**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 **Washington,
D.C. 20549**
 **____________________________**
 **FORM
10-Q**
 
 **x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR
      15(d) OF THE****SECURITIES
      EXCHANGE ACT OF 1934****For
      the quarterly period ended March 31, 2005****OR****o  TRANSITION REPORT PURSUANT TO SECTION 13 OR
      15(d) OF THE****SECURITIES
      EXCHANGE ACT OF 1934****For
      the transition period from****_________****to****_________****.**
 
 **Commission
File Number 000-30929**
 **___________________**
 **KERYX
BIOPHARMACEUTICALS, INC.**
 **(Exact
name of registrant as specified in its charter)**
 
 **Delaware**
      (State
      or other jurisdiction of incorporation or organization)
    **13-4087132**
      (I.R.S.
      Employer Identification No.)
 **750
Lexington Avenue**
 **New
York, New York 10022**
 (Address
including zip code of principal executive offices)
 
 **(212)
531-5965**
 (Registrant's
telephone number, including area code)
 
 
 Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
 
 Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes x  No o
 
 There
were 31,504,180 shares of the registrant’s common stock, $0.001 par value,
outstanding as of April 29, 2005.
  
  
 **KERYX
BIOPHARMACEUTICALS, INC.**
 **FORM
10-Q**
 **FOR
THE QUARTER ENDED MARCH 31, 2005**
 
 **TABLE
OF CONTENTS**
 
 
 **Page**SPECIAL
      CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
    1**PART
      I**
    **FINANCIAL
      INFORMATION**Item
      1
    Financial
      Statements
    2Consolidated
      Balance Sheets as of March 31, 2005 (unaudited) andDecember
      31, 2004 (audited)
    2Interim
      Consolidated Statements of Operations for the three monthsended
      March 31, 2005 and 2004 (unaudited)
    3Interim
      Consolidated Statements of Cash Flows for the three monthsended
      March 31, 2005 and 2004 (unaudited)
    4Notes
      to Interim Consolidated Financial Statements as of March 31, 2005
      (unaudited)
    6Item
      2
    Management's
      Discussion and Analysis of Financial Condition andResults
      of Operations
    9Item
      3
    Quantitative
      and Qualitative Disclosures About Market Risk
    26Item
      4
    Controls
      and Procedures
    26**PART
      II**
    **OTHER
      INFORMATION**Item
      5
    Other
      Information
    27Item
      6
    Exhibits
    27
  
 
 **SPECIAL
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS**
 
 Certain
matters discussed in this report, including matters discussed under the caption
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” may constitute forward-looking statements for purposes of the
Securities Act of 1933, as amended, or the Securities Act, and the Securities
Exchange Act of 1934, as amended, or the Exchange Act, and involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by such
forward-looking statements. The words “expect,” “anticipate,” “intend,” “plan,”
“believe,” “seek,” “estimate,” and similar expressions are intended to identify
such forward-looking statements. Our actual results may differ materially from
the results anticipated in these forward-looking statements due to a variety of
factors, including, without limitation, those discussed under the captions “Risk
Factors,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and elsewhere in this report, as well as factors which
may be identified from time to time in our other filings with the Securities and
Exchange Commission, or the SEC, or in the documents where such forward-looking
statements appear. All written or oral forward-looking statements attributable
to us are expressly qualified in their entirety by these cautionary statements.
Such forward-looking statements include, but are not limited to, those relating
to:
  ·
    our
      expectations for increases or decreases in expenses;
  ·
    our
      expectations for the development, manufacturing, and approval of KRX-101,
      KRX-0401, and our additional product candidates or any other products we
      may acquire or in-license;
  ·
    our
      expectations for incurring additional capital expenditures to expand our
      research and development capabilities;
  ·
    our
      expectations for generating revenue or becoming profitable on a sustained
      basis;
  ·
    our
      expectations or ability to enter into marketing and other partnership
      agreements;
  ·
    our
      expectations or ability to enter into product acquisition and in-licensing
      transactions;
  ·
    our
      estimates of the sufficiency of our existing cash and cash equivalents and
      investments to finance our operating and capital requirements;
  ·
    our
      expected losses; and
  ·
    our
      expectations for future capital requirements.
  The
forward-looking statements contained in this report reflect our views and
assumptions only as of the date this report is signed. Except as required by
law, we assume no responsibility for updating any forward-looking statements.
 
 We
qualify all of our forward-looking statements by these cautionary statements. In
addition, with respect to all of our forward-looking statements, we claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
  1
  **ITEM
1. FINANCIAL STATEMENTS**
 
 **Keryx
Biopharmaceuticals, Inc. (A Development Stage Company)**
 Consolidated
Balance Sheets as of March 31, 2005, and December 31, 2004
 
 (in
thousands, except share and per share amounts)
 
 **March
      31, 2005**
    
    **December
      31, 2004****(Unaudited)**
    
    **(Audited)****Assets**Current
      assetsCash
      and cash equivalents
    
    $
    23,093
    
    $
    29,699Short-term
      investment securities
    
    
    15,156
    
    
    20,035Accrued
      interest receivable
    
    
    58
    
    
    144Other
      receivables and prepaid expenses
    
    
    1,097
    
    
    622Total
      current assets
    
    
    39,404
    
    
    50,500Long-term
      investment securities
    
    
    6,509
    
    
    --Property,
      plant and equipment, net
    
    
    268
    
    
    145Other
      assets (primarily intangible assets), net
    
    
    195
    
    
    217Total
      assets
    
    $
    46,376
    
    $
    50,862**Liabilities
      and stockholders’ equity**Current
      liabilitiesAccounts
      payable and accrued expenses
    
    $
    3,400
    
    $
    3,079Accrued
      compensation and related liabilities
    
    
    186
    
    
    743Deferred
      revenue
    
    
    134
    
    
    140Total
      current liabilities
    
    
    3,720
    
    
    3,962Contingent
      equity rights
    
    
    4,004
    
    
    4,004Other
      liabilities
    
    
    75
    
    
    92Total
      liabilities
    
    
    7,799
    
    
    8,058Stockholders’
      equityCommon
      stock, $0.001 par value per share (60,000,000 and 60,000,000 shares
      authorized, 31,560,280 and 31,373,280 shares issued, 31,504,180 and
      31,317,180 shares outstanding at March 31, 2005, and December 31, 2004,
      respectively)
    
    
    32
    
    
    31Additional
      paid-in capital
    
    
    133,896
    
    
    132,643Treasury
      stock, at cost, 56,100 shares at March 31, 2005 and December 31, 2004,
      respectively
    
    
    (89
    )
    
    (89
    )Unearned
      compensation
    
    
    (2,877
    )
    
    (2,228
    )Deficit
      accumulated during the development stage
    
    
    (92,385
    )
    
    (87,553
    )Total
      stockholders’ equity
    
    
    38,577
    
    
    42,804Total
      liabilities and stockholders’ equity
    
    $
    46,376
    
    $
    50,862
 
 *The
accompanying notes are an integral part of the consolidated financial
statements.*
  2
  **Keryx
Biopharmaceuticals, Inc. (A Development Stage Company)**
 Interim
Unaudited Consolidated Statements of Operations for the
 Three
Months Ended March 31, 2005 and 2004
 
 (in
thousands, except share and per share amounts)
 
 **Three
      months ended****March
      31,**
    
    **Amountsaccumulatedduring
      thedevelopment****2005**
    
    **2004**
    
    **stage**Revenue:Service
      revenue
    
    $
    157
    
    $
    95
    
    $
    966Management
      fees from related party
    
    
    --
    
    
    --
    
    
    300Total
      revenue
    
    
    157
    
    
    95
    
    
    1,266Operating
      expenses:Cost
      of services
    
    
    181
    
    
    80
    
    
    1,016Research
      and development:Non-cash
      compensation
    
    
    176
    
    
    202
    
    
    7,316Non-cash
      acquired in-process research and development
    
    
    --
    
    
    18,800
    
    
    18,800Other
      research and development
    
    
    4,042
    
    
    1,652
    
    
    43,754Total
      research and development expenses
    
    
    4,218
    
    
    20,654
    
    
    69,870General
      and administrative:Non-cash
      compensation
    
    
    185
    
    
    185
    
    
    4,851Other
      general and administrative
    
    
    645
    
    
    1,093
    
    
    22,315Total
      general and administrative expenses
    
    
    830
    
    
    1,278
    
    
    27,166Total
      operating expenses
    
    
    5,229
    
    
    22,012
    
    
    98,052Operating
      loss
    
    
    (5,072
    )
    
    (21,917
    )
    
    (96,786
    )Interest
      and other income, net
    
    
    240
    
    
    95
    
    
    4,892Net
      loss before income taxes
    
    
    (4,832
    )
    
    (21,822
    )
    
    (91,894
    )Income
      taxes
    
    
    --
    
    
    1
    
    
    491Net
      loss
    
    $
    (4,832
    )
    $
    (21,823
    )
    $
    (92,385
    )Basic
      and diluted loss per common share
    
    $
    (0.15
    )
    $
    (0.78
    )
    $
    (5.61
    )Weighted
      average shares used in computing basic and diluted netloss
      per common share
    
    
    31,477,797
    
    
    27,828,090
    
    
    16,477,744
 *The
accompanying notes are an integral part of the consolidated financial
statements.*
  3
  **Keryx
Biopharmaceuticals, Inc. (A Development Stage Company)**
 Interim
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March
31, 2005 and 2004
 
 (in
thousands)
 
 **Three
      months ended**
      **March
      31,**
    
    **Amounts**
      **accumulated**
      **during
      the**
      **development****2005**
    
    **2004**
    
    **stage**CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
    
    $
    (4,832
    )
    $
    (21,823
    )
    $
    (92,385
    )Adjustments
      to reconcile cash flows used in operating activities:Acquired
      in-process research and development
    
    
    --
    
    
    18,800
    
    
    18,800Stock
      compensation expense (negative expense)
    
    
    361
    
    
    387
    
    
    12,167Issuance
      of common stock to technology licensor
    
    
    --
    
    
    --
    
    
    359Interest
      on convertible notes settled through issuance of preferred
      shares
    
    
    --
    
    
    --
    
    
    253Depreciation
      and amortization
    
    
    40
    
    
    35
    
    
    2,461Loss
      on disposal of property, plant and equipment
    
    
    --
    
    
    --
    
    
    170Impairment
      charges
    
    
    --
    
    
    --
    
    
    2,482Exchange
      rate differences
    
    
    --
    
    
    --
    *
    
    94Changes
      in assets and liabilities, net of effects of acquisitions:(Increase)
      in other receivables and prepaid expenses
    
    
    (475
    )
    
    (80
    )
    
    (726
    )Decrease
      (increase) in accrued interest receivable
    
    
    86
    
    
    19
    
    
    (58
    )Increase
      (decrease) in accounts payable and accrued expenses
    
    
    321
    
    
    (685
    )
    
    2,087Increase
      (decrease) in accrued compensation and related liabilities
    
    
    (557
    )
    
    358
    
    
    (386
    )(Decrease)
      in other liabilities
    
    
    (17
    )
    
    (12
    )
    
    (80
    )Increase
      (decrease) in deferred revenue
    
    
    (5
    )
    
    1
    
    
    (321
    )Net
      cash used in operating activities
    
    
    (5,078
    )
    
    (3,000
    )
    
    (55,083
    )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of property, plant and equipment
    
    
    (141
    )
    
    (7
    )
    
    (4,568
    )Proceeds
      from disposals of property, plant and equipment
    
    
    --
    
    
    --
    
    
    424(Increase)
      in note and accrued interest receivable from related party
    
    
    --
    
    
    (4
    )
    
    (356
    )Investment
      in other assets
    
    
    --
    
    
    --
    
    
    (1,196
    )Proceeds
      from sale and maturity of (investment in) held-to-maturity short-term
      securities
    
    
    4,904
    
    
    1,798
    
    
    (10,106
    )Investment
      in available-for-sale short-term securities
    
    
    (25
    )
    
    --
    
    
    (6,050
    )Proceeds
      from sale of available-for-sale short-term securities
    
    
    --
    
    
    --
    
    
    1,000(Investment
      in) held-to-maturity long-term securities
    
    
    (6,509
    )
    
    (5,053
    )
    
    (6,509
    )Net
      cash used in investing activities
    
    
    (1,771
    )
    
    (3,266
    )
    
    (27,361
    )
 * Amount
less than one thousand dollars.
 
