8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported) October 23, 2006

Kosan Biosciences Incorporated

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation)

000-31633	94-3217016
(Commission File Number)	(IRS Employer Identification No.)

3832 Bay Center Place, Hayward, CA 94545

(Address of principal executive offices, including Zip Code)

Registrant’s telephone number, including area code: (510) 732-8400

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 1.01. Entry into a Material Definitive Agreement.

On October 24, 2006, Kosan Biosciences Incorporated (the “Company”) entered into an employment offer letter (the “Offer Letter”) with Robert L. De Jager, M.D., F.A.C.P., pursuant to which Dr. De Jager will serve as the Company’s Senior Vice President, Clinical Development and Chief Medical Officer, effective as of November 6, 2006.

Pursuant to the terms of the Offer Letter, Dr. De Jager will receive an annual base salary of $325,000 and a one-time $50,000 sign on bonus. The sign on bonus must be repaid to the Company if Dr. De Jager leaves his employment with the Company within the first 12 months. Starting in 2007, Dr. De Jager will be eligible to participate in the Company’s executive officer cash bonus plan. The Company agreed to recommend to its Board of Directors that Dr. De Jager be able to earn a cash bonus of up to 35% of his annual base salary. The Company also agreed to provide Dr. De Jager with interim housing for up to 90 days and to reimburse him for the cost of the movement of his household goods (including packaging) from the San Diego area to the San Francisco area. The Offer Letter states that Dr. De Jager’s relocation is expected to occur within 12 months of his start date. These relocation expenses will be grossed up for tax purposes. The Offer Letter further provides for the granting of a stock option to purchase 150,000 shares of common stock (the “Stock Option”) under the Company’s 2006 Equity Incentive Plan at an exercise price per share equal to the closing price as reported on the Nasdaq Global Market on the trading day before Dr. De Jager’s first day of full-time employment with the Company. The Stock Option is subject to a four year vesting schedule, with one-fourth of the shares vesting after one year of employment and the remainder vesting in equal monthly increments over the remaining three years.

The foregoing description is subject to, and qualified in its entirety by, the Offer Letter, which is attached hereto as Exhibit 10.43 and incorporated herein by reference.

Item 2.02. Results Of Operations and Financial Condition.

On October 26, 2006, the Company publicly disseminated a press release announcing its financial results for the three and nine months ended September 30, 2006. A copy of the Company’s press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference.

The information under Item 2.02 in this Current Report on Form 8-K and the exhibit attached hereto shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section or Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended. The information contained herein and in the accompanying exhibit shall not be incorporated by reference into any filing with the U.S. Securities and Exchange Commission by the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

Item 5.02. Departure of Directors or Principal Officers; Election of Officers; Appointment of Officers.

On October 23, 2006, the Company’s Board of Directors appointed Robert G. Johnson, Jr., M.D., Ph.D. as President of the Company in addition to his role as Chief Executive Officer. Information with respect to Dr. Johnson is hereby incorporated by reference from Item 5.02 of the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on February 17, 2006 and Item 1.01 of the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on May 4, 2006.

Item 9.01. Financial Statements and Exhibits.

(d) Exhibits

Number	Description
10.43	Employment Agreement between the Company and Robert L. De Jager, M.D., F.A.C.P. dated October 24, 2006
99.1	Press Release entitled “Kosan Announces Third Quarter 2006 Financial Results and Highlights.”

SIGNATURES

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 hereunto duly authorized.

	KOSAN BIOSCIENCES INCORPORATED
Dated: October 26, 2006	By:	/s/ Margaret A. Horn Margaret A. Horn, Senior Vice President, Legal and Corporate Development, General Counsel and Secretary

EXHIBIT INDEX

Number	Description
10.43	Employment Agreement between the Company and Robert L. De Jager, M.D., F.A.C.P. dated October 24, 2006
99.1	Press Release entitled “Kosan Announces Third Quarter 2006 Financial Results and Highlights.”

EX-10.43

Exhibit 10.43

October 24, 2006

Robert L. De Jager, M.D., F.A.C.P.

Dear Robert,

On behalf of Kosan Biosciences Incorporated (“Kosan” or the “Company”), I am pleased to extend to you an offer of employment for the position of Senior Vice President, Clinical Development and Chief Medical Officer, reporting to me. We are very excited at the prospect of having you join us and becoming a key contributor to our efforts. I am looking forward to working closely with you.

