UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2007
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission file number 000-51169

ASPREVA PHARMACEUTICALS CORPORATION

(Exact name of registrant as specified in its charter)


British Columbia, Canada		98-0435540
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1203 – 4464 Markham Street,

Victoria, British Columbia,

Canada V8Z 7X8

(Address of principal executive office)

(250) 744-2488

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes þ No o

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

Large Accelerated Filer þ Accelerated Filer o Non-accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No þ

As of October 30, 2007, the registrant had 35,232,580 common shares outstanding.

ASPREVA PHARMACEUTICALS CORPORATION
FORM 10-Q
For the Quarterly Period Ended September 30, 2007

TABLE OF CONTENTS


			Page

PART I — FINANCIAL INFORMATION
	Item 1.	Financial Statements (unaudited)		3
		Consolidated Balance Sheets — September 30, 2007 and December 31, 2006		3
		Consolidated Statements of Income — Three and Nine-month periods ended September 30, 2007 and 2006		4
		Consolidated Statements of Cash Flows — Three and Nine-month periods ended September 30, 2007 and 2006		5
		Notes to Consolidated Financial Statements		6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		27
	Item 4.	Controls and Procedures		28

PART II — OTHER INFORMATION
	Item 1.	Legal Proceedings		29
	Item 1A.	Risk Factors		29
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		44
	Item 3.	Defaults Upon Senior Securities		44
	Item 4.	Submission of Matters to a Vote of Security Holders		44
	Item 5.	Other Information		44
	Item 6.	Exhibits		44
SIGNATURE				45

PART I — FINANCIAL INFORMATION


Item 1.	*FINANCIAL STATEMENTS*

ASPREVA PHARMACEUTICALS CORPORATION

CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)
(Unaudited)


	September 30,			December 31,
	2007			2006
ASSETS
Current
Cash and cash equivalents	$	27,843		$	49,217
Restricted cash		—			731
Marketable securities (Note 3)		325,320			210,678
Accounts receivable		70,776			57,426
Prepaid expenses		505			394
Deferred income tax asset		2,750			2,142
Foreign currency contracts (Note 8)		1,283			298

Total current assets		428,477			320,886
Property and equipment, net		4,356			4,736
Deferred income tax asset		1,817			1,435

TOTAL ASSETS	$	434,650		$	327,057


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current
Accounts payable	$	11,154		$	14,279
Income taxes payable		11,258			11,769
Accrued liabilities		11,418			8,604
Foreign currency contracts (Note 8)		5,900			1,695
Unearned royalty advance		6,854			6,559
Current portion under capital leases		131			329
Current portion of deferred lease inducement		157			130
Deferred income tax liability		952			742

Total current liabilities		47,824			44,107
Long-term portion under capital leases		16			91
Long-term portion of deferred lease inducement		308			391
Deferred income tax liability		1,065			830

Total liabilities		49,213			45,419

Commitments and contingencies (Notes 7, 12 and 18)
Shareholders’ equity (Note 6)
Common shares
Authorized: unlimited
Issued and outstanding		151,771			150,815
September 30, 2007 — 35,213,511
December 31, 2006 — 35,159,619
Additional paid-in capital		18,999			13,049
Retained earnings		216,501			118,625
Accumulated other comprehensive loss		(1,834	)		(851	)

Total shareholders’ equity		385,437			281,638

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	434,650		$	327,057

See accompanying notes to consolidated financial statements.

ASPREVA PHARMACEUTICALS CORPORATION

CONSOLIDATED STATEMENTS OF INCOME
(In thousands of U.S. dollars, except per share amounts)
(Unaudited)


	Three Months Ended					Nine Months Ended
	September 30					September 30
	2007			2006		2007		2006

Royalty revenue (Note 2)	$	62,302		$	47,943	$	185,351	$	162,316
Expenses
Research and development (Notes 15 and 16)		8,933			12,357		36,745		34,389
Global service fee (Note 17)		20,000			—		20,000		—
Marketing, general and administrative (Note 16)		11,204			9,969		30,216		26,833

		40,137			22,326		86,961		61,222

Operating income		22,165			25,617		98,390		101,094
Other income (expense)
Foreign exchange gain (loss)		(410	)		354		1		1,123
Interest and other income		4,554			2,904		11,237		6,526

Total other income		4,144			3,258		11,238		7,649

Income before income taxes		26,309			28,875		109,628		108,743
Income tax expense (Note 9)		2,989			3,475		11,752		10,634

Net income	$	23,320		$	25,400	$	97,876	$	98,109

Net income per common share (Note 5)
Basic	$	0.66		$	0.73	$	2.78	$	2.83

Diluted	$	0.65		$	0.71	$	2.74	$	2.73

See accompanying notes to consolidated financial statements.

ASPREVA PHARMACEUTICALS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30						September 30
	2007			2006			2007			2006

Operating Activities
Net income for the period	$	23,320		$	25,400		$	97,876		$	98,109
Adjustment to reconcile net income to cash provided by operating activities:
Depreciation and amortization (Note 15)		308			192			3,681			464
Deferred taxes		2,421			1,328			2,031			2,028
Stock-based compensation		987			2,830			6,451			6,044
Net change in non-cash working capital items related to operations:
Accounts receivable		(4,651	)		2,553			(13,988	)		(5,100	)
Prepaid expenses		164			190			(111	)		(733	)
Restricted cash		809			(4	)		731			(44	)
Accounts payable		3			(966	)		(2,832	)		1,791
Income taxes payable		1,815			2,455			(511	)		8,322
Accrued liabilities		1,434			1,109			2,814			2,384

Net cash flows from operating activities		26,610			35,087			96,142			113,265

Investing Activities
Purchases of marketable securities		(105,257	)		(92,380	)		(356,849	)		(246,273	)
Redemptions of marketable securities		54,817			51,507			242,540			145,757
Purchase of property and equipment		(267	)		(1,316	)		(3,356	)		(1,645	)

Net cash flows used in investing activities		(50,707	)		(42,189	)		(117,665	)		(102,161	)

Financing Activities
Issuance of common shares		187			1,214			421			3,169
Payments on capital lease obligations		(69	)		(109	)		(272	)		(328	)

Net cash flows from financing activities		118			1,105			149			2,841

Net increase (decrease) in cash and cash equivalents		(23,979	)		(5,997	)		(21,374	)		13,945

Cash and cash equivalents, beginning of the period		51,822			34,701			49,217			14,759

Cash and cash equivalents, end of the period	$	27,843		$	28,704		$	27,843		$	28,704

See Note 10 for supplemental cash flow information

See accompanying notes to consolidated financial statements.

ASPREVA PHARMACEUTICALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(all tabular amounts in thousands of U.S. dollars other than share or per share data or unless otherwise stated)
September 30, 2007


1.	Nature of Business and Basis of Presentation

Unless the context otherwise required, all references to “Aspreva”, “we”, “our” and “us” refer to Aspreva Pharmaceuticals Corporation and its subsidiaries.

We were incorporated on December 20, 2001 under the Canada Business Corporation Act and continued under the Business Corporations Act (British Columbia) on November 19, 2004. Our principal business is to identify, develop and upon approval, commercialize evidence-based medicines for patients living with less common diseases.

We have prepared these consolidated financial statements in accordance with U.S. generally accepted accounting principles for interim financial statements and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for annual financial statements. The financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the United States Securities and Exchange Commission on February 26, 2007.

In the opinion of management, these consolidated financial statements include all normal and recurring adjustments considered necessary to present fairly our financial position, results of operations and cash flows. The results for the three and nine-month periods ended September 30, 2007 are not necessarily indicative of the operating results for the full year or for any other interim period subsequent to September 30, 2007.


2.	Significant Accounting Policies

Our significant accounting policies are the same as described in Note 2 to our Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the United States Securities and Exchange Commission on February 26, 2007, except for the adoption of Financial Accounting Standards Board, or FASB, Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, or FIN 48. The following is a summary of the significant accounting policies used in the preparation of these financial statements.

Income Taxes

Effective January 1, 2007, Aspreva adopted FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attributes for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognizing, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The implementation of FIN 48 did not have a material impact on Aspreva’s consolidated financial statements.

Revenue Recognition

In accordance with the terms of our agreement with Hoffmann — La Roche Inc. and F. Hoffmann — La Roche Ltd, collectively Roche, we earn a royalty based on an equal sharing of incremental net sales of CellCept in non-transplant indications above a negotiated baseline less a distribution fee, payable on a quarterly basis. This baseline is subject to an annual price index adjustment. Roche and Aspreva initially set the baseline for 2007 at 131.3 million Swiss Francs, or CHF. On August 28, 2007, Roche and Aspreva agreed to reset the baseline to CHF 62.9 million

ASPREVA PHARMACEUTICALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

based on changes in the methodology for estimating net sales of CellCept in non-transplant indications. The changes to the revenue methodology and the associated baseline reset agreed to by Roche and Aspreva were in effect for the determination of third quarter revenue, but these changes did not have a material impact on the revenue for the quarter.

Royalty revenue is recognized net of value added tax in accordance with the provisions of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104, or SAB 104, Revenue Recognition, which sets forth criteria that must be met in order to recognize revenue: (i) there is persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is reasonably assured.

Roche and Aspreva have developed a proprietary sales tracking methodology to audit net sales of CellCept and to determine the portion attributable to sales from use in non-transplant indications. The results of this audit lag actual net sales by approximately six months. Roche and Aspreva use actual total CellCept sales results and estimates of the quarterly split between net sales attributed to transplant and non-transplant indications to calculate the royalty payment payable to us at the end of each quarter. We record a portion of this royalty payment as revenue within quarterly financial results, with the balance recorded as unearned royalty advance and subject to a subsequent reconciliation.

This reconciliation process is undertaken quarterly, based on the most recent available audit information, and limits reconciliation payments to either Roche or Aspreva to a maximum amount of CHF 4.0 million per quarter. Thus, at any period end we carry a maximum of CHF 4.0 million for each quarter that has not been reconciled, classified as unearned royalty advance on the balance sheet. As at September 30, 2007, there was CHF 8.0 million ($6.9 million) recorded in unearned royalties as the royalties for the second and third quarters of 2007 have not been reconciled.

Derivative Instruments

We use derivative financial instruments to hedge foreign currency exposures in the business.

Statement of Financial Accounting Standards No. 133, or SFAS 133, Accounting for Derivative Instruments and Hedging Activities, which was amended in June 2000 by SFAS 138 and in May 2003 by SFAS 149, establishes accounting and reporting standards for derivative instruments and hedging activities. Derivative instruments are recorded as assets or liabilities, measured at fair value. Derivative instruments that do not qualify as hedges or are not designated as hedges are adjusted to fair value through income.

Our royalty payments are received from Roche in CHF on a quarterly basis 45 days after each quarter end. Sales of CellCept are denominated in multi-currencies and are converted to CHF by Roche for the purpose of calculating amounts to be paid to us. To the extent the Swiss franc increases in value relative to these other currencies, the total aggregate CHF value of CellCept sales decreases and the amount that we are entitled to may be reduced. To mitigate this risk, at the beginning of each quarter, we enter into noon average rate contracts, or NARCs, to sell U.S. dollars and Euros and buy CHF. The NARCs are designed to hedge our direct exposures of forecasted transactions and are designated as cash flow hedges on the date the hedge is entered into. Changes in the fair value of the contracts are included in revenue.

In addition, forward contracts to sell CHF are entered into with settlement dates that coincide with the date we receive our royalty payments from Roche. The forward contracts entered into are based on forecasts and as such they are initially designated as cash flow hedges on the date the contracts are entered into. At each quarter end the forward contracts related to the respective quarter’s revenue payment are re-designated and are treated as fair value hedges. If the contract is entered into prior to the period in which the underlying transaction occurs, changes in the value of the contract are recorded in other comprehensive income (loss). During the period in which the hedged transaction occurs, changes in the fair value of the contract are included in revenue. Upon designation as a fair value hedge, changes in the fair value of the contract are included in other income as a foreign exchange gain (loss).

ASPREVA PHARMACEUTICALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As a result of our global operations with offices in Canada and Europe we incur significant amounts of our research and development and general and administrative expenditures in Canadian dollars, euros and pounds sterling. In order to hedge against the impact of fluctuations in the value of the Canadian dollar, euro and pounds sterling relative to the U.S. dollar, we enter into short-term forward contracts to purchase Canadian dollars, euros and pounds sterling. Forward contracts relating to forecasted expenditures are designated as cash flow hedges and changes in the fair value of these contracts are included in other comprehensive income (loss), until the hedged item is recognized in income at which time the deferred gain (loss) is recognized as other income as a foreign exchange gain (loss).


3.	Marketable Securities

Available for sale debt securities


										Approximate
					Gross		Gross			Market
			Accrued		Unrealized		Unrealized			and Carrying
	Cost		Interest		Gains		Losses			Value

September 30, 2007	$	319,967	$	4,122	$	1,441	$	(210	)	$	325,320
December 31, 2006	$	208,762	$	1,820	$	153	$	(57	)	$	210,678


4.	Stock-Based Compensation

We measure stock-based awards using the Black-Scholes option pricing model and amortize the fair value of granted stock options to the consolidated statement of income over the vesting period of the options on an accelerated basis. We estimate the fair value of options using the following weighted average assumptions:


	Three Months Ended						Nine Months Ended
	September 30						September 30
	2007			2006			2007			2006

Expected stock price volatility		70	%		70	%		70	%		70	%
Average risk-free interest rate		4	%		4	%		4	%		4	%
Expected option life in years		5.0			5.0			5.0			5.0
Dividend yield		0	%		0	%		0	%		0	%

Included within the consolidated statements of income are the following charges for stock-based compensation:


	Three Months Ended					Nine Months Ended
	September 30					September 30
	2007			2006		2007		2006

Research and development expense	$	(19	)	$	991	$	2,190	$	2,116
Marketing, general and administrative expense		1,006			1,839		4,261		3,928

Total stock-based compensation	$	987		$	2,830	$	6,451	$	6,044

ASPREVA PHARMACEUTICALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock option transactions for the nine-month period ended September 30, 2007, and the number of stock options outstanding as of September 30, 2007, are summarized below:


	Number of
	Optioned			Weighted
	Common			Average
	Shares			Exercise Price

Exercisable in Canadian dollars
Outstanding at December 31, 2006		2,011,371		$	17.92
Options granted		694,100			23.35
Options forfeited		(38,258	)		14.47
Options exercised		(13,038	)		5.52

Outstanding at March 31, 2007		2,654,175		$	19.45

Options granted		—			—
Options forfeited		(23,490	)		13.46
Options exercised		(24,052	)		7.04

Outstanding at June 30, 2007		2,606,633		$	19.62

Options granted		—			—
Options forfeited		(237,854	)		25.58
Options exercised		(16,802	)		11.93

Outstanding at September 30, 2007		2,351,977			19.07

Exercisable at September 30, 2007		1,043,566		$	15.38

The stock options expire at various dates from September 2013 to February 2017. As of September 30, 2007, a total of 1,957,071 common shares are available for future grant under the Aspreva 2002 Incentive Stock Option Plan. The stock options typically have a ten year contractual life and vest ratably over a period of one to four years from the date of grant.


