UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K





x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the fiscal year ended December 31, 2008.


OR





 ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the transition period from ________ to ________.





Commission
File Number  000-30929







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
                (Address
      of principal executive offices)
              10022
                (Zip
      Code)





Registrant’s
telephone number, including area code:  (212) 531-5965





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





Common
      Stock, Par Value $0.001 Per Share
                (Title
      of Class)
              NASDAQ
      Capital Market
                (Name
      of Each Exchange on Which
Registered)





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


None





Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.


Yes £ No x





Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.


Yes £ No x





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





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





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


Large
      accelerated filer £
              Accelerated
      filer £Non-accelerated
      filer £
              Smaller
      reporting company x








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


Yes £ No x





The
aggregate market value of voting common stock held by non-affiliates of the
registrant (assuming, for purposes of this calculation, without conceding, that
all executive officers and directors are “affiliates”) was $22,080,654 as of
June 30, 2008, based on the closing sale price of such stock as reported on the
NASDAQ Capital Market.





There were 47,832,004 shares of the
registrant’s common stock outstanding as of March 9, 2009.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the registrant’s Proxy Statement for the 2009 Annual Meeting of Stockholders
are incorporated by reference in Part III of this Annual Report on Form
10-K.





KERYX
BIOPHARMACEUTICALS, INC.


ANNUAL
REPORT ON FORM 10-K


FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008





TABLE
OF CONTENTS





PageSPECIAL
      CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
                                                              
                                                              1PART
      IITEM
      1
                                                              Business
                                                              
                                                              2ITEM
      1A
                                                              Risk
      Factors
                                                              
                                                              13ITEM
      1B
                                                              Unresolved
      Staff Comments
                                                              
                                                              23ITEM
      2
                                                              Properties
                                                              
                                                              23ITEM
      3
                                                              Legal
      Proceedings
                                                              
                                                              23ITEM
      4
                                                              Submission
      of Matters to a Vote of Security Holders
                                                              
                                                              24PART
      IIITEM
      5
                                                              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                                              
                                                              24ITEM
      6
                                                              Selected
      Financial Data
                                                              
                                                              27ITEM
      7
                                                              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                              
                                                              28ITEM
      7A
                                                              Quantitative
      and Qualitative Disclosure About Market Risk
                                                              
                                                              38ITEM
      8
                                                              Financial
      Statements and Supplementary Data
                                                              
                                                              38ITEM
      9
                                                              Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosures
                                                              
                                                              39ITEM
      9A
                                                              Controls
      and Procedures
                                                              
                                                              39ITEM
      9B
                                                              Other
      Information
                                                              
                                                              39PART
      IIIITEM
      10
                                                              Directors,
      Executive Officers and Corporate Governance
                                                              
                                                              39ITEM
      11
                                                              Executive
      Compensation
                                                              
                                                              39ITEM
      12
                                                              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                                              
                                                              39ITEM
      13
                                                              Certain
      Relationships and Related Transactions and Director
      Independence
                                                              
                                                              40ITEM
      14
                                                              Principal
      Accountant Fees and Services
                                                              
                                                              40PART
      IVITEM
      15
                                                              Exhibits
      and Financial Statement Schedules
                                                              
                                                              41





This
Annual Report on Form 10-K contains trademarks and trade names of Keryx
Biopharmaceuticals, Inc., including our name and logo. All other trademarks,
service marks, or tradenames referenced in this Annual Report on Form 10-K are
the property of their respective owners.





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 "anticipate," "believe," "estimate,"
"may," "expect" and similar expressions are generally intended to identify
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 other 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, statements about our:




·
            expectations
      for increases or decreases in
expenses;




·
            expectations
      for the development, manufacturing, regulatory approval, and
      commercialization of ZerenexTM
      (ferric citrate), KRX-0401 (perifosine), and our additional product
      candidates or any other products we may acquire or
    in-license;




·
            expectations
      for incurring capital expenditures to expand our research and development
      and manufacturing capabilities;




·
            expectations
      for generating revenue or becoming profitable on a sustained
      basis;




·
            expectations
      or ability to enter into marketing and other partnership
      agreements;




·
            expectations
      or ability to enter into product acquisition and in-licensing
      transactions;




·
            expectations
      or ability to build our own commercial infrastructure to manufacture,
      market and sell our drug
candidates;




·
            estimates
      of the sufficiency of our existing cash and cash equivalents and
      investments to finance our business strategy, including expectations
      regarding the value and liquidity of our investments, including auction
      rate securities;




·
            ability
      to continue as a going concern;




·
            expected
      losses; and




·
            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


PART
I





Unless the context requires otherwise,
references in this report to “Keryx,” “we,” “us” and “our” refer to Keryx
Biopharmaceuticals, Inc., our predecessor company and our respective
subsidiaries.





ITEM
1. BUSINESS.





OVERVIEW





We are a
biopharmaceutical company focused on the acquisition, development and
commercialization of medically important, novel pharmaceutical products for the
treatment of life-threatening diseases, including renal disease and cancer. We
are developing ZerenexTM (ferric citrate), an oral, iron-based compound that has
the capacity to bind to phosphate and form non-absorbable complexes. Zerenex is
currently in Phase 2 clinical development for the treatment of hyperphosphatemia
(elevated phosphate levels) in patients with end-stage renal disease, or ESRD.
We are also developing KRX-0401 (perifosine), a novel, potentially
first-in-class, oral anti-cancer agent that modulates Akt, a protein in the body
associated with tumor survival and growth. KRX-0401 also modulates a number of
other key signal transduction pathways, including the JNK and MAPK pathways,
which are pathways associated with programmed cell death, cell growth, cell
differentiation and cell survival. KRX-0401 is currently in Phase 2 clinical
development for multiple tumor types. We also actively engage in business
development activities that include evaluating compounds and companies for
in-licensing or acquisition, as well as seeking strategic relationships for our
product candidates and for our company. 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 product sales from our drug candidates. We have generated, and
expect to continue to generate, revenue from the licensing of rights to Zerenex
in Japan to our Japanese partner, Japan Tobacco Inc. (“JT”) and Torii
Pharmaceutical Co., Ltd. (“Torii”).





The table
below summarizes the status of our key pipeline products.  Each of
these drugs is discussed more fully under the heading “Products under
Development.”





Product
      candidate
                          
                          Target
      indication
                          
                          Development
      statusZerenexTM
      (ferric citrate)
                          
                          Hyperphosphatemia
      in patients with end-stage renal disease
                          
                          Phase
      2KRX-0401
      (perifosine)
                          
                          Multiple
      forms of cancer
                          
                          Phase
      2





OUR
STRATEGY





Our
mission is to create long-term shareholder value by acquiring, developing and
commercializing medically important, novel pharmaceutical products for the
treatment of life-threatening diseases, including renal disease and cancer. Our
strategy to achieve this mission is to:





●
            seek
      to acquire medically important, novel drug candidates in late pre-clinical
      or early clinical development;





●
            utilize
      our clinical development capabilities to manage and drive our drug
      candidates through the clinical development process to
      approval;





●
            identify
      and explore licensing and partnership opportunities for our current drug
      candidates; and





●
            commercialize
      our drug candidates, either alone or in partnership, which we believe is
      important to provide maximum shareholder
value.





CORPORATE
INFORMATION





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 its
operations in January 1997. Our executive offices are located at 750 Lexington
Avenue, New York, New York 10022. Our telephone number is 212-531-5965, and our
e-mail address is info@keryx.com.





We
maintain a website with the address www.keryx.com. We make available free of
charge through our Internet website our annual reports on Form 10-K, quarterly
reports on Form 10-Q and current reports on Form 8-K, and any amendments to
these reports, as soon as reasonably practicable after we electronically file
such material with, or furnish such material to, the SEC. We are not including
the information on our website as a part of, nor incorporating it by reference
into, this report.


2





PRODUCTS
UNDER DEVELOPMENT





ZerenexTM (ferric
citrate)





Overview





Zerenex
(ferric citrate) is an oral, iron-based compound that has the capacity to bind
to phosphate and form non-absorbable complexes. Zerenex is currently in Phase 2
clinical development for the treatment of hyperphosphatemia (elevated serum
phosphorous levels) in patients with ESRD in the United States and
Japan.





Market
Opportunity





In the U.S., according to data from the
U.S. Renal Data System, there are approximately 485,000 patients with end-stage
renal disease, or ESRD, and the number of ESRD patients is projected to rise 60%
to approximately 785,000 by 2020.  The majority of ESRD patients, over
350,000, require dialysis.  Phosphate retention and the resulting
hyperphosphatemia in patients with ESRD on dialysis are usually associated with
secondary hyperparathyroidism, renal osteodystrophy, soft tissue mineralization
and the progression of renal failure. ESRD patients usually require treatment
with phosphate-binding agents to lower and maintain serum phosphorus at
acceptable levels.





Aluminum-type
phosphate binders were widely used in the past. However, the systemic absorption
of aluminum from these agents and the potential toxicity associated with their
use no longer make this type of binder a viable long-term treatment
option.





Calcium-type
phosphate binders are commonly used to bind dietary phosphate; however, they
promote positive net calcium balance and an increased risk of metastatic
calcification in many patients, especially in those patients taking vitamin D
analogs and those with adynamic bone disease.





Non-calcium-based, non-absorbed
phosphate binders, including sevelamer hydrochloride and sevelamer carbonate are
among the most prescribed phosphate binders in the U.S.  Compared to
the calcium-type binders, fewer coronary and aortic calcifications have been
documented, however, there is a risk of metabolic acidosis with sevelamer
hydrochloride, the potential for gastrointestinal problems, and sevelamer can
affect concomitant vitamin K and vitamin D treatment.





Lanthanum-type phosphate binders are
another alternative. Lanthanum is a rare earth element and is minimally absorbed
in the gastrointestinal tract. Lower level tissue deposition, particularly in
bone and liver, has been observed in animals.  However, the long-term
effects due to the accumulation of lanthanum in these tissues have not been
clearly determined.





The need for alternative
phosphate-binding agents has long been recognized, especially given the
increasing prevalence of ESRD as well as shortcomings with current therapies.
Zerenex has the potential to be an effective and safe treatment in lowering
and/or maintaining serum phosphorus levels <5.5 mg/dL in patients with ESRD
and hyperphosphatemia.





Clinical
Data





In June
2006, we announced final results from the Phase 2 multi-center study entitled:
“A randomized, double-blind, placebo-controlled, dose ranging study of the
effects of Zerenex on serum phosphate in patients with end stage renal disease
(ESRD).” This Phase 2 study was conducted under an IND sponsored by our
licensors in both the United States and Taiwan.





From this
Phase 2 study, the investigators concluded that Zerenex appeared to have an
acceptable safety and tolerability profile at the 2, 4, and 6g/day dose. The
optimum dose of Zerenex in this study was 6g/day at which it appeared to be
efficacious, safe and well tolerated as treatment for hyperphosphatemia in
hemodialysis patients. Additionally, the investigators found that Zerenex
therapy for up to 28 days had no statistically significant effect on serum iron,
ferritin, transferrin saturation, or total iron binding
capacity.


3


The Phase
2 study was designed to determine the safety and efficacy of several doses of
Zerenex in patients with ESRD who were undergoing hemodialysis. In this study,
each of three Zerenex doses (2g, 4g and 6g) administered daily with meals was
compared to placebo. Patients who had been on other phosphate binders prior to
enrolling in this study underwent a 1-2-week washout period prior to
randomization. Patients who had a serum phosphorous level greater than or equal
to 5.5 mg/dl and less than or equal to 10 mg/dl by the end of this washout
period were eligible to be randomized to one of four treatment groups at a ratio
of 2:2:2:1, (Zerenex 2g, 4g, 6g and placebo, respectively) and were treated for
28 days. The primary endpoint for this study was the change in serum phosphorous
concentration at day 28 relative to baseline.





Of the
116 patients randomized in the study, 111 patients were evaluable for efficacy
at 28 days and were included in the analysis. At day 28, there was a
statistically significant dose response to Zerenex in reducing serum phosphorous
concentration (p=0.0073). In the 6g/day Zerenex group the mean decrease in serum
phosphorous concentration was statistically significant when compared with
placebo (p=0.0119) (see Table 1). There was also a statistically significant
dose response to Zerenex in the calcium x phosphorous (Ca x P) product at day 28
(p=0.0158). In the 6g/day Zerenex group the mean decrease in Ca x P product when
compared with placebo was statistically significant (p=0.0378) (See Table
2).





Table 1:Changes in Serum Phosphorous
Concentration (mg/dL) on day 28 compared to day 0 (baseline) at Zerenex doses of
2, 4 and 6 g/day





Placebo
                    (n=16)
                  
                  
                  2g/day
                    (n=31)
                  
                  
                  4g/day
                    (n=32)
                  
                  
                  6g/day
                    (n=32)Day
      0 (Baseline)*
                  
                  
                  7.2
      (1.4)
                  
                  
                  
                  7.2
      (1.2)
                  
                  
                  
                  7.1
      (1.3)
                  
                  
                  
                  7.3
      (1.3)Day
      28 (End of Treatment Period)*
                  
                  
                  7.2
      (1.2)
                  
                  
                  
                  6.9
      (2.2)
                  
                  
                  
                  6.0
      (1.3)
                  
                  
                  
                  5.8
      (1.8)Placebo
      Comparison:Mean
      Difference from Placebo
                  
                  
                  
                  
                  
                  
                  -0.02
                  
                  
                  
                  -1.1
                  
                  
                  
                  -1.5P-value
                  
                  
                  
                  
                  
                  NS
                  
                  
                  
                  0.06
                  
                  
                  
                  0.0119Baseline
      Comparison:Mean
      Difference from Baseline
                  
                  
                  -0.1
                  
                  
                  
                  -0.3
                  
                  
                  
                  -1.1
                  
                  
                  
                  -1.5P-value
                  
                  NS
                  
                  
                  NS
                  
                  
                  NS
                  
                  
                  <0.01*mean
      (standard deviation)





Table 2—Changes in the
Calcium x Phosphorous (mg/dL) on day 28 compared to day 0 (baseline) at Zerenex
doses of 2, 4 and 6 g/day





Placebo
                    (n=16)
                  
                  
                  2g/day
                    (n=31)
                  
                  
                  4g/day
                    (n=32)
                  
                  
                  6g/day
                    (n=32)Day
      0 (Baseline)*
                  
                  62.8
      (13.9)
                  
                  
                  62.9
      (13.2)
                  
                  
                  63.5
      (10.7)
                  
                  
                  65.8
      (12.2)Day
      28 (End of  Treatment Period)*
                  
                  63.2
      (12.6)
                  
                  
                  61.7
      (21.3)
                  
                  
                  55.4
      (13.4)
                  
                  
                  54.1
      (17.7)Placebo
      Comparison:Mean
      Difference from Placebo
                  
                  
                  
                  
                  
                  -0.9
                  
                  
                  
                  -7.91
                  
                  
                  
                  -11.4P-value
                  
                  
                  
                  
                  
                  0.8950
                  
                  
                  
                  0.1375
                  
                  
                  
                  0.0378Baseline
      Comparison:Mean
      Difference from Baseline
                  
                  
                  -0.3
                  
                  
                  
                  -1.1
                  
                  
                  
                  -8.1
                  
                  
                  
                  -11.7P-value
                  
                  NS
                  
                  
                  NS
                  
                  
                  NS
                  
                  
                  <0.01*mean
      (standard deviation)


4


There
were no deaths over the course of the 28 day study and there were no serious
adverse events that were deemed by the investigators to be related to Zerenex.
The majority of adverse events were of mild severity. Seven (43.8%), 13 (39.4%),
9 (26.5%), and 14 (42.4%) patients in the placebo, 2, 4, and 6g treatment
groups, respectively, experienced no adverse events more severe than mild, and 1
(6.3%), 0 (0.0%), 2 (5.9%), 1 (3.0%), of the placebo, 2, 4, and 6 grams per day
groups, respectively, experienced at least one severe adverse event. Possibly or
probably related adverse effects occurred in 4 (25.0%), 7 (21.2%), 8 (23.5%),
and 7 (21.2%) of the placebo, 2, 4, and 6 grams per day groups,
respectively.





In
addition, Zerenex has been studied in two previous Phase 2 clinical trials using
single fixed dose regimens. In both studies, Zerenex was able to significantly
reduce serum phosphorous (p <.005), and the degree of reduction appeared to
be generally comparable to calcium-based products which were used as positive
control arms in those studies. The study was not designed to compare Zerenex to
calcium-based products, therefore, no formal assessment can be made of the
comparative efficacy.





In
December 2008, we completed our Phase 2 high-dose tolerance and safety study.
The goal of this study was to assess tolerability and safety in end-stage renal
disease patients with doses of Zerenex ranging from approximately 3.0 grams per
day to 12.0 grams per day. The open-label study was conducted in two parts by
the Collaborative Study Group utilizing seven sites in the U.S. Part 1 of the
study enrolled 34 patients. Patients taking approximately 6 to 15 capsules or
tablets per day of their current phosphate binder were immediately switched to a
starting dose of 4.5 grams per day of Zerenex, and were treated for 28 days.
Part 2 of the study enrolled 21 patients. In this part, patients taking
approximately 12 or more capsules or tablets per day of their current phosphate
binder were immediately switched to a starting dose of 6.0 grams per day of
Zerenex, and were treated for 28 days. In January 2009, we presented preliminary
results of part 1 of the study at the J.P. Morgan Annual Healthcare Conference.
In March 2009, we provided updated preliminary results for the entire study on
our fourth quarter and year-end financial results conference call. The
preliminary results for the entire study are found in the table
below.





Serum Phosphorous
                      (Mean +/- standard
    deviation)Visit
      0 (Baseline)
                    
                    5.8
      +/- 1.5Visit
      4 (Treatment for 28 days)
                    
                    5.4
      +/- 1.3





The
average dose of Zerenex administered in this trial was 7.5 grams per day. There
were no observed changes in the following iron parameters: serum iron, ferritin,
transferrin, and total iron binding capacity, or intact parathyroid hormone.
Four serious adverse events were reported, all of which were deemed by the
investigators to be unrelated to Zerenex. The most commonly reported adverse
event was change in stool color, which is an expected side effect of Zerenex,
about which all of the patients were notified in advance, and no patients
withdrew from the study as a result. In addition, although not designed as an
efficacy clinical trial, Zerenex appeared to manage and control serum phosphorus
levels in patients who were switched from their current phosphorus binders
without washout to Zerenex.





Development
Status





In July
2006, we met with the FDA to discuss the further development of Zerenex,
including Phase 3 study design and requirements prior to moving into Phase 3. To
support higher doses and longer duration of treatment in Phase 3, we agreed with
the FDA to conduct additional studies. The FDA suggested additional animal
toxicity studies and a high dose Phase 2 study.





In August
2007, we provided the FDA with our 28-day toxicology package for rats and
canines.





In 2008,
we completed the dosing in the 90-day toxicology study in rats and 16-week
toxicology study in canines. The final reports for these studies were submitted
to the FDA in the first quarter of 2009. These studies will assist the Company
in designing the chronic toxicity studies, which we are planning, with our
Japanese partner, to initiate in 2009.





In 2008,
we completed our Phase 2 high-dose tolerance and safety study. Preliminary
results are presented above. We plan to meet with the FDA for an end of Phase 2
meeting in 2009 to discuss a Phase 3 program.





In
addition, in March 2009, our Japanese partner, JT and Torii, informed us that
they had initiated a Phase 2 clinical study of Zerenex in Japan, which triggered
a $3 million non-refundable milestone payment which was received by us in March
2009.





5




KRX-0401
(perifosine)





Overview




KRX-0401
(perifosine) is a novel, potentially first-in-class, oral anti-cancer agent that
modulates Akt, and a number of other key signal transduction pathways, including
the JNK and MAPK pathways, all of which are pathways associated with programmed
cell death, cell growth, cell differentiation and cell survival. The effects of
KRX-0401 on Akt are of particular interest because of the importance of this
pathway in the development of most cancers, with evidence that it is often
activated in tumors that are resistant to other forms of anticancer therapy, and
the difficulty encountered thus far in the discovery of drugs that will inhibit
this pathway without causing excessive toxicity. High levels of activated Akt
(pAkt) are seen frequently in many types of cancer and have been correlated with
poor prognosis.





To date,
over 1,800 patients have been treated with KRX-0401 in trials conducted both in
the United States and Europe. Its safety profile is distinctly different from
that of most cytotoxic agents. KRX-0401 does not appear to cause flu-like
symptoms, thrombocytopenia (decrease in platelets that may result in bleeding)
or alopecia (hair loss); all of these toxicities occur frequently with many of
the currently available treatments for cancer. The main side effects of KRX-0401
are nausea, vomiting, diarrhea and fatigue, but these are generally well-managed
particularly at lower daily doses (50 mg or 100 mg) that have induced tumor
regression. Responses have been seen with both daily and weekly regimens. At the
doses studied, the daily regimens were better tolerated.





Pre-Clinical
and Clinical Data Overview





In vitro, KRX-0401 inhibits
the growth of a variety of human tumor cell lines and has substantial activity
in vivo against a
number of murine tumor models and human xenografts. Investigators at the US
National Cancer Institute, or NCI, were among the first to study the effects of
KRX-0401 on Akt using a prostate cell line, PC-3, that is known to have
constitutively activated Akt.  Their results demonstrated that
KRX-0401 blocked phosphorylation of Akt but did not decrease the total amount of
Akt present in the cell.  In model systems, the drug appears to be
synergistic with radiotherapy and additive or synergistic with cytotoxics such
as cisplatin, doxorubicin, and cyclophosphamide. In these experiments, the
combination regimens were superior to chemotherapy alone and were well
tolerated. Recent pre-clinical data suggest that KRX-0401 may be additive or
synergistic with newer targeted agents such as the proteasome inhibitor
bortezomib (Velcade®), the
tyrosine kinase inhibitor sorafenib (Nexavar®), and
the mTOR inhibitor temsirolimus (Torisel®).





Seven
Phase 1 single agent studies of KRX-0401 have been completed; three in Europe by
Zentaris and four in the United States by the NCI, a department of the National
Institutes of Health, or NIH, as part of a Cooperative Research and Development
Agreement, or CRADA, and by us. These trials demonstrated that KRX-0401 can be
safely given to humans with a manageable toxicity profile. The dose limiting
toxicity in the Phase 1 studies was gastrointestinal: nausea, vomiting and
diarrhea.





Thirteen
Phase 1/2 studies of KRX-0401 in combination with other drugs have been
conducted by Keryx.  Agents that have been included in these
combinations include gemcitabine, paclitaxel, docetaxel, prednisone,
doxorubicin, capecitabine, pemetrexed, irinotecan, Doxil®(doxorubicin HCl liposome
injection), trastuzumab, various endocrine therapies, imatinib,
bortezomib, lenalidomide, sorafenib, and sunitinib.  KRX-0401 has
generally been well tolerated when used as a low daily dose (50 mg or 100 mg) in
combination with these approved agents.  KRX-0401 has also been
studied in combination with radiotherapy without evidence of increased
toxicity.





The NCI
has completed a number of Phase 2 clinical trials studying KRX-0401 as a single
agent, including studies in prostate, breast, head and neck and pancreatic
cancers, as well as melanoma and sarcomas. In total, nine NCI clinical trials
have been conducted across these six tumor types.





KRX-0401
has also been evaluated in ten Phase 2 clinical studies conducted by Keryx
evaluating the single agent activity in various tumor types where patients have
progressed on standard treatments.  Clinical trials where responses
have been reported have been conducted in patients with renal cell carcinoma,
advanced brain tumors, soft-tissue sarcomas, hepatocellular carcinoma, as well
as in hematologic malignancies including multiple myeloma and Waldenstrom’s
macroglobulinemia.  As illustrated in the previous NCI trials, the
lower daily doses (50 mg or 100 mg) have been better tolerated than the
intermittent higher doses.





6




Multiple
Myeloma Clinical Data


In
December 2008, at the American Society of Hematology annual meeting, in an oral
presentation by Dr. Paul Richardson, Clinical Director of the Multiple Myeloma
Center at Dana-Farber Cancer Institute in Boston, we announced data on the
clinical activity of KRX-0401 in combination with bortezomib (with or without
dexamethasone) in patients with relapsed/refractory multiple myeloma. Updated
data was presented in a poster at the February 2009 International Multiple
Myeloma Workshop. This trial was designed as a Phase 1/2 study. The Phase 1
portion enrolled 18 patients and the Phase 2 portion enrolled 66 patients (total
of 84 patients), all with advanced multiple myeloma (83% relapsed and
refractory). Patients had a median of five lines of prior therapy and all
patients were previously treated with at least one course of therapy on
bortezomib (median number of prior bortezomib treatments was two). The percent
of patients who received other prior treatments included dexamethasone (98%),
lenalidomide (75%), thalidomide (74%) and stem cell transplant
(57%).  In the Phase 1 portion, KRX-0401 was escalated from 50 to 100
mg once daily while bortezomib was escalated from 1.0 to 1.3 mg/m2. No
dose-limiting toxicity and no grade 3 peripheral neuropathy were reported.
Toxicities were generally well managed and tolerated. Dexamethasone, dosed at 20
mg the day of and day after each bortezomib dose, was added in patients with
progressive disease on the combination of KRX-0401 and bortezomib. The Phase 2
dose was selected at 50 mg of KRX-0401 once daily with 1.3 mg/m2 of
bortezomib at the FDA approved schedule. Seventy-three patients in the Phase 1/2
study were evaluable for response, assessed by modified EBMT/Blade criteria. As
in the Phase 1, adverse events were generally well managed. Overall response
rate (ORR), defined as complete responses (CR), partial responses (PR) and minor
responses (MR), as well as stable disease (SD) was reported in all evaluable
patients and is presented in the table below. Additionally, data for the subsets
of patients who were previously refractory to bortezomib (progressed on or
within 60 days) and patients who relapsed (responded, then progressed after 60
days off-treatment) from prior bortezomib treatment are presented in the table
below.





