The FDA's Cellular, Tissue and Gene Therapies Advisory Committee (the "Advisory Committee") review of our BLA for the use of Provenge in the treatment of patients with asymptomatic, metastatic, androgen-independent prostate cancer was held on March 29, 2007. The Advisory Committee was unanimous (17 yes, 0 no) in its opinion that the submitted data established that Provenge is reasonably safe for the intended population and the majority (13 yes, 4 no) believed that the submitted data provided substantial evidence of the efficacy of Provenge in the intended population.
On May 8, 2007, we received a Complete Response Letter from the FDA regarding our BLA. In its letter, the FDA requested additional clinical data in support of the efficacy claim contained in the BLA, as well as additional information with respect to the CMC section of the BLA. In a meeting with the FDA on May 29, 2007, we received confirmation that the FDA will accept a positive final analysis of survival from our Phase 3 D9902B IMPACT (IMmunotherapy for Prostate AdenoCarcinoma Treatment) study to support licensure of Provenge.
On April 14, 2009, we announced that the IMPACT study had met its primary endpoint of overall survival and exhibited a safety profile consistent with prior studies. On April 28, 2009 at the American Urological Association annual meeting, we presented detailed results of the IMPACT study. The IMPACT study had a final enrollment of 512 patients with asymptomatic or minimally symptomatic, metastatic, androgen-independent prostate cancer and was a multi-center, randomized, double-blind, placebo-controlled study. Final results from the IMPACT study showed that Provenge extended median survival by 4.1 months compared to placebo (25.8 months versus 21.7 months), and Provenge improved 3-year survival by 38% compared to placebo (31.7% versus 23.0%). The IMPACT study achieved a p-value of 0.032, exceeding the pre-specified level of statistical significance defined by the study's design (p-value less than 0.043), and Provenge reduced the risk of death by 22.5% compared to placebo (HR=0.775). In light of the IMPACT study results, we intend to amend our BLA with the FDA and proceed to seek U.S. licensure for Provenge.
We expect to increase our investments in commercial infrastructure in preparation for the possible FDA licensure of Provenge. The level of increased investment will depend on our ability to access additional financing, either through the capital markets, borrowings or through collaborative alliances with respect to the development and marketing of Provenge.
Other potential product candidates we have under development include Neuvengetm, our investigational active cellular immunotherapy for the treatment of patients with breast, ovarian and other solid tumors expressing HER2/ neu. We are also developing an orally-available small molecule targeting TRPM8 that could be applicable to multiple types of cancer as well as benign prostatic hyperplasia. In December 2008 we filed an investigational new drug application ("IND") to investigate this small molecule in advanced cancer patients. The IND was cleared by the FDA in January 2009. In April 2009, the first patient enrolled in our Phase 1 clinical trial for patients with advanced cancer.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES We make judgmental decisions and estimates with underlying assumptions when applying accounting principles to prepare our financial statements. Certain critical accounting policies requiring significant judgments, estimates, and assumptions are detailed below. We consider an accounting estimate to be critical if (1) it requires assumptions to be made that are uncertain at the time the estimate is made and (2) changes to the estimate or different estimates, that could have reasonably been used, would have materially changed our financial statements. The development and selection of these critical accounting policies have been reviewed with the Audit Committee of our Board of Directors.
We believe the current assumptions and other considerations used to estimate amounts reflected in our financial statements are appropriate. However, should our actual experience differ from these assumptions and other considerations used in estimating these amounts, the impact of these differences could have a material impact on our financial statements.
Except as noted below, our critical accounting policies are summarized in our 2008 Form 10-K.
Fair Value
Effective January 1, 2008, we adopted Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements" ("SFAS 157"), except as it applies to the nonfinancial assets and nonfinancial liabilities subject to Financial Accounting

