10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

[ x ] Annual Report Pursuant to Section 13 or 15(D) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2006.

or

[  ] 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: 000-31633

KOSAN BIOSCIENCES INCORPORATED

(Exact name of registrant as specified in its charter)

DELAWARE	94-3217016
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

3832 BAY CENTER PLACE, HAYWARD, CALIFORNIA 94545

(address of principal executive offices)

(510) 732-8400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:	Name of each exchange on which registered:
Common Stock, $.001 par value per share	Nasdaq Global Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes [  ]    No [ x ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes [  ]    No [ x ]

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 [ x ]    No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this Chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ].

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. (Check one):

Large accelerated filer [  ]        Accelerated filer [ x ]        Non-accelerated filer [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]    No [ x ]

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $57,423,000 as of June 30, 2006, based upon the closing sale price on the Nasdaq Global Market reported for such date. The determination of affiliate status for the purposes of this calculation is not necessarily a conclusive determination for other purposes. The calculation excludes approximately 20,216,000 shares held by directors, officers and stockholders whose ownership exceeded five percent of the registrant’s outstanding Common Stock as of June 30, 2006. Exclusion of these shares should not be construed to indicate that such person controls, is controlled by or is under common control with the registrant.

The number of shares of common stock of the registrant outstanding at February 28, 2007 was 42,461,170 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant’s Proxy Statement in connection with the registrant’s 2007 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report on Form 10-K, are incorporated by reference into Part III of this report.

Kosan Biosciences Incorporated

Form 10-K

For the Fiscal Year Ended December 31, 2006

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Business	3
Item 1A.	Risk Factors	17
Item 1B.	Unresolved Staff Comments	34
Item 2.	Properties	34
Item 3.	Legal Proceedings	34
Item 4.	Submission of Matters to a Vote of Security Holders	34
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	35
Item 6.	Selected Financial Data	37
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	48
Item 8.	Financial Statements and Supplementary Data	49
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	49
Item 9A.	Controls and Procedures	49
Item 9B.	Other Information	50
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	51
Item 11.	Executive Compensation	51
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	51
Item 13.	Certain Relationships and Related Transactions, and Director Independence	52
Item 14.	Principal Accountant Fees and Services	52
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	53
Signatures		57
Financial Statements		F-1

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PART I

KOSAN BIOSCIENCES

ITEM 1. BUSINESS

Forward-Looking Statements and Risk Factors

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, the statements about:

• our strategy, including our plans with respect to presenting clinical data and initiating clinical trials;

• the progress and results of our research and development programs, including clinical testing;

• sufficiency of our cash resources;

• revenues from existing and new partnering arrangements;

• product development;

• our research and development and other expenses; and

• our operations and legal risks.

In some cases, forward-looking statements can be identified by words such as “expect,” “anticipate,” “intend,” “believe,” “hope,” “assume,” “estimate,” “plan,” “will” and other similar words and expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Discussions containing these forward-looking statements may be found throughout this Annual Report on Form 10-K, including the sections entitled “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements involve risks and uncertainties, including the risks discussed in “Item 1A. Risk Factors,” that could cause our actual results to differ materially from those in the forward-looking statements. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this report. The risks discussed in “Item 1A. Risk Factors” and elsewhere in this report should be considered in evaluating our prospects and future performance.

The name Kosan Biosciences Incorporated, our logo and all other Kosan names are our trademarks. All other trademarks or brand names appearing in this Annual Report are the property of their respective holders.

Overview

We are a cancer therapeutics company focused on advancing two new classes of anticancer agents through clinical development: heat shock protein 90, or Hsp90, inhibitors and epothilones. We are leveraging our proprietary polyketide discovery platform to generate a pipeline of 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. Our Hsp90 inhibitor product candidates may have the potential to overcome resistance after relapse and to synergize the initial activity of existing cancer therapies. Our first and second generation Hsp90 inhibitor product candidates have demonstrated antitumor activity in multiple indications in early clinical trials. Our proprietary formulations of tanespimycin, or KOS-953, our first-generation Hsp90 inhibitor, are in Phase 1 and 2 clinical trials, primarily for multiple myeloma in combination with Velcade^® (bortezomib) and for HER2-positive metastatic breast cancer in combination with Herceptin^® (trastuzumab), as well as in melanoma. In addition, intravenous and oral formulations of our second-generation Hsp90 inhibitor, alvespimycin HCl, or KOS-1022, are being evaluated in Phase 1 clinical trials for hematological malignancies and solid tumors, including HER2-positive metastatic breast cancer.

Epothilones inhibit cell division with a mechanism of action similar to taxanes, one of the most successful classes of anti-tumor agents. KOS-1584 is in Phase 1 clinical trials in patients with solid tumors, and is anticipated to enter Phase

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2 clinical trials in the second half of 2007. Our epothilone program is partnered with Hoffmann-La Roche, Inc. and F. Hoffmann-La Roche Ltd., collectively Roche, through a global development and commercialization agreement.

We have a motilin receptor agonist program for the stimulation of gastrointestinal movement, or GI motility. In December 2006, we established a worldwide exclusive license agreement with Pfizer Inc. for our motilin agonist program, including our lead compound, KOS-2187, and related compounds. Pfizer is responsible for all development, regulatory and commercial activities related to the motilin agonist program.

We also have next-generation Hsp90 inhibitor, next-generation epothilone and nuclear export inhibitor programs for cancer that are undergoing preclinical evaluation.

Our Strategy

Our goal is to advance innovative cancer therapeutics into clinical trials and develop them into commercialized drugs. Our strategy includes the following components:

Focus on Polyketides. All of our programs are based on the development of polyketides. Polyketides are complex natural products produced by certain microorganisms. Numerous pharmaceutical products in many therapeutic areas have been derived from polyketides. We focus on polyketides because of our expertise in genetic manipulation, chemistry and production of polyketides. We use our technology to improve the structure of known polyketides with validated targets to make potential product candidates. We also improve the efficiency of large-scale production in order to more cost-effectively access promising compounds that cannot be obtained from nature in sufficient quantities to permit development and potential commercialization.

Discover and Develop Cancer Therapeutic Products with First-In-Class or Best-In-Class Potential. We have developed a core expertise in the discovery and preclinical and clinical development of potential cancer therapeutics. Focusing on cancer indications enables us to best utilize this expertise and develop potential first-in-class or best-in-class therapies for unmet medical needs.

Establish and Leverage Existing Partnering Arrangements. We have a collaboration with Roche to co-develop and commercialize compounds from our epothilone program for the treatment of cancer. We also have a collaboration with the National Cancer Institute, or NCI, to clinically develop tanespimycin and alvespimycin for the treatment of cancer. In addition, we have a license agreement with Pfizer for the development and commercialization of our motilin agonist program. We plan to establish additional partnering arrangements with pharmaceutical companies and other research and development organizations to help us advance product candidates into or through clinical trials and to the market.

Strategically Invest in Our Drug Discovery Efforts and Technology Platform. We intend to continue internal research activities on polyketide biosynthesis and chemical synthesis with the goal of advancing high-quality product candidates into preclinical and clinical development.

Disciplined Management of Our Financial Resources. We will focus our financial resources on those functions that we believe enhance our ability to advance our clinical product candidates towards regulatory approval and advance high-quality product candidates into preclinical and clinical development.

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Product Pipeline

The following chart indicates the most advanced stage of development for each of our product candidates.

Oncology

Hsp90 Inhibitors

We are developing compounds that have been shown to cause the degradation of numerous proteins involved in the growth and survival of cancer cells. These compounds bind to and disrupt the function of Hsp90. Hsp90 is a molecular “chaperone” in cells that maintains the stability and function of “client proteins” that are important for cell proliferation, angiogenesis and metastasis of tumors. By preventing Hsp90 from protecting its client proteins, Hsp90 inhibitors cause the client proteins to degrade. By simultaneously depleting multiple proteins involved in the genesis and maintenance of cancer cells, Hsp90 inhibitors may serve as chemotherapeutic agents in a number of cancers. Moreover, studies suggest that Hsp90 inhibitors re-sensitize cancer cells to drugs to which they have become resistant. Hsp90 inhibitors may also boost the initial activity of existing cancer therapies when used in combination. Hsp90 inhibitors, such as tanespimycin and alvespimycin, can simultaneously target several of the hallmark attributes of cancers and may have broad therapeutic activity against multiple types of cancers.

Tanespimycin. Our proprietary formulations of tanespimycin, or KOS-953 (also known as 17-AAG), are being evaluated in Phase 1 and 1b clinical trials in patients with relapsed refractory multiple myeloma, both as monotherapy and in combination with Velcade. In December 2006, we announced interim results from our Phase 1b clinical trial administering tanespimycin in combination with Velcade in 30 patients with relapsed-refractory multiple myeloma. Although this Phase 1b study was not specifically designed to measure efficacy, the combination of tanespimycin and Velcade was observed to have anticancer activity in an advanced and heavily pre-treated patient population. In mid-2007, we expect to present additional data from this Phase 1b clinical study of tanespimycin in combination with Velcade. We intend to initiate our Tanespimycin in Myeloma Evaluation, or “TIME”, clinical program for tanespimycin in the first half of 2007. The TIME program includes TIME-1, a Phase 3 pivotal study of tanespimycin in combination with Velcade in first-relapse patients with multiple myeloma, and TIME-2, a Phase 2/3 study of tanespimycin in combination with Velcade in patients with relapsed refractory multiple myeloma.

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Tanespimycin is also being studied in the Phase 2 portion of a Phase 1b/2 clinical trial in combination with Herceptin in patients with HER2-positive metastatic breast cancer. In December 2006, we announced interim results showing promising anticancer activity from this Phase 2 clinical trial in 12 patients, 11 of whom had been previously treated with a regimen containing Herceptin.

We are also conducting a Phase 2 clinical trial of tanespimycin in patients with metastatic melanoma whose disease had progressed prior to entry into the study. We expect to present data from this Phase 2 clinical trial in mid-2007.

We are collaborating with the NCI, a component of the National Institutes of Health, or NIH, in the development of tanespimycin. The NCI is currently conducting more than 15 Phase 1b and Phase 2 clinical trials of tanespimycin in a dimethyl sulfoxide and egg phospholipid formulation pursuant to our October 2002 Cooperative Research and Development Agreement, or CRADA, including studies in a wide range of tumor types such as melanoma, renal cell, breast, thyroid and ovarian cancers. Pursuant to the CRADA, we provide tanespimycin to the NCI for these studies. We intend to use the data from the studies conducted by the NCI to support the clinical development of our proprietary formulations of tanespimycin. In addition, these clinical studies provide us with valuable clinical safety data and experience and may enable us to identify additional clinical development targets for future development with this class of molecules.

In 2004, tanespimycin received orphan drug designations from both the European Medicines Agency, or EMEA, and the U.S. Food and Drug Administration, or FDA, for the treatment of two hematologic cancers, multiple myeloma and chronic myelogenous leukemia. Orphan drug designation makes a compound eligible for orphan drug exclusivity and, in the United States, specific tax credits. Generally, if a company receives the first marketing approval for a compound with an orphan drug designation in the clinical indication for which it has such designation, the compound is entitled to orphan drug exclusivity. Orphan drug exclusivity means that another application to market the same compound for the same indication may not be approved, except in limited circumstances, for a period of up to 10 years in Europe (reviewable after six years), and for a period of seven years in the United States.

Alvespimycin. Alvespimycin, or KOS-1022 (also known as 17-DMAG), is a highly-potent, water-soluble and orally-active Hsp90 inhibitor. We are evaluating both intravenous and oral formulations of alvespimycin in clinical trials. In December 2006, we announced interim results showing promising antitumor activity in refractory leukemia from a Phase 1 clinical trial of the intravenous formulation of alvespimycin in 17 patients with hematologic malignancies (mainly acute myelogenous leukemia).

Intravenous alvespimycin is also being studied in a Phase 1b combination trial with Herceptin in patients with solid tumors. In mid-2007, we expect to present data from this Phase 1b clinical trial. We are also studying an oral formulation of alvespimycin in a Phase 1 clinical trial in patients with solid tumors. We expect to present data from this Phase 1 clinical trial of oral alvespimycin in mid-2007.

In addition, the NCI is currently conducting four Phase 1 clinical trials evaluating several dosing schedules of the intravenous formulation of alvespimycin pursuant to our October 2002 CRADA. Pursuant to the CRADA, we provide alvespimycin to the NCI for these studies.

We intend to initiate a Phase 2 clinical trial of alvespimycin as monotherapy in patients with HER2-positive metastatic breast cancer in the first half of 2007 and a Phase 2/3 clinical trial investigating the combination of alvespimycin and Herceptin in patients with HER2-positive metastatic breast cancer in the second half of 2007.

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The following table summarizes the clinical trials we are conducting or expect to initiate in 2007 in our Hsp90 inhibitor program.

Product Candidate	Description	Phase of Development
Tanespimycin	Combination with Velcade for first relapse multiple myeloma (TIME-1)1	Phase 3
	Combination with Velcade for relapsed refractory multiple myeloma (TIME-2)1	Phase 2/3
	Combination with Herceptin in HER2-positive metastatic breast cancer	Phase 2
	Melanoma	Phase 2
Alvespimycin (intravenous formulation)	HER2-positive metastatic breast cancer2 Combination with Herceptin in HER2-positive metastatic breast cancer3	Phase 2 Phase 2/3
	Combination with Herceptin in solid tumors	Phase 1b
	Hematologic malignancies	Phase 1
Alvespimycin (oral formulation)	Solid tumors	Phase 1

¹ We expect our TIME program to begin in the first half of 2007. Phase 1 clinical trials in multiple myeloma patients are currently ongoing.

² We expect this study to begin in the first half of 2007.

³ We expect this study to begin in the second half of 2007.

Epothilones

Epothilones are polyketides that inhibit cancer cells by a mechanism of action similar to a class of cytotoxic drugs known as taxanes, including paclitaxel, marketed as Taxol^® by Bristol-Myers Squibb Company, and docetaxel, marketed as Taxotere^® by Sanofi-Aventis. In 2006, total worldwide sales of Taxol^® and Taxotere^® were reported to be over $2.3 billion. Epothilones may address a key limitation of the taxane class because they have shown activity against taxane-resistant human tumor cell lines in vitro and in animal models, as well as activity against taxane-sensitive human tumors cells in these models. Our epothilone program is partnered with Roche through a September 2002 global development and commercialization agreement.

KOS-1584. KOS-1584 is our clinical-stage product candidate that we are developing in collaboration with Roche. KOS-1584 is being studied in two Phase 1 dose-escalating clinical trials in patients with solid tumors. In November 2006, we announced interim results from two Phase 1 clinical trials administering KOS-1584 in an aggregate of 82 patients with advanced solid tumors. Although the primary objective of these studies was not to measure efficacy, anticancer activity was observed in several patients. We expect KOS-1584 to enter Phase 2 clinical trials in the second half of 2007. We expect to present data from our KOS-1584 Phase 1 clinical trials in mid-2007.

Gastrointestinal Motility

Motilin receptor agonists, called motilides, may be useful to treat diseases such as gastroparesis and other conditions in which GI motility is impaired. Preclinical data indicate that our lead compound, KOS-2187, is a potent motilin receptor agonist that has high oral bioavailability, is rapidly absorbed and significantly accelerates gastric emptying. In December 2006, we established a worldwide exclusive license agreement with Pfizer for our motilin agonist program, including KOS-2187 and related compounds. Pfizer is responsible for all development, regulatory and commercial

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activities related to the motilin agonist program. We expect Pfizer to initiate Phase 1 clinical testing of KOS-2187 later in 2007.

Early-Stage Programs

We have next-generation Hsp90 inhibitor, next-generation epothilone and nuclear export inhibitor programs for cancer that are undergoing preclinical evaluation. These programs are also based on the use of our technology to improve the structure of known polyketides and the efficiency of large-scale production.

Research and Development Expenses

Our research and development expenses consist primarily of salaries and other personnel-related expenses, clinical trial-related services performed by clinical research organizations and research institutions and other outside service providers, licensing-related expenses, lab consumables and facility-related expenses. Our research and development expenses were approximately $37.2 million in 2006, $38.4 million in 2005 and $40.2 million in 2004.

Intellectual Property

Our intellectual property consists of patents, copyrights, trademarks, trade secrets and know-how. Our ability to compete effectively depends in large part on our ability to obtain patents and trademarks for our technologies and products, maintain trade secrets, operate without infringing the rights of others and prevent others from infringing our proprietary rights. We will be able to protect our technologies from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents, or are effectively maintained as trade secrets. Accordingly, patents or other proprietary rights are an essential element of our business. As of December 31, 2006, we owned or exclusively licensed approximately 134 patents and 91 patent applications in the U.S. and approximately 71 foreign patents and 279 foreign patent applications. We pursue patent protection in countries where we believe it is commercially reasonable and advantageous to do so.

Our practice is to file patent applications to protect technology and compounds commercially important to our business. We also rely on trade secrets to protect our technology where patent protection is deemed inappropriate or unobtainable. We protect our proprietary technology and processes, in part, by confidentiality agreements with our employees, consultants, collaborators and certain contractors.

Collaborative Research, Development and License Agreements

Roche

In September 2002, we entered into a research and collaboration agreement with Roche. Under the terms of the agreement, Roche has worldwide exclusive rights to market and sell KOS-1584 and any other epothilones developed under the collaboration in the field of oncology, and we are co-developing and have the right to co-promote in the United States any epothilone products developed under the collaboration. Under the agreement, we are entitled to receive development funding for our agreed upon research activities and milestone payments based upon achievement of clinical, regulatory and commercial events. In addition, we are entitled to receive royalties on any sales of collaboration products. We have the option to increase our royalties by contributing to development costs and by co-promotion in the United States of products resulting from the collaboration.

We recognized under this agreement approximately $11.3 million and $11.9 million of contract revenue in 2006 and 2005, respectively, of which $2.0 million was related to a non-recurring milestone earned in 2006. Included in 2006 and 2005 revenue was the ratable portion of the $25.0 million up-front fee that is being recognized through the estimated clinical development period. As of December 31, 2006, we had received approximately $81.8 million from our collaboration with Roche.

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Either party may terminate the agreement at any time for the other party’s uncured material breach of the agreement. Roche may terminate the agreement as a whole for “cause” relating to the success of the program even if we have not breached the agreement. Roche may also terminate the agreement as a whole or in part for convenience. Upon such a termination by Roche for cause or convenience, the licensed rights would revert to us in the terminated territories, and Roche would be required to provide us with certain license rights, data and other assistance to take over the previously licensed products in the terminated territories. Unless earlier terminated, the agreement will remain in effect for the life of the relevant patents or a specified number of years from product launch.

Pfizer

In December 2006, we entered into an exclusive license agreement with Pfizer under which we granted to Pfizer a worldwide exclusive license to our motilin agonist program. Under the terms of the agreement, Pfizer and we agreed to collaborate on filing of regulatory documents for the initiation of a Phase 1 clinical trial of our clinical candidate, KOS-2187. Pfizer will be responsible for all development, regulatory and commercial activities related to the motilin agonist program.

We received an up-front fee of $12.5 million in December 2006 and are eligible to receive milestone payments for the successful development and commercialization of licensed compounds, including milestone payments for achieving certain sales amounts, as well as royalties on worldwide sales. We recognized revenue of approximately $1.8 million in contract revenue in 2006, which represents the ratable portion of the $12.5 million up-front fee that is being recognized over three and one-half months, the current estimated period of the Company’s participation in the development of KOS-2187.

Under the agreement, we agreed to assign to Pfizer all of our non-United States patent rights related to the technology licensed under the agreement, and Pfizer is primarily responsible for the prosecution and maintenance of these patent rights. We also agreed to assign to Pfizer all of our United States patent rights related to the technology licensed to Pfizer at a later stage of clinical development.

Either party may terminate the agreement at any time for the other party’s uncured material breach of the agreement. Pfizer may terminate the agreement for convenience. Upon a termination by Pfizer for uncured material breach, the license rights shall become perpetual and irrevocable. In the event of a termination by Pfizer for convenience or by us for uncured material breach, the licensed rights would revert to us, Pfizer may be required to provide us with certain license rights, regulatory filings, data and technical transfer assistance. Unless earlier terminated, the agreement will remain in effect for the life of the relevant patents or a specified number of years from the first commercial sale on a country-by-country basis.

Sloan-Kettering Institute for Cancer Research

Effective August 2000, we signed a research and license agreement with the Sloan-Kettering Institute for Cancer Research, or Sloan-Kettering, relating to epothilones. Under the agreement, we worked collaboratively with Sloan-Kettering to develop epothilone compounds and production methods. In addition, Sloan-Kettering granted us an exclusive license for all further development and commercialization of compounds selected by us in accordance with the agreement.

Under the agreement, we paid Sloan-Kettering an initial license fee and funding for the collaborative research program and we are required to pay annual maintenance fees and patent fees during the term of the agreement. In addition, we must pay Sloan-Kettering milestone payments if clinical development milestones are reached, royalty payments based on net sales of products covered by the collaboration, and a share of some sublicensing revenues.

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We may terminate the agreement in whole or on a product-by-product basis at any time. Either party may terminate the agreement upon the material breach of the agreement by the other party. Upon termination, all licenses granted by one party to the other revert to the granting party, and we are required to transfer to Sloan-Kettering any marketing authorizations, data and regulatory filings with respect to any compounds covered by the agreement. Unless earlier terminated, the agreement will remain in effect for the life of the relevant patents or a specified number of years from product launch. Effective September 2002, we received a consent from Sloan-Kettering to enter into a sublicense agreement with Roche and amended the research and license agreement with Sloan-Kettering to harmonize it with the collaboration agreement with Roche.

In 2003, we and Sloan-Kettering agreed that rights to certain epothilone analogs, including KOS-1584, are included in the exclusive license to us under the August 2000 research and license agreement. The agreement provided for an up-front payment to Sloan-Kettering and provides for additional payments to Sloan-Kettering upon the achievement of certain development milestones.

Stanford University

Effective March 1996, we entered into an exclusive license agreement with the Board of Trustees of the Leland Stanford Junior University, or Stanford University, for certain technology and related patent rights and materials for the recombinant production of novel polyketides. Under the terms of the agreement, we paid a license issue fee to Stanford University, and we pay annual maintenance fees and patent fees, make milestone payments based on achievement of specified events with licensed products, pay royalties on net sales of products claimed in or originating from the licensed technology and pay a share of some sublicensing fees. In March 2000, we amended the agreement to provide us an exclusive option to acquire an exclusive or non-exclusive license to future patents or patent applications that are related to certain technology developed by one of our founders and directors, Chaitan S. Khosla, Ph.D., related to polyketides or their production, and chosen by Stanford University in its discretion. Under the March 2000 amendment, we paid an issue fee in preferred stock that was subsequently converted to common stock in our initial public offering, and we are obligated to pay an option fee and patent expenses for each patent or patent application included in our option rights. We are also obligated to pay Stanford University a license fee and an annual fee, as well as royalties on net sales and a share of some sublicensing fees under the original agreement, with respect to each patent or patent application for which we exercise our option. Effective September 2002, we received a consent from Stanford University to enter into a sublicense agreement with Roche and amended the research and license agreement to harmonize it with the collaboration agreement with Roche and effect certain other changes.

NIH/NCI

Effective October 2002, we entered into two CRADAs with the NIH. Under these agreements, we are collaborating with the NCI in the clinical development of tanespimycin and alvespimycin. Under the terms of the CRADAs, we are responsible for the provision of sufficient quantities of study drug necessary to conduct the clinical trials funded by the NCI of tanespimycin and alvespimycin, and we have the option, at our expense, to conduct our own clinical trials of tanespimycin and alvespimycin in addition to those funded by the NCI. We have licensed from the NIH the formulation of tanespimycin being studied by the NCI and the compound alvespimycin. We developed our proprietary formulations of tanespimycin independently from the NIH. We have the option to obtain exclusive licenses under patents claiming inventions made in the collaborations under standard NIH licensing terms.

Under the CRADAs, we must conduct various activities, including providing sufficient quantities of the product candidates for the preclinical studies and clinical trials and committing a specified number of personnel to the programs. The clinical trials of tanespimycin and alvespimycin are or will be sponsored by the NCI in collaboration with us or by us solely. Unless earlier terminated, the term of the collaborative programs is currently scheduled to

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expire in October 2007, but may be adjusted as the programs proceed by agreement with the NIH. Either party may unilaterally terminate either or both of the CRADAs; provided that if we elect to terminate, we will still be required to meet certain obligations to supply compound to the NIH.

Under a November 2002 license agreement with the NIH, we obtained exclusive commercial rights under patent rights relating to the formulation of tanespimycin being studied by the NCI, alvespimycin and other geldanamycin analogs. Initially, our license was limited to specified medical fields of use, including the treatment of cancer, and the prevention of undesired cell growth or its deleterious effects, such as the prevention of restenosis and neurodegenerative diseases. In May 2005, we amended the license to include several additional fields of use. We paid the NIH an up-front fee and will owe annual minimum royalties, patent fees, royalties based on net sales of licensed products, milestone payments if clinical development milestones are reached and a portion of any sublicensing revenues. Our license could terminate if we are not diligent in developing licensed products or otherwise default in performing our material obligations under the agreement and fail to cure the deficiency. We may terminate the agreement on a country-by-country basis. The agreement contains standard NIH licensing terms. Unless the agreement is earlier terminated, our license will remain in effect for the life of the licensed patents.

Competition

The pharmaceutical and biotechnology industries are intensely competitive. Many companies, including biotechnology, chemical and pharmaceutical companies, are actively engaged in research and development of drugs for the treatment of the same diseases and conditions as our current and potential future product candidates. Many of these companies have substantially greater financial and other resources, larger research and development staffs and more extensive marketing and manufacturing organizations than we do. In addition, some of them have considerable experience in preclinical testing, clinical trials and other regulatory approval procedures. There are also academic institutions, governmental agencies and other research organizations that are conducting research in areas in which we are working. They may also market commercial products, either on their own or through collaborative efforts.

We expect to encounter significant competition for any of the pharmaceutical products we develop. Companies that complete clinical trials, obtain required regulatory approvals and commence commercial sales of their products before their competitors may achieve a significant competitive advantage. We are aware that many other companies or institutions are pursuing the development of drugs and technologies directly targeted at applications for which we are developing our drug compounds. Companies with competing Hsp90 inhibitors include Biogen Idec Inc., which has initiated Phase 1 clinical trials in solid tumors with its intravenous formulation of 17-AAG and its oral synthetic Hsp90 inhibitor and has announced that it expects to initiate Phase 2 clinical trials in 2007; Infinity Pharmaceuticals, which has initiated a Phase 1/2 clinical trial of its intravenous Hsp90 inhibitor in non-small cell lung cancer and a Phase 1 clinical trial in gastrointestinal stromal tumors and has an oral formulation in preclinical development in collaboration with MedImmune, Inc.; Abraxis BioScience, Inc., which has a nanoparticle formulation of 17-AAG in preclinical development; Vernalis plc, which has announced that it has selected an intravenous and an oral Hsp90 inhibitor preclinical development candidate in collaboration with Novartis AG and expects to initiate Phase 1 clinical trials in mid-2007; Serenex, Inc., which has announced plans to file an IND for its oral Hsp90 inhibitor in the first quarter of 2007; and Synta Pharmaceuticals Corp., which announced plans to file an IND for its Hsp90 inhibitor in the first half of 2007, as well as other companies reported to be pursuing Hsp90 inhibitors. Competing epothilones in clinical development include those being developed by Bristol-Myers Squibb Company, which is reported to be in Phase 3 clinical trials; Novartis AG, which is reported to be in Phase 3 clinical trials; and Schering AG, which is reported to be in Phase 2 clinical trials. Gastrointestinal motility competitors include Chugai Pharmaceuticals, whose motilide agonist is reported to be in Phase 2 clinical trials.

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Government Regulation

The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the clinical development, manufacture and marketing of pharmaceutical products. These agencies and other federal, state and local entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, approval, distribution, post-marketing surveillance, advertising and promotion of our potential products.

The process required by the FDA before our products may be marketed in the United States generally involves the following:

• preclinical laboratory and animal tests;

• submission of an IND, which must become effective before clinical trials may begin;

• adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug for its intended use; and

• FDA approval of a New Drug Application, or NDA, or Biologics License Application, or BLA.

Satisfaction of FDA requirements or similar requirements of state, local and foreign regulatory agencies typically takes multiple years, and the actual time required may vary substantially based upon the type, complexity and novelty of the product or indication.

In the United States, prior to commencing clinical trials, which are typically conducted in three sequential phases, we must submit an IND application to the FDA. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the trial and places the trial on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Our submission of an IND may not result in FDA authorization to commence a clinical trial. Outside of the United States, mechanisms to commence clinical trials vary, but often require submission of supporting information and prior health authority approval. Further, an independent institutional review board or ethics committee must review and approve the plan for the clinical trial before it commences.

The FDA (or foreign equivalent), an institutional review board, data safety monitoring board or the trial sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

In an effort to obtain marketing authorization in the United States, the results of product development, preclinical studies and clinical trials are submitted to the FDA as part of an NDA or BLA. The FDA may deny an NDA or BLA if the applicable regulatory criteria are not satisfied, require additional clinical data or ultimately determine that the NDA or BLA does not satisfy the criteria for approval. After review of an NDA or BLA, the FDA can grant a normal marketing authorization, or full approval, or a marketing authorization under accelerated approval conditions. Under accelerated approval conditions, FDA may grant a marketing authorization for a new drug on the basis of adequate and well-controlled clinical trials establishing that the drug product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit. Accelerated approval under this condition will require the applicant to study the drug further to verify and describe its clinical benefit.

Even if a product receives regulatory approval, the approval may be significantly limited to specific indications and dosages. Further, even after regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products that have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs.

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Any products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including record-keeping requirements and reporting of adverse experiences with the drug. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with good manufacturing practices, which impose certain procedural and documentation requirements upon us and our third-party manufacturers.

Outside the United States, our ability to market a product is contingent upon receiving a marketing authorization from the appropriate regulatory authorities. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursement vary from country to country. At present, foreign marketing authorizations are applied for at a national level, although within the European Union, or EU, centralized registration procedures are available to companies seeking to market a product throughout the EU community. If the regulatory authority is satisfied that adequate evidence of safety, quality and efficacy has been presented, a marketing authorization will be granted. These foreign regulatory approval processes involve all of the risks associated with FDA clearance and may be influenced by FDA actions with respect to a product candidate.

We are also subject to various federal, state and local laws and regulations relating to such matters as the use, handling and disposal of hazardous or potentially hazardous substances used in connection with our research, development and manufacturing operations. We believe that we are in compliance with these laws and regulations in all material respects.

Employees

As of February 28, 2007, we had 82 full-time employees, 34 of whom hold Ph.D. degrees and 63 of whom were engaged in research and development activities. None of our employees is represented by a collective bargaining agreement, nor have we experienced any work stoppage.

Directors and Executive Officers of the Registrant

Our directors and executive officers, and their ages as of March 15, 2007, are as follows:

Name	Age	Title
Robert G. Johnson, Jr., M.D., Ph.D.	55	President, Chief Executive Officer and Director
Robert De Jager, M.D.	65	Senior Vice President, Clinical Development and Chief Medical Officer
Margaret A. Horn, J.D.	44	Senior Vice President, Legal and Corporate Development, General Counsel and Secretary
Peter J. Licari, Ph.D.	43	Senior Vice President, Manufacturing and Operations
Pieter B.M.W.M. Timmermans, Ph.D.	57	Senior Vice President, Drug Discovery and Preclinical Development
Gary S. Titus, C.P.A.	47	Senior Vice President and Chief Financial Officer
Bruce A. Chabner, M.D.	66	Director
Kevan Clemens, Ph.D.	62	Director
Peter Davis, Ph.D.	62	Director
Jean Deleage, Ph.D.	66	Director
Charles J. Homcy, M.D.	58	Director
Chaitan S. Khosla, Ph.D.	42	Director
Christopher T. Walsh, Ph.D.	63	Director

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Robert G. Johnson, Jr., M.D., Ph.D. has served as our Chief Executive Officer since February 2006, a director since July 2006 and President since October 2006. From April 2004 to February 2006, Dr. Johnson was our Executive Vice President, Development, and Chief Medical Officer. From January 2002 to April 2004, Dr. Johnson served as Senior Vice President, Medical Affairs and Corporate Development, and in January 2003, he was also named our Chief Medical Officer. From September 2000 to January 2002, Dr. Johnson served as Vice President, Medical Affairs and Corporate Development. From 1998 to September 2000, Dr. Johnson was employed by Chiron Corporation, where he served as Vice President, Pharmacology and Preclinical Affairs through 1999 and most recently as Vice President, Corporate Development. From 1991 to 1998, Dr. Johnson was Director of Pharmacology at Merck & Co., Inc. In addition, Dr. Johnson was a member of the faculty at the University of Pennsylvania from 1987 to 1991 and at Harvard Medical School from 1985 to 1987. Dr. Johnson received a B.A. and a Ph.D. in biophysics and an M.D. from the University of Pennsylvania.