 *The
accompanying notes are an integral part of the consolidated financial
statements.*
  4
  **Keryx
Biopharmaceuticals, Inc. (A Development Stage Company)**
 Interim
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March
31, 2005 and 2004
 (continued)
 
 (in
thousands)
 
 **Three
      months ended**
      **March
      31,**
    
    **Amounts**
      **accumulated**
      **during
      the**
      **development****2005**
    
    **2004**
    
    **stage**CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from short-term loans
    
    $
    --
    
    $
    --
    
    $
    500Proceeds
      from long-term loans
    
    
    --
    
    
    --
    
    
    3,251Payment
      of assumed notes payable and accrued interest in connection with the
      ACCESS
      Oncology acquisition
    
    
    --
    
    
    (6,322
    )
    
    (6,322
    )Issuance
      of convertible note, net
    
    
    --
    
    
    --
    
    
    2,150Issuance
      of preferred shares, net
    
    
    --
    
    
    --
    
    
    8,453Receipts
      on account of shares previously issued
    
    
    --
    
    
    --
    
    
    7Proceeds
      from initial public offering, net
    
    
    --
    
    
    --
    
    
    46,298Proceeds
      from private placements, net
    
    
    --
    
    
    31,777
    
    
    45,795Proceeds
      from exercise of options and warrants
    
    
    243
    
    
    2,153
    
    
    5,494Purchase
      of treasury stock
    
    
    --
    
    
    --
    
    
    (89
    )Net
      cash provided by financing activities
    
    
    243
    
    
    27,608
    
    
    105,537Cash
      acquired in acquisition
    
    
    --
    
    
    94
    
    
    94Effect
      of exchange rate on cash
    
    
    --
    
    
    (--
    )*
    
    (94
    )NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (6,606
    )
    
    21,436
    
    
    23,093Cash
      and cash equivalents at beginning of year
    
    
    29,699
    
    
    21,672
    
    
    --CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    23,093
    
    $
    43,108
    
    $
    23,093NON
      - CASH TRANSACTIONSIssuance
      of common stock in connection with acquisition
    
    $
    --
    
    $
    5,100
    
    $
    6,325Issuance
      of contingent equity rights in connection with acquisition
    
    
    --
    
    $
    5,015
    
    
    4,004Assumption
      of liabilities in connection with acquisition
    
    
    --
    
    $
    8,937
    
    
    8,723Conversion
      of short-term loans into contributed capital
    
    
    --
    
    
    --
    
    
    500Conversion
      of long-term loans into contributed capital
    
    
    --
    
    
    --
    
    
    2,681Conversion
      of long-term loans into convertible notes of Partec
    
    
    --
    
    
    --
    
    
    570Conversion
      of convertible notes of Partec and accrued interest into stock in
      Keryx
    
    
    --
    
    
    --
    
    
    2,973Issuance
      of warrants to related party as finder’s fee in private
      placement
    
    
    --
    
    
    --
    
    
    114Declaration
      of stock dividend
    
    
    --
    
    
    --
    
    
    3SUPPLEMENTARY
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid for interest
    
    $
    --
    
    $
    1,026
    
    $
    1,166Cash
      paid for income taxes
    
    $
    --
    
    $
    1
    
    $
    432
 
 * Amount
less than one thousand dollars.
 
 *The
accompanying notes are an integral part of the consolidated financial
statements.*
  5
  **Keryx
Biopharmaceuticals, Inc. (A Development Stage Company)**
 Notes to
Interim Consolidated Financial Statements as of March 31, 2005
(unaudited)
 
 **NOTE
1 - GENERAL**
 
 BASIS OF
PRESENTATION
 
 Keryx
Biopharmaceuticals, Inc. (“Keryx” or the “Company”) is a biopharmaceutical
company focused on the acquisition, development and commercialization of novel
pharmaceutical products for the treatment of life-threatening diseases,
including diabetes and cancer. The Company was incorporated in Delaware in
October 1998 (under the name Paramount Pharmaceuticals, Inc., which was later
changed to Lakaro Biopharmaceuticals, Inc. in November 1999, and finally to
Keryx Biopharmaceuticals, Inc. in January 2000). The Company commenced
activities in November 1999, and since then has operated in one segment of
operations, namely the development and commercialization of clinical compounds
and core technologies for the life sciences.
 
 Until
November 1999, most of the Company’s activities were carried out by Partec
Limited, an Israeli corporation formed in December 1996, and its subsidiaries
SignalSite Inc. (85% owned), SignalSite Israel Ltd. (wholly-owned), Vectagen
Inc. (87.25% owned) and Vectagen Israel Ltd. (wholly-owned) (hereinafter
collectively referred to as “Partec”). In November 1999, the Company acquired
substantially all of the assets and liabilities of Partec and, as of that date,
the activities formerly carried out by Partec were performed by the Company. On
the date of the acquisition, Keryx and Partec were entities under common control
(the controlling interest owned approximately 79.7% of Keryx and approximately
76% of Partec) and accordingly, the assets and liabilities were recorded at
their historical cost basis by means of “as if” pooling, with Partec being
presented as a predecessor company. Consequently, these financial statements
include the activities performed in previous periods by Partec by aggregating
the relevant historical financial information with the financial statements of
the Company as if they had formed a discrete operation under common management
for the entire development stage.
 
 The
Company owns a 100% interest in each of ACCESS Oncology, Inc. and Neryx
Biopharmaceuticals, Inc., both U.S. corporations incorporated in the State of
Delaware, Keryx (Israel) Ltd., organized in Israel, Keryx Biomedical
Technologies Ltd., organized in Israel, and K.B.I. Biopharmaceuticals Ltd.,
organized in Israel. In 2003, the Company’s three subsidiaries in Israel ceased
operations and are currently in the process of being closed down. Substantially
all of the Company’s biopharmaceutical development and administrative activities
during the three months ended March 31, 2005, and 2004, respectively, were
conducted in the United States of America.
 
 On
February 5, 2004, the Company completed the acquisition of ACCESS Oncology, Inc.
and its subsidiaries (“ACCESS Oncology”). The transaction was structured as a
merger of AXO Acquisition Corp., a Delaware corporation and the Company’s
wholly-owned subsidiary, with and into ACCESS Oncology, with ACCESS Oncology
remaining as the surviving corporation and a wholly-owned subsidiary of the
Company. The transaction was accounted for under the purchase method of
accounting. See Note 4 - ACCESS Oncology Acquisition for additional information.
The assets and liabilities of ACCESS Oncology that the Company acquired and
assumed pursuant to the acquisition have been included in the Company’s
consolidated financial statements effective February 5, 2004 *.*
 
 The
accompanying unaudited interim consolidated financial statements were prepared
in accordance with U.S. generally accepted accounting principles (“GAAP”) for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. All adjustments that are, in the opinion of management, of a normal
recurring nature and are necessary for a fair presentation of the interim
consolidated financial statements have been included. Nevertheless, these
financial statements should be read in conjunction with the Company's audited
consolidated financial statements contained in its Annual Report on Form 10-K
for the year ended December 31, 2004. The results of operations for the three
months ended March 31, 2005, are not necessarily indicative of the results that
may be expected for the entire fiscal year or any other interim
period.
 
 The
Company has not generated any revenues from its planned principal operations and
is dependent upon significant financing to provide the working capital necessary
to execute its business plan. **** If the
Company determines that it is necessary to seek additional funding, there can be
no assurance that the Company will be able to obtain any such funding on terms
that are acceptable to it, if at all.
 
 6
 STOCK -
BASED COMPENSATION
 
 The
Company applies the intrinsic value-based method of accounting prescribed by the
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”), and related interpretations, including FASB
Interpretation 44, “Accounting for Certain Transactions involving Stock
Compensation, an Interpretation of APB Opinion No. 25,” to account for its
fixed-plan stock options for employees and directors. Under this method,
compensation expense is recorded on the date of grant only if the current market
price of the underlying stock exceeded the exercise price. Statement of
Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based
Compensation” (“SFAS No. 123”) is applied to stock options and warrants granted
to persons other than employees and directors.
 
 The
following is a pro forma unaudited presentation of reported net loss and net
loss per share, calculated to show adjusted values had the compensation expenses
for stock options granted under the Company’s stock option plans been determined
based on fair value at the grant dates consistent with the method of SFAS No.
123:
 
 **Three
      months ended****March
      31,**
    
    **Amountsaccumulated
      duringthe development**(in
      thousands, except per share amounts)
    
    **2005**
    
    **2004**
    
    **stage**Net
      loss, as reported
    
    $
    (4,832
    )
    $
    (21,823
    )
    $
    (92,385
    )Add:
      Stock-based compensation expense to employees and directors determined
      under the intrinsic value-based method, as included in reported net
      loss
    
    
    111
    
    
    --
    
    
    9,845Deduct:
      Stock-based compensation expense to employees and directors determined
      under fair value based method
    
    
    (873
    )
    
    (2,133
    )
    
    (17,292
    )Pro
      forma net loss
    
    $
    (5,594
    )
    $
    (23,956
    )
    $
    (99,832
    )Basic
      and diluted loss per common share:As
      reported
    
    $
    (0.15
    )
    $
    (0.78
    )
    $
    (5.61
    )Pro
      forma
    
    $
    (0.18
    )
    $
    (0.86
    )
    $
    (6.06
    )
 The value
of these options has been estimated using the Black-Scholes model. The weighted
average fair market value of options granted during the three months ended March
31, 2005, as of the date of the grant, was $7.74.  The assumptions used in
the calculation of the fair value of options granted during the three months
ended March 31, 2005 were a weighted average expected term of 5.0 years, a
weighted average expected volatility rate of 85.21% and a weighted average
risk-free interest rate of 3.70%.
  NET LOSS
PER SHARE
 
 Basic net
loss per share is computed by dividing the losses allocable to common
stockholders by the weighted average number of shares of common stock
outstanding for the period. Diluted net loss per share does not reflect the
effect of shares of common stock to be issued upon the exercise of stock options
and warrants, as their inclusion would be anti-dilutive. The options and
warrants exercisable as of March 31, 2005 and 2004, which are not included in
the computation of net loss per share amounts, were 4,400,886 and 4,859,708,
respectively.
 