Standards Board ("FASB") Staff Position No. FAS 157-2, "Effective Date of FASB Statement No. 157" ("FSP 157-2"). SFAS 157 defines fair value, establishes a framework for measuring fair value under U.S. GAAP and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs.
Warrant Liability
On April 3, 2008, we issued 8.0 million shares (the "Shares") of our common stock, and warrants to purchase up to 8.0 million shares of common stock (the "Warrants") to an institutional investor (the "Investor"). The Investor purchased the Shares and Warrants for a negotiated price of $5.92 per share of common stock purchased. The Warrants are exercisable at any time prior to April 8, 2015, with an exercise price of $20.00 per share of common stock.
We account for the Warrants as a liability under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended ("SFAS 133"), and Emerging Issues Task Force ("EITF") No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock," ("EITF No. 00-19") which provide guidance for distinguishing between permanent equity, temporary equity and assets and liabilities. The Warrants have been recorded at their relative fair values at issuance and will continue to be recorded at fair value each subsequent balance sheet date. Any change in value between reporting periods will be recorded as other income (expense) each reporting date. The Warrants will continue to be reported as a liability until such time as they are exercised or are otherwise modified to remove the provisions that require this treatment, at which time the Warrants will be adjusted to fair value and reclassified from liabilities to stockholders' equity. The fair value of the Warrants is estimated using the Black-Scholes-Merton ("BSM") option-pricing model. As of March 31, 2009 and December 31, 2008, the fair value of the Warrants was determined to be $11.8 million and $14.2 million, respectively; accordingly, we recorded approximately $2.4 million in other income for the three months ended March 31, 2009 related to the change in the fair value of the Warrants. Recent Accounting Pronouncements
On January 1, 2009, we adopted EITF Issue No. 07-1, "Accounting for Collaborative Arrangements" ("EITF 07-1"), which requires a certain presentation of transactions with third parties and of payments between parties to a collaborative arrangement in our statement of operations, along with disclosure about the nature and purpose of the arrangement. The adoption of EITF 07-1 did not have any impact on our results of operations, cash flows or financial position.
On January 1, 2009, we adopted EITF Issue No. 07-5, "Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity's Own Stock" ("EITF 07-5"), which requires that we apply a two-step approach in evaluating whether an equity-linked financial instrument (or embedded feature) is indexed to our own stock, including evaluating the instrument's contingent exercise and settlement provisions The adoption of EITF 07-5 did not have any impact on our results of operations, cash flows or financial position. New Accounting Standards Not Yet Adopted On April 9, 2009, the FASB issued FASB Staff Position No. 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" ("FSP 157-4"), which provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have significantly decreased. FSP 157-4 includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP 157-4 emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation techniques used, the objective of a fair value measurement remains the same. FSP 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. We have evaluated the impact of adopting FSP 157-4 on our financial statements and do not expect any impact on our results of operations, cash flows or financial position.
On April 9, 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments" ("FSP 115-2"), which amends the impairment guidance for certain debt securities and requires an investor to assess the likelihood of selling the security prior to recovering its cost basis. If an investor is able to meet the criteria to assert that it will not have to sell the security before recovery, impairment charges related to those credit losses would be recognized in earnings, while impairment charges related to non-credit losses would be reflected in other comprehensive income. FSP 115-2 is effective for interim and annual

reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We have evaluated the impact of adopting FSP 115-2 on our financial statements and do not expect a material impact on our results of operations, cash flows or financial position.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
Revenue
Revenue decreased to $30,000 for the three months ended March 31, 2009, compared to $31,000 for the three months ended March 31, 2008. Our revenue in the first quarter of 2009 and 2008 includes recognition of deferred revenue related to a license agreement.
Research and Development Expenses
Research and development expenses decreased to $11.8 million for the three months ended March 31, 2009, from $13.5 million for the three months ended March 31, 2008. The decrease in the first quarter of 2009 compared with 2008 was primarily due to the reduction of outside clinical manufacturing and the purchase of commercial antigen in 2008.
Financial data from our research and development-related activities is compiled and managed by us as follows:
1) Clinical programs; and

2) Discovery research.