Robert De Jager, M.D. has served as our Senior Vice President, Clinical Development and Chief Medical Officer since November 2006. From November 2004 to May 2006, Dr. De Jager served as Chief Medical Officer and Vice President, Clinical Research and Development at Conforma Therapeutics Corporation, a biotechnology company acquired by Biogen Idec Inc., and Senior Director, Oncology Research and Development of Biogen Idec from May 2006 to November 2006. From 2001 to November 2004, he served as Vice President, Research & Development, Oncology and Internal Medicine at Daiichi Pharmaceutical Corporation, a pharmaceutical company, and previously served as its Executive Director, Research and Development, Oncology and Senior Director, Research and Development, Oncology. Prior to joining Daiichi Pharmaceutical Corporation, Dr. De Jager served in various positions at Rgene Therapeutics, Inc., Perlmmune, Inc. (formerly Akzo-Organon Teknika/Biotechnology Research Institute), and Sanofi Research. Dr. De Jager has been a principal investigator and served on committees of many cancer organizations including European Organization for Research and Treatment of Cancer (EORTC), the Southeastern Cancer Study Group and the Eastern Cooperative Oncology Group. He earned his M.D. and B.S. in premedical sciences from the Free University of Brussels in Belgium, and did postdoctoral training at Lenox Hill Hospital (internship), the Mayo Clinic (residency in internal medicine) and Memorial Sloan-Kettering Cancer Center (fellowship in medical oncology and clinical pharmacology).

Margaret A. Horn, J.D. has served as our Senior Vice President, Legal and Corporate Development and General Counsel since December 2005 and Secretary since January 2006. Ms. Horn served as the Senior Vice President, General Counsel and Secretary of Genencor International, Inc., a biotechnology company, from June 2004 until October 2005. Ms. Horn joined Genencor in 1991 and served in various capacities, including Vice President, Assistant General Counsel from 1996 until 2004 and General Patent Counsel from 1992 until 1996. Prior to joining Genencor in 1991, Ms. Horn was employed by E.I. du Pont de Nemours and Company in various legal positions including patent counsel to its medical products division. Ms. Horn received a B.S. in pharmacy from the Philadelphia College of Pharmacy & Science and a J.D. from Villanova University School of Law.

Peter J. Licari, Ph.D. has served as our Senior Vice President, Manufacturing and Operations since February 2006. Dr. Licari joined Kosan in 1998 and served in various capacities, including Vice President, Process Sciences from 2001 until February 2006 and Executive Director, Process Sciences from 2000 to 2001. Prior to joining Kosan in August 1998, Dr. Licari was Director, Vaccine Manufacturing and Development at Massachusetts Biologic Laboratories, where he managed the manufacturing and development of licensed and investigational vaccines. From 1993 to 1996, Dr. Licari served as Senior Scientist at BASF Bioresearch Corporation, where he managed the fermentation process development group responsible for the production of proteins from animal cells, insect cells, yeast and bacteria. From 1992 to 1993, Dr. Licari served as an Engineering Associate at Merck & Co., Inc. Dr. Licari received a B.S. and M.S. in chemical engineering from Tufts University, a Ph.D in chemical engineering from the California Institute of Technology and an M.B.A. from Pepperdine University.

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Pieter B.M.W.M. Timmermans, Ph.D. has served as our Senior Vice President, Drug Discovery and Preclinical Development since February 2006. He served as our Senior Vice President, Preclinical Development from January 2005 to February 2006. From August 2004 to January 2005, Dr. Timmermans served as Vice President, Pharmacology and Preclinical Development at Amgen Inc., a biopharmaceutical company, subsequent to its acquisition of Tularik Inc., a biotechnology company. From 1997 to 2004, Dr. Timmermans held the same position at Tularik. Previously, he served in various management positions at The DuPont Merck Pharmaceutical Company and E.I. du Pont de Nemours & Company. He also was Associate Professor in Pharmacology at the University of Amsterdam. The author of more than 580 scientific publications, Dr. Timmermans received a B.S. in chemistry, mathematics, physics and biology and a Ph.D. in molecular pharmacology from Leiden State University in the Netherlands.

Gary S. Titus, C.P.A. has served as our Senior Vice President and Chief Financial Officer since September 2006. Mr. Titus served as Acting Chief Financial Officer of Nuvelo, Inc., a biotechnology company, from October 2005 to August 2006. From July 2004 to October 2005, Mr. Titus served as Vice President Finance and Chief Accounting Officer of Nuvelo, Inc. and Senior Director Finance from January 2003 to July 2004. From January 2002 to January 2003, Mr. Titus served as Senior Director Finance of Metabolex, Inc., a biotechnology company. From May 2001 to January 2002, he served as Senior Director Finance of Intrabiotics Pharmaceuticals, Inc., a biotechnology company, and Director Finance from January 2000 to April 2001. Mr. Titus received a B.S. in finance from the University of Florida and a B.S. in accounting from the University of South Florida, and he is a Certified Public Accountant.

Bruce A. Chabner, M.D. has served as a director since September 2001. Dr. Chabner has served as the Clinical Director of the Massachusetts General Hospital Cancer Center and as Professor of Medicine at Harvard Medical School since 1995. Dr. Chabner has also served as the Associate Director for Clinical Science of the Dana-Farber/Harvard Cancer Center since 1999 and has held numerous academic appointments, including the position of Director of the Division of Cancer Treatment of the National Cancer Institute from 1982 to 1995. Dr. Chabner has received numerous awards, including Phi Beta Kappa, Alpha Omega Alpha, the Public Health Service’s Distinguished Service Medal, the Karnofsky Award of the American Society for Clinical Oncology and the Bruce F. Cain Award for Drug Development of the American Association for Cancer Research. Dr. Chabner received a B.A. from Yale College and an M.D. from Harvard Medical School.

Kevan Clemens, Ph.D. has served as a director since May 2006. Dr. Clemens retired after 30 years of experience in the pharmaceutical industry. In his last position as Executive Vice President, Business Director of Hoffmann-La Roche Inc., a pharmaceutical company, he ran the Global Oncology business, including its strategic and business plans and the development and marketing of its products. Previously, he served Roche in various positions, including Global Head of Specialty Care, Global Head of Project Management and the Head of Clinical Operations for North and South America. Dr. Clemens worked for 25 years at Syntex and Roche in various development, sales and marketing positions including Head of Pharmacoeconomic Research and Global Pricing. Dr. Clemens is the Chairman of the board of directors of Chelsea Therapeutics International, Ltd. Dr. Clemens received a G.R.I.C. from Kingston Polytechnic and a Ph.D. from the University of London.

Peter Davis, Ph.D. has served as a director since April 1998 and as Chairman of our board of directors since April 2006. Since 2002, Dr. Davis has worked as an independent consultant to a number of companies. Dr. Davis served as president of DNA Plant Technologies Corp., an agriculture biotechnology company, from 2001 to 2002. Dr. Davis was a member of the Executive Committee of Pulsar International, S.A., a management consultant company and an affiliate of A.G. Biotech Capital, from 1993 to 2001. From 1975 to 1993, Dr. Davis was a faculty and staff member of the Wharton School of the University of Pennsylvania. His primary appointments included Director of the Applied Research Center and Director of Executive Education. He is a member of the board of directors of TorreyPines

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Therapeutics, Inc. and several private companies. Dr. Davis received a B.A. in physics from Cambridge University, a Masters Degree in operations research from the London School of Economics and a Ph.D. in operations research from the Wharton School.

Jean Deleage, Ph.D. has served as a director since April 1996. Dr. Deleage is a founder and managing director of Alta Partners, a venture capital firm investing in information technologies and life science companies. Alta Partners was founded in 1996. In 1979, Dr. Deleage was a founder and a managing partner of Burr, Egan, Deleage & Co., a venture capital firm in San Francisco and Boston. In 1971, he became a member of Sofinnova’s initial team, a venture capital organization in Paris, and in 1976 formed Sofinnova, Inc. (the U.S. subsidiary of Sofinnova). Dr. Deleage is a member of the board of directors of IDM Pharma, Inc., Rigel Pharmaceuticals, Inc., TorreyPines Therapeutics, Inc. and a number of private companies. In 1984, Dr. Deleage was awarded the Ordre National du Merite, and in 1993, he was awarded the Legion of Honor from the French government in recognition of his career accomplishments. Dr. Deleage received a Master’s Degree in electrical engineering from Ecole Superieurie d’Electricite and a Ph.D. in economics from the University of Paris, Sorbonne.

Charles J. Homcy, M.D. has served as a director since April 2003. Since November 2003, Dr. Homcy has served as Chief Executive Officer of Portola Pharmaceuticals, Inc., a biopharmaceutical company. From January 2003 to November 2003, Dr. Homcy served as Senior Research and Development Advisor of Millennium Pharmaceuticals, a biopharmaceutical company. From February 2002 to December 2002, Dr. Homcy served as the President of Research and Development at Millennium Pharmaceuticals. From 1995 to February 2002, he served as Executive Vice President, Research and Development of COR Therapeutics, Inc., a biotechnology company, where he served as a member of the board of directors from 1998 to February 2002. From 1994 to March 1995, Dr. Homcy was President of the Medical Research Division of American Cyanamid Company-Lederle Laboratories (now a division of Wyeth-Ayerst Laboratories). From 1990 to 1994, Dr. Homcy was Executive Director of the Cardiovascular and Central Nervous System Research Section at Lederle Laboratories. Dr. Homcy currently serves on the boards of directors of Millennium Pharmaceuticals, Inc., Cytokinetics, Incorporated and Geron Corporation. Dr. Homcy received his B.A. and his M.D from the Johns Hopkins University.

Chaitan S. Khosla, Ph.D. is one of our co-founders and has served as a director since our inception in January 1995. Dr. Khosla has been a Professor of Chemical Engineering, Chemistry and Biochemistry at Stanford University since 2001 and has been a faculty member since 1992. Dr. Khosla is the chairman of our Scientific Advisory Board. Dr. Khosla is the inventor of the combinatorial biosynthesis technology that we licensed from Stanford University. He is the recipient of several awards, including the 1999 Alan T. Waterman award by the National Science Foundation, the 1999 Eli Lilly Award in biological chemistry and the 2000 ACS Award in pure chemistry. Dr. Khosla is the author of over 200 publications and is an inventor on numerous patents. Dr. Khosla received a B.S. Tech. from the Indian Institute of Technology, Bombay, India and a Ph.D. from the California Institute of Technology.

Christopher T. Walsh, Ph.D. has served as a director since April 1996. Dr. Walsh has been the Hamilton Kuhn Professor of Biological Chemistry and Molecular Pharmacology at Harvard Medical School since 1991 and formerly was President of the Dana-Farber Cancer Institute and Chairman of the Department of Biological Chemistry and Molecular Pharmacology at Harvard Medical School. He has performed extensive research in enzyme stereochemistry, reaction mechanisms and the mechanisms of action of anti-infective and immunosuppressive agents. From 1996 until July 2003, Dr. Walsh served as co-chairman of our Scientific Advisory Board. Dr. Walsh is also a member of the board of directors of Critical Therapeutics, Inc. and several private companies. Dr. Walsh received an A.B. in biology from Harvard University and a Ph.D. in life sciences from The Rockefeller University, New York.

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Corporate Information

Kosan was incorporated under the laws of the state of California in January 1995 and commenced operations in 1996. In July 2000, we were reincorporated under the laws of the state of Delaware.

Available Information

We maintain a website at www.kosan.com; however, information found on, or that can be accessed through, our website is not incorporated by reference into this report. We make available free of charge on or through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Further, a copy of this report is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding our filings, at www.sec.gov.

In 2002, we adopted a code of ethics that applies to our employees, officers and directors and in February 2004, we amended and restated the code. We have posted the text of our code of ethics on our website at www.kosan.com on the “Corporate Governance” page under the “Investors/Press” tab. In addition, we intend to promptly disclose (1) the nature of any amendment to our code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and (2) the nature of any waiver, including an implicit waiver, from a provision of our code of ethics that is granted to one of these specified officers, the name of such person who is granted the waiver and the date of the waiver on our website in the future.

ITEM 1A. RISK FACTORS

You should carefully consider the risks described below, together with all of the other information included in this report, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations.

We have a history of net losses and may never become profitable.

We commenced operations in 1996 and are still developing our product candidates. We have not commercialized any products, and we have incurred significant losses to date. As of December 31, 2006, we had an accumulated deficit of approximately $160.3 million. To date, our revenues have been primarily from partnering arrangements and government grant awards. Our expenses have consisted principally of costs incurred in research and development and from general and administrative costs associated with our operations. We have incurred net losses since our inception, including a net loss of approximately $29.5 million for the year ended December 31, 2006. We expect our expenses to increase and to continue to incur operating losses for at least the next several years as we continue our research and development efforts for our product candidates and research programs. The amount of time necessary to successfully commercialize any of our product candidates is long and uncertain, and successful commercialization may not occur at all. As a result, we may never become profitable.

We expect that additional financing will be required, and an inability to obtain the capital necessary to fund our operations on acceptable terms or at all would threaten the continued operation of our business.

We expect that additional financing will be required to fund operations. We do not know whether additional financing will be available when needed, or that, if available, we will obtain financing on favorable terms. We have consumed

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substantial amounts of cash to date and expect to incur significant operating expenditures over the next several years as we continue to advance our product candidates into and through clinical trials.

We may raise additional financing through public or private equity offerings, debt financings, additional collaboration or licensing arrangements, government grant awards or any combination of the foregoing or other arrangements. To the extent we raise additional capital by issuing equity securities, our stockholders may experience dilution. Debt financing, if available, may subject us to restrictive covenants and significant interest costs. To the extent that we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to our technologies, product candidates or marketing territories.

If we are unable to raise sufficient funds when needed, we may be required to delay, scale back or eliminate some or all of our research or development programs; lose rights under existing licenses; or relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. Insufficient funds may adversely affect our ability to operate as a going concern. See Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Result of Operations.”

We believe that our existing cash and investment securities, anticipated cash flow from our existing collaboration with Roche and net proceeds from our offering of common stock in February 2007 will be sufficient to support our current operating plan into the first half of 2009, although we may choose to obtain additional financing from time to time. We have based this estimate on assumptions that may prove to be wrong. Our future capital uses and requirements depend on numerous forward-looking factors, including the following:

• our ability to establish any new partnering arrangements, our rights and obligations under any new partnering arrangements and our ability to generate revenues under any new partnering arrangements;

• the extent to which clinical and other development activities are funded or conducted by our current partners, Roche, Pfizer and the NCI;

• our ability to sell shares of our common stock under our committed equity financing facility, or CEFF, with Kingsbridge Capital Limited, or Kingsbridge;

• the progress, success and costs of preclinical testing and clinical trials of our product candidates;

• any acceleration or expansion of our clinical development plans;

• our ability to maintain or extend our existing partnering arrangements with Roche, Pfizer and the NCI;

• the progress, number and costs of our research programs;

• the costs and timing of obtaining, enforcing and defending patent and other intellectual property rights;

• any need to obtain licenses to additional patents or other intellectual property in order to use, import, manufacture, market or sell our product candidates;

• any need to expand our manufacturing capabilities; and

• expenses associated with any possible future litigation.

Our committed equity financing facility with Kingsbridge may not be available to us if we elect to make a draw down, may require us to make additional “blackout” or other payments to Kingsbridge and may result in dilution to our stockholders.

In July 2006, we entered into a CEFF with Kingsbridge. The CEFF entitles us to sell and obligates Kingsbridge to purchase, from time to time through September 25, 2009, shares of our common stock for cash consideration up to an aggregate of $50.0 million, subject to certain conditions and restrictions. Kingsbridge will not be obligated to

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purchase shares under the CEFF unless certain conditions are met, which include a minimum price for our common stock; the accuracy of representations and warranties made to Kingsbridge; compliance with laws; and the effectiveness of a registration statement registering for resale the shares of common stock to be issued in connection with the CEFF. In addition, among other termination rights, Kingsbridge is permitted to terminate the CEFF by providing written notice to us within 10 trading days after it obtains actual knowledge that an event has occurred resulting in a material and adverse effect on our business, operations, properties or financial condition. If we are unable to access funds through the CEFF, or if Kingsbridge terminates the CEFF, we may be unable to access capital on favorable terms, or at all.

We are entitled, in certain circumstances, to deliver a blackout notice to Kingsbridge to suspend the use of the resale registration statement and prohibit Kingsbridge from selling shares under the resale registration statement for a certain period of time. If we deliver a blackout notice in certain circumstances, or if the resale registration statement is not effective in circumstances not permitted by the agreement, then we must make a payment to Kingsbridge, or issue Kingsbridge additional shares in lieu of this payment, calculated on the basis of the number of shares purchased by Kingsbridge in the most recent draw down and held by Kingsbridge immediately prior to the blackout period and the change in the market price of our common stock during the period in which the use of the registration statement is suspended. If the trading price of our common stock declines during a suspension of the resale registration statement, the blackout or other payment could be significant.

In October 2006, we received $3.0 million in gross proceeds from the sale of 770,351 shares of common stock to Kingsbridge pursuant to the CEFF. Should we sell additional shares to Kingsbridge under the CEFF, or issue shares in lieu of a blackout payment, it will have a dilutive effect on the holdings of our current stockholders and may result in downward pressure on the price of our common stock. If we draw down under the CEFF, we will issue shares to Kingsbridge at a discount of up to 10% from the volume weighted average price of our common stock. If we draw down amounts under the CEFF when our share price is decreasing, we will need to issue more shares to raise the same amount than if our stock price was higher. Issuances in the face of a declining share price will have an even greater dilutive effect than if our share price were stable or increasing and may further decrease our share price.

If we are unable to recruit and retain skilled employees and consultants, we may not be able to successfully operate our business.

Retaining our current management and other employees and recruiting qualified scientific personnel to perform future research, manufacturing and development work will be critical to our success. None of our employees have employment commitments for any fixed period of time and could leave our employment at will. In March 2006, we implemented a corporate restructuring that resulted in a workforce reduction. We may have difficulty attracting required personnel as a result of a perceived risk of future workforce and expense reductions, or otherwise. Competition is intense among biotechnology, pharmaceutical and healthcare companies, universities and non-profit research institutions for experienced scientists and other personnel, and we may not be able to retain or recruit sufficient skilled personnel on acceptable terms to allow us to pursue collaborations and develop our product candidates and research programs, which would likely have an adverse effect on our business.

If our current partnering arrangements are unsuccessful or if conflicts develop with our partners, our research and development efforts could be delayed, curtailed or terminated, our revenues could significantly decrease and our operations may be adversely affected.

We have a collaboration agreement with Roche in the field of epothilones and a license agreement with Pfizer for our motilin agonist program. We also have collaborations with, or have licenses to technology and compounds from, several research groups, including Sloan-Kettering in the field of epothilones, the NCI in the field of geldanamycin

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analogs and Stanford University in the field of polyketide technology. The agreements permit our collaborators or licensors to terminate the agreements under certain circumstances. Our collaboration agreements with the NCI are currently set to expire in October 2007. We may not be able to maintain or extend our collaborations or license agreements on acceptable terms, if at all. If we do not maintain, extend or replace our collaboration with Roche or our license to Pfizer, the research and development efforts for our product candidates could be delayed, our revenues would significantly decrease and our operations could be adversely affected. If we are unable to maintain our research collaborations, including our collaboration agreements with the NCI, or if our in-license agreements are terminated, our research and development efforts could be delayed, curtailed or terminated or we could lose our rights to use the licensed technology and compounds.

We control neither the amount nor timing of resources that our partners devote to our programs or potential products, nor the scope, content and timing of the efforts that they conduct or permit. As a result, we do not know if our partners will dedicate sufficient resources or if the development or commercialization efforts by our corporate partners will be successful. We also do not know if the development or commercialization efforts by our partners will be the same as those we would choose to devote if we solely controlled the development and commercialization of our programs and product candidates. In particular, in our collaboration with Roche, we do not control the amount and timing of resources that Roche devotes to the epothilone program, and we do not control the scope, content and timing of the preclinical studies, clinical trials and other development efforts that Roche conducts or permits under the program, including for KOS-1584. In our collaboration with the NCI, we do not control the selection, conduct, timing and resources provided to clinical trials of tanespimycin or alvespimycin sponsored by the NCI. For these reasons, we may choose to undertake product development efforts that are within the scope of our collaborations at our own expense. Under our license agreement with Pfizer, Pfizer controls all development, regulatory and commercial activities related to our motilin agonist program. We also do not know whether our current partners or future partners, if any, might pursue alternative technologies or develop alternative products either on their own or in collaboration with others, including our competitors, as a means for developing treatments for the diseases targeted by the partnering arrangements with us. In addition, business combinations or significant changes in a partner’s business strategy may adversely affect its willingness or ability to continue the partnering arrangement with us.

Failure by our partners to develop or commercialize a compound or product for which they have rights from us could materially harm our business, financial condition and results of operations. For example, if Roche does not successfully develop and commercialize a product from our epothilone program, we may not receive any future milestone payments and will not receive any royalties under our collaboration with Roche.

If our partners fail to conduct research, development or commercialization activities successfully and in a timely manner or if they or our licensors breach or terminate their agreements with us, the development or commercialization of the affected product candidates, technology or research program could be delayed or terminated. If any of our existing partnering arrangements are terminated, we may be required to seek new partners or to undertake product development and commercialization at our own expense. This may limit the number of product candidates we will be able to develop and commercialize, significantly increase our capital requirements and reduce the likelihood of successful product introduction. Disputes might also arise with partners or licensors concerning rights to particular compounds or technologies. If we are unable to resolve these disputes in our favor, we could lose our rights to use those compounds or technologies.

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If we fail to enter into new partnering arrangements in the future, our business and operations would be negatively impacted.

Our strategy depends upon the formation and sustainability of multiple collaborative arrangements and license agreements with third parties. We expect to rely on these arrangements for not only financial resources, but also for expertise that we expect to need in the future relating to clinical trials, manufacturing, sales and marketing, and for license and technology rights. Although we have established collaborative arrangements and various license agreements, we do not know if we will be able to establish additional arrangements on favorable terms, or whether current or any future partnering arrangements will ultimately be successful. There have been, and may continue to be, a significant number of business combinations among pharmaceutical companies that have resulted, and may continue to result, in a reduced number of potential future partners, which may limit our ability to find partners who will work with us in developing and commercializing our product candidates. If we do not enter into new collaborative agreements, in particular, a collaborative arrangement for the further development of our Hsp90 inhibitor program, we may be required to curtail, suspend, delay or terminate research and development programs, including planned clinical trials for our product candidates, and therefore our ability to generate revenues from these programs will be adversely affected. Our ability to start new research and development programs may also be materially harmed.

Our potential products are in development, and substantial additional effort and expense will be necessary for further development.

Our product candidates are in various stages of research and development. We may not be able to develop products that prove to be safe and effective, meet applicable regulatory standards, are capable of being manufactured at reasonable costs or can be marketed successfully. All of the potential products that we are currently developing will require significant development and investment, including extensive clinical testing, before we can submit any application for regulatory approval. For example, we expect to incur significant expenses in connection with our TIME clinical trial program for tanespimycin in combination with Velcade for multiple myeloma. These expenses will be even higher to the extent we are required to pay for patients’ medical or other expenses, including, for example, the cost of Velcade for these studies.

Our products must satisfy rigorous standards of safety and efficacy before they can be approved by the FDA and international regulatory authorities for commercial use. We will need to conduct significant additional research and clinical trials before we can determine if our products are sufficiently safe and effective to file with the FDA and other regulatory agencies for product approval. Clinical trials are expensive and time-consuming, and therefore, significant amounts of money will need to be spent testing our products.

In addition, significant time and investment will be required to try to develop manufacturing processes for our products so that they are economical to manufacture on a commercial scale and satisfactory to the FDA and other governmental authorities.

The progress and results of our animal and human testing are highly uncertain.

We must provide the FDA and foreign regulatory authorities with clinical data that demonstrate the safety and efficacy of our products before they can be approved for commercial sale. As a result, commercialization of our product candidates depends upon successful completion of preclinical and clinical trials. Preclinical testing and clinical development are long, expensive and uncertain processes. It may take us a number of years to complete our testing, and failure can occur at any stage of testing. For example, in October 2005, we discontinued a Phase 2 clinical study of our first-generation epothilone, KOS-862, in hormone-refractory prostate cancer because the study did not meet the primary objective of tumor marker response in the first stage of a two stage clinical trial, and we previously discontinued clinical studies of KOS-862 in patients with non-small cell lung cancer and colorectal cancer. We could experience similar failures in other current or future clinical testing of our product candidates.

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Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and interim results of trials do not necessarily predict final results. A number of companies in the pharmaceutical and biotechnology industry, including Kosan, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. Also, preclinical and clinical data can be interpreted in different ways, which could delay, limit or prevent further testing or regulatory approval.

We do not know whether clinical trials of our product candidates will begin on time or whether any of our clinical trials will be completed on schedule, or at all. We may plan and initiate clinical trials before final data from earlier studies have been collected and analyzed because it takes a significant amount of time and effort to plan and initiate clinical trials and because of the length of time it takes to successfully develop a product candidate. Consequently, we may need to modify, suspend, cancel or terminate clinical trials based on final results from earlier studies. We also do not know whether clinical trials will indicate that an earlier-stage compound or formulation will be more appropriate for clinical and commercial development than a compound or formulation that is at a later stage of clinical development, and therefore result in extended timelines as well as increased development costs. For example, Roche and we decided in February 2007 to cease development of KOS-862 in favor of further development of our second-generation epothilone product candidate, KOS-1584. Negative or inconclusive results or adverse medical events during a clinical trial could cause a clinical trial to be suspended, terminated or repeated. Certain of the clinical trials of our product candidates are or may in the future be designed to include two stages, with the decision whether to proceed to the second stage dependent on results obtained in the first stage. Failure to achieve predetermined response rates as defined in the protocol may result in the decision not to proceed into the second stage of the trial.

We have multiple product candidates in human clinical trials for the treatment of cancer. Anticancer drugs frequently have a narrow therapeutic window between efficacy and toxicity. If unacceptable toxicity is observed in a clinical trial, the trial may be terminated at an early stage. For example, in June 2004, we discontinued a Phase 2 clinical study of KOS-862 in colorectal cancer due to unanticipated cumulative drug toxicities in patients who had previously been treated with the cancer treatment oxaliplatin. We also observed a higher incidence of adverse events resulting in patient withdrawal in our Phase 2 clinical study of KOS-862 in hormone-refractory prostate cancer than in our Phase 2 non-small cell lung cancer trial. We cannot predict whether any clinical trials of our product candidates will demonstrate toxicity issues or adverse events resulting in a significant patient withdrawal.

Completion of clinical trials may take several years or more. The length of time generally varies substantially according to the type, complexity, novelty and intended use of the product candidate. Our clinical trials may be suspended at any time if we, our collaborators, the FDA, or other regulatory authorities believe the patients participating in our studies are exposed to unacceptable health risks or that study protocols or patient informed consents should be amended to reflect additional health risks, additional testing procedures or other changes. For example, in September 2005, we temporarily suspended enrollment in our tanespimycin and alvespimycin clinical trials in connection with a request by the FDA to amend the protocols and patient informed consents for those trials. We provided amended protocols and informed consents for those clinical trials to the FDA in response to certain of its requested changes, and we resumed enrollment in the clinical trials. The FDA may require further changes to these protocols and informed consents, which may have a material adverse effect on the timing of, and our ability to conduct, the tanespimycin and alvespimycin clinical trials.

Our ability to commence or timely complete clinical trials may be adversely affected by many factors, including:

• ineffectiveness of the study compound, or perceptions by physicians that the compound is not effective for a particular indication;

• inability to manufacture sufficient quantities of compound for use in clinical trials;

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• a failure to obtain approval from the FDA, other regulatory authorities or an investigational site’s institutional review board to conduct a clinical trial;

• inability to reach agreement with a sufficient number of investigational sites to conduct a study;

• the number of patients required, slower than expected rate of patient recruitment or inability to recruit a sufficient number of patients;

• the occurrence of adverse medical events, including death, during a clinical trial, even if caused by the advanced status of patients’ disease or medical problems that are not related to our product candidates;

• inconclusive or negative results from a clinical trial;

• competing clinical trials in the same or similar indication;

• third-party clinical investigators failing to perform our clinical trials on our anticipated schedule or consistent with a clinical trial protocol, and other third-party organizations not performing data collection and analysis in a timely or accurate manner; and

• a decision by the FDA or other governmental authorities to require suspension or modification of a clinical trial.

Our product development costs will increase if we have delays in testing or approvals, if we need to perform more or larger clinical trials than planned or if our clinical trials include more expensive testing or other procedures than planned. If the delays are significant, our financial results and the commercial prospects for our products will be harmed, and our ability to become profitable will be adversely affected. If any clinical trials of our product candidates are not successful, our business, financial condition and results of operations will be harmed.

If we are not able to obtain required regulatory approvals, we will not be able to commercialize our product candidates, and our ability to generate revenue will be materially impaired.

Our product candidates and the activities associated with their development, manufacture and commercialization are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States, and by comparable authorities in other countries. Our products may not be commercialized unless and until our partners or we obtain regulatory approval from the FDA or foreign governmental authorities to do so. The process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon the type, complexity, novelty, safety and efficacy of the product candidates involved. We have not received regulatory approval to market any of our product candidates in any jurisdiction and, although our personnel have experience from working at other companies, we as a company have no experience in preparing and filing the applications necessary to gain regulatory approvals to commercialize our products. This lack of experience may impede our ability to obtain FDA or other foreign regulatory approvals to commercialize our products in a timely manner, if at all.

Changes in the regulatory approval policy during the development period, changes in or the enactment of additional regulations or statutes, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application for regulatory approval. Furthermore, the approval procedure and the time required to obtain approval varies among countries and can involve additional testing beyond that required by the FDA. Approval by one regulatory authority does not ensure approval by regulatory authorities in other jurisdictions.

The FDA and other regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional preclinical, clinical

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or other studies or modifications to the manufacturing processes or facilities or quality control procedures for our product candidates. For example, we plan to commence during 2007 late-stage clinical trials of tanespimycin, and, if the results are favorable, we believe these clinical trials will support the filing of an NDA with the FDA for the treatment of multiple myeloma. However, the FDA or other regulatory authorities may require additional data prior to accepting or approving an application for marketing approval for tanespimycin or other product candidates, which would result in delays in potential FDA or other regulatory authority approval and additional costs, either of which may be too significant to continue development of tanespimycin or other product candidates. This risk is further compounded by any changes during development of a product candidate, such as changes in manufacturing processes, formulations or dosing regimens.

Any clinical trial may fail to produce results satisfactory to the FDA or other regulatory authorities. For example, we currently conduct, and expect to conduct in the future, clinical trials for our product candidates in countries outside of the United States. The FDA or other regulatory authorities may reject data from clinical trials conducted in other countries if they are not conducted in accordance with applicable regulatory standards and procedures.

We do not know whether clinical trials for our product candidates will demonstrate safety and efficacy sufficient to obtain the requisite regulatory approvals or will result in marketable products. Our or our partners’ failure to adequately demonstrate the safety and efficacy of our products under development will prevent receipt of FDA and foreign approvals and, ultimately, commercialization of our products.

We rely on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily.

We do not have the ability to independently conduct clinical trials for our products, and we rely on third parties such as contract research organizations, laboratory testing companies, medical institutions and clinical investigators to perform this function. We also rely on Roche to conduct certain clinical trials for KOS-1584, Pfizer to conduct all clinical trials for our motilin agonist program, including KOS-2187, and the NCI to conduct certain clinical trials for tanespimycin and alvespimycin. We may rely on future partners to conduct clinical trials for our product candidates. If any of these third parties do not successfully carry out their obligations or meet expected deadlines, clinical trials may be extended, delayed, suspended or terminated, data generated from clinical trials may not be acceptable to the FDA or other regulatory authorities and our product candidates may not receive regulatory approval or be successfully commercialized.

We may not be able to obtain or maintain orphan drug exclusivity for our product candidates.

Some jurisdictions, including Europe and the United States, may designate drugs for relatively small patient populations as orphan drugs. The FDA and the European Medicines Agency have granted orphan drug status to tanespimycin for the treatment of multiple myeloma and chronic myelogenous leukemia. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process, but does make the product eligible for orphan drug exclusivity and, in the United States, specific tax credits. Generally, if a company receives the first marketing approval for a product with an orphan drug designation in the clinical indication for which it has such designation, the product is entitled to orphan drug exclusivity. Orphan drug exclusivity means that another application to market the same drug for the same indication may not be approved, except in limited circumstances, for a period of up to ten years in Europe (reviewable after six years), and for a period of seven years in the United States. This exclusivity, however, could block the approval of tanespimycin for the treatment of multiple myeloma or chronic myelogenous leukemia in the United States or Europe if a competitor obtains approval before us of a product containing tanespimycin for these specific indications. Even if we obtain orphan drug exclusivity for any of our product candidates, we may not be able to maintain it. For example, if a competitive product is shown to be clinically superior to our product, any orphan drug exclusivity we have obtained will not block the approval of such competitive product.

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Even if any of our product candidates receives regulatory approval, we may still face significant development and regulatory difficulties.

Even if the FDA or other regulatory authorities approves a product candidate, the approval may impose significant restrictions on the indicated uses, conditions for use, labeling, advertising, promotion, marketing and/or production of such product, and may impose ongoing requirements for post-approval studies, including additional research and development and clinical trials. In addition, regulatory agencies subject a product, its manufacturer and the manufacturer’s facilities to continual review and periodic inspections. If a regulatory agency discovers previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, our partners or us, including requiring withdrawal of the product from the market.