 **NOTE
2 - RECENTLY ISSUED ACCOUNTING STANDARDS**
 
 In
December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” (“SFAS
123R”). SFAS 123R will replace SFAS 123, which was issued in 1995. SFAS 123R
requires that the fair value of the grant of employee stock options be reported
as an expense. Historically, the Company has disclosed in its footnotes the pro
forma expense effect of stock options granted under the Company’s stock option
plans in Note 1 - General: Stock-Based Compensation. Under SFAS No. 123R, the
Company would have been required to implement the standard as of the beginning
of the first interim or annual period that begins after June 15, 2005. Calendar
year-end companies, therefore, would have been permitted to follow the
pre-existing accounting rules for the first and second quarters of 2005, but
required to follow SFAS No. 123R for their third quarter reports.
 
 7
 On April
15, 2005, the Securities and Exchange Commission (the “SEC”) approved a new rule
allowing companies to implement SFAS 123R at the beginning of their first annual
period, rather than the first interim period, beginning after June 15, 2005.
This means, for example, that the financial statements for a calendar year-end
company do not need to comply with Statement No. 123R until the interim
financial statements for the first quarter of 2006 are filed with the SEC. The
SEC’s new rule does not change the accounting required by SFAS No. 123R; it only
changes the dates for compliance with the standard. The Company plans to adopt
SFAS 123R when required by the SEC in the first quarter of 2006. The estimated
impact of adopting SFAS 123R will have a material impact on the Company’s
consolidated financial statements.
 
 **NOTE
3 - STOCKHOLDERS' EQUITY**
 
 During
the three months ended March 31, 2005, the compensation committee of the
Company’s board of directors granted options to purchase 797,500 shares of the
Company’s common stock to the Company’s employees, directors and consultants. As
a result of these grants, the Company recorded non-cash compensation expense of
approximately $47,000 during the three months ended March 31, 2005. The exercise
price of the options granted during the three months ended March 31, 2005, was
between $11.22 and $14.08 per share. Options and warrants for the purchase of
98,930 shares of the Company’s common stock were forfeited during the three
months ended March 31, 2005. In addition, options and warrants for the purchase
of 187,000 shares of the Company’s common stock were exercised during the three
months ended March 31, 2005.
 
 On
September 29, 2004, the Company filed a shelf registration statement on Form S-3
with the SEC, which the
SEC declared effective on October 13, 2004.  The
registration statement provides for the offering of up to five million shares of
the Company’s common stock. The Company may offer these securities from time to
time in response to market conditions or other circumstances if it believes such
a plan of financing is in the best interest of the Company and its stockholders.
The Company believes that the availability to conduct such offerings enhances
its ability to raise additional capital to finance its operations.
 
 **NOTE
4 - ACCESS ONCOLOGY ACQUISITION**
 
 On
February 5, 2004, the Company acquired ACCESS Oncology, a related party, for a
purchase price of approximately $19,502,000. The purchase price included the
Company’s assumption of certain liabilities of ACCESS Oncology equal to
approximately $8,723,000, the issuance of shares of the Company’s common stock
valued at approximately $6,325,000, contingent equity rights valued at
approximately $4,004,000 and transaction costs of approximately
$450,000.
 
 At the
effective time of the merger, each share of ACCESS Oncology common stock,
including shares issuable upon the exercise of options exercised before March 1,
2004, and upon the exercise of outstanding warrants, was converted into the
right to share in the contingent equity rights pro rata with such other holders
of ACCESS Oncology common stock. Pursuant to the merger agreement, 623,145
shares of the Company’s common stock valued at approximately $6,325,000 have
been issued to the preferred stockholders of ACCESS Oncology. An additional
4,433 shares of the Company’s common stock are issuable to those preferred
stockholders of ACCESS Oncology who have yet to provide the necessary
documentation to receive shares of the Company’s common stock.
 
 The
contingent equity rights will be paid upon the achievement of the following
milestones:
 
 ·
    500,000
      shares of the Company’s common stock upon enrollment of the first patient
      in a Keryx-sponsored Phase III (or other pivotal) clinical trial for any
      of the acquired ACCESS Oncology drug
candidates;
  8
  ·
    750,000
      shares of the Company’s common stock upon the first new drug application
      acceptance by the Food and Drug Administration, or FDA, for any of the
      acquired ACCESS Oncology drug candidates;
  ·
    1,750,000
      shares of the Company’s common stock upon the first FDA approval of any of
      the acquired ACCESS Oncology drug candidates;
and
  ·
    372,422
      shares of the Company’s common stock following the first 12-month period
      that sales of all of the acquired ACCESS Oncology drug candidates combined
      exceeds $100 million.
  In no
event will the Company issue more than 4,000,000 shares of its common stock
pursuant to the merger agreement. These 4,000,000 shares include 627,578 shares
issued or issuable to date and any contingent shares as described above.
Accordingly, the amount of the Company’s common stock deliverable to the former
ACCESS Oncology stockholders as milestone consideration will be no more than
3,372,422 shares. The Company’s stockholders approved the issuance of shares of
its common stock payable as contingent milestone consideration at the 2004
annual meeting of stockholders, which took place on June 10, 2004.
 
 The
ACCESS Oncology acquisition has been accounted for as a purchase by the Company
under U.S. generally accepted accounting principles. Under the purchase method
of accounting, the assets and liabilities assumed from ACCESS Oncology are
recorded at the date of acquisition at their respective fair values. The
consolidated financial statements and reported results of operations of the
Company issued after completion of the acquisition reflect these values but will
not be restated retroactively to reflect the historical financial position or
results of operations of ACCESS Oncology.
 
 As
required by FASB Interpretation No. 4, "Applicability of FASB Statement No. 2 to
Business Combinations Accounted for by the Purchase Method" ("FIN 4"), the
Company recorded a charge in the three months ended March 31, 2004 of
$18,800,000 for the portion of the purchase price allocated to acquired
in-process research and development.
 
 The
following unaudited pro forma financial information presents the combined
results of operations of the Company and ACCESS Oncology as if the acquisition
had occurred as of the beginning of the periods presented. The unaudited pro
forma financial information is not necessarily indicative of what the Company’s
consolidated results of operations actually would have been had it completed the
acquisition at the dates indicated. In addition, the unaudited pro forma
financial information does not purport to project the future results of
operations of the combined company.
 
 (in
      thousands, except per share amounts)
    
    **Three
      months ended**
      **March
      31, 2004**Revenue
    
    $
    197Net
      loss
    
    $
    (2,966
    )Basic
      and diluted loss per common share
    
    $
    (0.10
    )
 
 The
unaudited pro forma financial information above reflects the elimination of
balances and transactions between the Company and ACCESS Oncology, which upon
completion of the merger would be considered intercompany balances and
transactions. The entries include the elimination of certain interest income and
expense and the elimination of the reimbursement of salaries and related
facility costs of two employees of ACCESS Oncology, both of which net to zero.
In addition, the unaudited pro forma financial information above excludes the
non-recurring, non-cash charge of $18,800,000 related to acquired in-process
research and development in the three months ended March 31, 2004.
 
 
 **ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS**
 
 The
following discussion and analysis contains forward-looking statements about our
plans and expectations of what may happen in the future. Forward-looking
statements are based on a number of assumptions and estimates that are
inherently subject to significant risks and uncertainties, and our results could
differ materially from the results anticipated by our forward-looking statements
as a result of many known or unknown factors, including, but not limited to,
those factors discussed in “Risk Factors.” See also the “Special Cautionary
Notice Regarding Forward-Looking Statements” set forth at the beginning of this
report.
 
 9
 You
should read the following discussion and analysis in conjunction with the
unaudited, consolidated financial statements, and the related footnotes thereto,
appearing elsewhere in this report and in conjunction with management’s
discussion and analysis and the audited, consolidated financial statements
included in our annual report on Form 10-K for the year ended December 31,
2004.
 
 **OVERVIEW**
 
 We are a
biopharmaceutical company focused on the acquisition, development and
commercialization of novel pharmaceutical products for the treatment of
life-threatening diseases, including diabetes and cancer. We have two product
candidates in the later stages of clinical development: sulodexide, or KRX-101,
for the treatment of diabetic nephropathy, a life-threatening kidney disease
caused by diabetes, and perifosine, or KRX-0401, for the treatment of multiple
forms of cancer. To date, we have not received approval for the sale of any of
our drug candidates in any market and, therefore, have not generated any
revenues from our drug candidates.
 
 *KRX-101*
 
 Our lead
compound under development is KRX-101, to which we have an exclusive license in
North America, Japan and certain other markets. A randomized, double-blind,
placebo-controlled, Phase II study of the use of sulodexide for treatment of
diabetic nephropathy was conducted in 223 patients in Europe, and the results of
this study were published in the June 2002 issue of the Journal of the American
Society of Nephrology.  The results of this Phase II study showed a
dose-dependent reduction in proteinuria, or pathological urinary albumin
excretion rates. In 2001, the Food and Drug Administration, or FDA, granted
KRX-101 “Fast-Track” designation for the treatment of diabetic nephropathy.
 
 In the
third quarter of 2003, we announced that the Collaborative Study Group, or CSG,
the world’s largest standing renal clinical trial group comprised of academic
and tertiary nephrology care centers, would conduct the U.S.-based Phase II/III
clinical program for KRX-101 for the treatment of diabetic nephropathy. The CSG
has conducted multiple large-scale clinical trials resulting in over 40
publications in peer-reviewed journals. In addition, the CSG conducted the
pivotal studies for two of the three drugs that are currently approved for
treatment of diabetic nephropathy. In the fourth quarter of 2003, we initiated
the Phase II portion of our Phase II/III clinical program for KRX-101, and in
the third quarter of 2004, we completed the target enrollment for this Phase II
portion of the clinical program.
 
 In
January 2005, we announced that the CSG recommended that we proceed to the Phase
III portion of our Phase II/III clinical program of KRX-101, as planned. This
recommendation was based on the completion, by an independent Data Safety
Monitoring Committee, or DSMC, on January 4, 2005, of a safety evaluation of the
first interim analysis from the approximately 150-patient, randomized,
double-blind, placebo-controlled Phase II clinical trial of KRX-101, and an
efficacy assessment of the same data set conducted by the CSG.
 
 In March
2005, we announced that we had finalized a Special Protocol Assessment, or a
SPA, agreement with the FDA for the Phase III and Phase IV clinical trials of
KRX-101. The clinical plan to support a New Drug Application, or a NDA, approval
for KRX-101 under Subpart H (accelerated approval), as agreed upon with the FDA
under an SPA, consists of: (i) a single Phase III trial in patients with
microalbuminuria based on the surrogate marker of regression of microalbuminuria
as the primary endpoint; (ii) supportive data from previously conducted clinical
studies; and (iii) substantial recruitment into our Phase IV confirmatory study
that will measure clinical outcomes in patients with overt nephropathy, or
macroalbuminuria. As part of our commitment to the FDA, we plan to commence the
Phase IV trial at approximately the same time as we begin the Phase III trial.
Pursuant to this recommendation, and in accordance with our commitment to the
FDA, we expect to commence our pivotal program, including both Phase III and
Phase IV studies for KRX-101, in the second quarter of 2005.
 