Your monthly salary will be $27,083.33 ($325,000 on an annualized basis). We also offer you a $50,000 sign on bonus. Should you leave your employment with Kosan within the first twelve (12) months of employment you will owe this sign on back to the company. Your personal coverage under Kosan’s current benefit plans will become effective on your first day of full-time work at Kosan (your “start date”). We expect that your start date will be as soon as practical.

As soon as you accept this offer, we will recommend to the Board of Directors that you be granted an option to purchase 150,000 shares of Kosan Common Stock under the Kosan Stock Option Plan (the “Plan”). The option shares will vest over four years, with one-fourth vesting after one year of employment and the remainder vesting in equal monthly increments over the remaining three years as provided in the Plan. This option grant is subject to the approval of the Board and your execution of our standard Stock Option Agreement. Subject to Board or Compensation Committee approval of the grant, the exercise price will be equal to the closing price of the stock one trading day prior to your start date.

Starting in 2007, you will be eligible to participate in our bonus plan. We will recommend to the Board of Directors that you be able to earn up to 35% of your annual salary based on achieving your goals and objectives and Kosan’s achievement of its corporate goals and objectives.

In addition to the foregoing, to assist you in your relocation to the Bay Area, Kosan will provide you with interim housing for up to ninety (90) days. Kosan will reimburse you for the cost of the movement of your household goods (including packaging) from the San Diego area to the San Francisco area. We expect that such a move will take place within twelve (12) months of your start date. These relocation expenses will be grossed up for tax purposes.

This offer of employment is contingent upon your successfully undergoing a background check. Your employment with the Company is for no specified period and constitutes at will employment. As a result, you are free to resign at any time, for any reason or for no reason. Similarly, the Company is free to conclude its employment relationship with you at any time, with or without cause, and with or without notice.

As a condition of your employment, you must carefully review, sign, and comply with the enclosed Employee Proprietary Information and Invention Assignment Agreement. Also as a condition of your employment, you agree to abide by the Company’s policies and procedures, as adopted from time to time, and to refrain from any activities that conflict with your obligations to the Company. You represent that you do not have any agreements with any third parties (e.g., former employers), including but not limited to non-competition or proprietary information agreements, that will conflict with or limit your ability to discharge your duties to Kosan. You agree that, in the course of your work for Kosan, you will not make any unauthorized use or disclosure of any proprietary information or materials of any third party (e.g., a former employer).

The Immigration Reform and Control Act of 1986 requires that every person present to potential employers proof of identity and eligibility or authorization to accept employment in the United States. In order to comply with this law, and before you can become a Kosan employee, you must provide appropriate documentation to prove both your identity and legal eligibility to be employed by Kosan. Acceptable forms of documentation are described on the attachment to this offer letter. Please be sure to bring this documentation with you on your first day of employment.

This letter, (together with your Employee Proprietary Information and Inventions Agreement and any stock option grant agreement you receive) constitutes the complete and exclusive statement of your agreement with Kosan concerning the subject matter hereof. It supersedes any other agreements or promises made to you by anyone, whether oral or written, and it cannot be changed except in a written agreement, signed by you and a duly authorized officer of Kosan.

Robert, we are very excited at the prospect of your joining Kosan Biosciences. Please do not hesitate to contact me if you have any questions.

To indicate your acceptance of our offer, please sign and date one copy of this letter and the Employee Proprietary Information and Invention Assignment Agreement and return them to me.

Sincerely,
Kosan Biosciences		AGREED AND ACCEPTED:
By:	/s/ Robert G. Johnson, Jr.	/s/ Robert L. De Jager
	Robert Johnson, M.D., Ph.D.	NAME
	Chief Executive Officer
		Date: October 24, 2006
		Date your employment begins:
		November 6, 2006

EX-99.1

Exhibit 99.1

Contact:

Kosan Biosciences

Gary S. Titus	Jane Green
Chief Financial Officer	510.731.5335 (office)
510.731- 5373	415.652.4819 (mobile)
titus@kosan.com	green@kosan.com

FOR IMMEDIATE RELEASE

KOSAN ANNOUNCES THIRD QUARTER 2006 FINANCIAL RESULTS AND HIGHLIGHTS

HAYWARD, CA — October 26, 2006 - Kosan Biosciences Incorporated (Nasdaq: KOSN) today reported financial results for the quarter and nine months ended September 30, 2006.