If our partners, any of our product candidates that become approved for marketing by a regulatory authority or we fail to comply with applicable regulatory requirements, a regulatory authority may take various actions, including:

• issuing warning letters;

• imposing civil or criminal penalties;

• suspending regulatory approval;

• refusing to approve pending applications or supplements to approved applications filed by us or our partners;

• imposing restrictions on operations, including costly new manufacturing requirements; or

• seizing or detaining products or requiring a product recall.

Any inability to protect our proprietary technologies could significantly harm our business and ability to successfully commercialize product candidates.

Our commercial success will depend in part on our ability to obtain patents and maintain adequate protection of other intellectual property for our technologies and product candidates in the United States and other countries and prevent others from infringing our proprietary rights. If we are unable to adequately protect our intellectual property, competitors may be able to use our technologies and erode or negate any competitive advantage we may have. Intellectual property laws vary from country to country, and the laws of a particular country may afford less intellectual property protection than another country.

Any patents that we or our partners own or license from third parties may not provide protection against competitors. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies and products are covered by valid and enforceable patents or are effectively maintained as trade secrets. However, our patent positions, as well as the patent positions of biotechnology companies and other third parties, involve complex legal and factual questions, and, therefore, we cannot predict with certainty whether our patent applications will be allowed or any resulting patents will be valid and enforceable. Further, our patents or patent applications or those of our licensors could be placed into interference, and we may lose our rights in such patents or applications. Patents may be challenged, even by our partners, held unenforceable, invalidated or circumvented. Certain of our current exclusive license agreements restrict, and any future exclusive license agreements may restrict, our rights under patents and patent applications to certain fields of use, and therefore, we may not have the ability to prevent competitors from developing and commercializing our product candidates or technologies in fields of use not covered by our exclusive license agreements.

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The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:

• we or our licensors were the first to make the inventions covered by each of our patents or pending patent applications;

• we or our licensors were the first to file patent applications for these inventions;

• others will not independently develop similar or alternative technologies or duplicate any of our technologies;

• any of our or our licensors’ or partners’ pending patent applications will result in issued patents;

• any of our or our licensors’ or partners’ patents will be valid or enforceable;

• any patents issued to us or our licensors or collaborators will provide a basis for commercially viable products, will provide us with any competitive advantages or will not be challenged by third parties;

• we will develop additional proprietary technologies that are patentable; or

• the patents of others will not have an adverse effect on our business.

We apply for patents covering our technologies, product candidates, formulations and uses thereof, as we deem appropriate. However, we may fail to apply for patents on important technologies or products in a timely fashion or at all. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products and technologies. For example, tanespimycin, the active pharmaceutical ingredient in the most advanced product candidate in our Hsp90 inhibitor program, was originally disclosed in a now-expired third party patent. Consequently, others can develop products containing tanespimycin. We are aware of at least three other companies that have been developing product candidates containing or based on tanespimycin, and these companies have filed patent applications relating to their products in development. Other competitors may currently be developing, or may in the future develop, products containing or based on tanespimycin. In addition, we generally are unable to control the patent prosecution of technology that we license from others to the same degree as we would for our own technology. Further, some of our patents and patent applications for our motilide program have been assigned to Pfizer, and additional patents and patent applications may in the future be assigned to Pfizer or other current or future partners. We generally are unable to control the filing, prosecution and maintenance of patent rights that we assign to partners to the same degree as we would if we maintained ownership of them.

In addition to patents, we rely on trade secrets and proprietary know-how. We have taken measures to protect our confidential information and trade secrets. However, these measures may not provide adequate protection. We seek to protect our confidential information and trade secrets by entering into confidentiality agreements with employees, collaborators, consultants and others. Nevertheless, parties may breach these agreements or competitors may otherwise obtain or independently develop our trade secrets.

Interference, opposition or similar proceedings relating to our patents and patent applications are costly, and an unfavorable outcome could prevent us from commercializing our product candidates.

We are aware of a significant number of patents and patent applications relating to aspects of our technologies and compounds filed by, and issued to, other parties. Others have filed patent applications or have been granted patents claiming inventions also claimed or licensed by us, and we may have to participate in an interference or other proceeding before a patent agency or court to determine priority of invention or which party was first to invent and, thus, has the right to a patent for these inventions. We believe one or more interferences may be declared between

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patents and applications we own or have exclusively licensed and patents and applications owned by Abbott Laboratories or Biotica Technologies Ltd. relating to erythromycin polyketide synthase, or PKS, genes, methods for altering PKS genes, and erythromycin analogs. In April 2005, a hearing was held at the European Patent Office to address an opposition filed by Biotica to one of our exclusively licensed patents related to the recombinant production of polyketides. The European Patent Office maintained, or upheld, the patent, but with narrowing amendments. Both parties have filed an appeal. We believe an interference may also be declared between patents and applications we have exclusively licensed from two parties covering KOS-1584.

A proceeding or a lawsuit involving an interference or opposition could result in substantial cost to us even if the outcome is favorable, and if the outcome is unfavorable, we could be required to license the other party’s rights, on terms that may be unfavorable to us, or cease using the technology. An interference or opposition may also result in loss of claims based on patentability grounds raised in the interference or opposition. Although patent and intellectual property disputes in the biotechnology area are often settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and could include ongoing royalties. Furthermore, we cannot be certain that a license would be available to us on satisfactory terms, if at all. Companies and others developing products that could compete with our product candidates, such as Novartis AG in the area of potential epothilone products, may be particularly unwilling to grant us a license at any price. If we are not able to obtain necessary licenses, we may not be able to manufacture or commercialize our product candidates, which would materially harm our business, financial condition and results of operations.

Claims by third parties of intellectual property infringement would require us to spend time and money and could deprive us of valuable rights needed to develop or commercialize our products.

Our commercial success depends significantly on not infringing the patents and proprietary rights of other parties and not breaching any licenses that we have entered into with regard to our technologies and products. Other parties may currently or in the future possess intellectual property rights covering product candidates that we or our partners are developing or desire to develop; methods of treatment or administration involving our product candidates; formulations of our product candidates; and genes, gene fragments, cell lines, compounds and other technologies we use or may wish to use. Any infringement of patent rights or violation of other proprietary rights may require us to obtain a license from another party, forego product development or commercialization or face lawsuits or other claims.

The biotechnology industry is characterized by extensive litigation regarding patents and other intellectual property rights. We are aware of patents and published patent applications that, if valid, and if we are unsuccessful in circumventing or acquiring the rights to these patents, may block our ability to commercialize products based on the product candidates that we are developing or pursue our PKS gene manipulation and production technologies. We cannot be sure that other parties have not filed for or obtained relevant patents that could affect our ability to obtain patents or operate our business. Others, including our partners, may challenge our patent or other intellectual property rights or sue us for patent infringement, misappropriation of their intellectual property rights or breach of license agreements. We may be required to commence legal proceedings to resolve our patent or other intellectual property rights. An adverse determination in any litigation or administrative proceeding to which we may become a party could subject us to significant liabilities, result in our patents being deemed invalid, unenforceable or revoked, require us to license disputed rights from others or to cease using the disputed technology. In addition, our involvement in any of these proceedings may cause us to incur substantial costs and result in diversion of management and technical personnel.

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Other parties may obtain patents in the future and claim that our products or the use of our technologies infringes these patents or that we are employing their proprietary technology without authorization. We could incur substantial costs and diversion of management and technical personnel in defending ourselves against any claims that the use of our technologies infringes any patents, defending ourselves against any claim that we are employing any proprietary technology without authorization or enforcing our patents against others. Furthermore, parties making claims against us may be able to obtain injunctive or other equitable relief that could effectively block our ability to develop, commercialize and sell products, and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to:

• pay substantial damages;

• stop producing certain products and using certain methods;

• develop non-infringing products and methods; and

• obtain one or more licenses from other parties.

We may not be able to obtain licenses from other parties at a reasonable cost, or at all. If we are not able to obtain necessary licenses at a reasonable cost or at all, we could encounter substantial delays in product introductions while we attempt to develop alternative methods and products, which we may not be able to accomplish. Litigation or the failure to obtain licenses could prevent us from manufacturing or commercializing products and could materially harm our business, financial condition and results of operation.

Manufacturing difficulties could delay or preclude commercialization of our products and substantially increase our expenses.

We currently use contract manufacturers to make tanespimycin and alvespimycin active pharmaceutical ingredients and to formulate the final drug products. The NCI formulates the final drug product for alvespimycin and the formulation of tanespimycin being studied by it under our cooperative research and development agreements, or CRADAs. We maintain a limited inventory of tanespimycin and alvespimycin drug product at our facilities in Hayward, California, and we also maintain a limited inventory at the facilities of an outside contractor. The NCI is not obligated to maintain an inventory of either the active pharmaceutical ingredient or formulated drug product for alvespimycin or the formulation of tanespimycin being studied by the NCI under our CRADA. In our epothilone program, we rely on contract manufacturers for the active pharmaceutical ingredient for KOS-1584. Drug product for KOS-1584 is formulated at our facilities and by an outside contractor. We maintain limited inventories of formulated drug product for KOS-1584 at our facilities in Hayward, California and at the facilities of an outside contractor.

If any of our or our contract manufacturers’ manufacturing or inventory facilities encounter delays, are destroyed or otherwise become unavailable to us, then the clinical development of our product candidates or submissions for their regulatory approval, and therefore commercialization, could be delayed or precluded. Adverse effects would be particularly acute if problems arise with our sole sourcing or inventory relationships. Alternative qualified production capacity may not be available on a timely basis or at all because manufacturing processes for our product candidates are complex and may be subject to a lengthy regulatory approval process.

A number of factors could cause prolonged interruptions in the manufacturing and supply of our product candidates, including:

• the failure of a supplier to provide raw materials or intermediates used for manufacture of our product candidates;

• equipment malfunctions or failures;

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• the failure to manufacture in accordance with current good manufacturing practices, FDA or other regulatory requirements;

• the delay of product shipments due to U.S. custom regulations or third-party carriers used to transport our product candidates, and damage to our product candidates while they are in transit;

• changes in FDA or other regulatory authority requirements or standards that require modifications to the manufacturing processes or facilities used in the production of our product candidates;

• action by the FDA or other regulatory authorities to suspend production of one or more of our product candidates; or

• difficulties in scaling-up production of our product candidates for large clinical trials or commercial supply.

While our manufacturing personnel have extensive experience from working at other companies, we as a company have no experience manufacturing products for commercial sale. We may encounter difficulties in scaling-up our manufacturing processes and equipment. We may not be able to achieve such scale-up in a timely manner or at a commercially reasonable cost, if at all. In addition, our facilities in Hayward, California are located within the San Francisco Bay Area, an area where earthquakes periodically occur. They are also located in a designated flood zone. Our access to any raw materials, intermediates, active pharmaceutical ingredients or formulated drug product for our product candidates sourced or inventoried through our facilities in Hayward, California may be subject to interruption, damage or loss in the event of an earthquake or flood.

As discussed above, we rely upon outside contractors to manufacture and supply to us raw materials, intermediates, active pharmaceutical ingredients and formulated drug product for our product candidates. Our dependence upon others for the manufacture of our product candidates and their components may adversely affect our ability to continue clinical development of our product candidates in a timely manner and may adversely affect any future profit margins and our ability to commercialize any products that we may develop on a timely and competitive basis. Dependence on contract manufacturers involves a number of additional risks, many of which are outside of our control, including:

• failure of a contract manufacturer to manufacture products to our specifications or to deliver products in the quantities, timeframe or manner that we require;

• a decision by the FDA or other regulatory authorities not to approve our use of a particular contract manufacturer to supply our products;

• intellectual property rights to any improvements in a manufacturing process or new manufacturing processes being owned by or shared with a contract manufacturer;

• termination of an agreement with a contract manufacturer or increased prices charged by a contract manufacturer; or

• a contract manufacturer declaring bankruptcy or otherwise going out of business.

Any of these factors could cause us to delay or suspend clinical trials, regulatory submissions or commercialization of our products and could result in significantly increased costs.

In addition, our future contract manufacturers may not be in the United States, and we currently utilize contract manufacturers located outside the United States. Consequently, we may face additional manufacturing difficulties due to a number of potential factors, including importation and customs issues, political uncertainties and a potentially limited ability to enforce our contractual rights against parties not located within the United States.

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We face intense competition from pharmaceutical companies, biotechnology companies and academic groups.

We face, and will continue to face, intense competition from organizations such as biotechnology and pharmaceutical companies, as well as academic and research institutions and government agencies, that are pursuing competing technologies and products. These organizations may develop or currently possess technologies or products that are superior alternatives to ours. For example, companies with competing Hsp90 inhibitors include Biogen Idec Inc., which has initiated Phase 1 clinical trials in solid tumors with its intravenous formulation of tanespimycin and its oral synthetic Hsp90 inhibitor and has announced that it expects to initiate Phase 2 clinical trials in 2007; Infinity Pharmaceuticals, which has initiated a Phase 1/2 clinical trial of its intravenous Hsp90 inhibitor in non-small cell lung cancer and a Phase 1 clinical trial in gastrointestinal stromal tumors and has an oral formulation in preclinical development in collaboration with MedImmune, Inc.; Abraxis BioScience, Inc., which has a nanoparticle formulation of tanespimycin in preclinical development; Vernalis plc, which has announced that it has selected an intravenous and an oral Hsp90 inhibitor preclinical development candidate in collaboration with Novartis AG and expects to initiate Phase 1 clinical trials in mid-2007; Serenex, Inc., which has announced plans to file an IND for its oral Hsp90 inhibitor in the first quarter of 2007; and Synta Pharmaceuticals Corp., which announced plans to file an IND for its Hsp90 inhibitor in the first half of 2007, as well as other companies reported to be pursuing Hsp90 inhibitors. Competing epothilones in clinical development include those being developed by BMS, which is reported to be in Phase 3 clinical trials; Novartis AG, which is reported to be in Phase 3 clinical trials; and Schering AG, which is reported to be in Phase 2 clinical trials. Gastrointestinal motility competitors include Chugai Pharmaceuticals, whose motilide agonist is reported to be in Phase 2 clinical trials. Thus, it is possible that, even if we are successful in developing any of our product candidates, one or more compounds of our competitors will be approved and marketed before our own. This could place our partners and us at a significant disadvantage and could prevent us from realizing significant commercial benefit from such compounds. Further, our competitors in the polyketide gene-engineering field may be more effective at implementing their technologies to develop commercial products or may hold or develop patents or other proprietary rights that may prevent us from practicing our technologies and pursuing our programs.

We also face and will continue to face intense competition from other companies for partnering arrangements with pharmaceutical and biotechnology companies, for establishing relationships with academic and research institutions and for licenses to additional technologies. These competitors, either alone or with their collaborative partners, may succeed in developing technologies or products that are superior to ours.

Any products that we develop through our technologies will compete in multiple, highly competitive markets. Development of pharmaceutical products requires significant investment and resources. Many of the organizations competing with us in the markets for such products have greater capital resources, research and development and marketing staffs, facilities and capabilities, and greater experience in discovery and developing drugs, obtaining regulatory approvals and product manufacturing and marketing. Accordingly, our competitors may succeed in more rapidly developing and marketing technologies and products that are more effective than our technologies and products or that would render our products or technologies obsolete or noncompetitive.

We believe that our ability to successfully compete will depend on, among other things:

• our ability to develop novel product candidates with attractive pharmaceutical properties and to secure and protect intellectual property rights based on our innovations;

• the efficacy and safety of our product candidates;

• the speed at which we and our partners develop our product candidates;

• our and our partners’ ability to design and successfully execute appropriate clinical trials;

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• our and our partners’ ability to obtain regulatory approvals to market our product candidates and the timing and scope of any regulatory approvals;

• our and our partners’ ability to manufacture commercial quantities and sell any product candidates that are approved for marketing;

• acceptance of future products by physicians and other healthcare providers; and

• the development of effective pricing and reimbursement strategies.

If we face product liability claims, these claims will divert our management’s time and we will incur litigation costs, and if we are held liable, our business, financial condition and results of operation may be materially harmed.

We face an inherent business risk of liability claims in the event that the use of our potential products in clinical trials or otherwise, or any other products manufactured in our facility, results in personal injury or death. Even though we have obtained product liability insurance, it may not be sufficient to cover claims that may be made against us. Product liability insurance is expensive, difficult to obtain and may not be available on acceptable terms, if at all. Any claims against us, regardless of their merit, could materially and adversely affect our business, financial condition and results of operation, because litigation related to these claims would strain our financial resources in addition to consuming the time and attention of our management. If we are sued for any injuries caused by our products or products manufactured at our facility, our liability could exceed our total assets.

We use hazardous chemicals and radioactive and biological materials in our business. Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly.

Our research and development processes involve the controlled use of hazardous materials, including hazardous chemicals and radioactive and biological materials. Some of these materials may be novel, including bacteria with novel properties and bacteria that produce biologically active compounds. Our operations also produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling, shipment and disposal of these materials. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, we could be sued for injury or contamination that results from our use or the use by third parties or our partners of these materials, and our liability may exceed our insurance coverage and total assets. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development or commercialization efforts. In the event we do not comply with any of these laws or regulations, we may incur significant fines, our governmental licenses or permits may be revoked or we may face additional penalties, any of which could harm our business.

We have a stockholders rights plan and anti-takeover provisions in our corporate charter documents that may result in outcomes with which you do not agree.

Our board of directors has the authority to issue up to 10,000,000 shares of preferred stock and to determine the rights, preferences, privileges and restrictions of those shares without further vote or action by our stockholders. The rights of the holders of any preferred stock that may be issued in the future may adversely affect the rights of the holders of common stock. The issuance of preferred stock could make it more difficult for third parties to acquire a majority of our outstanding voting stock.

Our certificate of incorporation provides for staggered terms for the members of the board of directors and prevents our stockholders from acting by written consent. These provisions and other provisions of our bylaws and of

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KOSAN BIOSCIENCES

Delaware law applicable to us could delay or make more difficult a merger, tender offer or proxy contest involving us. This could reduce the price that investors might be willing to pay for shares of our common stock and result in the market price being lower than it would be without these provisions. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. This is because our board of directors is responsible for appointing the members of our management team.

We have adopted a rights agreement under which all stockholders have the right to purchase shares of a new series of preferred stock at an exercise price of $70.00 per one one-hundredth of a share, if a person acquires more than 20% of our common stock. The rights plan could make it more difficult for a person to acquire a majority of our outstanding voting stock. The rights plan could also reduce the price that investors might be willing to pay for shares of our common stock and result in the market price being lower than it would be without the rights plan. In addition, the existence of the rights plan itself may deter a potential acquirer from acquiring us. As a result, either by operation of the rights plan or by its potential deterrent effect, mergers and acquisitions of us that our stockholders may consider in their best interests may not occur.

Our stock price has been, and may continue to be, extremely volatile.

The trading price of our common stock has been, and is likely to continue to be, highly volatile. During the period from January 1, 2006 through December 31, 2006, our common stock traded between $2.88 and $6.19 on the Nasdaq Global Market. The trading price of our common stock could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:

• delay or failure in initiating, conducting, completing or analyzing clinical trials or unsatisfactory design of or data from these trials by our collaborators or us;

• announcements of data from clinical trials, new partnering arrangements or other developments that do not meet the expectations of analysts, investors or other third parties;

• developments in clinical trials for potentially competitive product candidates;

• changes in the United States or foreign health care systems or regulations;

• regulatory approvals for competitive product candidates or delays or failures by our partners or us in obtaining regulatory approvals for our product candidates;

• new products or services introduced or announced by us or our competitors;

• announcements of technological developments in research by us or our competitors;

• published reports by securities analysts;

• announcements of expirations, terminations or amendments of collaborations, licenses or government research grants, or announcements that we have entered into new collaboration, licensing or similar arrangements;

• departures of key personnel;

• developments or disputes as to patent or other proprietary rights;

• litigation or an unfavorable outcome in litigation;

• sales of our common stock;

• announcements of, and actual or anticipated fluctuations in, our financial results; and

• economic and other external factors, disasters or crises.

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In addition, the stock market in general, and the Nasdaq Global Market and the market for biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against that company. If this type of litigation were instituted against us, we would be faced with substantial costs and management’s attention and resources would be diverted, which could in turn seriously harm our business, financial condition and results of operations.

We expect that our quarterly and annual results of operations will fluctuate, and this fluctuation could cause our stock price to decline, creating investor losses.

Our quarterly and annual operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our stock price to fluctuate significantly or decline. Some of the factors that could cause our operating results to fluctuate include:

• expiration or termination of partnering arrangements, which may not be renewed or replaced;

• the success rate of our or our partners’ efforts leading to milestone payments and royalties under our partnering arrangements with Roche or Pfizer or any future collaboration or license agreements;

• the progress of our product candidates in clinical trials, and therefore, the timing of expenses for those clinical trials;

• the timing and willingness of partners to develop and commercialize our products;

• general and industry specific economic conditions, which may affect our partners’ research and development expenditures; and

• costs and expenses related to any litigation or administrative proceedings in which we may be involved.

If our revenues decline or do not grow due to expiration, termination or amendment of current or future collaboration agreements or licenses, failure to obtain new contracts or other factors, we may not be able to reduce our operating expenses correspondingly. In addition, we expect operating expenses to continue to increase. Failure to achieve anticipated levels of revenues could therefore significantly harm our operating results for a particular fiscal period.

Due to the possibility of fluctuations in our revenues and expenses, we believe that quarter-to-quarter or year-to-year comparisons of our operating results are not a good indication of our future performance. Our operating results in some quarters or years may not meet the expectations of stock market analysts and investors. In that case, our stock price may decline.

Changes in the accounting treatment of stock options will continue to adversely affect our results of operations.

We adopted Statement of Financial Accounting Standards No. 123 (revised 2004), or SFAS 123R, on January 1, 2006, under which we are required to record additional compensation expense related to stock options and other share-based payments in 2006 and beyond. This statement had no impact on our financial position; however, it negatively impacted and will continue to have a negative impact on our earnings and reported results of operations compared to the results we have reported under prior accounting standards on stock options and other share-based payments.

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If we are unable to favorably assess the effectiveness of internal controls over financial reporting, or if our independent auditors are unable to provide an unqualified attestation report on our assessment, our stock price could be adversely affected.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, on an annual basis, our management is required to report on, and our independent auditors to attest to, the effectiveness of our internal controls over financial reporting. The rules governing the standards that must be met for management to make its annual assessment are complex and require significant documentation and testing. While our internal controls over financial reporting were deemed effective by both our management and our independent auditors as of December 31, 2006, there may be changes in our systems, processes or operations that will affect the effectiveness of internal controls in the future. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Our future assessments of internal controls may continue to result in increased expenses and the devotion of significant management resources. If we cannot favorably assess the effectiveness of our internal controls over financial reporting in the future, or if our independent auditors are unable to provide an unqualified attestation report on our assessment, investor confidence and our stock price could be adversely affected.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our facilities consist of approximately 113,000 square feet of research and office space located in Hayward, California, of which approximately 44,000 and 69,000 square feet are leased to us until 2013 and 2008, respectively. We have an option to renew our lease on the 44,000 square foot facility for one additional period of five years and an option to renew our lease on the 69,000 square foot facility for two additional periods of five years.

ITEM 3. LEGAL PROCEEDINGS

None.

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

None.

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PART II

KOSAN BIOSCIENCES

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Registrant’s Common Equity

Our common stock trades on the Nasdaq Global Market under the symbol “KOSN.” The following table shows the high and low sales prices per share of our common stock as reported on the Nasdaq Global Market for the periods indicated:

2006	High		Low		2005	High		Low
Fourth Quarter	$	5.68	$	3.70	Fourth Quarter	$	8.10	$	4.20
Third Quarter	$	5.00	$	2.88	Third Quarter	$	9.77	$	5.17
Second Quarter	$	5.93	$	3.65	Second Quarter	$	5.99	$	3.96
First Quarter	$	6.19	$	4.43	First Quarter	$	7.56	$	3.96

As of February 28, 2007, there were approximately 80 record holders of our common stock.

Dividend Policy

We have never declared or paid dividends on our capital stock. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.

Recent Sales of Unregistered Securities

On July 19, 2006, we entered into a Committed Equity Financing Facility, or CEFF, with Kingsbridge Capital Limited, an unaffiliated purchaser, as described under Note 9 to the Financial Statements included with this Annual Report on Form 10-K. In connection with the CEFF, in October 2006, we received $3.0 million in gross proceeds for the sale of 770,351 shares of our common stock to Kingsbridge. We relied on the exemption from registration contained in Section 4(2) of the Securities Act, and Regulation D, Rule 506 thereunder, for the issuance of these shares to Kingsbridge.

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KOSAN BIOSCIENCES

Performance Graph

The following graph shows the total stockholder return of an investment of $100 in cash on December 31, 2001 through December 29, 2006, the last date of trading of the 2006 fiscal year, for (i) the our common stock, (ii) the Nasdaq Stock Market (U.S.) Index and (iii) the Nasdaq Pharmaceutical Index. All values assume reinvestment of the full amount of all dividends.

COMPARISON OF QUARTERLY CUMULATIVE RETURN

FOR KOSAN BIOSCIENCES INCORPORATED,

THE NASDAQ STOCK MARKET (U.S.) INDEX

AND THE NASDAQ PHARMACEUTICAL INDEX⁽¹⁾

(1) The material in this report is not “soliciting material,” is not deemed “filed” with the Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act or Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation by reference language contained in such filing.

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ITEM 6. SELECTED FINANCIAL DATA

The statement of operations data for each of the years ended December 31, 2006, 2005 and 2004, and the balance sheet data as of December 31, 2006 and 2005, have been derived from our audited financial statements included elsewhere in this Annual Report on Form 10-K. We have derived the statement of operations data for the years ended December 31, 2003 and 2002, and the balance sheet data as of December 31, 2004, 2003 and 2002 from our audited financial statements that are not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of results to be expected for any future period. The data presented below have been derived from financial statements that have been prepared in accordance with accounting principles generally accepted in the United States and should be read with our financial statements, including the notes, and with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.

(in thousands, except per share data)
	Year Ended December 31,
	2006 (2)			2005			2004			2003			2002
STATEMENT OF OPERATIONS DATA:
Contract revenue	$	13,105		$	11,916		$	20,493		$	28,482		$	7,269
Grant revenue		401			1,494			2,399			2,907			2,334
Total revenues		13,506			13,410			22,892			31,389			9,603
Operating expenses (1):
Research and development		37,179			38,400			40,175			36,789			28,378
General and administrative		7,823			6,038			5,934			5,137			4,932
Total operating expenses		45,002			44,438			46,109			41,926			33,310
Loss from operations		(31,496	)		(31,028	)		(23,217	)		(10,537	)		(23,707	)
Interest and other income, net		2,027			1,391			1,091			869			2,843
Net loss	$	(29,469	)	$	(29,637	)	$	(22,126	)	$	(9,668	)	$	(20,864	)
Basic and diluted net loss per common share	$	(0.88	)	$	(1.01	)	$	(0.77	)	$	(0.38	)	$	(0.84	)
Shares used in computing basic and diluted net loss per common share		33,394			29,227			28,913			25,567			24,906
(1)    Includes non-cash charges for stock-based compensation as follows:
Research and development	$	1,419		$	224		$	594		$	695		$	2,782
General and administrative		1,046			131			163			232			656
	$	2,465		$	355		$	757		$	927		$	3,438

(2) Effective January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (revised 2004) or SFAS 123R, “Share-Based Payment,” using the modified prospective transition method and therefore have not restated prior periods’ results. See Note 3 to the financial statements.

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(in thousands, except per share data)
	Year Ended December 31,
	2006			2005			2004			2003			2002
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments	$	63,138		$	54,177		$	67,560		$	81,459		$	53,451
Working capital		42,262			44,458			60,276			75,773			48,748
Restricted cash		949			949			949			904			904
Long-term investments		—			—			14,884			22,936			26,183
Total assets		71,187			65,997			96,613			123,189			91,590
Deferred revenue, current portion		13,992			3,277			3,277			5,625			2,500
Deferred revenue, less current portion		5,599			8,876			12,153			15,234			9,271
Equipment loans, less current portion		899			1,785			2,283			2,701			1,796
Accumulated deficit		(160,306	)		(130,837	)		(101,200	)		(79,074	)		(69,406	)
Stockholders’ equity		41,754			41,106			69,186			89,452			70,840

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read with “Selected Financial Data” and our financial statements and notes included elsewhere in this Annual Report on Form 10-K. The discussion in this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this Annual Report on Form 10-K should be read as applying to all related forward-looking statements wherever they appear in this Annual Report on Form 10-K. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to these differences include those discussed in Item 1A. “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Overview

We are a cancer therapeutics company focused on advancing two new classes of anticancer agents through clinical development: Hsp90 inhibitors and epothilones. The following is the status of our product candidates.

Hsp90 Inhibitors

Tanespimycin

Our proprietary formulations of tanespimycin are in Phase 1 and 2 clinical trials, primarily for multiple myeloma in combination with Velcade, for HER2-positive metastatic breast cancer in combination with Herceptin and as monotherapy for melanoma. In mid-2007, we expect to present data from a Phase 1b clinical trial of tanespimycin in multiple myeloma in combination with Velcade and a Phase 2 clinical trial of tanespimycin in metastatic melanoma. We intend to initiate our Tanespimycin in Myeloma Evaluation, or “TIME”, clinical program for tanespimycin in the first half of 2007. The TIME program includes TIME-1, a Phase 3 pivotal study of tanespimycin in combination with Velcade in first-relapse patients with multiple myeloma, and TIME-2, a Phase 2/3 study of tanespimycin in combination with Velcade in patients with relapsed refractory multiple myeloma.

Alvespimycin

Intravenous and oral formulations of a second-generation Hsp90 inhibitor, alvespimycin HCl, are currently in Phase 1 clinical trials. In mid-2007, we expect to present data from a Phase 1b clinical trial of intravenous alvespimycin in combination with Herceptin in patients with solid tumors as well as interim results from a Phase 1 clinical trial of oral alvespimycin in solid tumors. We intend to initiate a Phase 2 clinical trial of alvespimycin as monotherapy in patients with metastatic breast cancer in the first half of 2007 and a Phase 2/3 clinical trial investigating the combination of alvespimycin and Herceptin in patients with HER2-positive metastatic breast cancer in the second half of 2007.

Epothilones

KOS-1584 is our epothilone anticancer clinical candidate that is being evaluated in two dose-escalating Phase 1 clinical trials in patients with solid tumors. We expect to present data from our KOS-1584 Phase 1 clinical trials in mid-2007. We expect to initiate Phase 2 clinical trials with KOS-1584 in the second half of 2007.

Our epothilone program is partnered with Roche through a global development and commercialization agreement, which requires Roche to fund all of the current and anticipated KOS-1584 clinical trials.

Other Programs

We also have a motilin receptor agonist program for the stimulation of gastrointestinal movement, or GI motility. In December 2006, we established a worldwide exclusive license agreement with Pfizer for our motilin agonist program, including KOS-2187 and related compounds. Pfizer is responsible for all development, regulatory and commercial activities related to the motilin agonist program. We expect Pfizer to initiate Phase 1 clinical testing of KOS-2187 later in 2007.

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We also have next-generation Hsp90 inhibitor, next-generation epothilone and nuclear export inhibitor programs for cancer that are undergoing preclinical evaluation. These programs are also based on the use of our technology to improve the structure of known polyketides and the efficiency of large-scale production.

We have incurred significant losses since our inception. As of December 31, 2006, our accumulated deficit was $160.3 million. We expect to incur additional operating losses over the next several years as we continue to advance our product candidates into and through clinical trials.

We believe that our existing cash and investment securities, anticipated cash flow from our existing collaboration with Roche and net proceeds from our offering of common stock in February 2007 will be sufficient to support our current operating plan into the first half of 2009. We expect that additional financing will be required in order to fund our operations.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities as of the date of the financial statements. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the financial statements in the period they are determined. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.

We believe the following critical accounting policies and estimates, which have been reviewed by our Audit Committee, affect our more significant judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

We recognize revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery of the services, supplies or technology license has occurred; (iii) the price is fixed and determinable; and (iv) collectability is reasonably assured. We recognize license and other up-front fees pursuant to research and development collaboration agreements over our estimated period of continuing involvement with the research and development of the respective agreement. These estimates are reviewed on a periodic basis and updated if the underlying assumptions are modified. Any changes in these estimates will result in either an acceleration or further deferral of the related revenue recognition. Payments related to substantive performance milestones that are at risk at the initiation of an agreement are recognized upon successful completion of a performance milestone event.

Contract revenues related to collaborative research and development efforts are recognized as revenue as the related services are performed or delivered in accordance with contract terms. Such payments generally are made based on the number of full-time equivalent researchers assigned to the collaboration project and the related research and development expenses incurred or as other deliverables under the contracts are fulfilled. Revenues related to government grants are recognized at the time a grant is awarded and as related research expenses are incurred. Any amounts received in advance of performance are recorded as deferred revenue until earned.

Clinical Trial Accruals

Research and development expenditures are expensed as incurred. Our expenses related to clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with multiple institutions and clinical research organizations that conduct and manage clinical trials on our behalf. The financial terms of these agreements

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are established prior to the initiation of the related services, thus establishing the basis of our estimates. However, these terms may be subject to amendment due to changes in the scope and length of the related clinical trial or work performed. Expenses related to clinical trials generally are accrued based on the level of patient enrollment and activity according to the protocol. We monitor patient enrollment levels and related activity and adjust our estimates accordingly. All estimates may differ significantly from the actual amounts subsequently invoiced. No adjustments for material changes in estimates have been recognized in any period presented.