 10
 *KRX-0401*
 
 KRX-0401
is a novel, first-in-class, oral signal transduction modifier that inhibits the
Akt pathway and other important pathways. It has demonstrated preliminary single
agent anti-tumor activity. KRX-0401 is currently in a Phase II clinical program
in which it is under evaluation as a single agent as well as in combination with
other anti-cancer treatments for multiple forms of cancer. The National Cancer
Institute, or NCI, a department of the National Institutes of Health, or NIH,
has completed a number of Phase II clinical trials studying KRX-0401 as a single
agent, conducted and funded by the NCI under a Cooperative Research and
Development Agreement, or CRADA, arrangement with us. To our knowledge, the NCI
and its collaborators have presented data from three of their Phase II studies
through the date hereof, including from Phase II studies involving sarcoma, head
and neck and breast cancers. Findings from these studies led the investigators
to conclude that the drug was safe and well-tolerated at the Phase II dose
utilized. In the sarcoma study, the investigators reported a partial response
(greater than a 50% decrease in tumor mass) as well as several disease
stabilizations. With the responses seen in the Phase I trials, there are now
three sarcoma patients with durable partial responses. On the Phase II breast
cancer study, the investigators scored 3 of 15 evaluable patients as having
stable disease, one of which was classified as a mixed responder.
 
 During
the second quarter of 2004, we announced the initiation of the Keryx-sponsored
Phase II program for KRX-0401. To date we have initiated several trials under
this program. The first is a multi-center study that will evaluate the safety
and efficacy of KRX-0401 as a single-agent administered weekly to patients with
non-small cell lung cancer, or NSCLC, who have progressed despite standard
therapy. We have also initiated additional multi-center trials evaluating
KRX-0401 in combination with gemcitabine (Gemzar®), paclitaxel (Taxol®) and
docetaxel (Taxotere®), all common forms of chemotherapy used to treat multiple
tumor types. Recently, we started an “all-comers” Phase II clinical trial
evaluating KRX-0401 as a single-agent administered either weekly or daily in a
variety of tumor types.
 
 *Additional
Product Candidates*
 
 Our
cancer portfolio also includes KRX-0402, an inhibitor of DNA repair, which is
also being studied by the NCI under a CRADA arrangement in multiple clinical
trials. In addition, the portfolio includes KRX-0403, which is a novel spindle
poison, or type of chemotherapy commonly used. We are currently evaluating
whether we will continue development of KRX-0403.
 
 During
2004 and in the first quarter of 2005, we in-licensed two pre-clinical compounds
in accordance with our acquisition and in-licensing strategy, which have been
designated as KRX-0404 and KRX-0501, respectively. These compounds are in the
areas of oncology and neurology, respectively.
 
 *General
Corporate*
 
 We were
incorporated in Delaware in October 1998. We commenced operations in November
1999, following our acquisition of substantially all of the assets and certain
of the liabilities of Partec Ltd., our predecessor company that began operations
in January 1997. Since commencing operations, our activities have been primarily
devoted to developing our technologies and drug candidates, acquiring
clinical-stage compounds, raising capital, purchasing assets for our facilities,
and recruiting personnel.
 
 In the
first quarter of 2004, we completed the acquisition of ACCESS Oncology, Inc., or
ACCESS Oncology, a privately-held, cancer-focused biotechnology company. The
acquired drug portfolio included three clinical stage oncology compounds,
designated as KRX-0401, KRX-0402 and KRX-0403. As a part of the acquisition of
ACCESS Oncology, we acquired the Online Collaborative Oncology Group, Inc., or
OCOG, a subsidiary of ACCESS Oncology, which provides clinical trial management
and site recruitment services to us, as well as other biotechnology and
pharmaceutical companies.
 
 We are a
development stage company and have no product sales to date. Our major sources
of working capital have been proceeds from various private placements of equity
securities, option and warrant exercises, and from our initial public offering.
We have devoted substantially all of our efforts to the discovery, in-licensing
and development of drug candidates. We have incurred negative cash flow from
operations each year since our inception. We anticipate incurring negative cash
flows from operating activities for the foreseeable future. We have spent, and
expect to continue to spend, substantial amounts in connection with implementing
our business strategy, including our planned product development efforts, our
clinical trials and potential in-licensing and acquisition opportunities.
 
 11
 Our
revenues consist of clinical trial management and site recruitment services.
Revenues from providing these services are recognized as the services are
provided. Deferred revenue is incurred when we receive a deposit or prepayment
for services to be performed at a later date.
 
 Our cost
of services consist of all costs specifically associated with client programs
such as salaries, benefits paid to personnel, payments to third-party vendors
and systems and other support facilities associated with delivering services to
our clients. Cost of services are recognized as services are
performed.
 
 Our
research and development expenses consist primarily of salaries and related
personnel costs, fees paid to consultants and outside service providers for
clinical and laboratory development, facilities-related and other expenses
relating to the design, development, testing, and enhancement of our product
candidates, as well as expenses related to in-licensing and acquisition of new
product candidates. We expense our research and development costs as they are
incurred.
 
 Our
general and administrative expenses consist primarily of salaries and related
expenses for executive, finance and other administrative personnel, recruitment
expenses, professional fees and other corporate expenses, including investor
relations, general legal activities and facilities related expenses.
 
 Our
results of operations include non-cash compensation expense as a result of the
grants of stock options and warrants. Compensation expense for fixed award
options and warrants granted to employees and directors represents the intrinsic
value (the difference between the stock price of the common stock and the
exercise price of the options or warrants) of the options and warrants at the
date of grant. For variable awards, we consider the difference between the stock
price at reporting date and the exercise price, in the case where a measurement
date has not been reached. The compensation cost is recorded over the respective
vesting periods of the individual stock options and warrants. The expense is
included in the respective categories of expense in the statement of operations.
We expect to incur significant non-cash compensation expense in the future;
however, because some of the options and warrants issued to employees,
consultants and other third-parties either do not vest immediately or vest upon
the achievement of certain milestones, the total expense is uncertain.
 
 Our
ongoing clinical trials will be lengthy and expensive. Even if these trials show
that our drug candidates are effective in treating certain indications, there is
no guarantee that we will be able to record commercial sales of any of our
product candidates in the near future. In addition, we expect losses to continue
as we continue to fund in-licensing and development of new drug candidates. As
we continue our development efforts, we may enter into additional third-party
collaborative agreements and may incur additional expenses, such as licensing
fees and milestone payments. As a result, our quarterly results may fluctuate
and a quarter-by-quarter comparison of our operating results may not be a
meaningful indication of our future performance.
 
 **RESULTS
OF OPERATIONS**
 
 **Three
months ended March 31, 2005 and March 31, 2004**
 
 *Revenue.* Service
revenue increased by $62,000 to $157,000 for the three months ended March 31,
2005, as compared to revenue of $95,000 for the three months ended March 31,
2004. The increase in service revenue was primarily due to the inclusion of
ACCESS Oncology’s results from February 5, 2004, the acquisition date, in the
prior comparable period. We do not expect our service revenues to have a
material impact on our financial results during the remainder of 2005.
 
 *Cost
of Services Expense* . Cost of
services expense increased by $101,000 to $181,000 for the three months ended
March 31, 2005, as compared to expense of $80,000 for the three months ended
March 31, 2004. The increase in cost of services expense was primarily due to
the inclusion of ACCESS Oncology’s results from February 5, 2004, the
acquisition date, in the prior comparable period. We do not expect our cost of
service expense to have a material impact on our financial results during the
remainder of 2005.
 
 12
 *Non-Cash
Compensation Expense (Research and Development).* Non-cash
compensation expense related to stock option grants and warrant issuances was
$176,000 for the three months ended March 31, 2005, as compared to an expense of
$202,000 for the three months ended March 31, 2004. Non-cash compensation
expense in the current and comparable period were due to adjustments to the fair
market value of previously-issued options to consultants and also due to the
issuance of options to consultants accounted for using the fair value
method.
 
 *Non-Cash
Acquired In-Process Research and Development Expense* . We did
not record a charge for the three months ended March 31, 2005. As required by
Financial Accounting Standards Board Interpretation No. 4, “Applicability of
FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
Method," or FIN 4, the Company recorded a charge of $18,800,000 in the three
months ended March 31, 2004 for the estimate of the portion of the purchase
price of ACCESS Oncology allocated to acquired in-process research and
development. A project-by-project valuation was performed with the assistance of
independent valuation specialists to determine the fair value of research and
development projects of ACCESS Oncology which were in-process, but not yet
completed.
 
 *Other
Research and Development Expenses* . Other
research and development expenses increased by $2,390,000 to $4,042,000 for the
three months ended March 31, 2005, as compared to expenses of $1,652,000 for the
three months ended March 31, 2004. The increase in other research and
development expenses was due primarily to a $870,000 increase in expenses
related to the KRX-101 clinical program as well as to set-up costs associated
with the planned Phase III and IV trials, a $1,164,000 increase in expenses
related to our clinical stage, oncology drug portfolio, primarily the KRX-0401
clinical program (the $1,164,000 increase includes $159,000 for the purchase of
license rights and interests covering patent rights for KRX-0402), and an
increase in our licensing costs of $250,000 for the recent in-licensing of a
pre-clinical compound. The comparative period last year included one-half, or
$500,000, of a one-time bonus paid to our Chief Executive Officer pursuant to
his employment agreement for the
achievement of a milestone .
 
 We expect
our other research and development costs to increase during the year as a result
of the pending initiation of the pivotal clinical program for KRX-101 and the
expansion of the clinical program for KRX-0401, including the planned
commencement of additional single agent and combination trials, as well as
possible development programs for our other drug candidates.
 
 *Non-Cash
Compensation Expense (General and Administrative).* Non-cash
compensation expense related to stock option grants was $185,000 in each of the
three month periods ended March 31, 2005 and 2004. Non-cash
compensation expense in the current and comparable period were due to
adjustments to the fair market value of previously-issued options to
consultants, the issuance of options to consultants accounted for using the fair
value method, as well as the current period impact of options granted to certain
directors below market value on the date of grant.
 
 *Other
General and Administrative Expenses* . Other
general and administrative expenses decreased by $448,000 to $645,000 for the
three months ended March 31, 2005, as compared to expenses of $1,093,000 for the
three months ended March 31, 2004. The decrease in general and administrative
expenses was due primarily to the absence of payroll expenses incurred in the
comparable period last year relating to one-half, or $500,000, of a one-time
bonus to our Chief Executive Officer for the achievement of a certain milestone
pursuant to his employment agreement. The compensation of our Chief Executive
Officer is allocated equally between other research and development expenses and
other general and administrative expenses to reflect the allocation of his
responsibilities and activities for Keryx.
 
 We expect
our other general and administrative costs to increase modestly over the year
primarily as a result of our support for our clinical development programs, as
well as increased costs associated with being a public company.
 
 *Interest
and Other Income, Net* .
Interest and other income, net, increased by $145,000 to $240,000 for the three
months ended March 31, 2005, as compared to income of $95,000 for the three
months ended March 31, 2004. The increase resulted from the general increase in
short-term market interest rates when compared to the comparable period last
year.
 
 *Income
Taxes* . We did
not record any income tax expense for the three months ended March 31, 2005. For
the three months ended March 31, 2004, income tax expense was $1,000. Our income
tax expense for the three months ended March 31, 2004 resulted from state taxes
imposed on our capital.
 