5.	Net Income per Common Share

We calculate net income per common share in accordance with SFAS No. 128, Earnings per Share, which requires the presentation of basic and diluted net income per common share using the treasury stock method.

The denominators for basic and diluted net income per common share for the three and nine-month periods ended September 30, 2007 and 2006 were calculated as follows:


	Three Months Ended				Nine Months Ended
	September 30				September 30
	2007		2006		2007		2006

Weighted average shares outstanding used for basic net income per common share		35,201,767		34,890,894		35,185,106		34,650,645
Effect of dilutive stock options		494,961		982,404		595,598		1,167,885
Effect of dilutive warrants		—		43,802		—		105,534

Weighted average shares outstanding used for diluted net income per common share		35,696,728		35,917,100		35,781,704		35,924,064

ASPREVA PHARMACEUTICALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Due to their anti-dilutive nature, the following potentially issuable shares were omitted from the calculation of diluted net income per common share for these periods:

Three Months Ended

Nine Months Ended

September 30

2007

2006

2007

2006

Stock options

1,312,837

2,334,497

882,012

2,334,497


6.	Shareholders’ Equity

Statement of Shareholders’ Equity

The following table summarizes the activity in our shareholders’ equity from December 31, 2006 to September 30, 2007:


								Accumulated
					Additional			Other					Total
	Number		Common		Paid-In			Comprehensive			Retained		Shareholders’
	of Shares		Shares		Capital			Income (Loss)			Earnings		Equity

Balance, as of December 31, 2006		35,159,619	$	150,815	$	13,049		$	(851	)	$	118,625	$	281,638

Shares issued on:
Exercise of options		13,038		229		(149	)		—			—		80
Stock-based compensation expense		—		—		2,849			—			—		2,849
Unrealized gain on derivative financial instruments, net of tax		—		—		—			159			—		159
Reclassification of unrealized gain on derivative financial instruments, net of tax		—		—		—			(147	)		—		(147	)
Unrealized gain on marketable securities, net of tax		—		—		—			314			—		314
Net income for the period		—		—		—			—			36,414		36,414

Balance, as of March 31, 2007		35,172,657	$	151,044	$	15,749		$	(525	)	$	155,039	$	321,307

Shares issued on:
Exercise of options		24,052		364		(210	)		—			—		154
Stock-based compensation expense		—		—		2,615			—			—		2,615
Income tax benefit on exercise of stock options		—		—		31			—			—		31
Unrealized gain on derivative financial instruments, net of tax		—		—		—			2,025			—		2,025
Reclassification of unrealized gain on derivative financial instruments, net of tax		—		—		—			(93	)		—		(93	)
Unrealized gain on marketable securities, net of tax		—		—		—			461			—		461
Reclassification of unrealized gain on marketable securities, net of tax		—		—		—			(44	)		—		(44	)
Net income for the period		—		—		—			—			38,142		38,142

Balance, as of June 30, 2007		35,196,709	$	151,408	$	18,185		$	1,824		$	193,181	$	364,598

Shares issued on:
Exercise of options		16,802		363		(176	)		—			—		187
Stock-based compensation expense		—		—		987			—			—		987
Income tax benefit on exercise of stock options		—		—		3			—			—		3
Unrealized loss on derivative financial instruments, net of tax		—		—		—			(3,643	)		—		(3,643	)
Reclassification of unrealized gain on derivative financial instruments, net of tax		—		—		—			(269	)		—		(269	)
Unrealized gain on marketable securities, net of tax		—		—		—			775			—		775
Reclassification of unrealized gain on marketable securities, net of tax		—		—		—			(521	)		—		(521	)
Net income for the period		—		—		—			—			23,320		23,320

Balance, as of September 30, 2007		35,213,511	$	151,771	$	18,999		$	(1,834	)	$	216,501	$	385,437

ASPREVA PHARMACEUTICALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Comprehensive Income

Comprehensive income was $19.7 million and $27.6 million for the three-month periods ended September 30, 2007 and 2006, respectively. Comprehensive income was $96.9 million and $98.1 million for the nine-month periods ended September 30, 2007 and 2006, respectively.


7.	Contractual Obligations and Commitments

We have agreements with clinical sites and contract research organizations for the conduct of our clinical trials. We make payments to these sites and organizations based upon the number of patients enrolled and the period of follow-up in the trials. At September 30, 2007, we have commitments to these groups amounting to $14.2 million over the next three years.

Occasionally, we enter into agreements with third parties in the ordinary course of business that include indemnification provisions that are customary in the industry. Those indemnifications generally require us to compensate the other party for certain damages and costs incurred as a result of third party claims or damages arising from these transactions. These indemnification provisions may survive termination of the underlying agreement. The nature of the indemnification obligation prevents us from making a reasonable estimate of the maximum potential amount we could be required to pay. Historically, we have not made any indemnification payments under such agreements and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification obligations.


8.	Derivative Financial Instruments

The following is a summary of the derivative instruments in place at September 30, 2007:


				Average
			Total Notional	Settlement
Type of Hedge	Currency Exchanged	Settlement dates	Amount	Amount

Forward Contract	Sell USD buy CAD	October 2007 — September 2008	7,162 USD		0.9053
Forward Contract	Sell USD buy GBP	October 2007 — September 2008	3,118 USD		1.9673
Forward Contract	Sell CHF buy GBP	November 2007 — August 2008	1,010 CHF		2.3677
Forward Contract	Sell CHF buy CAD	November 2007 — August 2008	2,530 CHF		1.0986
Forward Contract	Sell USD buy Euro	October 2007 — December 2007	408 USD		1.3091
Forward Contract	Sell CHF buy Euro	November 2007	140 CHF		1.5967
Fair Value — dual purpose	Sell CHF buy USD	November 2007	60,629 CHF		1.2013
Cash Flow — dual purpose	Sell CHF buy USD	February 2008 — August 2008	126,736 CHF		1.1955
NARC	Sell USD buy CHF	November 2007 — February 2008	55,373 USD		0.8446
NARC	Sell Euro buy CHF	August 2007 — November 2007	10,677 Euro		0.6068

The fair value of the derivative financial instruments is the estimated amount that we would receive or pay to terminate a contract at the reporting date. At September 30, 2007, the fair value of our forward contracts and NARCs totaled ($4.9) million and $330,000 respectively. Cash flow hedges amounting to ($3.2) million were recorded in Other Comprehensive Income (Loss). For the three and nine month periods ended September 30, 2007, ($1.5) million and ($2.1) million of fair value and cash flow hedges were recorded in revenue, respectively.

We do not use derivative financial instruments for speculative or trading purposes, nor do we hold or issue leveraged derivative financial instruments. All activity is governed by a Board of Directors approved hedging policy and is monitored for compliance on an ongoing basis.

ASPREVA PHARMACEUTICALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


9.	Income Taxes

The provision for income taxes was $11.8 million for the nine month period ended September 30, 2007, resulting in an effective global tax rate of 10.7% for the period. The difference between the effective tax rate and the statutory Canadian federal income tax rate of 34.1% relates to differing foreign tax rates, changes in our future income tax valuation allowance and utilization of tax pools. We believe the overall effective global tax rate for the full year will be less than 15%.

Effective January 1, 2007, we adopted FIN 48. The total amount of unrecognized tax benefits as of the date of adoption was $0.7 million, and, if recognized, the full amount would impact the effective tax rate. As at September 30, 2007, the total amount of unrecognized tax benefits is $0.9 million. We do not expect the unrecognized tax benefit to materially decrease until the conclusion of Canadian tax audits of certain years.

Our accounting policy is to treat interest and penalties relating to unrecognized tax benefits as a component of income taxes. As of January 1, 2007 and September 30, 2007 we had no accrued interest and penalties related to income taxes.

Aspreva is subject to taxes in Switzerland, Canada, the United Kingdom and the United States. The tax years which remain subject to examination by major jurisdictions as of September 30, 2007 include 2003 to present. The Canadian tax authorities are currently conducting an audit of our Canadian tax returns for the years of 2003 to 2006.


10.	Supplemental Cash Flow

Supplemental cash flow information is as follows:


	Three Months Ended				Nine Months Ended
	September 30				September 30
	2007		2006		2007		2006

Income taxes paid	$	1,028	$	—	$	13,023	$	269
Interest paid		29		11		54		32
Amortization of leasehold inducements		22		17		56		78


11.	Related Party Transactions

We retain a law firm where a senior partner is a member of our board of directors and acts as our Corporate Secretary. In the nine-month period ended September 30, 2007 and 2006, we incurred legal fees payable to this law firm of $412,000 and $415,000, respectively, all of which, excluding $62,000 in accrued liabilities, has been paid as of September 30, 2007. In 2007 and 2006, these fees relate primarily to general corporate legal advice.


12.	Contingencies

a) From time to time, we may be involved in litigation relating to claims arising out of our operations. We are not currently involved in any material legal proceedings.

b) Pursuant to the employment agreement of J. William Freytag, our Chief Executive Officer, we are obligated to issue Dr. Freytag options to purchase 700,000 common shares of Aspreva under the terms of the Aspreva 2002 Incentive Stock Option Plan. As of September 30, 2007, these stock options have not been granted as our board of directors has been in possession of material non-public information since Dr. Freytag commenced his employment on July 10, 2007, and we were therefore not permitted by securities legislation to transact equity awards. On October 17, 2007, the board of directors approved a one-time cash payment of US $5.1 million to Dr. Freytag in lieu of our obligation to issue these stock options. This payment is contingent upon the completion of the transaction discussed in Note 18.

ASPREVA PHARMACEUTICALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


13.	Comparative Figures

Certain of the prior year’s figures have been reclassified to conform to the presentation adopted in the current period.


14.	Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or SFAS 157. SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS 159. SFAS 159 allows companies to elect to follow fair value accounting for certain financial assets and liabilities in an effort to mitigate volatility in earnings. SFAS 159 is applicable only to certain financial instruments and is effective for fiscal years beginning after November 15, 2007. We are currently assessing the impact of SFAS 159 on our consolidated financial statements.

In June 2007, the FASB issued Emerging Issues Task Force No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities, or EITF 07-3. EITF 07-3 concludes that nonrefundable advance payments for goods and services to be received in the future for use in research and development activities should be deferred and capitalized. The capitalized amounts should be expensed as the related goods are delivered or the services are performed. EITF 07-3 is effective for new contracts entered into during fiscal years beginning after December 15, 2007. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.


15.	Impairment of Long-Lived Asset

In connection with the preparation of the consolidated financial statements for the three and six-month period ended June 30, 2007, we determined that certain enterprise data capture software was impaired based on its uncertain future service potential. Accordingly, an impairment charge of $2.9 million was recorded as a depreciation expense and included in research and development expense in our consolidated statement of income.


16.	Restructuring

On July 25, 2007, we announced a restructuring plan designed to better focus our operations on core activities that are expected to drive long-term growth. During the three months ended September 30, 2007, cash payments of $900,000 and $600,000 were charged to research and development and marketing, general and administrative expenses, respectively. Non-cash recoveries related to stock-based compensation of $1.0 million and $300,000 were credited to research and development and marketing, general and administrative expenses, respectively. The restructuring plan was substantially complete as of September 30, 2007.


17.	Global Service Fee

On August 28, 2007, we agreed to pay Roche $20 million as reimbursement of pre-market development activities undertaken by Roche outside the U.S., Canadian and major European markets. The agreement does not provide for any additional payments.

ASPREVA PHARMACEUTICALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


18.	Subsequent Event

On October 17, 2007, we entered into a combination agreement, the Combination Agreement, with Galenica AG, or Galenica, pursuant to which, among other things, Galenica, through a wholly-owned Canadian subsidiary, agreed to acquire all of our outstanding common shares at a price of $26 per share in cash. Pursuant to the Combination Agreement, we agreed to certain customary negative and affirmative covenants relating to the operation of our business between the date of execution of the Combination Agreement and the closing of the transaction.

The transaction will be carried out by way of a statutory plan of arrangement under Section 288 of the British Columbia Business Corporations Act, and must be approved by the applicable court, as well as our shareholders and optionholders at a meeting that we anticipate to take place in December 2007. The completion of the transaction is also subject to customary closing conditions, including regulatory approvals. The transaction is expected to close by early January 2008, however, no assurance can be given that all conditions to the closing under the Combination Agreement will be met or that the transaction will become effective.

Estimated cash consideration of approximately $11.8 million will be paid by us pursuant to and contingent upon approval of the Combination Agreement. This contingent consideration includes amounts for executive and employee compensation and fees of our financial advisors. Additional contingent consideration related to accelerated vesting of outstanding options is not estimable at this time. Non-contingent transaction fees of $3.1 million were also incurred subsequent to September 30,2007.

In addition, the Combination Agreement provides that if, under certain circumstances, the Combination Agreement is not completed, we must pay Galenica a termination fee of $23 million.


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

You should read the following discussion and analysis by our management of our financial condition and results of operations in conjunction with our audited consolidated financial statements and related notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2006 and our unaudited consolidated financial statements for the nine month period ended September 30, 2007. Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and are presented in U.S. dollars.