Stock-Based Compensation

Effective January 1, 2006, we adopted the fair value expense recognition provisions of SFAS 123R, using the modified prospective transition method and therefore we did not restate prior periods’ results. Under this transition method, stock-based compensation expense beginning January 1, 2006 included compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. Stock-based compensation expense for all stock-based payment awards granted after December 31, 2005 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. We recognize these compensation costs, net of an expected forfeiture rate, on a graded-vesting basis over the requisite service period of the award, which is generally the option vesting term of one or four years.

We use the Black-Scholes model to value stock-based compensation expense. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. Expected term is based on the simplified method allowed under the provisions of Staff Accounting Bulletin No. 107 and may only be applied through December 31, 2007. The risk-free interest rate is based on the U.S. Treasury zero coupon issues with an equivalent remaining term at the time of the option grant. Expected volatility is based on the historical volatility of our stock price and other factors. The assumptions used to value stock-based compensation to employees are subject to periodic adjustment. As such, changes to these assumptions in the future could be substantial.

Stock-based compensation expense for options granted to non-employees has been determined in accordance with SFAS 123 and Emerging Issues Task Force 96-18 as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. The measurement of stock-based compensation to non-employees is subject to periodic adjustment as the underlying securities vest. As such, changes to these future period measurements could be substantial should we experience significant changes in our stock price. For example, a 50% increase in the price of our stock, from that of December 31, 2006, would translate into an approximately 70% increase in our expense for options granted as of December 31, 2006.

Impairment of Investments

We recognize an impairment charge when the decline in the estimated fair value of a marketable security below the amortized cost is determined to be other-than-temporary. We consider various factors in determining whether to recognize an impairment charge, including the duration of time and the severity to which the fair value has been less than its amortized cost, any adverse changes in the investees’ financial condition and associated downgrades to credit ratings and our intent and ability to hold the marketable security for a period of time sufficient to allow for any anticipated recovery in market value. For the years ended December 31, 2006, 2005 and 2004, we did not recognize an impairment charge related to our investment securities.

Income Taxes

Since inception, we have recognized income taxes under the liability method. Deferred income taxes are recognized for differences between the financial statement and tax basis of assets and liabilities at enacted statutory rates in effect for years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is

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recognized in income in the period that includes the enactment date. In addition, valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. We record a valuation allowance to reduce deferred income tax assets to an amount that is more likely than not to be realized. Due to our lack of earnings history, our total deferred tax assets have been fully offset by a valuation allowance.

Results of Operations

Revenues

(in thousands except percentages)
	Year Ended December 31,						Annual Percent Change
	2006		2005		2004		2006/2005		2005/2004
Contract revenue	$	13,105	$	11,916	$	20,493	10	%	(42	)%
Grant revenue		401		1,494		2,399	(73	)%	(38	)%
Total revenues	$	13,506	$	13,410	$	22,892	1	%	(41	)%

Revenues for the years ended December 31, 2006, 2005 and 2004 were approximately $13.5 million, $13.4 million and $22.9 million, respectively, of which $2.0 million was related to a non-recurring milestone earned in 2006. Revenues in 2006 consisted primarily of contract revenue recognized under our agreements with Roche and Pfizer. Revenues in 2005 and 2004 consisted primarily of contract revenue recognized under our agreement with Roche and funded research related to government grant awards.

The increase in revenues of approximately 1%, or $0.1 million, in 2006 compared to 2005 was the result of the following:

• approximately $1.8 million in contract revenue from Pfizer, reflecting the amortization of the $12.5 million up-front payment received in December 2006;

• approximately $0.6 million in lower contract revenue from Roche, reflecting a decrease in KOS-862 development activities due the conclusion of certain clinical trials, partially offset by the $2.0 million non-recurring milestone in connection with our March 2006 letter agreement with Roche; and

• approximately $1.1 million in decreased grant revenue due to fewer grant awards in 2006.

The decrease in revenues of approximately 41%, or $9.5 million, in 2005 compared to 2004 was the result of the following:

• approximately $6.5 million in lower funding, reflecting a decrease in KOS-1584 research and preclinical expenses due to the completion of IND-enabling studies in 2004, lower reimbursement for KOS-862 production-related activities due to the previous manufacture of sufficient clinical supply for anticipated clinical trials through 2005 and lower clinical trial reimbursement associated with the conclusion of certain KOS-862 Phase 1 clinical trials and the KOS-862 Phase 2 clinical trial in non-small cell lung cancer;

• approximately $2.2 million in decreased amortization of the $25.0 million up-front fee from Roche due to the increase in the estimated clinical development period in December 2004; and

• approximately $0.9 million in decreased grant revenue due to the timing of effort spent on government grants and a lower number of grant awards in 2005.

In February 2007, Roche and we jointly made a decision to advance KOS-1584 into later stage clinical trials. We expect that our contract revenues from Roche will increase over the next several quarters as Phase 2 clinical trials

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are initiated with KOS-1584. This increase is expected to be partially offset by a decrease in the amortization of the $25.0 million up-front fee from Roche due to the increase in the estimated clinical development period. If we do not maintain our agreement with Roche, our revenues will significantly decrease unless we enter into additional collaborations that provide substantial new revenues. We expect that the unamortized portion of the up-front fee from Pfizer will be recognized in the first quarter of 2007. We do not expect our grant revenue to continue in 2007 due to changes in Small Business Administration rules that make most public companies ineligible for small business grants.

Research and Development Expenses

For the years ended December 31, 2006, 2005 and 2004, our research and development expenses were approximately $37.2 million, $38.4 million, and $40.2 million, respectively. Our research and development activities consist primarily of salaries and other personnel-related expenses, clinical trial-related services performed by clinical research organizations and research institutions and other outside service providers, licensing-related expenses, lab consumables and facility-related expenses. We group these activities into two major categories: “research and preclinical” and “clinical development.” We are unable to estimate the nature, timing or costs to complete our major research and development projects, or when material net cash inflows to us could be expected to commence, if ever, due to the numerous risks and uncertainties associated with developing pharmaceutical products. These risks and uncertainties are fully discussed in this Annual Report under Part I, Item 1A. “Risk Factors.”

The costs associated with research and preclinical and clinical development activities approximated the following:

(In thousands, except for percentages)
	Year Ended December 31,						Annual Percent Change				Inception – December 31, 2006
	2006		2005		2004		2006/2005		2005/2004
Clinical development
Epothilones	$	7,627	$	11,170	$	12,101	(32	)%	(8	)%	$	57,168
Hsp90 inhibitors		16,680		9,616		5,432	73	%	77	%		31,754
Total clinical development		24,307		20,786		17,533	17	%	19	%		88,922
Research and preclinical (1)		12,872		17,614		22,642	(27	)%	(22	)%		151,133
Total research and development	$	37,179	$	38,400	$	40,175	(3	)%	(4	)%	$	240,055

(1) “Research and preclinical” constitutes research and development costs for our early stage programs in the areas of cancer, gastrointestinal motility and technology development in 2006, 2005 and 2004 and infectious disease in 2005 and 2004. Expenses for the years ended December 31, 2006, 2005 and 2004 include allocated personnel-related expenses of approximately $6.1 million, $8.2 million and $9.4 million, allocated facility-related expenses of approximately $3.9 million, $5.5 million and $6.3 million and allocated lab consumables of $0.5 million, $1.2 million and $1.6 million, respectively. Expenses for the period from inception through December 31, 2006 include allocated personnel-related expenses of approximately $74.6 million, allocated facility-related expense of approximately $37.3 million and allocated lab consumables of $10.3 million.

43

The decrease of 3%, or approximately $1.2 million, in research and development expenses for the year ended December 31, 2006 compared to 2005 was primarily due to the following, including the recognition of stock-based compensation expense due to the implementation of SFAS 123R:

• approximately $4.7 million decrease in preclinical and research costs primarily related to reduced investment in certain non-oncology, early-stage research programs; offset by

• an increase of approximately $3.5 million in clinical development primarily due to the advancement of our clinical product candidates in the Hsp90 inhibitor program.

The decrease of 4%, or approximately $1.8 million, in research and development expenses for the year ended December 31, 2005 compared to 2004 was primarily due to the following:

• approximately $5.0 million in decreased research and preclinical costs, primarily due to advancing KOS-1584 through IND-enabling studies in the first half of 2004; and

• approximately $0.9 million in decreased clinical development costs in our epothilone program due to non-recurring milestone payments made to a licensor in the third quarter of 2004; partially offset by

• approximately $4.2 million in increased clinical development costs in the Hsp90 inhibitor program, including initiation of our tanespimycin Phase 2 and alvespimycin Phase 1 clinical trials, filing an IND for the oral formulation of alvespimycin and further advancement of tanespimycin through Phase 1 and Phase 1b clinical trials.

We allocate salary-driven and space-use-driven overhead expenses to research and development and to general and administrative expenses based on salaries and utilization by each respective area. Our research and development employees decreased to 62 employees in 2006 from 98 in 2005, primarily as a result of our March 2006 restructuring. We intend to initiate our TIME clinical program studying tanespimycin in multiple myeloma in the first half of 2007 and a Phase 2 clinical trial of intravenous alvespimycin as a single agent in HER2-positive metastatic breast cancer in the first half of 2007. These study initiations will result in an increase in our research and development expenses over the next several quarters. We expect that our research and development expenses will further increase over the next several quarters as Phase 2 clinical trials are initiated for KOS-1584.

Phase 1 clinical trials generally are expected to last between 12 and 18 months, Phase 2 clinical trials are expected to last between 18 and 24 months and Phase 3 clinical trials are expected to last between 24 and 42 months. The length of clinical development depends on the specific disease and patient population. For product candidates that are in preclinical development, the timing of an IND filing varies significantly and is difficult to predict and therefore not reflected in the table above.

Roche is funding all of the current KOS-862 and current and planned KOS-1584 clinical trial costs. We are responsible, at our cost, to supply tanespimycin and alvespimycin for clinical trials sponsored by the NCI under the CRADAs, and the NCI is responsible for the remainder of the costs of these trials through Phase 2. In addition, we are sponsoring other clinical trials of tanespimycin and alvespimycin at our sole expense. Our research and development expenses do not reflect the costs incurred by our partners, Roche or the NCI, associated with the clinical trials they are conducting in connection with our epothilone and Hsp90 inhibitor programs, respectively.

44

KOSAN BIOSCIENCES

General and Administrative Expenses

For the years ended December 31, 2006, 2005 and 2004, general and administrative expenses were approximately $7.8 million, $6.0 million, and $5.9 million, respectively.

(in thousands, except percentages)
	Year Ended December 31,						Annual Percent Change
	2006		2005		2004		2006/2005		2005/2004
General and administrative	$	7,823	$	6,038	$	5,934	30	%	2	%

The increase of 30%, or approximately $1.8 million, in general and administrative expenses in 2006 compared to 2005 was primarily due to severance related payments to our former Chief Executive Officer and the recognition of stock-based compensation expense due to the implementation of SFAS 123R.

The increase of 2%, or approximately $0.1 million in general and administrative expenses in 2005 compared to 2004 was primarily due approximately $0.5 million in increased professional services expenses, primarily for legal and accounting expenses, partially offset by approximately $0.4 million in decreased employee-related expenses, primarily associated with certain management departures in the third quarter of 2004.

Our general and administrative employees decreased to 17 in 2006 from 24 in 2005, primarily as a result of our March 2006 restructuring. We expect our general and administrative expenses will increase over the next several quarters to support our operations.

Interest Income and Interest Expense

(in thousands except percentages)
	Year Ended December 31,									Annual Percent Change
	2006			2005			2004			2006/2005		2005/2004
Interest income	$	2,549		$	1,711		$	1,434		49	%	19	%
Interest expense		(522	)		(320	)		(343	)	63	%	(7	)%
Other income, net	$	2,027		$	1,391		$	1,091		46	%	27	%

Interest Income. Interest income increased to approximately $2.5 million in 2006 from approximately $1.7 million in 2005. This increase resulted from higher returns in the current interest rate environment, partially offset by lower average investment balances in 2006 compared to 2005. Interest income increased to approximately $1.7 million in 2005 from approximately $1.4 million in 2004. This increase resulted from higher returns in a rising interest rate environment, partially offset by lower average investment balances in 2005 compared to 2004.

Interest Expense. Interest expense increased to approximately $0.5 million in 2006 from approximately $0.3 million in 2005. The increase resulted from fees associated with our Silicon Valley Bank line of credit facility, which expired in May 2006, partially offset by lower average debt balances in 2006. Interest expense of approximately $0.3 million in 2005 approximated interest expense in 2004.

Provision for Income Taxes

We incurred net operating losses in the years ended December 31, 2006, 2005 and 2004 and consequently did not pay federal or state income taxes. As of December 31, 2006, we had federal net operating loss carryforwards of approximately $112.2 million. We also had federal research and development tax credit carryforwards of approximately $3.9 million. If not utilized, the net operating losses and credit carryforwards will expire at various dates beginning in 2010 through 2026. As of December 31, 2006, we had state net operating loss carryforwards and state research and development tax credit carryforwards of approximately $92.8 million and $2.2 million,

45

respectively. The state net operating loss carryforwards will expire at various dates from 2012 through 2016, if not utilized. The state research and development carryforwards do not expire. Use of the net operating losses and credits may be subject to a substantial annual limitation due to the change in ownership provisions of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. See Note 10 of our financial statements.

Liquidity and Capital Resources

Since inception we have financed our operations primarily through sales of our equity securities, contract payments received under our collaboration and license agreements and government grant awards, interest income and equipment financing arrangements. As of December 31, 2006, we had received approximately $178.2 million from the sales of equity securities, approximately $125.7 million from contract payments received under our corporate collaboration and license agreements and government grant awards, approximately $18.4 million from interest income and approximately $14.2 million from equipment financing arrangements. As of December 31, 2006, we had approximately $64.1 million in cash, cash equivalents, restricted cash and investments, compared to approximately $55.1 million as of December 31, 2005. In addition, in February 2007, we raised approximately $42.8 million in a registered direct public offering of our common stock, after placement agent fees, but excluding other offering expenses. Our funds are currently invested in government agency obligations and corporate obligations.

Cash used in operating activities was approximately $16.4 million in 2006, compared to approximately $27.3 million in 2005. Our net loss of approximately $29.5 million in 2006 was partially offset by non-cash expenses of approximately $4.6 million related to stock-based compensation, depreciation and amortization of property and equipment and investment premiums and discounts, and an approximately $8.5 million increase in assets and liabilities primarily due to the net effect of deferred revenue from the up-front fees from Pfizer and Roche. We do not anticipate generating cash from operating activities for the next several years. Our net loss of approximately $29.6 million in 2005 was partially offset by non-cash expenses of approximately $3.5 million related to stock-based compensation, depreciation and amortization of property and equipment and investment premiums and discounts, and by an approximately $1.1 million decrease in assets and liabilities primarily due to recognition of deferred revenue related to the up-front fee from Roche made in 2002.

Cash used in investing activities, excluding changes in our restricted cash and investments, for the year ended December 31, 2006 was approximately $1.1 million, primarily related to the purchase of additional laboratory and office equipment, compared to approximately $1.4 million in 2005. Investing activities in 2005 reflected approximately $1.1 million related to the purchase of additional laboratory and office equipment and approximately $0.3 million related to the renovation of our facilities.

Cash provided by financing activities was approximately $26.0 million for the year ended December 31, 2006, compared to approximately $0.9 million in 2005. Financing activities in 2006 included approximately $27.5 million in net proceeds from the sale of our common stock, stock option exercises and stock purchases made under our 2000 Employee Stock Purchase Plan and approximately $0.5 million of equipment debt financing, offset by approximately $1.9 million of scheduled payments on equipment loans. Financing activities in 2005 included approximately $2.0 million of equipment debt financing and $1.0 million in proceeds from the sale of our common stock through stock option exercises and stock purchases made under our 2000 Employee Stock Purchase Plan, offset by $2.1 million of scheduled payments on equipment loans.

In April 2004, we entered into a $3.5 million equipment line of credit agreement for facility improvements and capital purchases, which expires in April 2007. As of March 15, 2007, we had fully utilized the line. We currently have no intentions to renew the line.

46

KOSAN BIOSCIENCES

On July 19, 2006, we entered into a Committed Equity Financing Facility, or CEFF, with Kingsbridge, pursuant to which Kingsbridge committed to purchase, subject to certain conditions, up to $50.0 million of our common stock. The CEFF allows us to raise capital as required, at the time and in the amounts deemed suitable to us, through September 25, 2009. We are not obligated to sell any of the $50.0 million of common stock available under the CEFF, and there are no minimum commitments or minimum use penalties. Under the terms of the CEFF, the maximum number of shares that we may sell to Kingsbridge is 6,879,868 shares (exclusive of the shares underlying a warrant), which may limit the amount of proceeds that we are able to obtain from the CEFF. In connection with the CEFF, we issued a warrant to Kingsbridge to purchase 285,000 shares of our common stock at an exercise price of $4.94 per share. The warrant is currently exercisable and expires in 2011. In October 2006, we received $3.0 million in gross proceeds for the sale of 770,351 shares of our common stock to Kingsbridge.

On February 14, 2007, we completed a registered direct offering of 7,000,000 shares of common stock, at a price of $6.50 per share. The aggregate proceeds of the offering after placement agent fees, but excluding other offering expenses, were approximately $42.8 million.

We believe that our existing cash and investment securities, anticipated cash flow from our existing collaboration with Roche and net proceeds from our offering in February 2007 will be sufficient to support our current operating plan into the first half of 2009. We have based this estimate on assumptions that may prove to be wrong. Our future capital uses and requirements depend on numerous forward-looking factors, including those set forth in Part I, Item 1A. “Risk Factors.”

In addition, we review from time to time potential opportunities to expand our technologies or add to our portfolio of product candidates. In the future, we may need further capital in order to acquire or invest in technologies, products or businesses.

We expect that additional financing will be required in order to fund our operations. We expect to finance future cash needs through the sale of equity securities, debt financings, additional collaboration or licensing arrangements or any combination of the foregoing or other arrangements. In September 2003, we filed a registration statement on Form S-3 registering common stock which could be sold in one or more offerings up to a dollar amount of $75.0 million. In December 2003, we completed under this registration statement a registered direct public offering of 3,115,000 shares of common stock at an offering price of $9.00 per share. We received approximately $26.0 million in net proceeds after placement agent fees and other offering costs. In December 2004, we filed an additional registration statement on Form S-3 registering common stock and/or warrants which could be sold in one or more offerings up to a dollar amount of $50.0 million. In April 2006, we completed under this registration statement an underwritten offering of 5,100,000 shares of common stock at a public offering price of $5.00 per share. We received approximately $24.0 million in net proceeds after payment of underwriting discounts and commissions and other offering costs. In February 2007, we completed a registered direct offering under our registration statement originally filed in September 2003 of 7,000,000 shares of common stock, at an offering price of $6.50 per share. We received approximately $42.8 million in proceeds after payment of placement agent fees, but excluding other offering costs. We may sell in the future pursuant to the two shelf registration statements, approximately $26.0 million of our common stock, plus an additional approximately $5.2 million that we could sell under immediately effective related registration statements in connection any offering under the shelf registration statements.

We have no current commitments to offer and sell any securities that may be offered or sold pursuant to the registration statements described above. Additional financing or collaboration and licensing arrangements may not be available when needed or, if available, may not be on terms favorable to us or our stockholders. Insufficient funds may require us to delay, scale back or eliminate some or all of our research or development programs, to lose rights

47

under existing licenses or to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. Insufficient funds may preclude us from meeting the conditions required for the extension of credit and may adversely affect our ability to operate as a going concern. If additional funds are obtained by issuing equity securities, substantial dilution to existing stockholders may result. In addition, see Part I, Item 1A. “Risk Factors.”

As of December 31, 2006, our obligations and commitments to make future payments under contracts, such as debt and lease agreements, were as follows:

(in thousands)
	Payments Due by Period
	Total		Less than 1 Year		1-3 Years		4-5 Years		After 5 Years
Equipment financing obligations	$	2,378	$	1,416	$	916	$	46	$	—
Operating leases		7,635		1,679		2,251		2,293		1,412
Total contractual obligations	$	10,013	$	3,095	$	3,167	$	2,339	$	1,412

Off-Balance Sheet Arrangements

As of December 31, 2006, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary objective of our investment activities is to preserve our capital for the purpose of funding our operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the value of the principal amount of the investments to fluctuate. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and investments in a variety of securities, which may include commercial paper, money market funds, government and non-government debt securities and investment-grade corporate obligations. Although changes in interest rates may affect the fair value of our portfolio and cause unrealized gains and losses, such gains and losses would not be realized unless the investments were sold prior to maturity. Through our money managers, we maintain risk management control systems to monitor interest rate risk. The risk management control systems use analytical techniques, including sensitivity analysis. If market interest rates were to increase by 100 basis points, or 1%, at December 31, 2006 and 2005 rates, the fair value of our portfolio on those dates would decline by approximately $0.1 million.

48

KOSAN BIOSCIENCES

The table below presents the principal amounts of our investments and equipment loans by expected maturity and related weighted average interest rates at December 31, 2006, which approximates fair value:

(in thousands, except interest rate information)
	2007			2008			2009			2010			2011		Total
Debt securities:
U.S. agency notes	$	23,637		$	—		$	—		$	—		$	—	$	23,637
Corporate bonds		3,838			—			—			—			—		3.838
Average interest rate		5.32	%		—			—			—			—		5.32	%
Equipment financing		1,289			628			227			44			—		2,188
Average interest rate		7.81	%		8.34	%		8.78	%		9.08	%		—		8.09	%

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The reports of our Independent Registered Public Accounting Firm, Financial Statements and Notes to Financial Statements begin on page F-1 and are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Based on their evaluation as of December 31, 2006, our chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are effective.

Management’s Annual Report on Internal Control over Financial Reporting. We are responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act). Under the supervision and with the participation of our management, including our principal executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the preparation and fair presentation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

49

Based on our evaluation under the framework in Internal Controls – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2006.

Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which is included elsewhere herein.

Changes in Internal Controls over Financial Reporting. There were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls. The Company’s management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

ITEM 9B. OTHER INFORMATION

None.

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PART III

KOSAN BIOSCIENCES

Certain information required by Part III is omitted from this Annual Report on Form 10-K since we intend to file our definitive Proxy Statement for our 2007 Annual Meeting of Stockholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the “Proxy Statement”), not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and certain information to be included in the Proxy Statement is incorporated herein by reference.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item concerning our executive officers and certain of the information required by this Item concerning our directors may be found under the caption “Directors and Executive Officers of the Registrant” in Item 1 of this Annual Report on Form 10-K. Additional information required by this Item with respect to our directors, including information regarding our audit committee, audit committee financial experts and procedures for the nomination of directors may be found under the section entitled “Election of Directors” appearing in the Proxy Statement, and such information is incorporated herein by reference. Information concerning compliance with Section 16(a) of the Exchange Act will be contained in our Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance”, and such information is incorporated herein by reference. Information concerning our code of ethics is contained in Item 1 of this Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item concerning executive compensation will be contained in our Proxy Statement under the captions “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” and such information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item concerning the security ownership of certain beneficial owners and management will be contained in our Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management,” and such information is incorporated herein by reference.

The following table summarizes the securities for issuance under our equity compensation plans as of December 31, 2006, including our 1996 Stock Option Plan, 2000 Non-Employee Director Stock Option Plan, 2000 Employee Stock Purchase Plan and 2006 Equity Incentive Plan:

Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights	Weighted Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (1)
Equity compensation plans approved by stockholders	4,367,852	$	7.16	4,230,512
Equity compensation plans not approved by stockholders	—		—	—
Total	4,367,852	$	7.16	4,230,512

(1) As of December 31, 2006, 207,500 shares of common stock remained available for future issuance under our 2000 Non-Employee Director Stock Option Plan, 63,903 shares of common stock remained available for future issuance under our 2000 Employee Stock Purchase Plan and 3,959,109 shares of common stock remained available for future issuance under our 2006 Equity Incentive Plan.

51

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item concerning certain relationships will be contained in our Proxy Statement under the caption “Certain Relationships and Related Transactions,” and such information is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item concerning audit fees, tax fees, all other fees and pre-approval policies and procedures will be contained in our Proxy Statement under the caption “Ratification of Selection of Independent Registered Accounting Firm”, and such information is incorporated herein by reference.

Consistent with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002, we are responsible for disclosing the non-audit services approved by our Audit Committee to be performed by Ernst & Young LLP, our independent registered public accounting firm. Non-audit services are defined as services other than those provided in connection with an audit or a review of our financial statements. In the period covered by this report, our Audit Committee pre-approved the following non-audit services rendered, currently being rendered, or to be rendered, to us by Ernst & Young LLP:

• all work required to be performed by Ernst & Young LLP in connection with preparing and giving consents required to be given in connection with our filings with the Securities and Exchange Commission; and

• all work required to be performed by Ernst & Young LLP in connection with tax preparation services.

52

PART IV

KOSAN BIOSCIENCES

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed or incorporated by reference as part of this Annual Report on Form 10-K:

(1) Financial Statements:

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

Balance Sheets—December 31, 2005 and 2004

Statements of Operations—Years Ended December 31, 2005, 2004, and 2003

Statement of Changes in Stockholders’ Equity—Years Ended December 31, 2005, 2004 and 2003

Statements of Cash Flows—Years Ended December 31, 2005, 2004 and 2003

Notes to Financial Statements

(2) Financial Statement Schedules:

None

(3) Exhibits:

Exhibit No.	Description
3.1	Amended and Restated Certificate of Incorporation of Registrant. (1)
3.2	Amended and Restated Bylaws of Registrant. (2)
4.1	Specimen Registrant’s Common Stock Certificate. (3)
4.2	Third Amended and Restated Registration Rights Agreement, dated March 30, 2000, between Registrant and certain stockholders. (3)
4.3	Registrant’s Certificate of Designation of Series A Junior Preferred Stock. (4)
4.4	Warrant for the purchase of shares of common stock, dated July 19, 2006, issued by the Registrant to Kingsbridge Capital Limited. (5)
4.5	Registration Rights Agreement, dated July 19, 2006, by and between the Registrant and Kingsbridge Capital Limited. (5)
10.1	Form of Indemnification Agreement entered into by Registrant with each of its directors and executive officers. (3)
10.2	Form of Level I Change of Control and Severance Benefit Agreement. (6)*
10.3	Form of Level II Change of Control and Severance Benefit Agreement. (6)*
10.4	1996 Stock Option Plan, as amended. (3)*
10.5	2000 Employee Stock Purchase Plan and related agreements. (3)*
10.6	2000 Non-Employee Director Stock Option Plan and related agreements, as amended. (7)*
10.7	2006 Equity Incentive Plan. (8)*
10.8	Form of Stock Option Grant Notice and Stock Option Agreement under the 2006 Equity Incentive Plan. (8)*
10.9	Non-Employee Director Compensation Arrangements. (9)*

53

Exhibit No.		Description
10.10		Compensation Information for Certain Officers. (10)*
10.11		Summary of 2007 Executive Officer Cash Bonus Plan. (10)*
10.12	†	Research and License Agreement between Registrant and The Sloan-Kettering Institute for Cancer Research, dated August 25, 2000. (3)
10.13	†	Consent and Amendment to the License Agreement, effective as of September 16, 2002, by and between Registrant and The Sloan-Kettering Institute for Cancer Research. (11)
10.14	†	Settlement Agreement, entered into September 19, 2003, by and between Registrant and The Sloan-Kettering Institute for Cancer Research. (12)
10.15	†	Letter Agreement between Registrant and The Sloan-Kettering Institute for Cancer Research, dated May 4, 2006. (7)
10.16	†	License Agreement between Registrant and The Board of Trustees of The Leland Stanford Junior University, dated March 11, 1996. (3)
10.17	†	Amendment No. 1 to License Agreement with the Board of Trustees of The Leland Stanford Junior University, dated March 1996; Letter to Mona Wan to confirm the agreement between Registrant and the Board of Trustees of The Leland Stanford Junior University, dated September 21, 1998; and Amendment No. 3 to License Agreement, dated March 10, 2000. (3)
10.18	†	Consent and Amendment to the License Agreement, effective as of September 16, 2002, by and between Registrant and Stanford University. (11)
10.19	†	License Agreement between Registrant and President and Fellows of Harvard College, dated December 2, 1998. (3)
10.20		Employment Agreement between Registrant and Robert G. Johnson, Jr., dated September 5, 2000. (3)*
10.21		Rights Agreement, dated as of October 5, 2001, between Registrant and Mellon Investor Services, LLC. (4)
10.22		Lease Agreement, dated as of June 7, 2002, by and between EOP-Industrial Portfolio, L.L.C. and Registrant. (13)
10.23		Landlord Consent to Assignment and Assumption of Lease, dated as of June 20, 2002, by and among EOP-Industrial Portfolio, L.L.C., Aventis Pharmaceuticals, Inc. and Registrant. (13)
10.24	†	Collaborative Research, Development and Commercialization Agreement, dated as of September 19, 2002, by and among Registrant, Hoffmann-La Roche, Inc. and F. Hoffmann-La Roche Ltd. (11)
10.25		Amendment to Collaborative Research, Development and Commercialization Agreement, effective July 1, 2004, by and among Registrant, Hoffmann-La Roche Inc. and F. Hoffmann-La Roche Ltd. (14)
10.26	†	Letter agreement among Registrant, Hoffmann-La Roche Inc. and F. Hoffmann-La Roche Ltd. dated March 27, 2006. (15)
10.27		Loan and Security Agreement between the Registrant and Silicon Valley Bank dated July 15, 2005. (16)

54

KOSAN BIOSCIENCES

Exhibit No.		Description
10.28		First Amendment to Loan and Security Agreement between Registrant and Silicon Valley Bank dated as of February 21, 2006. (6)
10.29		Employment Agreement between Registrant and Petrus Timmermans, Ph.D. dated December 6, 2004. (6)*
10.30		Employment Agreement between Registrant and Margaret A. Horn dated December 1, 2005. (17)*
10.31		Consulting Agreement between Registrant and Susan M. Kanaya dated January 1, 2006. (6)*
10.32		Separation and Consulting Agreement between Registrant and Daniel V. Santi, M.D., Ph.D. dated March 20, 2006. (15)*
10.33		Common Stock Purchase Agreement between Registrant and Kingsbridge Capital Limited, dated July 19, 2006. (5)
10.34		Amendment No. 1 to Common Stock Purchase Agreement between Registrant and Kingsbridge Capital Limited, dated January 24, 2007.
10.35		Scientific Advisory Board Agreement between Registrant and Chaitan S. Khosla, Ph.D., dated July 19, 2006. (18)*
10.36		Employment Agreement between Registrant and Gary S. Titus dated August 7, 2006. (19)*
10.37		Employment Agreement between Registrant and Robert L. De Jager, M.D., F.A.C.P. dated October 24, 2006. (20)*
10.38	‡	Exclusive License Agreement between Registrant and Pfizer Inc. dated December 19, 2006.
23.1		Consent of Independent Registered Public Accounting Firm.
24.1		Power of Attorney (included in signature page hereto).
31.1		Certification required by Rule 13a-14(a) or Rule 15d-14(a).
31.2		Certification required by Rule 13a-14(a) or Rule 15d-14(a).
32.1		Certification by the Chief Executive Officer and Chief Financial Officer of Kosan Biosciences Incorporated, as required by Rule 13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350). (21)

(1) Incorporated herein by reference to an exhibit of our quarterly report on Form 10-Q for the period ended June 30, 2001.

(2) Incorporated herein by reference to an exhibit of our quarterly report on Form 10-Q for the period ended June 30, 2003.

(3) Incorporated herein by reference to an exhibit of our Registration Statement on Form S-1, Registration No. 333-33732.

(4) Incorporated herein by reference to an exhibit of our current report on Form 8-K filed on October 15, 2001.

(5) Incorporated herein by reference to an exhibit of our current report on Form 8-K filed on July 25, 2006.

(6) Incorporated herein by reference to an exhibit of our Annual Report on Form 10-K for the period ended December 31, 2005.

55

(7) Incorporated herein by reference to an exhibit of our quarterly report on Form 10-Q for the period ended June 30, 2006.

(8) Incorporated herein by reference to an exhibit of our current report on Form 8-K filed on June 1, 2006.

(9) Incorporated herein by reference to an exhibit of our quarterly report on Form 10-Q for the period ended September 30, 2006.

(10) Incorporated herein by reference to an exhibit of our current report on Form 8-K filed on December 22, 2006.

(11) Incorporated herein by reference to an exhibit of our quarterly report on Form 10-Q for the period ended September 30, 2002.

(12) Incorporated herein by reference to an exhibit of our quarterly report on Form 10-Q for the period ended September 30, 2003.

(13) Incorporated herein by reference to an exhibit of our quarterly report on Form 10-Q for the period ended June 30, 2002.

(14) Incorporated herein by reference to an exhibit of our quarterly report on Form 10-Q for the period ended September 30, 2004.

(15) Incorporated herein by reference to an exhibit of our quarterly report on Form 10-Q for the period ended March 31, 2006.