 13
 **LIQUIDITY
AND CAPITAL RESOURCES**
 
 We have
financed our operations from inception primarily through our initial public
offering, various private placement transactions, and option and warrant
exercises. As of March 31, 2005, we had received net proceeds of $46.3 million
from our initial public offering, net proceeds of approximately $60.4 million
from private placements of our common and preferred stock and convertible notes,
including the conversion of $3.2 million of loans into contributed capital, and
proceeds of $5.5 million from the exercise of options and warrants.
 
 As of
March 31, 2005, we had $44.8 million in cash, cash equivalents, interest
receivable, and short-term and long-term securities, a decrease of $5.1 million
from December 31, 2004. Cash used in operating activities for the three months
ended March 31, 2005 was $5.1 million, as compared to $3.0 million for the three
months ended March 31, 2004. This increase in cash used in operating activities
was due primarily to increased expenditures associated with the execution of our
business plan, including, set-up costs for the KRX-101 pivotal program and
expansion of the KRX-0401 clinical program. For the three months ended March 31,
2005, net cash used in investing activities of $1.8 million was primarily the
result of an investment in securities. For the three months ended March 31,
2005, net cash provided by financing activities of $0.2 million was the result
of net proceeds from the exercise of options and warrants.
 
 We
believe that our cash and cash equivalents, interest receivable and short-term
and long-term securities will provide us with capital to support our current and
planned clinical programs for KRX-101, KRX-0401 and our other drug candidates
within our portfolio for approximately the next 24 months. Additionally, we also
believe that our cash position provides us with added flexibility in our
in-licensing and product acquisition program to potentially strengthen our
portfolio with additional clinical-stage drug candidates.
 
 Our cash
and cash equivalents and short-term and long-term securities as of March 31,
2005 are invested in highly liquid investments such as cash, money market
accounts and short-term and long-term U.S. corporate and government debt and
auction note securities. As of March 31, 2005, we are unaware of any known
trends or any known demands, commitments, events, or uncertainties that will, or
that are reasonably likely to, result in a material increase or decrease in our
required liquidity. We expect that our liquidity needs throughout 2005 will
continue to be funded from existing cash, cash equivalents, and short-term
marketable securities.
 
 On
September 29, 2004, we filed a shelf registration statement on Form S-3 with the
SEC, which the SEC declared effective on October 13, 2004. The registration
statement provides for the offering of up to five million shares of our common
stock. We may offer these securities from time to time in response to market
conditions or other circumstances if we believe such a plan of financing is in
the best interest of the company and our stockholders. We believe that the
availability to conduct such offerings enhances our ability to raise additional
capital to finance our operations.
 
 **OFF-BALANCE
SHEET ARRANGEMENTS**
 
 We have
not entered into any transactions with unconsolidated entities whereby we have
financial guarantees, subordinated retained interests, derivative instruments or
other contingent arrangements that expose us to material continuing risks,
contingent liabilities, or any other obligations under a variable interest in an
unconsolidated entity that provides us with financing, liquidity, market risk or
credit risk support.
 
 **OBLIGATIONS
AND COMMITMENTS**
 
 As of
March 31, 2005, we have known contractual obligations, commitments and
contingencies of $32,142,000. Of this amount, $29,140,000 relates to research
and development agreements (primarily relating to our pending pivotal Phase III
and Phase IV clinical program for KRX-101), of which $9,697,000 is due within
the next year, with the remaining balance due as per the schedule below. The
additional $3,002,000 relates to our current and recently signed operating lease
obligations, of which $268,000 is due within the next year, with the remaining
balance due as per the schedule below.
  14
  **Payment
      due by period****Contractual
      obligations**
    
    **Total**
    
    **Less
      than**
      **1
      year**
    
    **1-3**
      **years**
    
    **3-5**
      **years**
    
    **More
      than**
      **5
      years**Research
      and development agreements
    
    $
    29,140,000
    
    $
    9,697,000
    
    $
    12,560,000
    
    $
    6,883,000
    
    
    --Operating
      leases
    
    
    3,002,000
    
    
    268,000
    
    
    1,193,000
    
    
    1,193,000
    
    
    348,000Total
    
    $
    32,142,000
    
    $
    9,965,000
    
    $
    13,753,000
    
    $
    8,076,000
    
    $
    348,000
 Additionally,
we have undertaken to make contingent milestone payments to certain of our
licensors of up to approximately $67.9 million over the life of the licenses, of
which approximately $47.7 million will be due upon or following regulatory
approval of the drugs. In certain cases, such payments will reduce any royalties
due on sales of related products. In the event that the milestones are not
achieved, we remain obligated to pay one licensor $50,000 annually until the
license expires. We have also committed to pay to the former stockholders of
ACCESS Oncology certain contingent equity rights if its drug candidates meet
certain development milestones. In addition, pursuant to his employment
agreement, our Chief Executive Officer is entitled to receive a one-time $2.0
million performance-based cash bonus upon our achievement of certain levels of
market capitalization or working capital. These commitments are not included in
the table above.
 
 During
2004, we entered into a temporary lease arrangement with our President for the
utilization of part of his residence for office space associated with our
employees in San Francisco, California.  We have expensed a total of
$62,000 (which includes $12,000 for the first quarter of
2005) pursuant to the terms of this arrangement, which amount has been
included in accounts payable and accrued expenses in the accompanying balance
sheet as of March 31, 2005.  In April 2005, we moved our San Francisco
operations to new office space and terminated our temporary lease arrangement
with our President.
 
 **CRITICAL
ACCOUNTING POLICIES**
 
 The
discussion and analysis of our financial condition and results of operations is
based upon our consolidated 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 judgments that
affect the reported amount of assets and liabilities and related disclosures of
contingent assets and liabilities at the date of our financial statements and
the reported amounts of revenues and expenses during the applicable period.
Actual results may differ from these estimates under different assumptions or
conditions.
 
 We define
critical accounting policies as those that are reflective of significant
judgments and uncertainties and which may potentially result in materially
different results under different assumptions and conditions. In applying these
critical accounting policies, our management uses its judgment to determine the
appropriate assumptions to be used in making certain estimates. These estimates
are subject to an inherent degree of uncertainty. Our critical accounting
policies include the following:
 
 *Stock
Compensation* . We have
granted options to employees, directors and consultants, as well as warrants to
other third parties. In applying Statement of Financial Accounting Standards No.
123, “Accounting for Stock-Based Compensation,” or SFAS 123, we use the
Black-Scholes pricing model to calculate the fair market value of our options
and warrants. The Black-Scholes model takes into account volatility in the price
of our stock, the risk-free interest rate, the estimated life of the option or
warrant, the closing market price of our stock and the exercise price. We have
assumed for the purposes of the Black-Scholes calculation that an option will be
exercised one year and two years after it fully vests for consultants and
employees, respectively. We base our estimates of our stock price volatility on
the volatility during the period prior to the grant of the option or warrant;
however, this estimate is neither predictive nor indicative of the future
performance of our stock. For purposes of the calculation, we assumed that no
dividends would be paid during the life of the options and warrants.
 
 In
accordance with EITF 96-18 “Accounting for Equity Instruments that are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services,” total compensation expense for options issued to consultants is
determined at the “measurement date.” The expense is recognized over the vesting
period for the options. Until the measurement date is reached, the total amount
of compensation expense remains uncertain. We record option compensation based
on the fair value of the options at the reporting date. These options are then
revalued, or the total compensation is recalculated based on the then current
fair value, at each subsequent reporting date. This results in a change to the
amount previously recorded in respect of the option grant, and additional
expense or a negative expense may be recorded in subsequent periods based on
changes in the assumptions used to calculate fair value, such as changes in
market price, until the measurement date is reached and the compensation expense
is finalized.
 
 15
 We
account for stock-based employee and director compensation arrangements in
accordance with the provisions of APB Opinion No. 25, “Accounting for Stock
Issued to Employees,” and the Financial Accounting Standards Board, or FASB,
Interpretation No. 44, “Accounting for Certain Transactions Involving Stock
Compensation,” as permitted by SFAS 123. We also comply with the disclosure
provisions of SFAS 123 and Statement of Financial Accounting Standards No. 148,
“Accounting for Stock-Based Compensation-Transition and Disclosure.”
 
 *Accounting
Related to the Valuation of Acquired In-Process Research and
Development.* As
required by FASB Interpretation No. 4, “Applicability of FASB Statement No. 2 to
Business Combinations Accounted for by the Purchase Method," or FIN 4, we
recorded a charge for the three months ended March 31, 2004, of $18,800,000 for
the estimate of the portion of the ACCESS Oncology purchase price allocated to
acquired in-process research and development.
 
 A
project-by-project valuation using the guidance in Statement of Financial
Accounting Standards No. 141, “Business Combinations” and the AICPA Practice Aid
“Assets Acquired in a Business Combination to Be Used In Research and
Development Activities: A Focus on Software, Electronic Devices and
Pharmaceutical Industries” was performed with the assistance of independent
valuation specialists to determine the fair value of research and development
projects of ACCESS Oncology which were in-process, but not yet
completed.
 
 The fair
value was determined using the income approach on a project-by-project basis.
This method starts with a forecast of the expected future net cash flows. These
cash flows are then adjusted to present value by applying an appropriate
discount rate that reflects the project’s stage of completion and other risk
factors. These other risk factors can include the nature of the product, the
scientific data associated with the technology, the current patent situation and
market competition.
 
 The
following assumptions were made in order to forecast future net cash
flows:
  ·
    revenue
      that is likely to result from specific in-process research and development
      projects, including estimated patient populations, estimated selling
      prices, estimated market penetration and estimated market share and
      year-over-year growth rates over the product life
  cycles;
  ·
    cost
      of sales related to the potential products using industry data or other
      sources of market data;
  ·
    sales
      and marketing expense using industry data or other market
      data;
  ·
    general
      and administrative expenses; and
  ·
    research
      and development expenses.
  The
valuations are based on information that were available as of the acquisition
date and the expectations and assumptions deemed reasonable by our management.
No assurance can be given, however, that the underlying assumptions or events
associated with such assets will occur as projected. For these reasons, among
others, the actual results may vary from the projected results.
 
 *Accounting
For Income Taxes* . In
preparing our consolidated financial statements, we are required to estimate our
income taxes in each of the jurisdictions in which we operate. This process
requires management to estimate our actual current tax exposure and assess
temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities. We must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income and, to the extent we believe that
recovery is not likely, we must establish a valuation allowance. To the extent
we establish a valuation allowance or increase this allowance in a period, we
must include an expense within the tax provision in the statement of operations.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have fully offset our
U.S. deferred tax assets with a valuation allowance. Our lack of earnings
history and the uncertainty surrounding our ability to generate taxable income
prior to the reversal or expiration of such deferred tax assets were the primary
factors considered by management in establishing the valuation allowance. Our
income tax expense during the three months ended March 31, 2004 resulted from
state taxes imposed on our capital.
 
 16
 *Impairment* . We have
complied with Statement of Financial Accounting Standards No. 144 *,
“Accounting for the Impairment or Disposal of Long-Lived
Assets,”* or SFAS
144, since January 1, 2002. SFAS 144 requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future cash flows expected to be generated by the asset or used in its
disposal. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs required to sell
the assets.
 