Net losses for the quarter and nine months ended September 30, 2006 were $7.5 million and $24.9 million, or $0.22 and $0.76 per share, compared to $7.5 million and $22.9 million, or $0.26 and $0.78 per share, in the same periods for the prior year. At September 30, 2006, cash, cash equivalents, restricted cash and marketable securities totaled $54.3 million, compared to $55.1 million at December 31, 2005.

Revenues were $2.2 million and $7.8 million for the quarter and nine months ended September 30, 2006, compared to $3.2 million and $9.4 million in the same periods in 2005, substantially all of which was generated under the Roche-Kosan global development and commercialization agreement in both periods.

Total operating expenses were $10.3 million and $34.1 million, including stock based compensation expense of $0.6 million and $1.6 million, for the quarter and nine months ended September 30, 2006, compared to $11.1 million and $33.3 million for the same periods last year. Research and development expenses were $8.7 million for the quarter ended September 30, 2006, compared to $9.3 million in the same period in 2005. The decrease for the third quarter reflects a reduction in investment in certain early-stage research programs, offset by increased costs in the Hsp90 inhibitor program. General and administrative expenses were $1.6 million for the quarter ended September 30, 2006, compared to $1.8 million in the same period in 2005.

Cash used in operating activities was approximately $7.3 million and $24.2 million for the quarter and nine months ended September 30, 2006. In April 2006 the Company completed a common stock offering which resulted in net proceeds of approximately $24.0 million. In July 2006, Kosan secured a committed equity financing facility with Kingsbridge Capital Limited, a private investment group, which enables the Company at its discretion to raise up to $50.0 million in capital over a three-year period to support its corporate, research and development activities.

“We believe that Kosan has made significant progress over the last nine months in all major areas of our operations,” said Robert G. Johnson, Jr., Chief Executive Officer. “We are the leader in an exciting and important new class of anticancer compounds, Hsp90 inhibitors, in which we have first-to-market potential and a promising second generation compound. Our epothilone program has the potential to attain best-in-class status. Our clinical programs in Hsp90 inhibition are progressing toward registration programs and our epothilones are advancing into late-stage development. We believe the company today represents an excellent investment opportunity with the potential to file two to three NDAs over the next five years, and excellent partnering opportunities.”

Kosan Highlights

• We intend to exploit our ability to co-administer our Hsp90 inhibitor compounds with market-leading cancer therapeutics, including Velcade^® and Herceptin^®.

• Tanespimycin (KOS-953), our first-generation Hsp90 inhibitor, is expected to enter Phase 2/3 registration trials in multiple myeloma in combination with Velcade^® in the first quarter of 2007.

• Alvespimycin (KOS-1022), our second-generation Hsp90 inhibitor, is anticipated to enter a Phase 2 trial as monotherapy in HER2-positive metastatic breast cancer in the first half of 2007, followed by a Phase 2/3 trial in combination with Herceptin^® later in 2007.

• We expect that our epothilone program can achieve best-in-class status and compete in the large taxane market.

• Our epothilone program, partnered with Roche, includes KOS-862, and a second-generation compound, KOS-1584. Both compounds have shown promising antitumor activity and a broad therapeutic index. Toward the end of 2006 or in early 2007, Kosan and Roche will make a decision about advancing the most attractive epothilone from this program into later-stage clinical trials.

Upcoming Kosan Scientific Presentations

• European Organization for the Research and Treatment of Cancer (EORTC), November 2006: Phase 1 KOS-1584 results.

• American Society of Hematology (ASH), December 11, 2006: oral presentation, Phase 1b tanespimycin plus Velcade results; Phase 1 alvespimycin results in hematologic malignancies.

• San Antonio Breast Cancer Symposium, December 2006: Phase 2 tanespimycin plus Herceptin results.

Upcoming Kosan Corporate Presentations

• CIBC World Markets 17^th Annual Healthcare Conference, November 6, 2006, New York.

• Rodman and Renshaw 8^th Annual Healthcare Conference, November 7, 2006, New York.

• Cowen and Company 7^th Annual Global Health Care Conference, November 8, 2006, London.

• Credit Suisse 2006 Healthcare Conference, November 17, 2006, Phoenix.