Our research and development expenses for the three months ended March 31, 2009 and 2008 were as follows (in millions):

                                                      Three months ended
                                                           March 31,
                                                      2009           2008
           Clinical programs:
           Direct costs                             $     1.4       $   2.9
           Indirect costs                                10.0           9.7

           Total clinical programs                       11.4          12.6

           Discovery research                             0.4           0.9

           Total research and development expense   $    11.8       $  13.5

Direct research and development costs associated with our clinical programs include clinical trial site costs, clinical manufacturing costs, costs incurred for consultants and other outside services, such as data management and statistical analysis support, and materials and supplies used in support of the clinical programs. Indirect costs of our clinical program include wages, payroll taxes and other employee-related expenses, rent, restructuring charges, stock-based compensation, utilities and other facilities-related maintenance. The costs in each category may change in the future and new categories may be added. Costs attributable to our discovery research programs represent our efforts to develop and expand our product pipeline.
While we believe our clinical programs are promising, we do not know whether any commercially viable products will result from our research and development efforts. Due to the unpredictable nature of scientific research and product development, we cannot reasonably estimate:
• the timeframe over which our projects are likely to be completed;

• whether they will be completed;

• if they are completed, whether they will provide therapeutic benefit or be approved for commercialization by the necessary regulatory agencies; or

• whether, if approved, they will be scalable to meet commercial demand.

General and Administrative Expenses
General and administrative expenses decreased to $5.2 million for the three months ended March 31, 2009, compared to $5.7 million for the three months ended March 31, 2008. General and administrative expenses were primarily comprised of salaries and wages, consulting fees, marketing fees and administrative costs to support our operations. The decrease in the first quarter of 2009 compared to 2008 was primarily attributable to decreased depreciation expense associated with fully depreciated assets and decreased legal fees associated with our current legal proceedings.
Interest Income
Interest income decreased to $333,000 for the three months ended March 31, 2009, from $1.1 million for the three months ended March 31, 2008. The decrease in 2009 was primarily due to lower average interest rates and lower average cash and investment balances.
Interest Expense
Interest expense decreased to $1.1 million for the three months ended March 31, 2009, compared to $1.5 million for the three months ended March 31, 2008. The decrease in 2009 was primarily due to capitalized interest expense related to the construction of the Facility and our product scheduling system and decreased interest expense related to debt and capital lease obligations. Warrant Liability
Non-operating income associated with the decrease in warrant liability was $2.4 million for the three months ended March 31, 2009. This represents the decrease in the fair value of $14.2 million for the Warrants at December 31, 2008. Under SFAS 157, the Warrants were determined to be Level 3 liability. As such, the fair value was calculated using the Black-Scholes-Merton option-pricing model and is remeasured at each reporting period. Potential future increases in our stock price will result in losses being recognized in our statement of operations in future periods. Conversely, potential future declines in our stock price will result in gains being recognized in our statement of operations in future periods. Neither of these potential gains or losses will have any impact on our cash balance, liquidity or cash flows from operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash Uses
As of March 31, 2009, we had approximately $91.2 million in cash, cash equivalents and short-term and long-term investments. To date, we have financed our operations primarily through proceeds from the sale of equity and debt securities, including the Notes, cash receipts from collaborative agreements and interest income earned.
Net cash used in operating activities for the three months ended March 31, 2009 and 2008 was $14.9 million and $18.7 million, respectively. Expenditures in all periods were a result of research and development expenses, clinical trial costs, contract manufacturing costs and general and administrative expenses in support of our operations.
Since our inception, investing activities, other than purchases and maturities of short-term and long-term investments, consist primarily of purchases of property and equipment. At March 31, 2009, our aggregate investment in equipment and leasehold improvements was $47.4 million.
As of March 31, 2009, we anticipate that our cash on hand, including our cash equivalents and short-term and long-term investments, will not be sufficient to enable us to meet our anticipated expenditures during the next 12 months because we are commencing activities in anticipation of the possible licensure of Provenge for commercialization due to the favorable results of our IMPACT study. While we believe that our current cash on hand is sufficient to initiate our commercialization efforts, we will need to raise additional funds for, among other things:

• the development of marketing, manufacturing, information technology and other infrastructure and activities related to the commercialization of Provenge,

• working capital needs,

• expanding our manufacturing capabilities,

• increased personnel needs, and

• continuing our internal research and development programs.