 **RECENTLY
ISSUED ACCOUNTING STANDARDS**
 
 In
December 2004, the FASB issued Statement of Financial Accounting Standards No.
123R, “Share-Based Payment,” or SFAS 123R. SFAS 123R will replace SFAS 123,
which was issued in 1995. SFAS 123R requires that the fair value of the grant of
employee stock options be reported as an expense. Historically, we have
disclosed in our footnotes the pro forma expense effect of stock options granted
under our stock option plans in Note 1 - General: Stock-Based Compensation.
Under SFAS 123R, we would have been required to implement the standard as of the
beginning of the first interim or annual period that begins after June 15, 2005.
Calendar year-end companies, therefore, would have been permitted to follow the
pre-existing accounting literature for the first and second quarters of 2005,
but would be required to follow SFAS 123R beginning with their third quarter
periodic reports.
 
 On April
15, 2005, the SEC approved a new rule allowing companies to implement SFAS 123R
at the beginning of their first annual period, rather than the first interim
period, beginning after June 15, 2005. This means, for example, that the
financial statements for a calendar year-end company do not need to comply with
SFAS 123R until the interim financial statements for the first quarter of 2006
are filed with the SEC. The SEC’s new rule does not change the accounting
required by SFAS 123R; it changes only the dates for compliance with the
standard.
 
 We plan
to adopt SFAS 123R when required by the SEC in the first quarter of 2006. The
estimated impact of adopting SFAS 123R will have a material impact on our
consolidated financial statements.
 
 **RISK
FACTORS**
 
 You
should carefully consider the following risks and uncertainties. If any of the
following occurs, our business, financial condition or operating results could
be materially harmed. These factors could cause the trading price of our common
stock to decline, and you could lose all or part of your investment.
 
 **Risks
Related to Our Business**
 
 ***We
have a limited operating history and have incurred substantial operating losses
since our inception. We expect to continue to incur losses in the future and may
never become profitable.***
 
 We have a
limited operating history. You should consider our prospects in light of the
risks and difficulties frequently encountered by early stage companies. In
addition, we have incurred operating losses since our inception and expect to
continue to incur operating losses for the foreseeable future and may never
become profitable. As of March 31, 2005, we had an accumulated deficit of
approximately $92.4 million. As we expand our research and development efforts,
we will incur increasing losses. We may continue to incur substantial operating
losses even if we begin to generate revenues from our drug candidates or
technologies.
 
 We have
not yet commercialized any products or technologies and cannot be sure we will
ever be able to do so. Even if we commercialize one or more of our drug
candidates or technologies, we may not become profitable. Our ability to achieve
profitability depends on a number of factors, including our ability to complete
our development efforts, obtain regulatory approval for our drug candidates and
successfully commercialize our drug candidates and technologies.
 
 17
 ***If
we are unable to successfully complete our clinical trial programs, or if such
clinical trials take longer to complete than we project, our ability to execute
our current business strategy will be adversely affected.***
 
 Whether
or not and how quickly we complete clinical trials is dependent in part upon the
rate at which we are able to engage clinical trial sites and, thereafter, the
rate of enrollment of patients. Patient enrollment is a function of many
factors, including the size of the patient population, the proximity of patients
to clinical sites, the eligibility criteria for the study and the existence of
competitive clinical trials. If we experience delays in identifying and
contracting with sites and/or in patient enrollment in our clinical trial
programs, we may incur additional costs and delays in our development programs,
and may not be able to complete our clinical trials on a cost-effective basis.
 
 Additionally,
while we have finalized an agreement with the FDA, pursuant to a Special
Protocol Assessment, or SPA, regarding a subpart H clinical development plan for
the clinical development of KRX-101 for diabetic nephropathy, no assurance can
be given that we will be able to meet the requirements set forth in this
agreement. The subpart H process is complex and requires careful execution. Many
companies who have been granted the right to utilize an accelerated approval
approach have failed to obtain approval. Moreover, negative or inconclusive
results from the clinical trials we hope to conduct or adverse medical events
could cause us to have to repeat or terminate the clinical trials. Accordingly,
we may not be able to complete the clinical trials within an acceptable time
frame, if at all.
 
 ***If
our drug candidates do not receive the necessary regulatory approvals, we will
be unable to commercialize our drug candidates.***
 
 We have
not received, and may never receive, regulatory approval for the commercial sale
of any of our drug candidates. We will need to conduct significant additional
research and human testing before we can apply for product approval with the FDA
or with regulatory authorities of other countries. Pre-clinical testing and
clinical development are long, expensive and uncertain processes. Satisfaction
of regulatory requirements typically depends on the nature, complexity and
novelty of the product and requires the expenditure of substantial resources.
Data obtained from pre-clinical and clinical tests can be interpreted in
different ways, which could delay, limit or prevent regulatory approval. It may
take us many years to complete the testing of our drug candidates and failure
can occur at any stage of this process. Negative or inconclusive results or
medical events during a clinical trial could cause us to delay or terminate our
development efforts.
 
 Furthermore,
interim results of preclinical or clinical studies do not necessarily predict
their final results, and acceptable results in early studies might not be
obtained in later studies. Drug candidates in the later stages of clinical
development may fail to show the desired safety and efficacy traits despite
having progressed through initial clinical testing. Specifically, we recently
received the recommendation to proceed, as planned, into our pivotal Phase III
and Phase IV program for KRX-101 from the Collaborative Study Group. This
recommendation was made pursuant to a safety and efficacy assessment of a first
interim analysis of data from our ongoing Phase II study for KRX-101. There can
be no assurance that the full data from the Phase II study will track the data
from the first interim analysis of the Phase II study upon which the
recommendation to move forward was made. Moreover, this recommendation to move
into our pivotal program, as well as any positive results from our Phase II
trial, may not be indicative of results from future clinical trials and the risk
remains that the pivotal program for KRX-101 may generate efficacy data that
will be insufficient for the approval of the drug, or may raise safety concerns
that may prevent approval of the drug.
 
 Clinical
trials also have a high risk of failure. A number of companies in the
pharmaceutical industry, including biotechnology companies, have suffered
significant setbacks in advanced clinical trials, even after achieving promising
results in earlier trials. If we experience delays in the testing or approval
process or if we need to perform more or larger clinical trials than originally
planned, our financial results and the commercial prospects for our drug
candidates may be materially impaired. In addition, we have limited experience
in conducting and managing the clinical trials necessary to obtain regulatory
approval in the United States and abroad and, accordingly, may encounter
unforeseen problems and delays in the approval process.
 
 18
 ***Because
we license our proprietary technologies, termination of these license agreements
would prevent us from developing our drug candidates.***
 
 We do not
own any of our drug candidates. We have licensed the patent rights to these
drugs candidates from others. These license agreements require us to meet
development or financing milestones and impose development and commercialization
due diligence requirements on us. In addition, under these agreements, we must
pay royalties on sales of products resulting from licensed technologies and pay
the patent filing, prosecution and maintenance costs related to the licenses. If
we do not meet our obligations in a timely manner or if we otherwise breach the
terms of our license agreements, our licensors could terminate the agreements,
and we would lose the rights to our drug candidates.
 
 ***We
rely on third parties to manufacture our products. If these third parties do not
successfully manufacture our products, our business will be
harmed.***
 
 We have
no experience in manufacturing products for clinical or commercial purposes and
do not have any manufacturing facilities. We intend to continue, in whole or in
part, to use third parties to manufacture our products for use in clinical
trials and for future sales. We may not be able to enter into future third-party
contract manufacturing agreements on acceptable terms to us, if at all.
 
 Contract
manufacturers often encounter difficulties in scaling up production, including
problems involving production yields, quality control and assurance, shortage of
qualified personnel, compliance with FDA and foreign regulations, production
costs and development of advanced manufacturing techniques and process controls.
Our third-party manufacturers may not perform as agreed or may not remain in the
contract manufacturing business for the time required by us to successfully
produce and market our drug candidates. In addition, our contract manufacturers
will be subject to ongoing periodic, unannounced inspections by the FDA and
corresponding foreign governmental agencies to ensure strict compliance with,
among other things, current good manufacturing practices, in addition to other
governmental regulations and corresponding foreign standards. We will not have
control over, other than by contract, third-party manufacturers’ compliance with
these regulations and standards. Switching or engaging multiple manufacturers
may be difficult because the number of potential manufacturers is limited and,
particularly in the case of KRX-101, the process by which multiple manufacturers
make the drug substance must be identical at each manufacturing facility. It may
be difficult for us to find and engage replacement or multiple manufacturers
quickly and on terms acceptable to us, if at all. Moreover, if we need to change
manufacturers, the FDA and corresponding foreign regulatory agencies must
approve these manufacturers in advance, which will involve testing and
additional inspections to ensure compliance with FDA and foreign regulations and
standards.
 
 If
third-party manufacturers fail to deliver the required quantities of our drug
candidates on a timely basis and at commercially reasonable prices, we will not
be able to commercialize our products as planned.
 
 We have
entered into a contract manufacturing relationship with a U.S.-based contract
manufacturer for KRX-101 which we believe will be adequate to satisfy our
current clinical and initial commercial supply needs; however, as we transition
the manufacturing of KRX-101 to our U.S.-based contract manufacturer, we will
need to create a reproducible manufacturing process that will ensure consistent
manufacture of KRX-101 across multiple batches and sources. As with all
heparin-like compounds, the end product is highly sensitive to the manufacturing
process utilized. Accordingly, the creation of a reproducible process will be
required for the successful commercialization of KRX-101. There can be no
assurance that we will be successful in this endeavor.
 
 ***If
we are not able to obtain the raw materials required for the manufacture of our
lead product candidate, KRX-101, our ability to develop and market this product
candidate will be substantially harmed.***
 
 Source
materials for KRX-101, our lead product candidate, are derived from porcine
mucosa. Long-term supplies for KRX-101 could be affected by limitations in the
supply of porcine mucosa and the demand for other heparin products, over which
we will have no control. Additionally, diseases affecting the world supply of
pigs could have an actual or perceived negative impact on our ability, or the
ability of our contract manufacturers, to source, make and/or sell KRX-101. Such
negative impact could materially affect the commercial success of KRX-101.
 
 19
 ***If
we do not establish or maintain drug development and marketing arrangements with
third parties, we may be unable to commercialize our technologies into products.***
 
 We are an
emerging company and do not possess all of the capabilities to fully
commercialize our product candidates on our own. From time to time, we may need
to contract with third parties to:
  ·
    assist
      us in developing, testing and obtaining regulatory approval for and
      commercializing some of our compounds and technologies; and
  ·
    market
      and distribute our drug candidates.
  We can
provide no assurance that we will be able to successfully enter into agreements
with such third parties on terms that are acceptable to us, if at all. If we are
unable to successfully contract with third parties for these services when
needed, or if existing arrangements for these services are terminated, whether
or not through our actions, or if such third parties do not fully perform under
these arrangements, we may have to delay, scale back or end one or more of our
drug development programs or seek to develop or commercialize our technologies
independently, which could result in delays. Furthermore, such failure could
result in the termination of license rights to one or more of our technologies.
Moreover, if these development or marketing agreements take the form of a
partnership or strategic alliance, such arrangements may provide our
collaborators with significant discretion in determining the efforts and
resources that they will apply to the development and commercialization of
products based on our technologies. Accordingly, to the extent that we rely on
third parties to research, develop or commercialize products based on our
technologies, we are unable to control whether such products will be
scientifically or commercially successful.
 