Evaluable
      Patients (≥ 2
      cycles)
                  
                  CR
                  
                  
                  PR
                  
                  
                  MR
                  
                  
                  ORR
                  
                  
                  SD > 3 monthsBortezomib
      Relapsed (n=20)
                  
                  
                  2
                  
                  
                  
                  10%
                  
                  
                  
                  6
                  
                  
                  
                  30%
                  
                  
                  
                  3
                  
                  
                  
                  15%
                  
                  
                  
                  11
                  
                  
                  
                  55%
                  
                  
                  
                  9
                  
                  
                  
                  45%Bortezomib
      Refractory (n=53)
                  
                  
                  1
                  
                  
                  
                  2%
                  
                  
                  
                  6
                  
                  
                  
                  11%
                  
                  
                  
                  10
                  
                  
                  
                  19%
                  
                  
                  
                  17
                  
                  
                  
                  32%
                  
                  
                  
                  24
                  
                  
                  
                  45%All
      Evaluable Patients (n=73)
                  
                  
                  3
                  
                  
                  
                  4%
                  
                  
                  
                  12
                  
                  
                  
                  16%
                  
                  
                  
                  13
                  
                  
                  
                  18%
                  
                  
                  
                  28
                  
                  
                  
                  38%
                  
                  
                  
                  33
                  
                  
                  
                  45%





Patients
who had previously relapsed on a bortezomib-based treatment had a median time to
progression of 8.5 months at the time of data presentation. The median time to
progression for all 73 evaluable study patients (both bortezomib relapsed and
refractory) was 6.4 months at the time of data presentation. The investigators
concluded that the combination of KRX-0401 and bortezomib (with or without
dexamethasone) was well tolerated and is active in heavily pre-treated and
relapsed/refractory multiple myeloma patients, including bortezomib-refractory
patients. The trial remains open with 16 patients continuing on study treatment
as of February 2009.





Development
Status





In March
2008, we implemented a strategic restructuring plan to reduce our cash burn rate
and re-focus our development efforts on programs and opportunities that we
believed were most likely to provide long-term shareholder value. As such,
during 2008, we closed enrollment to several clinical trials for KRX-0401 to
better focus on tumor types showing promise, such as multiple myeloma, renal
cell carcinoma, colorectal cancer and brain cancer.





We
believe that the data compiled to date, both with KRX-0401 used as single agent
and in combination with novel agents, continues to support the development of
KRX-0401 in Phase 2/3 trials for patients with advanced cancer. We are currently
exploring the design of a randomized Phase 3 placebo controlled clinical trial
in multiple myeloma.





COSTS
AND TIME TO COMPLETE PRODUCT DEVELOPMENT





The
information below provides estimates regarding the costs associated with the
completion of the current development phase and our current estimated range of
the time that will be necessary to complete that development phase for our key
pipeline products. We also direct your attention to the risk factors which could
significantly affect our ability to meet these cost and time estimates found in
this report in Item 1A under the heading “Risks Associated with Our Product
Development Efforts.”





Product
      candidate
                            
                            Target
      indication
                            
                            Development
      status
                            
                            Completion
                              of
      phase
                            
                            Estimated
      cost to
                              complete
      phaseZerenexTM
      (ferric citrate)
                            
                            Hyperphosphatemia
      in patients
                              with
      end-stage renal disease
                            
                            Phase
      2
                            
                            Mid-2009
                            
                            Approximately$1
      millionKRX-0401
      (perifosine)
                            
                            Multiple
      forms of cancer
                            
                            Phase
      2
                            
                            Mid-2009
                            
                            Approximately$1
      million


Completion
dates and costs in the above table are estimates due to the uncertainties
associated with clinical trials and the related requirements of development. In
the cases where the requirements for clinical trials and development programs
have not been fully defined, or are dependent on the success of other trials, we
cannot estimate trial completion or cost with any certainty.  The
actual spending on each trial during the year is also dependent on
funding.  We therefore direct your attention to Item 7 under the
heading “Liquidity and Capital Resources.”




7





INTELLECTUAL
PROPERTY AND PATENTS





General





Patents
and other proprietary rights are very important to the development of our
business. We will be able to protect our proprietary technologies from
unauthorized use by third parties only to the extent that our proprietary rights
are covered by valid and enforceable patents, supported by regulatory data
exclusivity or are effectively maintained as trade secrets. It is our intention
to seek and maintain patent and trade secret protection for our drug candidates
and our proprietary technologies. As part of our business strategy, our policy
is to actively file patent applications in the United States and, when
appropriate, internationally to cover methods of use, new chemical compounds,
pharmaceutical compositions and dosing of the compounds and compositions and
improvements in each of these. We also rely on trade secret information,
technical know-how, innovation and agreements with third parties to continuously
expand and protect our competitive position. We have a number of patents and
patent applications related to our compounds and other technology, but we cannot
guarantee the scope of protection of the issued patents, or that such patents
will survive a validity or enforceability challenge, or that any of the pending
patent applications will issue as patents.





Generally,
patent applications in the United States are maintained in secrecy for a period
of 18 months or more. Since publication of discoveries in the scientific or
patent literature often lag behind actual discoveries, we are not certain that
we were the first to make the inventions covered by each of our pending patent
applications or that we were the first to file those patent applications. The
patent positions of biotechnology and pharmaceutical companies are highly
uncertain and involve complex legal and factual questions. Therefore, we cannot
predict the breadth of claims allowed in biotechnology and pharmaceutical
patents, or their enforceability. To date, there has been no consistent policy
regarding the breadth of claims allowed in biotechnology patents. Third parties
or competitors may challenge or circumvent our patents or patent applications,
if issued. If our competitors prepare and file patent applications in the United
States that claim technology also claimed by us, we may have to participate in
interference proceedings declared by the United States Patent and Trademark
Office to determine priority of invention, which could result in substantial
cost, even if the eventual outcome is favorable to us. Because of the extensive
time required for development, testing and regulatory review of a potential
product, it is possible that before we commercialize any of our products, any
related patent may expire or remain in existence for only a short period
following commercialization, thus reducing any advantage of the
patent.





If a
patent is issued to a third party containing one or more preclusive or
conflicting claims, and those claims are ultimately determined to be valid and
enforceable, we may be required to obtain a license under such patent or to
develop or obtain alternative technology.  In the event of a
litigation involving a third party claim, an adverse outcome in the litigation
could subject us to significant liabilities to such third party, require us to
seek a license for the disputed rights from such third party, and/or require us
to cease use of the technology.  Further, our breach of an existing
license or failure to obtain a license to technology required to commercialize
our products may seriously harm our business. We also may need to commence
litigation to enforce any patents issued to us or to determine the scope and
validity of third-party proprietary rights. Litigation would involve substantial
costs.





Pursuant
to our license for Zerenex (ferric citrate) with Panion & BF Biotech, Inc.,
or Panion, we have the exclusive commercial rights to a series of patent
applications worldwide, excluding certain Asian-Pacific countries. These patents
and patent applications cover a method of treatment of hyperphosphatemia in
patients with ESRD, as well as a method for the manufacture of ferric citrate.
Panion holds one use patent expiring 2017 (with extensions expected through
2020) and two manufacturing process patents (expiring 2023).




Pursuant
to our license for KRX-0401 (perifosine) with Aeterna Zentaris, Inc., we have
the exclusive commercial rights to a series of patents and patent applications
in the United States, Canada, and Mexico. These patents and patent applications
include a composition of matter patent expiring in 2013 (with extension possible
through 2018), as well as method of use patent application, in
combination with various other anticancer agents, which would expire
in 2022.





8




The
patent rights that we own or have licensed relating to our product candidates
are limited in ways that may affect our ability to exclude third parties from
competing against us if we obtain regulatory approval to market these product
candidates. In particular:
 
 ●
              Our
      composition of matter patent covering KRX-0401 (perifosine) expires in
      2013 and we cannot assure that we can obtain an extension to 2018. We do
      not hold a composition of matter patent covering Zerenex. Composition of
      matter patents can provide protection for pharmaceutical products to the
      extent that the specifically covered compositions are important. Upon
      expiration of our composition of matter patent for KRX-0401, or for
      Zerenex, where we do not have a composition of matter patent, competitors
      who obtain the requisite regulatory approval can offer products with the
      same composition as our products so long as the competitors do not
      infringe any method of use patents that we may
  hold.
 
 ●
              For
      our product candidates, the principal patent protection that covers or
      those we expect will cover, our product candidate is a method of use
      patent. This type of patent only protects the product when used or sold
      for the specified method. However, this type of patent does not limit a
      competitor from making and marketing a product that is identical to our
      product that is labeled for an indication that is outside of the patented
      method, or for which there is a substantial use in commerce outside the
      patented method.
 
 Moreover,
physicians may prescribe such a competitive identical product for indications
other than the one for which the product has been approved, or off-label
indications, that are covered by the applicable patents. Although such off-label
prescriptions may infringe or induce infringement of method of use patents, the
practice is common and such infringement is difficult to prevent or
prosecute.
 
 In
addition, the limited patent protection described above may adversely affect the
value of our product candidates and may inhibit our ability to obtain a
corporate partner at terms acceptable to us, if at all.




Other
Intellectual Property Rights


We depend
upon trademarks, trade secrets, know-how and continuing technological advances
to develop and maintain our competitive position. To maintain the
confidentiality of trade secrets and proprietary information, we require our
employees, scientific advisors, consultants and collaborators, upon commencement
of a relationship with us, to execute confidentiality agreements and, in the
case of parties other than our research and development collaborators, to agree
to assign their inventions to us. These agreements are designed to protect our
proprietary information and to grant us ownership of technologies that are
developed in connection with their relationship with us. These agreements may
not, however, provide protection for our trade secrets in the event of
unauthorized disclosure of such information.





In
addition to patent protection, we may utilize orphan drug regulations or other
provisions of the Food, Drug and Cosmetic Act to provide market exclusivity for
certain of our drug candidates. Orphan drug regulations provide incentives to
pharmaceutical and biotechnology companies to develop and manufacture drugs for
the treatment of rare diseases, currently defined as diseases that exist in
fewer than 200,000 individuals in the United States, or, diseases that affect
more than 200,000 individuals in the United States but that the sponsor does not
realistically anticipate will generate a net profit. Under these provisions, a
manufacturer of a designated orphan drug can seek tax benefits, and the holder
of the first FDA approval of a designated orphan product will be granted a
seven-year period of marketing exclusivity for such FDA-approved orphan product.
We believe that KRX-0401 (perifosine) will be eligible for orphan drug
designation; however, we cannot assure that KRX-0401, or any other drug
candidates we may acquire or in-license, will obtain such orphan drug
designation or that we will be the first to receive FDA approval for such drugs
so as to be eligible for market exclusivity protection.





LICENSING
AGREEMENTS AND COLLABORATIONS




We have
formed strategic alliances with a number of companies for the manufacture and
commercialization of our products. Our current key strategic alliances are
discussed below.





AEterna
Zentaris Inc.





In
September 2002, we signed a commercial license agreement with Zentaris AG, a
wholly owned subsidiary of AEterna Zentaris Inc., relating to the development of
perifosine covering composition of matter and methods of treatment. This
agreement grants us the exclusive rights to perifosine (KRX-0401) in the United
States, Canada and Mexico. Zentaris is entitled to certain royalty payments, as
well as additional compensation upon successful achievement of certain
milestones. The license terminates upon the later of the expiration of all
underlying patent rights or ten years from the first commercial sale of KRX-0401
in any of the covered territories. We also have the right to extend the
agreement for an additional five years beyond the expiration of all underlying
patents.





Panion
& BF Biotech, Inc.





In
November 2005, we entered into a license agreement with Panion. Under the
license agreement, we have acquired the exclusive worldwide rights, excluding
certain Asian-Pacific countries, for the development and marketing of ferric
citrate (Zerenex).  Panion is entitled to certain milestone payments, as
well as royalty payments on net sales of Zerenex.  The license
terminates upon the expiration of all underlying patent rights.





Japan
Tobacco Inc. and Torii Pharmaceutical Co., Ltd.





In
September 2007, we entered into a sublicense agreement with Japan Tobacco Inc.
(“JT”) and Torii Pharmaceutical Co., Ltd. (“Torii”), JT's pharmaceutical
business subsidiary, under which JT and Torii obtained the exclusive rights for
the development and commercialization of Zerenex (ferric citrate) in Japan. The
licensing arrangement calls for JT and Torii to pay us up to $100 million in
up-front license fees and payments upon the achievement of pre-specified
milestones, including up to $20 million in up-front payments and near-term
milestones, of which Keryx received $12 million in October 2007 and $8 million
in April 2008. In March 2009, JT and Torii informed us that they had initiated a
Phase 2 clinical study of Zerenex in Japan, which triggered a $3 million
non-refundable milestone payment which was received by us in March 2009. In
addition, upon commercialization, JT and Torii will make royalty payments to
Keryx on net sales of ferric citrate in Japan. JT and Torii will be responsible
for the future development and commercialization costs in Japan.





COMPETITION





Competition
in the pharmaceutical and biotechnology industries is intense. 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.   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.








9





SUPPLY
AND MANUFACTURING





We have
limited experience in manufacturing products for clinical or commercial
purposes.





We have
established contract manufacturing relationships for the supply of Zerenex to
ensure that we will have sufficient material for clinical trials. In addition,
we are establishing the basis for commercial production capabilities. As with
any supply program, obtaining raw materials of the correct quality cannot be
guaranteed and we cannot ensure that we will be successful in this
endeavor.





We have
also established contract manufacturing relationships for the supply of
KRX-0401.





At the
time of commercial sale, to the extent possible and commercially practicable, we
would seek to engage a back-up supplier for each of our product candidates.
Until such time, we expect that we will rely on a single contract manufacturer
to produce each of our product candidates under current Good Manufacturing
Practice, or cGMP, regulations. Our third-party manufacturers have a limited
number of facilities in which our product candidates can be produced and will
have limited experience in manufacturing our product candidates in quantities
sufficient for conducting clinical trials or for commercialization. Our
third-party manufacturers will have other clients and may have other priorities
that could affect their ability to perform the work satisfactorily and/or on a
timely basis. Both of these occurrences would be beyond our
control.





We expect
to similarly rely on contract manufacturing relationships for any products that
we may in-license or acquire in the future. However, there can be no assurance
that we will be able to successfully contract with such manufacturers on terms
acceptable to us, or at all.





Contract
manufacturers are subject to ongoing periodic and unannounced inspections by the
FDA, the Drug Enforcement Agency and corresponding state agencies to ensure
strict compliance with cGMP and other state and federal regulations. Our
contractors in Europe face similar challenges from the numerous European Union
and member state regulatory agencies. We do not have control over third-party
manufacturers’ compliance with these regulations and standards, other than
through contractual obligations.





If we
need to change manufacturers after commercialization, the FDA and corresponding
foreign regulatory agencies must approve these new manufacturers in advance,
which will involve testing and additional inspections to ensure compliance with
FDA regulations and standards and may require significant lead times and delay.
Furthermore, switching manufacturers may be difficult because the number of
potential manufacturers is limited. It may be difficult or impossible for us to
find a replacement manufacturer quickly or on terms acceptable to us, or at
all.





GOVERNMENT
AND INDUSTRY REGULATION





Numerous
governmental authorities, principally the FDA and corresponding state and
foreign regulatory agencies, impose substantial regulations upon the clinical
development, manufacture and marketing of our drug candidates, as well as our
ongoing research and development activities. None of our drug candidates have
been approved for sale in any market in which we have marketing rights. Before
marketing in the United States, any drug that we develop must undergo rigorous
pre-clinical testing and clinical trials and an extensive regulatory approval
process implemented by the FDA under the Federal Food, Drug, and Cosmetic Act of
1938, as amended. The FDA regulates, among other things, the pre-clinical and
clinical testing, safety, efficacy, approval, manufacturing, record keeping,
adverse event reporting, packaging, labeling, storage, advertising, promotion,
export, sale and distribution of biopharmaceutical
products.


10


The
regulatory review and approval process is lengthy, expensive and uncertain. We
are required to submit extensive pre-clinical and clinical data and supporting
information to the FDA for each indication or use to establish a drug
candidate’s safety and efficacy before we can secure FDA approval. The approval
process takes many years, requires the expenditure of substantial resources and
may involve ongoing requirements for post-marketing studies or surveillance.
Before commencing clinical trials in humans, we must submit an IND to the FDA
containing, among other things, pre-clinical data, chemistry, manufacturing and
control information, and an investigative plan. Our submission of an IND may not
result in FDA authorization to commence a clinical trial.





The FDA
may permit expedited development, evaluation, and marketing of new therapies
intended to treat persons with serious or life-threatening conditions for which
there is an unmet medical need under its fast track drug development programs. A
sponsor can apply for fast track designation at the time of submission of an
IND, or at any time prior to receiving marketing approval of the new drug
application, or NDA. To receive fast track designation, an applicant must
demonstrate:





·
            that
      the drug is intended to treat a serious or life-threatening
      condition;





·
            that
      the drug is intended to treat a serious aspect of the condition;
      and





·
            that
      the drug has the potential to address unmet medical needs, and this
      potential is being evaluated in the planned drug development
      program.





The FDA
must respond to a request for fast track designation within 60 calendar days of
receipt of the request. Over the course of drug development, a product in a fast
track development program must continue to meet the criteria for fast track
designation. Sponsors of products in fast track drug development programs must
be in regular contact with the reviewing division of the FDA to ensure that the
evidence necessary to support marketing approval will be developed and presented
in a format conducive to an efficient review. Sponsors of products in fast track
drug development programs ordinarily are eligible for priority review and also
may be permitted to submit portions of an NDA to the FDA for review before the
complete application is submitted.





Sponsors
of drugs designated as fast track also may seek approval under the FDA’s
accelerated approval regulations under subpart H. Pursuant to subpart H, the FDA
may grant marketing approval for a new drug product on the basis of adequate and
well-controlled clinical trials establishing that the drug product has an effect
on a surrogate endpoint that is reasonably likely, based on epidemiologic,
therapeutic, pathophysiologic, or other evidence, to predict clinical benefit or
on the basis of an effect on a clinical endpoint other than survival or
irreversible morbidity.   Approval will be subject to the requirement that
the applicant study the drug further to verify and describe its clinical benefit
where there is uncertainty as to the relation of the surrogate endpoint to
clinical benefit or uncertainty as to the relation of the observed clinical
benefit to ultimate outcome.  Post-marketing studies are usually underway
at the time an applicant files the NDA.  When required to be conducted,
such post-marketing studies must also be adequate and well-controlled.  The
applicant must carry out any such post-marketing studies with due
diligence.  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.





Clinical
testing must meet requirements for institutional review board oversight,
informed consent and good clinical practices, and must be conducted pursuant to
an IND, unless exempted.




For
purposes of NDA approval, clinical trials are typically conducted in the
following sequential phases:





·
            Phase 1: The drug is
      administered to a small group of humans, either healthy volunteers or
      patients, to test for safety, dosage tolerance, absorption, metabolism,
      excretion, and clinical
pharmacology.





·
            Phase 2: Studies are
      conducted on a larger number of patients to assess the efficacy of the
      product, to ascertain dose tolerance and the optimal dose range, and to
      gather additional data relating to safety and potential adverse
      events.





·
            Phase 3: Studies
      establish safety and efficacy in an expanded patient
      population.





·
            Phase 4: The FDA may
      require Phase 4 post-marketing studies to find out more about the drug’s
      long-term risks, benefits, and optimal use, or to test the drug in
      different populations.


11


The
length of time necessary to complete clinical trials varies significantly and
may be difficult to predict. Clinical results are frequently susceptible to
varying interpretations that may delay, limit or prevent regulatory approvals.
Additional factors that can cause delay or termination of our clinical trials,
or that may increase the costs of these trials, include:




·
            slow
      patient enrollment due to the nature of the clinical trial plan, the
      proximity of patients to clinical sites, the eligibility criteria for
      participation in the study or other
factors;





·
            inadequately
      trained or insufficient personnel at the study site to assist in
      overseeing and monitoring clinical trials or delays in approvals from a
      study site’s review board;





·
            longer
      treatment time required to demonstrate efficacy or determine the
      appropriate product dose;





·
            insufficient
      supply of the drug candidates;





·
            adverse
      medical events or side effects in treated patients;
  and





·
            ineffectiveness
      of the drug candidates.





In
addition, the FDA may place a clinical trial on hold or terminate it if it
concludes that subjects are being exposed to an unacceptable health risk. Any
drug is likely to produce some toxicity or undesirable side effects in animals
and in humans when administered at sufficiently high doses and/or for a
sufficiently long period of time. Unacceptable toxicity or side effects may
occur at any dose level at any time in the course of studies in animals designed
to identify unacceptable effects of a drug candidate, known as toxicological
studies, or clinical trials of drug candidates. The appearance of any
unacceptable toxicity or side effect could cause us or regulatory authorities to
interrupt, limit, delay or abort the development of any of our drug candidates
and could ultimately prevent approval by the FDA or foreign regulatory
authorities for any or all targeted indications.





Before
receiving FDA approval to market a product, we must demonstrate that the product
is safe and effective for its intended use by submitting to the FDA an NDA
containing the pre-clinical and clinical data that have been accumulated,
together with chemistry and manufacturing and controls specifications and
information, and proposed labeling, among other things. The FDA may refuse to
accept an NDA for filing if certain content criteria are not met and, even after
accepting an NDA, the FDA may often require additional information, including
clinical data, before approval of marketing a product.





As part
of the approval process, the FDA must inspect and approve each manufacturing
facility. Among the conditions of approval is the requirement that a
manufacturer’s quality control and manufacturing procedures conform to cGMP.
Manufacturers must expend time, money and effort to ensure compliance with cGMP,
and the FDA conducts periodic inspections to certify compliance. It may be
difficult for our manufacturers or us to comply with the applicable cGMP and
other FDA regulatory requirements. If we, or our contract manufacturers, fail to
comply, then the FDA will not allow us to market products that have been
affected by the failure.





If the
FDA grants approval, the approval will be limited to those disease states,
conditions and patient populations for which the product is safe and effective,
as demonstrated through clinical studies. Further, a product may be marketed
only in those dosage forms and for those indications approved in the NDA.
Certain changes to an approved NDA, including, with certain exceptions, any
changes to labeling, require approval of a supplemental application before the
drug may be marketed as changed. Any products that we manufacture or distribute
pursuant to FDA approvals are subject to continuing regulation by the FDA,
including compliance with cGMP and the reporting of adverse experiences with the
drugs. The nature of marketing claims that the FDA will permit us to make in the
labeling and advertising of our products will be limited to those specified in
an FDA approval, and the advertising of our products will be subject to
comprehensive regulation by the FDA. Drugs approved under Subpart H carry
additional restrictions on marketing activities, including the requirement that
all promotional materials to be used in support of the product are pre-submitted
to FDA.  Claims exceeding those that are approved will constitute a
violation of the Federal Food, Drug, and Cosmetic Act. Violations of the Federal
Food, Drug, and Cosmetic Act or regulatory requirements at any time during the
product development process, approval process, or after approval may result in
agency enforcement actions, including withdrawal of approval, recall, seizure of
products, injunctions, fines and/or civil or criminal penalties. Any agency
enforcement action could have a material adverse effect on our
business.





Should we
wish to market our products outside the United States, we must receive marketing
authorization from the appropriate foreign regulatory authorities. The
requirements governing the conduct of clinical trials, marketing authorization,
pricing and reimbursement vary widely from country to country. At present,
companies are typically required to apply for foreign marketing authorizations
at a national level. However, within the European Union, registration procedures
are available to companies wishing to market a product in more than one European
Union member state. Typically, if the regulatory authority is satisfied that a
company has presented adequate evidence of safety, quality and efficacy, then
the regulatory authority will grant a marketing authorization. This foreign
regulatory approval process, however, involves risks similar or identical to the
risks associated with FDA approval discussed above, and therefore we cannot
guarantee that we will be able to obtain the appropriate marketing authorization
for any product in any particular country.


12




Failure
to comply with applicable federal, state and foreign laws and regulations would
likely have a material adverse effect on our business. In addition, federal,
state and foreign laws and regulations regarding the manufacture and sale of new
drugs are subject to future changes. We cannot predict the likelihood, nature,
effect or extent of adverse governmental regulation that might arise from future
legislative or administrative action, either in the United States or
abroad.





RESEARCH
AND DEVELOPMENT





Company-sponsored
research and development expenses (excluding non-cash compensation and
discontinued operations) totaled $55,751,000 in 2006, $74,883,000 in 2007 and
$38,075,000 in 2008. “Other 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, manufacture, testing,
and enhancement of our drug candidates and technologies, as well as expenses
related to in-licensing of new product candidates.  See “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Overview.”





EMPLOYEES





As of
March 30, 2009, we had 17 full- and part-time employees. None of our employees
are represented by a collective bargaining agreement, and we have never
experienced a work stoppage. We consider our relations with our employees to be
good.





ITEM
1A.          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 substantial operating losses since our inception and
expect to continue to incur operating losses for the foreseeable future and may
never become profitable. As of December 31, 2008, we had an accumulated deficit
of approximately $331.9 million and a deficiency in equity of $1.5 million. As
we continue 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.





We have
not yet commercialized any of our drug candidates and cannot be sure we will
ever be able to do so. Even if we commercialize one or more of our drug
candidates, 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,
successfully complete any post-approval regulatory obligations and successfully
commercialize our drug candidates.





13




Risks Associated with Our
Product Development Efforts





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, and the rate we collect, clean, lock and analyze
the clinical trial database. 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, the existence of
competitive clinical trials, and whether existing or new drugs are approved for
the indication we are studying. We are aware that other companies are planning
clinical trials that will seek to enroll patients with the same diseases as we
are studying. Certain clinical trials are designed to continue until a
pre-determined number of events have occurred to the patients enrolled. Trials
such as this are subject to delays stemming from patient withdrawal and from
lower than expected event rates and may also incur increased costs if enrollment
is increased in order to achieve the desired number of events. 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 or timely basis. In addition, conducting multi-national studies
adds another level of complexity and risk as we are subject to events affecting
countries outside the United States. Moreover, negative or inconclusive
results from the clinical trials we 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.