Forward-Looking Statements

The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and/or forward-looking information under applicable Canadian provincial securities laws (collectively, “forward-looking statements”), which are subject to the “safe harbor” created by those sections. The words “anticipates”, “believes”, “estimates”, “expects”, “intends”, “may”, “plans”, “projects”, “will”, “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. The forward-looking statements in this discussion include, but are not limited to, statements concerning:


	•	our strategy;

	•	our future operations;

	•	our future financial position;

	•	our future revenues;

	•	our projected costs;

	•	prospects, plans and objectives of our management;

	•	the potential acquisition of Aspreva by Galenica in an all cash transaction valued at US$26.00 per outstanding share;

	•	the approval of the acquisition by our shareholders and the Canadian regulatory authorities;

	•	the expected closing date of the acquisition;

	•	our expectations regarding our relationship with Hoffmann — La Roche Inc. and F. Hoffmann - La Roche Ltd, or collectively Roche;

	•	our expectations regarding the development of CellCept for certain autoimmune indications; and

	•	our expectations with respect to our clinical trials of CellCept.

With respect to the forward-looking statements contained in this discussion, we have made numerous assumptions regarding, among other things:


	•	our ability to complete our clinical trials of CellCept;

	•	Galenica’s ability to finance its acquisition of Aspreva;

	•	the ability of Aspreva and Galenica to satisfy all of the closing conditions to complete the acquisition;

	•	our ability to protect our intellectual property rights and to not infringe on the intellectual property rights of others;

	•	our ability to comply with applicable governmental regulations and standards;

	•	our ability to succeed at establishing a successful commercialization program for CellCept in any indication for which it may be approved; and

	•	other assumptions set forth in Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q.

We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements or the underlying assumptions thereto, and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from the plans, intentions and expectations disclosed in the forward-looking statements and underlying assumptions, including, without limitation, those set forth in Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not assume any obligation to update any forward-looking statements, other than as required by applicable law.

Overview

Aspreva is a global pharmaceutical company focused on identifying, developing, and, upon approval, commercializing evidence-based medicines for patients living with less common diseases.

On October 17, 2007, Aspreva entered into a definitive Combination Agreement, or the Combination Agreement, with Galenica AG, a diversified global healthcare company headquartered in Bern, Switzerland, or Galenica, and Galenica Canada Ltd., a wholly-owned Canadian subsidiary of Galenica, or Galenica Canada. Pursuant to the Combination Agreement, and upon the terms and subject to the conditions thereof, Galenica Canada will acquire all of the outstanding common shares of Aspreva for US$26.00 per share in cash, the Acquisition. In addition, pursuant to the Combination Agreement, each holder of an outstanding option to acquire common shares of Aspreva will be entitled to receive, with respect to each common share of Aspreva underlying such options, a cash payment equal to the excess, if any, of US$26.00 per share in cash over the exercise price payable under such option.

The Acquisition has been unanimously approved by Aspreva’s Board of Directors, following receipt of the recommendation of a special committee of Aspreva’s Board of Directors. Aspreva’s Board of Directors has resolved to recommend to Aspreva’s shareholders that they vote in favor of a resolution approving the Acquisition. In reaching its decision to approve the Acquisition and determining to recommend the Acquisition to Aspreva shareholders, Aspreva’s Board of Directors considered a number of factors and received fairness opinions from Aspreva’s financial advisors, Lazard Frères & Co. LLC and Lehman Brothers Inc. to the effect, and subject to the assumptions and conditions set forth in such opinions, that the consideration to be received by the holders of common shares of Aspreva in the Acquisition is fair to such holders from a financial point of view.

The Acquisition is to be carried out by way of statutory plan of arrangement and will be subject to, among other things, the approval of 66-2/3%of the votes cast by holders of common shares of Aspreva and options to acquire common shares of Aspreva at a special meeting of shareholders and optionholders that is currently anticipated to take place in December 2007. The closing of the Acquisition is subject to a number of other closing conditions, including court and regulatory approvals. The Acquisition is expected to be consummated on January 3, 2008 shortly after receipt of shareholder and court approvals.

Collaborative Agreements

Our initial focus in autoimmune diseases led us to identify the potential efficacy of the drug CellCept, (mycophenolate mofetil, or MMF) in the treatment of autoimmune diseases. In July 2003, we entered into our first collaboration with Roche for exclusive world-wide rights, excluding Japan, to develop and, upon regulatory approval, commercialize CellCept, for all autoimmune indications. CellCept is an immunosuppressant or “anti-rejection” drug currently approved by the FDA for use in the prevention of rejection in patients receiving heart, kidney and liver transplants. It is important to note that CellCept is not currently approved by the FDA for use in autoimmune indications.

Under the terms of our collaboration agreement with Roche, we agreed to conduct three clinical programs for the indications lupus nephritis, pemphigus vulgaris and myasthenia gravis. We are responsible for assembling the necessary materials from these programs in preparation for potential filings and Roche are responsible for submitting the applications to the relevant regulatory authorities. If a regulatory filing is made under this agreement, Roche will be the holder of any regulatory submissions and any resulting approvals.

Pursuant to our collaboration agreement with Roche we are entitled to a royalty based on an equal sharing of incremental net sales of CellCept in non-transplant indications above a negotiated baseline less a distribution fee, payable on a quarterly basis.

We use a proprietary methodology for tracking sales of CellCept. This enables Roche and Aspreva to determine the portion of Roche’s net sales attributable to the use of CellCept in non-transplant indications. We and Roche have agreed that autoimmune sales are considered the equivalent of non-transplant sales for the purposes of our agreement. We have the right to audit Roche’s calculations of the net sales of CellCept attributable to non-transplant sales, including all data used in the sales tracking methodology, on an annual basis. We also rely on third party data providers, such as International Medical Statistics, or IMS, and the United Network for Organ Sharing to supplement our information regarding the sales tracking of CellCept in transplant and autoimmune diseases and to validate our market assumptions underlying our agreed upon tracking methodology.

On August 28, 2007, Aspreva and Roche announced adjustments to the sales tracking methodology used as part of Aspreva’s CellCept agreement with Roche. This amendment to the CellCept agreement (Fourth Amendment to CellCept Collaboration and Promotion Agreement; included herein as Exhibit 10.39) is intended to allow the methodology to more accurately estimate the use of CellCept in non-transplant indications. As a result of these modifications, it was also necessary to reset the baseline used in the calculation of royalty revenue to CHF 62.9 million for fiscal 2007. As per the CellCept agreement, this baseline is subject to an annual price index adjustment and is updated accordingly by Roche and Aspreva.

If we and Roche receive regulatory approval for the use of CellCept in the treatment of any autoimmune indications, we will be obligated to commercialize CellCept for such indications pursuant to a jointly agreed commercialization plan with Roche. Roche will conduct all manufacturing and distribution of CellCept. Roche will also continue to record all sales and will retain control over the pricing of CellCept.

Our collaboration agreement with Roche currently excludes Japan as a licensed territory and thus excludes that region from our revenue sharing arrangement. In April 2006, Aspreva entered into a non-binding collaboration agreement with Chugai Pharmaceuticals Co., Ltd., for the development of CellCept in Japan for certain autoimmune indications. Based on the preliminary results from the induction phase of our lupus nephritis trial released in June 2007, Chugai is currently evaluating options in consultation with key opinion leaders in Japan. Should Chugai decide to proceed with our collaboration agreement, we will provide an update once the details are finalized.

Clinical Development Programs

We currently have two clinical development programs underway to evaluate CellCept in the treatment of the autoimmune diseases lupus nephritis and pemphigus vulgaris.

Lupus Nephritis

Systemic lupus erythematosus, commonly referred to as lupus, is a complex autoimmune disease affecting numerous organs and tissues. The immune system, which typically fights off viruses and bacteria, loses the ability to differentiate between foreign substances, or antigens, and its own cells and tissues. The involvement of the kidney, known as lupus nephritis, is considered to be the most serious manifestation of lupus. From our analysis of various sources of data, we also estimate that there are about 600,000 diagnosed lupus nephritis patients worldwide.

The Lupus Foundation of America estimates that between 500,000 and 1.5 million Americans have lupus. This wide range demonstrates the challenge that exists when trying to determine the true prevalence of less common diseases such as lupus. Our analysis shows that there are currently about 600,000 patients being treated for lupus in the U.S. health care system. Since clinicians estimate that one third to one half of all lupus patients have lupus nephritis, it is projected that this disease affects at least 200,000 Americans. Based on data from third-party data providers such as IMS Health, we estimate that approximately 14% of lupus nephritis patients in the U.S. are being treated with CellCept. Neither we nor Roche market CellCept for the treatment of any autoimmune disease and the FDA has not approved the use of CellCept for the treatment of any autoimmune disease.

Clinical and Regulatory Progress

In July 2005, we initiated enrollment of patients with biopsy-proven lupus nephritis into our two phase, international phase III trial comparing CellCept to the current standard of care for inducing treatment response and maintaining remission in patients suffering from lupus nephritis.

The open-label induction phase was designed as a 24-week study comparing CellCept to intravenous cyclophosphamide, or IVC, the current standard of care for inducing treatment response in patients with lupus nephritis. With a total enrollment of 370 patients, this is one of the largest late-stage trials ever conducted in lupus nephritis. Preliminary results from this clinical trial were released in June 2007. These initial results showed that, although response rates were similar in both arms of the study, the induction stage of the trial did not meet its primary objective of demonstrating that MMF was superior to IVC in inducing treatment response in lupus nephritis. In September 2007, Aspreva and Roche announced their decision not to proceed at this time with a regulatory submission for CellCept as an induction therapy for this disease.

Patients who successfully completed the induction phase of the lupus nephritis study, and who were eligible, have been re-randomized into the maintenance phase, a blinded study comparing CellCept to azathioprine in maintaining remission and renal function in subjects with lupus nephritis. A total of 227 patients were re-randomized into the maintenance phase. These patients will remain in this study until they have a relapse of disease, need a treatment that the protocol does not allow, or withdraw for any other reason. The phase of the study is ongoing and will continue until a predetermined number of patients have left the study or for a maximum of 36 months.

Pemphigus Vulgaris

Pemphigus vulgaris is a rare dermatological autoimmune disease that, according to the International Pemphigus Foundation, affects approximately 40,000 people worldwide. Symptoms include painful and life-threatening blistering of the skin and mucous membranes which can cover much of the body.

Clinical and Regulatory Progress

In June 2006, we received orphan drug designation from the FDA for CellCept in the treatment of pemphigus vulgaris. In May 2007, we completed expanded enrollment in our international phase III trial for the study of CellCept in the treatment of pemphigus vulgaris with a total of 96 patients. In this trial, CellCept is compared to placebo with both groups receiving corticosteroids as background therapy. The trial is a randomized, double-blind, placebo controlled comparison study of CellCept and placebo and is designed to investigate the efficacy and safety of CellCept for patients with pemphigus vulgaris over a treatment period of 52 weeks. The primary end points encompass both minimal disease activity, defined as no new persistent lesions, together with a low steroid dose. We expect to complete this trial during 2008.

Preliminary Studies

Based on our analysis of existing clinical trial and scientific data, we believe that CellCept has the potential to be effective in treating other autoimmune diseases. We are supporting the study of some of these diseases such as cardiovascular disease in lupus patients and multiple sclerosis through investigator initiated trials. These trials help to answer key clinical questions regarding CellCept’s potential ability to help these patients and provide scientific evidence to support physicians’ management of patients suffering with these debilitating conditions. In addition, this early stage research provides us with valuable data to help determine if there is a business case for continuing further clinical development.

Commercialization

Should we receive regulatory approval for a drug candidate, we intend to design our commercialization activities to comply with the laws and regulations enforced by applicable regulatory authorities. Our overall commercialization strategy is to target a small subset of specialty physicians who treat a majority of patients with the greatest underserved medical needs.

Although CellCept is currently approved in Malaysia for the treatment of lupus nephritis, we do not currently have an approved drug in any other market.

Critical Accounting Policies and Significant Judgments and Estimates

The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Significant accounting policies are more fully described in the notes to our audited consolidated financial statements and notes thereto, included as part of our Annual Report on Form 10-K for the year ended December 31, 2006. However, we believe the following accounting policies relating to revenue recognition, stock-based compensation, clinical trial accounting, provision for income taxes and derivative instruments are the most critical accounting policies for assessing our financial performance.

Revenue Recognition

Pursuant to our agreement with Roche commencing April 1, 2005, we became entitled to a royalty based on an equal sharing of incremental net sales of CellCept in non-transplant indications above a negotiated baseline less a distribution fee, payable on a quarterly basis. Roche and Aspreva initially reset the baseline for 2007 to CHF 131.3 million, after taking into account the price index adjustment. During the third quarter of 2007, Roche and Aspreva agreed to reset the baseline to 62.9 million CHF based on a change in the methodology for estimating net sales of CellCept in non-transplant indications. The changes to the revenue methodology and the associated baseline reset agreed to by Roche and Aspreva were in effect for the determination of third quarter revenue, but these changes did not have a material impact on the revenue for the quarter. We follow the provisions of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104, or SAB 104, Revenue Recognition, which sets forth criteria that must be met in order to recognize revenue: (i) there is persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is reasonably assured.

Once the six month lag period has passed, and audited results can be obtained, Aspreva and Roche employ a mechanism to reconcile audited amounts against the royalty previously paid to us. This reconciliation process is undertaken quarterly, based on the most recent available audit information. This reconciliation mechanism, however, will limit reconciliation payments to either Roche or Aspreva to a maximum amount of CHF 4.0 million per quarter. If the results of the reconciliation indicate that the CHF 4.0 million collar has been exceeded in favor of the same party for two consecutive quarters, we and Roche have agreed upon a mechanism to review the sales tracking methodology and/or our methodology for estimating royalty payments and introduce appropriate changes. The terms of this collar may be changed prospectively at any time by the joint committee formed under our agreement with Roche, on which we have equal representation.

We record all but CHF 4.0 million of the royalty payment as revenue within quarterly financial results. In subsequent quarters, consistent with the timing of the reconciliation described above, the remaining CHF 4.0 million of the royalty payment, as well as any additional payments to us or from us to Roche as a result of such reconciliation will be recorded in the period the reconciliation is completed. Thus, at any period end we will carry a

maximum of CHF 4.0 million for each quarter that has not then been reconciled, classified as unearned royalty advance on the balance sheet. At September 30, 2007, there was CHF 8.0 million ($6.9 million) recorded in unearned royalties as the second and third quarters of 2007 have not been reconciled.