(16) Incorporated by reference to an exhibit of our quarterly report on Form 10-Q for the period ended June 30, 2005.

(17) Incorporated by reference to an exhibit of our current report on Form 8-K filed on December 7, 2005.

(18) Incorporated by reference to an exhibit of our current report on Form 8-K filed on July 25, 2006.

(19) Incorporated by reference to an exhibit of our current report on Form 8-K filed on August 15, 2006.

(20) Incorporated by reference to an exhibit of our current report on Form 8-K filed on October 26, 2006.

(21) This certification accompanies this Annual Report on Form 10-K and shall not be deemed “filed” by Registrant for purposes of Section 18 of the Exchange Act.

† Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

‡ Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

* Represents a management or director compensation plan.

56

KOSAN BIOSCIENCES

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

	Kosan Biosciences Incorporated
March 16, 2007	By:	/s/ Robert G. Johnson, Jr., M.D., Ph.D.
		Robert G. Johnson, Jr., M.D., Ph.D.
		President and Chief Executive Officer

POWER OF ATTORNEY

KNOW TO ALL PERSONS BY THESE PRESENTS, that the persons whose signatures appear below each severally constitutes and appoints Robert G. Johnson, Jr., M.D., Ph.D. and Margaret A. Horn or either of them, his or her true and lawful attorneys-in-fact and agents, with full powers of substitution and re-substitution, for him or her and in his or her name, place and stead, in any and all capacities to sign any and all amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto the attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that the attorneys-in-fact and agents, or either of them, or their, his or her substitutes or substitute, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Robert G. Johnson, Jr., M.D., Ph.D. Robert G. Johnson, Jr., M.D., Ph.D.	President and Chief Executive Officer (Principal Executive Officer) and Director	March 16, 2007
/s/ Gary S. Titus Gary S. Titus	Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	March 16, 2007
/s/ Peter Davis, Ph.D. Peter Davis, Ph.D.	Chairman	March 16, 2007
/s/ Bruce A. Chabner, M.D. Bruce A. Chabner, M.D.	Director	March 16, 2007
/s/ Kevan E. Clemens, Ph. D. Kevan E. Clemens, Ph. D.	Director	March 16, 2007
/s/ Jean Deleage, Ph.D. Jean Deleage, Ph.D.	Director	March 16, 2007
/s/ Charles J. Homcy, M.D. Charles J. Homcy, M.D.	Director	March 16, 2007
/s/ Chaitan S. Khosla, Ph.D. Chaitan S. Khosla, Ph.D.	Director	March 16, 2007
/s/ Christopher T. Walsh, Ph.D. Christopher T. Walsh, Ph.D.	Director	March 16, 2007

57

Kosan Biosciences Incorporated

INDEX TO FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firm	F-2
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting	F-3
Balance Sheets—December 31, 2006 and 2005	F-4
Statements of Operations—Years ended December 31, 2006, 2005 and 2004	F-5
Statements of Stockholders’ Equity—Years ended December 31, 2006, 2005 and 2004	F-6
Statements of Cash Flows—Years ended December 31, 2006, 2005 and 2004	F-7
Notes to Financial Statements	F-8

F-1

REPORT OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

Kosan Biosciences Incorporated

We have audited the accompanying balance sheets of Kosan Biosciences Incorporated as of December 31, 2006 and 2005, and the related statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of Kosan Biosciences Incorporated’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kosan Biosciences Incorporated at December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Kosan Biosciences Incorporated’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2007 expressed an unqualified opinion thereon.

As discussed in Note 1 to the Notes to Financial Statements, under the heading Organization and Summary of Significant Accounting Policies—Stock-Based Compensation, in fiscal 2006 Kosan Biosciences Incorporated changed its method of accounting for employee stock-based compensation.

/S/ ERNST & YOUNG LLP

San Francisco, California

March 14, 2007

F-2

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Stockholders of

Kosan Biosciences Incorporated

We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting included in Item 9A, that Kosan Biosciences Incorporated maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Kosan Biosciences Incorporated’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Kosan Biosciences Incorporated maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Kosan Biosciences Incorporated maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of Kosan Biosciences Incorporated as of December 31, 2006 and 2005, and the related statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2006 of Kosan Biosciences Incorporated and our report dated March 14, 2007 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

San Francisco, California

March 14, 2007

F-3

Kosan Biosciences Incorporated

BALANCE SHEETS

(in thousands, except share and per share data)

	December 31,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	35,655		$	18,750
Short-term investments		27,483			35,427
Accounts receivable		1,152			3,319
Prepaid and other current assets		907			1,192
Total current assets		65,197			58,688
Restricted cash		949			949
Property and equipment, net		4,801			6,061
Other assets and notes receivable from related parties		240			299
Total assets	$	71,187		$	65,997
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,323		$	2,639
Accrued liabilities		6,331			6,460
Current portion of deferred revenue		13,992			3,277
Current portion of equipment loans		1,289			1,854
Total current liabilities		22,935			14,230
Deferred revenue, less current portion		5,599			8,876
Equipment loans, less current portion		899			1,785
Commitments
Stockholders’ equity:
Convertible preferred stock, $0.001 par value, 10,000,000 shares authorized, 1,000,000 shares designated as Series A junior preferred stock, no shares issued and outstanding at December 31, 2006 and 2005		—			—
Common stock, $0.001 par value, 100,000,000 shares authorized 35,389,717 and 29,371,602 shares issued and outstanding at December 31, 2006 and 2005, respectively		35			29
Additional paid-in capital		202,016			172,083
Accumulated other comprehensive income/(loss)		9			(169	)
Accumulated deficit		(160,306	)		(130,837	)
Total stockholders’ equity		41,754			41,106
Total liabilities and stockholders’ equity	$	71,187		$	65,997

See accompanying notes.

F-4

Kosan Biosciences Incorporated

STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Year Ended December 31,
	2006			2005			2004
Revenues:
Contract revenue	$	13,105		$	11,916		$	20,493
Grant revenue		401			1,494			2,399
Total revenues		13,506			13,410			22,892
Operating expenses:
Research and development (including charges for stock-based compensation of $1,419, $224 and $594 for the years ended December 31, 2006, 2005 and 2004, respectively)		37,179			38,400			40,175
General and administrative (including charges for stock-based compensation of $1,046, $131 and $163 for the years ended December 31, 2006, 2005 and 2004, respectively)		7,823			6,038			5,934
Total operating expenses		45,002			44,438			46,109
Loss from operations		(31,496	)		(31,028	)		(23,217	)
Interest income		2,549			1,711			1,434
Interest expense		(522	)		(320	)		(343	)
Net loss	$	(29,469	)	$	(29,637	)	$	(22,126	)
Basic and diluted net loss per common share	$	(0.88	)	$	(1.01	)	$	(0.77	)
Shares used in computing basic and diluted net loss per common share		33,394			29,227			28,913

See accompanying notes.

F-5

Kosan Biosciences Incorporated

STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands, except shares)

	Convertible Preferred Stock			Common Stock			Additional Paid-In Capital			Deferred Stock-Based Compensation			Accumulated Other Comprehensive Loss/(Income)			Total Accumulated Deficit			Stockholders’ Equity
	Shares	Amount		Shares	Amount
BALANCES AT DECEMBER 31, 2003	—	$	—	28,752,535	$	29	$	168,668		$	(192	)	$	21		$	(79,074	)	$	89,452
Issuance of common stock upon exercise of options for cash, net of repurchases	—		—	234,412		—		872			—			—			—			872
Issuance of common stock under employee stock purchase plan	—		—	109,386		—		630			—			—			—			630
Reversal of deferred stock-based compensation from employee terminations	—		—	—		—		(40	)		40			—			—			—
Amortization of deferred stock-based compensation	—		—	—		—		—			152			—			—			152
Other stock-based compensation	—		—	—		—		605			—			—			—			605
Comprehensive income (loss):
Net loss	—		—	—		—		—			—			—			(22,126	)		(22,126	)
Unrealized loss on available-for-sale securities, net	—		—	—		—		—			—			(399	)		—			(399	)
Comprehensive loss	—		—	—		—		—			—			—			—			(22,525	)
BALANCES AT DECEMBER 31, 2004	—	$	—	29,096,333	$	29	$	170,735		$	—		$	(378	)	$	(101,200	)	$	69,186
Issuance of common stock upon exercise of options for cash	—		—	80,400		—		320			—			—			—			320
Issuance of common stock under employee stock purchase plan	—		—	194,869		—		673			—			—			—			673
Other stock-based compensation	—		—	—		—		355			—			—			—			355
Comprehensive income (loss):
Net loss	—		—	—		—		—			—			—			(29,637	)		(29,637	)
Unrealized gain on available-for-sale securities, net	—		—	—		—		—			—			209			—			209
Comprehensive loss	—		—	—		—		—			—			—			—			(29,428	)
BALANCES AT DECEMBER 31, 2005	—	$	—	29,371,602	$	29	$	172,083		$	—		$	(169	)	$	(130,837	)	$	41,106
Issuance of common stock in a direct offering, net of offering costs of $1,520	—		—	5,100,000		5		23,975			—			—			—			23,980
Issuance of common stock upon exercise of options for cash	—		—	59,994		—		222			—			—			—			222
Issuance of common stock under employee stock purchase plan	—		—	87,770		—		379			—			—			—			379
Issuance of common stock in connection with committed equity financing facility, net of issuance costs of $107	—		—	770,351		1		2,892			—			—			—			2,893
Financing cost of warrant issued in connection with committed equity financing facility	—		—	—		—		(629	)		—			—			—			(629	)
Issuance of warrant in connection with committed equity financing facility	—		—	—		—		629			—			—			—			629
Stock-based compensation	—		—	—		—		2,086			—			—			—			2,086
Other stock-based compensation	—		—	—		—		379			—			—			—			379
Comprehensive income (loss):
Net loss	—		—	—		—		—			—			—			(29,469	)		(29,469	)
Unrealized gain on available-for-sale securities, net	—		—	—		—		—			—			178			—			178
Comprehensive loss	—		—	—		—		—			—			—			—			(29,291	)
BALANCES AT DECEMBER 31, 2006	—	$	—	35,389,717	$	35	$	202,016		$	—		$	9		$	(160,306	)	$	41,754

See accompanying notes.

F-6

Kosan Biosciences Incorporated

STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended December 31,
	2006			2005			2004
OPERATING ACTIVITIES
Net loss	$	(29,469	)	$	(29,637	)	$	(22,126	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,326			2,532			2,493
Amortization of investment premiums and discounts		(224	)		610			1,715
Stock-based compensation expense		2,465			355			757
Changes in assets and liabilities:
Accounts and other receivables		2,167			711			4,992
Prepaid and other current assets		285			68			(166	)
Other assets and notes receivable from related parties		59			55			103
Accounts payable and accrued liabilities		(1,445	)		1,301			(525	)
Deferred revenue		7,438			(3,277	)		(5,429	)
Net cash used in operating activities		(16,398	)		(27,282	)		(18,186	)
INVESTING ACTIVITIES
Acquisition of property and equipment		(1,066	)		(1,434	)		(2,335	)
Purchase of investments and restricted cash		(39,004	)		(28,287	)		(72,905	)
Proceeds from maturity or sale of investments and restricted cash		47,350			61,126			74,983
Net cash provided by (used in) investing activities		7,280			31,405			(257	)
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of repurchases and issuance costs		27,474			993			1,502
Proceeds from equipment loans		458			2,005			1,290
Principal payments under equipment loans		(1,909	)		(2,148	)		(2,063	)
Net cash provided by financing activities		26,023			850			729
Net increase (decrease) in cash and cash equivalents		16,905			4,973			(17,714	)
Cash and cash equivalents at beginning of period		18,750			13,777			31,491
Cash and cash equivalents at end of period	$	35,655		$	18,750		$	13,777
SUPPLEMENTAL DISCLOSURE
Interest expense paid in cash	$	522		$	320		$	343
NON-CASH INVESTING AND FINANCING ACTIVITIES
Other receivable due for equipment loan	$	—		$	—		$	417
Unrealized gain (loss) on investments, net	$	178		$	209		$	(399	)
Issuance of warrant in connection with committed equity financing facility	$	629		$	—		$	—

See accompanying notes.

F-7

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Overview

Kosan Biosciences Incorporated (the “Company” or “Kosan”) was incorporated under the laws of the State of California on January 6, 1995 and commenced operations in 1996. In July 2000, the Company was reincorporated under the laws of the State of Delaware.

Kosan is a cancer therapeutics company focused on advancing two new classes of anticancer agents through clinical development: heat shock protein 90, or Hsp90, inhibitors and epothilones. Hsp90 inhibitors have a novel mechanism of action targeting multiple pathways involved in cancer cell growth and survival. The Company’s proprietary formulations of tanespimycin (KOS-953), are in Phase 1 and 2 clinical trials, primarily for multiple myeloma in combination with Velcade (bortezomib) and HER2-positive metastatic breast cancer in combination with Herceptin (trastuzumab). In addition, intravenous and oral formulations of a second-generation Hsp90 inhibitor, alvespimycin HCl (KOS-1022), are being evaluated in Phase 1 clinical trials.

Kosan is also developing KOS-1584 in Phase 1 clinical trials in patients with solid tumors. Epothilones inhibit cell division with a mechanism of action similar to taxanes, one of the most successful classes of anti-tumor agents. The epothilone program is partnered with Hoffmann-La Roche, Inc. and F. Hoffmann-La Roche Ltd. (collectively, “Roche”) through a global development and commercialization agreement.

Kosan also has a motilin receptor agonist program for the stimulation of gastrointestinal movement, or GI motility. In December 2006, the Company established a worldwide exclusive license agreement with Pfizer Inc. for its motilin agonist program, including KOS-2187 and related compounds. Pfizer is responsible for all development, regulatory and commercial activities related to the motilin agonist program.

Kosan also has next-generation Hsp90 inhibitor, next-generation epothilone and nuclear export inhibitor programs for cancer that are undergoing preclinical evaluation.

Kosan has funded its operations primarily through equity financing, contract payments under its collaboration agreements, equipment financing arrangements and government grants.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the accompanying notes. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the financial statements in the period they are determined. Actual results could differ from those estimates.

Cash Equivalents and Investments

The Company considers all highly liquid investments with a maturity from date of purchase of three months or less to be cash equivalents. The Company limits its concentration of risk by diversifying its investments among a variety of issuers. All investment securities are classified as available-for-sale and are recorded at fair value based on quoted market prices, with unrealized gains and losses excluded from earnings and reported in other comprehensive loss. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Realized gains and losses and declines in fair value that are deemed to be other-than-temporary are reflected in earnings. The cost of securities sold is based on the specific identification method.

The Company recognizes an impairment charge when the decline in the estimated fair value of a marketable security below the amortized cost is determined to be other-than-temporary. The Company considers various factors in

F-8

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

determining whether to recognize an impairment charge, including the duration of time and the severity to which the fair value has been less than its amortized cost, any adverse changes in the investees’ financial condition and associated downgrades to credit ratings and the Company’s intent and ability to hold the marketable security for a period of time sufficient to allow for any anticipated recovery in market value. For each of the three years ended December 31, 2006, the Company did not recognize an impairment charge related to its investment securities.

Restricted Cash

The Company held a restricted investment consisting of a certificate of deposit of approximately $949,000 at December 31, 2006 and 2005. This investment is carried at fair value and is restricted as to withdrawal under a letter of credit agreement related to a facility lease.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Property and equipment are depreciated on a straight-line basis over the estimated useful lives of three to five years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the lease term.

Revenue Recognition

The Company generates revenue under license and collaborative agreements with pharmaceutical companies and under research grants from the National Institutes of Health. The arrangements may include up-front non-refundable fees, reimbursement for personnel and supply costs, milestone payments for the achievement of defined collaboration objectives and royalties on potential sales of commercialized products. The Company recognizes revenue under these arrangements when (i) persuasive evidence of an arrangement exists; (ii) delivery of the services, supplies or technology license has occurred; (iii) the price is fixed and determinable; and (iv) collectability is reasonably assured.

The Company recognizes license and other up-front fees pursuant to license and research and development collaboration agreements over the Company’s estimated period of continuing involvement with research and development of the respective agreement. These estimates are reviewed on a periodic basis and updated if the underlying assumptions are modified. Any changes in these estimates will result in either an acceleration or further deferral of the related revenue recognition. Payments related to substantive performance milestones that are at risk at the initiation of an agreement are recognized upon successful completion of a performance milestone event.

Contract revenues related to research and development efforts are recognized as revenue as the related services are performed or delivered in accordance with contract terms. Such payments generally are made based on the number of full-time equivalent researchers assigned to the project and the related research and development expenses incurred or as other deliverables under the contracts are fulfilled. Revenues related to government grants are recognized at the time a grant is awarded and as related research expenses are incurred. Any amounts received in advance of performance are recorded as deferred revenue until earned.

Research and Development

Research and development consists of costs incurred for Company-sponsored and collaborative research and development activities. These costs consist primarily of salaries and other personnel-related expenses, including associated stock-based compensation, facility-related expenses, licensing-related expenses, depreciation of facilities and equipment, lab consumables, services performed by clinical research organizations and research institutions and other outside service providers. Expenses related to clinical trials generally are accrued based on the level of patient enrollment and activity according to the protocol. The Company monitors patient enrollment level and related activity to the extent possible and adjusts estimates accordingly.

F-9

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Research and development expenses under government grant awards and collaborative agreements approximated the revenue recognized, excluding milestone, up-front fees received under such arrangements.

The Company’s research and development expenses do not reflect the costs incurred by the Company’s partners, Roche or the National Cancer Institute, or NCI, associated with the clinical trials they are conducting in connection with the Company’s epothilone and Hsp90 inhibitor programs, respectively.

Net Loss Per Share

Basic and diluted net loss per common share have been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted net loss is not presented separately as the Company is in a net loss position and including potentially dilutive securities in the loss per share computation would be antidilutive.

The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):

	Year Ended December 31,
	2006			2005			2004
Net loss	$	(29,469	)	$	(29,637	)	$	(22,126	)
Weighted-average shares of common stock outstanding		33,394			29,227			28,934
Less: weighted-average shares subject to repurchase		(—	)		(—	)		(21	)
Weighted-average shares used in computing basic and diluted net loss per common share		33,394			29,227			28,913
Basic and diluted net loss per common share	$	(0.88	)	$	(1.01	)	$	(0.77	)

The Company has excluded all convertible preferred stock, outstanding stock options and warrants and shares subject to repurchase from the calculation of diluted net loss per common share because all such securities are antidilutive for all applicable periods presented. The total number of outstanding stock options and warrants excluded from the calculations of diluted net loss per share, prior to application of the treasury stock method for options, was 4,652,852, 4,902,597, and 4,875,864 for the years ended December 31, 2006, 2005 and 2004, respectively. Such securities, had they been dilutive, would have been included in the computations of diluted net loss per share. See Notes 3 and 9 for further information on these securities.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004) or “SFAS 123R”, “Share-Based Payment”, using the modified prospective transition method. SFAS 123R requires that the compensation cost relating to share-based payment transactions, including stock options and employee stock purchase plans, be recognized in the financial statements. Under this transition method, stock-based compensation expense is recognized for all stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS No. 123, “Accounting for Stock-Based Compensation”. Stock-based compensation expense for all stock-based compensation awards granted after December 31, 2005 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The Company recognizes these

F-10

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

compensation costs net of an expected forfeiture rate on a graded-vesting basis over the requisite service period of the award, which is generally the option vesting term of one or four years. Prior to the adoption of SFAS 123R, the Company accounted for common stock options granted to employees using the intrinsic value method as prescribed by Accounting Principles Board (“APB”) No. 25 “Accounting for Stock Issued to Employees” and related interpretations, and thus, recognized compensation expense for options granted with exercise prices less than the fair value of the Company’s common stock on the date of the grant. Other stock compensation expense for options granted to non-employees has been determined in accordance with SFAS 123 and Emerging Issues Task Force (“EITF”) 96-18 “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. The measurement of stock-based compensation to non-employees is subject to periodic adjustment as the underlying securities vest. As such, changes to these measurements could be substantial should the Company experience significant changes in its stock price.

Comprehensive Loss

Comprehensive loss is comprised of net income and other comprehensive loss, which includes certain changes in equity that are excluded from net income. The Company includes unrealized gains and losses on available-for-sale securities in other comprehensive loss.

Income Taxes

Since inception, the Company has recognized income taxes under the liability method. Deferred income taxes are recognized for differences between the financial statement and tax basis of assets and liabilities at enacted statutory rates in effect for years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

Segment Reporting

The Company has determined that it operates in only one segment. Accordingly, no segment disclosures have been included in the accompanying notes to the financial statements.

Reclassifications

Certain reclassifications of prior years’ balances have been made to conform to the current year presentation. These reclassifications had no effect on prior years’ net loss or stockholders’ equity.

Recent Accounting Pronouncement

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. FIN 48 is effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle, if any, recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of FIN 48 on its financial statements.

F-11

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

2. RESEARCH AND DEVELOPMENT AGREEMENTS

Roche

In September 2002, the Company entered into a research and development collaboration agreement (the “Roche Agreement”) with Roche. Under the terms of the Roche Agreement, Roche has worldwide exclusive rights to market and sell KOS-1584 and any other epothilones developed under the collaboration in the field of oncology, and the Company has the right to co-promote in the United States any epothilone products developed under the collaboration. The Roche Agreement provides for the Company to receive payments for the reimbursement of agreed upon research and development expenditures, funding of a back-up research program that led to the selection of KOS-1584 as a clinical candidate, achievement of clinical, regulatory and commercial milestone payments and royalties on sales of collaboration products. In addition, the Company is entitled to increase its royalties on any sales of collaboration products through a buy-in at a later stage of clinical development and by co-promotion in the United States of products resulting from the collaboration. Effective July 1, 2004, the Company entered into an amendment to the Roche Agreement that provided for the reimbursement of costs that exceeded the previously stipulated amounts set forth in the Roche Agreement. In March 2006, the Company entered into a letter agreement with Roche, replacing a particular at-risk milestone payment obligation in the Roche Agreement with an obligation by Roche to pay the Company $2.0 million for certain patent expenses.

For the years ended December 31, 2006, 2005 and 2004, the Company recognized revenue related to the Roche Agreement of approximately $11.3 million, $11.9 million, and $20.5 million, respectively, representing approximately 84%, 89%, and 90%, respectively, of total revenues, of which $2.0 million was related to a non-recurring milestone earned in 2006 relating to certain patent expenses pursuant to the March 2006 letter agreement. Such amounts, excluding the ratable portion of up-front fees and milestone payments, approximated research and development expenses incurred under the Roche Agreement. Included in total Roche-related revenue for 2006, 2005 and 2004 was approximately $3.3 million, $3.3 million, and $5.4 million, respectively, related to the ratable portion of the $25.0 million up-front fee that is being recognized through the current estimated clinical development period for product candidates in clinical trials. The Company’s research and development expenses do not reflect the costs incurred by Roche associated with the clinical trials it is conducting in connection with the Company’s epothilone program. At December 31, 2006 and 2005, approximately $1.1 million and $2.4 million, or 95% and 72%, respectively, of accounts receivable were due from Roche.

Pfizer

In December 2006, the Company entered into an exclusive license agreement (the “Pfizer Agreement”) with Pfizer Inc. under which the Company granted to Pfizer a worldwide exclusive license to its motilin agonist program. Under the terms of the Pfizer Agreement, Pfizer and the Company agreed to collaborate on filing of regulatory documents for the initiation of a Phase 1 clinical trial of the Company’s clinical candidate, KOS-2187. Pfizer will be responsible for all development, regulatory and commercial activities related to the motilin agonist program. The Company received an up-front fee of $12.5 million in December 2006 and is eligible to receive milestone payments for the successful development and commercialization of licensed compounds, including milestone payments for achieving certain sales amounts, as well as royalties on worldwide sales. For the year ended December 31, 2006, the Company recognized revenue of approximately $1.8 million related to the Pfizer Agreement, which represents the ratable portion of the $12.5 million up-front fee that is being recognized through the current estimated period of the Company’s participation in the development of KOS-2187. For the year ended December 31, 2006, the Company recognized approximately $1.8 million of contract revenue from Pfizer, representing approximately 13% of total revenues for fiscal year 2006.

F-12

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

2. RESEARCH AND DEVELOPMENT AGREEMENTS (Continued)

License Agreements

The Company has collaborative and license agreements with several academic, government and medical institutions. Included in research and development expenses were fees incurred in connection with these agreements of approximately $578,000, $428,000, and $1.0 million for the years ended December 31, 2006, 2005 and 2004, respectively.

3. STOCK-BASED COMPENSATION

At December 31, 2006, the Company had the following stock-based compensation plans:

2006 Equity Incentive Plan

The Company’s 2006 Equity Incentive Plan (the “2006 Plan”) provides for the granting of incentive stock options, nonstatutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights and other forms of equity compensation. The 2006 Plan also provides for the granting of performance stock awards and performance cash awards so that the Compensation Committee of the Company’s board of directors may use performance criteria in establishing specific targets to be attained as a condition to the grant or vesting of one or more awards under the 2006 Plan. Incentive and nonstatutory stock options may be granted with exercise prices not less than fair value on the date of determination. The fair value of grants is determined by the closing sales price of the Company’s common stock as listed on an established stock exchange on the last market trading date preceding the date of grant. Stock options granted to a stockholder owning more than 10% of voting stock of the Company may be granted with an exercise price of not less than 110% of the fair value on the date of grant. Options expire no later than ten years from the date of the grant. The number of shares, terms and exercise periods are determined by the Company’s board of directors or its delegates. Options generally vest at 25% per year over a four-year period.

1996 Stock Option Plan

The Company’s 1996 Stock Option Plan (the “1996 Plan”) provided for the granting of incentive stock options and nonstatutory stock options to employees, officers, directors and consultants of the Company. Incentive stock options were granted with exercise prices not less than fair value, and nonstatutory stock options were granted with exercise prices not less than 85% of the fair value on the date of grant. The fair value of grants was determined by the closing sales price of the Company’s common stock as listed on any established stock exchange for the last market trading day prior to the time of determination. Stock options granted to a stockholder owning more than 10% of voting stock of the Company were granted with an exercise price of not less than 110% of the fair value on the date of grant. Options expire no later than ten years from the date of the grant. The number of shares, terms and exercise period were determined by the Company’s board of directors or its delegates. Options generally vest at 25% per year over a four-year period. The 1996 Plan expired in June 2006.

Shares subject to outstanding options under the 1996 Plan as of May 25, 2006 that expire or otherwise terminate without being exercised in full will be added to the share reserve under the 2006 Plan. The maximum number of shares of common stock authorized for issuance under the 1996 Plan and the 2006 Plan was 11,475,000 as of December 31, 2006.

2000 Employee Stock Purchase Plan

The Company’s 2000 Employee Stock Purchase Plan (the “Purchase Plan”) permits eligible employees to purchase common stock at a discount through payroll deductions during defined offering periods. The maximum number of shares authorized for issuance pursuant to the Purchase Plan was 750,000 as of December 31, 2006. The Purchase Plan provides for an annual increase of shares on January 1 of each year equal to the lesser of 150,000 shares, 0.75%

F-13

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

3. STOCK-BASED COMPENSATION (Continued)

of the outstanding shares on such date or such amount as determined by the Company’s board. The price at which the stock is purchased is equal to the lower of 85% of the fair market value of the common stock on the first day of the offering or 85% of the fair market value of the Company’s common stock on the purchase date. Each offering is for a six-month period. As of December 31, 2006, 686,097 shares were issued under the Purchase Plan.

2000 Non-Employee Director Stock Option Plan

The Company’s 2000 Non-Employee Director Stock Option Plan (the “Directors’ Plan”) provides for the granting of nonstatutory stock options to directors of the Company. The maximum number of shares of common stock authorized for issuance pursuant to the Directors’ Plan was 500,000 as of December 31, 2006. Under the Directors’ Plan, as amended, each non-employee director who becomes a director of the Company will be automatically granted a non-statutory stock option to purchase 20,000 shares of common stock on the date on which such person first becomes a director, and such option will vest over four years. Beginning with the 2002 Annual Stockholders Meeting and each year thereafter, each non-employee director will automatically be granted, one day following each year’s annual meeting of stockholders, a non-statutory option to purchase 5,000 shares of common stock, which will vest one day before the annual meeting of stockholders subsequent to the date of grant. The exercise price of options under the Directors’ Plan will be equal to the fair market value of the common stock on the date of grant. The maximum term of the options granted under the Directors’ Plan is ten years. As of December 31, 2006, options to purchase 292,500 shares were granted under the Director’s Plan.

Prior to January 1, 2006, the Company provided pro forma disclosure amounts in accordance with SFAS 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”, as if the fair value method defined by SFAS 123 had been applied to its stock-based compensation. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R, using the modified prospective transition method and therefore has not restated prior periods’ results. Under this transition method, stock-based compensation expense beginning January 1, 2006 included compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. Stock-based compensation expense for all share-based payment awards granted after December 31, 2005 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The Company recognizes these compensation costs, net of an expected forfeiture rate, on a graded-vesting basis over the requisite service period of the award, which is generally the option vesting term of one or four years.

As a result of adopting SFAS 123R on January 1, 2006, the Company’s net loss for the year ended December 31, 2006 was approximately $2.1 million greater than if the Company had continued to account for stock-based compensation under APB 25. The impact on both basic and diluted earnings per share for the year ended December 31, 2006 was $0.06 per share. Due to the Company’s lack of earnings history, no income tax benefit or cash flow effect is recognized as any resulting deferred tax asset is fully offset by a valuation allowance.

F-14

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

3. STOCK-BASED COMPENSATION (Continued)

The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data) had the Company applied the fair value recognition provisions under SFAS 123 for the year ended December 31:

	2005			2004
Net loss as reported	$	(29,637	)	$	(22,126	)
Plus: Stock-based employee compensation expense included in reported net loss		—			152
Less: Stock-based employee compensation expense determined under fair value based method for all awards		(2,312	)		(3,897	)
Pro forma net loss	$	(31,949	)	$	(25,871	)
Basic and diluted net loss per common share:
As reported	$	(1.01	)	$	(0.77	)
Pro forma	$	(1.09	)	$	(0.89	)

The Company uses the Black-Scholes model to value stock-based compensation expense. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The table below presents the valuation assumptions used to determine stock-based compensation expense under the provisions of SFAS 123R and SFAS 123 for each of the three years ended December 31, 2006. Expected term under SFAS 123R is based on the simplified method allowed under the provisions of Staff Accounting Bulletin (“SAB”) No. 107 and may only be applied through December 31, 2007. The risk-free interest rate is based on the U.S. Treasury zero coupon issues with an equivalent remaining term at the time of the option grant. Expected volatility is based on the historical volatility of the Company’s stock price and other factors.

	Year Ended December 31,
	2006	2005		2004
Risk-free interest rate	4.6% – 5.0%	4.0	%	2.7	%
Expected dividends	—	—		—
Expected term (in years)	6.25	4.0		4.0
Expected volatility	65% – 67%	64	%	70	%

F-15

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

3. STOCK-BASED COMPENSATION (Continued)

A summary of stock option activity is presented below:

	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Instrinsic Value
	(in thousands)				(in years)	(in thousands)
Outstanding at December 31, 2003	3,905		$	7.90
Granted	1,423		$	7.49
Forfeited or expired	(212	)	$	7.55
Exercised	(240	)	$	3.78
Outstanding at December 31, 2004	4,876		$	8.00
Granted	1,025		$	6.20
Forfeited or expired	(918	)	$	8.63
Exercised	(81	)	$	3.98
Outstanding at December 31, 2005	4,902		$	7.57
Granted	741		$	4.23
Forfeited or expired	(1,215	)	$	7.20
Exercised	(60	)	$	3.35
Outstanding at December 31, 2006	4,368		$	7.16	6.76	$	1,696
Vested and expected to vest at December 31, 2006	3,982		$	7.29	6.55	$	1,435
Exercisable at December 31, 2006	2,792		$	7.96	5.60	$	560

The weighted-average grant-date fair value of options granted for the years ended December 31, 2006 and 2005 was $2.73 and $2.41 per share, respectively. The total intrinsic value of options exercised for the years ended December 31, 2006 and 2005 was approximately $107,000 and $295,000, respectively.

F-16

The following table summarizes information with respect to stock options outstanding and exercisable at December 31, 2006:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of shares	Weighted- Average Remaining Contractual Term	Weighted- Average Exercise Price		Number of shares	Weighted- Average Exercise Price
		(in years)
$  0.33 - $  4.28	557,245	8.24	$	3.30	127,544	$	1.91
4.33 -     4.82	496,145	9.00		4.70	107,544		4.71
4.88 -     6.25	384,646	7.12		5.89	291,456		5.97
6.30 -     6.30	449,223	7.71		6.30	232,268		6.30
6.50 -     6.93	461,144	5.70		6.63	395,757		6.59
6.95 -     7.93	490,503	7.44		7.39	273,901		7.37
8.00 -     9.70	713,971	4.54		9.12	667,073		9.13
10.20 -   10.67	565,475	5.42		10.41	495,127		10.44
10.94 -   14.00	232,000	6.63		11.57	189,083		11.66
14.44 -   14.44	17,500	7.31		14.44	11,978		14.44
	4,367,852	6.76	$	7.16	2,791,731	$	7.96

Of the 4,367,852 options outstanding, 2,791,731 options were exercisable as of December 31, 2006. The weighted-average exercise price of options granted and outstanding was $7.16, $7.57, and $8.00 per share at December 31, 2006, 2005 and 2004, respectively.