Additionally,
we have never filed a new drug application, or NDA, or similar application for
approval in the United States or in any country, which may result in a delay in,
or the rejection of, our filing of an NDA or similar application. During the
drug development process, regulatory agencies will typically ask questions of
drug sponsors. While we endeavor to answer all such questions in a timely
fashion, or in the NDA filing, some questions may not be answered by the time we
file our NDA. Unless the FDA waives the requirement to answer any such
unanswered questions, submission of an NDA may be delayed or
rejected.





Pre-clinical
testing and clinical development are long, expensive and uncertain processes. 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. Safety signals detected during clinical studies and
pre-clinical animal studies, such as the gastrointestinal bleeding that has been
seen in some high-dose, ferric citrate canine studies, may require us to do
additional studies, which could delay the development of the drug or lead to a
decision to discontinue development of the drug. Drug candidates in the later
stages of clinical development may fail to show the desired safety and efficacy
traits despite positive results in initial clinical testing. Results from
earlier studies may not be indicative of results from future clinical trials and
the risk remains that a pivotal program 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. Interpretation of the prior pre-clinical and
clinical safety and efficacy data of our drug candidates may be flawed and there
can be no assurance that safety and/or efficacy concerns from the prior data
were overlooked or misinterpreted, which in subsequent, larger studies appear
and prevent approval of such drug candidates. We will need to re-input our
safety information on KRX-0401 into a Good Clinical Practice-compliant database
and can provide no assurance that safety concerns will not subsequently
arise.





Clinical
trials 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 what appeared to be 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. Though we may engage a
clinical research organization with experience in conducting regulatory trials,
errors in the conduct, monitoring and/or auditing could invalidate the results
from a regulatory perspective.




14




Because
all of our proprietary technologies are licensed to us by third parties,
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 rights, patent or
otherwise, to our drugs candidates from third parties. These license agreements
require us to meet development 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.
From time to time, in the ordinary course of business, we may have disagreements
with our licensors or collaborators regarding the terms of our agreements or
ownership of proprietary rights, which could lead to delays in the research,
development and commercialization of our drug candidates or could require or
result in litigation or arbitration, which would be time-consuming and
expensive.





We
rely on third parties to manufacture and analytically test our products. If
these third parties do not successfully manufacture and test our products, our
business will be harmed.





We have
limited experience in manufacturing products for clinical or commercial
purposes. We intend to continue, in whole or in part, to use third parties to
manufacture and analytically test our products for use in clinical trials and
for future sales. We may not be able to enter into future contract agreements
with these third-parties on terms acceptable to us, if at all.





Contract
manufacturers often encounter difficulties in scaling up production, including
problems involving raw material supplies, 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.  These risks become more acute as we
scale up for commercial quantities, where a reliable source of raw material
supplies becomes critical to commercial success.  For example, given
the large quantity of materials required for ferric citrate production, as we
approach commercialization for Zerenex we will need to ensure an adequate supply
of starting materials that meet quality, quantity and cost
standards.  Failure to achieve this level of supply can jeopardize the
successful commercialization of the product.





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 and unannounced inspections by the FDA and
corresponding foreign governmental agencies to ensure strict compliance with
current Good Manufacturing Practices, as well as other governmental regulations
and corresponding foreign standards. The same issues apply to contract
analytical services which we use for testing of our products. We will not have
control over, other than by contract and periodic oversight, third-party
manufacturers' compliance with these regulations and standards. We are currently
developing analytical tools for ferric citrate active pharmaceutical ingredient
testing. Failure to develop effective analytical tools could result in
regulatory or technical delay or could jeopardize our ability to begin Phase 3
clinical trials and/or obtain FDA approval. Switching or engaging multiple
third-party contractors to produce our products may be difficult because the
number of potential manufacturers may be limited and 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. For
Zerenex, we currently rely on a sole source of ferric citrate active
pharmaceutical ingredient. The loss of this sole source of supply would result
in significant additional costs and delays in our development program.Moreover, if we need to change manufacturers after commercialization, 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
we do not establish or maintain manufacturing, drug development and marketing
arrangements with third parties, we may be unable to commercialize our
products.





We do not
possess all of the capabilities to fully commercialize our products on our own.
From time to time, we may need to contract with third parties to:





●
            manufacture
      our product candidates;





●
            assist
      us in developing, testing and obtaining regulatory approval for and
      commercializing some of our compounds and technologies;
  and





●
            market
      and distribute our drug products.





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 products
independently, which could result in delays. Furthermore, such failure could
result in the termination of license rights to one or more of our products. If
these manufacturing, 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 our
products. Accordingly, to the extent that we rely on third parties to research,
develop or commercialize our products, we are unable to control whether such
products will be scientifically or commercially successful. Additionally, if
these third parties fail to perform their obligations under our agreements with
them or fail to perform their work in a satisfactory manner, in spite of our
efforts to monitor and ensure the quality of such work, we may face delays in
achieving the regulatory milestones required for commercialization of one or
more drug candidates.


15





Given the
current market conditions for raising capital, and given our limited resources,
we may be forced to further restructure our workforce, and thus rely
predominantly or entirely on our ability to contract with third parties for our
manufacturing, drug development and marketing. If we are unable to contract with
such third parties, we may be forced to limit or suspend or terminate the
development of some or all of our product candidates, including, without
limitation, suspending development of KRX-0401 (perifosine) and/or Zerenex
(ferric citrate).





Our
reliance on third parties, such as clinical research organizations, or CROs, may
result in delays in completing, or a failure to complete, clinical trials if
such CROs fail to perform under our agreements with them.





In the
course of product development, we engage CROs to conduct and manage clinical
studies and to assist us in guiding our products through the FDA review and
approval process.  If the CROs fail to perform their obligations under
our agreements with them or fail to perform clinical trials in a satisfactory
manner, we may face delays in completing our clinical trials, as well as
commercialization of one or more drug candidates. Furthermore, any loss or delay
in obtaining contracts with such entities may also delay the completion of our
clinical trials and the market approval of drug candidates.





Other Risks Related to Our
Business





If
we are unable to develop adequate sales, marketing or distribution capabilities
or enter into agreements with third parties to perform some of these functions,
we will not be able to commercialize our products effectively.





In the
event that one or more of our drug candidates are approved by the FDA, we
currently plan to conduct our own sales and marketing effort to support the
drugs. We currently have limited experience in sales, marketing or distribution.
To directly market and distribute any products, we must build a sales and
marketing organization with appropriate technical expertise and distribution
capabilities. We may attempt to build such a sales and marketing organization on
our own or with the assistance of a contract sales organization. For some market
opportunities, we may want or need to enter into co-promotion or other licensing
arrangements with larger pharmaceutical or biotechnology firms in order to
increase the commercial success of our products. We may not be able to establish
sales, marketing and distribution capabilities of our own or enter into such
arrangements with third parties in a timely manner or on acceptable terms. To
the extent that we enter into co-promotion or other licensing arrangements, our
product revenues are likely to be lower than if we directly marketed and sold
our products, and some or all of the revenues we receive will depend upon the
efforts of third parties, and these efforts may not be successful. Additionally,
building marketing and distribution capabilities may be more expensive than we
anticipate, requiring us to divert capital from other intended purposes or
preventing us from building our marketing and distribution capabilities to the
desired levels.





Notwithstanding
our current plans to commercialize our drug candidates, from time to time we may
consider offers or hold discussions with companies for partnerships or the
acquisition of our company or any of our products. Any accepted offer may
preclude us from the execution of our current business plan.





Even
if we obtain FDA approval to market our drug products, if they 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 drug products 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 products offer over existing treatment
      methods;





●
            the
      cost-effectiveness of our products relative to competing
      products;




●
              the
      availability of government or third-party payor reimbursement for our
      products;
 
 ●
              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 products, 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.


16




If
our competitors develop and market products that are less expensive, more
effective or safer than our drug products, 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 drug products
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.





The drugs
that we are attempting to develop will have to compete with existing therapies.
For example, Zerenex, if approved in the United States, would compete with other
FDA approved phosphate binders such as Renagel® (sevelamer hydrochloride) and
Renvela® (sevelamer carbonate), both marketed by Genzyme Corporation, PhosLo®
(calcium acetate), marketed by Fresenius Medical Care, and Fosrenol® (lanthanum
carbonate), marketed by Shire Pharmaceuticals Group plc, as well as
over-the-counter calcium carbonate products such as TUMS® and metal-based
options such as aluminum and magnesium. A generic formulation of PhosLo®
manufactured by Roxane Laboratories, Inc. was launched in the United States in
October 2008. KRX-0401 (perifosine), if approved in the United States would
compete with other anti-cancer agents, such as mTOR inhibitors. Wyeth Corp.,
Novartis AG and Ariad Pharmaceuticals are developing mTOR inhibitors for use in
cancer and Wyeth’s mTOR inhibitor, temsirolimus, has been approved to treat
patients with advanced kidney disease. Biotechnology companies such as Amgen
Inc., Biogen-Idec, Inc., ImClone Systems, Inc. (a wholly-owned subsidiary of Eli
Lilly and Company), Millennium Pharmaceuticals, Inc., Onyx Pharmaceuticals,
Inc., OSI Pharmaceuticals, Inc. and Vertex Pharmaceuticals, Inc. are developing
and, in some cases, marketing drugs to treat various diseases, including cancer,
by inhibiting cell-signaling pathways. In addition, we are aware of a number of
small and large companies developing competitive products that target the Akt
pathway.





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 products. Other companies have 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 products. 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.





As of
March 30, 2009, we had 17 full and part-time employees. To successfully develop
our drug candidates, we must be able to attract and retain highly skilled
personnel. Our limited resources may hinder our efforts 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. Although we have an employment agreement with Mr. Weiss,
this agreement does not prevent him from terminating his employment with
us.




17


Any
acquisitions we make may 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 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 goodwill and write-off of in-process research and
      development costs, adversely affecting our reported results of
      operations.





The
status of reimbursement from third-party payors for newly approved health care
drugs is uncertain and failure to obtain adequate reimbursement could limit our
ability to generate revenue.





Our
ability to commercialize pharmaceutical products may depend, in part, on the
extent to which reimbursement for the products will be available
from:





●
            government
      and health administration
authorities;





●
            private
      health insurers;





●
            managed
      care programs; and





●
            other
      third-party payors.





Significant
uncertainty exists as to the reimbursement status of newly approved health care
products. Third-party payors, including Medicare, are challenging the prices
charged for medical products and services. Government and other third-party
payors increasingly are attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new drugs and by refusing, in some
cases, to provide coverage for uses of approved products for disease indications
for which the FDA has not granted labeling approval. Third-party insurance
coverage may not be available to patients for our products. If government and
other third-party payors do not provide adequate coverage and reimbursement
levels for our products, their market acceptance may be reduced.





Health care
reform measures could adversely affect our business.





The
business and financial condition of pharmaceutical and biotechnology companies
are affected by the efforts of governmental and third-party payors to contain or
reduce the costs of health care. In the United States and in foreign
jurisdictions there have been, and we expect that there will continue to be, a
number of legislative and regulatory proposals aimed at changing the health care
system, such as proposals relating to the reimportation of drugs into the U.S.
from other countries (where they are then sold at a lower price) and government
control of prescription drug pricing. The pendency or approval of such proposals
could result in a decrease in our stock price or limit our ability to raise
capital or to obtain strategic partnerships or licenses.





We
face product liability risks and may not be able to obtain adequate
insurance.





The use
of our drug candidates in clinical trials, the future sale of any approved drug
candidates and new technologies, and our sale of Accumin prior to its
discontinuation, 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.


18


We
believe that we have obtained sufficient product liability insurance coverage
for our clinical trials and the sale of Accumin prior to its discontinuation. 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 also 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 in 2004, 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.





Our
corporate compliance efforts cannot guarantee that we are in compliance with all
potentially applicable regulations.





The
development, manufacturing, pricing, sales, and reimbursement of our products,
together with our general operations, are subject to extensive regulation by
federal, state and other authorities within the United States and numerous
entities outside of the United States. We are a relatively small company with 17
full and part-time employees as of March 30, 2009. We also have significantly
fewer employees than many other companies that have a product candidate in
clinical development, and we rely heavily on third parties to conduct many
important functions. While we believe that our corporate compliance program is
sufficient to ensure compliance with applicable regulations, we cannot assure
you that we are or will be in compliance with all potentially applicable
regulations. If we fail to comply with any of these regulations we could be
subject to a range of regulatory actions, including suspension or termination of
clinical trials, the failure to approve a product candidate, restrictions on our
products or manufacturing processes, withdrawal of products from the market,
significant fines, or other sanctions or litigation.


19


Risks Related to Our
Financial Condition
 
 Our
current cash, cash equivalents and investment securities may not be adequate to
support our operations for the length of time that we have
estimated.
 
 We
currently anticipate that our cash, cash equivalents and investment securities
as of December 31, 2008, exclusive of our holdings in auction rate securities
and inclusive of a $3 million milestone payment received by us in March 2009
under our sublicense agreement for Zerenex in Japan, are sufficient to meet our
anticipated working capital needs and fund our business plan through the end of
2009. However, if we are not able to receive proceeds from some portion of our
auction rate securities by the first quarter of 2010, we may not have the
ability to continue as a going concern for any significant period beyond that
point. We are evaluating market conditions to determine the appropriate timing
and extent to which we will seek to obtain additional debt, equity or other type
of financing. If we determine that it is necessary to seek additional funding,
there can be no assurance that we will be able to obtain any such funding on
terms that are acceptable to us, if at all.
 
 In
addition, the report of our independent registered public accounting firm
covering our 2008 Consolidated Financial Statements, included in this Annual
Report, contains an explanatory paragraph that makes reference to uncertainty
about our ability to continue as a going concern. Future reports may continue to
contain this explanatory paragraph.  Our forecast of the period of
time through which our cash, cash equivalents and investment 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, design and conduct of, and results from, clinical trials for our
      drug candidates;





●
            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;





●
            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
      value and liquidity of our investment securities, including our
      investments in auction rate securities;
and





●
            the
      costs involved in prosecuting and enforcing patent claims and other
      intellectual property rights.





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
intellectual property. 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
intellectual property, we may be unable to do so on terms favorable to us, if at
all.





With
respect to our auction rate securities, we will continue to attempt to sell
these securities until the auctions are successful. If uncertainties in the
credit and capital markets continue, these markets deteriorate further or we
experience any credit rating downgrades on the auction rate securities in our
portfolio, we may incur additional impairment charges with respect to our
auction rate securities portfolio, which could negatively affect our financial
condition, cash flow and reported earnings. We continue to monitor the fair
value of our auction rate securities and relevant market conditions and will
recognize additional impairment charges if future circumstances warrant such
charges. In addition, the lack of liquidity of our auction rate securities could
have a material impact on our ability to fund our operations.





Risks Related to Our
Intellectual Property and Third-Party Contracts





If
we are unable to adequately protect our intellectual property, third parties may
be able to use our intellectual property, 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 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 drug products or technologies or design around our
patented drug products and technologies. The patents we use may be challenged or
invalidated or may fail to provide us with any competitive
advantage.





We rely
on trade secrets to protect our intellectual property 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
products and technologies 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.




The
intellectual property that we own or have licensed relating to our product
candidates are limited, which could adversely affect our ability to compete in
the market and adversely affect the value of our product
candidates.
 
 The
patent rights that we own or have licensed relating to our product candidates
are limited in ways that may affect our ability to exclude third parties from
competing against us if we obtain regulatory approval to market these product
candidates. In particular:
 
 ●
              Our
      composition of matter patent covering KRX-0401 (perifosine) expires in
      2013 and we cannot assure you that we can obtain an extension to 2018. We
      do not hold a composition of matter patent covering Zerenex. Composition
      of matter patents can provide protection for pharmaceutical products to
      the extent that the specifically covered compositions are important. Upon
      expiration of our composition of matter patent for KRX-0401, or for
      Zerenex, where we do not have a composition of matter patent, competitors
      who obtain the requisite regulatory approval can offer products with the
      same composition as our products so long as the competitors do not
      infringe any method of use patents that we may
  hold.
 
 ●
              For
      our product candidates, the principal patent protection that covers or
      those we expect will cover, our product candidate is a method of use
      patent. This type of patent only protects the product when used or sold
      for the specified method. However, this type of patent does not limit a
      competitor from making and marketing a product that is identical to our
      product that is labeled for an indication that is outside of the patented
      method, or for which there is a substantial use in commerce outside the
      patented method.
 
 Moreover,
physicians may prescribe such a competitive identical product for indications
other than the one for which the product has been approved, or off-label
indications, that are covered by the applicable patents. Although such off-label
prescriptions may infringe or induce infringement of method of use patents, the
practice is common and such infringement is difficult to prevent or
prosecute.
 
 In
addition, the limited patent protection described above may adversely affect the
value of our product candidates and may inhibit our ability to obtain a
corporate partner at terms acceptable to us, if at all.


20




Litigation
or third-party claims could require us to spend substantial time and money
defending such claims and adversely affect our ability to develop and
commercialize our products.


We may be
forced to initiate litigation to enforce our contractual and intellectual
property rights, or we may be sued by third parties asserting claims based on
contract, tort or intellectual property infringement. In addition, third parties
may have or may obtain patents in the future and claim that our drug products or
technologies infringe their patents. If we are required to defend against suits
brought by third parties, or if we sue third parties to protect our 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 our drug products or technologies could
subject us to monetary liability and require our licensors or us to obtain a
license to continue to use our drug products or 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





Future
sales or other issuances 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.





If we
make one or more significant acquisitions in which the consideration includes
stock or other securities, our stockholders’ holdings may be significantly
diluted. In addition, we may enter into arrangements with third parties
permitting us to issue shares of common stock in lieu of certain cash payments
upon the achievement of milestones.





In
addition, we may be required to issue up to 3,372,422 shares of our common stock
to former stockholders of ACCESS Oncology upon the achievement of certain
milestones, of which 500,000 shares may be payable in the next 12 months if we
reach the first milestone, or we may conclude, under certain circumstances, that
it is in our best interest to settle this contingent share obligation for all or
substantially all of such shares in advance of reaching any milestones. A
substantial portion of the contingent shares would be payable to related
parties.





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 and
      liquidity;





●
            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.


21





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.





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 the approval of our
stockholders. 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.





We
are currently not in compliance with NASDAQ rules for continued listing on the
NASDAQ Capital Market and are at risk of being delisted, which may subject us to
the SEC’s penny stock rules and decrease the liquidity of our common
stock.





On April
22, 2008, we received notice from The NASDAQ Stock Market that we were not in
compliance with the $1.00 minimum bid price requirement for continued inclusion
on the applicable NASDAQ market. This notification is a standard communication
when the bid price of a NASDAQ-listed company closes below the minimum $1.00 per
share requirement for 30 consecutive business days. In accordance with NASDAQ
rules, we were provided 180 calendar days to regain compliance by having the bid
price of our common stock close at $1.00 per share or more for a minimum of 10
consecutive business days. On October 21, 2008, we received notice from The
NASDAQ Stock Market that the bid price and market value of publicly traded
securities requirements for continued listing on a NASDAQ market had been
temporarily suspended. Due to this action, we believe that we have until July
20, 2009, to achieve compliance with the $1.00 minimum closing bid price
requirement.





On
November 17, 2008, we received notice from The NASDAQ Stock Market that we were
no longer in compliance with Marketplace Rule 4310(c)(3), which requires us to
have a minimum of $2,500,000 in stockholders' equity, or $35,000,000 market
value of listed securities, or $500,000 of net income from continuing operations
for the most recently completed fiscal year or two of the three most recently
completed fiscal years, for continued listing on the NASDAQ Capital Market. On
December 2, 2008, we submitted to The NASDAQ Stock Market a plan to achieve and
sustain compliance with all of the NASDAQ Capital Market listing
requirements.





On March
3, 2009, we received notice from The NASDAQ Stock Market indicating that we had
failed to regain compliance with NASDAQ Marketplace Rule 4310(c)(3). Therefore,
The NASDAQ Stock Market determined to delist our common stock from the NASDAQ
Capital Market unless we appealed the delisting determination to a hearing. On
March 9, 2009, we requested a hearing to appeal the determination of The NASDAQ
Stock Market to delist our common stock to a NASDAQ Listings Qualification Panel
(“Panel”), which automatically stayed the delisting of our common stock pending
issuance of the Panel's decision. The hearing is scheduled for April 30, 2009.
At the Panel hearing, we plan to ask the Panel to provide us with additional
time to regain compliance with NASDAQ Marketplace Rule
4310(c)(3).  There can be no assurance that such a request will be
granted or that the Panel will permit us to continue to list our common stock on
the NASDAQ Capital Market, or that in the future we will meet the listing
requirements of the NASDAQ Capital Market, including, without limitation, bid
price, stockholders’ equity and/or market value of listed securities minimum
requirements. Additionally, our efforts to continue to meet the listing
requirements may be limited by current market conditions, including volatility
in the market.





If we are
delisted from the NASDAQ Capital Market, our common stock may be traded
over-the-counter on the OTC Bulletin Board or in the “pink sheets.” These
alternative markets, however, are generally considered to be less efficient than
the NASDAQ Capital Market. Many over-the-counter stocks trade less frequently
and in smaller volumes than securities traded on the NASDAQ markets, which would
likely have a material adverse effect on the liquidity of our common
stock.





If our
common stock is delisted from the NASDAQ Capital Market, there may be a limited
market for our stock, trading in our stock may become more difficult and our
share price could decrease even further. In addition, if our common stock is
delisted, our ability to raise additional capital may be
impaired.


22


In
addition, our common stock may become subject to penny stock rules. The SEC
generally defines “penny stock” as an equity security that has a market price of
less than $5.00 per share, subject to certain exceptions. We are not currently
subject to the penny stock rules because our common stock qualifies for an
exception to the SEC’s penny stock rules for companies that have an equity
security that is quoted on The NASDAQ Stock Market. However, if we were
delisted, our common stock would become subject to the penny stock rules, which
impose additional sales practice requirements on broker-dealers who sell our
common stock. If our common stock were considered penny stock, the ability of
broker-dealers to sell our common stock and the ability of our stockholders to
sell their shares in the secondary market would be limited and, as a result, the
market liquidity for our common stock would be adversely affected. We cannot
assure you that trading in our securities will not be subject to these or other
regulations in the future.





ITEM
1B. UNRESOLVED STAFF COMMENTS





None.





ITEM
2. PROPERTIES.





Our
corporate and executive office is located in New York, New York. Our New York
facility consists of approximately 11,700 square feet of leased space at 750
Lexington Avenue, New York, New York 10022. We have entered into an office
sharing agreement with a third-party for a portion of our leased space with an
initial term through April 2009 and, thereafter, on a month-to-month
basis.





ITEM
3. LEGAL PROCEEDINGS.





We, and
our subsidiaries, are not a party to, and our property is not the subject of,
any material pending legal proceedings, other than as noted below.





In July
2003, Keryx (Israel) Ltd., one of our Israeli subsidiaries, vacated its
Jerusalem facility, after giving advance notice to RMPA Properties Ltd., the
landlord. On May 1, 2005, the landlord filed suit in the Circuit Court of
Jerusalem in Jerusalem, Israel, claiming that Keryx (Israel) Ltd., among other
parties, was liable as a result of the alleged breach of the lease agreement. On
March 3, 2009, we entered into a settlement agreement with R.M.P.A. Properties
Ltd., with respect to the dispute. In accordance with the settlement agreement,
in March 2009, we paid the landlord a total sum of $260,000 for a full release
of all claims and obligations under the lease agreement.





We
prevailed in an arbitration proceeding with Alfa Wasserman concerning certain
terms of the 1998 License Agreement between Alfa Wasserman and the Company
related to the provision of data to Alfa Wasserman and consultation regarding
management of the licensed patents. An arbitration hearing was held in October
2007 and the arbitrator issued his decision on March 25, 2008, rejecting Alfa
Wasserman’s claims that we were in material breach of the License Agreement. The
arbitrator determined that each party would bear its own costs for the
arbitration.





In April
2008, we notified Alfa Wasserman of our intention to terminate the License
Agreement. We offered to transfer to Alfa Wasserman all regulatory applications
as provided in the License Agreement and demanded payment by Alfa Wasserman of
25% of our development costs associated with sulodexide, as provided in the
License Agreement. Alfa Wasserman itself served a notice of termination of the
License Agreement on the alleged grounds that we are in material breach of the
agreement for failing to diligently develop sulodexide by terminating the Phase
4 clinical trial. By seeking to terminate the License Agreement, Alfa Wasserman
is thereby seeking to avoid reimbursing us our development costs. We intend to
submit our claim for development costs and Alfa Wasserman’s claim of material
breach to arbitration for resolution.





In April
2008, we commenced an action in the U.S. District Court for the Southern
District of New York against Panion & BF Biotech, Inc. (“Panion”) for
breaching the manufacturing provisions of the March 14, 2008 Amended and
Restated License Agreement between the Company and Panion, and the implied
covenant of good faith and fair dealing contained therein. We sought declaratory
and injunctive relief and damages against Panion. Panion asserted counterclaims
against us for alleged breach of the agreement and the implied covenant of good
faith and fair dealing contained therein and for alleged breach of fiduciary
duties, and sought declaratory and injunctive relief and damages in the amount
of “at least one million dollars.” We replied, denying Panion’s counterclaims.
In November 2008, the parties agreed to settle their dispute. The parties
entered into a first amendment to the Amended and Restated License Agreement by
which Panion granted us additional manufacturing and development rights, and we
paid Panion $200,000 in November 2008. Following execution of the settlement
agreement and first amendment to the Amended and Restated License Agreement, the
parties entered a voluntary dismissal of the action, including Panion’s asserted
counterclaims.