Conference Call and Webcast Today

Kosan will hold a conference call to discuss the Company’s third quarter 2006 financial results today at 1:30 p.m. Pacific / 4:30 p.m. Eastern. To access the live call, please dial 866.831.6234 (US) or 617.213.8854 (international), access code 67084568. Interested parties may listen to the webcast live at http://www.kosan.com by clicking on the “Calendar of Events” tab under the heading, “News and Events.” The webcast is also being distributed over Thomson’s Investor Distribution Network to both institutional and individual investors. Individual investors can listen to the call through Thomson’s individual investor center at http://www.earnings.com or by visiting any of the investor sites in Thomson’s Individual Investor Network. Institutional investors can access the call via Thomson’s password-protected event management site, StreetEvents, at http://www.streetevents.com. A telephonic replay will be available through November 2, 2006 by dialing 888.286.8010, access code: 22894235. International callers can dial 617.801.6888, access code: 22894235.

About Kosan

Kosan Biosciences is a biotechnology company advancing two new classes of anticancer agents through clinical development – Hsp90 (heat shock protein 90) inhibitors and epothilones. Kosan is leveraging its proprietary discovery platform to generate a pipeline of potentially significant product candidates, primarily in the area of oncology.

Hsp90 inhibitors have a novel mechanism of action targeting multiple pathways involved in cancer cell growth and survival. Kosan’s proprietary formulation of tanespimycin (KOS-953) is currently in Phase 1 and 2 clinical trials, primarily for multiple myeloma and HER2-positive breast cancer. In addition, intravenous and oral formulations of Kosan’s second-generation Hsp90 inhibitor, alvespimycin (KOS-1022), are being evaluated in Phase 1 clinical trials.

Epothilones inhibit cell division with a mechanism of action similar to taxanes, one of the most successful classes of anti-tumor agents. KOS-862 is currently being studied in a Phase 2 single-agent clinical trial in patients with metastatic breast cancer, as well as a Phase 2 combination trial with Herceptin^®. KOS-1584, a second candidate designed to improve pharmacokinetics, is in Phase 1 clinical trials in patients with solid tumors. Kosan’s epothilone program is partnered with Roche through a global development and commercialization agreement.

For additional information on Kosan Biosciences, please visit the company’s website at www.kosan.com.

This press release contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”). Such forward-looking statements include but are not limited to statements relating to the further development and potential safety, efficacy and registration of Kosan’s product candidates; potential regulatory filings by Kosan for its product candidates; initiations of clinical trials; the decision by Roche and Kosan to advance an epothilone candidate and the timing thereof; and anticipated presentations of clinical data. Any statements contained in this press release that are not statements of historical fact may be deemed to be forward-looking statements. There are a number of important factors that could cause the results of Kosan to differ materially from those indicated by these forward-looking statements, including, among others, risks related to the clinical advancement of Kosan’s clinical candidates, including the risk that clinical trials may not demonstrate safety and efficacy sufficient to obtain the requisite regulatory approvals or to result in a marketable product; the possible determination that an earlier-stage compound, such as KOS-1584 will be more appropriate for commercial development than KOS-862; and other risks detailed from time to time in the Company’s SEC reports, including its Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 and other periodic filings with the SEC. Kosan does not undertake any obligation to update forward-looking statements.

Velcade^® (bortezomib) is a registered trademark of Millennium Pharmaceuticals, Inc.

Herceptin^® (trastuzumab) is a registered trademark of Genentech, Inc.

Selected Financial Information

Condensed Statements of Operations

(in thousands, except per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
	(unaudited)						(unaudited)
Revenues:
Contract revenue	$	2,137		$	2,906		$	7,455		$	8,419
Grant revenue		32			311			341			1,011
Total revenues		2,169			3,217			7,796			9,430
Operating expenses:
Research and development		8,712			9,335			28,362			28,461
General and administrative		1,632			1,763			5,733			4,827
Total operating expenses		10,344			11,098			34,095			33,288
Loss from operations		(8,175	)		(7,881	)		(26,299	)		(23,858	)
Net interest income		635			350			1,389			996
Net loss	$	(7,540	)	$	(7,531	)	$	(24,910	)	$	(22,862	)
Basic and diluted net loss per common share	$	(0.22	)	$	(0.26	)	$	(0.76	)	$	(0.78	)
Shares used in computing basic and diluted net loss per common share		34,573			29,247			32,778			29,180

Condensed Balance Sheets

(in thousands)

	September 30, 2006		December 31, 2005
	(unaudited)
Cash, cash equivalents, restricted cash and marketable securities	$	54,283	$	55,126
Total assets	$	62,022	$	65,997
Deferred revenue	$	9,695	$	12,153
Total liabilities	$	19,476	$	24,891
Total liabilities and stockholders’ equity	$	62,022	$	65,997
Shares issued and outstanding		34,619		29,372