In September 2007, Aspreva and Roche agreed to the final audited results for the net sales relating to the first quarter of 2007. The resulting reconciliation payment of $600,000 is payable by Aspreva to Roche within 45 days of September 30, 2007. For the three month period ended September 30, 2007, we recorded royalty revenue of $62.3 million, which is comprised of $59.5 million for the third quarter initial royalty payment ($62.9 million less $3.4 million collar recorded as unearned royalty advance) and a net reconciliation amount of $2.8 million arising from the reconciliation of audited net sales data to the initial royalty payment for the first quarter of 2007. The initial royalty payment and reconciliation payment are recorded in accounts receivable as of September 30, 2007, and are payable to us within 45 days of September 30, 2007.

Stock-Based Compensation

Stock-based compensation expense, which is a non-cash charge, results in part from estimating the fair value of employee stock options granted using the Black-Scholes option pricing model. The exercise price for option grants are based on the market value of our common shares.

We account for employee stock options in accordance with the provisions of Statement of Financial Accounting Standards No. 123(R), Share-based Payment, a revision of SFAS 123. The Black-Scholes option pricing model requires the input of the fair value of our stock at the date of grant of the stock options as well as the input of several subjective assumptions including: the expected life of the option, the expected volatility at the time the options are granted, and the expected forfeiture rate at the time the options were granted. Our current estimate of expected stock price volatility is 70%, expected option life is five years, and expected forfeiture rate is 5%. The estimated grant date fair value of our options as calculated by the Black-Scholes option pricing model is amortized, using the accelerated method, over the vesting period, which is generally two to four years.

Changes in the inputs and assumptions can materially affect the measure of the estimated fair value of our employee stock options. Also, the accounting estimate of stock-based compensation expense is reasonably likely to change from period to period as further stock options are granted and adjustments are made for stock option forfeitures and cancellations.

As a result of our restructuring in August 2007, credits of $1.3 million related to stock-based compensation were recorded for forfeited options.

Included within the statements of operations are the following charges for stock-based compensation:


	Three Months Ended					Nine Months Ended
	September 30					September 30
	2007			2006		2007		2006
	(In thousands)

Research and development expense	$	(19	)	$	991	$	2,190	$	2,116
Marketing, general and administrative expense		1,006			1,839		4,261		3,928

Total stock-based compensation	$	987		$	2,830	$	6,451	$	6,044

Clinical Trial Accounting

We record expenses for clinical research organizations, investigators and other vendors based upon the estimated amount of work completed on each trial. These estimates may or may not match the actual services performed by the organizations as determined by patient enrollment levels and related activities. We monitor patient enrollment levels and related activities to the extent possible through internal reviews, correspondence and discussions with contract research organizations and review of contractual terms.

However, if we have incomplete or inaccurate information, our estimates of activity levels associated with various trials at a given point in time may be inaccurate. In this event, we could record significant adjustments to research and development expenses in future periods when the actual activity level becomes known. All such costs

are charged to research and development expenses as incurred. To date, we have not experienced material changes in these estimates.

Income Taxes

We have established a wholly-owned subsidiary, Aspreva Pharmaceuticals SA, a Swiss company, which is the principal party to our agreement with Roche. We have received a tax ruling from the Swiss tax authorities with an indefinite term pursuant to which certain income attributable to the exploitation of the CellCept rights we acquired from Roche and certain income attributable to the exploitation of rights we may acquire in the future from other third parties will be subject to a reduced tax rate in Switzerland.

We believe that our effective overall global corporate tax rate realized through this structure will be less than 15%.

We believe that our agreement with Roche should not be classified as a partnership for U.S. federal income tax purposes. If this belief is incorrect, the income of our Swiss subsidiary that is from sources within the United States, if any, could be taxable in the United States on a net income basis. In such event, our effective tax rate and our tax liability could increase.

If we fail to maintain our tax structure, or one or more of the various taxation authorities successfully assert that more profits should be allocated to their respective tax jurisdictions, this may result in a higher overall effective tax rate. The foregoing analysis only applies to our agreement with Roche. Any future collaborations that we enter into may be structured differently and may result in different tax consequences.

We account for income taxes under the liability method. Deferred tax assets and liabilities are recognized for the differences between the financial statement and income tax bases of assets and liabilities, and for operating losses and tax credit carry forwards. A valuation allowance is provided for the portion of deferred tax assets that is more likely than not to be unrealized. Deferred tax assets and liabilities are measured using the enacted tax rates and laws.

Effective January 1, 2007, Aspreva adopted Financial Accounting Standards Board, or FASB, Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, or FIN 48. The implementation of FIN 48 did not have a material impact on Aspreva’s consolidated financial statements.

Derivative Instruments

We utilize foreign exchange forward contracts and other derivative instruments to manage our exposure to foreign exchange fluctuations.

We account for our derivative instruments in accordance with SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities. Derivative instruments are recorded as assets or liabilities, measured at fair value. Derivatives that are not hedges, or are not designated as hedges, are adjusted to fair value through income. If the derivative is a hedge, depending upon the nature of the hedge, changes in the fair value of the derivatives are either offset against the fair value of assets, liabilities or firm commitments through income, or recognized in other comprehensive income (loss) until the hedged item is recognized in income. The ineffective portion of a derivative’s change in fair value is immediately recognized in income.

Results of Operations

Presented below is a comparison of our results of operations for the three and nine-month periods ended September 30, 2007 and 2006.

Royalty Revenue

In accordance with the terms of our agreement with Roche we earn a royalty based on an equal sharing of incremental net sales of CellCept in non-transplant indications above a negotiated baseline less a distribution fee, payable on a quarterly basis. This baseline is subject to an annual price index adjustment. Accordingly, Roche and Aspreva set the baseline to CHF 131.3 million for 2007. On August 28, 2007, Roche and Aspreva agreed to reset the

baseline to CHF 62.9 million based on a change in the methodology for estimating net sales of CellCept in non-transplant indications. The changes to the revenue methodology and the associated baseline reset agreed to by Roche and Aspreva were in effect for the determination of third quarter revenue, but these changes did not have a material impact on the revenue for the quarter.

Under this agreement with Roche, we and Roche calculate and record the royalty payment due to us at the end of each quarter. We recognize a portion of this royalty payment as revenue within our quarterly financial results, and record CHF 4.0 million of the royalty payment due to us as unearned royalty advance on our consolidated balance sheets. This amount is subject to a subsequent reconciliation between Roche and Aspreva at which time the remaining CHF 4.0 million (approximately $3.4 million) of the royalty payment, as well as any additional payments to us or from us resulting from the reconciliations, will be recorded in the period the reconciliation is completed.

The following summarizes the royalty revenue we have earned over the last five quarters under our agreement with Roche:


	September 30,		December 31,		March 31,		June 30,		September 30,
	2006		2006		2007		2007		2007
			(In millions of U.S. dollars)

Initial quarterly payment less collar	$	47.1	$	50.0	$	54.5	$	59.8	$	59.5
Reconciliation amount		0.8		2.5		4.8		4.0		2.8

Total royalty revenue	$	47.9	$	52.5	$	59.3	$	63.8	$	62.3

Our third quarter 2007 revenue represents an increase over the third quarter 2006 revenue of $14.4 million and a decrease of $1.5 million over the second quarter of 2007. Third quarter 2007 revenue includes the negative impact of foreign exchange and reconciliation payments to Roche. The reconciliation amount is in compliance with the terms of Aspreva’s collaboration agreement with Roche and the sales tracking methodology. We continue to expect that, moving forward, the reconciliation amounts will be within the collar as stated in the agreement.

Our only revenue is from our collaboration agreement with Roche. In the third quarter of 2007, we estimate that 50% of our revenue was derived from sales of CellCept in U.S. markets, 18% from major European markets (UK, Spain, Italy, France and Germany) and the remainder from rest of world markets.

Research and Development Expenses

From inception to September 30, 2007, we have incurred total research and development expenses of $126.2 million. Research and development expenses include clinical development expenditures for the use of CellCept to treat lupus nephritis, pemphigus vulgaris, and myasthenia gravis; regulatory affairs expenses related to CellCept; sponsorship of preliminary studies of CellCept efficacy in multiple investigator initiated trials; and expenses related to our business development team which is working to identify potential new drug opportunities. We expense research and development costs as they are incurred.

Clinical expenses primarily include clinical trial costs, salaries and related costs for clinical and regulatory personnel, supplies and materials, consultant services and facilities. Business development expenses primarily include salaries and related costs for business development personnel, and consultant services related to our efforts to identify other drug opportunities.

The following table shows the allocation of research and development expenses:


							For the Nine
	Annual		Annual		Annual		Months Ended				Total from Inception
	Total		Total		Total		September 30,				to September 30
	2004		2005		2006		2006		2007		2007
	(In millions of U.S. dollars)

Lupus nephritis	$	4.9	$	11.9	$	23.9	$	15.5	$	20.5	$	61.3
Myasthenia gravis		2.2		11.3		12.0		9.1		1.9		27.8
Pemphigus vulgaris		1.3		3.3		3.4		2.5		2.4		10.8
Other		—		0.7		3.2		2.1		6.9		10.8

Clinical development expenditures		8.4		27.2		42.5		29.2		31.7		110.7
Business development expenditures		1.7		3.0		5.5		5.2		5.0		15.5

Total	$	10.1	$	30.2	$	48.0	$	34.4	$	36.7	$	126.2

Research and development expenses were $8.9 million for the three-month period ended September 30, 2007, compared to $12.4 million for the three-month period ended September 30, 2006. The decrease of $3.5 million was due to a $3.3 million decrease in our clinical development programs and $200,000 decrease in our business development operations. Clinical development costs decreased as a result of: a $700,000 decrease in our lupus nephritis program costs reflecting the completion of the induction phase of this trial; a $2.9 million decrease in our myasthenia gravis program as a result of the discontinuation of the program in October 2006; offset by a $300,000 increase in our pemphigus vulgaris program.

Included in the above we incurred a net increase of $600,000 in salaries and stock-based compensation expenses as a result of reorganization costs incurred in the third quarter of 2007.

Research and development expenses were $36.7 million for the nine-month period ended September 30, 2007, compared to $34.4 million for the nine-month period ended September 30, 2006. The increase of $2.3 million was due to a $2.5 million increase in our clinical development programs, offset by a $200,000 decrease in our business development operations. Clinical development costs increased as a result of: a $5.0 million increase in our lupus nephritis program costs reflecting the intense activity subsequent to achieving full patient enrollment in September 2006; a $4.8 million increase in other programs, including charges related to an impairment of enterprise data capture software of $2.9 million; offset by a $7.2 million decrease in our myasthenia gravis program as a result of the discontinuation of the program in October 2006, and a $100,000 decrease in our pemphigus vulgaris program.

Included in the above is an increase of $2.6 million in salaries and stock-based compensation expenses. This increase relates to our business development and clinical teams in our Canadian, European and U.S. offices and includes the net effect of reorganization charges incurred in the third quarter of 2007.

The total number of employees engaged in research and development decreased from 56 at September 30, 2006 to 40 at September 30, 2007, which includes 6 in our business development function.

Global Service Fee

Marketing, General and Administrative Expenses

Marketing, general and administrative expenses consist primarily of costs and salaries associated with building our infrastructure, costs of general corporate activities, and salaries and related costs for personnel in executive, finance, accounting, corporate compliance and operational functions. Prior to regulatory approval of CellCept for any autoimmune indications, we limit our marketing activity to conducting extensive market research regarding specialty physician prescribing practices and product positioning, and undertaking a market preparation program.

Marketing, general and administrative expenses were $11.2 million for the three-month period ended September 30, 2007, compared to $10.0 million for the three-month period ended September 30, 2006. The increase of $1.2 million was primarily due to increased consulting expenses and personnel costs over the third quarter of 2006 and includes reorganization charges incurred in the third quarter of 2007.

For the three-month period ended September 30, 2007, our marketing costs represented 39% of total marketing, general and administrative expenses, compared to 41% for the three-month period ended September 30, 2006. We expect our general and administrative expenses to keep pace with overall company activity.

Marketing, general and administrative expenses were $30.2 million for the nine-month period ended September 30, 2007, compared to $26.8 million for the nine-month period ended September 30, 2006. The increase of $3.4 million was primarily due to increased consulting expenses and personnel costs over the second quarter of 2006 and includes reorganization charges incurred in the third quarter of 2007.

The total number of employees engaged in marketing, general and administrative activities decreased from 75 at September 30, 2006 to 55 at September 30, 2007.

Foreign Exchange Gain (Loss)

Foreign exchange losses were $410,000 for the three-month period ended September 30, 2007, compared to gains of $354,000 for the three-month period ended September 30, 2006. The net foreign exchange losses were due to the decline in the U.S. dollar against the Swiss Franc, Canadian dollar and British pound during the quarter.

Foreign exchange gains were $1,000 for the nine-month period ended September 30, 2007, compared to gains of $1.1 million for the nine-month period ended September 30, 2006. The net foreign exchange gains were due to the increase in the U.S. dollar against the Swiss Franc during the second quarter, offset by the overall decline in the U.S. dollar against the Canadian dollar, British pound and Swiss Franc.

Interest and Other Income

Interest and other income was $4.6 million for the three-month period ended September 30, 2007, compared to $2.9 million for the three-month period ended September 30, 2006. The increase of $1.7 million was due to higher average investment balances during the three-month period ended September 30, 2007 and higher average rates of return on those investments.

Interest and other income was $11.2 million for the nine-month period ended September 30, 2007, compared to $6.5 million for the nine-month period ended September 30, 2006. The increase of $4.7 million was due to higher average investment balances during the nine-month period ended September 30, 2007 and higher average rates of return on those investments.

Income Taxes

The provision for income taxes was $3.0 million for the three months ended September 30, 2007, resulting in an effective global tax rate of 11.4% for the period. The provision for income taxes was $11.8 million for the nine months ended September 30, 2007, resulting in an effective global tax rate of 10.7% for the period.

For both periods, the difference between the effective tax rate and the statutory Canadian federal income tax rate of 34.1% relates to significant profit in our Swiss subsidiary with favourable foreign tax rates, changes in our future income tax valuation allowance and utilization of tax pools.

We expect our global structure to yield an effective tax rate of less than 15% going forward.

Liquidity and Capital Resources

Sources of Liquidity

As of September 30, 2007, we had working capital of $380.7 million, which included $353.2 million in cash, cash equivalents and marketable securities. In aggregate, our cash, cash equivalents and marketable securities increased by $93.3 million from $259.9 million at December 31, 2006. We had $70.8 million in accounts receivable

at September 30, 2007, of which $68.6 million is due from Roche and payable to us within 45 days of September 30, 2007.