23


We
in-licensed KRX-0501 from Krenitsky Pharmaceuticals, Inc. (“Krenitsky”) in 2005.
In October 2008, Krenitsky commenced an action in the United States District
Court, Middle District of North Carolina, Durham Division, against the Company,
requesting a declaratory judgment from the court determining that (i) we
breached the 2005 License Agreement between Krenitsky and the Company, (ii)
Krenitsky was within its legal rights to terminate the License Agreement for
cause, (iii) we have no further rights or interests in the licensed patents, and
(iv) Krenitsky has no further obligations to us under the License Agreement. In
December 2008, the parties agreed to settle their dispute and as a result have
entered into a License Termination, Technology Transfer and Settlement
Agreement, whereby the license agreement was terminated and certain know-how was
transferred to Krenitsky in exchange for a portion of any future license and
milestone payments received by Krenitsky related to KRX-0501 and a royalty on
sales of the drug, if any. Following execution of the Termination, Technology
Transfer and Settlement Agreement, the parties entered a voluntary dismissal of
the action.





We are
presently engaged in an arbitration proceeding with ICON Central Laboratories
(“ICON”), the central laboratory we used for the clinical development of
Sulonex, concerning certain fees related mainly to the provision of storage
services pursuant to a series of service agreements. In March 2008, we
terminated the agreements.  ICON is claiming that the we owe it
$816,647 in unpaid invoices, much of which is made up of charges for annual
storage fees. It is our position that we should not have to pay for storage fees
incurred after the effective date of the termination of the agreements, and we
intend to vigorously defend this proceeding on this basis, and to assert a
counterclaim for a refund of the unused portions of the annual storage fees
already paid to ICON.





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





We did
not submit any matters to a vote of our security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of
2008.





PART
II





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





Market
Information





Our
common stock is listed on the NASDAQ Capital Marketand
trades under the symbol “KERX.” Trading of our common stock commenced on July
28, 2000, following the completion of our initial public offering.





On April
22, 2008, we received notice from The NASDAQ Stock Market that we were not in
compliance with the $1.00 minimum bid price requirement for continued inclusion
on the applicable NASDAQ market. This notification is a standard communication
when the bid price of a NASDAQ-listed company closes below the minimum $1.00 per
share requirement for 30 consecutive business days. In accordance with NASDAQ
rules, we were provided 180 calendar days to regain compliance by having the bid
price of our common stock close at $1.00 per share or more for a minimum of 10
consecutive business days. On October 21, 2008, we received notice from The
NASDAQ Stock Market that the bid price and market value of publicly traded
securities requirements for continued listing on a NASDAQ market had been
temporarily suspended. Due to this action, we believe that we have until July
20, 2009, to achieve compliance with the $1.00 minimum closing bid price
requirement.





On
November 17, 2008, we received notice from The NASDAQ Stock Market that we were
no longer in compliance with Marketplace Rule 4310(c)(3), which requires us to
have a minimum of $2,500,000 in stockholders' equity, or $35,000,000 market
value of listed securities, or $500,000 of net income from continuing operations
for the most recently completed fiscal year or two of the three most recently
completed fiscal years, for continued listing on the NASDAQ Capital Market. On
December 2, 2008, we submitted to The NASDAQ Stock Market a plan to achieve and
sustain compliance with all of the NASDAQ Capital Market listing
requirements.





On March
3, 2009, we received notice from The NASDAQ Stock Market indicating that we had
failed to regain compliance with NASDAQ Marketplace Rule 4310(c)(3). Therefore,
The NASDAQ Stock Market determined to delist our common stock from the NASDAQ
Capital Market unless we appealed the delisting determination to a hearing. On
March 9, 2009, we requested a hearing to appeal the determination of The NASDAQ
Stock Market to delist our common stock to a NASDAQ Listings Qualification Panel
(“Panel”), which automatically stayed the delisting of our common stock pending
issuance of the Panel's decision. The hearing is scheduled for April 30, 2009.
At the Panel hearing, we plan to ask the Panel to provide us with additional
time to regain compliance with NASDAQ Marketplace Rule
4310(c)(3).  There can be no assurance that such a request will be
granted or that the Panel will permit us to continue to list our common stock on
the NASDAQ Capital Market, or that in the future we will meet the listing
requirements of the NASDAQ Capital Market, including, without limitation, bid
price, stockholders’ equity and/or market value of listed securities minimum
requirements. Additionally, our efforts to continue to meet the listing
requirements may be limited by current market conditions, including volatility
in the market.


24





The
following table sets forth the high and low closing sale prices of our common
stock for the periods indicated.





Fiscal Year Ended December 31,
      2008
                  
                  High
                  
                  
                  LowFourth
      Quarter
                  
                  $
                  0.36
                  
                  
                  $
                  0.12Third
      Quarter
                  
                  $
                  0.54
                  
                  
                  $
                  0.32Second
      Quarter
                  
                  $
                  0.67
                  
                  
                  $
                  0.46First
      Quarter
                  
                  $
                  8.71
                  
                  
                  $
                  0.52





Fiscal Year Ended December 31,
      2007
                  
                  High
                  
                  
                  LowFourth
      Quarter
                  
                  $
                  11.14
                  
                  
                  $
                  8.40Third
      Quarter
                  
                  $
                  11.05
                  
                  
                  $
                  8.27Second
      Quarter
                  
                  $
                  11.64
                  
                  
                  $
                  9.77First
      Quarter
                  
                  $
                  13.27
                  
                  
                  $
                  10.19





Holders





The
number of record holders of our common stock as of March 9, 2009 was
69.





Dividends





We have
never declared or paid any cash dividends on our common stock and do not
anticipate paying any cash dividends in the foreseeable future. Any future
determination to pay dividends will be at the discretion of our board of
directors.





Securities
Authorized for Issuance Under Equity Compensation Plans





The
following table provides information as of December 31, 2008, regarding the
securities authorized for issuance under our equity compensation plans,
consisting of the 1999 Stock Option Plan, as amended, the 2000 Stock Option
Plan, as amended, the 2002 CEO Incentive Stock Option Plan, the 2004 President
Incentive Plan, the 2004 Long-Term Incentive Plan and the 2007 Incentive
Plan.





Equity Compensation Plan
      InformationPlan Category
                    
                    Number
      of
                        securities
      to be
                        issued
      upon
                        exercise
      of
                        outstanding
      options
                    
                    
                    Weighted-average
                        exercise
      price of
                        outstanding
                        options
                    
                    
                    Number
      of
                        securities
                        remaining
                        available
      for
                        future
      issuance
                        under
      equity
                        compensation
                        plans
      (excluding
                        securities
      reflected
                        in
      column (a))(a)
                    
                    
                    (b)
                    
                    
                    (c)Equity
      compensation plans approved by security holders
                    
                    
                    6,611,802
                    
                    
                    $
                    8.81
                    
                    
                    
                    2,533,928Equity
      compensation plans not approved by security holders
                    
                    
                    2,502,657
                    
                    
                    $
                    2.89
                    
                    
                    
                    —Total
                    
                    
                    9,114,459
                    
                    
                    $
                    7.19
                    
                    
                    
                    2,533,928





For
information about all of our equity compensation plans, see Note 11 to our
Consolidated Financial Statements included in this report.


25


COMMON
STOCK PERFORMANCE GRAPH





The
following graph compares the cumulative total stockholder return on our common
stock for the period from December 31, 2003 through December 31, 2008, with the
cumulative total return over such period on (i) the United States Index of The
NASDAQ Stock Market and (ii) the Biotechnology Index of The NASDAQ Stock Market.
The graph assumes an investment of $100 on December 31, 2003, in our common
stock (at the closing market price) and in each of the indices listed above, and
assumes the reinvestment of all dividends. Measurement points are December 31 of
each year.













26




ITEM
6. SELECTED FINANCIAL DATA.
 
 The
following Statement of Operations Data for the years ended December 31, 2008,
2007, 2006, 2005 and 2004, and Balance Sheet Data as of December 31, 2008, 2007,
2006, 2005 and 2004, as set forth below are derived from our audited
consolidated financial statements. This financial data should be read in
conjunction with “Item 7.  Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and “Item 8.  Financial
Statements and Supplementary Data.”




Years
      ended December 31,2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004(in
      thousands, except per share data)Statement
      of Operations Data:Revenue:License
      revenue
              
              $
              1,180
              
              
              $
              204
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —Service
      revenue
              
              
              103
              
              
              
              52
              
              
              
              431
              
              
              
              574
              
              
              
              809Other
      revenue
              
              
              —
              
              
              
              727
              
              
              
              —
              
              
              
              —
              
              
              
              —Total
      revenue
              
              
              1,283
              
              
              
              983
              
              
              
              431
              
              
              
              574
              
              
              
              809Operating
      expenses:Cost
      of services
              
              
              27
              
              
              
              124
              
              
              
              390
              
              
              
              819
              
              
              
              835Research
      and development:Non-cash
      compensation
              
              
              (67
              )
              
              
              3,574
              
              
              
              6,504
              
              
              
              594
              
              
              
              413Non-cash
      acquired in-process research and development
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              18,800Other
      research and development
              
              
              38,075
              
              
              
              74,883
              
              
              
              55,751
              
              
              
              24,182
              
              
              
              9,805Total
      research and development
              
              
              38,008
              
              
              
              78,457
              
              
              
              62,255
              
              
              
              24,776
              
              
              
              29,018Selling,
      general and administrative:Non-cash
      compensation
              
              
              6,815
              
              
              
              7,086
              
              
              
              8,408
              
              
              
              775
              
              
              
              1,087Other
      selling, general and administrative
              
              
              7,474
              
              
              
              9,141
              
              
              
              8,519
              
              
              
              3,416
              
              
              
              3,581Total
      selling, general and administrative
              
              
              14,289
              
              
              
              16,227
              
              
              
              16,927
              
              
              
              4,191
              
              
              
              4,668Total
      operating expenses
              
              
              52,324
              
              
              
              94,808
              
              
              
              79,572
              
              
              
              29,786
              
              
              
              34,521Operating
      loss
              
              
              (51,041
              )
              
              
              (93,825
              )
              
              
              (79,141
              )
              
              
              (29,212
              )
              
              
              (33,712
              )Other
      income (expense):Interest
      and other (expense) income, net
              
              
              (1,665
              )
              
              
              4,555
              
              
              
              6,393
              
              
              
              2,317
              
              
              
              770Income
      taxes
              
              
              —
              
              
              
              (36
              )
              
              
              —
              
              
              
              —
              
              
              
              (1
              )Loss
      from continuing operations
              
              
              (52,706
              )
              
              
              (89,306
              )
              
              
              (72,748
              )
              
              
              (26,895
              )
              
              
              (32,943
              )Loss
      from discontinued operations
              
              
              (175
              )
              
              
              (756
              )
              
              
              (1,016
              )
              
              
              —
              
              
              
              —Net
      loss
              
              $
              (52,881
              )
              
              $
              (90,062
              )
              
              $
              (73,764
              )
              
              $
              (26,895
              )
              
              $
              (32,943
              )Basic
      and diluted loss per common share:Continuing
      operations
              
              $
              (1.17
              )
              
              $
              (2.05
              )
              
              $
              (1.74
              )
              
              $
              (0.78
              )
              
              $
              (1.10
              )Discontinued
      operations
              
              
              (0.01
              )
              
              
              (0.02
              )
              
              
              (0.02
              )
              
              
              —
              
              
              
              —Basic
      and diluted loss per common share
              
              $
              (1.18
              )
              
              $
              (2.07
              )
              
              $
              (1.76
              )
              
              $
              (0.78
              )
              
              $
              (1.10
              )
  As
      of December 31,2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004(in
      thousands)Balance
      Sheet Data:Cash,
      cash equivalents, interest receivable and short-term investment
      securities
              
              $
              15,467
              
              
              $
              62,386
              
              
              $
              112,920
              
              
              $
              86,783
              
              
              $
              49,878Working
      capital
              
              
              9,282
              
              
              
              42,319
              
              
              
              102,774
              
              
              
              83,890
              
              
              
              46,538Long-term
      investment securities
              
              
              7,185
              
              
              
              2,296
              
              
              
              12,690
              
              
              
              13,950
              
              
              
              —Total
      assets
              
              
              26,634
              
              
              
              81,061
              
              
              
              140,313
              
              
              
              105,097
              
              
              
              50,862Deferred
      revenue, net of current portion
              
              
              17,308
              
              
              
              11,022
              
              
              
              —
              
              
              
              —
              
              
              
              —Other
      liabilities
              
              
              118
              
              
              
              202
              
              
              
              294
              
              
              
              322
              
              
              
              92Contingent
      equity rights
              
              
              4,004
              
              
              
              4,004
              
              
              
              4,004
              
              
              
              4,004
              
              
              
              4,004Total
      stockholders’ (deficiency) equity
              
              
              (1,489
              )
              
              
              44,422
              
              
              
              123,821
              
              
              
              94,678
              
              
              
              42,804


27


ITEM
7. 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 “Item 1A. Risk Factors.”
See also the “Special Cautionary Notice Regarding Forward-Looking Statements”
set forth at the beginning of this report.





You
should read the following discussion and analysis in conjunction with “Item 6.
Selected Financial Data,” “Item 8. Financial Statements and Supplementary Data,”
and our consolidated financial statements beginning on page F-1 of this
report.





Overview





We are a
biopharmaceutical company focused on the acquisition, development and
commercialization of medically important, novel pharmaceutical products for the
treatment of life-threatening diseases, including renal disease and cancer. We
are developing ZerenexTM (ferric citrate), an oral, iron-based compound that has
the capacity to bind to phosphate and form non-absorbable complexes. Zerenex is
currently in Phase 2 clinical development for the treatment of hyperphosphatemia
(elevated phosphate levels) in patients with end-stage renal disease, or ESRD.
We are also developing KRX-0401 (perifosine), a novel, potentially
first-in-class, oral anti-cancer agent that modulates Akt, a protein in the body
associated with tumor survival and growth. KRX-0401 also modulates a number of
other key signal transduction pathways, including the JNK and MAPK pathways,
which are pathways associated with programmed cell death, cell growth, cell
differentiation and cell survival. KRX-0401 is currently in Phase 2 clinical
development for multiple tumor types. We also actively engage in business
development activities that include evaluating compounds and companies for
in-licensing or acquisition, as well as seeking strategic relationships for our
product candidates and for our company. 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 product sales from our drug candidates. We have generated, and
expect to continue to generate, revenue from the licensing of rights to Zerenex
in Japan to our Japanese partner, Japan Tobacco Inc. (“JT”) and Torii
Pharmaceutical Co., Ltd. (“Torii”).





Our major
sources of working capital have been proceeds from various private placements of
equity securities, option and warrant exercises, public offerings of our common
stock, interest income, and, beginning in 2007, from the upfront and milestone
payments from our Sublicense Agreement with JT and Torii and miscellaneous
payments from our other prior licensing activities. We have devoted
substantially all of our efforts to the identification, in-licensing,
development and partnering 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 product development
efforts, our clinical trials, partnership and licensing activities.





Our
license revenues currently consist of license fees arising from our agreement
with JT and Torii. We recognize these revenues ratably over the estimated period
which we will have certain ongoing responsibilities under the sublicense
agreement, with unamortized amounts recorded as deferred revenue.





Our
service revenues consist entirely of clinical trial management and site
recruitment services. Revenues from providing these services are recognized as
the services are provided. Deferred revenue is recorded when we receive a
deposit or prepayment for services to be performed at a later date.





We have
not earned any revenues from the commercial sale of any of our drug
candidates.





Our cost
of services consists of all costs specifically associated with our clinical
trial management and site recruitment client programs such as salaries, benefits
paid to personnel, payments to third-party vendors and other support facilities
associated with delivering services to our clients. Costs 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, manufacture, testing, and enhancement of
our drug candidates and technologies, as well as expenses related to
in-licensing of new product candidates. We expense our research and development
costs as they are incurred. Other research and development expenses, which
excludes non-cash compensation and discontinued operations, for the years ended
December 31, 2008, 2007 and 2006 were $38,075,000, $74,883,000 and 55,751,000,
respectively.


28





The
following table sets forth the other research and development expenses per
project, for the periods presented.




Years
      ended December 31,2008
                
                
                2007
                
                
                2006Zerenex
                
                $
                3,423,000
                
                
                $
                4,825,000
                
                
                $
                1,531,000KRX-0401
                
                
                7,045,000
                
                
                
                15,210,000
                
                
                
                8,508,000Other
                
                
                677,000
                
                
                
                2,088,000
                
                
                
                658,000Terminated
      programs (including Sulonex)
                
                
                26,930,000
                
                
                
                52,760,000
                
                
                
                45,054,000Total
                
                $
                38,075,000
                
                
                $
                74,883,000
                
                
                $
                55,751,000





Amounts
in the above table excludes discontinued operations.





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, legal activities and facilities-related expenses.





Our
results of operations include non-cash compensation expense as a result of the
grants of stock options, restricted stock and warrants. Compensation expense for
awards of options and restricted stock granted to employees and directors
represents the fair value of the award recorded over the respective vesting
periods of the individual awards. The expense is included in the respective
categories of expense in the consolidated statements of operations. We expect to
continue to incur significant non-cash compensation as a result of Statement of
Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment” (“SFAS
No. 123R”), which we adopted on January 1, 2006. For awards of options and
warrants to consultants and other third-parties, compensation expense is
determined at the “measurement date,” in accordance with the fair value method
prescribed by the provisions of Emerging Issues Task Force (“EITF”) Issue No.
96-18, “Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling Goods or Services”
(“EITF 96-18”). The expense is recognized over the vesting period of the award.
Until the measurement date is reached, the total amount of compensation expense
remains uncertain. We record compensation expense based on the fair value of the
award at the reporting date. The awards to consultants and other third-parties
are then revalued, or the total compensation is recalculated based on the then
current fair value, at each subsequent reporting date. In addition, because some
of the options, restricted stock and warrants issued to employees, consultants
and other third-parties 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 drug
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. In addition, we may need to establish the
commercial infrastructure required to manufacture, market and sell our drug
candidates following approval, if any, by the FDA, which would result in us
incurring additional expenses. 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





Years
Ended December 31, 2008 and 2007





License Revenue. License
revenue increased by $976,000 to $1,180,000 for the year ended December 31,
2008, as compared to $204,000 for the year ended December 31, 2007. License
revenue is related to the amortization of a portion of the license fees of $12.0
million and milestone payment of $8.0 million associated with our sublicense
agreement with JT and Torii. Such amounts were recognized as license revenue on
a straight-line basis over the life of the agreement, which is through the
expiration of the last-to-expire patent covered by the agreement in 2023, and
represents the estimated period over which we will have certain ongoing
responsibilities under the sublicense agreement. The increase in license revenue
was due to a full year of amortization in 2008, as compared to a partial period
of amortization in 2007.


29





Service Revenue. Service
revenue increased by $51,000 to $103,000 for the year ended December 31, 2008,
as compared to service revenue of $52,000 for the year ended December 31, 2007.
The increase in service revenue was primarily due to the timing and extent of
services performed in accordance with our service contracts. We do not expect
our service revenue to have a material impact on our financial results during
the next fiscal year.





Other Revenue. There was no
other revenue for the year ended December 31, 2008. Other revenue was $727,000
for the year ended December 31, 2007, and was related to a payment from Yissum
under an October 2004 termination agreement whereby we received a portion of
cash consideration earned by Yissum from the terminated license rights. Payments
from Yissum are recognized as earned since we have no responsibilities under the
terminated license agreement or the termination agreement.





Cost of Services. Cost of
services decreased by $97,000 to $27,000 for the year ended December 31, 2008,
as compared to an expense of $124,000 for the year ended December 31, 2007.
We do not expect our
cost of service expense to have a material impact on our financial results
during the next fiscal year.





Non-Cash Compensation Expense
(Research and Development). Non-cash compensation expense (research and
development) related to equity incentive grants decreased by $3,641,000 to a
credit of $67,000 for the year ended December 31, 2008, as compared to an
expense of $3,574,000 for the year ended December 31, 2007. The decrease was
primarily attributable to $3,486,000 decrease in compensation expense related to
stock options and restricted stock issued to our President, who was terminated
as part of our restructuring of our business in March 2008, as well as due to a
reduction in research and development personnel following the
restructuring.





Other Research and Development
Expenses. Other research and development expenses decreased by
$36,808,000 to $38,075,000 for the year ended December 31, 2008, as compared to
$74,883,000 for the year ended December 31, 2007. The decrease in other research
and development expenses was due primarily to a $22,872,000 decrease in research
and development expenses related the Sulonex program which was terminated in
March 2008. Included in the research and development expenses related to Sulonex
for the year ended December 31, 2008 are an $11,037,000 impairment charge
related to the write-down of the assets of the Sulonex manufacturing suite to
their fair value following the cessation of our development of Sulonex, and a
$2,063,000 expense for costs relating to the required restoration of the leased
manufacturing facility to its original condition. For more information regarding
these expenses please see “Note 18 - Restructuring” to our consolidated
financial statements. Including the impairment charge and restoration expense
discussed above, other research and development expenses related to Sulonex were
$26,500,000 and $49,372,000 during the years ended December 31, 2008 and 2007,
respectively.  In addition to the $22,872,000 decrease in other
research and development expenses related to Sulonex discussed above, there were
decreases of $8,165,000, $1,402,000 and $1,411,000 in expenses related to
KRX-0401, Zerenex and our other research and development programs, respectively,
primarily due to reductions in headcount and other expenses related to these
development programs. We expect other research and development expenses to
decline in 2009, as compared to 2008, due to the absence of expenses associated
with Sulonex and due to a full year impact of the restructuring that occurred in
March 2008.





Non-Cash Compensation Expense
(Selling, General and Administrative). Non-cash compensation expense
(selling, general and administrative) related to equity incentive grants
decreased by $271,000 to $6,815,000 for the year ended December 31, 2008, as
compared to an expense of $7,086,000 for the year ended December 31, 2007. The
decrease was primarily due to a reduction in selling, general and administrative
personnel following our March 2008 restructuring.





Other Selling General and
Administrative Expenses. Other selling, general and administrative
expenses decreased by $1,667,000 to $7,474,000 for the year ended December 31,
2008, as compared to an expense of $9,141,000 for the year ended December 31,
2007. The decrease was primarily related to a reduction of expenses as a result
of the March 2008 restructuring, partially offset by a one-time premium payment
for insurance of $1,151,000.We expect other
selling general and administrative expenses to decline in 2009, as compared to
2008, due to a full year impact of the March 2008 restructuring.





Interest and Other (Expense),
Net. Interest and other (expense) income, net, decreased by $6,220,000 to
an expense of $1,665,000 for the year ended December 31, 2008, as compared to
income of $4,555,000 for the year ended December 31, 2007. The decrease was
primarily due to $3,196,000 of impairment charges recorded during the year ended
December 31, 2008, related to our investments in auction rate securities. The
decrease also resulted from a lower level of invested funds and lower interest
rates on our investments as compared to the comparable period last year,
resulting in reduced interest income.


30


Income
Taxes. We did
not record income tax expense for the year ended December 31, 2008.We
recorded $36,000 in income tax expense for the year ended December 31, 2007, as
a result of Israeli income tax withheld associated with the Yissum revenue as
described above.





Loss from Discontinued
Operations. Represents results from discontinued operations relating to
our Diagnostic business that was terminated in September 2008. See Note 8 –
Discontinued Operations. We do not expect our discontinued operations to have an
impact on our financial results in 2009.





Years
Ended December 31, 2007 and 2006





License Revenue. License
revenue was $204,000 for the year ended December 31, 2007, as compared to no
revenue for the year ended December 31, 2006. License revenue for the year ended
December 31, 2007 was related to the amortization of a portion of the license
fees of $12.0 million associated with our sublicense agreement with JT and
Torii. Such amount is being recognized as license revenue on a straight-line
basis over the life of the license agreement, which is through the expiration of
the last-to-expire patent covered by the agreement in 2023, and represents the
estimated period over which we will have significant responsibilities under the
sublicense agreement.





Service Revenue. Service
revenue decreased by $379,000 to $52,000 for the year ended December 31, 2007,
as compared to service revenue of $431,000 for the year ended December 31, 2006.
The decrease in service revenue was primarily due to the timing and extent of
services performed in accordance with our service contracts.





Other Revenue. Other revenue
was $727,000 for the year ended December 31, 2007, as compared to no other
revenue for the year ended December 31, 2006. Other revenue for the year ended
December 31, 2007 was related to a payment from Yissum under an October 2004
termination agreement whereby we received a portion of cash consideration earned
by Yissum from the terminated license rights. Payments from Yissum are
recognized as earned since we have no responsibilities under the terminated
license agreement or the termination agreement.





Cost of Services. Cost of
services decreased by $266,000 to $124,000 for the year ended December 31, 2007,
as compared to an expense of $390,000 for the year ended December 31, 2006. The
decrease in cost of services was primarily due to the timing and extent of
services performed in accordance with our service contracts.





Non-Cash Compensation Expense
(Research and Development). Non-cash compensation expense (research and
development) related to stock option and restricted stock grants decreased by
$2,930,000 to $3,574,000 for the year ended December 31, 2007, as compared to an
expense of $6,504,000 for the year ended December 31, 2006. This difference was
primarily attributable to, during the year ended December 31, 2006,
approximately $1,128,000 of expense for the accelerated vesting of options due
to the achievement of a financial milestone, and additionally, in the year ended
December 31, 2006, based on his activities in this area, a portion of the
compensation expense relating to our chief executive officer included an
allocation to non-cash compensation expense (research and development).
Beginning in 2007, based on his current activities, this expense is being
charged to non-cash compensation expense (selling, general and administrative).
This change accounted for approximately $2,458,000 of the difference. During the
year ended December 31, 2007, we incurred expenses of approximately $869,000
related to the grant of 150,000 shares of restricted stock to our former
President upon the signing of a new employment agreement with us, which offsets
the decrease discussed above.





Other Research and Development
Expenses. Other research and development expenses increased by
$19,132,000 to $74,883,000 for the year ended December 31, 2007, as compared to
$55,751,000 for the year ended December 31, 2006. The increase in other research
and development expenses was due primarily to a $7,839,000 increase in expenses
related to our Sulonex pivotal Phase 3 and Phase 4 clinical programs. The
comparative period last year included one-half, or $1,000,000, of a one-time
bonus paid to our Chief Executive Officer pursuant to his employment agreement
for the achievement of a corporate milestone. In addition, the increase was due
to a $6,702,000 increase in expenses related to KRX-0401 (including a $1,250,000
milestone), a $3,294,000 increase in expenses related to Zerenex (including a
$2,500,000 license-related accrual for a contingent liability) and a $1,580,000
increase in expenses related to our other clinical compounds (including $997,000
of expenses relating to the in-licensing and purchase of related inventory for
KRX-0701).