The unamortized compensation expense related to unvested options as of December 31, 2006, excluding estimated forfeitures, was $3.1 million. The weighted-average period over which compensation expense related to these options is expected to be recognized is 1.5 years.

Non-Employee Stock-Based Compensation

As of December 31, 2006, the Company had issued consultant stock options totaling approximately 1.3 million shares with exercise prices ranging from $0.15 to $14.40 and terms up to ten years. Compensation related to the grants of stock options is recorded in accordance with SFAS 123 and EITF 96-18 using the Black-Scholes model. The Company recognized other stock-based compensation for grants to non-employees of approximately $379,000, $355,000, and $605,000 for the years ended December 31, 2006, 2005 and 2004, respectively. The measurement of stock-based compensation to non-employees is subject to periodic adjustment as the underlying awards vest.

F-17

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

4. INVESTMENTS

The amortized cost and fair value of securities, with gross unrealized gains and losses, at December 31, were as follows (in thousands):

	2006									2005
	Amortized Cost		Gross Unrealized					Fair Value		Amortized Cost		Gross Unrealized					Fair Value
			Gains		Losses							Gains		Losses
Debt Securities:
US agency notes	$	23,637	$	12	$	(3	)	$	23,646	$	23,067	$	—	$	(129	)	$	22,938
Corporate bonds		3,837		—		—			3,837		12,529		—		(40	)		12,489
	$	27,474	$	12	$	(3	)	$	27,483	$	35,596	$	—	$	(169	)	$	35,427

The fair value of available-for-sale securities by contractual maturity at December 31, were as follows (in thousands):

	2006
Within one year	$	27,483
Greater than one year, less than two years		—
	$	27,483

5. PROPERTY AND EQUIPMENT

Property and equipment at December 31, consisted of the following (in thousands):

	2006			2005
Lab equipment	$	11,499		$	10,664
Leasehold improvements		5,128			5,092
Computer equipment and software		2,211			2,055
Office furniture		517			478
		19,355			18,289
Less accumulated depreciation and amortization		(14,554	)		(12,228	)
	$	4,801		$	6,061

Depreciation and amortization expense was approximately $2.3 million, $2.5 million, and $2.5 million for the years ended December 31, 2006, 2005 and 2004, respectively.

F-18

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

6. EQUIPMENT FINANCING

The Company financed certain equipment and facility improvements under debt obligations. As of December 31, 2006, future minimum loan payments under these obligations were as follows (in thousands):

Year ended December 31,
2007	$	1,416
2008		677
2009		239
2010		46
Total minimum debt payments		2,378
Less amount representing interest		(190	)
Present value of net minimum payments		2,188
Less current portion		(1,289	)
Long-term portion	$	899

In April 2004, the Company entered into a $3.5 million equipment line of credit agreement. Each draw has an interest rate that is fixed at the time of draw down. As of December 31, 2006, the Company utilized approximately $2.8 million of the line of credit. The term of the debt obligations is 48 months. Interest rates are fixed at the time of the draw down, with rates ranging from 6.31% to 9.09%. Obligations under the loans are secured by the underlying assets financed.

7. FACILITY LEASES

In June 2002, the Company expanded its facilities by entering into an assignment of a non-cancelable operating lease, which commenced in June 2002 and expires in February 2008, with an option to renew. The Company also entered into a new lease on its existing facility lease to February 2013, with an option to renew.

Minimum annual rental commitments at December 31, 2006 were as follows (in thousands):

Year ended December 31,
2007	$	1,679
2008		1,163
2009		1,088
2010		1,127
2011		1,166
Thereafter		1,412
Total minimum payments	$	7,635

Rent expense for operating leases was approximately $1.7 million for each of the three years ended December 31, 2006.

The Company holds a stand-by letter of credit for approximately $903,000 from a commercial bank as security for the Company’s obligation under one of its facility leases. The letter of credit is secured by a certificate of deposit in the amount of $949,000 held in an investment account that the Company must maintain for the term of the letter of credit. The investment account is classified as restricted cash on the balance sheet.

F-19

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

8. ACCRUED LIABILITIES

Accrued liabilities at December 31, consisted of the following (in thousands):

	2006		2005
Research and development-related	$	3,538	$	3,115
Compensation-related		1,564		1,438
Professional services		486		899
Facilities-related		508		767
Other		235		241
	$	6,331	$	6,460

9. STOCKHOLDERS’ EQUITY

Common Stock Subject to Repurchase

Under the terms of the 1996 Stock Option Plan (the “1996 Plan”), options granted before the Company’s initial public offering of common stock are exercisable when granted, and if exercised prior to vesting, such shares are subject to repurchase upon termination of employment or consulting agreement at a price per share equal to the original exercise price. Repurchase rights lapse over the vesting periods, which are generally four years. At December 31, 2006, there were no shares subject to repurchase. Stock options granted after the Company’s initial public offering of common stock are exercisable only for the portion of the stock options that have vested.

Common Stock Offering

In April 2006, the Company completed an underwritten offering of 5,100,000 shares of common stock at an offering price of $5.00 per share. The Company received approximately $24.0 million in net proceeds after underwriting discounts and commissions and other offering costs.

Committed Equity Financing Facility

In July 2006, the Company entered into a Committed Equity Financing Facility (“CEFF”) with Kingsbridge Capital Limited (“Kingsbridge”) which entitles the Company to sell and obligates Kingsbridge to purchase, subject to certain conditions, up to $50.0 million of the Company’s common stock. The CEFF allows the Company to raise capital as required, at the time and in the amounts deemed suitable to the Company, during the three-year period following September 25, 2006, the date of effectiveness of the registration statement filed by the Company with the Securities and Exchange Commission covering the resale of the shares of the Company’s common stock issuable in connection with the CEFF and the shares of common stock underlying the warrant discussed below. The Company can draw down on the CEFF in tranches of up to a maximum of 2.0% of the Company’s market capitalization at the time of draw down, or $10.0 million, whichever is less, subject to certain conditions. The purchase price of these shares will be between 90% and 94% of the volume weighted average price of the Company’s common stock for each of the eight trading days following the election to sell shares. Kingsbridge is not obligated to purchase shares at prices below $2.00 per share or at a price below 85% of the closing share price of the Company’s stock on the trading day immediately preceding the commencement of the draw down. The Company is entitled, in certain circumstances, to deliver a blackout notice to Kingsbridge to suspend the use of the resale registration statement and prohibit Kingsbridge from selling shares under the resale registration statement for a certain period of time. If the Company delivers a blackout notice in certain circumstances, or if the resale registration statement is not effective in circumstances not permitted by the agreement, then the Company must make a payment to Kingsbridge, or issue Kingsbridge additional shares in lieu of this payment, calculated on the basis of the number of shares purchased by Kingsbridge in the most recent draw down and held by Kingsbridge immediately prior to the blackout period and the

F-20

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

9. STOCKHOLDERS’ EQUITY (Continued)

change in the market price of our common stock during the period in which the use of the registration statement is suspended.

In connection with the CEFF, the Company issued a warrant to Kingsbridge to purchase 285,000 shares of the Company’s common stock at an exercise price of $4.94 per share. The warrant is exercisable beginning six months after the date of grant and for a period of five years thereafter. The fair value of the warrant was valued on the date of issuance under the Black-Scholes method using the following assumptions: contractual life of 5.5 years, risk free interest rate of 4.84%, volatility of 66% and no dividends. The fair value of the warrant was $629,000 and was recorded as a contra-equity amount in additional paid-in-capital. As of December 31, 2006, a warrant to purchase 285,000 shares was outstanding.

The Company is not obligated to sell any of the $50.0 million of common stock available under the CEFF, and there are no minimum commitments or minimum use penalties. Under the terms of the CEFF, the maximum number of shares the Company may sell to Kingsbridge is 6,879,868 shares (exclusive of the shares underlying the warrant), which may limit the amount of proceeds the Company is able to obtain from the CEFF. The CEFF does not contain any restrictions on the Company’s operating activities, automatic pricing resets or minimum market volume restrictions.

In October 2006, the Company received proceeds of $3.0 million, before expenses of approximately $0.1 million relating to the execution of the CEFF in July 2006, filing of the registration statement, which became effective on September 25, 2006, and the sale of 770,351 shares of common stock to Kingsbridge in October 2006.

Reserved Shares

As of December 31, 2006, the Company had reserved shares of common stock for future issuance as follows:

	Reserved Shares
Stock option plans:
Shares available for grant	4,166,609
Options outstanding	4,367,852
Employee Stock Purchase Plan	63,903
Shares available for issuance under the CEFF	6,109,517
Warrant outstanding	285,000
	14,992,881

Stockholder Rights Plan

In October 2001, the board of directors of the Company adopted a Stockholder Rights Plan (the “Rights Plan”) under which all stockholders received rights (the “Rights”) to purchase shares of a new series of Preferred Stock. 1,000,000 shares of Junior A Preferred Stock were authorized in conjunction with the Series A Junior Participating Preferred Stock under certain circumstances at an exercise price of $70.00 per adoption of the Rights Plan. Each Right entitles the holder to purchase one one-hundredth of a share of a Series A Junior Participating Preferred Stock under certain circumstances at an exercise price of $70.00 per one-one hundredth of a share. The Rights were distributed as a non-taxable dividend and expire on October 29, 2011. At the time of the adoption, the Rights were neither exercisable nor traded separately from the common stock. However, subject to certain exceptions, the Rights will become exercisable at such time that a person (or group of affiliated persons) acquires beneficial ownership of 20% or more of the outstanding Company common stock (an “Acquiring Person”) or on the tenth business day after a

F-21

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

9. STOCKHOLDERS’ EQUITY (Continued)

person or entity commences, or expresses an intention to commence, a tender or exchange offer that would result in such person acquiring 20% or more of the outstanding Company common stock.

In the event a person becomes an Acquiring Person, each Right held by all persons other than the Acquiring Person will become the right to acquire one share of Company common stock at a price equal to 50% of the then-current market value of the Company common stock. Furthermore, in the event an Acquiring Person effects a merger of the Company, each Right will entitle the holder thereof to purchase one share of common stock of the Acquiring Person or the Acquiring Person’s ultimate parent at a price equal to 50% of the then-current market value of the Acquiring Person’s or the Acquiring Person’s ultimate parent’s common stock.

The board of directors can redeem the Rights at any time prior to a person becoming an Acquiring Person at a redemption price of $0.001 per Right. In addition, the board of directors may, after any time a person becomes an Acquiring Person, exchange each Right for one share of common stock of the Company. As of December 31, 2006, no shares had been issued under the Rights Plan.

10. INCOME TAXES

As of December 31, 2006, the Company had federal net operating loss carryforwards and federal research and development tax credit carryforwards of approximately $112.2 million and $3.9 million, respectively. The federal net operating loss and research and development credit carryforwards will expire at various dates beginning in the year 2010 through 2026, if not utilized. As of December 31, 2006, the Company had state net operating loss carryforwards and state research and development tax credit carryforwards of approximately $92.8 million and $2.2 million, respectively. The state net operating loss carryforwards will expire at various dates from 2012 through 2016, if not utilized. The state research and development carryforwards do not expire.

Utilization of the federal net operating loss and credit carryforwards may be subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and credits before utilization.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets for financial reporting and the amount used for income tax purposes. Significant components of the Company’s deferred tax assets for federal income taxes as of December 31 were as follows (in thousands):

	2006			2005
Deferred tax assets:
Net operating loss carryforwards	$	43,700		$	35,540
Deferred revenue		7,830			4,860
Depreciable assets		1,210			1,180
Research and development credits		5,330			2,930
Capitalized research and development expenses		1,050			1,330
Other		1,370			1,020
Total deferred tax assets		60,490			46,860
Valuation allowance		(60,490	)		(46,860	)
Net deferred taxes	$	—		$	—

F-22

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

10. INCOME TAXES (Continued)

Due to the Company’s lack of earnings history, the total deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $13.6 million and $11.5 million during the years ended December 31, 2006 and 2005, respectively.

11. RESTRUCTURING CHARGE

In March 2006, the Company implemented and completed a corporate restructuring, reflecting a realignment of research priorities and corporate operations to support its clinical product candidates and pipeline opportunities. As a result, the Company reduced its workforce by 39 positions, from 119 to 80 full-time employees, primarily in research and general and administrative. The reduction in workforce resulted in a one-time severance-related charge of approximately $0.6 million, all of which was recognized and paid in 2006.

12. SUBSEQUENT EVENT

In February 2007, the Company completed a registered direct offering of 7,000,000 shares of common stock at an offering price of $6.50 per share. The aggregate proceeds of the offering after placement agent fees, but excluding other offering expenses, were approximately $42.8 million.

13. QUARTERLY INFORMATION (Unaudited)

The Company’s quarterly results were as follows (in thousands, except per share amounts):

	Quarter Ended
	March 31,			June 30,			September 30,			December 31,			Total
2006
Revenue	$	2,961		$	2,666		$	2,169		$	5,710		$	13,506
Loss from operations		(10,948	)		(7,176	)		(8,175	)		(5,197	)		(31,496	)
Net loss		(10,581	)		(6,789	)		(7,540	)		(4,559	)		(29,469	)
Basic and diluted earnings per common share	$	(0.36	)	$	(0.20	)	$	(0.22	)	$	(0.13	)	$	(0.88	)
2005
Revenue	$	2,875		$	3,338		$	3,217		$	3,980		$	13,410
Loss from operations		(8,321	)		(7,656	)		(7,881	)		(7,170	)		(31,028	)
Net loss		(8,015	)		(7,316	)		(7,531	)		(6,775	)		(29,637	)
Basic and diluted earnings per common share	$	(0.28	)	$	(0.25	)	$	(0.26	)	$	(0.23	)	$	(1.01	)

F-23

EX-10.34

Exhibit 10.34

AMENDMENT NO. 1

TO

COMMON STOCK PURCHASE AGREEMENT

This Amendment No. 1 to Common Stock Purchase Agreement (“Amendment”) is entered into as of January 24, 2007, by and between Kingsbridge Capital Limited, an entity organized and existing under the laws of the British Virgin Islands, whose registered address is Palm Grove House, 2^nd Floor, Road Town, Tortola, British Virgin Islands (the “Investor”), and Kosan Biosciences Incorporated, a corporation organized and existing under the laws of the State of Delaware (the “Company”).

WHEREAS, the Investor and the Company are parties to that certain Common Stock Purchase Agreement dated as of July 19, 2006 (the “Agreement”), and the parties now wish to amend the Agreement as set forth herein.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency are hereby acknowledged, the parties agree as follows:

1. Section 3.05 of the Agreement shall be replaced in its entirety with the following:

“Settlement. Subject to Section 3.06(b), the number of Shares purchased by the Investor in any Draw Down shall be determined and settled no later than the second Trading Day after the last Trading Day of the related Draw Down Pricing Period. Each date on which settlement of the purchase and sale of Shares occurs hereunder being referred to as a “Settlement Date.” The Investor shall provide the Company with delivery instructions for the Shares to be issued at each Settlement Date at least two Trading Days in advance of such Settlement Date. The number of Shares actually issued shall be rounded to the nearest whole number of Shares.”

2. Section 5.06(b) shall be replaced in its entirety with the following:

“(b) The Investor covenants that during the Commitment Period, neither the Investor nor any of its affiliates nor any entity managed or controlled by the Investor will ever (i) enter into or execute or cause any Person to enter into or execute any “short sale” (as such term is defined in Rule 200 of Regulation SHO promulgated by the Commission under the Exchange Act) of any shares of Common Stock, (ii) sell, during the term of a Draw Down Pricing Period, Common Stock other than Common Stock purchased pursuant to the Draw Down pertaining to such Draw Down Pricing Period as permitted below or (iii) engage, through related parties or otherwise, in any derivative transaction directly related to shares of Common Stock (including, without limitation, the purchase of any option or contract to sell). Notwithstanding clause (ii) above, but subject to clauses (i) and (iii) above, the Investor shall have the right during any Draw Down Pricing Period to sell shares of Common Stock equal in number to the aggregate number of the Shares purchased pursuant to the Draw Down pertaining to such Draw Down Pricing Period.”

3. The Agreement remains in full force and effect except as explicitly amended herein.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officer as of the date first written above.

KINGSBRIDGE CAPITAL LIMITED
By:	/s/ Adam Gurney
	Adam Gurney
	Director
KOSAN BIOSCIENCES INCORPORATED
By:	/s/ Gary Titus
	Gary Titus,
	Senior Vice President and Chief Financial Officer

EX-10.38

Exhibit 10.38

EXCLUSIVE LICENSE AGREEMENT

This License Agreement (“Agreement”) is entered into as of this 19 day of December, 2006 (“Effective Date”), by and between:

on the one hand,

Pfizer Inc, a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 234 East 42^nd Street, New York, New York 10017 (including its Affiliates (as defined herein, “Licensee”),

and on the other hand,

Kosan Biosciences Incorporated, a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 3832 Bay Center Place, Hayward, California 94545 (“Kosan”). Licensee and Kosan each may be referred to herein as a “Party,” and collectively as “Parties.”

WHEREAS, Kosan owns or possesses certain patent rights and know-how with respect to motilin agonist compounds, including KOS-2187;

WHEREAS, Kosan desires to license its technology and rights to Licensee for the continued development and commercialization of Kosan’s motilin agonist compounds, including but not limited to KOS-2187;

WHEREAS, Licensee desires to continue the development and commercialization of KOS-2187 and such other Kosan compounds as Licensee may determine could be beneficial in the treatment of GI disorders;

WHEREAS, Licensee desires to obtain an exclusive license under Kosan’s patent rights and know-how with respect to such compounds, including KOS-2187; and

WHEREAS, Kosan is willing to grant an exclusive license to Licensee under such patent rights and know-how all as more particularly described in, and subject to the terms and conditions of, this Agreement.

NOW THEREFORE, in consideration of the foregoing and of the mutual covenants hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties mutually agree as follows:

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

ARTICLE 1

DEFINITIONS

As used in this Agreement, the following terms shall have the following meanings, and singular forms, plural forms and derivative forms (i.e. other parts of speech), shall be interpreted accordingly:

1.1 “Affiliate” means any corporation or non-corporate business entity which controls, is controlled by, or is under common control with a Party to this Agreement. A corporation or non-corporate business entity shall be regarded as in control of another corporation if it owns or directly or indirectly controls greater than fifty percent (>50%) of the voting stock of the other corporation or such lesser maximum percentage permitted in those jurisdictions where majority ownership by foreign entities is prohibited, or (a) in the absence of the ownership of greater than fifty percent (>50%) of the voting stock of a corporation, or (b) in the case of a non-corporate business entity, if it possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the corporation or non-corporate business entity, as applicable, whether through the ownership or control of voting securities, by contract or otherwise.

1.2 “Approval” or “Approved” means any and all approvals, including supplements and amendments, licenses, registration or authorizations of any agency, department or bureau or government authority that are necessary for the manufacture, distribution, use marketing or sale of a pharmaceutical product in a regulatory jurisdiction.

1.3 “Bulk KOS-2187” means Kosan’s inventory of the active pharmaceutical ingredient for KOS-2187.

1.4 “Business Day” or business day means a day other than Saturday, Sunday or any other day on which commercial banks located in New York, New York are obligated by applicable laws to close.

1.5 “CTA” means a Clinical Trial Authorization filed with the EMEA with respect to the EU or with the Regulatory Agency of a country within the EU for a compound to be developed for use within the Field.

1.6 “Combination Product” means a product that contains a Licensed Product in any dosage strength or formulation and one (1) additional active ingredient.

1.7 “Commencement” means, with respect to a clinical trial, the date upon which the first patient receives the first dose of an item that is the subject of such clinical trial.

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

2

1.8 “Commercialize” or “Commercialization” means all activities relating to the commercialization of a Licensed Product including, without limitation, promotion, marketing, sales and distribution.

1.9 “Commercially Reasonable Efforts” means those efforts and resources that Licensee would use were it developing or commercializing its own pharmaceutical products that are of similar market potential as the Licensed Product, taking into account product labeling or anticipated labeling, present and future market potential, past performance, financial return, medical and clinical considerations, present and future regulatory environment and competitive market conditions in the Field, all as measured by the facts and circumstances at the time such efforts are due.

1.10 “Control” means the possession of the ability to grant a license or sublicense as provided for herein without violating the terms of any agreement or other arrangement with any Third Party.

1.11 “Dollars” or “$” means US dollars.

1.12 “EU” means the European Union.

1.13 “FDA” means the US Food and Drug Administration and any successor entity thereto.

1.14 “Field” [*].

1.15 “First Commercial Sale” means the first sale of a Licensed Product to a Third Party.

1.16 [*]

1.17 [*]

1.18 “GI Indication” [*]

1.19 “GI Product” [*]

1.20 “IND” means an Investigational New Drug Application filed with FDA for a Licensed Product to be developed for use in the Field or foreign equivalent.

1.21 “Joint Research and Development Plan” shall have the meaning given in Section 6.4.

1.22 “Know-How” means all non-patented data, information, methods, procedures, processes and other know-how related to the use, manufacture or sale of Kosan Compound Library. Know-How includes but is not limited to: biological, chemical, biochemical, toxicological, pharmacological, metabolic, formulation, clinical, analytical and stability information, standard operating procedures and protocols relating

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

3

to the research scale, pilot scale and commercial scale synthesis of the Kosan Compound Library (other than such information and data which is or becomes the subject of a patent or patent application).

1.23 “KOS-2187” means the compound known as [*].

1.24 “Kosan Compound Library” means the compounds generically or specifically described in the Kosan Patent Rights.

1.25 “Kosan [*] Patent Rights” means the patent applications listed on Exhibit A as Kosan Patent Family [*], including any patents issuing therefrom, as well as all continuations, continuations-in-part, divisions, patents of addition, reissues, renewals, extensions, substitutions, and supplementary protection certificates thereof, and the foreign patents and foreign patent applications corresponding to any of the foregoing.

1.26 “Kosan Know-How” means all Know-How that is Controlled by Kosan as of the Effective Date.

1.27 “Kosan Patent Rights” means all patents and patent applications that are Controlled by Kosan as of the Effective Date, including all continuations, continuations-in-part, divisions, patents of addition, reissues, renewals, extensions, substitutions, and supplementary protection certificates thereof, and the foreign patents and foreign patent applications corresponding to any of the foregoing. The Kosan Patent Rights existing as of the Effective Date are set forth in Exhibit A.

1.28 “Kosan Technology” means collectively Kosan Know-How and Kosan Patent Rights.

1.29 “Licensed Product” means (a) any product the manufacture, use or sale of which is covered by a Valid Claim or (b) any product covered by Section 4.1(c) with respect to countries where the manufacture, use or sale of the product is not covered by a Valid Claim.

1.30 “Licensee” means Licensee and its Affiliates.

1.31 “Licensee Quarter” means (i) in the US, each of the four (4) thirteen (13)-week periods used by Licensee in its audited financial reports, the first such period commencing on January 1 of any year and (ii) in any country in the Territory other than the US, each of the four (4) thirteen (13)-week periods used by Licensee in its audited financial reports, the first such period commencing on December 1 of any year. Provisions in this Agreement requiring a calculation of sales in the Territory in the first Licensee Quarter or in [*] consecutive Licensee Quarters shall be calculated by adding the sales in the first Licensee Quarter in the US pursuant to clause (i) above and the sales in the first Licensee Quarter outside of the US pursuant to clause (ii) above and likewise for each of the [*] Licensee Quarters in a particular year.

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

4

1.32 [*]

1.33 “NDA” means a New Drug Application filed with the FDA (or foreign equivalent thereof) for approval to market and sell a drug.

1.34 “Net Sales” means:

(a) with respect to a Licensed Product (subject to subsection (b) below), the amount invoiced by Licensee or a sublicensee for sales of such Licensed Product, to Third Parties, less, without duplication, (i) [*], (ii) [*]; and

(b) in the case of a Combination Product,

(i) if Licensee or any sublicensee separately sells in such country during such year when it sells such Combination Product both (1) one or more Licensed Products as a single chemical entity and (2) other products containing active pharmaceutical ingredient(s) as a single chemical entity, both of which are also contained in such Combination Product, then the Net Sales attributable to such Combination Product during such year shall be calculated by multiplying actual Net Sales of such Combination Product by the fraction A/(A+B) where: A is the sum of Licensee’s (or its sublicensees’) average Net Sales prices per daily dose during such year for each Licensed Product in such Combination Product as a single chemical entity in such country and B is the sum of the average of Licensee’s (or its sublicensees’) Net Sales prices per daily dose during such year in such country, for each product(s) containing the active pharmaceutical ingredient(s) in such Combination Product (other than the Licensed Product) as a single chemical entity;

(ii) if Licensee or any sublicensee separately sells, in such country during such year when it sells such Combination Product, one or more Licensed Products as a single chemical entity but does not separately sell, in such country, other products containing the active pharmaceutical ingredient(s) that are also contained in such Combination Product, then the Net Sales attributable to such Combination Product during such year shall be calculated by multiplying the Net Sales of such Combination Product by the fraction A/C where: A is the sum of Licensee’s (or its sublicensees’) average Net Sales prices per daily dose during such year for each Licensed Product in such Combination Product as a single chemical entity in such country, and C is Licensee’s (or its sublicensees’) average Net Sales price per daily dose during such year for the Combination Product in such country; and

(iii) if Licensee or its sublicensee does not separately sell, in such country during such year when it sells such Combination Products, each Licensed Product contained in the Combination Product, then the Net Sales attributable to such Combination Product during such year shall be calculated by multiplying the Net Sales of such Combination Product by the fraction D/D+E where D is the fair market value of the portion of the Combination Product that contains the Licensed Product and E is the fair market value of the portion of the Combination Product containing the other active ingredient in the Combination Product, as the fair market values are determined by mutual agreement of the Parties.

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

5

In all cases, Net Sales shall be determined from books and records maintained in accordance with [*]

1.35 “Non-GI Product” means a Licensed Product that has been Approved for an indication [*].

1.36 “Phase I” means, with respect to the US, the first phase of human clinical trials using a limited number of human subjects to gain evidence of the safety and tolerability of a Licensed Product and information regarding pharmacokinetics and potentially pharmacological activity for such Licensed Product, which human clinical trials are completed prior to the initiation of Phase II, as described in 21 C.F.R. § 312.21(a), as may be amended, or, with respect to any other country or jurisdiction, the equivalent of such a clinical trial in such other country or jurisdiction.

1.37 “Phase II” means, with respect to the US, the second phase of human clinical trials of a Licensed Product to gain evidence of the efficacy in one or more indications and expanded evidence of the safety of such Licensed Product, as well as an indication of the dosage regimen required, as described in 21 C.F.R.§ 312.21(b), as may be amended, or, with respect to any other country or jurisdiction, the equivalent of such a clinical trial in such other country or jurisdiction.

1.38 [*]

1.39 [*]

1.40 [*]

1.41 “Registration” in relation to any Licensed Product means such approvals by government authorities in a country or community or association of countries included in the Territory (including, where applicable, price approvals) that are required to be obtained prior to marketing or selling such Licensed Product for use in the Field.

1.42 “Regulatory Agency” means, with respect to any particular country, the governmental authority, body, commission, agency or other instrumentality of such country (or the EMEA with respect to the EU), with the primary responsibility for the evaluation or approval of pharmaceutical products before a Licensed Product can be tested, marketed, promoted, distributed or sold in such country, including such governmental bodies that have jurisdiction over the pricing of such pharmaceutical product. The term “Regulatory Agency” includes the FDA.

1.43 “Regulatory Filing” means any filing with a Regulatory Agency relating to or to permit or request, as applicable, the clinical evaluation or Registration of a pharmaceutical product. Regulatory Filings include without limitation INDs, CTAs and NDAs.

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

6

1.44 “Reverted Product” means a Licensed Product (a) [*] and (b) that is required to be reverted to Kosan in accordance with Section 12.8.

1.45 “Royalty Term” shall be as defined in Section 4.1.

1.46 “Second GI Product” [*].

1.47 “Second Non-GI Product” [*]

1.48 “Territory” means the entire world.

1.49 “Third Party” means any party other than Kosan, Kosan’s Affiliates or Licensee.

1.50 “US” means the United States of America, its territories and possessions.

1.51 “Valid Claim” means any claim from (a) an issued and unexpired patent included within the Kosan Patent Rights that has not been revoked or held unenforceable or invalid by a final decision of a court or other governmental authority of competent jurisdiction, unappealable or unappealed within the time allowed for appeal or that has not been disclaimed, denied or admitted to be invalid or unenforceable through reissue or disclaimer or otherwise; or (b) a patent application included within the Kosan Patent Rights; provided however, that such a claim from a patent application has not been canceled, withdrawn, or abandoned or been pending for more than [*] from the date of its first priority filing anywhere in the world. If a claim of a patent application that ceased to be a Valid Claim under item (b) because of the passage of time that later issues as part of a patent within item (a), then it shall again be considered to be a Valid Claim effective as of the earlier of the grant, allowance or issuance of such patent.

ARTICLE 2

GRANT OF LICENSE/ASSIGNMENT OF PATENTS

2.1 Grant. Subject to the terms and conditions of this Agreement, Kosan hereby grants to Licensee, and Licensee hereby accepts on its and their behalf, an exclusive license, with a right to sublicense as provided in Section 2.2, under the Kosan Technology to (a) develop, use, sell, offer for sale, import and/or export Licensed Products in the Territory and in the Field, and (b) make and have made Licensed Products in the Territory for such development, use, sale, offering for sale, importation and/or exportation. [*]

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

7

2.2 Right to Sublicense. Licensee shall have the right to sublicense the rights granted under Section 2.1 to Third Parties in the Field or the Territory. Licensee assumes full responsibility for the performance of such sublicense, and compliance with the terms of this Agreement by such sublicensee, and will itself pay and account to Kosan for all royalties or other payments due under this Agreement by reason of the operations of any such sublicensee. Any agreement governing the terms of a sublicense by Licensee or any of its sublicensees of any of the rights granted under Section 2.1 must be consistent with the terms and conditions of this Agreement.

ARTICLE 3

MILESTONE PAYMENTS

3.1 Upfront Payment. Upon the Effective Date hereof, Licensee shall pay Kosan a non-refundable upfront license fee in the amount of Twelve Million Five Hundred Thousand Dollars ($12,500,000).

3.2 Milestone Payments.

(a) Development. Licensee shall pay to Kosan non-refundable milestone payments specified below with respect to development by Licensee and its sublicensees of Licensed Product as a human therapeutic no later than thirty (30) days after the following events have occurred.

Licensee will only pay the development milestones listed below once for each Licensed Product.

Licensee will pay development milestones for a Second GI Product only if [*]. Development milestone payments will then be paid [*] for the Second GI Product.

Licensee will pay development milestones for a Second Non-GI Product only if [*]. Milestone payments will then be paid [*] for the Second Non-GI Product.

Milestone Event	Milestone Payment
[*]	[	*]

It is the parties’ intent that each of the foregoing [*]. However, the parties recognize that it is possible that during the development of a Licensed Product, one or more of the above milestone events may be skipped. Therefore, if a particular milestone event occurs on a given date and, as of such date, any of the prior milestone events have not occurred, Licensee shall be required to make the prior milestone payment(s) as if such milestone event(s) had occurred as of the date the subsequent milestone event occurred.

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

8

(b) Examples.

(i) KOS-2187 enters into [*] but is discontinued in favor of another Licensed Product (“KOS-X”), which proceeds to [*]. In this situation, Licensee would be required to pay Kosan [*] within 30 days after [*] with KOS-2187, would not be required to pay Kosan a milestone payment for [*] with KOS-X and would be required to pay Kosan [*] within 30 days after [*] with KOS-X.

(ii) KOS-2187 proceeds through clinical development and is first Approved (in the US) on [*]. On [*], KOS-X is in [*] and [*] of KOS-X is initiated on [*]. In this situation, (A) with respect to KOS-2187, Licensee would be required to pay Kosan each of the first [*] milestone payments listed in the table above within 30 days of the occurrence of the applicable milestone event and (B) with respect to KOS-X, Licensee would be required to pay Kosan the [*] milestone payments listed in the table above within 30 days after [*].

(c) Commercialization. Licensee shall pay to Kosan non-refundable milestone payments specified below with respect to Commercialization by Licensee and its sublicensees of each Licensed Product as a human therapeutic no later than sixty (60) days after the end of the applicable Licensee Quarter. Licensee will pay each Commercialization milestone only once for each Licensed Product:

Milestone Event	Milestone Payment
Upon aggregate Net Sales in the Territory reaching $[*] in any [*] consecutive Licensee Quarters	$	[	*]
Upon aggregate Net Sales in the Territory reaching $[*] in any [*] consecutive Licensee Quarters	$	[	*]
Upon aggregate Net Sales in the Territory reaching $[*] in any [*] consecutive Licensee Quarters	$	[	*]
Upon aggregate Net Sales in the Territory reaching $[*] in any [*] consecutive Licensee Quarters	$	[	*]

(d) [*]

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

9

ARTICLE 4

ROYALTIES

4.1 Royalties in General. For each Licensed Product, the obligation of Licensee to pay Kosan royalties in a given country shall commence on the date of the First Commercial Sale of such Licensed Product by the Licensee in such country and shall continue until the later of (i) the date upon which no Valid Claim would cover the manufacture, use or sale of such Licensed Product in the country of manufacture, use or sale, or (ii) the date which is [*] after the date of such First Commercial Sale in such country (the “Royalty Term”).