 ***Even
if we obtain FDA approval to market our product candidates, if our products fail
to achieve market acceptance, we will never record meaningful revenues.***
 
 Even if
our products are approved for sale, they may not be commercially successful in
the marketplace. Market acceptance of our product candidates will depend on a
number of factors, including:
  ·
    perceptions
      by members of the health care community, including physicians, of the
      safety and efficacy of our product candidates;
  ·
    the
      rates of adoption of our products by medical practitioners and the target
      populations for our products;
  ·
    the
      potential advantages that our product candidates offer over existing
      treatment methods;
  ·
    the
      cost-effectiveness of our product candidates relative to competing
      products;
  ·
    the
      availability of government or third-party payor reimbursement for our
      product candidates;
  ·
    the
      side effects or unfavorable publicity concerning our products or similar
      products; and
  ·
    the
      effectiveness of our sales, marketing and distribution efforts.
  Because
we expect sales of our product candidates, if approved, to generate
substantially all of our revenues in the long-term, the failure of our drugs to
find market acceptance would harm our business and could require us to seek
additional financing or other sources of revenue.
 
 20
 ***If
our competitors develop and market products that are less expensive, more
effective or safer than our product candidates, our commercial opportunities may
be reduced or eliminated.***
 
 The
pharmaceutical industry is highly competitive. Our competitors include
pharmaceutical companies and biotechnology companies, as well as universities
and public and private research institutions. In addition, companies that are
active in different but related fields represent substantial competition for us.
Many of our competitors have significantly greater capital resources, larger
research and development staffs and facilities and greater experience in drug
development, regulation, manufacturing and marketing than we do. These
organizations also compete with us to recruit qualified personnel, attract
partners for joint ventures or other collaborations, and license technologies
that are competitive with ours. As a result, our competitors may be able to more
easily develop technologies and products that could render our technologies or
our drug candidates obsolete or noncompetitive. To
compete successfully in this industry we must identify novel and unique drugs or
methods of treatment and then complete the development of those drugs as
treatments in advance of our competitors.
 
 Our
commercial opportunities may be reduced or eliminated if our competitors develop
and market products that are less expensive, more effective or safer than our
drug candidates. Other companies have products or drug candidates in various
stages of pre-clinical or clinical development to treat diseases for which we
are also seeking to discover and develop drug candidates. Some of these
potential competing drugs are further advanced in development than our drug
candidates and may be commercialized earlier. Even if we are successful in
developing effective drugs, our products may not compete successfully with
products produced by our competitors.
 
 ***If
we lose our key personnel or are unable to attract and retain additional
personnel, our operations could be disrupted and our business could be harmed.***
 
 We
currently have 24 full and part-time employees. To successfully develop our drug
candidates, we must be able to attract and retain highly skilled personnel. In
addition, if we lose the services of our current personnel, in particular,
Michael S. Weiss, our Chairman and Chief Executive Officer, our ability to
continue to execute on our business plan could be materially impaired. In
addition, while we have an employment agreement with Mr. Weiss, this agreement
would not prevent him from terminating his employment with us.
 
 ***Any
acquisitions we make may dilute your equity or require a significant amount of
our available cash and may not be scientifically or commercially successful.***
 
 As part
of our business strategy, we may effect acquisitions to obtain additional
businesses, products, technologies, capabilities and personnel. If we make one
or more significant acquisitions in which the consideration includes stock or
other securities, your equity in us may be significantly diluted. If we make one
or more significant acquisitions in which the consideration includes cash, we
may be required to use a substantial portion of our available cash.
 
 Acquisitions
involve a number of operational risks, including:
  ·
    difficulty
      and expense of assimilating the operations, technology and personnel of
      the acquired business;
  ·
    our
      inability to retain the management, key personnel and other employees of
      the acquired business;
  ·
    our
      inability to maintain the acquired company’s relationship with key third
      parties, such as alliance partners;
  ·
    exposure
      to legal claims for activities of the acquired business prior to the
      acquisition;
  ·
    the
      diversion of our management’s attention from our core business; and
  ·
    the
      potential impairment of substantial goodwill and write-off of in-process
      research and development costs, adversely affecting our reported results
      of operations.
  21
 ***We
face product liability risks and may not be able to obtain adequate insurance.***
 
 The use
of our drug candidates in clinical trials, and the future sale of any approved
products, exposes us to liability claims. Although we are not aware of any
historical or anticipated product liability claims against us, if we cannot
successfully defend ourselves against product liability claims, we may incur
substantial liabilities or be required to cease clinical trials of our drug
candidates or limit commercialization of any approved products.
 
 We
believe that we have obtained sufficient product liability insurance coverage
for our clinical trials. We intend to expand our insurance coverage to include
the commercial sale of any approved products if marketing approval is obtained;
however, insurance coverage is becoming increasingly expensive. We may not be
able to maintain insurance coverage at a reasonable cost. We may not be able to
obtain additional insurance coverage that will be adequate to cover product
liability risks that may arise. Regardless of merit or eventual outcome, product
liability claims may result in:
  ·
    decreased
      demand for a product;
  ·
    injury
      to our reputation;
  ·
    our
      inability to continue to develop a drug candidate;
  ·
    withdrawal
      of clinical trial volunteers; and
  ·
    loss
      of revenues.
  Consequently,
a product liability claim or product recall may result in losses that could be
material.
 
 ***In
connection with providing our*** ***clinical
trial management and site recruitment*** ****** ***services,
we may be exposed to liability that could have a material adverse effect on our
financial condition and results of operations.***
 
 The
Online Collaborative Oncology Group, Inc., or OCOG, a subsidiary we acquired
through our acquisition of ACCESS Oncology, provides clinical trial management
and site recruitment services to us as well as other biotechnology and
pharmaceutical companies. In conducting the activities of OCOG, any failure on
our part to comply with applicable governmental regulations or contractual
obligations could expose us to liability to our clients and could have a
material adverse effect on us. We also could be held liable for errors or
omissions in connection with the services we perform. In addition, the wrongful
or erroneous delivery of health care information or services may expose us to
liability. If we were required to pay damages or bear the costs of defending any
such claims, the losses could be material.
 
 **Risks
Related to Our Financial Condition**
 
 ***Our
current cash, cash equivalents and short-term securities may not be adequate to
support our operations for the next 24 months as we have estimated.***
 
 We
believe that our $44.8 million in cash, cash equivalents, interest receivable
and short-term and long-term securities as of March 31, 2005, will be sufficient
to enable us to meet our planned operating needs and capital expenditures for
approximately the next 24 months. Our
forecast of the period of time through which our cash, cash equivalents and
short-term securities will be adequate to support our operations is a
forward-looking statement that involves risks and uncertainties. The actual
amount of funds we will need to operate is subject to many factors, some of
which are beyond our control. These factors include the following:
  ·
    the
      timing of expenses associated with manufacturing and product development
      of the proprietary drug candidates within our portfolio and those that may
      be in-licensed, partnered or acquired;
  ·
    the
      timing of the in-licensing, partnering and acquisition of new product
      opportunities;
  22
  ·
    the
      progress of the development efforts of parties with whom we have entered,
      or may enter, into research and development agreements;
  ·
    our
      ability to achieve our milestones under our licensing arrangements;
  ·
    the
      costs involved in prosecuting and enforcing patent claims and other
      intellectual property rights; and
  ·
    the
      amount of any funds expended to repurchase our common
    stock.
  ***If
we are unable to obtain additional funds on terms favorable to us, or at all,
our business would be harmed.***
 
 We expect
to use, rather than generate, funds from operations for the foreseeable future.
Based on our current plans, we believe our existing cash and cash equivalents, interest
receivable and short-term and long-term securities will be
sufficient to fund our operating expenses and capital requirements for
approximately the next 24 months; however, the actual amount of funds that we
will need prior to or after that date will be determined by many factors, some
of which are beyond our control. As a result, we may need funds sooner or in
different amounts than we currently anticipate, depending upon:
  ·
    the
      progress of our development activities;
  ·
    the
      progress of our research activities;
  ·
    the
      number and scope of our development programs;
  ·
    our
      ability to establish and maintain current and new licensing or acquisition
      arrangements;
  ·
    our
      ability to achieve our milestones under our licensing arrangements;
  ·
    the
      costs involved in enforcing patent claims and other intellectual property
      rights; and
  ·
    the
      costs and timing of regulatory approvals.
  If our
capital resources are insufficient to meet future capital requirements, we will
have to raise additional funds. If we are unable to obtain additional funds on
terms favorable to us or at all, we may be required to cease or reduce our
operating activities or sell or license to third parties some or all of our
technology. If we raise additional funds by selling additional shares of our
capital stock, the ownership interests of our stockholders will be diluted. If
we need to raise additional funds through the sale or license of our technology,
we may be unable to do so on terms favorable to us.
 
 ***Our
prior restructurings may result in additional Israeli-related liabilities.***
 
 In
September 2001, one of our Israeli subsidiaries received the status of an
“Approved Enterprise,” a status which grants certain tax benefits in Israel in
accordance with the “Law for the Encouragement of Capital Investments, 1959.”
Through December 31, 2003, our Israeli subsidiary, which ceased operations in
2003, has received tax benefits in the form of exemptions of approximately
$744,000 as a result of our subsidiary’s status as an “Approved Enterprise.” As
part of the restructuring implemented during 2003, we closed down our Jerusalem
laboratory facility. In October 2003, the subsidiary received a letter from the
Israeli Ministry of Industry and Trade that its Approved Enterprise status was
cancelled as of July 2003 and that past benefits would not need to be repaid.
The Israeli tax authorities have yet to confirm this position; however, we
believe that, based on the letter received from the Ministry of Industry and
Trade, it is unlikely that past benefits will need to be repaid, and therefore,
we have not recorded any charge with respect to this potential liability. There
can be no assurances that the Israeli tax authorities will confirm this
position. As a result, we may be liable to repay some or all of the tax benefits
received to date, which could adversely affect our cash flow and results of
operations.
 
 23
 In July
2003, our Israeli subsidiaries vacated their Jerusalem facility and relocated to
smaller facilities. The landlord of the Jerusalem facility has alleged that we
were immediately liable to pay the landlord a sum in excess of $1.1 million as a
result of the alleged breach of the lease agreement for the Jerusalem facility.
The amount demanded by the landlord includes rent for the entire remaining term
of the lease (through 2005), as well as property taxes and other costs. In
August 2003, the landlord claimed a bank guarantee, in the amount of $222,000,
which was previously provided as security in connection with the lease
agreement, making the net amount potentially due to the landlord $776,000. To
date, no litigation has been initiated, and, to our knowledge, the landlord has
succeeded in leasing most, if not all, of the space to one or more new tenants.
 