Non-Cash Compensation Expense
(Selling, General and Administrative). Non-cash compensation expense
(selling general and administrative) related to stock option and restricted
stock grants decreased by $1,322,000 to $7,086,000 for the year ended December
31, 2007, as compared to an expense of $8,408,000 for the year ended December
31, 2006. This difference was primarily attributable to, during the year ended
December 31, 2006, approximately $1,636,000 of expense for the accelerated
vesting of options due to the achievement of a financial milestone, and
approximately $1,697,000 of expense for modifications made by the Board of
Directors of the vesting and exercisability of certain grants during the second
quarter of 2006. In the year ended December 31, 2006, based on his activities in
this area, a portion of the compensation expense relating to our chief executive
officer included an allocation to non-cash compensation expense (research and
development). Beginning in 2007, based on his current activities, this expense
is being charged to non-cash compensation expense (selling, general and
administrative), accounting for approximately $2,458,000 of increased expense,
which offsets the decrease discussed above. In addition, during the year ended
December 31, 2007, we recorded a reduction of expense of approximately $780,000
associated with stock options and restricted stock issued to our former chief
financial officer in 2006, who resigned in the second quarter of
2007.


31





Other Selling, General and
Administrative Expenses. Other selling, general and administrative
expenses increased by $622,000 to $9,141,000 for the year ended December 31,
2007, as compared to an expense of $8,519,000 for the year ended December 31,
2006. The increase was due to an increase in legal fees of approximately
$1,243,000 associated primarily with the Alfa Wasserman arbitration (see Legal
Proceedings) and general maintenance of our products. The comparative period in
2006 included one-half, or $1,000,000, of a one-time bonus paid to our Chief
Executive Officer pursuant to his employment agreement for the achievement of a
corporate milestone.  In addition, during the year ended December 31,
2007, we incurred additional expenses associated with the scale-up of our
operations and infrastructure to prepare for possible commercialization of our
drug candidates.





Interest and Other (Expense) Income,
Net. Interest and other (expense) income, net, decreased by $1,838,000 to
$4,555,000 for the year ended December 31, 2007, as compared to income of
$6,393,000 for the year ended December 31, 2006. The decrease resulted from a
lower level of invested funds as compared to the comparable period last
year.





Income
Taxes.We recorded $36,000 in income tax expense for the year ended December 31,
2007, as a result of Israeli income tax withheld associated with the Yissum
revenue as described above.





Loss from Discontinued
Operations. Represents results from discontinued operations relating to
our Diagnostic business that was terminated in September 2008. See Note 8 –
Discontinued Operations.





LIQUIDITY
AND CAPITAL RESOURCES





We have
financed our operations from inception primarily through public offerings of our
common stock, various private placement transactions, option and warrant
exercises, interest income, and, beginning in 2007, from the upfront and
milestone payments from our sublicense agreement with JT and Torii and
miscellaneous payments from our other prior licensing activities.





As of
December 31, 2008, we had $15.5 million in cash, cash equivalents, interest
receivable, and short-term investment securities, a decrease of $46.9 million
from December 31, 2007. In addition, at December 31, 2008, we had $7.2 million
in non-current auction rate securities, as discussed below. Cash used in
operating activities in continuing operations for the year ended December 31,
2008 was $38.6 million, as compared to $57.3 million for the year ended December
31, 2007. This decrease was due primarily to the cessation of the Sulonex
program in March 2008 and the 2008 Restructuring.





For the
year ended December 31, 2008, net cash provided by investing activities from
continuing operations of $32.6 million was primarily the result of the maturity
and sale of short-term securities in our investment portfolio, net of purchases.
For the year ended December 31, 2008, net cash provided by financing activities
from continuing operations of $0.2 million was the result of proceeds from the
exercise of stock options.





As of
December 31, 2008, $7.2 million of our investment securities were auction rate
securities and represent interests in student loan-backed securities. The
auction rate securities are recorded at their fair value and classified as
long-term investments. Auction rate securities are structured to provide
liquidity through a Dutch auction process that resets the applicable interest
rate at pre-determined calendar intervals, generally every 28 days. This
mechanism has historically allowed existing investors either to rollover their
holdings, whereby they would continue to own their respective securities, or
liquidate their holdings by selling such securities at par. This auction process
has historically provided a liquid market for these securities; however, the
uncertainties in the credit markets have affected all of our holdings in auction
rate securities. Since February 2008, the auctions for our auction rate
securities have not had sufficient buyers to cover investors’ sell orders,
resulting in unsuccessful auctions. When an auction is unsuccessful, the
interest rate is re-set to a level pre-determined by the loan documents and
remains in effect until the next auction date, at which time the process
repeats. While all but one of these investments were rated A or higher at
December 31, 2008, we are uncertain as to when, or if, the liquidity issues
relating to these investments will improve. We assessed the fair value of our
auction rate securities portfolio. As a result of this valuation process, we
recorded impairment charges totaling $3.2 million during the year ended December
31, 2008, for other-than-temporary declines in the value of our auction rate
securities. These other-than-temporary impairment charges were included in
interest and other (expense) income, net. In addition, in the first quarter of
2008, we reclassified the entire auction rate securities portfolio from
short-term to long-term investments due to the uncertainty of when we will be
able to sell these securities. In November 2008, we sold one of our auction rate
security investments in the secondary market. The security had a par value of
$2.0 million and an adjusted book value of $1.6 million. Proceeds from the sale
of this security were $1.7 million, representing a gain of $0.1 million over the
adjusted book value. The estimated fair value of our remaining auction rate
securities is $7.2 million at December 31, 2008.


32





We will
continue to attempt to sell our auction rate securities until the auctions are
successful; however, there is no assurance as to when, or if, the market for
auction rate securities will stabilize. The fair value of our auction rate
securities could change significantly based on market conditions and continued
uncertainties in the credit markets. If these uncertainties continue or if these
securities experience credit rating downgrades, we may incur additional
impairment charges with respect to our auction rate securities portfolio, which
could negatively affect our financial condition, cash flow and reported
earnings, and the lack of liquidity of our auction rate securities could have a
material impact on our ability to fund our operations.





We have
incurred substantial operating losses since our inception and expect to continue
to incur operating losses for the foreseeable future and may never become
profitable. As of December 31, 2008, we have an accumulated deficit of $331.9
million and a deficiency in equity of $1.5 million. We are dependent upon
significant financing to provide the working capital necessary to execute our
business plan. We have not yet commercialized any of our drug candidates and
cannot be sure if we will ever be able to do so. Even if we commercialize one or
more of our drug candidates, we may not become profitable. Our ability to
achieve profitability depends on a number of factors, including our ability to
obtain regulatory approval for our drug candidates, successfully complete any
post-approval regulatory obligations and successfully commercialize our drug
candidates alone or in partnership. We may continue to incur substantial
operating losses even if we begin to generate revenues from our drug candidates,
if approved. We currently anticipate that our cash, cash equivalents and
investment securities as of December 31, 2008, exclusive of our holdings in
auction rate securities and inclusive of a $3 million milestone payment received
by us in March 2009 under our sublicense agreement for Zerenex in Japan, are
sufficient to meet our anticipated working capital needs and fund our business
plan through the end of 2009. However, if we are not able to receive proceeds
from some portion of our auction rate securities by the first quarter of 2010,
we may not have the ability to continue as a going concern for any significant
period beyond that point. The actual amount of funds that we will need to
operate is subject to many factors, including the timing, design and conduct of
clinical trials for our drug candidates. We are evaluating market conditions to
determine the appropriate timing and extent to which we will seek to obtain
additional debt, equity or other type of financing. If we determine that it is
necessary to seek additional funding, there can be no assurance that we will be
able to obtain any such funding on terms that are acceptable to us, if at
all.





In
addition, the report of our independent registered public accounting firm
covering our 2008 Consolidated Financial Statements, included in this Annual
Report, contains an explanatory paragraph that makes reference to uncertainty
about our ability to continue as a going concern.





The
accompanying financial statements have been prepared assuming that we will
continue as a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The factors
discussed above, taken together with our limited cash, cash equivalents, and
short-term investment securities, and illiquid investments in auction rate
securities raise substantial doubt about our ability to continue as a going
concern. The financial statements do not include any adjustments that might be
necessary should we be unable to continue as a going concern.





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.







33




OBLIGATIONS
AND COMMITMENTS
 
 As of
December 31, 2008, we have known contractual obligations, commitments and
contingencies of $1,469,000. Of this amount, $413,000 relates to research and
development agreements (relating to our KRX-0401 and Zerenex clinical programs),
all of which is due within the next year. Certain of these commitments are
contingent upon our continuing development of our drug candidates. The
additional $1,056,000 relates to our operating lease obligations, of which
$597,000 is due within the next year, with the remaining balance due as per the
schedule below.




Payment
      due by periodContractual
      obligations
                
                Total
                
                
                Less
      than
                  1
      year
                
                
                1-3
                  years
                
                
                3-5
                  years
                
                
                More
      than
                  5
      yearsResearch
      and development agreements
                
                $
                413,000
                
                
                $
                413,000
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —Operating
      leases
                
                
                1,056,000
                
                
                
                597,000
                
                
                
                459,000
                
                
                
                —
                
                
                
                —Total
                
                $
                1,469,000
                
                
                $
                1,010,000
                
                
                $
                459,000
                
                
                $
                —
                
                
                $
                —





We have
undertaken to make contingent milestone payments to certain of our licensors of
up to approximately $40.8 million over the life of the licenses, of which
approximately $36.4 million will be due upon or following regulatory approval of
the licensed drugs. We have also committed to pay to the former stockholders of
ACCESS Oncology certain contingent equity rights (up to 3,372,422 shares of our
common stock) if KRX-0401 meets certain development milestones. Of the 3,372,422
shares, 500,000 of these shares would be payable upon achieving the first
development milestone. A substantial portion of the contingent shares would be
payable to related parties. The contingent equity rights have been recognized as
a non-current liability on the consolidated balance sheet. The uncertainty
relating to the timing of the commitments described in this paragraph prevents
us from including them in the table above.





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 disclosure 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 stock options and restricted stock to employees, directors and
consultants, as well as warrants to other third parties. In applying SFAS No.
123R to employee and director grants, the value of each option award is
estimated on the date of grant using the Black-Scholes option-pricing model. 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, the closing market
price of our stock and the exercise price. We base our estimates of our stock
price volatility on the historical volatility of our common stock and our
assessment of future volatility; however, these estimates are 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. The estimates utilized in the Black-Scholes calculation
involve inherent uncertainties and the application of management judgment. In
addition, we are required to estimate the expected forfeiture rate and only
recognize expense for those equity awards expected to vest. As a result, if
other assumptions had been used, our recorded stock-based compensation expense
could have been materially different from that reported.  In addition,
because some of the options and warrants issued to employees, consultants and
other third-parties vest upon the achievement of certain milestones, the total
expense is uncertain.





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 and restricted stock issued to
consultants is determined at the “measurement date.” The expense is recognized
over the vesting period for the options and restricted stock. Until the
measurement date is reached, the total amount of compensation expense remains
uncertain. We record stock-based compensation expense based on the fair value of
the equity awards at the reporting date. These equity awards 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 equity award grant, and additional expense
or a reversal of 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.


34


Accruals for Clinical Research
Organization and Clinical Site Costs.We make estimates of
costs incurred in relation to external clinical research organizations, or CROs,
and clinical site costs. We analyze the progress of clinical trials, including
levels of patient enrollment, invoices received and contracted costs when
evaluating the adequacy of the amount expensed and the related prepaid asset and
accrued liability. Significant judgments and estimates must be made and used in
determining the accrued balance and expense in any accounting period. In
addition, administrative costs related to external CROs are recognized on a
straight-line basis over the estimated contractual period. With respect to
clinical site costs, the financial terms of these agreements are subject to
negotiation and vary from contract to contract. Payments under these contracts
may be uneven, and depend on factors such as the achievement of certain events,
the successful recruitment of patients, the completion of portions of the
clinical trial or similar conditions. The objective of our policy is to match
the recording of expenses in our financial statements to the actual services
received and efforts expended. As such, expense accruals related to clinical
site costs are recognized based on our estimate of the degree of completion of
the event or events specified in the specific clinical study or trial
contract.





Revenue Recognition.We
recognize license revenue consistent with the provisions of Staff Accounting
Bulletin (“SAB”) No. 104 and EITF Issue No. 00-21, “Revenue
Arrangements with Multiple Deliverables.” We analyze each element of our
licensing agreement to determine the appropriate revenue recognition. We
recognize revenue on upfront payments and milestone payments over the period of
significant involvement under the related agreements unless the fee is in
exchange for products delivered or services rendered that represent the
culmination of a separate earnings process and no further performance obligation
exists under the contract. We may recognize milestone payments in revenue upon
the achievement of specified milestones if (1) the milestone is substantive
in nature, and the achievement of the milestone was not reasonably assured at
the inception of the agreement and (2) the fees are nonrefundable. Any
milestone payments received prior to satisfying these revenue recognition
criteria are recognized as deferred revenue. Sales milestones and royalties that
are deferred will be recognized when earned under the agreements.





Prior to
discontinuing the sale of our diagnostic product, we had recognized diagnostic
revenue when persuasive evidence of an arrangement existed, the product had been
shipped, title and risk of loss had passed to the customer and collection from
the customer was reasonably assured. Diagnostic revenue is included in
discontinued operations.





We
recognize service revenues as the services are provided. Deferred revenue is
recorded when we receive a deposit or prepayment for services to be performed at
a later date.





Accounting Related to
Goodwill. As of December 31, 2008, there was approximately $3.2 million
of goodwill on our consolidated balance sheet. SFAS No. 142, “Goodwill and Other
Intangible Assets,” or SFAS No. 142, addresses how intangible assets that are
acquired individually or with a group of other assets (but not those acquired in
a business combination) should be accounted for in financial statements upon
their acquisition. This statement also addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. SFAS No. 142 requires goodwill be tested
using a two-step process. The first step compares the fair value of the
reporting unit with the unit's carrying value, including goodwill. When the
carrying value of the reporting unit is greater than fair value, the unit’s
goodwill may be impaired, and the second step must be completed to measure the
amount of the goodwill impairment charge, if any. In the second step, the
implied fair value of the reporting unit’s goodwill is compared with the
carrying amount of the unit’s goodwill. If the carrying amount is greater than
the implied fair value, the carrying value of the goodwill must be written down
to its implied fair value.





We are
required to perform impairment tests under SFAS No. 142 annually, at December
31, and whenever events or changes in circumstances suggest that the carrying
value of an asset may not be recoverable. For all of our acquisitions, various
analyses, assumptions and estimates were made at the time of each acquisition
specifically regarding cash flows that were used to determine the valuation of
goodwill and intangibles. In future years, the possibility exists that changes
in forecasts and estimates from those used at the acquisition date could result
in impairment indicators.





Impairment of Long-Lived
Assets.  In accordance with the guidance in SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” or SFAS No.
144, we recognize an impairment loss when circumstances indicate that the
carrying value of long-lived tangible and intangible assets with finite lives
may not be recoverable. Management’s policy in determining whether an impairment
indicator exists, a triggering event, comprises measurable operating performance
criteria as well as qualitative measures. If an analysis is necessitated by the
occurrence of a triggering event, we make certain assumptions in determining the
impairment amount. 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 for the excess of the carrying value of the asset above its fair
value.


35


We had
entered into a relationship with SPL, a U.S.-based contract manufacturer, for
Sulonex to build a larger scale manufacturing suite within their current
facility, which they would operate on our behalf. We spent approximately $11.3
million in capital expenditures building the suite. In accordance with the
guidance in SFAS No. 144, with the cessation of our development of Sulonex in
March 2008, we recognized an impairment charge of $11.0 million, which is
included in other research and development expenses in the year ended December
31, 2008, to write the assets down to their fair value of $300,000, the amount
for which the assets were sold during the three months ended June 30,
2008.





Impairment of Investment
Securities. As of December 31, 2008, $7.2 million of our investment
securities were auction rate securities and represent interests in student
loan-backed securities. The auction rate securities are recorded at their fair
value and classified as long-term investments. The uncertainties in the credit
markets have affected all of our holdings in auction rate securities. Since
February 2008, the auctions for our auction rate securities have not had
sufficient buyers to cover investors’ sell orders, resulting in unsuccessful
auctions. When an auction is unsuccessful, the interest rate is re-set to a
level pre-determined by the loan documents and remains in effect until the next
auction date, at which time the process repeats. While all but one of these
investments were rated A or higher at December 31, 2008, we are uncertain as to
when, or if, the liquidity issues relating to these investments will improve. We
assessed the fair value of our auction rate securities portfolio. As a result of
this valuation process, as described below, we recorded impairment charges
totaling $3.2 million during the year ended December 31, 2008, for
other-than-temporary declines in the value of our auction rate securities. These
other-than-temporary impairment charges were included in interest and other
(expense) income, net. In addition, in the first quarter of 2008, we
reclassified the entire auction rate securities portfolio from short-term to
long-term investments due to the uncertainty of when we will be able to sell
these securities.





The
valuation methods used to estimate the auction rate securities’ fair value were
(1) a discounted cash flow model, where the expected cash flows of the auction
rate securities are discounted to the present using a yield that incorporates
compensation for illiquidity, and (2) a market comparables method, where the
auction rate securities are valued based on indications, from the secondary
market, of what discounts buyers demand when purchasing similar auction rate
securities. The valuation also included assessments of the underlying structure
of each security, expected cash flows, discount rates, credit ratings, workout
periods, and overall capital market liquidity. These assumptions, assessments
and the interpretations of relevant market data are subject to uncertainties,
are difficult to predict and require significant judgment. The use of different
assumptions, applying different judgment to inherently subjective matters and
changes in future market conditions could result in significantly different
estimates of fair value of our auction rate securities. In addition, the
estimated fair value of the auction rates securities may differ from the values
that would have been used had a ready market existed, and the differences could
be material to the consolidated financial statements.





The fair
value of our auction rate securities could change significantly based on market
conditions and continued uncertainties in the credit markets. If these
uncertainties continue or if these securities experience credit rating
downgrades, we may incur additional impairment charges with respect to our
auction rate securities portfolio. We continue to monitor the fair value of our
auction rate securities and relevant market conditions and will recognize
additional impairment charges if future circumstances warrant such
charges.





We review
investment securities for impairment in accordance with the guidance in FSP SFAS
115-1 and 124-1, “The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments,” to determine the classification of the
impairment as temporary or other-than-temporary. Losses are recognized in our
consolidated statement of operations when a decline in fair value is determined
to be other-than-temporary. We review our investments on an ongoing basis for
indications of possible impairment. Once identified, the determination of
whether the impairment is temporary or other-than-temporary requires significant
judgment. The primary factors we consider in classifying an impairment include
the extent and time the fair value of each investment has been below cost and
our ability to hold such investment to maturity.





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
involves management estimation of our actual current tax exposure and assessment
of 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 consolidated 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 deferred tax assets with a valuation allowance at December 31, 2008
and 2007. 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
maintaining the valuation allowance.


36





RECENTLY
ISSUED ACCOUNTING STANDARDS





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141R”) which replaces SFAS No. 141. SFAS No. 141R
changes the accounting for business combinations, including the measurement of
acquirer shares issued in consideration for a business combination, the
recognition of contingent consideration, the accounting for contingencies, the
recognition of acquired in-process research and development, the accounting for
acquisition-related restructuring cost accruals, the treatment of
acquisition-related transaction costs and the recognition of changes in the
acquirer’s income tax valuation allowance and income tax uncertainties. SFAS No.
141R applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008, and interim periods within those fiscal years.
Early application is prohibited.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51” (“SFAS No. 160”),
which changes the accounting and reporting for minority interests. Minority
interests will be recharacterized as noncontrolling interests and will be
reported as a component of equity separate from the parent’s equity, and
purchases or sales of equity interests that do not result in a change in control
will be accounted for as equity transactions. In addition, net income
attributable to the noncontrolling interest will be included in consolidated net
income (loss) on the face of the consolidated statement of operations and, upon
a loss of control, the interest sold, as well as any interest retained, will be
recorded at fair value with any gain or loss recognized in operations. SFAS No.
160 is effective for fiscal years (including interim periods within those fiscal
years) beginning on or after December 15, 2008. Earlier adoption is prohibited.
The statement shall be applied prospectively as of the beginning of the fiscal
year in which it is initially applied, except for the presentation and
disclosure requirement which shall be applied retrospectively for all periods
presented. We expect that the adoption of SFAS No. 160 will not have an impact
on our results of operations and financial position.





In
December 2007, the FASB ratified EITF Issue No. 07-1, “Accounting for
Collaborative Arrangements” (“EITF 07-1”). EITF 07-1 defines collaborative
arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the
arrangement and third parties. EITF 07-1 also establishes the appropriate income
statement presentation and classification for joint operating activities and
payments between participants, as well as the sufficiency of the disclosures
related to these arrangements. EITF 07-1 is effective for fiscal years beginning
after December 15, 2008. EITF 07-1 shall be applied using the modified version
of retrospective transition for those arrangements in place at the effective
date. An entity should report the effects of applying this Issue as a change in
accounting principle through retrospective application to all prior periods
presented for all arrangements existing as of the effective date, unless it is
impracticable to apply the effects the change retrospectively. We are currently
assessing the impact that EITF 07-1 may have on our results of operations and
financial position.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FASB
Statement No. 115” (“SFAS 159”). SFAS 159 is expected to expand the use of fair
value accounting, but does not affect existing standards which require certain
assets or liabilities to be carried at fair value. The objective of SFAS 159 is
to improve financial reporting by providing companies with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. Under SFAS 159, a company may choose, at its initial application or
at other specified election dates, to measure eligible items at fair value and
report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date. SFAS 159 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. We have not
elected the fair value option for any of our existing assets and liabilities and
thus the adoption of SFAS 159 did not have an impact on our results of
operations and financial position.





In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements,” to clarify the definition of fair value, establish a framework
for measuring fair value and expand the disclosures on fair value measurements.
SFAS No. 157 defines fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. SFAS No. 157 also
stipulates that, as a market-based measurement, fair value measurement should be
determined based on the assumptions that market participants would use in
pricing the asset or liability, and establishes a fair value hierarchy that
distinguishes between: (a) market participant assumptions developed based
on market data obtained from sources independent of the reporting entity, or
observable inputs; and (b) the reporting entity’s own assumptions about
market participant assumptions developed based on the best information available
in the circumstances, or unobservable inputs. Except for the deferral for the
implementation of SFAS No. 157 for specified other non-financial
assets and liabilities, SFAS No. 157 is effective for our fiscal year
ended December 31, 2008. As a result of the adoption of
SFAS No. 157, we measured our financial assets and liabilities at fair
value and provided the required disclosures in our consolidated financial
statements.


37





In
February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2, “Effective
Date of FASB Statement No. 157” (“FSP 157-2”), which delays the effective
date of SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) for
non-financial assets and non-financial liabilities. The delay is intended to
allow the FASB and constituents additional time to consider the effect of
various implementation issues that have arisen, or that may arise, from the
application of SFAS No. 157. For items within the scope of
FSP 157-2, this FSP defers the effective date of SFAS No. 157 to
fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years. We currently do not believe that the adoption of the
deferred portion of SFAS No. 157 will have a material impact on our
financial condition or results of operations.





ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 rate securities in
accordance with our investment policy. Some of the securities in which we invest
have market risk. This means that a change in prevailing interest rates, and/or
credit risk, may cause the fair value 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 fair
value of our investment will probably decline. As of December 31, 2008, our
portfolio of financial instruments consists of cash equivalents and short-term
and long-term interest bearing securities, including money market funds,
government debt and auction rate securities. The average duration to maturity of
all of our held-to-maturity investments held as of December 31, 2008, was less
than 12 months. Due to the short-term nature of our money market funds and
held-to-maturity investments, we believe we have no material exposure to
interest rate risk, and/or credit risk, arising from our money market funds and
held-to-maturity investments.





As of
December 31, 2008, $7.2 million of our investment securities were auction rate
securities and represent interests in student loan-backed securities. The
auction rate securities are recorded at their fair value and classified as
long-term investments. The uncertainties in the credit markets have affected all
of our holdings in auction rate securities. Since February 2008, the auctions
for our auction rate securities have not had sufficient buyers to cover
investors’ sell orders, resulting in unsuccessful auctions. When an auction is
unsuccessful, the interest rate is re-set to a level pre-determined by the loan
documents and remains in effect until the next auction date, at which time the
process repeats. While all but one of these investments were rated A or higher
at December 31, 2008, we are uncertain as to when, or if, the liquidity issues
relating to these investments will improve. We will continue to attempt to sell
our auction rate securities until the auctions are successful. If uncertainties
in the credit and capital markets continue, these markets deteriorate further or
we experience any credit rating downgrades on the auction rate securities in our
portfolio, we may incur additional impairment charges with respect to our
auction rate securities portfolio, which could negatively affect our financial
condition, cash flow and reported earnings. We continue to monitor the fair
value of our auction rate securities and relevant market conditions and will
recognize additional impairment charges if future circumstances warrant such
charges.





The
valuation methods used to estimate the auction rate securities’ fair value were
(1) a discounted cash flow model, where the expected cash flows of the auction
rate securities are discounted to the present using a yield that incorporates
compensation for illiquidity, and (2) a market comparables method, where the
auction rate securities are valued based on indications, from the secondary
market, of what discounts buyers demand when purchasing similar auction rate
securities. The valuation also included assessments of the underlying structure
of each security, expected cash flows, discount rates, credit ratings, workout
periods, and overall capital market liquidity. These assumptions, assessments
and the interpretations of relevant market data are subject to uncertainties,
are difficult to predict and require significant judgment. The use of different
assumptions, applying different judgment to inherently subjective matters and
changes in future market conditions could result in significantly different
estimates of fair value. Assuming a 10% adverse change in the fair value of
these securities overall, the fair value of our auction rate securities would
decline approximately $700,000. However, each of our auction rate security
investments have different features and are subject to different risks and
therefore, any market decline would impact these securities to a different
degree. In addition, the estimated fair value of the auction rates
securities may differ from the values that would have been used had a ready
market existed, and the differences could be material to the consolidated
financial statements.





ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





Our
consolidated financial statements and the notes thereto, included in Part IV,
Item 15(a), part 1, are incorporated by reference into this Item 8.





38




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


Not
applicable.





ITEM
9A(T). CONTROLS AND PROCEDURES.





Evaluation
of Disclosure Controls and Procedures.As of December 31, 2008,
management carried out, under the supervision and with the participation of our
Chief Executive Officer and Principal Financial and Accounting Officer, an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act). Our disclosure controls and procedures are designed to provide
reasonable assurance that information we are required to disclose in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in applicable rules and forms.
Based upon that evaluation, our Chief Executive Officer and Principal Financial
and Accounting Officer concluded that, as of December 31, 2008, our disclosure
controls and procedures were effective.





Management's
Report on Internal Control over Financial Reporting.Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act).
Our management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission, known as COSO, in Internal
Control-Integrated Framework. Our management has concluded that, as of
December 31, 2008, our internal control over financial reporting was
effective based on these criteria. This annual report does not include an
attestation report of the Company’s independent registered public accounting
firm regarding internal control over financial reporting. Management’s report
was not subject to attestation by the Company’s independent registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permits the Company to provide only management’s report in this
annual report.





Changes in Internal Control Over
Financial Reporting.There were no changes in our internal controls over
financial reporting during the quarter ended December 31, 2008, that have
materially affected, or are reasonably likely to materially affect our internal
control over financial reporting.





Limitations on the Effectiveness of
Controls.Our management, including our Chief Executive Officer and
Principal Financial and Accounting Officer, does not expect that our disclosure
controls and procedures or our internal control 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.





ITEM
9B. OTHER INFORMATION





Not
Applicable.





Part
III





ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





The
information required by this Item is incorporated herein by reference from our
Proxy Statement for our 2009 Annual Meeting of Stockholders.





ITEM
11. EXECUTIVE COMPENSATION





The
information required by this Item is incorporated herein by reference from our
Proxy Statement for our 2009 Annual Meeting of Stockholders.





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





The
information required by this Item is incorporated herein by reference from our
Proxy Statement for our 2009 Annual Meeting of Stockholders.





39




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





The
information required by this Item is incorporated herein by reference from our
Proxy Statement for our 2009 Annual Meeting of Stockholders.





ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.





The
information required by this Item is incorporated herein by reference from our
Proxy Statement for our 2009 Annual Meeting of
Stockholders.


40


PART
IV





ITEM
15.  EXHIBITS and FINANCIAL STATEMENT SCHEDULES





(a)       1.      Consolidated
Financial Statements





The
following consolidated financial statements of Keryx Biopharmaceuticals, Inc.
are filed as part of this report.





Contents
                  
                  PageReport
      of Independent Registered Public Accounting Firm
                  
                  F-1Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                  
                  F-2Consolidated
      Statements of Operations for the years ended December 31, 2008, 2007 and
      2006
                  
                  F-3Consolidated
      Statements of Changes in Stockholders’ (Deficiency) Equity for the years
      ended December 31, 2008, 2007 and 2006
                  
                  F-4Consolidated
      Statements of Cash Flows for the years ended December 31, 2008, 2007 and
      2006
                  
                  F-7Notes
      to the Consolidated Financial Statements
                  
                  F-9





2.      Consolidated
Financial Statement Schedules





All
schedules are omitted as the information required is inapplicable or the
information is presented in the consolidated financial statements or the related
notes.





3.      Exhibits





ExhibitNumber
                    
                    Exhibit
      Description2.1
                    
                    Agreement
      and Plan of Merger by and among Keryx Biopharmaceuticals, Inc., AXO
      Acquisition Corp., and ACCESS Oncology, Inc. dated as of January 7, 2004,
      filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated
      January 8, 2004, filed on January 15, 2004 (File No. 000-30929), and
      incorporated herein by reference.2.2
                    
                    First
      Amendment to the Agreement and Plan of Merger by and among Keryx
      Biopharmaceuticals, Inc., AXO Acquisition Corp., and ACCESS Oncology, Inc.
      dated as of February 5, 2004, filed as Exhibit 2.2 to the Registrant’s
      Current Report on Form 8-K dated February 5, 2004, filed on February 20,
      2004 (File No. 000-30929), and incorporated herein by
      reference.3.1
                    
                    Amended
      and Restated Certificate of Incorporation of Keryx Biopharmaceuticals,
      Inc., filed as Exhibit 3.1 to the Registrant's Quarterly Report on Form
      10-Q for the quarter ended June 30, 2004, filed on August 12, 2004 (File
      No. 000-30929), 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.3.3
                    
                    Amendment
      to Amended and Restated Certificate of Incorporation of Keryx
      Biopharmaceuticals, Inc., dated July 24, 2007, filed as Exhibit 3.3 to the
      Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
      2007, filed on August 9, 2007 and incorporated herein by
      reference.4.1
                    
                    Specimen
      Common Stock Certificate, filed as Exhibit 4.1 to the Registrant’s First
      Amendment to the Registration Statement on Form S-1 filed on June 30, 2000
      (File No. 333-37402), and incorporated herein by
  reference.


41


4.2
                          
                          Form
      of Warrant for the Purchase of Shares of Common Stock between certain
      holders of Series A Preferred Stock and Keryx Biopharmaceuticals, Inc.,
      dated as of December 14, 1999, filed as Exhibit 4.9 to the Registrant’s
      Registration Statement on Form S-1 filed on May 19, 2000 (File No.
      333-37402), and incorporated herein by reference.4.3
                          
                          Form
      of Common Stock Purchase Warrant dated November 20, 2003, issued to the
      purchasers under the Securities Purchase Agreement, filed as Exhibit 10.3
      to the Registrant’s Registration Statement on Form S-3 filed on December
      12, 2003 (File No. 333-111143), and incorporated herein by
      reference.4.4
                          
                          Securities
      Purchase Agreement dated November 12, 2003 among Keryx Biopharmaceuticals,
      Inc. and the Purchasers identified on the signature pages thereof, filed
      as Exhibit 10.1 to the Company’s Registration Statement on Form S-3 filed
      on December 12, 2003 (File No. 333-111143), and incorporated herein by
      reference.4.5
                          
                          Registration
      Rights Agreement dated November 17, 2003 among Keryx Biopharmaceuticals,
      Inc. and the Purchasers identified on the signature pages thereof, filed
      as Exhibit 10.2 to the Registrant’s Registration Statement on Form S-3
      filed on December 12, 2003 (File No. 333-111143), and incorporated herein
      by reference.4.6
                          
                          Securities
      Purchase Agreement dated February 12, 2004 among Keryx Biopharmaceuticals,
      Inc. and the Purchasers identified on the signature pages thereof, filed
      as Exhibit 10.1 to the Company’s Registration Statement on Form S-3 filed
      on March 16, 2004 (File No. 333-113654), and incorporated herein by
      reference.4.7
                          
                          Registration
      Rights Agreement dated February 17, 2004 among Keryx Biopharmaceuticals,
      Inc. and the Purchasers identified on the signature pages thereof, filed
      as Exhibit 10.2 to the Registrant’s Registration Statement on Form S-3
      filed on March 16, 2004 (File No. 333-113654), and incorporated herein by
      reference.10.1!
                          
                          License
      Agreement between Alfa Wassermann S.p.A. and Partec Ltd., dated as of
      November 12, 1998, filed as Exhibit 10.7 to the Registrant’s Second
      Amendment to the Registration Statement on Form S-1 filed on July 24, 2000
      (File No. 333-37402), and incorporated by reference.10.2!
                          
                          License
      Agreement between Opocrin S.p.A. and Keryx Biopharmaceuticals, Inc., dated
      September 25, 2002, filed as Exhibit 10.9 to the Registrant’s Quarterly
      Report on Form 10-Q for the quarter ended September 30, 2002 filed on
      November 12, 2002 (File No. 000-30929), and incorporated herein by
      reference.10.3†
                          
                          Employment
      Agreement between Keryx Biopharmaceuticals, Inc. and Michael S. Weiss
      dated as of December 23, 2002, filed as Exhibit 10.1 to the Registrant’s
      Quarterly Report of Form 10-Q for the quarter ended March 31, 2003 filed
      on May 15, 2003 (File No. 000-30929), and incorporated herein by
      reference.10.4†
                          
                          1999
      Stock Option Plan, as amended, filed as Exhibit 10.2 to the Registrant’s
      Quarterly Report of Form 10-Q for the quarter ended March 31, 2003 filed
      on May 15, 2003 (File No. 000-30929) and incorporated herein by
      reference.10.5†
                          
                          2000
      Stock Option Plan, as amended, filed as Exhibit 10.3 to the Registrant’s
      Quarterly Report of Form 10-Q for the quarter ended March 31, 2003 filed
      on May 15, 2003 (File No. 000-30929) and incorporated herein by
      reference.10.6†
                          
                          2002
      CEO Incentive Stock Option Plan, filed as Exhibit 10.4 to the Registrant’s
      Quarterly Report of Form 10-Q for the quarter ended March 31, 2003 filed
      on May 15, 2003 (File No. 000-30929) and incorporated herein by
      reference.10.7!
                          
                          License
      Agreement dated September 18, 2002 between Zentaris AG and AOI Pharma,
      Inc, filed as Exhibit 10.38 to the
      Registrant’s Annual
      Report on Form 10-K for the year ended December 31, 2003, filed on March
      30, 2004, and incorporated herein by reference.10.8!
                          
                          Addendum
      Agreement to License and Cooperation Agreement for Perifosine dated
      December 3, 2003 between Zentaris AG and AOI Pharma, Inc., filed as Exhibit 10.39 to the
      Registrant’s Annual Report on Form 10-K for the year ended
      December 31, 2003, filed on March 30, 2004, and incorporated herein by
      reference.10.9
                          
                          Cooperative
      Research and Development Agreement between the National Cancer Institute
      and ASTA Medica Inc., as amended, filed as
      Exhibit 10.40 to the Registrant’s Annual
      Report on Form 10-K for the year ended December 31, 2003, filed on March
      30, 2004, and incorporated herein by
  reference.
  42




10.10†
                                  
                                  Keryx Biopharmaceuticals, Inc. 2004 Long-Term
      Incentive Plan, filed with the Registrant’s Definitive
      Proxy Statement for the Annual Meeting of Stockholders on June 10, 2004,
      filed on April 29, 2004, and incorporated herein by
      reference.10.11!
                                  
                                  License
      Agreement between Keryx Biopharmaceuticals, Inc. and Panion & BF
      Biotech, Inc. dated as of November 7, 2005, filed as Exhibit 10.21 to the
      Registrant’s Annual Report on Form 10-K for the year ended
      December 31, 2005, filed on March 8, 2006, and
      incorporated herein by
      reference.10.12†
                                  
                                  Amendment
      to the Keryx Biopharmaceuticals, Inc. 2004 Long-Term Incentive Plan dated
      April 11, 2006, filed as Exhibit 10.1 to the
      Registrant’s Quarterly Report on Form 10-Q for the quarter
      ended June 30, 2006, filedon August
      9, 2006, and incorporated herein by reference.10.13!
                                  
                                  Sub-license
      Agreement by and among Keryx Biopharmaceuticals, Inc., Japan Tobacco Inc.,
      and Torii Pharmaceutical Co., Ltd. dated September 26, 2007,filed
      as Exhibit 10.1 to the Registrant’s Quarterly
      Report on Form 10-Q for the quarter ended September 30, 2007,
      filed on November 9, 2007, and incorporated herein by
      reference.10.14†
                                  
                                  Employment
      Agreement between Dr. I. Craig Henderson and Keryx Biopharmaceuticals,
      Inc. dated April 25, 2007,filed as Exhibit
      10.3 to the Registrant’s Annual Report on Form 10-Q for the quarter ended
      March 31, 2007, filed on May 7, 2007, and incorporated herein by
      reference.10.15!
                                  
                                  Amended
      and Restated License Agreement by and between Panion & BF Biotech,
      Inc. and Keryx Biopharmaceuticals, Inc. dated March 17, 2008, filed as
      Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
      quarter ended March 31, 2008, filed on May 12, 2008, and incorporated
      herein by reference.10.16*
                                  
                                  First
      Amendment to Amended and Restated License Agreement by and between Panion
      & BF Biotech, Inc. and Keryx Biopharmaceuticals, Inc. dated March 17,
      2008.21.1
                                  
                                  List
      of subsidiaries of Keryx Biopharmaceuticals, Inc.23.1
                                  
                                  Consent
      of KPMG LLP.24.1
                                  
                                  Power of Attorney of Director and Officers of
      Keryx Biopharmaceuticals, Inc. (included
herein).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
      March 31, 2009.31.2
                                  
                                  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
      March 31, 2009.32.1
                                  
                                  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 March 31,
      2009.32.2
                                  
                                  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 March 31,
      2009.


!
              Confidential
      treatment has been granted with respect to the omitted portions of this
      exhibit.


†
            Indicates
      management contract or compensatory plan or
  arrangement.


*
            Confidential
      treatment has been requested with respect to the omitted portions of this
      exhibit.


43


Keryx
Biopharmaceuticals, Inc.


Consolidated
Financial Statements as of December 31, 2008








Contents
                  
                  PageReport
      of Independent Registered Public Accounting Firm
                  
                  F-1Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                  
                  F-2Consolidated
      Statements of Operations for the years ended December 31, 2008, 2007 and
      2006
                  
                  F-3Consolidated
      Statements of Changes in Stockholders’ (Deficiency) Equity for the years
      ended December 31, 2008, 2007 and 2006
                  
                  F-4Consolidated
      Statements of Cash Flows for the years ended December 31, 2008, 2007 and
      2006
                  
                  F-7Notes
      to the Consolidated Financial Statements
                  
                  F-9





Report
of Independent Registered Public Accounting Firm





The Board
of Directors and Stockholders


Keryx
Biopharmaceuticals, Inc.:




We have
audited the accompanying consolidated balance sheets of Keryx
Biopharmaceuticals, Inc. and subsidiaries (the “Company”), as of
December 31, 2008 and 2007, and the related consolidated statements of
operations, stockholders’ (deficiency) equity, and cash flows for each of the
years in the three-year period ended December 31, 2008.  These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.





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




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Keryx Biopharmaceuticals,
Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred substantial
recurring losses from operations, a deficiency in equity, limited cash, cash
equivalents, and short-term investment securities, and illiquid investments in
auction rate securities that raise substantial doubt about its ability to
continue as a going concern. Management’s plans in regard to these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.





As
discussed in Note 4 to the consolidated financial statements, the Company has
changed its method of accounting for the fair value of financial assets and
liabilities in 2008 due to the adoption of Statement of Financial Accounting
Standards No. 157, “Fair Value
Measurements.”Also, as discussed in Note 1 to the consolidated financial
statements, the Company has changed its method of accounting for share-based
payments in 2006 due to the adoption of Statement of Financial Accounting
Standards No. 123 (revised 2004), “Share-Based
Payment.”





/s/ KPMG
LLP





New York,
New York


March 31,
2009


F-1


Keryx
Biopharmaceuticals, Inc.


Consolidated
Balance Sheets as of December 31





(in
thousands, except share and per share amounts)





2008
                
                
                2007AssetsCurrent
      assets:Cash
      and cash equivalents
                
                $
                13,143
                
                
                $
                19,065Short-term
      investment securities
                
                
                2,299
                
                
                
                43,038Interest
      receivable
                
                
                25
                
                
                
                283Assets
      of discontinued operations
                
                
                —
                
                
                
                87Other
      current assets
                
                
                508
                
                
                
                1,257Total
      current assets
                
                
                15,975
                
                
                
                63,730Long-term
      investment securities
                
                
                7,185
                
                
                
                2,296Property,
      plant and equipment, net
                
                
                182
                
                
                
                11,483Goodwill
                
                
                3,208
                
                
                
                3,208Other
      assets, net
                
                
                84
                
                
                
                344Total
      assets
                
                $
                26,634
                
                
                $
                81,061Liabilities
      and stockholders’ (deficiency) equityCurrent
      liabilities:Accounts
      payable and accrued expenses
                
                $
                4,613
                
                
                $
                18,971Accrued
      compensation and related liabilities
                
                
                496
                
                
                
                1,254Current
      portion of deferred revenue
                
                
                1,464
                
                
                
                1,023Liabilities
      of discontinued operations
                
                
                120
                
                
                
                163Total
      current liabilities
                
                
                6,693
                
                
                
                21,411Deferred
      revenue, net of current portion
                
                
                17,308
                
                
                
                11,022Contingent
      equity rights
                
                
                4,004
                
                
                
                4,004Other
      liabilities
                
                
                118
                
                
                
                202Total
      liabilities
                
                
                28,123
                
                
                
                36,639Commitments
      and contingencies (Notes 14 and 17)Stockholders’
      (deficiency) equity:Preferred
      stock, $0.001 par value per share (5,000,000 shares authorized, no shares
      issued and outstanding)
                
                
                —
                
                
                
                —Common
      stock, $0.001 par value per share (95,000,000 shares authorized,
      47,729,507 and 43,751,101 shares issued, 47,649,559 and 43,671,153 shares
      outstanding at December 31, 2008 and 2007, respectively)
                
                
                48
                
                
                
                44Additional
      paid-in capital
                
                
                330,738
                
                
                
                323,772Treasury
      stock, at cost, 79,948 shares at December 31, 2008 and 2007,
      respectively
                
                
                (357
                )
                
                
                (357
                )Accumulated
      deficit
                
                
                (331,918
                )
                
                
                (279,037
                )Total
      stockholders’ (deficiency) equity
                
                
                (1,489
                )
                
                
                44,422Total
      liabilities and stockholders’ (deficiency) equity
                
                $
                26,634
                
                
                $
                81,061





The
accompanying notes are an integral part of the consolidated financial
statements.


F-2


Keryx
Biopharmaceuticals, Inc.


Consolidated
Statements of Operations for the Year Ended December 31





(in
thousands, except share and per share amounts)





2008
                
                
                2007
                
                
                2006Revenue:License
      revenue
                
                $
                1,180
                
                
                $
                204
                
                
                $
                —Service
      revenue
                
                
                103
                
                
                
                52
                
                
                
                431Other
      revenue
                
                
                —
                
                
                
                727
                
                
                
                —Total
      revenue
                
                
                1,283
                
                
                
                983
                
                
                
                431Operating
      expenses:Cost
      of services
                
                
                27
                
                
                
                124
                
                
                
                390Research
      and development:Non-cash
      compensation
                
                
                (67
                )
                
                
                3,574
                
                
                
                6,504Other
      research and development
                
                
                38,075
                
                
                
                74,883
                
                
                
                55,751Total
      research and development
                
                
                38,008
                
                
                
                78,457
                
                
                
                62,255Selling,
      general and administrative:Non-cash
      compensation
                
                
                6,815
                
                
                
                7,086
                
                
                
                8,408Other
      selling, general and administrative
                
                
                7,474
                
                
                
                9,141
                
                
                
                8,519Total
      selling, general and administrative
                
                
                14,289
                
                
                
                16,227
                
                
                
                16,927Total
      operating expenses
                
                
                52,324
                
                
                
                94,808
                
                
                
                79,572Operating
      loss
                
                
                (51,041
                )
                
                
                (93,825
                )
                
                
                (79,141
                )Interest
      and other (expense) income, net
                
                
                (1,665
                )
                
                
                4,555
                
                
                
                6,393Loss
      from continuing operations before income taxes
                
                
                (52,706
                )
                
                
                (89,270
                )
                
                
                (72,748
                )Income
      taxes
                
                
                —
                
                
                
                36
                
                
                
                —Loss
      from continuing operations
                
                
                (52,706
                )
                
                
                (89,306
                )
                
                
                (72,748
                )Loss
      from discontinued operations
                
                
                (175
                )
                
                
                (756
                )
                
                
                (1,016
                )Net
      loss
                
                $
                (52,881
                )
                
                $
                (90,062
                )
                
                $
                (73,764
                )Basic
      and diluted loss per common share:Continuing
      operations
                
                
                (1.17
                )
                
                
                (2.05
                )
                
                
                (1.74
                )Discontinued
      operations
                
                
                (0.01
                )
                
                
                (0.02
                )
                
                
                (0.02
                )Basic
      and diluted loss per common share
                
                $
                (1.18
                )
                
                $
                (2.07
                )
                
                $
                (1.76
                )Weighted
      average shares used in computing basic and diluted net loss per common
      share
                
                
                44,902,398
                
                
                
                43,583,950
                
                
                
                41,919,741





The
accompanying notes are an integral part of the consolidated financial
statements.


F-3


Keryx
Biopharmaceuticals, Inc.


Consolidated
Statements of Changes in Stockholders’ (Deficiency) Equity


for
the Years Ended December 31, 2008, 2007 and 2006





(in
thousands, except share amounts)





Series
      A convertible
                  preferred stock
                
                
                Common stock
                
                
                Additional
                  paid-inShares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                capitalBalance
      at December 31, 2005
                
                
                —
                
                
                $
                —
                
                
                
                37,831,896
                
                
                $
                38
                
                
                $
                211,521Changes
      during the year:Issuance
      of common stock in public offering (net of issuance expenses of
      $104)
                
                
                —
                
                
                
                —
                
                
                
                4,500,000
                
                
                
                5
                
                
                
                82,692Issuance
      of common stock in connection with acquisition
                
                
                —
                
                
                
                —
                
                
                
                245,024
                
                
                
                —
                *
                
                
                3,310Issuance
      of common stock held in escrow
                
                
                —
                
                
                
                —
                
                
                
                15,646
                
                
                
                —
                *
                
                
                —Issuance
      of restricted stock
                
                
                —
                
                
                
                —
                
                
                
                100,000
                
                
                
                —
                *
                
                
                —Exercise
      of options
                
                
                —
                
                
                
                —
                
                
                
                824,103
                
                
                
                1
                
                
                
                1,987Reclassification
      of unearned compensation upon adoption of SFAS No. 123R
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (1,581
                )Compensation
      in respect of options, restricted stock and warrants granted to employees,
      directors and third-parties
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                14,912Net
      loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Balance
      at December 31, 2006
                
                
                —
                
                
                $
                —
                
                
                
                43,516,669
                
                
                $
                44
                
                
                $
                312,841








Treasury stock
                
                
                Unearned
                
                
                AccumulatedShares
                
                
                Amount
                
                
                compensation
                
                
                deficit
                
                
                TotalBalance
      at December 31, 2005
                
                
                56,100
                
                
                $
                (89
                )
                
                $
                (1,581
                )
                
                $
                (115,211
                )
                
                $
                94,678Changes
      during the year:Issuance
      of common stock in public offering (net of issuance expenses of
      $104)
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                82,697Issuance
      of common stock in connection with acquisition
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                3,310Issuance
      of common stock held in escrow
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                *Issuance
      of restricted stock
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                *Exercise
      of options
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,988Reclassification
      of unearned compensation upon adoption of SFAS No. 123R
                
                
                —
                
                
                
                —
                
                
                
                1,581
                
                
                
                —
                
                
                
                —Compensation
      in respect of options, restricted stock and warrants granted to employees,
      directors and third-parties
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                14,912Net
      loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (73,764
                )
                
                
                (73,764
                )Balance
      at December 31, 2006
                
                
                56,100
                
                
                $
                (89
                )
                
                $
                —
                
                
                $
                (188,975
                )
                
                $
                123,821





* Amount
less than one thousand dollars.





The
accompanying notes are an integral part of the consolidated financial
statements.


F-4


Keryx
Biopharmaceuticals, Inc.


Consolidated
Statements of Changes in Stockholders’ (Deficiency) Equity


for
the Years Ended December 31, 2008, 2007 and 2006 (continued)





(in
thousands, except share amounts)








Series A convertible
                  preferred stock
                
                
                Common stock
                
                
                Additional
                  paid-inShares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                capitalBalance
      at December 31, 2006
                
                
                —
                
                
                $
                —
                
                
                
                43,516,669
                
                
                $
                44
                
                
                $
                312,841Changes
      during the year:Cancellation
      of common stock held in escrow
                
                
                —
                
                
                
                —
                
                
                
                (15,646
                )
                
                
                (—
                )*
                
                
                —Issuance
      of restricted stock
                
                
                —
                
                
                
                —
                
                
                
                195,000
                
                
                
                —
                *
                
                
                —Forfeiture
      of restricted stock
                
                
                —
                
                
                
                —
                
                
                
                (83,334
                )
                
                
                (—
                )*
                
                
                —Surrender
      of common stock for tax withholding
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Exercise
      of options
                
                
                —
                
                
                
                —
                
                
                
                138,412
                
                
                
                —
                
                
                
                271Compensation
      in respect of options, restricted stock and warrants granted to employees,
      directors and third-parties
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                *
                
                
                10,660Net
      loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Balance
      at December 31, 2007
                
                
                —
                
                
                $
                —
                
                
                
                43,751,101
                
                
                $
                44
                
                
                $
                323,772





Treasury stock
                
                
                Unearned
                
                
                AccumulatedShares
                
                
                Amount
                
                
                compensation
                
                
                deficit
                
                
                TotalBalance
      at December 31, 2006
                
                
                56,100
                
                
                $
                (89
                )
                
                $
                —
                
                
                $
                (188,975
                )
                
                $
                123,821Changes
      during the year:Cancellation
      of common stock held in escrow
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (—
                )*Issuance
      of restricted stock
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                *Forfeiture
      of restricted stock
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (—
                )*Surrender
      of common stock for tax withholding
                
                
                23,848
                
                
                
                (268
                )
                
                
                —
                
                
                
                —
                
                
                
                (268
                )Exercise
      of options
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                271Compensation
      in respect of options, restricted stock and warrants granted to employees,
      directors and third-parties
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                10,660Net
      loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (90,062
                )
                
                
                (90,062
                )Balance
      at December 31, 2007
                
                
                79,948
                
                
                $
                (357
                )
                
                $
                —
                
                
                $
                (279,037
                )
                
                $
                44,422





* Amount
less than one thousand dollars.