(a) Licensee shall pay or cause to be paid to Kosan a royalty based on Net Sales of Licensed Products made by Licensee and its sublicensees [*] as provided for in the table below in this Section 4.1(a).

Total Annual Net Sales of Licensed Products [*]	Royalty Rate
[*]	[	*]

(b) [*].

(c) [*]

(d) Examples

(1) [*]

4.2 Accrual of Royalties. No royalty shall be due or owing from the use or distribution of Licensed Product in transactions where no consideration is received by the Licensee, such as when Licensed Product is made or used for tests or development purposes or is distributed as samples. Royalties shall accrue based on the fair market value of any non-monetary consideration received. No royalties shall be payable on sales between Licensee, its Affiliates and sublicensees, but royalties shall be payable on subsequent sales by any such entities. No multiple royalties shall be payable under this Agreement because Commercialized Licensed Product is covered by more than one Valid Claim.

4.3 Compulsory Licenses. If Licensee is required to grant a compulsory license to a Third Party as required by the applicable laws of any country in the Territory under the Kosan Patent Rights, and the royalty rate payable to Licensee for sales of Licensed Product by such Third Party is lower than the royalty rate payable by Licensee to Kosan for such sales, then the royalty rate payable hereunder by Licensee for sales

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of Licensed Products by such Third Party in such country shall be [*] payable by such Third Party to Licensee for such country. If Licensee is required to grant a license under this Section 4.3, the compulsory licensee shall not be considered a licensee under Section 4.4.

4.4 [*]

4.5 Third Party Royalty Obligations. If (a) in order to avoid infringement of any patent not licensed hereunder, it is reasonably necessary for Licensee to obtain a license from a Third Party in order to make, use, sell, offer for sale, supply, cause to be supplied, or import a Licensed Product in a country in the Territory and to pay a royalty or other consideration under such license (including in connection with the settlement of a patent infringement claim), in which case, Licensee shall discuss the matter with Kosan prior to obtaining such a license, or (b) shall be subject to a final court or other similar binding order or ruling requiring any payments, including the payment of a royalty to a Third Party patent holder in respect of sales of any Licensed Product in a country in the Territory, then the amount of Licensee’s royalty payments with respect to Net Sales for such Licensed Product in such country shall be reduced by [*] of (i) the royalties on sales of such Licensed Product payable by Licensee to such Third Party or (ii) other amount payable by Licensee specifically as a total buyout of all of the Third Party’s expected royalties on sales of such Licensed Product, provided, however, that in no event will a deduction, or deductions, under this Section 4.5, in the aggregate, reduce any royalty payment made by Licensee in respect of Net Sales of such Licensed Product by more than [*]. If, but for the proviso in the preceding sentence, the deduction under Section 4.5(ii) would have reduced a royalty payment made by Licensee by more than [*], then the amount of such deduction that exceeds [*] will be carried over to the subsequent royalty payment until the full amount the Licensee would have been entitled to deduct (absent the above limitation) is deducted.

ARTICLE 5

ROYALTY REPORTS AND ACCOUNTING

5.1 Royalty Payments; Royalty Reports. After the First Commercial Sale and for the remaining term of this Agreement, Licensee shall submit with each payment of royalties to Kosan a written royalty report (“Royalty Report”) covering sales of Licensed Product for each Licensee Quarter with the following information provided on a country-by-country basis:

(a) [*] for each Licensed Product (by country) in local currency and in Dollars;

(b) the royalties, payable in Dollars, which shall have accrued hereunder in respect to such Net Sales;

(c) withholding taxes, if any, required by law to be deducted in respect of such sales;

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(d) the exchange rates used in determining the amount of Dollars; and

(e) the names and addresses of all sublicensees.

Royalty Reports shall be due for the entire Territory no later than sixty (60) days after the end of the Licensee Quarter to which they pertain. Royalty payments for each Licensee Quarter with respect to Net Sales covered by a Royalty Report shall be due at the same time as such written report for the Licensee Quarter.

5.2 Manner of Payment. All payments due under this Agreement shall be made in Dollars via wire transfer of immediately available funds.

5.3 Sales Record Audit. Licensee shall keep, and shall cause each of its Affiliates, and sublicensees, if any, to keep, full and accurate books of accounting in accordance with GAAP containing all particulars that may be necessary for the purpose of calculating all royalties payable to Kosan. Such books of accounting (including, without limitation, those of the Licensee’s Affiliates, and sublicensees, if any) shall be kept at their principal place of business and, with all necessary supporting data, shall during all reasonable times for the [*] next following the end of the calendar year to which each shall pertain, be open for inspection at reasonable times by an independent certified accountant selected by Kosan, and reasonably acceptable to Licensee, at Kosan’s expense, for the purpose of verifying royalty statements for compliance with this Agreement. Such accountant must have agreed in writing to maintain all information learned in confidence, except as necessary to disclose to Kosan such compliance or noncompliance by the Licensee. The results of each inspection, if any, shall be binding on both Parties other than in the case of manifest error. Kosan shall pay for such inspections, except that in the event there is any upward adjustment in aggregate royalties payable for the Licensee Quarter period of such inspection of more than [*] of the amount paid, Licensee shall pay for the reasonable out-of-pocket costs of such inspection. Any underpayments shall be paid by Licensee within ten (10) Business Days of notification of the results of such inspection. Any overpayments shall be promptly paid by Kosan.

5.4 Currency Exchange. Conversion of sales recorded in local currencies to Dollars for the purpose of calculating the sales milestone payments under Section 3.2(b) or royalty payments will be performed [*].

5.5 Taxes. It is understood and agreed between the Parties that any payments made under Sections 3.1, 3.2 or 4.1 of this Agreement are inclusive of any value added or similar tax imposed upon such payments. In addition, in the event any such payments made by Licensee become subject to withholding taxes under the laws of any jurisdiction, Licensee shall deduct and withhold the amount of such taxes for the account of Kosan to the extent required by applicable laws or regulations, such amounts payable to Kosan shall be reduced by the amount of taxes deducted and withheld, and Licensee shall pay the amounts of such taxes to the proper governmental authority in a timely manner and promptly transmit to Kosan an official tax certificate or other

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evidence of such tax obligations together with proof of payment from the relevant governmental authority of all amounts deducted and withheld sufficient to enable Kosan to claim such payment of taxes. Any such withholding taxes required under applicable laws or regulations to be paid or withheld shall be an expense of, and borne solely by, Kosan. Licensee will provide Kosan with reasonable assistance to enable Kosan to recover such taxes as permitted by applicable laws or regulations.

5.6 Interest Due. Without limiting any other rights or remedies available to Kosan, Licensee shall pay Kosan interest on any payments that are not paid on or before the date such payments are due under this Agreement at an annual rate equal to the [*] rate effective for the date the payment was due, as reported by the Wall Street Journal. If the payment is still not received [*] after its due date, the interest rate will increase to [*].

ARTICLE 6

DEVELOPMENT AND MARKETING

6.1 Development and Commercialization. Licensee will use Commercially Reasonable Efforts to develop, seek Approval for and Commercialize [*], including KOS-2187, and in the event that [*], develop, seek Approval for and Commercialize [*], the manufacture, use or sale of which is covered by a Valid Claim. Licensee’s initial development plan for KOS-2187 is attached as Exhibit B. Licensee will have the sole authority and discretion to modify the development plan and to make all decisions relating to Licensed Product development and Commercialization, including termination.

6.2 Development Information Exchange. It is the parties’ intent that there will be open communications between the Parties to discuss the development of Licensed Products. [*] the Parties shall meet to review and discuss (a) past, current and anticipated development and regulatory activities with respect to Licensed Products, including without limitation the then current development plans and projected timing for the milestone events listed in Section 3.2, and (b) the status of prosecution and maintenance of Kosan Patent Rights. Development information exchange meetings shall be held at mutually agreeable times and at least [*] per calendar year shall be in person at a location to be designated by each Party in turn in Sandwich, UK, Nagoya, Japan, California, US or another location agreed by the Parties. Licensee and Kosan shall each bear all expenses of their respective representatives at development information exchange meetings. Licensee’s development lead for the Licensed Product will actively participate in each development information exchange meeting. [*], shall also be available at reasonable times to answer questions Kosan may have between development information exchange meetings.

6.3 Supply of Compound by Kosan. If requested by Licensee, Kosan shall deliver to Licensee or designee [*] within thirty (30) days after such request. If

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requested by Licensee in writing within sixty (60) days after the Effective Date, Kosan [*] within thirty (30) days after the request by Licensee. Title and risk of loss of Bulk KOS-2187 and compounds within the Kosan Compound Library shall [*]. If requested by Licensee, Kosan will use reasonable efforts to obtain the consent of its Third Party manufacturer for KOS-2187 in order for Kosan to assign its rights under the manufacturing agreement with that manufacturer dated [*] with respect to manufacture of KOS-2187.

6.4 Research and Development Collaboration. In order to transition the continued research, Kosan Know-How, and initiate Phase I development of KOS-2187, the Parties will agree [*] to the Joint Research and Development Plan, as may be amended or supplemented from time to time by the Parties (the “Joint Research and Development Plan. The agreed elements of the Joint Research and Development Plan are attached as Exhibit C. If the Parties are unable to agree on the Joint Research and Development Plan, Licensee shall have the right to make any final decisions relating to development activities. Kosan shall use commercially reasonable efforts to conduct, on behalf of Licensee, the research and development activities set forth in the Joint Research and Development Plan. In conducting the Joint Research and Development Plan, Kosan shall comply with all applicable laws, regulations and generally accepted principles of good clinical practice. Licensee will pay Kosan its reasonable costs, as agreed in advance by the Parties, for its work under the Joint Research and Development Plan. Such payments shall be made on a quarterly basis within sixty (60) days after receipt of Kosan’s invoice therefor. Any taxes or withholding on the payments to be made by Licensee under this Section 6.4 (other than taxes on Kosan’s income) shall be borne by Licensee. Any invention covering the manufacture, use or sale of a compound within the Kosan Compound Library conceived or reduced to practice by employees or agents of Kosan or Licensee in performance of the Joint Research and Development Plan shall be [*] owned by [*], such inventions shall [*] and [*]. All data and information generated in the performance of the Joint Research and Development Plan shall be owned by [*] and shall be considered [*] Confidential Information, subject to the exceptions set forth in Section 10.3. Except for accrued obligations, and unless otherwise agreed by the Parties, the Parties’ obligations under the Joint Research and Development Plan shall terminate upon Commencement of the first Phase II trial for Licensed Product. In the event Licensee decides to initiate development activities with respect to a compound within the Kosan Compound Library other than KOS-2187 during the term of this Agreement, Licensee shall notify Kosan, and the Parties shall discuss whether Licensee is interested in having Kosan assist in any such activities under an amended Joint Research and Development Plan. In the event Kosan undergoes a Change of Control, Licensee shall have the right to terminate the Joint Research and Development Plan upon thirty days notice. Change of Control means that any of the following has occurred (i) a pharmaceutical company with sales of greater than $1 billion per year (“Large Pharmaceutical Company”) becomes the beneficial owner, directly or indirectly, of fifty percent or more of the voting stock of Kosan; (ii) Kosan enters into agreement with a Large Pharmaceutical Company providing for the sale of substantially all of Kosan’s assets; or (iii) Kosan enters into a merger, reorganization or consolidation agreement or other similar transaction with a Large Pharmaceutical Company.

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ARTICLE 7

PATENT RIGHTS

7.1 Ownership, Prosecution and Maintenance of Kosan Patent Rights in the Territory, Except in the US. Within thirty (30) days of the Effective Date, Kosan shall execute an assignment transferring all of Kosan’s right, title and interest in and to the Kosan Patent Rights to Licensee in every country in the Territory except the US (“Ex-US Kosan Patent Rights”). Licensee shall have the right, but not the obligation, to prosecute any and all patent applications within the Ex-US Kosan Patent Rights, including but not limited to, the right to conduct interferences, oppositions, reissue proceedings and reexaminations, to obtain patents thereon, and to maintain all patents included therein. The prosecution and maintenance of the Ex-US Kosan Patent Rights may be performed by outside counsel of Licensee’s choosing. Kosan’s comments regarding the choice of such outside counsel shall be considered, but Licensee’s decision in this regard shall be final. Kosan will not file any additional patents claiming the manufacture, use or sale of any compound within the Kosan Compound Library, unless requested by Licensee. Licensee shall be responsible for one hundred percent (100%) of expenses incurred in preparing, filing, prosecuting and maintaining the Ex-US Kosan Patent Rights. Licensee shall keep Kosan fully informed in a timely manner, and, as is reasonably practicable, of the progress regarding the prosecution of each patent application included within the Ex-US Kosan Patent Rights. Kosan shall have the right to review all pending patent applications and other proceedings, and to make recommendations to Licensee regarding the prosecution of such patent applications; provided that all final decisions regarding the prosecution and maintenance of such Ex-US Kosan Patent Rights shall be made by Licensee.

7.2 Discontinuance/Abandonment. Notwithstanding Section 7.1, Licensee shall have the right to discontinue the prosecution of any patent application, or to abandon any patent, on a country-by-country basis, encompassed within the Ex-US Kosan Patent Rights. The cancellation or amendment of a claim or claims during the prosecution of a patent application in a country within the Ex-US Kosan Patent Rights shall not constitute a discontinuance or abandonment under this section, provided that such cancellation or abandonment does not prejudice the ability to obtain granted claims to the cancelled subject matter in a related continuation, divisional, or other application in such country. If Licensee decides to discontinue the prosecution of any patent application or to abandon any patent within the Ex-US Kosan Patent Rights in any country, Licensee shall inform Kosan at least sixty (60) days prior to such discontinuance and Kosan shall be given the opportunity to prosecute such patent application and/or maintain such patent at its expense prior to the date that such discontinuance would otherwise take effect. Kosan shall advise Licensee in writing of its decision regarding the opportunity to prosecute and/or maintain such application or

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patent within thirty (30) days of the date of discontinuance and in the absence of a written decision from Kosan, Licensee shall have the right to discontinue or abandon such application or patent. In the event Kosan timely elects to prosecute and maintain such patent or patent application, Licensee shall execute an assignment transferring ownership of the patent or patent application to Kosan in each such country. Effective upon Kosan’s election to prosecute and maintain any patent or patent application in a particular country, Kosan may, in its sole discretion, elect, by written notice to Licensee, to exclude such patent or patent application from the Kosan Patent Rights under this Agreement.

7.3 Status of Ex-US Kosan Patent Rights.

(a) Initial. As of the Effective Date, Kosan shall advise Licensee as to the current status of any patent applications and patents included within the Ex-US Kosan Patent Rights, and, to the extent it has not previously done so, promptly make available to Licensee all documentation relating to such patent applications and patents, including, but not limited to, copies of all patent applications, relevant prior art, search reports, official actions and examination reports, and all correspondence to and from local agents or attorneys responsible for local prosecution of such applications.

(b) Annual. Within thirty (30) days after the end of each calendar year, Licensee shall: (i) advise Kosan as to the then-current status of any patent applications or patents within the Ex-US Kosan Patent Rights specifically relevant to any Licensed Product; and (ii) to the extent Kosan requests, make available to Kosan materially relevant documentation relating to such patent applications and patents, including, but not limited to, copies thereof.

(c) Notices. Kosan will execute and file at Licensee’s expense those notices and other filings as Licensee shall reasonably request be made, from time to time with any patent office or patent agency in the Ex-US Territory, and in all other respects shall reasonably cooperate with Licensee, to affect an orderly transfer of ownership and affect the further prosecution and maintenance of the Ex-US Kosan Patent Rights granted to Licensee under this Agreement.

7.4 Ownership, Prosecution and Maintenance of Kosan Patent Rights in the US

Prior to the assignment under Section 7.7, Kosan shall have the right to prosecute any and all patent applications within Kosan Patent Rights within the US (“US Kosan Patent Rights”) including but not limited to, the right to conduct interferences, oppositions, reissue proceedings and reexaminations, to obtain patents thereon, and to maintain all patents included therein. The prosecution and maintenance of US Kosan Patent Rights may be performed by outside counsel of Kosan’s choosing and approved by Licensee, which approval shall not be unreasonably withheld or delayed. Licensee hereby approves [*] as outside counsel. Licensee shall be responsible for one hundred percent (100%) of expenses incurred by Kosan in preparing, filing, prosecuting and maintaining the US Kosan Patent Rights. Kosan shall keep Licensee fully informed in a

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timely manner, and as is reasonably practicable, of the progress regarding the prosecution of each patent application included within the US Kosan Patent Rights. Licensee shall have the right to review all pending patent applications and other proceedings, and to make recommendations to Kosan regarding the prosecution of such patent applications; provided that all final decisions regarding the prosecution and maintenance of such US Kosan Patent Rights shall be made by Kosan.

7.5 Discontinuance/Abandonment. Notwithstanding Section 7.4, Kosan shall have the right to discontinue the prosecution of any patent application, or to abandon any patent, encompassed within the US Kosan Patent Rights. The cancellation or amendment of a claim or claims during the prosecution of a patent application within the US Kosan Patent Rights shall not constitute a discontinuance or abandonment under this section, provided that such cancellation or amendment does not prejudice the ability to obtain granted claims to the cancelled subject matter in a related continuation, divisional, or other US patent application. If Kosan decides to discontinue the prosecution of any patent application or to abandon any patent within the US Kosan Patent Rights, Kosan shall inform Licensee at least sixty (60) days prior to such discontinuance and Licensee shall be given the opportunity to prosecute such patent application and/or maintain such patent at its expense prior to the date that such discontinuance would otherwise take effect. Licensee shall advise Kosan in writing of its decision regarding the opportunity to prosecute and/or maintain such application or patent within thirty (30) days of the date of such discontinuance and in the absence of a written decision from Licensee, Kosan shall have the right to discontinue or abandon such application or patent. Effective upon Licensee’s election to prosecute and maintain any patent or patent application in the US, Licensee may, in its sole discretion, elect, by written notice to Kosan, to exclude such patent or patent application from the Kosan Patent Rights under this Agreement.

7.6 Status of US Kosan Patent Rights.

(a) Initial. As of the Effective Date, Kosan shall advise Licensee as to the current status of any patent applications and patents included within the US Kosan Patent Rights, and, to the extent it has not previously done so, promptly make available to Licensee all documentation relating to such patent applications and patents, including, but not limited to, copies of all patent applications, relevant prior art, search reports, official actions and examination reports, and all correspondence to and from local agents or attorneys responsible for local prosecution of such applications.

(b) Annual. Within thirty (30) days after the end of each calendar year, Kosan shall: (i) advise Licensee as to the then-current status of any patent applications or patents within the US Kosan Patent Rights specifically relevant to any Licensed Product; and (ii) to the extent Licensee requests, make available to Licensee materially relevant documentation relating to such patent applications and patents, including, but not limited to, copies thereof.

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7.7 Assignment of US Kosan Patent Rights. Upon [*] for a Licensed Product, Kosan shall execute an assignment transferring all of Kosan’s right, title and interest in and to the US Kosan Patent Rights to Licensee (“Assigned US Kosan Patent Rights”). Thereafter, Licensee shall have the right to prosecute and maintain any and all patent applications within the Assigned US Kosan Patent Rights, including but not limited to, the right to conduct interferences, oppositions, reissue proceedings and reexaminations, to obtain patents thereon, and to maintain all patents included therein. The prosecution and maintenance of the Assigned US Kosan Patent Rights may be performed by outside counsel of Licensee’s choosing. Kosan’s comments regarding the choice of such outside counsel shall be considered, but Licensee’s decision in this regard shall be final. Kosan will not file any additional patents claiming the manufacture, use or sale of any compound within the Kosan Compound Library, unless requested by Licensee. Licensee shall be responsible for one hundred percent (100%) of expenses incurred in preparing, filing, prosecuting and maintaining the Assigned US Kosan Patent Rights. Licensee shall keep Kosan fully informed in a timely manner, and as is reasonably practicable, of the progress regarding the prosecution of each patent application included within the Assigned US Kosan Patent Rights. Kosan shall have the right to review all pending patent applications and other proceedings, and to make recommendations to Licensee regarding the prosecution of such patent applications; provided that all final decisions regarding the prosecution and maintenance of such Assigned US Kosan Patent Rights shall be made by Licensee.

7.8 Discontinuance/Abandonment. Subsequent to the assignment by Kosan to Licensee of Assigned US Kosan Patent Rights pursuant to section 7.7, the discontinuance/abandonment of such Assigned US Kosan Patent Rights by Licensee, and the opportunity of Kosan to elect to continue the prosecution and maintenance of such discontinued/abandoned Assigned US Kosan Patent Rights, shall be governed as in Section 7.2 with respect to Ex-US Kosan Patent Rights.

7.9 Patent Term Extension. Licensee shall have the exclusive right and obligation to seek, at Licensee’s expense, patent term extensions or supplemental patent protection, including supplementary protection certificates, in any country in the Territory in relation to the Licensed Products. Kosan and Licensee shall cooperate in connection with all such activities, and Licensee, its agents and attorneys will give due consideration to all timely suggestions and comments of Kosan regarding any such activities; provided that all final decisions shall be made by Licensee.

7.10 Orange Book Listings. With respect to filings in the FDA Orange Book (and foreign equivalents) for issued patents for a Licensed Product, Licensee shall be solely responsible at its expense for fulfilling its obligations under applicable law to list any applicable Kosan Patent Rights in a timely manner and make all applicable filings regarding the Kosan Patent Rights required to be filed by it under applicable law. Licensee will be solely responsible for any such filings and listings, and for any and all decisions with respect to such filings and listings.

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7.11 Notification of Patent Certification.

(a) Notice. If a Party becomes aware of any certification filed pursuant to 21 U.S.C. § 355(b)(2)(A) or 355(j)(2)(A)(vii)(IV), or any notice under any future analogous provisions of United States Law relating to regulation or approval of drug products (or any amendment or successor statute thereto) claiming that any Kosan Patent Rights covering a Licensed Product in the Field, are invalid or otherwise unenforceable, or that infringement will not arise from the manufacture, use, import or sale of a product by a Third Party (a “Paragraph IV Claim”), such Party shall promptly notify the other Party in writing within five (5) Business Days after its receipt thereof.

(b) Control of Response. Licensee shall have the first right, but not the obligation, to initiate patent infringement litigation for such Paragraph IV Claim, at its own expense. If Licensee elects not to assume control over enforcing any Paragraph IV Claim, Licensee shall notify Kosan as soon as practicable but in any event not later than ten (10) days before the first action required to enforce or preserve such Paragraph IV Claim so that Kosan may, but shall not be required to, assume sole control over enforcing such Paragraph IV Claim using counsel of its own choice. The Parties shall reasonably cooperate in the prosecution of any Paragraph IV Claim so long as such Paragraph IV Claim relates to Kosan Patent Rights, and share any damages, settlements, accounts of profits, or other financial compensation recovered from a Third Party as a result of such prosecution, as set forth in Section 8.2; provided that the Party controlling such Paragraph IV Claim shall promptly reimburse all out-of-pocket expenses (including reasonable counsel fees and expenses) actually incurred by the other Party in connection with such cooperation.

7.12 Limitation on Patent Actions. Neither Party shall be required to take any action pursuant to Sections 7.9 to 7.11 hereof that such Party reasonably determines in its sole judgment and discretion conflicts with or violates any court or government order or decree that such Party is then subject to or otherwise may create legal liability on the part of such Party.

7.13 Kosan License. Notwithstanding the grant in Section 2.1, Kosan shall retain an exclusive, worldwide, fully paid-up license, with the right to sublicense, under the Kosan [*] Patent Rights assigned to Licensee pursuant to this Article 7 to make, have made, use, offer to sell, sell and import any products that do not have utility as a motilin agonist.

ARTICLE 8

INFRINGEMENT

8.1 Applicability. The provisions of this Article 8 shall govern the Parties’ rights and obligations, as between themselves, with respect to actions against Third Parties for infringement of the Kosan Patent Rights or misappropriation of the Kosan Know-How licensed under this Agreement.

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8.2 Third Party Infringement.

(a) Notice. Each Party shall promptly report in writing to the other Party during the Term any known or suspected (i) infringement of any of the Kosan Patent Rights, or (ii) unauthorized use or misappropriation of any of the Kosan Know-How (an “Infringement Claim”) of which such Party becomes aware, and shall provide the other Party with all available evidence supporting such known or suspected infringement or unauthorized use.

(b) Initial Right to Enforce. Licensee shall have the first right, but not the obligation, to initiate a suit or take other appropriate action that it believes is reasonably required to protect (i.e., prevent or abate actual or threatened infringement or misappropriation of) or otherwise enforce the Kosan Patent Rights relating to a Licensed Product in the Field in the Territory at its expense. Any suit by Licensee shall be either in the name of Kosan or its Affiliate, the name of Licensee or its Affiliate, or jointly by Licensee, Kosan and their respective Affiliates, as may be required by the Law of the forum. For this purpose, Kosan shall execute such legal papers and cooperate in the prosecution of such suit as may be reasonably requested by Licensee; provided that Licensee shall promptly reimburse all out-of-pocket expenses (including reasonable counsel fees and expenses) actually incurred by Kosan in connection with such cooperation.

(c) Step-In Right. If Licensee does not initiate a suit or take other appropriate action that it has the initial right to initiate or take pursuant to this Section 8.2, then Kosan may, in its discretion, provide Licensee with notice of Kosan’s intent to initiate a suit or take other appropriate action. If Kosan provides such notice and Licensee does not initiate a suit or take such other appropriate action within thirty (30) days after receipt of such notice from Kosan, then Kosan shall have the right to initiate a suit or take other appropriate action that it believes is reasonably required to protect the Kosan Patent Rights. Any suit by Kosan shall be either in the name of Kosan or its Affiliate, the name of Licensee or its Affiliate, or jointly by Licensee, Kosan and their respective Affiliates, as may be required by the Law of the forum. For this purpose, Licensee shall execute such legal papers and cooperate in the prosecution of such suit as may be reasonably requested by Kosan; provided that Kosan shall promptly reimburse all out-of-pocket expenses (including reasonable counsel fees and expenses) actually incurred by Licensee in connection with such cooperation.

(d) Conduct of Certain Actions; Costs. The Party initiating suit shall have the sole and exclusive right to select counsel for any suit initiated by it pursuant to this Section 8.2. The initiating Party shall assume and pay all of its own out-of-pocket costs incurred in connection with any litigation or proceedings initiated by it pursuant to this Section 8.2, including the fees and expenses of the counsel selected by it. The other Party shall have the right to participate and be represented in any such suit by its own counsel at its own expense.

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(e) Recoveries. In the event Licensee assumes control over enforcing any Infringement Claim, Kosan shall be entitled to receive [*] of any damages, settlements, accounts of profits, or other financial compensation recovered by Licensee from a Third Party based upon any such Infringement Claim after deducting Licensee’s actual out-of-pocket expenses (including reasonable counsel fees and expenses) incurred in pursuing such Infringement Claim, and Licensee may retain the balance. In the event Kosan assumes control over enforcing any Infringement Claim, Licensee shall be entitled to receive [*] of any damages, settlements, accounts of profits, or other financial compensation recovered from a Third Party based upon any such Infringement Claim after deducting Kosan’s actual out-of-pocket expenses (including reasonable counsel fees and expenses) incurred in pursuing such Infringement Claim, and Kosan may retain the balance.

(f) Patent Invalidity Claim. Each of the Parties shall promptly notify the other in the event of any legal or administrative action by any Third Party against a Kosan Patent Right of which it becomes aware, including any nullity, revocation, reexamination or compulsory license proceeding. Licensee shall have the first right, but not the obligation, to defend against any such action involving a Kosan Patent Right, in its own name, and the costs of any such defense shall be at Licensee’s expense. Kosan, upon request of Licensee, agrees to join in any such action and to cooperate reasonably with Licensee; provided that Licensee shall promptly reimburse all out-of-pocket expenses (including reasonable counsel fees and expenses) actually incurred by Kosan in connection with such cooperation. If Licensee does not defend against any such action involving such Kosan Patent Right, then Kosan shall have the right, but not the obligation, to defend such action and any such defense shall be at Kosan’s expense. Licensee, upon request of Kosan, agrees to join in any such action and to cooperate reasonably with Kosan; provided that Kosan shall promptly reimburse all out-of-pocket expenses (including reasonable counsel fees and expenses) actually incurred by Licensee in connection with such cooperation.

ARTICLE 9

REPRESENTATIONS AND WARRANTIES

9.1 Representations and Warranties of Kosan. Kosan hereby represents and warrants to Licensee as of the Effective Date that:

(a) Kosan is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, with the corporate power and authority to enter into this Agreement and to perform its obligations hereunder. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all requisite corporate action on the part of Kosan. This Agreement has been duly executed and delivered by Kosan and constitutes the valid, binding and enforceable obligation of Kosan, subject to applicable bankruptcy, reorganization, insolvency, moratorium and other laws affecting creditors’ rights generally from time to time in effect and to general principles of equity.

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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(b) Kosan is not subject to, or bound by, any provision of:

(i) any articles or certificates of incorporation or by-laws;

(ii) any mortgage, deed of trust, lease, note, shareholders’ agreement, bond, indenture, license, permit, trust, custodianship, or other instrument, agreement or restriction; or

(iii) any judgment, order, writ, injunction or decree or any court, governmental body, administrative agency or arbitrator;

that would prevent, or be violated by, or under which there would be a default as a result of, nor is the consent of any Third Party required for, the execution, delivery and performance by Kosan of this Agreement and the obligations contained herein. The execution and delivery of this Agreement by Kosan and the performance by Kosan will not violate any laws or order of any court or government authority.

(c) [*]

(d) [*]

(e) To the best of Kosan’s knowledge, [*].

(f) [*].

(g) None of the Kosan Patent Rights [*]

(h) The Bulk KOS-2187 transferred to Licensee [*].

(i) [*]

9.2 Representations and Warranties of Licensee. Licensee hereby represents and warrants to Kosan as of the Effective Date that:

(a) Licensee is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its organization, with the corporate power and authority to enter into this Agreement and to perform its obligations hereunder. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all requisite corporate action on the part of Licensee. This Agreement has been duly executed and delivered by Licensee constitutes the valid, binding and enforceable obligation of each of them, subject to applicable bankruptcy, reorganization, insolvency, moratorium and other laws affecting creditors’ rights generally from time to time in effect and to general principles of equity.

(b) Licensee is not subject to, or bound by, any provision of:

(i) any articles or certificates of incorporation or by-laws;

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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(ii) any mortgage, deed of trust, lease, note, shareholders’ agreement, bond, indenture, license, permit, trust, custodianship, or other instrument, agreement or restriction, or

(iii) any judgment, order, writ, injunction or decree or any court, governmental body, administrative agency or arbitrator,

that would prevent, or be violated by, or under which there would be a default as a result of, nor is the consent of any Third Party required for, the execution, delivery and performance by Licensee of this Agreement and the obligations contained herein.

9.3 Disclaimer of Warranties. EXCEPT AS SET FORTH EXPRESSLY IN THIS AGREEMENT, EACH PARTY HEREBY EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES OF ANY KIND, EXPRESSED OR IMPLIED, INCLUDING WITHOUT LIMITATION THE WARRANTIES OF DESIGN, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NONINFRINGEMENT OF THE INTELLECTUAL RIGHTS OF THIRD PARTIES. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, BOTH PARTIES ACKNOWLEDGE AND DISCLAIM ANY WARRANTY AS TO REGULATORY APPROVAL, PRODUCT INTRODUCTION, SAFETY, USEFULNESS OR COMMERCIAL SUCCESS OF ANY LICENSED PRODUCT.

ARTICLE 10

CONFIDENTIALITY

10.1 Treatment of Confidential Information. Except as otherwise provided in this Article 10, during the term of this Agreement and for a period of [*] thereafter, each Party agrees to keep confidential all of the other Party’s Confidential Information that is disclosed to it or its Affiliates. Confidential Information shall be defined as information marked confidential or if disclosed orally, summarized in writing and provided to the receiving Party within thirty days after disclosure. Each Party agrees to preserve and protect the Confidential Information to the same extent it protects its own confidential information. Each Party will use the Confidential Information only as permitted under this Agreement, and will not disclose Confidential Information to any third parties.

10.2 Right to Disclose. To the extent it is reasonably necessary or appropriate to fulfill its obligations or exercise its rights under this Agreement or any rights which survive termination or expiration hereof, Licensee and Kosan may disclose Confidential Information to their respective Affiliates, sublicensees, consultants, outside contractors, clinical investigators or other Third Parties that need to know such information, provided that such entities or persons agree in writing (a) to keep the Confidential Information confidential for [*] after the date of disclosure to such entities and to the same extent as Licensee and Kosan are required to keep the Confidential Information confidential and (b) to use the Confidential Information only for such purposes as Licensee and Kosan are entitled to use the Confidential Information. Each Party or its Affiliates or

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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sublicensees may disclose such Confidential Information to government or other regulatory authorities to the extent that such disclosure (i) is reasonably necessary to obtain patents or authorizations to conduct clinical trials with or to market commercially the Licensed Products or to prosecute or defend litigation; provided that this clause (i) shall only apply with respect to Kosan in the event of a reversion under Section 12.8; (ii) is otherwise legally required; or (iii) is permitted pursuant to Section 15.7; provided that if a Party is legally required to make such a disclosure under (ii), it shall first have given prompt notice to the other Party hereto to enable it to seek any available exemptions from or limitations on such a disclosure, or to apply for confidential treatment or a protective order.