We expect to continue to devote substantial resources to continue our CellCept development program for the treatment of lupus nephritis and pemphigus vulgaris, and to continue to pursue other new drug opportunities.

We expect that our available cash resources, and the revenue from our agreement with Roche, will be sufficient to support our operations for at least 12 months; however, if we pursue new indications for CellCept or pursue other drug opportunities, we may need to raise additional external funds through the sale of additional equity or debt securities. The sale of additional equity and debt securities may result in additional dilution to our shareholders. Additional financing may not be available in amounts or on terms acceptable to us or at all. If we are unable to obtain this additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned research, development and commercialization activities, which could harm our business.

Cash Flows

Operating activities

Net cash from operating activities was $26.6 million for the three-month period ended September 30, 2007, compared to $35.1 million for the three-month period ended September 30, 2006. The decrease of $8.5 million in net cash from operating activities reflects a $2.0 million decrease in net income, a $600,000 decrease in non-cash expenditures, $7.2 million decrease due to accounts receivable, offset by a $700,000 increase due to accounts payable, income taxes payable and accrued liabilities, and an $800,000 increase from restricted cash.

Net cash from operating activities was $96.1 million for the nine-month period ended September 30, 2007, compared to $113.3 million for the nine-month period ended September 30, 2006. The decrease of $17.2 million in net cash from operating activities reflects a $200,000 decrease in net income, an $8.9 million decrease due to accounts receivable, and a $13.0 million decrease due to accounts payable, income taxes payable and accrued liabilities, offset by a $3.6 million increase in non-cash expenditures, and an $800,000 increase from restricted cash.

Investing activities

Net cash used in investing activities was $50.7 million for the three-month period ended September 30, 2007, while net cash used in investing activities was $42.2 million for the three-month period ended September 30, 2006. Purchases of marketable securities during the three-month period September 30, 2007 were $105.3 million, and were offset by proceeds from sales of short-term investments in marketable securities of $54.8 million. Royalty revenue received in the three-month period ended September 30, 2007 was sufficient to fund our current operations, which allowed us to put more of our investments into higher rate, longer term maturities as compared to the three-month period ended September 30, 2006.

Net cash used in investing activities was $117.7 million for the nine-month period ended September 30, 2007, while net cash used in investing activities was $102.2 million for the nine-month period ended September 30, 2006. Purchases of marketable securities during the nine-month period ended September 30, 2007 were $356.8 million, and were offset by proceeds from sales of short-term investments in marketable securities of $242.5 million. Royalty revenue received in the nine-month period ended September 30, 2007 was sufficient to fund our current operations, which allowed us to put more of our investments into higher rate, longer term maturities as compared to the nine-month period ended September 30, 2006.

Financing activities

Net cash from financing activities was $118,000 for the three-month period ended September 30, 2007, compared to $1.1 million for the three-month period ended September 30, 2006. The decrease of $1.0 million was due to fewer share issuances under our stock option plan.

Net cash from financing activities was $149,000 million for the nine-month period ended September 30, 2007, compared to $2.8 million for the nine-month period ended September 30, 2006. The decrease of $2.7 million was due to fewer share issuances under our stock option plan.

Hedging Activities

We utilize a hedging program to manage our exposure to the impact of foreign currency exchange rate fluctuations on our revenue and expenditure cash flows. The program is governed by a hedging policy approved by our Board of Directors and limits the use of derivatives to simple foreign exchange forward contracts and noon average rate contracts. The contracts are intended to protect against changes in the value of the U.S. dollar relative to other currencies. The policy limits the hedged amount between 40% and 80% of forecasted revenue and 60% to 80% of forecasted expenditures in foreign currencies. Our hedges are initiated on a regular basis to maintain a rolling twelve months of hedge position.

The fair value of the derivative financial instruments is the estimated amount that we would receive or pay to terminate a contract at the reporting date. At September 30, 2007 the amount we would pay to terminate all open contracts is $4.6 million.

Contractual Obligations and Commitments

As of September 30, 2007, there was no material change in our capital lease or operating lease obligations or any other long-term liabilities reflected on our consolidated balance sheet as compared to such obligations and liabilities at December 31, 2006.

We also have agreements with clinical sites, and contract research organizations for the conduct of our clinical trials. We make payments to these sites and organizations based upon the number of patients enrolled and the period of follow-up in the trials. At September 30, 2007, we have commitments to these groups amounting to $12.9 million over the next three years. In addition we have contractual commitments for investigator initiated trials totaling $1.3 million over the next three years.

Credit Facilities

We have various agreements with a Canadian chartered bank providing for revolving demand facilities and a lease line in the aggregate amount of $3.6 million. As of September 30, 2007, we had $519,000 of outstanding indebtedness under our credit facilities. The Canadian chartered bank may cancel or restrict the availability of any unutilized portion of our facilities at any time and from time to time without notice. Our credit facilities are secured by a security agreement constituting a first ranking security interest in all our personal property.

Off-Balance Sheet Arrangements

Since inception we have not engaged in material off-balance sheet activities, including the use of structured finance, special purpose entities or variable interest entities.

Related Party Transactions

For a description of our related party transactions during the nine-month period ended September 30, 2007, please see Note 11 of our Notes to Consolidated Financial Statements.

Recent Accounting Pronouncements

fair value accounting for certain financial assets and liabilities in an effort to mitigate volatility in earnings. SFAS 159 is applicable only to certain financial instruments and is effective for fiscal years beginning after November 15, 2007. We are currently assessing the impact of SFAS 159 on our consolidated financial statements.


ITEM 3.	*QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK*

Market Risks

We are exposed to market risk, including changes to interest rates and foreign currency exchange rates.

We maintain risk management control systems to monitor the risks associated with foreign currency exchange rates and our derivative and financial instrument positions. To reduce the volatility relating to these exposures, we enter into various derivative hedging transactions pursuant to our investment and risk management policies and procedures. We do not use derivatives for speculative purposes. Though we intend for our risk management control systems to be comprehensive, there are inherent risks that may only be partially offset by our hedging programs should there be unfavorable movements in foreign currency exchange rates.

Interest Rate Risk

Our material interest-bearing assets consisted of cash, cash equivalents and marketable securities. The balance of our interest-bearing portfolio, including cash, cash equivalents and investments, was $353.2 million, or 82.4% of total current assets at September 30, 2007. Interest income related to this portfolio was $11.2 million for the nine-month period ended September 30, 2007. Our interest income is sensitive to changes in the general level of interest rates, primarily U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest-bearing portfolio.

Foreign Currency Exchange and Foreign Economic Conditions Risk

Financial risk is the risk to our results of operations that arises from fluctuations in interest rates and foreign exchange rates and the degree of volatility of these rates. Foreign exchange risk arises as our investments, which finance operations, are substantially denominated in U.S. dollars, our royalty payments are received in Swiss francs and our expenses are denominated in several foreign currencies, including U.S. dollars, Canadian dollars, pounds sterling and euros.

If exchange rates change by 10%, we do not believe that it would have a material impact on our results of operations or cash flows to date. However, future exchange rate fluctuations may affect our future operating results.

To mitigate the risk of foreign exchange fluctuations against the U.S. dollar, we have entered into a number of foreign exchange forward contracts and noon average rate contracts.

Counterparties Credit Risks

We could be exposed to losses related to the financial instruments described in Note 8 to the Notes to Consolidated Financial Statements should one of our counterparties default. We attempt to mitigate this risk through credit rating monitoring procedures.


ITEM 4.	*CONTROLS AND PROCEDURES*

Evaluation of disclosure controls and procedures

We maintain “disclosure controls and procedures” (as such term is defined under Securities Exchange Act Rule 13a-15(e)) that are designed to ensure that information required to be disclosed in our reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and in reaching a reasonable level of assurance our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We have carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2007. Based upon their evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as such term is defined under Securities Exchange Act Rule 13a-15(e)) were effective.

Changes in internal controls

There were no changes in our internal controls over financial reporting during the three-month period ended September 30, 2007 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

PART II — OTHER INFORMATION


ITEM 1.	*LEGAL PROCEEDINGS*

None.


ITEM 1A.	*RISK FACTORS*

Risks Related to the Proposed Arrangement with Galenica

On October 17, 2007, we entered into a combination agreement with Galenica AG whereby Galenica, through a wholly-owned Canadian subsidiary, will acquire all of our outstanding shares. The transaction, or Arrangement, is subject to a number of conditions and approvals, including approval by the Supreme Court of British Columbia; approval of our shareholders and optionholders; regulatory approvals and/or clearances; and customary closing conditions, including the ability of Galenica to provide adequate funds to complete the Arrangement. The Arrangement is expected to close by early January 2008, however, no assurance can be given that all the necessary approvals and conditions to the closing will be met by this time, or that the Arrangement will become effective at all.

If the proposed Arrangement is not completed, we will have incurred substantial costs that will adversely affect our financial results and operations and our share price.

If the Arrangement is not completed, the price of our common shares will decline to the extent that the current price of our shares reflect a market assumption that the Arrangement will be completed. In addition, we have incurred and will continue to incur substantial costs in connection with the proposed Arrangement. These costs are primarily associated with fees of our financial advisors and legal counsel. In addition, we have diverted significant management resources in an effort to complete the Arrangement and are subject to the restrictions contained in the Combination Agreement on the conduct of our business. If the Arrangement is not completed, we will have incurred significant costs, including the diversion of management resources, for which we will have received little to no benefit. Also, if the Arrangement is not completed under certain circumstances specified in the Combination Agreement, we may be required to pay a termination fee of $23 million. In addition, if the Arrangement is not completed, we may experience negative reactions from the financial markets, our business associates and our employees. Each of these factors may further adversely affect the trading price of our common shares.

Provisions of the Combination Agreement may deter alternate business combinations that could result in greater value to our shareholders.

The Combination Agreement prohibits us from soliciting, initiating, encouraging or knowingly facilitating certain alternative acquisition proposals with any third party, subject to exceptions set forth in the Combination Agreement. The Combination Agreement also provides for the payment of a termination fee of $23 million if the Combination Agreement is terminated in certain circumstances in connection with a competing third-party acquisition proposal and certain other circumstances. These provisions limit our ability to pursue offers from third parties that could result in greater value to our shareholders. The obligation to pay the termination fee may also discourage a third-party from pursuing an alternative acquisition proposal. If the Arrangement is terminated and we seek another business combination, we cannot assure our shareholders that we will be able to negotiate a transaction with another company on terms comparable to the terms of the Arrangement, or that it will avoid incurrence of any fees associated with the termination of the Combination Agreement.

In the event the Agreement is terminated by us in circumstances that obligate us to pay the termination fee, including where we terminate the Combination Agreement because our board of directors withdraws support of the Arrangement, the trading price of our common shares may decline.

The Combination Agreement contains provisions that prevent us from taking certain actions and might prevent us from taking actions we would otherwise pursue.

The Combination Agreement requires us to refrain from taking a number of actions. We cannot, among other things, except in certain circumstances:


	•	make or commit to make any capital expenditures over a specified dollar amount;

	•	incur any material indebtedness for borrowed money other than in the ordinary course and not to exceed a specified dollar amount; or

	•	make any material change in conduct of our business or enter into any transaction outside the ordinary course of business and consistent with past practice.

As a result of these provisions, we might be prevented from pursuing actions or business strategies that we otherwise believe to be in our best interest.

We might lose key personnel due to uncertainty created by the proposed Arrangement.

Our success depends in part on the continued service of key personnel as well as recruitment of additional qualified personnel. As a result of the Arrangement announcement, current and prospective employees could experience uncertainty about their future roles with us, which could adversely affect our ability to attract and retain key personnel. If a substantial number of key employees leave as a result of the Arrangement announcement, or if we fail to attract needed qualified personnel, our business will be harmed.

Risks Related to Our Business

We anticipate that substantially all of our revenue for the foreseeable future will be from royalties based on sales of CellCept and we may not be able to sustain our profitability.

Our operating results may fluctuate from period to period for a number of reasons. In budgeting our operating expenses, some of which are fixed in the short term, we assume that revenues will continue to grow. Even a relatively small revenue shortfall or a small increase in operating expenses may cause our results to be below expectations. A revenue shortfall or increase in operating expenses could arise from any number of factors including:


	•	lower than expected revenues on commercial sales of CellCept;

	•	higher than expected operating expenses as we further develop CellCept for autoimmune indications, seek additional collaborations and operate as a public company;

	•	higher than expected levels of marketing expenses and the expenses of potentially launching CellCept and any future products for our targeted indications; and

	•	fluctuations in currency exchange rates.

We anticipate that substantially all of our revenue for the foreseeable future will be from royalties based on sales of CellCept pursuant to our agreement with Roche. Our revenue is dependent on Roche and our mutual ability to track product sales arising from the use of CellCept by transplant patients. The methodology for accurately tracking sales of CellCept that has been agreed to may be a source of dispute with Roche, which may negatively affect our revenue and our relationship.

If we and Roche are unable to successfully manage our collaboration, the development and potential commercialization of CellCept for autoimmune indications may be delayed or prevented.

Our collaboration with Roche involves a complex sharing of control over decisions, responsibilities, costs and benefits. Development and promotional activities related to CellCept in the autoimmune indications are approved by a joint committee, consisting of an equal number of our representatives and Roche’s representatives. In the event that the joint committee is unable to reach consensus on an issue, the dispute will be referred to senior management of both parties. Unless and until senior management reaches agreement on such dispute, neither party will have the

right to implement any changes to the status quo that would result from resolution of such matter. Ultimate decision making authority is vested in us as to some matters and in Roche as to other matters. Although we are responsible for compiling and preparing all applications for regulatory approval of CellCept in autoimmune indications, Roche has the ultimate decision making authority to submit these applications to the appropriate regulatory authorities. If Roche does not approve the application we prepared, or requires that we revise or modify the application, this could result in delays in receipt of regulatory approvals. In addition, Roche may develop and commercialize, either alone or with others, products that are similar to, or competitive with, CellCept. Roche may also change the focus of its development and commercialization efforts and dedicate fewer resources to CellCept or our collaboration.

If we do not satisfy our obligations under the Roche agreement or if the agreement is terminated we may be forced to limit or cease our operations.

