served as Vice President for Economic and Health Policy for the Health Industry Manufacturers Association. He currently sits on the boards of directors of Aradigm Corporation, a biopharmaceutical company, ISTA Pharmaceuticals, Inc., a specialty pharmaceutical company, and a number of privately-held companies. Mr. Roe also serves on the executive committee of the Maryland Angels Fund. Mr. Roe received a bachelor’s degree in Economics from Union College and an M.A. in Economics from the University of Maryland.

Ivor Royston, M.D. has served as a member of our board of directors since January 2000, and as our acting Chief Executive Officer from January 2000 to August 2001. He is a co-founder of Forward Ventures, a venture fund affiliated with certain holders of our capital stock. From 1990 to 2000, Dr. Royston served as the founding President and Chief Executive Officer of the non-profit Sidney Kimmel Cancer Center. He remains a member of the Board of Trustees of that organization. In 1986, Dr. Royston co-founded IDEC Pharmaceuticals Corporation (now Biogen Idec), and in 1978 he founded Hybritech, Inc. From 1978 to 1990, Dr. Royston served on the faculty of the medical school and cancer center at the University of California, San Diego. Dr. Royston also serves on the board of directors of CancerVax Corporation, a biotechnology company, Corautus Genetics, Inc., a biopharmaceutical company and Avalon Pharmaceuticals, Inc., a biopharmaceutical company. Dr. Royston received a bachelor’s degree in Human Biology and an M.D. from The Johns Hopkins University and completed post-doctoral training in internal medicine and medical oncology at Stanford University.

Item 1A.       Risk Factors

You should consider carefully the risk factors described below, together with the other information contained in this report. If any of the following risks actually occur, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment in our common stock.

Risks Related to the Development of Our Product Candidates

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

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

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

Other than FavId, we have only two other product development programs, which are at significantly earlier stages of development. We are currently preparing to file an IND for a product candidate, FAV-201, from one of these programs in patients with T-cell lymphoma. During the fourth quarter of 2005, we initiated preclinical studies to assess the applicability of our technology to autoimmune diseases, with an initial focus on multiple sclerosis. We cannot be certain that we will be able to successfully develop any product candidate from these development programs. We cannot be certain that the clinical development of FavId or any other product candidate in preclinical testing or clinical trials will be successful, that it will receive the regulatory approvals required to commercialize it, or that any of our other research programs will yield a product candidate suitable for entry into clinical trials. If we are unable to commercialize FavId or our other product candidates, we may be unable to generate sufficient revenues to attain or maintain profitability, our ability to raise additional capital will be impaired and our stock price may be negatively affected.

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

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

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

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

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

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

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

• warning letters;

• fines and other civil penalties;

• unanticipated expenditures;

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

• product recall or seizure;

• interruption of production;

• operating restrictions;

• injunctions; and

• criminal prosecution.

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

Conducting clinical trials is a lengthy, time-consuming and expensive process, and the results of these trials are inherently uncertain. We have completed enrollment of patients in several Phase 2 clinical trials of FavId involving over 130 indolent B-cell NHL patients and are currently conducting follow-up evaluation of those patients. We completed enrollment of patients in a pivotal Phase 3 clinical trial of FavId for the treatment of follicular B-cell NHL in January 2006 and anticipate an analysis of the secondary endpoint, response improvement, during the fourth quarter of 2006 and final analysis of the primary endpoint, TTP, during the second half of 2007. Four additional Phase 2 clinical trials of FavId were ongoing during 2005 with one additional Phase 2 clinical trial planned for 2006. One of these clinical trials is being conducted under a separate physician-sponsored IND in the United States. A second of these is being conducted