The
accompanying notes are an integral part of the consolidated financial
statements.


F-5


Keryx
Biopharmaceuticals, Inc.


Consolidated
Statements of Changes in Stockholders’ (Deficiency) Equity


for
the Years Ended December 31, 2008, 2007 and 2006 (continued)





(in
thousands, except share amounts)





Series A convertible
                  preferred stock
                
                
                Common stock
                
                
                Additional
                  paid-inShares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                capitalBalance
      at December 31, 2007
                
                
                —
                
                
                $
                —
                
                
                
                43,751,101
                
                
                $
                44
                
                
                $
                323,772Changes
      during the year:Issuance
      of restricted stock
                
                
                —
                
                
                
                —
                
                
                
                3,976,906
                
                
                
                4
                
                
                
                —Forfeiture
      of restricted stock
                
                
                —
                
                
                
                —
                
                
                
                (73,500
                )
                
                
                (—
                )*
                
                
                —Exercise
      of options
                
                
                —
                
                
                
                —
                
                
                
                75,000
                
                
                
                —
                *
                
                
                222Compensation
      in respect of options and restricted stock granted to employees, directors
      and third-parties
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                6,744Net
      loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Balance
      at December 31, 2008
                
                
                —
                
                
                $
                —
                
                
                
                47,729,507
                
                
                $
                48
                
                
                $
                330,738





Treasury stock
                
                
                Unearned
                
                
                AccumulatedShares
                
                
                Amount
                
                
                compensation
                
                
                deficit
                
                
                TotalBalance
      at December 31, 2007
                
                
                79,948
                
                
                $
                (357
                )
                
                $
                —
                
                
                $
                (279,037
                )
                
                $
                44,422Changes
      during the year:Issuance
      of restricted stock
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                4Forfeiture
      of restricted stock
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (—
                )*Exercise
      of options
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                222Compensation
      in respect of options and restricted stock granted to employees, directors
      and third-parties
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                6,744Net
      loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (52,881
                )
                
                
                (52,881
                )Balance
      at December 31, 2008
                
                
                79,948
                
                
                $
                (357
                )
                
                $
                —
                
                
                $
                (331,918
                )
                
                $
                (1,489
                )





* Amount
less than one thousand dollars.





The
accompanying notes are an integral part of the consolidated financial
statements.


F-6


Keryx
Biopharmaceuticals, Inc.


Consolidated
Statements of Cash Flows for the Year Ended December 31





(in
thousands)





2008
                  
                  
                  2007
                  
                  
                  2006CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                  
                  $
                  (52,881
                  )
                  
                  $
                  (90,062
                  )
                  
                  $
                  (73,764
                  )Loss
      from discontinued operations
                  
                  
                  (175
                  )
                  
                  
                  (756
                  )
                  
                  
                  (1,016
                  )Loss
      from continuing operations
                  
                  
                  (52,706
                  )
                  
                  
                  (89,306
                  )
                  
                  
                  (72,748
                  )Adjustments
      to reconcile loss from continuing operations to cash flows used in
      operating activities of continuing operations:Stock
      compensation expense
                  
                  
                  6,748
                  
                  
                  
                  10,660
                  
                  
                  
                  14,912Depreciation
      and amortization
                  
                  
                  111
                  
                  
                  
                  130
                  
                  
                  
                  176Impairment
      of investment securities
                  
                  
                  3,196
                  
                  
                  
                  —
                  
                  
                  
                  —Other
      impairment charges
                  
                  
                  11,037
                  
                  
                  
                  —
                  
                  
                  
                  —Gain
      on sale of investment securities
                  
                  
                  (81
                  )
                  
                  
                  —
                  
                  
                  
                  —Changes
      in assets and liabilities, net of effects of acquisitions:Decrease
      (increase) in other current assets
                  
                  
                  749
                  
                  
                  
                  706
                  
                  
                  
                  1,236Decrease
      (increase) in accrued interest receivable
                  
                  
                  258
                  
                  
                  
                  242
                  
                  
                  
                  (189
                  )Decrease
      (increase) in security deposits
                  
                  
                  260
                  
                  
                  
                  —
                  
                  
                  
                  (255
                  )(Decrease)
      increase in accounts payable and accrued expenses
                  
                  
                  (14,059
                  )
                  
                  
                  8,790
                  
                  
                  
                  5,359(Decrease)
      increase in accrued compensation and related liabilities
                  
                  
                  (758
                  )
                  
                  
                  (281
                  )
                  
                  
                  598(Decrease)
      in other liabilities
                  
                  
                  (84
                  )
                  
                  
                  (92
                  )
                  
                  
                  (28
                  )Increase
      in deferred revenue
                  
                  
                  6,727
                  
                  
                  
                  11,845
                  
                  
                  
                  97Net
      cash used in operating activities of continuing operations
                  
                  
                  (38,602
                  )
                  
                  
                  (57,306
                  )
                  
                  
                  (50,841
                  )Net
      cash used in operating activities of discontinued
    operations
                  
                  
                  (131
                  )
                  
                  
                  (239
                  )
                  
                  
                  (1,359
                  )Net
      cash used in operating activities
                  
                  
                  (38,733
                  )
                  
                  
                  (57,545
                  )
                  
                  
                  (52,201
                  )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of property, plant and equipment
                  
                  
                  (146
                  )
                  
                  
                  (3,159
                  )
                  
                  
                  (7,582
                  )Payments
      of transaction costs
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (231
                  )Decrease
      (increase) in other assets
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  27Investment
      in held-to-maturity short-term securities
                  
                  
                  (33
                  )
                  
                  
                  (6,136
                  )
                  
                  
                  (4,080
                  )Proceeds
      from maturity of held-to-maturity short-term securities
                  
                  
                  20,869
                  
                  
                  
                  24,020
                  
                  
                  
                  8,275Investment
      in available-for-sale short-term securities
                  
                  
                  (12,000
                  )
                  
                  
                  (56,700
                  )
                  
                  
                  (38,375
                  )Proceeds
      from sale of available-for-sale short-term securities
                  
                  
                  22,200
                  
                  
                  
                  76,200
                  
                  
                  
                  6,725Proceeds
      from sale of available-for-sale long-term securities
                  
                  
                  1,700
                  
                  
                  
                  —
                  
                  
                  
                  —Investment
      in held-to-maturity long-term securities
                  
                  
                  (1
                  )
                  
                  
                  (6,372
                  )
                  
                  
                  (16,677
                  )Proceeds
      from maturity of held-to-maturity long-term securities
                  
                  
                  —
                  
                  
                  
                  3
                  
                  
                  
                  5Net
      cash provided by (used in) investing activities of continuing
      operations
                  
                  
                  32,589
                  
                  
                  
                  27,856
                  
                  
                  
                  (51,913
                  )Net
      cash provided by (used in) investing activities of discontinued
      operations
                  
                  
                  —
                  
                  
                  
                  15
                  
                  
                  
                  (15
                  )Net
      cash provided by (used in) investing activities
                  
                  
                  32,589
                  
                  
                  
                  27,871
                  
                  
                  
                  (51,928
                  )





The
accompanying notes are an integral part of the consolidated financial
statements.


F-7


Keryx
Biopharmaceuticals, Inc.


Consolidated
Statements of Cash Flows for the Year Ended December 31 (continued)





(in
thousands)





2008
                
                
                2007
                
                
                2006CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from public offerings, net
                
                $
                —
                
                
                $
                —
                
                
                $
                82,697Proceeds
      from exercise of options and warrants
                
                
                222
                
                
                
                271
                
                
                
                1,988Purchase
      of treasury stock
                
                
                —
                
                
                
                (268
                )
                
                
                —Net
      cash provided by financing activities of continuing
    operations
                
                
                222
                
                
                
                3
                
                
                
                84,685Cash
      acquired in acquisition
                
                
                —
                
                
                
                —
                
                
                
                5Effect
      of exchange rate on cash
                
                
                —
                
                
                
                —
                
                
                
                —NET
      DECREASE IN CASH AND CASH EQUIVALENTS
                
                
                (5,922
                )
                
                
                (29,671
                )
                
                
                (19,439
                )Cash
      and cash equivalents at beginning of year
                
                
                19,065
                
                
                
                48,736
                
                
                
                68,175CASH
      AND CASH EQUIVALENTS AT END OF YEAR
                
                $
                13,143
                
                
                $
                19,065
                
                
                $
                48,736NON
      - CASH TRANSACTIONSSale
      of manufacturing facility assets in settlement of
liability
                
                $
                300
                
                
                $
                —
                
                
                $
                —Issuance
      of common stock in connection with acquisition
                
                
                —
                
                
                
                —
                
                
                
                3,310Assumption
      of liabilities in connection with acquisition
                
                
                —
                
                
                
                —
                
                
                
                345SUPPLEMENTARY
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid for income taxes
                
                $
                —
                
                
                $
                36
                
                
                $
                —




The
accompanying notes are an integral part of the consolidated financial
statements.


F-8


Keryx
Biopharmaceuticals, Inc.


Notes
to the Consolidated Financial Statements





NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





DESCRIPTION
OF BUSINESS





Keryx
Biopharmaceuticals, Inc. and subsidiaries (“Keryx” or the “Company”) is a
biopharmaceutical company focused on the acquisition, development and
commercialization of medically important, novel pharmaceutical products for the
treatment of life-threatening diseases, including renal disease and cancer. The
Company owns a 100% interest in each of ACCESS Oncology, Inc., Neryx
Biopharmaceuticals, Inc., and Accumin Diagnostics, Inc., all U.S. corporations
incorporated in the State of Delaware, and Keryx (Israel) Ltd. and Keryx
Biomedical Technologies Ltd., each organized in Israel. In 2003, the Company’s
subsidiaries in Israel ceased operations and are currently in the process of
being closed down. Most of the Company's biopharmaceutical development and
substantially all of its administrative operations during 2008, 2007 and 2006
were conducted in the United States of America.





The
Company was in the development stage at December 31, 2007. During the year ended
December 31, 2008, the Company completed its development activities and
commenced its planned principal operations.





LIQUIDITY





The
Company has incurred substantial operating losses since its inception and
expects to continue to incur operating losses for the foreseeable future and may
never become profitable. As of December 31, 2008, the Company has an accumulated
deficit of $331.9 million and a deficiency in equity of $1.5 million. The
Company is dependent upon significant financing to provide the working capital
necessary to execute its business plan. The Company has not yet commercialized
any of its drug candidates and cannot be sure if it will ever be able to do so.
Even if the Company commercializes one or more of its drug candidates, the
Company may not become profitable. The Company’s ability to achieve
profitability depends on a number of factors, including its ability to obtain
regulatory approval for its drug candidates, successfully complete any
post-approval regulatory obligations and successfully commercialize its drug
candidates alone or in partnership. The Company may continue to incur
substantial operating losses even if it begins to generate revenues from its
drug candidates, if approved. The Company currently anticipates that its cash,
cash equivalents and investment securities as of December 31, 2008, exclusive of
its holdings in auction rate securities and inclusive of a $3 million milestone
payment received by the Company in March 2009 under its sublicense agreement for
Zerenex in Japan, are sufficient to meet the Company’s anticipated working
capital needs and fund its business plan through the end of 2009. However, if
the Company is not able to receive proceeds from some portion of its auction
rate securities by the first quarter of 2010, the Company may not have the
ability to continue as a going concern for any significant period beyond that
point. The actual amount of funds that the Company will need to operate is
subject to many factors, including the timing, design and conduct of clinical
trials for the Company’s drug candidates. The Company is evaluating market
conditions to determine the appropriate timing and extent to which it will seek
to obtain additional debt, equity or other type of financing. If the Company
determines that it is necessary to seek additional funding, there can be no
assurance that it will be able to obtain any such funding on terms that are
acceptable to the Company, if at all.





The
accompanying financial statements have been prepared assuming that the Company
continues as a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The factors
discussed above, taken together with the Company’s limited cash, cash
equivalents, and short-term investment securities, and illiquid investments in
auction rate securities raise substantial doubt about the Company’s ability to
continue as a going concern. The financial statements do not include any
adjustments that might be necessary should the Company be unable to continue as
a going concern.





The
Company’s common stock is listed on the NASDAQ Capital Marketand
trades under the symbol “KERX.” On April 22, 2008, the Company received notice
from The NASDAQ Stock Market that it was not in compliance with the $1.00
minimum bid price requirement for continued inclusion on the applicable NASDAQ
market. On October 21, 2008, the Company received notice from The NASDAQ Stock
Market that the bid price and market value of publicly traded securities
requirements for continued listing on a NASDAQ market had been temporarily
suspended. Due to this action, the Company believes that it has until July 20,
2009, to achieve compliance with the $1.00 minimum closing bid price
requirement.


F-9





On
November 17, 2008, the Company received notice from The NASDAQ Stock Market that
it was no longer in compliance with Marketplace Rule 4310(c)(3), which requires
the Company to have a minimum of $2,500,000 in stockholders' equity, or
$35,000,000 market value of listed securities, or $500,000 of net income from
continuing operations for the most recently completed fiscal year or two of the
three most recently completed fiscal years, for continued listing on the NASDAQ
Capital Market. On December 2, 2008, the Company submitted to The NASDAQ Stock
Market a plan to achieve and sustain compliance with all of the NASDAQ Capital
Market listing requirements.





On March
3, 2009, the Company received notice from The NASDAQ Stock Market indicating
that it had failed to regain compliance with NASDAQ Marketplace Rule 4310(c)(3).
Therefore, The NASDAQ Stock Market determined to delist the Company’s common
stock from the NASDAQ Capital Market unless the Company appealed the delisting
determination to a hearing. On March 9, 2009, the Company requested a hearing to
appeal the determination of The NASDAQ Stock Market to delist the Company’s
common stock to a NASDAQ Listings Qualification Panel (“Panel”), which
automatically stayed the delisting of the Company’s common stock pending
issuance of the Panel's decision. The hearing is scheduled for April 30, 2009.
At the Panel hearing, the Company plans to ask the Panel to provide it with
additional time to regain compliance with NASDAQ Marketplace Rule
4310(c)(3).  There can be no assurance that such a request will be
granted or that the Panel will permit the Company to continue to list its common
stock on the NASDAQ Capital Market, or that in the future the Company will meet
the listing requirements of the NASDAQ Capital Market, including, without
limitation, bid price, stockholders’ equity and/or market value of listed
securities minimum requirements. Additionally, the Company’s efforts to continue
to meet the listing requirements may be limited by current market conditions,
including volatility in the market. If the Company’s common stock is delisted
from the NASDAQ Capital Market, there may be a limited market for the Company’s
stock, trading in the Company’s stock may become more difficult and the
Company’s share price could decrease even further. In addition, if the Company’s
common stock is delisted, the Company’s ability to raise additional capital may
be impaired.





PRINCIPLES
OF CONSOLIDATION





The
consolidated financial statements include the financial statements of the
Company and its wholly owned subsidiaries. Intercompany transactions and
balances have been eliminated in consolidation.





CORRECTION
OF IMMATERIAL ERROR





The
Company had previously disclosed in its consolidated financial statements as of,
and for the quarter and six months ended, June 30, 2006, differences that were
identified during fiscal 2006 in connection with the Company’s internal review
of its historical stock option practices, including the underlying option grant
documentation and procedures, which resulted in the determination of additional
compensation expense based on revised measurement dates. At that time, the
Company determined that the additional compensation expense resulting from
revised measurement dates was immaterial for each period and as a result was not
recorded. The Company has continued to assess the impact of this adjustment
under the provisions of SEC Staff Accounting Bulletin Nos. 99 and 108 and
concluded it would continue to be immaterial in subsequent periods. Due to the
Company’s decision to cease development of Sulonex and the related
restructurings implemented during 2008, the Company believes this additional
compensation expense may become material in future periods. As a result, the
Company has recorded an adjustment to increase its accumulated deficit and
additional paid-in capital as of January 1, 2006 by $763,000 to account for the
recognition of these additional stock-based compensation costs incurred prior to
January 1, 2006. The adjustment recorded as of January 1, 2006 has no effect on
the total amount of the Company’s stockholders’ (deficiency) equity balances in
the consolidated financial statements as of, and for years ended December 31,
2006, 2007 and 2008, and there will be no impact on any future
period.





USE
OF ESTIMATES





The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles (“GAAP”) requires management to make estimates and
judgments that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
applicable reporting period. Actual results could differ from those estimates.
Such differences could be material to the financial statements.


F-10





CASH
EQUIVALENTS





The
Company treats liquid investments with original maturities of less than three
months when purchased as cash equivalents.





INVESTMENT
SECURITIES





Investment
securities at December 31, 2008 and 2007 consist of short-term and long-term
government and auction rate securities. The Company classifies its short-term
and long-term debt securities as held-to-maturity, with the exception of auction
rate securities, which are classified as available-for-sale. Held-to-maturity
securities are those securities in which the Company has the ability and intent
to hold the security until maturity. Held-to-maturity securities are recorded at
amortized cost, adjusted for the amortization or accretion of premiums or
discounts. Premiums and discounts are amortized or accreted over the life of the
related held-to-maturity security as an adjustment to yield using the effective
interest method. Available-for-sale investment securities (which are comprised
of auction rate securities) are recorded at fair value. Changes in fair value
are recorded in accumulated other comprehensive income unless realized on sale
or recognized as an other-than-temporary impairment. See Note 4 – Fair Value
Measurements.





A decline
in the market value of any investment security below cost, that is deemed to be
other than temporary, results in a reduction in the carrying amount to fair
value. The impairment is charged to operations and a new cost basis for the
security is established. Other-than-temporary impairment charges are included in
interest and other (expense) income, net. Dividend and interest income are
recognized when earned.





PROPERTY,
PLANT AND EQUIPMENT





Property,
plant and equipment are stated at historical cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets:




Estimated
                        useful life
                        (years)Lab
      equipment
                      
                      4Office
      furniture and equipment
                      
                      3-7Computers,
      software and related equipment
                      
                      3





Leasehold
improvements are amortized over the shorter of their useful life or the
remaining term of the lease exclusive of renewal options.





PATENT
COSTS





The Company expenses
patent maintenance costs as incurred.Through March 31, 2006, the Company
classified its patent expenses in other research and
development.  Effective April 1, 2006, the Company has classified its
patent expenses in other selling, general and administrative.  The
results of prior periods have not been reclassified because they were not
significant.





REVENUE
RECOGNITION





The
Company recognizes license revenue consistent with the provisions of Staff
Accounting Bulletin (“SAB”) No. 104 and Emerging Issues Task Force (“EITF”)
Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” The
Company analyzes each element of its licensing agreement to determine the
appropriate revenue recognition. The Company recognizes revenue on upfront
payments and milestone payments over the period of significant involvement under
the related agreements unless the fee is in exchange for products delivered or
services rendered that represent the culmination of a separate earnings process
and no further performance obligation exists under the contract. The Company may
recognize milestone payments in revenue upon the achievement of specified
milestones if (1) the milestone is substantive in nature, and the
achievement of the milestone was not reasonably assured at the inception of the
agreement and (2) the fees are nonrefundable. Any milestone payments
received prior to satisfying these revenue recognition criteria are recognized
as deferred revenue. Sales milestones and royalties that are deferred will be
recognized when earned under the agreements.


Service
revenue consists of clinical trial management and site recruitment services.
Revenues generated from providing clinical trial management and site recruitment
services are recognized at the time such services are provided. Deferred revenue
is incurred when the Company receives a deposit or prepayment for services to be
performed at a later date.
 
 Other
revenue consists of a payment in 2007 associated with a termination agreement,
which was recognized when earned. (See Note
9).




F-11





COST
OF SERVICES





Cost of
services consist of all costs specifically associated with client programs such
as salary, benefits paid to personnel, payments to third-party vendors and
systems and other support facilities associated with delivering services to the
Company's clients. Cost of services are recognized at the time such services are
performed.





RESEARCH
AND DEVELOPMENT COSTS





Research and development
costs are expensed as incurred. The Companymakes estimates of costs
incurred in relation to external clinical research organizations, or CROs, and
clinical site costs. The Company analyzes the progress of clinical trials,
including levels of patient enrollment, invoices received and contracted costs
when evaluating the adequacy of the amount expensed and the related prepaid
asset and accrued liability. Additionally, administrative costs related to
external CROs are recognized on a straight-line basis over the estimated
contractual period. With respect to clinical site costs, the financial terms of
these agreements are subject to negotiation and vary from contract to contract.
Payments under these contracts may be uneven, and depend on factors such as the
achievement of certain events, the successful accrual of patients, the
completion of portions of the clinical trial or similar conditions. The
objective of the Company’s policy is to match the recording of expenses in its
financial statements to the actual services received and efforts expended. As
such, expense accruals related to clinical site costs are recognized based on
the Company’s estimate of the degree of completion of the event or events
specified in the specific clinical study or trial contract.





Effective
January 1, 2008, the Company adopted EITF No. 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for Use in Future
Research and Development Activities” (“EITF 07-3”). EITF 07-3 requires that
nonrefundable advance payments for goods or services that will be used or
rendered for future research and development activities be deferred and
amortized over the period that the goods are delivered or the related services
are performed, subject to an assessment of recoverability. The adoption of EITF
07-3 did not have an effect on the Company’s results of operations and financial
position as no nonrefundable advance payments were made during
2008.





INCOME
TAXES





Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary and permanent differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in operations in the period
that includes the enactment date. If the likelihood of realizing the deferred
tax assets or liability is less than “more likely than not,” a valuation
allowance is then created.





On
January 1, 2007, the Company adopted Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”). FIN 48 clarifies the criteria for recognizing tax benefits
related to uncertain tax positions under Statement of Financial Accounting
Standards (“SFAS”) No. 109, “Accounting for Income Taxes” (“SFAS No. 109”), and
requires additional financial statement disclosure. FIN 48 requires that the
Company recognize, in its consolidated financial statements, the impact of a tax
position if that position is more likely than not to be sustained upon
examination, based on the technical merits of the position. Adoption of FIN 48
had no impact on the Company’s consolidated results of operations and financial
position. Upon adoption, the Company believed there were no uncertain tax
positions that failed to meet the more likely than not recognition threshold
under FIN 48 to be sustained upon examination.


Prior to
the adoption of FIN 48, the Company included interest accrued on the
underpayment of income taxes, if any, in selling, general and administrative
expense.  The Company continued to follow this policy following the
adoption of FIN 48.
 
 The
Company and its subsidiaries file income tax returns in the U.S. federal
jurisdiction and in various states.  The Company has tax net operating
loss carryforwards that are subject to examination for a number of years beyond
the year in which they may be utilized for tax purposes. Since a portion of
these net operating loss carryforwards may be utilized in the future, many of
these net operating loss carryforwards will remain subject to
examination.




F-12





STOCK
- BASED COMPENSATION





In
December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment”
(“SFAS No. 123R”). SFAS No. 123R requires all share-based payments to employees,
and to non-employee directors as compensation for service on the Board of
Directors, to be recognized as compensation expense in the consolidated
financial statements based on the fair values of such payments.





The
Company adopted SFAS No. 123R on January 1, 2006 using the modified prospective
transition method. Under this method, compensation cost recognized beginning
January 1, 2006 includes: a) compensation cost for all share-based payments
granted prior to, but not yet vested as of January 1, 2006, based on the
grant-date fair value estimated in accordance with the original provisions of
SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”),
and b) compensation cost for all share-based payments granted subsequent to
January 1, 2006, based on the grant-date fair value estimated in accordance
with the provisions of SFAS No. 123R. The results for prior periods have not
been restated.





Stock-based
compensation expense recognized each period is based on the value of the portion
of share-based payment awards that is ultimately expected to vest during the
period. SFAS No. 123R requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. In the Company’s pro forma disclosures required under SFAS
No. 123 for periods prior to 2006, the Company accounted for forfeitures as they
occurred. Upon adoption of SFAS No. 123R, the Company elected to use the
Black-Scholes model to value share-based payments granted to employees
subsequent to January 1, 2006 and elected to attribute the value of
stock-based compensation expense using the straight-line single option method.
These methods were previously used for the Company’s pro forma information
required under SFAS No. 123. For additional information, see Note 11 –
Stockholders' Equity.





The
Company accounts for equity instruments issued to third party service providers
(non-employees) in accordance with the fair value method prescribed by the
provisions of EITF Issue No. 96-18, “Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling
Goods or Services” (“EITF 96-18”). Unvested options are revalued at every
reporting period and amortized over the vesting period in order to determine the
compensation expense.





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. Shares of restricted stock
are included in common stock outstanding unless forfeited.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
outstanding as of December 31, 2008, 2007 and 2006, which are not included in
the computation of net loss per share amounts, were 9,187,023, 11,191,149 and,
11,106,689, respectively.





F-13




COMPREHENSIVE
LOSS





Comprehensive
loss is the same as net loss for all years presented.





BUSINESS
ACQUISITIONS





The
Company accounts for acquired businesses using the purchase method of accounting
which requires that the assets acquired and liabilities assumed be recorded at
the date of acquisition at their respective fair values. The Company’s
consolidated financial statements and results of operations reflect an acquired
business after the completion of the acquisition and are not retroactively
restated. The cost to acquire a business, including transaction costs, is
allocated to the underlying net assets of the acquired business in proportion to
their respective fair values. Any excess of the purchase price over the
estimated fair values of the net assets acquired is recorded as goodwill. Any
excess of the net assets acquired over the purchase price represents negative
goodwill.





The
acquisition of ACCESS Oncology in February 2004 (see Note 10 – Contingent Equity
Rights) resulted in negative goodwill. Since the negative goodwill was a result
of not recognizing contingent consideration (i.e., the contingent equity
rights), the lesser of the negative goodwill and the maximum value of the
contingent equity rights at the date of the acquisition was recorded as if it
were a liability, thereby eliminating the negative goodwill.