Our agreement with Roche requires us to use commercially reasonable efforts to conduct three clinical trial programs for CellCept in autoimmune indications pursuant to an agreed upon development plan. Roche may allege that we are in breach of a material obligation under our agreement and seek to litigate the allegation. If Roche is successful in such litigation, Roche may either be awarded damages based upon such breach or the agreement might be terminated. After 2011, either party may terminate the agreement if there is a lack of non-transplant sales over the baseline for a prolonged period. In addition, if CellCept is withdrawn from or recalled in any given country, either party may terminate the agreement with respect to that country. If the agreement is terminated in its entirety or in a given country we may be forced to limit or cease our operations.

Our agreement with Roche contains provisions requiring us to comply with applicable laws and regulations, including restrictions on the promotion of approved drugs for off label uses. If it were determined by the FDA or other regulatory authority that we violated the rules relating to off label promotion in connection with our pre-approval communications regarding CellCept, we may be deemed by Roche to be in material breach of the agreement. If we fail to cure any material breach of the agreement, Roche may commence legal action for damages and/or seek to terminate our agreement.

If Roche does not manufacture, distribute, price or sell CellCept at levels which generate sufficient revenue for us to operate, we may have to limit or cease our operations.

We do not own or operate any manufacturing or distribution facilities. Roche, not Aspreva, controls the manufacture of CellCept and we have no alternative supplier. If we are unable to obtain adequate supplies of CellCept from Roche for our clinical trials, they could be delayed or prevented. In addition, if there is a shortage of CellCept, Roche may decide to allocate available supplies of CellCept to purchasers for use in transplant indications and not autoimmune or other indications, thereby reducing our revenues. Roche is solely responsible for distributing and selling CellCept, and setting the price, including all discounts and rebates, of CellCept.

Roche’s control over the manufacture, distribution, pricing and sale of CellCept exposes us to a number of risks which are outside our control including:


	•	Roche may fail to comply with FDA-mandated current good manufacturing practices or similar regulations in other jurisdictions resulting in mandated production halts or limitations;

	•	Roche may experience manufacturing quality or control issues which halt or limit CellCept production;

	•	a manufacturing plant may be closed as a result of a natural disaster or work stoppage;

	•	Roche may experience short or long-term supply problems, or problems distributing CellCept, including difficulties importing or exporting supplies or products;

	•	Roche may decrease its efforts to market and promote CellCept for the transplant indications thus lowering the visibility of CellCept in the market; and

	•	Roche may set a low price for CellCept or give discounts or rebates that effectively lower the price of CellCept, which in either case could reduce our revenues.

However, we may in the future outsource the manufacturing of supply for our clinical trials to third parties other than Roche, subject to approval from Roche and the FDA.

The expiration of Roche’s patents covering CellCept may reduce our revenue as competitors may seek to sell generic versions of CellCept.

Roche owns the patents covering the composition matter of CellCept. The United States patent covering CellCept expires in May 2009. Counterparts of this patent expire in most European countries in late 2010, but in some instances (for example, Spain, Portugal, Greece and Romania) expire as early as December 2007. Roche patents covering the process for manufacture of CellCept expire in the United States in July 2012, and in most other countries in July 2013. We and Roche expect that following expiration of composition of matter patents competitors may manufacture and sell generic versions of CellCept, at a lower price, which would reduce CellCept’s revenues. In certain jurisdictions, including most Canadian provinces, legislation mandates generic substitution for brand name drugs.

If we obtain an orphan drug designation and FDA approval of CellCept for an indication, we would be entitled to seven years of marketing exclusivity for that orphan drug indication. In June 2006, we were granted orphan drug designation for CellCepts’ use in pemphigus vulgaris. In March 2006, Roche and Aspreva agreed not to pursue orphan drug designation for CellCept’s use in lupus nephritis. However, if a competitor obtained approval of a generic form of CellCept for another indication, such as transplant use, physicians would not be prevented from prescribing the generic drug for the orphan indication during the period of marketing exclusivity. Such prescribing practices could adversely affect the sales of CellCept for the orphan indication.

We may incur significant liability if it is determined that we are promoting the “off-label” use of drugs or are otherwise found in violation of federal and state regulations in the United States or elsewhere.

Physicians may prescribe drug products for uses that are not described in the product’s labelling and that differ from those approved by the FDA or other applicable regulatory agencies. Such off-label uses are common across medical specialties. We are aware that some physicians are prescribing CellCept for the treatment of certain autoimmune diseases, including lupus nephritis, although neither we nor Roche are permitted to promote CellCept for the treatment of any autoimmune diseases, and the FDA and other regulatory agencies have not approved the use of CellCept for any autoimmune indications. Although the FDA and other regulatory agencies do not regulate a physician’s choice of treatments, the FDA and other regulatory agencies do restrict communications on the subject of off-label use. Companies may not promote drugs for off-label uses. Accordingly, prior to approval of any autoimmune indications for CellCept, we may not promote CellCept for such indications. The FDA and other regulatory agencies actively enforce regulations prohibiting promotion of off-label uses and the promotion of products for which marketing clearance has not been obtained. A company that is found to have improperly promoted off-label uses may be subject to significant liability, including civil and administrative remedies as well as criminal sanctions.

Notwithstanding the regulatory restrictions on off-label promotion, the FDA and other regulatory authorities allow companies to engage in truthful, non-misleading, and non-promotional speech concerning their products. We engage in medical education activities and communicate with investigators and potential investigators regarding our clinical trials. Although we believe that all of our communications regarding CellCept are in compliance with the relevant regulatory requirements, the FDA or another regulatory authority may disagree, and we may be subject to significant liability, including civil and administrative remedies as well as criminal sanctions.

We and our collaborators are also subject to the U.S. federal False Claims Act and U.S. federal Anti-Kickback law. We have developed a comprehensive compliance program that seeks to establish internal controls to facilitate adherence to the rules and program requirements to which we are and will become subject. If, however, we are determined to have violated these and other laws, we could incur significant penalties and be subject to criminal prosecution. Roche might deem any such determination by a governmental authority to constitute a material breach of our agreement. In addition, management’s attention could be diverted and our reputation and our ability to enter into future collaborations could be damaged.

If CellCept and any future products do not gain meaningful market acceptance we are not likely to generate significant revenues or sustain profitability.

The degree of market acceptance for any product that we commercialize will depend on a number of factors, including:


	•	acceptance by physicians and patients of each product as safe and effective;

	•	potential advantages over existing or alternative therapies, including cost;

	•	actual or perceived safety of similar classes of products;

	•	relative convenience and ease of administration;

	•	reimbursement policies of government and third-party payors;

	•	effectiveness of our sales, marketing and medical education efforts; and

	•	scope of the product label approved by the FDA and other regulatory agencies.

Hospitals or physicians may not choose to administer CellCept or any future product to the entire intended market, if at all. If CellCept and any future products do not achieve meaningful acceptance in their intended markets or if the intended market is smaller than anticipated, we are not likely to generate significant revenues or maintain profitability.

Any failure or delay in obtaining additional capital may curtail the development or commercialization of CellCept or any future products.

We expect that our future need for additional capital will be substantial. The extent of this need will depend on many factors, some of which are beyond our control, including:


	•	our ability to develop and obtain regulatory approval for CellCept and any future products in our targeted indications;

	•	our ability to establish marketing and sales capabilities and the costs of launching CellCept and any future products for our targeted indications;

	•	the extent of costs associated with protecting and expanding our patent and other intellectual property rights;

	•	market acceptance of CellCept and any future products for our targeted indications;

	•	future payments, if any, we receive or make under existing or future collaborative arrangements;

	•	the timing of regulatory approvals needed to market products for our targeted indications;

	•	the need to acquire licenses for new products or compounds; and

	•	compliance with rules and regulations implemented by the U.S. Securities and Exchange Commission, Canadian provincial securities regulatory authorities, the NASDAQ Global Select Market and the Toronto Stock Exchange.

We have no committed sources of additional capital. Funds may not be available to us in the future on favorable terms, if at all, and we may be required to delay, reduce the scope of, or eliminate research and development efforts or clinical trials for CellCept or other future products. We may also be forced to curtail or restructure our operations, obtain funds by entering into arrangements with collaborators on unattractive terms or relinquish rights to technologies or product candidates that we would not otherwise relinquish in order to continue our operations.

If we are not successful in establishing additional collaborations we will not be able to grow our business.

Our long-term success depends upon our ability to identify drugs and drug candidates with significant potential and to acquire the rights for those indications from multiple collaborators, thus creating multiple sources of revenue. We face intense competition from other companies for collaborative arrangements with pharmaceutical and

biopharmaceutical companies, and there are no barriers prohibiting other companies from adopting our business model. Pharmaceutical and biopharmaceutical companies may also decide to pursue new indications for their products themselves, rather than enter into collaborative arrangements to develop new indications. In addition, accurate sales tracking may be difficult or impossible under future collaborations which may preclude a collaboration or lead to disputes once a collaboration has been established. We currently have one collaboration agreement with Roche and one non-binding collaboration with Chugai. If we are unable to enter into additional collaborations, we will continue to be dependent upon Roche for substantially all our revenues, and we will be limited in our ability to grow our business. In addition, the fact that we are collaborating with Roche, or other potential collaborators, may be viewed negatively by other potential collaborators, making them less likely to enter into arrangements with us.

The terms and conditions of any future collaboration agreements may be less favorable than our agreement with Roche.

Our strategy is to seek collaborations with pharmaceutical and biopharmaceutical companies to develop and commercialize new indications. Any new collaborations that we may secure will likely involve drugs or drug candidates, or collaborators, with characteristics different from CellCept or Roche. These characteristics may include:


	•	costs to manufacture, distribute and sell;

	•	patent terms;

	•	expenditures by our collaborators on research and development;

	•	size and difficulty of development programs for potential product indications;

	•	competitive threats; and

	•	other factors relevant to the development and commercialization of such products.

We expect that any new collaborations will be highly negotiated, and the above characteristics all may play a role in the financial terms of such collaborations, possibly resulting in any or all of the following:


	•	our payment of upfront or milestone fees for product rights;

	•	greater clinical trial expenses;

	•	longer timelines to approval;

	•	lower revenue sharing percentages;

	•	shorter agreement periods; or

	•	less than global product rights.

In addition, any new collaboration agreement may provide that we only begin sharing revenue with our collaborator after some long period of time after entering into such collaboration, or after some specific action or approval over which we may have limited control.

If we fail to establish sufficient marketing and sales promotion capabilities, or enter into successful arrangements with third parties to conduct these activities, we may be unable to generate sufficient revenue to continue our operations.

Roche is solely responsible for distributing and selling CellCept. If we obtain approval of CellCept for autoimmune indications, or any future products, we intend to market and promote them through our own sales promotion force in the United States and certain other countries. We currently have no sales promotion capabilities, limited marketing capabilities, limited infrastructure to support such activities, and have limited experience in the commercialization of pharmaceutical products. We may not be able to attract and retain qualified marketing or sales promotion people or be able to establish an effective sales promotion force.

In countries where we do not have a sales promotion force, we may establish relationships with third parties. However, we may not be able to enter into such arrangements on favorable terms or at all and to the extent that we enter into such arrangements, our revenue will depend on their efforts, which may not be successful.

If product liability lawsuits are successfully brought against us, we will incur significant liabilities and may be required to limit the commercialization of our product candidates.

Our use of CellCept and other products in clinical trials, and our future promotion of any products, may expose us to product liability claims and associated adverse publicity. We have a global product clinical trial insurance policy, with aggregate coverage of $10.0 million, for countries not requiring a local insurance policy (including the United States and Canada). In addition, we have policies in varying amounts for all the other countries in which we are conducting clinical trials, and which do not fall within the scope of our global policy. Our insurance coverage may not protect us against any or all of the product liability claims which could be brought against us in the future. Prior to the commercialization of CellCept in autoimmune indications, we expect to obtain product liability insurance for potential claims associated with our promotion of CellCept. However, we may not be able to obtain or maintain adequate insurance coverage at a commercially reasonable cost or in sufficient amounts or scope to protect us against potential losses. Roche is obligated to indemnify us for any product liability claims, except if the claims arise due to false or misleading promotional activity on our part. In the event a product liability claim is brought against us, we may be required to pay legal and other expenses to defend the claim and, if such a claim is successful, damage awards not covered by our insurance. We may also be obligated to indemnify our collaborators. Defending any product liability claim or claims could require us to expend significant financial and managerial resources.

If our competitors are able to develop and market products that are preferred over CellCept or other product candidates that we may develop, we may not be able to generate sufficient revenues to continue our operations.

We may not be able to contend successfully with competitors. The biotechnology and pharmaceutical industries are highly competitive and subject to significant and rapid technological change as researchers learn more about diseases and develop new technologies and treatments. Our current and potential competitors generally include major multinational pharmaceutical companies, biopharmaceutical firms, specialty pharmaceutical companies, universities and other research institutions.

In the transplant market, CellCept currently competes with Novartis’ product, Myfortic. If CellCept is approved for any autoimmune indications, Novartis may choose to also pursue clinical trials and regulatory approval for the same indications. If approved, CellCept will also compete with immunosuppressants, such as steroids and cytotoxic agents, including cyclophosphamide, cyclosporine and azathioprine. A cytotoxic agent is an anti-cancer substance that acts by killing or preventing the division of cells. In addition, we are aware of several companies that have products in development or on the market that may be competitive with CellCept in lupus nephritis and pemphigus vulgaris. Some of the companies have commenced clinical trials for products targeting the same markets and indications that we are addressing.

The existence of these products, other products or treatments of which we are not aware, or products or treatments that may be developed in the future may reduce the marketability of CellCept and any future products, particularly to the extent such products:


	•	are more effective;

	•	have fewer or less severe adverse side effects;

	•	have better patient compliance;

	•	receive better reimbursement terms;

	•	are accepted by more physicians;

	•	are more adaptable to various modes of dosing;

	•	have better distribution channels;


	•	are easier to administer; or

	•	are less expensive.

Some of our competitors, either alone or together with their collaborators, have substantially greater financial resources and larger research, development and regulatory staffs than we do. In addition, many of our competitors, either alone or together with their collaborators, have significantly greater experience than we do in discovering, developing, manufacturing and marketing products. Additional mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated in our competitors.

If we are unable to effectively focus on our core activities that are expected to drive long-term growth we may be unable to develop or commercialize CellCept or any other product candidate successfully.