 **Risks
Related to Our Intellectual Property**
 
 ***If
we are unable to adequately protect our intellectual property, third parties may
be able to use our technology, which could adversely affect our ability to
compete in the market.***
 
 Our
commercial success will depend in part on our ability and the ability of our
licensors to obtain and maintain patent protection on our drug products and
technologies and successfully defend these patents and technologies against
third-party challenges. The patent positions of pharmaceutical and biotechnology
companies can be highly uncertain and involve complex legal and factual
questions. No consistent policy regarding the breadth of claims allowed in
biotechnology patents has emerged to date. Accordingly, the patents we use may
not be sufficiently broad to prevent others from practicing our technologies or
from developing competing products. Furthermore, others may independently
develop similar or alternative technologies or design around our patented
technologies. The patents we use may be challenged or invalidated or may fail to
provide us with any competitive advantage.
 
 Moreover,
we rely on trade secrets to protect technology where we believe patent
protection is not appropriate or obtainable. Trade secrets are difficult to
protect. While we require our employees, collaborators and consultants to enter
into confidentiality agreements, this may not be sufficient to adequately
protect our trade secrets or other proprietary information. In addition, we
share ownership and publication rights to data relating to some of our drug
candidates with our research collaborators and scientific advisors. If we cannot
maintain the confidentiality of this information, our ability to receive patent
protection or protect our trade
secrets or other  proprietary
information will be at risk.
 
 ***Litigation
or third-party claims of intellectual property infringement could require us to
spend substantial time and money defending such claims and adversely affect our
ability to develop and commercialize our products.***
 
 Third
parties may assert that we are using their proprietary technology without
authorization. In addition, third parties may have or obtain patents in the
future and claim that our technologies infringe their patents. If we are
required to defend against patent suits brought by third parties, or if we sue
third parties to protect our patent rights, we may be required to pay
substantial litigation costs, and our management’s attention may be diverted
from operating our business. In addition, any legal action against our licensors
or us that seeks damages or an injunction of our commercial activities relating
to the affected technologies could subject us to monetary liability and require
our licensors or us to obtain a license to continue to use the affected
technologies. We cannot predict whether our licensors or we would prevail in any
of these types of actions or that any required license would be made available
on commercially acceptable terms, if at all.
 
 **Risks
Related to Our Common Stock**
 
 ***Concentration
of ownership of our common stock among our existing executive officers,
directors and principal stockholders may prevent new investors from influencing
significant corporate decisions.***
 
 As of
March 31, 2005, our executive officers, directors and principal stockholders
(including their affiliates) beneficially owned, in the aggregate, approximately
24.6% of our outstanding common stock, including, for this purpose, currently
exercisable options and warrants held by our executive officers, directors and
principal stockholders. **** As a
result, these persons, acting together, may have the ability to significantly
influence  the
outcome of all matters submitted to our stockholders for approval, including the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of our assets. In addition, such persons, acting together,
may have the ability to effectively control our management and affairs.
Accordingly, this concentration of ownership may depress the market price of our
common stock.
 
 24
 ***Future
sales of our common stock could depress the market for our common
stock.***
 
 Sales of
a substantial number of shares of our common stock, or the perception by the
market that those sales could occur, could cause the market price of our common
stock to decline or could make it more difficult for us to raise funds through
the sale of equity in the future. On September 29, 2004, we filed with the SEC a
shelf registration statement on Form S-3, which the SEC declared effective on
October 13, 2004, providing for the offering of up to five million shares of our
common stock. Future sales pursuant to this registration statement could depress
the market for our common stock.
 
 Additionally,
our executive officers, directors, and principal stockholders beneficially
owned, in the aggregate, approximately 24.6% of our common stock as of March 31,
2005, including currently exercisable warrants and options held by them. If some
or all of them should decide to sell a substantial number of their holdings, it
could have a material adverse effect on the market for our common
stock.
 
 ***Our
stock price can be volatile, which increases the risk of litigation, and may
result in a significant decline in the value of your investment.***
 
 The
trading price of our common stock is likely to be highly volatile and subject to
wide fluctuations in price in response to various factors, many of which are
beyond our control. These factors include:
  ·
    developments
      concerning our drug candidates;
  ·
    announcements
      of technological innovations by us or our competitors;
  ·
    introductions
      or announcements of new products by us or our competitors;
  ·
    announcements
      by us of significant acquisitions, strategic partnerships, joint ventures
      or capital commitments;
  ·
    changes
      in financial estimates by securities analysts;
  ·
    actual
      or anticipated variations in quarterly operating results;
  ·
    expiration
      or termination of licenses, research contracts or other collaboration
      agreements;
  ·
    conditions
      or trends in the regulatory climate and the biotechnology and
      pharmaceutical industries;
  ·
    changes
      in the market valuations of similar companies; and
  ·
    additions
      or departures of key personnel.
  In
addition, equity markets in general, and the market for biotechnology and life
sciences companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of companies traded in those markets. These broad market and
industry factors may materially affect the market price of our common stock,
regardless of our development and 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. Such
litigation, if instituted against us, could cause us to incur substantial costs
to defend such claims and divert management’s attention and resources, which
could seriously harm our business.
 
 25
 ***The
concentration of stock ownership by our executive officers, directors and
principle stockholders and certain anti*** ***--takeover
provisions in our charter documents and Delaware law could make a third-party
acquisition of us difficult. This could limit the price investors might be
willing to pay in the future for our common stock.***
 
 As of
March 31, 2005, our executive officers, directors and principal stockholders
(including their affiliates) beneficially owned, in the aggregate, approximately 24.6 % of our
outstanding common stock, including, for this purpose, currently exercisable
options and warrants held by our executive officers, directors and principal
stockholders. In addition, provisions  in our
amended and restated certificate of incorporation and bylaws could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, or control us. These
factors could limit the price that certain investors might be willing to pay in
the future for shares of our common stock. Our amended and restated certificate
of incorporation allows us to issue preferred stock with rights senior to those
of the common stock. The issuance of preferred stock could decrease the amount
of earnings and assets available for distribution to the holders of our common
stock or could adversely affect the rights and powers, including voting rights,
of such holders. In certain circumstances, such issuance could have the effect
of decreasing the market price of our common stock. Our amended
and restated bylaws eliminate the right of stockholders to call a special
meeting of stockholders, which could make it more difficult for stockholders to
effect certain corporate actions. Any of
these provisions could also have the effect of delaying or preventing a change in
control.
 
 **ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK**
 
 The
primary objective of our investment activities is to preserve principal while
maximizing our income from investments and minimizing our market risk. We invest
in government and investment-grade corporate debt and auction note securities in
accordance with our investment policy. Some of the securities in which we invest
may have market risk. This means that a change in prevailing interest rates may
cause the principal amount of the investment to fluctuate. For example, if we
hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the principal
amount of our investment will probably decline. As of March 31, 2005, our
portfolio of financial instruments consists of cash equivalents and short-term
and long-term interest bearing securities, including corporate debt, money
market funds, government debt and auction note securities. The average duration
of all of our held-to-maturity investments held as of March 31, 2005, was less
than one year. Additionally, the re-pricing of our auction notes within thirty
days allows these securities to function as short-term investments. Due to the
short-term nature of all of our investments, we believe we have no material
exposure to interest rate risk arising from our investments.
 
 **ITEM
4. CONTROLS AND PROCEDURES**
 
 Our
disclosure controls and procedures are designed to ensure that information
required to be disclosed in our periodic filings with the SEC is (1) recorded,
processed, summarized and reported properly, within the time periods specified
in the SEC’s rules and forms and (2) accumulated and communicated to our
management, including our Chief Executive Officer and Principal Financial
Officer, on a timely basis so that proper disclosure can be made. Our Chief
Executive Officer and Principal Financial Officer conducted an evaluation of our
disclosure controls and procedures as of March 31, 2005, and concluded that our
disclosure controls and procedures were effective.
 
 There
were no changes in our internal controls over financial reporting during the
quarter ended March 31, 2005, that have materially affected, or are reasonably
likely to materially affect our internal controls over financial reporting.
 
 Our
management, including our Chief Executive Officer and Principal Financial
Officer, does not expect that our disclosure controls and procedures or our
internal controls over financial reporting will prevent all errors 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. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. 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 our company have been
detected.
 
 26
 
 **PART
II. OTHER INFORMATION**
 
 **ITEM
5. OTHER INFORMATION**
 
 On
December 22, 2004, our Compensation Committee approved base salaries for fiscal
2005 for each of our named executive officers. The table below indicates each
named executive officers’ base salary for fiscal 2005:
  **Executive
      officer**
    
    
    **Base
      salary for 2005**
  Michael
      S. Weiss, Chairman and Chief Executive Officer
    
    $
    286,000I.
      Craig Henderson, President
    
    $
    260,000Ron
      Bentsur, Vice President, Finance and Investor Relations
    
    $
    176,800
 
 In
addition, the Compensation Committee approved discretionary bonus eligibility
for Dr. Henderson in addition to the terms of his employment agreement. Under
this plan, Dr. Henderson may receive up to 100% of his salary as a bonus based
upon the achievement of corporate goals and objectives agreed to by the Board of
Directors.
 
 On March
9, 2005, we entered into an agreement with Procept, Inc. and the United States
Public Health Service, which amended the Patent License Agreement dated February
28, 2002, between Procept, Inc. and the United States Public Health Service, as
amended. The license covers the patent rights for KRX-0402. Under the amendment,
we obtained all of Procept's rights and interests, and assumed all of Procept's
obligations, under the Patent License Agreement. The total consideration to be
paid by Keryx under the terms of this agreement is $158,750.
  **ITEM
6. EXHIBITS**
  The exhibits
      listed on the Exhibit Index are included with this report.3.1
    Amended
      and Restated Certificate of Incorporation of Keryx Biopharmaceuticals,
      Inc., filed as Exhibit 3.1 to the Registrant's Annual Report on Form 10-Q
      for the quarter ended June 30, 2004, filed on August 12, 2004, and
      incorporated herein by reference.3.2
    Amended
      and Restated Bylaws of Keryx Biopharmaceuticals, Inc., filed as Exhibit
      3.2 to the Registrant’s Annual Report on Form 10-K for the year ended
      December 31, 2001, filed on March 26, 2002 (File No. 000-30929), and
      incorporated herein by reference.10.1
    Amendment
      dated March 9, 2005, between Keryx Biopharmaceuticals, Inc., Procept, Inc.
      and the United States Public Health Service, to the Patent License
      Agreement dated February 28, 2002, between Procept, Inc. and the United
      States Public Health Service.31.1
    Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
      May 4, 2005.31.2
    Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
      May 4, 2005.32.1
    Certification
      of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 4,
      2005.32.2
    Certification
      of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 4,
      2005.
 
 27
 SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 KERYX
      BIOPHARMACEUTICALS, INC.Date:
      May 4, 2005
    By:
    /s/
      Ron BentsurRon
      BentsurVice
      President, Finance and Investor Relations
      (Principal
      Financial and Accounting Officer)
 
  28
 
 EXHIBIT
INDEX
 
 The
following exhibits are included as part of this Quarterly Report on Form
10-Q:
 
 10.1
    Amendment
      dated March 9, 2005, between Keryx Biopharmaceuticals, Inc., Procept, Inc.
      and the United States Public Health Service, to the Patent License
      Agreement dated February 28, 2002, between Procept, Inc. and the United
      States Public Health Service.31.1
    Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
      May 4, 2005.31.2
    Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
      May 4, 2005.32.1
    Certification
      of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 4,
      2005.32.2
    Certification
      of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 4,
      2005.