Additional financing may not be available on favorable terms or at all. If we are unable to raise additional funds through sales of common stock or debt securities, borrowings, or collaborative alliances with respect to Provenge, or otherwise, should we need them, we may be required to delay or scale back our commercialization efforts for Provenge.
Leases and Credit Facility
On March 9, 2009, we entered into the second amendment to our office lease agreement with Selig Holdings Company, LLC. The amendment extends the term on our headquarters to December 31, 2011. On August 22, 2007, we entered into the third amendment to our lease agreement with ARE - 3005 First Avenue, LLC. The amendment extends the lease on our principal research, development and administrative facilities in Seattle, Washington that consist of approximately 71,000 square feet to December 31, 2011, with option to extend the term for an additional five years. The annual base rent for the extended lease term is approximately $2.7 million, which is to be increased annually between three to six percent, approximating the Seattle area consumer price index.
On August 18, 2005, we entered into an agreement to lease 158,242 square feet of commercial manufacturing space in Morris Plains, New Jersey. The lease term is seven years, and we have the option to extend the lease for two ten-year periods and one five- year period, with the same terms and conditions except for rent, which adjusts upon renewal to market rate. We intend to outfit the Facility in phases to meet the anticipated clinical and commercial manufacturing needs for Provenge and our other immunotherapy product candidates in development. The initial phase of the build-out of the Facility was completed in July 2006. In February 2007, we started to manufacture Provenge for clinical use in the Facility. The lease required us to provide the landlord with a letter of credit in the amount of $3.1 million as a security deposit. We provided Wells Fargo, the bank that issued the letter of credit on our behalf, a security deposit of $3.1 million to guarantee the letter of credit, which was recorded as long-term restricted cash on our balance sheet upon issuance. During 2008, the letter of credit was reduced to $1.9 million and the collateral amount required by Wells Fargo was reduced commensurately, resulting in a release of restricted cash of $1.2 million. The $1.9 million letter of credit was recorded as long-term restricted cash on our balance sheet as of March 31, 2009.
In December 2005, we entered into the first two of a series of anticipated Promissory Notes (the "GE Notes"), with General Electric Capital Corporation ("GE Capital"), for the purchase of equipment and associated build-out costs for the Facility. The GE Notes, which evidence one loan with an original principal amount of $7.0 million bearing interest at 7.55 percent per year that was paid in full at December 31, 2008, and the remaining loans with original principal amounts totaling $9.6 million and an average interest rate of 10.1 percent, are to be repaid in 36 consecutive monthly installments of principal and interest. The GE Notes are secured by a Master Security Agreement (the "Security Agreement"), and two Security Deposit Pledge Agreements (the "Pledge Agreements"). Pursuant to the Pledge Agreements, we deposited an aggregate of $7.0 million as a security deposit for the repayment of the GE Notes, which will be released upon the repayment of the GE Notes or upon receipt of FDA approval for the commercialization of Provenge. The balance of such security deposit as of March 31, 2009 was $3.0 million. The security deposit is recorded on our balance sheet in short-term restricted cash. There is a material adverse change clause in the Security Agreement which may accelerate the maturity of the GE Notes upon the occurrence of certain events. We do not believe a material adverse change in our financial condition has occurred. The balance due on the GE Notes as of March 31, 2009 was approximately $1.3 million.

Financings from the Sale of Securities and Issuance of Convertible Notes Equity Offering Proceeds
We have received net proceeds of $107.9 million from the sale of equity securities through a public offering, registered direct offerings and our equity line arrangement since January 1, 2006.
In November 2006, we sold 9.9 million shares of common stock at a price of $4.55 per share for gross proceeds of $45.0 million, or $42.2 million, net of underwriting fees, commissions and other offering costs.
In April 2008, we received net proceeds of $46.0 million from our issuance of the Shares and the Warrants to the Investor. The Investor purchased the Shares and Warrants for a negotiated price of $5.92 per share of common stock purchased. The Warrants are exercisable at any time prior to April 8, 2015, with an exercise price of $20.00 per share of common stock. The Warrants contain a "fundamental change" provision, as defined in the Warrants, which may in certain . . .