In the quarter ended September 30, 2007, we decreased our number of employees by 34 and, as of September 30, 2007, we had 95 employees. In July 2007, we implemented a restructuring plan that resulted in a reduction of approximately 25% of our workforce, or 33 positions worldwide. The restructuring coincides with the winding down of the induction phase of our lupus nephritis clinical trial following the release of preliminary results in June 2007 and the completion of our phase III myasthenia gravis clinical trial in late 2006. We implemented the restructuring in order to better focus on core activities that are expected to drive long-term growth. We currently have operations in Canada, the United States, the United Kingdom and Switzerland. Our ability to manage our global operations and any growth will require us to continue to improve our operational, financial and management controls, reporting systems and procedures. We may not be able to make such improvements in an efficient or timely manner. Our ability to develop and commercialize products for new indications and compete effectively, and our future financial performance will depend, in part, on our ability to focus on our core activities and manage any future growth effectively.

We may engage in future acquisitions that could disrupt our business, cause dilution to our stockholders, reduce our financial resources and result in increased expenses.

In the future, we may acquire other businesses, drugs or drug candidates. We have not made any acquisitions to date. Accordingly, our ability as an organization to make acquisitions is unproven. We may not be able to find suitable acquisition candidates, and we may not be able to complete acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not strengthen our competitive position or achieve our goals, or these acquisitions may be viewed negatively by financial markets or investors. In addition, any acquisitions that we make could lead to difficulties in integrating personnel, technologies and operations from the acquired businesses and in retaining and motivating key personnel from these businesses. Acquisitions may disrupt our ongoing operations, divert management from day-to-day responsibilities, increase our expenses and harm our business. Future acquisitions may reduce our cash available for operations and other uses, and could result in an increase in amortization expense related to identifiable assets acquired, potentially dilutive issuances of equity securities or the incurrence of debt. We cannot forecast the number, timing or size of future acquisitions, or the effect that any such acquisitions might have on our operating or financial results.

We depend on our executive officers, and if we are not able to retain them or recruit additional qualified personnel, we may be unable to successfully develop or commercialize CellCept.

Our success depends upon the continued contributions of our executive officers and scientific and technical personnel. Due to the specialized knowledge that each of our executive officers possess with respect to CellCept and our operations, the loss of service of any of our executive officers could delay or prevent the successful completion of the clinical trials necessary for the commercialization of CellCept for lupus nephritis or pemphigus vulgaris and could harm our relationship with Roche. We do not carry key man life insurance for any of our other executive officers.

We have employment agreements with each of our executive officers; however, each may terminate their employment upon notice and without cause or good reason. We currently are not aware that any executive officer is planning to leave or retire.

Our success also depends in part on our ability to attract and retain highly qualified scientific, commercial and administrative personnel. In order to pursue our product development and commercialization strategies, we will need to attract and hire additional personnel with experience in a number of disciplines, including clinical testing, government regulation, sales and marketing, drug reimbursement and information systems. There is intense competition for personnel in the fields in which we operate. We have not experienced difficulty to date in attracting and retaining the personnel we require. If, however, we are unable to continue to attract new employees and retain existing employees, we may be unable to continue our development and commercialization activities.

We may incur losses associated with currency fluctuations and may not be able to effectively hedge our exposure.

Our operations are in many instances conducted in currencies other than the U.S. dollar and fluctuations in the value of currencies relative to the U.S. dollar could cause us to incur currency exchange losses. All amounts paid by Roche to us will be in Swiss Francs. In addition, we currently conduct some operations and incur a portion of our expenses in Canadian dollars, pounds sterling and other foreign currencies. Although we have implemented currency hedging techniques to mitigate the impact of currency fluctuations on our financial results, these techniques do not eliminate the effects of currency fluctuations with respect to anticipated revenues or cash flows, and, as they are short term in nature, do not protect us from prolonged periods of currency fluctuations.

CellCept net sales are denominated in multiple currencies and will be converted to Swiss Francs by Roche for the purpose of calculating amounts to be paid to us. To the extent the Swiss Franc increases in value relative to these other currencies, the total aggregate value of CellCept’s net sales will decrease and the amount, if any, that we are entitled to may be reduced.

Risks Related to Regulatory Matters

We will not be able to commercialize our product candidates if our clinical trials do not demonstrate safety and efficacy in humans.

We are currently not authorized to market CellCept for autoimmune indications in any jurisdiction, and we may never be authorized to market CellCept for any autoimmune indication. The development and commercialization of CellCept for autoimmune indications, and any future products, are subject to extensive and rigorous regulation by the U.S. federal government, principally the FDA, other federal, state and local agencies, and governmental authorities elsewhere. Prior to marketing CellCept for any autoimmune indication, we must conduct, at our own expense, extensive clinical trials to demonstrate with substantial evidence to the satisfaction of the FDA and other regulatory authorities that CellCept is safe and effective for the indication. We have no prior experience as a company in conducting clinical trials. Preclinical studies and clinical trials are expensive, can take many years and have uncertain outcomes. In addition, the regulatory approval procedures vary among countries and additional testing may be required in some jurisdictions. It may take several years to complete the requisite clinical trials, and a product candidate may fail any stage of testing. Difficulties and risks associated with clinical trials may result in our failure to receive regulatory approval to market CellCept for autoimmune indications or our inability to commercialize any future products for new indications. The FDA, other regulatory authorities, our collaborators, or we may suspend or terminate clinical trials at any time. The commencement and completion of our clinical trials could be delayed or prevented by several factors, including:


	•	delays in obtaining regulatory approvals to commence or continue a study;

	•	delays in identifying and reaching agreement on acceptable terms with prospective clinical trial sites;

	•	insufficient quantities of the study drug;

	•	slower than expected rates of patient recruitment and enrollment or the inability to reach full enrollment;

	•	inconclusive or negative interim results during clinical trials, including lack of effectiveness or unforeseen safety issues;


	•	death of, or serious adverse effects experienced by, one or more patients during a clinical trial even if the reasons are not related to the study drug, including the advanced stage of the patient’s disease or medical condition;

	•	uncertain dosing issues;

	•	inability to monitor patients adequately during and after treatment;

	•	inability or unwillingness of contract laboratories to follow good laboratory practices;

	•	inability or unwillingness of clinical investigators to follow our clinical protocols or good clinical practices generally; and

	•	inability or unwillingness of other third parties to perform data collection and analysis in a timely or accurate manner.

Delays or failures in obtaining regulatory approvals may:


	•	delay or prevent the commercialization of any product that we develop for new indications;

	•	diminish any competitive advantages;

	•	reduce or eliminate revenue from the sale of CellCept and any future products; and

	•	adversely affect our ability to attract new collaborators; and,

	•	impact our staffing levels.

The results of early clinical trials do not necessarily predict the results of later clinical trials. Drugs in later clinical trials may fail to show desired safety and efficacy traits despite having progressed through initial clinical trials. In October 2006, we announced preliminary results of our phase III trial of CellCept for the treatment of myasthenia gravis. The results of our analysis indicated that CellCept failed to meet both the primary and secondary endpoints. Given the results of the study we have discontinued our development efforts in this area. In June 2007, we announced preliminary results of our phase III trial of CellCept for the treatment of lupus nephritis. Preliminary analysis of the data revealed that the trial did not meet its primary objective of demonstrating that CellCept was superior to IVC in inducing treatment response in these patients. In September 2007, Aspreva and Roche announced their decision not to proceed at this time with a regulatory submission for CellCept as an induction therapy for this disease. We are aware that Roche conducted three phase III clinical trials for CellCept in the treatment of rheumatoid arthritis which did not demonstrate efficacy. Even if we believe the data collected from clinical trials of drugs are promising, such data may not be sufficient to support approval by the FDA or any other regulatory authority. The FDA or other regulatory authorities could also interpret our data differently, which could delay, limit or prevent regulatory approval.

We expect to rely in part on the results of CellCept clinical trials that were previously performed by or on behalf of Roche and on clinical trials that were previously performed or are being performed by third-party physicians. These trial results may not be predictive of the results of the clinical trials that we plan to conduct for the purposes of our targeted indications. In addition, the results of prior clinical trials may not be acceptable to the FDA or other regulatory authorities because the data may be incomplete, outdated or not otherwise acceptable for inclusion in our submissions for regulatory approval for CellCept in autoimmune indications.

Even if CellCept or any future product candidate receives regulatory approval, we and our collaborators may still face development and regulatory difficulties that may delay or impair future sales.

If we or our collaborators obtain regulatory approval for CellCept for any of our targeted indications, or any other product, we and our collaborators will continue to be subject to extensive regulation by the FDA, other federal authorities, certain state agencies and regulatory authorities elsewhere. These regulations will impact many aspects of our operations and the drug manufacturer’s operations including manufacture, record keeping, quality control, adverse event reporting, storage, labelling, advertising, promotion, sale and distribution, export and personnel. The FDA and state agencies may conduct periodic inspections to assess compliance with these requirements. We, together with our collaborators, will be required to conduct post-marketing surveillance of the product. We also may

be required to conduct post-marketing studies. Our or our collaborators’ failure to comply with applicable FDA and other regulatory requirements, or the later discovery of previously unknown problems, may result in restrictions including:


	•	delays in commercialization;

	•	refusal by the FDA or other similar regulatory agencies to review pending applications or supplements to approved applications;

	•	product recalls or seizures;

	•	warning letters;

	•	suspension of manufacturing;

	•	withdrawals of previously approved marketing applications;

	•	fines and other civil penalties;

	•	injunctions, suspensions or revocations of marketing licenses;

	•	refusals to permit products to be imported to or exported from the United States; and

	•	criminal prosecutions.

Even after a product receives regulatory approval, in the event of serious adverse advents or adverse new clinical data, regulatory authorities may require the addition of restrictive labelling statements, such as “black box” warnings, or impose significant restrictions on a product’s indicated uses or marketing. A “black box” warning or other significant restriction imposed on CellCept or any future product candidate could reduce our revenues and harm our reputation.

Post-approval marketing laws and regulations in other jurisdictions generally provide for the same types of sanctions that may be imposed in the United States.

We may experience delays in patient enrollment, which would delay regulatory approval of CellCept in autoimmune indications and possibly reduce our revenues.

Our ability to obtain, and the timing of, regulatory approval for CellCept in any autoimmune indication depends in part on our ability to successfully complete clinical trials of CellCept in that autoimmune indication. The ability to complete clinical trials depends, in part, on the rate of patient enrollment and patient retention, which is a function of many factors, some of which are beyond our control. In particular, because some of our clinical trials will be blinded so that some patients receive CellCept and others receive another drug or a placebo, and because CellCept is marketed for transplant indications and prescribed by physicians, patients may not want to participate in a clinical trial in which they could receive a placebo or drug other than CellCept.

If third-party clinical research organizations do not perform in an acceptable and timely manner, our clinical trials could be delayed or unsuccessful.

We have limited experience as a company in conducting and managing clinical trials, and rely on third parties, including contract research organizations, outside consultants and principal investigators to assist us in managing, monitoring and conducting our clinical trials. We rely on these parties to assist in the recruitment of sites for participation in clinical trials, to maintain positive relations with the clinical sites and to ensure that these sites conduct the trials in compliance with the protocol and our instructions. If these third parties fail to perform satisfactorily or do not adequately fulfill their obligations to us, our clinical trials may be delayed or unsuccessful. The FDA or other regulatory agencies may inspect some of our clinical sites or our third-party vendors’ sites, to determine if our clinical trials are being conducted according to current good clinical practices. If the FDA or another applicable regulatory agency determines that our third-party vendors are not in compliance with applicable regulations, we may be required to delay, repeat or terminate such clinical trials. Any delay, repetition or termination of our clinical trials could prevent or delay the commercialization of CellCept for autoimmune indications and any other future product candidate.

If government and third-party payors fail to provide coverage and adequate reimbursement rates for our product candidates, our revenues and potential for profitability will be reduced.

In the United States and elsewhere, our product revenues will depend principally upon the reimbursement rates established by third-party payors, including government health administration authorities, managed-care providers, public health insurers, private health insurers and other organizations. These third-party payors are increasingly challenging the price, and examining the cost effectiveness, of medical products and services. In addition, significant uncertainty exists as to the reimbursement status, if any, of newly approved drugs, pharmaceutical products or product indications. We may need to conduct post-marketing clinical trials in order to demonstrate the cost-effectiveness of products. Such studies may require us to commit a significant amount of management time and financial and other resources. CellCept is included in various drug compendia as a commercially approved drug in connection with the prevention of organ rejection and certain third party payors provide reimbursement for this use of CellCept because of such inclusion. However, CellCept or other future products may not be reimbursed or covered by any of these third-party payors for our targeted indications.

In some countries other than the United States, particularly the countries of the European Union and Canada, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, obtaining pricing approval from governmental authorities can take six to twelve months or longer after the receipt of regulatory marketing approval of a product for an indication. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of a product that is the subject of a collaboration with us to other available therapies. If reimbursement of such products is unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels our revenues could be reduced.

Domestic and foreign governments continue to propose and pass legislation designed to reduce the cost of healthcare, including drugs. In the United States, there have been, and we expect that there will continue to be, federal and state proposals to implement similar governmental control. In addition, increasing emphasis on managed care in the United States will continue to put pressure on the pricing of pharmaceutical products. For example, the Medicare Prescription Drug Improvement and Modernization Act of 2003 reforms the way Medicare will cover and reimburse for pharmaceutical products. The legislation expands Medicare coverage for drug purchases by the elderly and has resulted in a new reimbursement methodology based on average sales prices for certain drugs. In addition, the new legislation provides authority for limiting the number of outpatient drugs that will be covered in any therapeutic class. As a result of the new legislation and the expansion of federal coverage of drug products, we expect that there will be additional pressure to contain and reduce costs. The Medicaid program has recently been modified and state healthcare laws and regulations will soon be amended to conform to the federal changes. The new laws and regulations will reduce Medicaid reimbursement. Cost control initiatives could decrease the established reimbursement rates that we receive for any products in the future, which would limit our revenues and profitability. Legislation and regulations affecting the pricing of pharmaceutical products, including CellCept, may change at any time, which could further limit or eliminate reimbursement rates for CellCept or other products.

Risks Related to Intellectual Property

We may incur significant expenses or be prevented from developing or commercializing products as a result of an intellectual property infringement claim.