10.3 Release From Restrictions. The foregoing obligations in respect of disclosure and use of Confidential Information shall not apply to any part of such Confidential Information that the non-disclosing Party, or its Affiliates (all collectively referred to as the “Receiving Party”) can demonstrate by contemporaneously prepared competent evidence:

(a) is or becomes part of the public domain other than by acts of the Receiving Party in contravention of this Agreement;

(b) is disclosed to the Receiving Party or its Affiliates or sublicensees by a Third Party who had the right to disclose such Confidential Information to the Receiving Party; or

(c) prior to disclosure under this Agreement, was already in the possession of the Receiving Party or its Affiliates or sublicensees, provided such Confidential Information was not obtained, directly or indirectly, from the other Party under this Agreement.

10.4 Confidentiality of Agreement. Except as otherwise required by law or the terms of this Agreement or mutually agreed upon by the Parties hereto, each Party shall treat as confidential the terms and conditions of this Agreement, except that Kosan and Licensee may each disclose such terms and conditions of this Agreement and the achievement of milestone events, and payments, to its Affiliates and sublicensees, and current and potential investors, provided that the recipient has entered into a confidentiality agreement in accordance with Section 10.2. Furthermore, each Party in connection with its status as a public company may disclose the terms to the extent required by the federal securities laws, and provided, that such Party shall seek confidential treatment of key business terms contained in this Agreement, including but not limited to the royalty rates and the milestone payments. Each Party shall provide the other Party any such disclosure or filing in advance and include any reasonable and timely suggestions, advice and input from the other Party with respect to seeking confidential treatment of key business terms contained in the Agreement. In addition, the Parties have agreed to the publicity-related provisions that are set forth in Section 15.7.

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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10.5 Return of Confidential Information. Upon termination of this Agreement by either Party for any reason, the rights of each Party to retain and use the Confidential Information of the other shall be as provided in Article 12, provided, however, that each Party may retain a single archival copy of the other Party’s Confidential Information solely for the purpose of determining the extent of disclosure of Confidential Information hereunder and assuring compliance with the surviving provisions of this Agreement.

ARTICLE 11

REGULATORY

11.1 Assignment of Regulatory Filings. At Licensee’s request, Kosan shall transfer and assign to Licensee, all Regulatory Filings owned by Kosan related to KOS-2187 (the “Transferred Regulatory Filings”), including but not limited to any CTA regarding KOS-2187, and copies of all written correspondence with Regulatory Agencies regarding KOS-2187. If requested by Licensee, Kosan agrees to perform within thirty (30) days of the Effective Date all such acts, and execute such further instruments, documents or certificates, as may be required for the Transferred Regulatory Filings to be transferred and assigned more effectively to Licensee. Effective upon such date that Kosan transfers to Licensee each Transferred Regulatory Filing officially with the applicable Regulatory Agency; Licensee shall and hereby does undertake all regulatory responsibilities, obligations and risks related to such Regulatory Filing. However, both Parties agree to work together to ensure a smooth transfer of Transferred Regulatory Filings and continuous dialog with FDA or foreign equivalent.

ARTICLE 12

TERM AND TERMINATION

12.1 Term. This Agreement shall become binding upon the Effective Date and shall continue thereafter in full force and effect, unless terminated sooner pursuant to Sections 12.2, 12.3 or 12.4, until it expires upon the expiration of Licensee’s obligation to pay royalties to Kosan hereunder (such expiration of the term of this Agreement without termination, “Expiration”). The Parties acknowledge and agree that Licensee shall have no obligation to pay Kosan any royalties after the expiration of the applicable periods referred to in Section 4.1 hereof for Net Sales accruing after such periods.

12.2 Bilateral Termination Rights. Either Party may terminate this Agreement upon (i) the bankruptcy, liquidation or dissolution of the other Party (without further action by the Party); or (ii) the filing of any voluntary petition for bankruptcy, dissolution, liquidation or winding-up of the affairs of the other Party which is not dismissed within one hundred twenty (120) days after the date on which it is filed or commenced.

12.3 Licensee’s Right to Terminate.

(a) For Material Breach at any Time. Licensee may terminate this Agreement, as a whole, at any time if (i) Kosan materially breaches the Agreement and (ii) such material breach is not cured by Kosan within [*] after Licensee provides Kosan with written notice of such breach, or, [*].

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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(b) For Convenience. Licensee may terminate this Agreement for convenience, upon [*] prior written notice to Kosan. [*]

12.4 Kosan’s Right to Terminate. Kosan may terminate this Agreement, as a whole, at any time if (i) Licensee materially breaches the Agreement and (ii) such material breach is not cured by Licensee within [*] after Kosan provides Licensee with written notice of such breach. [*]

12.5 General Effect of Expiration or Termination. Upon Expiration or termination of this Agreement for any reason, all rights and obligations of the Parties hereunder shall cease, except as explicitly provided for below in this Article 12 or elsewhere in this Agreement. Upon Expiration or termination, [*]. Expiration or termination of this Agreement shall not relieve the Parties of any obligation accruing prior to such Expiration or termination.

12.6 Rights Upon Expiration or Any Termination.

(a) Upon Expiration of this Agreement in any country, Licensee shall continue to have a royalty-free, perpetual right to Commercialize Licensed Products in the Field and Territory, as the license granted Licensee in Section 2.1 shall automatically become royalty-free, non-exclusive and perpetual in the country of Expiration.

(b) Upon Expiration or termination of this Agreement, the following Sections and Articles shall survive such expiration or termination, subject to any later termination dates provided for therein: Sections 5.3, 5.5 and 5.6 and Articles 10, 12, 13 and 15.

12.7 Rights Upon Certain Licensee Termination.

Upon termination by Licensee pursuant to Section 12.2 or for Kosan’s uncured material breach of this Agreement pursuant to Section 12.3(a), the following Sections shall survive such termination in addition to the Sections and Articles set forth to survive in Section 12.6(b): Sections 2.1 and 3.2 [*]; Article 4 [*] and all other Sections and Articles governing the mechanics of milestone and royalty payments hereunder). The licenses granted by Kosan to Licensee shall [*] if Licensee terminates under Section 12.2 or 12.3(a).

12.8 Rights Upon Kosan Termination and Other Licensee Terminations. (i) If Kosan terminates this Agreement pursuant to Section 12.2 or Section 12.4, the following provisions will apply. (ii) If Licensee terminates for convenience pursuant to Section 12.3(b) [*], then the following provisions will apply [*].

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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(a) Kosan Patent Rights. Licensee will assign to Kosan all of Licensee’s right, title and interest in the Kosan Patent Rights within thirty (30) days after termination.

(b) [*] Licensed Product. In the event of a termination of this Agreement by Kosan pursuant to Section 12.4 or 12.2 or if Licensee terminates for convenience pursuant to Section 12.3(b), and if [*] Licensee shall [*].

(c) Licensed Product other than an Approved Licensed Product. The following provisions in paragraphs (d) through (j) will apply to each Reverted Product [*].

(d) Assignment and Technology License. (i) Licensee will grant to Kosan, effective upon such termination, an irrevocable, perpetual and exclusive license under any patent or patent application owned or Controlled by Licensee that claims the composition of matter or method of use of the Reverted Product to (A) develop, use, sell, offer for sale, import and/or export Reverted Products and (B) make and have made Reverted Products for such development, use, sale, offering for sale, importation and/or exportation. Such license shall be sublicenseable by Kosan through one or more tiers of sublicensees without Licensee’s consent. [*]

In all cases where patents or patent rights covered by this Section 12.8(d) are licensed to Licensor by a Third Party, as a condition precedent for a license to be granted to Kosan pursuant to this Section 12.8(d), Kosan shall be required to agree to pay any payments, including royalties on sales by Kosan or its sublicensees, that accrue and become payable to such Third Party licensor after the effective date of the license to Kosan and provided that to the extent any patents and patent applications are licensed to Kosan on a non-exclusive basis, Kosan’s payment obligations to the Third Party shall be on a pro rata basis with any other licensees thereof, including Licensee. Licensee will not be obligated to grant sublicenses under this Section 12.8(d) if Licensee is prevented from granting such sublicenses under its agreements with its licensors, but shall be required to use reasonable efforts to obtain permission to do so from any such licensors.

(e) Regulatory Filings. Licensee shall assign (or cause to be assigned) to Kosan any Regulatory Filings of Licensee or its sublicensee with respect to any Reverted Product , and take such actions and execute such other instruments, assignments and documents as may be necessary to affect the transfer of rights thereunder to Kosan within sixty (60) days after termination. Licensee shall, in each sublicense that it grants hereunder, require the sublicensee to transfer any Regulatory Filings with respect to any Reverted Product in the event of a termination of this Agreement or such sublicense, to Kosan if this Agreement does not remain in effect, and to Licensee if only such sublicense terminates.

(f) Data Disclosure. In accordance with Section 12.8(h), Licensee will transfer the Product Documents to Kosan for each Reverted Product within sixty (60) days after termination. Licensee will not be liable for any inaccuracy or incompleteness

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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of the Product Documents. Product Documents means (a) a copy of the [*], (b) copies of completed and final [*], (c) copies of all documents filed to the IND, NDA and foreign equivalents, (d) [*] the investigator filing package for each clinical study of the Reverted Product, (e) copies of correspondence with the FDA and equivalent foreign agencies and (f) [*] information [*] is relevant to safety of the Reverted Product.

(g) Remaining Quantities. Upon Kosan’s request, Licensee shall negotiate in good faith for the transfer to Kosan or its designee all quantities of Reverted Products in the possession of the Licensee.

(h) Technology Transfer. The appropriate technical teams at Kosan and Licensee will meet to plan technical transfer for the Reverted Products as follows: (a) Licensee’s project lead(s) for the Reverted Products will meet with representatives from Kosan for not more than [*] to [*] with respect to Reverted Product’s pre-clinical and clinical development and establish a plan for the transfer for technology with respect to Reverted Products; (b) Licensee will allocate [*] appropriately qualified FTEs to work with Kosan to [*] to Kosan over a total period not to exceed [*]; (c) [*]; and (d) the technical transfer must be completed within [*] of the initial technical transfer planning meeting.

(i) [*]

(j) Kosan Covenant. Kosan shall not conduct any clinical trials for any Reverted Product if the clinical development of such Reverted Product was terminated by Licensee because of either (a) FDA or other Regulatory Agency action or advice that due to an unfavorable patient benefit/risk balance, further development of the Licensed Product is not reasonable or (b) [*]

(k) Bankruptcy. All rights and licenses granted under or pursuant to this Agreement by Kosan are, and shall otherwise be deemed to be, for purposes of Article 365(n) of the U.S. Bankruptcy Code, licenses of rights to “intellectual property” as defined under Article 101 of the U.S. Bankruptcy Code. The Parties agree that Licensee, as licensee of such rights under this Agreement, shall retain and may fully exercise all of its rights and elections under the U.S. Bankruptcy Code. The Parties further agree that, in the event of the commencement of any proceeding by or against Kosan under the U.S. Bankruptcy Code, Licensee shall be entitled to a complete duplicate of (or complete access to, as appropriate) any such intellectual property and all embodiments of such intellectual property, and, if not already in its possession, Kosan shall promptly deliver to Licensee all such intellectual property and all embodiments of such intellectual property (a) upon Licensee’s request any time following commencement of any such proceeding, unless Kosan elects to continue to perform all of its obligations under this Agreement or (b) if not delivered under (a) above, upon Licensee’s request any time following the rejection of this Agreement by or on behalf of Kosan.

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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ARTICLE 13

INDEMNIFICATION

13.1 Indemnification by Licensee. Subject to Section 13.3 hereof, Licensee hereby agrees to defend, indemnify and hold harmless Kosan and its Affiliates and licensors, and their directors, officers, employees and agents (“Kosan Indemnitees”) from and against any liabilities, losses, fines, penalties, damages, expenses (including reasonable attorney’s fees and expenses and expenses incurred in connection with the enforcement of this provision), actions or claims brought or threatened after the Effective Date of this Agreement and which arise out of claims against Kosan brought by Third Parties after the Effective Date of this Agreement, including but not limited to, any actions in contract (including breach of warranty) or tort (including negligence, strict liability or commercial torts) which arise, result from, or relate to:

(i) any breach of any of the representations or warranties of Licensee contained in Section 9.2 hereof,

(ii) the negligence, recklessness or willful misconduct of the Licensee; and

(iii) any development or Commercialization of Licensed Product including without limitation, any manufacture, storage, use or possession of Compound or Licensed Product by Licensee, its sublicensees and distributors, including without limitation any Bulk KOS-2187 or compound within the Kosan Compound Library provided by Kosan.

Items (i) through (iii) are hereinafter collectively referred to as a “Kosan Loss.” Licensee shall have no obligation to indemnify Kosan, to the extent that any Kosan Loss arises out of the negligence or willful misconduct of any Kosan Indemnitee or Kosan’s breach of this Agreement.

13.2 Indemnification by Kosan. Subject to Section 13.3 hereof, Kosan hereby agrees to indemnify and hold harmless Licensee and its sublicensees, and their directors, officers, employees and agents (“Licensee Indemnitees”) from and against any liabilities, losses, fines, penalties, damages, expenses (including reasonable attorney’s fees and expenses and expenses incurred in connection with the enforcement of this provision), actions or claims brought or threatened after the Effective Date and which arise out of claims against Licensee brought by Third Parties after the Effective Date, including but not limited to, any actions in contract (including breach of warranty) or tort (including negligence, strict liability or commercial torts) which arise, result from, or relate to:

(i) any breach of any of the representations or warranties of Kosan contained in Section 9.1 hereof,

(ii) the negligence, recklessness or willful misconduct of Kosan, its Affiliates or agents; or

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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(iii) any development or Commercialization of Reverted Product by Kosan, its Affiliates or agents including without limitation, any manufacture, storage, use or possession of Reverted Product by Kosan, its Affiliates or agents.

Items (i) through (iii) are hereinafter collectively referred to as a “Licensee Loss.” Kosan shall have no obligation to indemnify Licensee, to the extent that any Licensee Loss arises out of the negligence or willful misconduct of any Licensee Indemnitee or Licensee’s breach of this Agreement.

13.3 Indemnification Procedures With Respect to Third Party Claims.

(a) To be eligible to seek indemnification under this Article 13 in respect to a liability, loss, fine, penalty, damage, expense, action, or claim brought against such Indemnitee by a Third Party (such claim hereinafter referred to as a “Third Party Claim”), a Licensee Indemnitee or Kosan Indemnitee (each, an “Indemnitee”) shall promptly give written notice thereof to the Party from whom indemnification is sought (such Party hereinafter referred to as the “Indemnitor”) within a reasonable period of time after the assertion of such Third Party Claim by such Third Party; provided, however, that the failure to provide written notice of such Third Party Claim within a reasonable period of time shall not relieve the Indemnitor of any of its obligations hereunder, except to the extent that the Indemnitor is prejudiced by such failure.

Except for patent disputes and claims covered under Article 8, the Indemnitor shall have the right to assume the complete control of the defense, compromise or settlement of any Third Party Claim if the Indemnitor, in the reasonable judgment of the Indemnitee, has the financial resources to satisfy the amount of any judgment, the claims seek monetary judgment only, and the Indemnitor agrees in writing to satisfy and discharge the Third Party Claim. If these conditions are not met, the Indemnitee shall defend the Third Party Claim at the expense of the Indemnitor. If the conditions are met, the Indemnitor shall have the right to defend, compromise or settle the Third Party Claim (provided that no settlement of any Third Party Claim shall include any admission of wrongdoing on the part of an Indemnitee, without the prior written consent of such Indemnitee, which consent shall not be unreasonably withheld), including, at its own expense, employment of legal counsel.

The Indemnitor will not, without the prior written consent of the Indemnitee, enter into any compromise or settlement that commits the Indemnitee to take, or forbear to take, any action. The Indemnitee shall have sole authority to settle any Third Party Claim that involves non-monetary damages or equitable relief. At any time thereafter the Indemnitor shall be entitled to exercise, on behalf of the Indemnitee, any rights which may mitigate the extent or amount of such Third Party Claim; provided, however, that if the Indemnitor shall have exercised its right to assume control of such Third Party Claim, the Indemnitee (i) may, in its sole discretion and at its own expense (which expense shall not be subject to indemnification hereunder), employ legal counsel to represent it (in addition to the legal counsel employed by the Indemnitor) in any such matter, and in such event legal counsel selected by the Indemnitee shall be required to

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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confer and cooperate with such counsel of the Indemnitor in such defense, compromise or settlement for the purpose of informing and sharing information with the Indemnitor; (ii) shall, at its own expense, make available to Indemnitor those employees, officers and directors or Indemnitee whose assistance, testimony or presence is necessary or appropriate to assist the Indemnitor in evaluating and in defending any such Third Party Claim (provided, however, that any such access shall be conducted in such a manner as not to interfere unreasonably with the operations of the businesses of Indemnitee); and (iii) shall otherwise fully cooperate with the Indemnitor and its legal counsel in the investigation and defense of such Third Party Claim.

(b) If the Parties acting in good faith cannot agree as to the applicability of Section 13.1 and/or 13.2 to a particular Third Party Claim, then each Party (and its respective Indemnitees) reserves the right to conduct its own defense of such Third Party Claim and seek indemnification from the applicable Party upon its resolution.

ARTICLE 14

REGISTRATION OF LICENSE

14.1 Licensee may, at its expense, register the exclusive license granted under this Agreement in any country of, or community or association of countries in, the Territory where Commercializing a Licensed Product in such country would be covered by a Valid Claim. Kosan shall reasonably cooperate in such registration at Licensee’s expense. Upon request by Licensee, Kosan agrees promptly to execute any “short form” licenses developed in a form reasonably acceptable to both Licensee and Kosan and reasonably submitted to it by Licensee from time to time in order to effect the foregoing registration in such country. No such “short form” license shall be deemed to amend or be used to interpret this Agreement. If there is any conflict between such a license or other recordation document and this Agreement, this Agreement shall control.

ARTICLE 15

GENERAL PROVISIONS

15.1 Force Majeure. Neither Party shall be held liable or responsible to the other Party nor be deemed to have defaulted under or breached this Agreement for failure or delay in fulfilling or performing any term of this Agreement, other than an obligation to make payments hereunder, when such failure or delay is caused by or results from fire; flood; earthquake; tornado; embargo; government regulation; prohibition or intervention; war; act of war (whether war be declared or not); insurrection; act of terrorism; riot; civil commotion; strike; lockout; act of God or any other cause beyond the reasonable control of the affected Party to anticipate, prevent, avoid or mitigate (a “Force Majeure Event”) so long as the affected Party uses commercially reasonable efforts to overcome the effects of the Force Majeure Event.

15.2 Further Assurances. Each Party hereto agrees to perform such acts, execute such further instruments, documents or certificates, and provide such cooperation in proceedings and actions as may be reasonably requested by the other Party in order to carry out the intent and purpose of this Agreement, including without limitation the registration or recordation of the rights granted hereunder.

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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15.3 Severability. Both Parties hereby expressly acknowledge and agree that it is the intention of neither Party to violate any public policy, statutory or common law, rules, regulations, treaty or decision of any government agency or executive body thereof of any country or community or association of countries and specifically agree that if any word, sentence, paragraph, clause or combination thereof in this Agreement is found by a court or executive body with judicial powers having jurisdiction over this Agreement or any of the Parties hereto in a final unappealed order, to be in violation of any such provisions in any country or community or association of countries, then in such event such words, sentences, paragraphs, clauses or combination shall be inoperative in such country or community or association of countries (or reformed, for example but without limitation, to apply for a shorter period of time, such that their effect is in compliance with law) and the remainder of this Agreement shall remain binding upon the Parties hereto.

15.4 Notices. Any notice required or permitted to be given hereunder shall be in writing and shall be deemed to have been properly given if delivered in person, or if mailed by registered or certified mail (return receipt requested) postage prepaid, or by a nationally recognized overnight courier, to the addresses given below or such other addresses as may be designated in writing by the Parties from time to time during the term of this Agreement. Any notice sent by overnight courier shall be deemed received on the first Business Day after posted with the courier. Any notice sent by registered, certified mail shall be deemed received on the fourth (4^th) Business Day following the date of posting.

In the case of Kosan:	Kosan Biosciences Incorporated
	3832 Bay Center Place
	Hayward, CA 94545
	Attention: General Counsel
	Telephone No.: 510-732-8400

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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In the case of Licensee:	Pfizer Inc.
	235 E. 42nd St.
	New York, New York 10017-5755
	Attention: Vice President, General Counsel
	Telephone No.: 212-733-2323
With Copies to:	Pfizer Global Research and Development
	50 Pequot Ave
	New London, CT 06320
	Attention: Vice President, Strategic Alliances
And:	Vice President, Chief Counsel

15.5 Assignment. This Agreement may not be assigned or otherwise transferred by either Party without the written consent of the other Party; provided, however, that either Party may, without such consent, assign this Agreement (i) to a successor corporation in connection with the transfer or sale of all or substantially all of its business to which this Agreement pertains or in the event of the merger or consolidation with another corporation; (ii) to an Affiliate and (iii) with respect to Licensee, to a Third Party if Licensee is required to divest any of the Licensed Products in order to comply with applicable antitrust law or government order. Any purported assignment in violation of the preceding sentence shall be void. Any permitted assignee shall assume all obligations of its assignor under this Agreement.

15.6 Performance by Affiliates. Each of Kosan and Licensee acknowledge that their obligations and rights under this Agreement may be performed and exercised by Affiliates of Kosan and Licensee, respectively. Obligations of the Party for which one of its Affiliates is performing hereunder shall be deemed to extend to such performing Affiliate. Each of Kosan and Licensee guarantee performance of this Agreement by its Affiliates. Wherever in this Agreement the Parties delegate responsibility to Affiliates or local operating entities, the Parties agree that such entities shall not make decisions inconsistent with this Agreement, amend the terms of this Agreement or act contrary to its terms in any way. Further, if a Party’s Affiliate breaches any aspect of this Agreement performance of which has been delegated to such Affiliate or acts in any way inconsistently with the foregoing sentence, then the other Party shall be entitled to proceed against the Party whose Affiliate so breached, and shall not first be required to proceed against the Affiliate that so breached.

15.7 Publicity. The Parties have agreed that Kosan may issue the press release in the form previously provided to Licensee. Neither Party will originate any publicity, news release or other public announcement, written or oral, relating to the confidential terms or conditions contained in this Agreement without the prior notification to the other Party, unless such disclosure is required by law or stock exchange rule, is

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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required to be contained in financial statements prepared in accordance with generally accepted accounting principles, or has been announced previously in accordance with this Section 15.7. If disclosure is required by law or stock exchange rule, the disclosing Party shall use commercially reasonable efforts to obtain confidential treatment, give the other Party sufficient advance notice to allow the other Party to comment and redact business and financial provisions reasonably identified by the other Party. Licensee agrees that the timely announcement of the progression of a Licensed Product through clinical development is required for Kosan to communicate effectively with its shareholders and prospective investors, including but not limited to the announcement of the initiation of clinical trials, the filing of an NDA, Approval and First Commercial Sale of a Licensed Product.

15.8 Amendment. The Parties hereto may amend, modify or alter any of the provisions of this Agreement, but only by a written instrument that explicitly refers to this Agreement and is duly executed by both Parties hereto.

15.9 Entire Agreement. This Agreement contains the entire understanding of the Parties with respect to the subject matter hereof. All express or implied agreements and understandings, either oral or written, heretofore made with respect to such subject matter are expressly superceded by this Agreement.

15.10 Waiver. The failure of a Party to enforce at any time for any period any of the provisions hereof shall not be construed as a waiver of such provisions or of the rights of such Party thereafter to enforce each such provision.

15.11 No Implied Licenses. Except as expressly and specifically provided under this Agreement, the Parties agree that neither Party is granted any implied rights to or under any of the other Party’s current or future patents, trade secrets, copyrights, moral rights, trade or service marks, trade dress, or any other intellectual property rights.

15.12 Independent Contractors. The Parties agree that the relationship of Kosan and Licensee established by this Agreement is that of independent licensee and licensor. Furthermore, the Parties agree that this Agreement does not, is not intended to, and shall not be construed to, establish a partnership or joint venture, and nor shall this Agreement create or establish an employment, agency or any other relationship. Except as may be specifically provided herein, neither Party shall have any right, power or authority, nor shall they represent themselves as having any authority to assume, create or incur any expense, liability or obligation, express or implied, on behalf of the other Party, or otherwise act as an agent for the other Party for any purpose.

15.13 No Third Party Beneficiaries. All rights, benefits and remedies under this Agreement are solely intended for the benefit of Kosan and Licensee, and no Third Party shall have any rights whatsoever to (i) enforce any obligation contained in this Agreement; (ii) seek a benefit or remedy for any breach of this Agreement; or (iii) take any other action relating to this Agreement under any legal theory, including but not limited to, actions in contract, tort (including but not limited to negligence, gross negligence and strict liability), or as a defense, setoff or counterclaim to any action or claim brought or made by the Parties.

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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15.14 Limitation of Liability. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY LOSS OF PROFITS, LOSS OF BUSINESS OR INTERRUPTION OF BUSINESS, OR FOR ANY OTHER INDIRECT, SPECIAL, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES OF ANY KIND, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS OR DAMAGES, EXCEPT FOR INDEMNIFICATION OBLIGATIONS. IN NO CASE SHALL EITHER PARTY BE LIABLE FOR ANY REPRESENTATION OR WARRANTY MADE BY THE OTHER PARTY TO ANY THIRD PARTY. Notwithstanding the foregoing, each Party shall be liable to the other for special, indirect or consequential damages arising out a breach of the non-disclosure and non-use obligations under Article 10. Nothing in this Section 15.14 is intended to limit either Party’s obligations under Article 13 in relation to amounts paid to a Third Party. Kosan’s aggregate liability with respect to the Bulk KOS-2187 and compounds within the Kosan Compound Library provided by Kosan pursuant to Section 6.3 shall be limited to [*].

15.15 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, exclusive of its choice-of-law rules. Venue for any dispute under this Agreement shall be in New York City, New York, and each Party expressly consents to the exclusive jurisdiction of the United States District Court for the Southern District of New York or the local courts sitting in New York.

15.16 Headings. The article, section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

15.17 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same document.

15.18 Dispute Resolution. The Parties recognize that disputes as to certain matters may from time to time arise during the term of this Agreement which relate to either Party’s rights and/or obligations hereunder. The Parties shall seek to amicably resolve disputes arising under this Agreement in an expedient manner by mutual cooperation.

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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In Witness Hereof, the Parties have executed this Agreement effective as of the Effective Date.

Pfizer Inc
By:	/s/ Martin Mackay
Name:	Martin Mackay
Title:	SVP WW Research and Technology
Kosan Biosciences Incorporated
By:	/s/ Robert G. Johnson, Jr.
Name:	Robert G. Johnson, MD, PhD
Title:	Chief Executive Officer

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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EXHIBIT A

KOSAN PATENT RIGHTS

Kosan Patent Family: [*]
Title (US): [*]
Kosan ref. Country	Appln No.	Appln Date	Pat/Pub No.	Pat/Pub. Date	Status
[*]
Kosan Patent Family: [*]
Title (US): [*]
Kosan ref. Country	Appln No.	Appln Date	Pat/Pub No.	Pat/Pub. Date	Status
[*]
Kosan Patent Family: [*]
Title (US): [*]
Kosan ref. Country	Appln No.	Appln Date	Pat/Pub No.	Pat/Pub. Date	Status
[*]
Kosan Patent Family: [*]
Title (US): [*]
Kosan ref. Country	Appln No.	Appln Date	Pat/Pub No.	Pat/Pub. Date	Status
[*]
Kosan Patent Family: [*]
Title (US): [*]
Kosan ref. Country	Appln No.	Appln Date	Pat/Pub No.	Pat/Pub. Date	Status
[*]
Kosan Patent Family: [*]
Title (US): [*]
Kosan ref. Country	Appln No.	Appln Date	Pat/Pub No.	Pat/Pub. Date	Status
[*]
Kosan Patent Family: [*]
Title (US): [*]
Kosan ref. Country	Appln No.	Appln Date	Pat/Pub No.	Pat/Pub. Date	Status
[*]
Kosan Patent Family: [*]
Title (US): [*]
Kosan ref. Country	Appln No.	Appln Date	Pat/Pub No.	Pat/Pub. Date	Status
[*]
Kosan Patent Family: [*]
Title (US): [*]
Kosan ref. Country	Appln No.	Appln Date	Pat/Pub No.	Pat/Pub. Date	Status
[*]

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

EXHIBIT B

INITIAL KOS-2187 DEVELOPMENT PLAN

[*]

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

Exhibit C

Joint Research and Development Work Plan

I. Working Team: The Parties will promptly establish a research and development team (the “Working Team”) that will meet [*]. The initial Working Team meeting shall be in [*]. Prior to the initial Working Team meeting, Licensee shall provide to Kosan the name and contact information for the research and development representative of Licensee who shall be Kosan’s primary contact person under this Joint Research and Development Plan. The Working Team shall discuss the research and development activities for Licensed Product, [*]. The frequency of Working Team meetings will [*]. Meetings will take place by phone, or in person if deemed appropriate by the Working Team, to conduct the research and development efforts detailed herein. [*] will chair the Working Team. [*] will nominate a point person who will serve as the primary point of contact for [*]. Other [*] representatives may attend based on the subject matter to be discussed at a particular meeting; provided that [*] provides reasonable advance notice to the chairperson of any additional attendees. Working Team will include members of Kosan’s and Licensee’s respective research and development organizations. [*]

II. Scope of Work: The initial scope of work contemplated by this Plan includes the following, but may be modified [*].

a. [*]

i. Regulatory Documents. [*]

ii. Completion of Audit Reports. [*]

iii. Pharmaceutical Sciences/Manufacturing

1. [*]

b. Preparation for the Initial Phase 1 Trial. In order to facilitate the initiation of the first in human trial:

i. [*]

c. Costs. [*]

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

EXHIBIT D

EXCEPTIONS TO SECTION 9.1(i)

Kosan Patent Family: [*]
Title (US): [*]
Kosan ref. Country	Appln No.	Appln Date	Pat/Pub No.	Pat/Pub. Date	Status
[*]
Kosan Patent Family: [*]
Title (US): [*]
Kosan ref. Country	Appln No.	Appln Date	Pat/Pub No.	Pat/Pub. Date	Status
[*]

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following Registration Statements:

(1) Registration Statement (Form S-3 Nos. 333-108909 and 333-121597) of Kosan Biosciences Incorporated,

(2) Registration Statement (Form S-8 No. 333-63534, 333-96669, 333-115766 and 333-123578) pertaining to the 1996 Stock Option Plan,

(3) Registration Statement (Form S-8 No. 333-108502) pertaining to the 1996 Stock Option Plan and 2000 Employee Stock Purchase Plan,

(4) Registration Statement (Form S-8 No. 333-47758) pertaining to the 1996 Stock Option Plan, 2000 Employee Stock Purchase Plan and the 2000 Non-Employee Directors’ Stock Option Plan,

(5) Registration Statement (Form S-8 No. 333-136067) pertaining to the 2006 Equity Incentive Plan;

of our report dated March 14, 2007, with respect to the financial statements of Kosan Biosciences Incorporated, our report dated March 14, 2007, with respect to Kosan Biosciences Incorporated management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting of Kosan Biosciences Incorporated, included in the Annual Report (Form 10-K) for the year ended December 31, 2006.

/s/    Ernst & Young LLP

San Francisco, California

March 14, 2007

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Robert G. Johnson, Jr., M.D., Ph.D. certify that:

1. I have reviewed this annual report on Form 10-K of Kosan Biosciences Incorporated;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 16, 2007	/s/ Robert G. Johnson Jr., M.D., Ph.D.
	Robert G. Johnson, Jr., M.D., Ph.D.
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Gary S. Titus, certify that:

1. I have reviewed this annual report on Form 10-K of Kosan Biosciences Incorporated;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 16, 2007	/s/ Gary S. Titus
	Gary S. Titus
	Senior Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. § 1350), Robert G. Johnson, Jr., M.D., Ph.D., President and Chief Executive Officer of Kosan Biosciences Incorporated (the “Company”), and Gary S. Titus, Senior Vice President and Chief Financial Officer of the Company, each hereby certifies that, to the best of his or her knowledge:

1. The Company’s Annual Report on Form 10-K for the period ended December 31, 2006, to which this Certification is attached as Exhibit 32.1 (the “Annual Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act, and

2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

In Witness Whereof, the undersigned have set their hands hereto as of the 16th day of March, 2007.

/s/ Robert G. Johnson, Jr., M.D., Ph.D.	/s/ Gary S. Titus
Robert G. Johnson, Jr., M.D., Ph.D.	Gary S. Titus
President and Chief Executive Officer	Senior Vice President and Chief Financial Officer

This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Kosan Biosciences Incorporated 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 the Form 10-K), irrespective of any general incorporation language contained in such filing.