Our commercial success depends in part on our ability to operate without infringing the patents and other proprietary rights of third parties. Infringement proceedings in the pharmaceutical and biotechnology industries are lengthy, costly and time-consuming and their outcome is uncertain. If we become involved in any patent litigation, interference or other administrative proceedings, we will incur substantial expense and the efforts of our technical and management personnel will be significantly diverted. As a result of such litigation or proceedings we could lose our proprietary position and be restricted or prevented from developing, manufacturing and selling the affected products, incur significant damage awards, including punitive damages, or be required to seek third-party licenses that may not be available on commercially acceptable terms, if at all.

Although Roche has an extensive patent estate covering the composition of matter, methods of treatment and manufacture of CellCept, it is possible that a third party may be issued a patent covering some aspect of CellCept or its use. If this happens, we and Roche may be restricted from developing and commercializing CellCept for

autoimmune indications. If a third party brings an infringement claim against us based solely upon the development or promotion of CellCept in autoimmune indications, Roche has the right under our agreement to deduct 50% of its cost in defending such action, plus any amounts paid in settlement or in a judgment against Roche or Aspreva, from the calculation of CellCept’s net sales prior to determining our share of such sales. Roche is obligated to indemnify us if the infringing activity relates to the development and commercialization of CellCept in both transplant and non-transplant indications.

If we or our collaborators are unable to adequately protect or enforce our intellectual property, our competitive position could be impaired.

Our commercial success depends in part on our ability to:


	•	obtain patents or rights to patents and maintain their validity;

	•	protect our trade secrets; and

	•	effectively enforce our proprietary rights or patents against infringers.

Patent applications may not result in patents being issued. Until a patent is issued, the claims covered by the patent may be narrowed or removed entirely and therefore we may not obtain adequate patent protection. As a result, we may face unanticipated competition, or conclude that, without patent rights, the risk of bringing products to the market is too great. Even if we or our collaborators are issued patents covering our products we cannot predict with certainty whether we or our collaborators will be able to ultimately enforce our patents or proprietary rights. Any patents that we own or license may be challenged, invalidated or circumvented and may not provide us with protection against competitors. We or our collaborators may be forced to engage in costly and time-consuming litigation in order to protect our intellectual property rights. In addition, our collaborators may choose not to enforce or maintain their intellectual property rights, and we may be forced to incur substantial additional costs to maintain or enforce such rights. Patent rights may not provide us with adequate proprietary protection or competitive advantages against competitors with similar products or technologies. The laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States.

In addition to patents, we rely on trade secrets and proprietary know-how. We seek protection, in part, through confidentiality and non-disclosure agreements. These agreements may not provide meaningful protection of our technology or adequate remedies in the event of unauthorized use or disclosure of confidential and proprietary information and, in any event, others may develop independently, or obtain access to, the same or similar information. Our failure or inability to protect our trade secrets and proprietary know-how could impair our competitive position.

Our stock price is volatile and purchasers of our common shares could incur substantial losses.

Our stock price is volatile. Since our initial public offering on March 4, 2005 and through October 31, 2007, our common shares have traded on the NASDAQ Global Select Market between $11.00 and $34.89 per share. The stock market in general and the market for biopharmaceutical and biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The price for our common shares may be influenced by many factors, including:


	•	The timing of our Acquisition by Galenica;

	•	our ability to develop and obtain regulatory approval for CellCept and any future products in our targeted indications;

	•	our ability to establish marketing and sales capabilities and the costs of launching CellCept and any future products for our targeted indications;

	•	market acceptance of CellCept and any future products for our targeted indications;

	•	developments concerning our collaboration with Roche;

	•	our success in establishing additional collaborations;


	•	regulatory developments in the United States, Canada and other countries;

	•	developments or disputes concerning patents or other proprietary rights;

	•	public concern over CellCept or any future products;

	•	litigation;

	•	the departure of key personnel;

	•	future sales of our common shares;

	•	variations in our financial results or those of companies that are perceived to be similar to us;

	•	investors’ perceptions of us; and

	•	general economic, industry and market conditions.

Our articles, our shareholder rights plan and certain Canadian laws could delay or deter a change of control.

Our authorized preferred capital stock is available for issuance from time to time at the discretion of our board of directors, without shareholder approval. Our articles grant our board of directors the authority, subject to the corporate law of British Columbia, to determine or alter the special rights and restrictions granted to or imposed on any wholly unissued series of preferred shares, and such rights may be superior to those of our common shares.

Also, pursuant to our shareholder rights plan, anyone who seeks to acquire 20% or more of our outstanding common shares is required to make a bid complying with specific provisions of the plan. In connection with the proposed Acquisition by Galenica, we will seek approval from our shareholders to amend the shareholder rights plan to allow Galenica and Galenica Canada to acquire all of our outstanding common shares.

Limitations on the ability to acquire and hold our common shares may be imposed by the Competition Act (Canada). This legislation permits the Commissioner of Competition of Canada to review any acquisition of a significant interest in us. This legislation grants the Commissioner jurisdiction to challenge such an acquisition before the Canadian Competition Tribunal if the Commissioner believes that it would, or would be likely to, result in a substantial lessening or prevention of competition in any market in Canada. The Investment Canada Act (Canada) subjects an acquisition of control of a company by a non-Canadian to government review if the value of our assets as calculated pursuant to the legislation exceeds a threshold amount. A reviewable acquisition may not proceed unless the relevant minister is satisfied that the investment is likely to be a net benefit to Canada.

Any of the foregoing could prevent or delay a change of control and may deprive or limit strategic opportunities for our shareholders to sell their shares.

We may be a passive foreign investment company for U.S. tax purposes which may negatively affect U.S. investors.

For U.S. federal income taxation purposes, we will be a passive foreign investment company, or PFIC, if in any taxable year either: (a) 75% or more of our gross income consists of passive income; or (b) 50% or more of the value of our assets is attributable to assets that produce, or are held for the production of, passive income. If we meet either test, our shares held by a U.S. person in that year will be PFIC shares for that year and all subsequent years in which they are held by that person. We were a PFIC prior to 2005 and may be a PFIC in future taxable years. Gain realized by a U.S. investor from the sale of PFIC shares is taxed as ordinary income, as opposed to capital gain, and subject to an interest charge unless the U.S. person has timely made a certain tax election.

The PFIC rules are extremely complex. A U.S. person is encouraged to consult his or her U.S. tax advisor before making an investment in our shares.

As a foreign private issuer, we are subject to different U.S. securities laws and rules than a domestic U.S. issuer, which may limit the information publicly available to our shareholders.

As a foreign private issuer we are not required to comply with all the periodic disclosure requirements of the Securities Exchange Act of 1934 and therefore there may be less publicly available information about Aspreva than if we were a U.S. domestic issuer. In addition, our officers, directors, and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Securities Exchange Act of 1934 and the rules thereunder. However, under Canadian provincial securities laws, our officers, directors and principal shareholders are required to file reports in electronic format through the System for Electronic Disclosure by Insiders, or SEDI, disclosing changes in beneficial ownership of, or control or direction over, our common shares and other securities. Our shareholders can access such reports at www.sedi.ca.

You may be unable to enforce actions against us, or certain of our directors and officers, under U.S. federal securities laws.

We are a corporation organized under the laws of British Columbia, Canada. A majority of our directors and officers reside principally in Canada. Because all or a substantial portion of our assets and the assets of these persons are located outside the U.S., it may not be possible for you to effect service of process within the United States upon us or those persons. Furthermore it may not be possible for you to enforce against us or them in the United States, judgments obtained in U.S. courts based upon the civil liability provisions of the U.S. federal securities laws or other laws of the U.S. There is doubt as to the enforceability, in original actions in Canadian courts, of liabilities based upon the U.S. federal securities laws and as to the enforceability in Canadian courts of judgments of U.S. courts obtained in actions based upon the civil liability provisions of the U.S. federal securities laws. Therefore, it may not be possible to enforce those actions against us or certain of our directors and officers.

An unfavourable determination by tax regulators may cause our provision for income and other taxes to be inadequate and may result in a material impact to our financial results.

We are subject to income taxes in the United States, Canada and other foreign jurisdictions. Significant judgment is required in determining our provision for income taxes, and although we believe that we have made adequate provision for income taxes, tax regulators in jurisdictions where we are subject to income tax may determine that a position we have taken on an issue is inappropriate. Should additional taxes be assessed as a result, there could be a material effect on our cash, income tax provision and net income.

The Canada Revenue Agency, or CRA, is currently conducting an audit of our Canadian tax returns for the years of 2003 to 2006. The CRA audit is still in progress, and we could be subject to significant tax liability as well as loss of certain tax credits and other tax attributes as a result of the CRA audit.


ITEM 2.	*UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.*

None.


ITEM 3.	*DEFAULTS UPON SENIOR SECURITIES*

None.


ITEM 4.	*SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.*

None.


ITEM 5.	*OTHER INFORMATION*

None.


ITEM 6.	*EXHIBITS.*


2	.1(1)	Combination Agreement, dated as of October 17, 2007, among Galenica AG, Galenica Canada Ltd. and Aspreva Pharmaceuticals Corporation.
10	.35(2)	Employment Agreement between the Registrant and J. William Freytag, Ph.D., dated July 10, 2007.
10	.36(2)	Change in Control Agreement between the Registrant and J. William Freytag, Ph.D., dated July 10, 2007.
10	.37(3)	Letter Agreement dated July 25, 2007, between the Registrant and Dr. Richard Jones.
10	.38(4)	Letter Agreement between the Registrant and Dr. Usman Azam, dated September 24, 2007.
10	.39#	Fourth Amendment to CellCept Collaboration and Promotion Agreement, dated August 28, 2007, between and among the Registrant, F. Hoffman-La Roche Ltd and Hoffman-La Roche Inc.
10	.40#	Support Agreement, dated August 28, 2007, between and among the Registrant, F. Hoffman-La Roche Ltd and Hoffman-La Roche Inc.
31	.1	Certification of the Chief Executive Officer, as required by Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended.
31	.2	Certification of the Chief Financial Officer, as required by Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended.
32	.1*	Certification of the Chief Executive Officer, as required by Rule 13a-14(b) of the Securities and Exchange Act of 1934, as amended and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350).
32	.2*	Certification of the Chief Financial Officer, as required by Rule 13a-14(b) of the Securities and Exchange Act of 1934, as amended and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350).


(1)		Filed as the like numbered exhibit to our Current Report on Form 8-K (File No. 000-51169), dated October 17, 2007, and filed with the U.S. Securities and Exchange Commission on October 18, 2007, and incorporated herein by reference.

(2)		Filed as the like numbered exhibit to our Current Report on Form 8-K (File No. 000-51169), dated July 10, 2007, and filed with the U.S. Securities and Exchange Commission on July 16, 2007, and incorporated herein by reference.

(3)		Filed as the like numbered exhibit to our Current Report on Form 8-K (File No. 000-51169), dated July 25, 2007, and filed with the U.S. Securities and Exchange Commission on July 31, 2007, and incorporated herein by reference.

(4)		Filed as the like numbered exhibit to our Current Report on Form 8-K (File No. 000-51169), dated September 24, 2007, and filed with the U.S. Securities and Exchange Commission on September 26, 2007, and incorporated herein by reference.

*		The certifications attached as Exhibits 32.1 and 32.2 accompany this quarterly report on Form 10-Q, are not deemed filed with the U.S. Securities and Exchange Commission and are not to be incorporated by reference into any filing of Aspreva Pharmaceuticals Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

#		Confidential treatment has been requested for portions of this exhibit. Omitted material for which confidential treatment has been requested has been filed separately with the U.S. Securities and Exchange Commission.

SIGNATURE

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

ASPREVA PHARMACEUTICALS CORPORATION


		/s/ Bruce G. Cousins

Bruce G. Cousins

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

November 5, 2007

EXHIBIT INDEX


2	.1(1)	Combination Agreement, dated as of October 17, 2007, among Galenica AG, Galenica Canada Ltd. and Aspreva Pharmaceuticals Corporation.
10	.35(2)	Employment Agreement between the Registrant and J. William Freytag, Ph.D., dated July 10, 2007.
10	.36(2)	Change in Control Agreement between the Registrant and J. William Freytag, Ph.D., dated July 10, 2007.
10	.37(3)	Letter Agreement dated July 25, 2007, between the Registrant and Dr. Richard Jones.
10	.38(4)	Letter Agreement between the Registrant and Dr. Usman Azam, dated September 24, 2007.
10	.39#	Fourth Amendment to CellCept Collaboration and Promotion Agreement, dated August 28, 2007, between and among the Registrant, F. Hoffman-La Roche Ltd and Hoffman-La Roche Inc.
10	.40#	Support Agreement, dated August 28, 2007, between and among the Registrant, F. Hoffman-La Roche Ltd and Hoffman-La Roche Inc.
31	.1	Certification of the Chief Executive Officer, as required by Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended.
31	.2	Certification of the Chief Financial Officer, as required by Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended.
32	.1*	Certification of the Chief Executive Officer, as required by Rule 13a-14(b) of the Securities and Exchange Act of 1934, as amended and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350).
32	.2*	Certification of the Chief Financial Officer, as required by Rule 13a-14(b) of the Securities and Exchange Act of 1934, as amended and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350).


(1)		Filed as the like numbered exhibit to our Current Report on Form 8-K (File No. 000-51169), dated October 17, 2007, and filed with the U.S. Securities and Exchange Commission on October 18, 2007, and incorporated herein by reference.

(2)		Filed as the like numbered exhibit to our Current Report on Form 8-K (File No. 000-51169), dated July 10, 2007, and filed with the U.S. Securities and Exchange Commission on July 16, 2007, and incorporated herein by reference.

(3)		Filed as the like numbered exhibit to our Current Report on Form 8-K (File No. 000-51169), dated July 25, 2007, and filed with the U.S. Securities and Exchange Commission on July 31, 2007, and incorporated herein by reference.

(4)		Filed as the like numbered exhibit to our Current Report on Form 8-K (File No. 000-51169), dated September 24, 2007, and filed with the U.S. Securities and Exchange Commission on September 26, 2007, and incorporated herein by reference.

*		The certifications attached as Exhibits 32.1 and 32.2 accompany this quarterly report on Form 10-Q, are not deemed filed with the U.S. Securities and Exchange Commission and are not to be incorporated by reference into any filing of Aspreva Pharmaceuticals Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

#		Confidential treatment has been requested for portions of this exhibit. Omitted material for which confidential treatment has been requested has been filed separately with the U.S. Securities and Exchange Commission.

Aspreva Pharmaceuticals CORP 10-Q