IMPAIRMENT





The
Company accounts for impairment of long-lived assets using the provisions of
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”
(“SFAS No. 144”). This statement requires the recognition of an impairment loss
when circumstances indicate that the carrying value of long-lived tangible and
intangible assets with finite lives may not be recoverable. Management’s policy
in determining whether an impairment indicator exists, a triggering event,
comprises measurable operating performance criteria as well as qualitative
measures. If an analysis is necessitated by the occurrence of a triggering
event, the Company makes certain assumptions in determining the impairment
amount. 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. During the
first quarter of 2007, management reviewed both its original and projected
revenue estimates associated with the Accumin diagnostic tool. As a result of
this analysis, the Company concluded that the asset was impaired and recorded an
impairment charge of approximately $600,000 to write-down identifiable
intangible long-lived assets associated with Accumin. The charge was recorded in
loss from discontinued operations. As further discussed in Note 5, the
Company recorded an impairment charge of $11.0 million during the year ended
December 31, 2008 related to the write-down of fixed assets following the
cessation of its development of Sulonex.





The
Company accounts for impairment of goodwill using the provisions of SFAS No.
142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). This statement
addresses how intangible assets that are acquired individually or with a group
of other assets (but not those acquired in a business combination) should be
accounted for in financial statements upon their acquisition. SFAS No. 142 also
addresses how goodwill and other intangible assets should be accounted for after
they have been initially recognized in the financial statements. SFAS No. 142
requires goodwill be tested using a two-step process. The first step compares
the fair value of the reporting unit with the unit's carrying value, including
goodwill. When the carrying value of the reporting unit is greater than fair
value, the unit’s goodwill may be impaired, and the second step must be
completed to measure the amount of the goodwill impairment charge, if any. In
the second step, the implied fair value of the reporting unit’s goodwill is
compared with the carrying amount of the unit’s goodwill. If the carrying amount
is greater than the implied fair value, the carrying value of the goodwill must
be written down to its implied fair value. The negative outcome of the Company’s
pivotal SUN-MICRO Phase 3 clinical trial of SulonexTM (sulodexide) for the
treatment of diabetic nephropathy, announced on March 7, 2008, and the Company’s
subsequent decision to terminate the ongoing SUN-MACRO Phase 4 clinical trial
triggered an impairment test. As of March 31, 2008, management concluded that
there was no impairment of the Company’s goodwill. Additionally, as of December
31, 2008, management conducted its annual assessment of goodwill and concluded
that there is no impairment to its goodwill. The Company will continue to
perform impairment tests under SFAS No. 142 annually, at December 31, and
whenever events or changes in circumstances suggest that the carrying value of
an asset may not be recoverable.





F-14




CONCENTRATIONS
OF CREDIT RISK





The
Company does not have significant off-balance-sheet risk or credit risk
concentrations. The Company maintains its cash and cash equivalents and
short-term and long-term held-to-maturity investments with multiple financial
institutions that invests in investment-grade securities with average maturities
of less than twelve months. The Company also maintains long-term investments in
auction rate securities. See Note 3 – Investment Securities and Note 4 – Fair
Value Measurements.





RECENTLY
ISSUED ACCOUNTING STANDARDS





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141R”), which replaces SFAS No. 141. SFAS No. 141R
changes the accounting for business combinations, including the measurement of
acquirer shares issued in consideration for a business combination, the
recognition of contingent consideration, the accounting for contingencies, the
recognition of acquired in-process research and development, the accounting for
acquisition-related restructuring cost accruals, the treatment of
acquisition-related transaction costs and the recognition of changes in the
acquirer’s income tax valuation allowance and income tax uncertainties. SFAS No.
141R applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008, and interim periods within those fiscal years.
Early application is prohibited.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51” (“SFAS No. 160”),
which changes the accounting and reporting for minority interests. Minority
interests will be recharacterized as noncontrolling interests and will be
reported as a component of equity separate from the parent’s equity, and
purchases or sales of equity interests that do not result in a change in control
will be accounted for as equity transactions. In addition, net income
attributable to the noncontrolling interest will be included in consolidated net
income (loss) on the face of the consolidated statement of operations and, upon
a loss of control, the interest sold, as well as any interest retained, will be
recorded at fair value with any gain or loss recognized in operations. SFAS No.
160 is effective for fiscal years (including interim periods within those fiscal
years) beginning on or after December 15, 2008. Earlier adoption is prohibited.
The statement shall be applied prospectively as of the beginning of the fiscal
year in which it is initially applied, except for the presentation and
disclosure requirement which shall be applied retrospectively for all periods
presented. The Company expects that the adoption of SFAS No. 160 will not have
an impact on its results of operations and financial position.





In
December 2007, the FASB ratified EITF Issue No. 07-1, “Accounting for
Collaborative Arrangements” (“EITF 07-1”).  EITF 07-1 defines
collaborative arrangements and establishes reporting requirements for
transactions between participants in a collaborative arrangement and between
participants in the arrangement and third parties. EITF 07-1 also establishes
the appropriate income statement presentation and classification for joint
operating activities and payments between participants, as well as the
sufficiency of the disclosures related to these arrangements. EITF 07-1 is
effective for fiscal years beginning after December 15, 2008. EITF 07-1 shall be
applied using a modified version of retrospective transition for those
arrangements in place at the effective date. An entity should report the effects
of applying this Issue as a change in accounting principle through retrospective
application to all prior periods presented for all arrangements existing as of
the effective date, unless it is impracticable to apply the effects the change
retrospectively. The Company is currently assessing the impact that EITF 07-1
may have on its results of operations and financial position.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FASB
Statement No. 115” (“SFAS 159”). SFAS 159 is expected to expand the use of fair
value accounting, but does not affect existing standards which require certain
assets or liabilities to be carried at fair value. The objective of SFAS 159 is
to improve financial reporting by providing companies with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. Under SFAS 159, a company may choose, at its initial application or
at other specified election dates, to measure eligible items at fair value and
report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date. SFAS 159 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company
has not elected the fair value option for any of its existing assets and
liabilities and thus the adoption of SFAS 159 did not have an impact on its
results of operations and financial position.


In
February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2, “Effective
Date of FASB Statement No. 157” (“FSP 157-2”), which delays the effective date
of SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) for
non-financial assets and non-financial liabilities. The delay is intended to
allow the FASB and constituents additional time to consider the effect of
various implementation issues that have arisen, or that may arise, from the
application of SFAS No. 157. For items within the scope of FSP 157-2, this FSP
defers the effective date of SFAS No. 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years. The Company
currently does not believe that the adoption of the deferred portion of SFAS No.
157 will have a material impact on the Company’s financial condition or results
of operations.




F-15





NOTE
2 – CASH AND CASH EQUIVALENTS





(in thousands)
                  
                  December 31, 2008
                  
                  
                  December 31, 2007Money
      market funds
                  
                  $
                  12,159
                  
                  
                  $
                  14,457Checking
      and bank deposits
                  
                  
                  984
                  
                  
                  
                  4,608Total
                  
                  $
                  13,143
                  
                  
                  $
                  19,065





NOTE
3 - INVESTMENT SECURITIES





The
Company records its investments as either held-to-maturity or
available-for-sale. Held-to-maturity investments are recorded at amortized cost.
Available-for-sale investment securities (which are comprised of auction rate
securities) are recorded at fair value (see Note 4 – Fair Value Measurements).
Other-than-temporary impairment charges are included in interest and other
(expense) income, net.  The following tables summarize the Company’s
investment securities at December 31, 2008 and December 31, 2007:





December 31, 2008(in thousands)
                  
                  Amortized cost,
                    as adjusted
                  
                  
                  Gross
                    unrealized
                    holding gains
                  
                  
                  Gross
                    unrealized
                    holding losses
                  
                  
                  Estimated
                    fair valueShort-term
      investment securities:Obligations
      of domestic governmental agencies (mature May 2009)
                    (held-to-maturity)
                  
                  $
                  2,299
                  
                  
                  $
                  39
                  
                  
                  $
                  —
                  
                  
                  $
                  2,338Long-term
      investments:Auction
      rate securities (mature between 2037 and 2047)
      (available-for-sale)
                  
                  $
                  7,185
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  7,185





December 31, 2007(in thousands)
                  
                  Amortized cost
                  
                  
                  Gross
                    unrealized
                    holding gains
                  
                  
                  Gross
                    unrealized
                    holding losses
                  
                  
                  Estimated
                    fair valueShort-term
      investments:Obligations
      of domestic governmental agencies (mature between April and October 2008)
      (held-to-maturity)
                  
                  $
                  20,838
                  
                  
                  $
                  91
                  
                  
                  $
                  —
                  
                  
                  $
                  20,929Auction
      rate securities (available-for-sale) *
                  
                  
                  22,200
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  22,200$
                  43,038
                  
                  
                  $
                  91
                  
                  
                  $
                  —
                  
                  
                  $
                  43,129Long-term
      investments:Obligations
      of domestic governmental agencies (mature May 2009)
                    (held-to-maturity)
                  
                  $
                  2,296
                  
                  
                  $
                  54
                  
                  
                  $
                  —
                  
                  
                  $
                  2,350





*     Amortized
cost approximates fair value.  Unrealized gains and losses are
immaterial.


F-16





NOTE
4 – FAIR VALUE MEASUREMENTS





As of
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”) for its financial assets and liabilities carried at fair value
on a recurring basis in the financial statements only. SFAS No. 157 defines fair
value, establishes a fair value hierarchy for assets and liabilities measured at
fair value and requires expanded disclosures about fair value measurements. The
SFAS No. 157 hierarchy ranks the quality and reliability of inputs, or
assumptions, used in the determination of fair value and requires financial
assets and liabilities carried at fair value to be classified and disclosed in
one of the following three categories:





·
            Level
      1 – quoted prices in active markets for identical assets and
      liabilities;





·
            Level
      2 – inputs other than Level 1 quoted prices that are directly or
      indirectly observable; and





·
            Level
      3 – unobservable inputs that are not corroborated by market
      data.





As of
December 31, 2008, $7.2 million of the Company’s investment securities were
auction rate securities and represent interests in student loan-backed
securities. The auction rate securities are recorded at their fair value and
classified as long-term investments. Auction rate securities are structured to
provide liquidity through a Dutch auction process that resets the applicable
interest rate at pre-determined calendar intervals, generally every 28 days.
This mechanism has historically allowed existing investors either to rollover
their holdings, whereby they would continue to own their respective securities,
or liquidate their holdings by selling such securities at par. This auction
process has historically provided a liquid market for these securities; however,
the uncertainties in the credit markets have affected all of the Company’s
holdings in auction rate securities. Since February 2008, the auctions for the
auction rate securities held by the Company have not had sufficient buyers to
cover investors’ sell orders, resulting in unsuccessful auctions. When an
auction is unsuccessful, the interest rate is re-set to a level pre-determined
by the loan documents and remains in effect until the next auction date, at
which time the process repeats. While all but one of these investments were
rated A or higher at December 31, 2008, the Company is uncertain as to when, or
if, the liquidity issues relating to these investments will improve. The Company
assessed the fair value of its auction rate securities portfolio. As a result of
this valuation process, as described below, the Company recorded impairment
charges totaling $3.2 million during the year ended December 31, 2008, for
other-than-temporary declines in the value of its auction rate securities. These
other-than-temporary impairment charges were included in interest and other
(expense) income, net. In addition, in the first quarter of 2008, the Company
reclassified the entire auction rate securities portfolio from short-term to
long-term investments due to the uncertainty of when the Company will be able to
sell these securities. In November 2008, the Company sold one of its auction
rate security investments in the secondary market. The security had a par value
of $2.0 million and an adjusted book value of $1.6 million.  Proceeds
from the sale of this security were $1.7 million, representing a gain of $0.1
million over the adjusted book value. The estimated fair value of the Company’s
remaining auction rate securities is $7.2 million at December 31,
2008.





The
valuation methods used to estimate the auction rate securities’ fair value were
(1) a discounted cash flow model, where the expected cash flows of the auction
rate securities are discounted to the present using a yield that incorporates
compensation for illiquidity, and (2) a market comparables method, where the
auction rate securities are valued based on indications, from the secondary
market, of what discounts buyers demand when purchasing similar auction rate
securities. The valuation also included assessments of the underlying structure
of each security, expected cash flows, discount rates, credit ratings, workout
periods, and overall capital market liquidity. These assumptions, assessments
and the interpretations of relevant market data are subject to uncertainties,
are difficult to predict and require significant judgment. The use of different
assumptions, applying different judgment to inherently subjective matters and
changes in future market conditions could result in significantly different
estimates of fair value of the Company’s auction rate securities. In addition,
the estimated fair value of the auction rates securities may differ from the
values that would have been used had a ready market existed, and the differences
could be material to the consolidated financial statements.





The fair
value of the Company’s auction rate securities could change significantly based
on market conditions and continued uncertainties in the credit markets. If these
uncertainties continue or if these securities experience credit rating
downgrades, the Company may incur additional impairment charges with respect to
its auction rate securities portfolio. The Company continues to monitor the fair
value of its auction rate securities and relevant market conditions and will
recognize additional impairment charges if future circumstances warrant such
charges.


F-17





The
Company reviews investment securities for impairment in accordance with the
guidance in FSP SFAS 115-1 and 124-1, “The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments,” to determine the
classification of the impairment as temporary or other-than-temporary. Losses
are recognized in the Company’s consolidated statement of operations when a
decline in fair value is determined to be other-than-temporary. The Company
reviews its investments on an ongoing basis for indications of possible
impairment. Once identified, the determination of whether the impairment is
temporary or other-than-temporary requires significant judgment. The Company
believes that the impairment charges related to its auction rate securities
investments are other-than-temporary.  The primary factors the Company
considers in classifying an impairment include the extent and time the fair
value of each investment has been below cost and the Company’s ability to hold
such investment to maturity.





The
following table provides the fair value measurements of applicable Company
financial assets according to the fair value levels defined by SFAS No. 157 as
of December 31, 2008:





Financial assets at fair value
                    as of December 31, 2008(in thousands)
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3Money
      market funds (1)
                  
                  $
                  12,159
                  
                  
                  $
                  —
                  
                  
                  $
                  —Obligations
      of domestic governmental agencies (held-to-maturity) (2)
                  
                  
                  2,299
                  
                  
                  
                  —
                  
                  
                  
                  —Auction
      rate securities (3)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  7,185Total
                  
                  $
                  14,458
                  
                  
                  $
                  —
                  
                  
                  $
                  7,185


(1)
            Included
      in cash and cash equivalents on the Company’s consolidated balance sheet.
      The carrying amount of money market funds is a reasonable estimate of fair
      value.


(2)
            Amortized
      cost approximates fair value.


(3)
            Included
      in long-term investment securities on the Company’s consolidated balance
      sheet.





The
following table summarizes the change in carrying value associated with Level 3
financial assets for the twelve months ended December 31, 2008:





(in thousands)
                    
                    Available-for-sale
                      long-term
                      investmentsBalance
      at January 1, 2008
                    
                    $
                    —Transfer
      into Level 3 at original cost (1)
                    
                    
                    12,000Sale
      of security
                    
                    
                    (1,700
                    )Realized
      gain on sale of security
                    
                    
                    81Total
      impairment charges included in net loss
                    
                    
                    (3,196
                    )Balance
      at December 31, 2008
                    
                    $
                    7,185


(1)
            Based
      on deteriorated market conditions experienced in the first quarter of
      2008, the Company changed the fair value measurement methodology of its
      auction rate securities portfolio that the Company classifies as
      available-for-sale from quoted prices in active markets to a model based
      on discounted cash flows and market comparables. Accordingly, these
      securities were re-classified from Level 1 to Level
  3.





NOTE
5 - PROPERTY, PLANT AND EQUIPMENT





(in thousands)
                      
                      December 31, 2008
                      
                      
                      December 31, 2007Manufacturing
      suite and equipment
                      
                      $
                      —
                      
                      
                      $
                      11,224Leasehold
      improvements
                      
                      
                      20
                      
                      
                      
                      36Office
      furniture and equipment
                      
                      
                      315
                      
                      
                      
                      315Computers,
      software and related equipment
                      
                      
                      436
                      
                      
                      
                      386771
                      
                      
                      
                      11,961Accumulated
      depreciation and amortization
                      
                      
                      (589
                      )
                      
                      
                      (478
                      )Net
      book value
                      
                      $
                      182
                      
                      
                      $
                      11,483





F-18




The
Company spent approximately $11.3 million in capital expenditures building a
manufacturing suite for Sulonex. With the cessation of the Company’s development
of Sulonex in March 2008, the Company took an impairment charge of $11.0
million, which is included in other research and development expenses in year
ended December 31, 2008, to write the assets down to their fair value of
$300,000, the amount for which the assets were sold during year ended December
31, 2008. The sale of the assets offset a payable and, therefore, cash was not
received by the Company. In addition, the Company recognized a $2.1 million
expense, which is included in other research and development expenses in the
year ended December 31, 2008, for costs related to the required restoration of
the leased facility to its original condition.  See Note 18 –
Restructuring.





Depreciation
expense for the years ended December 31, 2008, 2007 and 2006 was approximately
$111,000, $130,000 and $132,000, respectively.  The following table
summarizes depreciation expense for the years ended December 31, 2008, 2007 and
2006.





For the year ended December 31(in thousands)
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006Depreciation
      expense:Cost
      of services
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  2Research
      and development
                  
                  
                  84
                  
                  
                  
                  86
                  
                  
                  
                  84General
      and administrative
                  
                  
                  27
                  
                  
                  
                  44
                  
                  
                  
                  46Total
                  
                  $
                  111
                  
                  
                  $
                  130
                  
                  
                  $
                  132





NOTE 6–
GOODWILL





On April
6, 2006, Accumin Diagnostics, Inc. (“ADI”), a wholly-owned subsidiary of the
Company, completed the acquisition of AccuminTM, a
novel, patent protected, diagnostic for the direct measurement of total,
intact urinary albumin, from AusAm Biotechnologies, Inc. (“AusAm”). The purchase
price of Accumin was $3,996,000, which included the issuance of 245,024 shares
of the Company’s common stock, the assumption of certain liabilities of AusAm
equal to approximately $345,000 and transaction costs and cash settlement costs
of approximately $341,000.





Subsequent
to the closing, disputes arose between AusAm and Keryx relating to the
determination of the purchase consideration under the acquisition
agreement. On July 31, 2006, AusAm filed a motion purporting to seek to
enforce the terms of the acquisition agreement and alleging damages in the
amount of $818,145. The matter has been settled pursuant to a settlement
agreement approved by the Bankruptcy Court on April 10, 2007. In April 2007,
under the settlement, Keryx paid AusAm $110,075 in full settlement of all claims
made by AusAm in the action. Following completion of the settlement, 15,646
shares of the Company’s common stock, which were issued and outstanding and held
in escrow, were canceled.





The
Accumin transaction has been accounted for as a purchase by the Company. The
excess of the purchase price over the net assets acquired in the Accumin
transaction represented goodwill of approximately $3,208,000, which has been
allocated to the Company’s Products segment based on the proposed synergies
associated with Sulonex prior to its discontinuation of development by the
Company.





In
September 2008, the Company terminated its license agreement related to the
Accumin product and ceased all operations related to the Diagnostic segment. See
Note 8 – Discontinued Operations.





NOTE
7 - OTHER ASSETS





(in thousands)
                        
                        December 31, 2008
                        
                        
                        December 31, 2007Patents
      and other intangible assets
                        
                        $
                        352
                        
                        
                        $
                        352Long-term
      deposits
                        
                        
                        62
                        
                        
                        
                        322Deferred
      registration fees
                        
                        
                        22
                        
                        
                        
                        22436
                        
                        
                        
                        696Accumulated
      amortization
                        
                        
                        (352
                        )
                        
                        
                        (352
                        )$
                        84
                        
                        
                        $
                        344


Amortization
expense for the years ended December 31, 2008, 2007 and 2006 was approximately
$0, $14,000 and $84,000, respectively. The Company does not expect to record
amortization expenses going forward, as all intangible assets are fully
amortized.


F-19





NOTE 8–
DISCONTINUED OPERATIONS





In
September 2008, the Company terminated its license agreement related to the
Accumin product and ceased all operations related to the Diagnostic segment. The
results of the Company’s Diagnostic segment and the related financial position
have been reflected as discontinued operations in the consolidated financial
statements in accordance with SFAS No. 144 and EITF Issue No. 03-13,
“Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in
Determining Whether to Report Discontinued Operations” (“EITF Issue No. 03-13”).
The consolidated financial statements have been reclassified to conform to
discontinued operations presentation for all historical periods
presented.





Summarized
selected financial information for discontinued operations are as
follows:





(in thousands)
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006Diagnostic
      revenue
                  
                  $
                  —
                  
                  
                  $
                  66
                  
                  
                  $
                  103Operating
      expenses:Cost
      of diagnostics sold
                  
                  
                  —
                  
                  
                  
                  38
                  
                  
                  
                  140Research
      and development
                  
                  
                  4
                  
                  
                  
                  6
                  
                  
                  
                  388Selling,
      general and administrative
                  
                  
                  171
                  
                  
                  
                  778
                  
                  
                  
                  591Total
      operating expenses
                  
                  
                  175
                  
                  
                  
                  822
                  
                  
                  
                  1,119Loss
      from discontinued operations
                  
                  $
                  (175
                  )
                  
                  $
                  (756
                  )
                  
                  $
                  (1,016
                  )





In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” the Company recognizes an impairment loss when circumstances
indicate that the carrying value of long-lived tangible and intangible assets
with finite lives may not be recoverable. Management reviews various
quantitative and qualitative factors in determining whether an impairment
indicator exists, a triggering event. If an analysis is necessitated by the
occurrence of a triggering event, the Company makes certain assumptions in
determining the impairment amount. 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. During the first quarter of 2007, management
reviewed both its original and projected revenue estimates associated with the
Accumin diagnostic tool. As a result of the projected cash flows of the
diagnostic tool, the Company concluded that the intangible asset was impaired
and recorded an impairment charge of approximately $600,000 to write-down
identifiable intangible long-lived assets associated with Accumin. The charge
was included in selling, general and administrative expenses and reflected
within the Company’s discontinued operations.





The
assets and liabilities of discontinued operations are stated separately as of
December 31, 2008 and 2007 on the accompanying consolidated balance sheets. The
major assets and liabilities categories are as follows:





(in thousands)
                    
                    December 31, 2008
                    
                    
                    December 31, 2007AssetsOther
      current assets
                    
                    $
                    —
                    
                    
                    $
                    73Property,
      plant and equipment, net
                    
                    
                    —
                    
                    
                    
                    14Assets
      of discontinued operations
                    
                    $
                    —
                    
                    
                    $
                    87LiabilitiesAccounts
      payable and accrued expenses
                    
                    $
                    120
                    
                    
                    $
                    163Liabilities
      of discontinued operations
                    
                    $
                    120
                    
                    
                    $
                    163




F-20




NOTE
9 - LICENSE AGREEMENTS





In
September 2007, the Company entered into a Sublicense Agreement with Japan
Tobacco Inc. (“JT”) and Torii Pharmaceutical Co., Ltd. (“Torii”), JT's
pharmaceutical business subsidiary, under which JT and Torii obtained the
exclusive sublicense rights for the development and commercialization of ferric
citrate in Japan, which is being developed in the United States under the trade
name Zerenex. JT and Torii are responsible for the future development and
commercialization costs in Japan.





An
upfront payment of $12.0 million, which was received in October 2007, is being
recognized as license revenue on a straight-line basis over the life of the
agreement, which is through the expiration of the last-to-expire patent covered
by the agreement in 2023, and represents the estimated period over which the
Company will have certain ongoing responsibilities under the sublicense
agreement. The Company recorded license revenue of approximately $774,000 and
$204,000 for the years ended December 31, 2008 and 2007, respectively, and, at
December 31, 2008 and 2007, has deferred revenue of approximately $11.0 million
and $11.8 million, respectively, associated with this $12.0 million payment
(approximately $774,000 of which has been classified as a current liability at
December 31, 2008 and 2007).





An
additional milestone payment of $8.0 million, for the achievement of certain
milestones reached in March 2008, was received in April 2008, and is being
recognized as license revenue on a straight-line basis over the life of the
agreement (as discussed above). The Company recorded license revenue of
approximately $406,000 for the year ended December 31, 2008, and, at December
31, 2008, has deferred revenue of approximately $7.6 million (approximately
$533,000 of which has been classified as a current liability) associated with
this $8.0 million payment.





The
Company may receive up to an additional $80.0 million in payments upon the
achievement of pre-specified milestones. In addition, upon commercialization, JT
and Torii will make royalty payments to the Company on net sales of ferric
citrate in Japan.





In
October 2004, the Company entered into a termination agreement with Yissum
Research and Development Company of the Hebrew University of Jerusalem
(“Yissum”), whereby in consideration for the Company’s agreement to a
termination of certain license rights, Yissum agreed to pay the Company 33.3% of
any cash consideration received by Yissum relating to the terminated license
rights, up to $6.0 million. In December 2007, the Company recognized $726,600 of
other revenue, which was received net of $36,330 of income tax
withheld, related to this termination agreement. Payments from Yissum are
recognized as earned since the Company has no responsibilities under the
terminated license agreement or the termination agreement.





NOTE
10 – CONTINGENT EQUITY RIGHTS





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 the 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 former 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.


F-21





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 3 (or other pivotal) clinical trial for any of
      the acquired ACCESS Oncology drug
candidates;




·
            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.





To date,
none of the above milestones have been achieved. 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 former preferred stockholders of ACCESS Oncology do not have a share of the
milestone consideration. 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.
The excess of the net assets acquired over the purchase price represented
negative goodwill of approximately $4,004,000. Since the negative goodwill is a
result of not recognizing contingent consideration (i.e., the contingent equity
rights), the lesser of the negative goodwill ($4,004,000) and the maximum value
of the contingent equity rights at the date of the acquisition ($34,275,000) has
been recorded as a liability, thereby eliminating the negative goodwill. The
value of the contingent equity rights of $34,275,000 was based on the
volume-adjusted weighted average closing price per share of the Company’s common
stock measured over the last seven trading days immediately preceding the
closing of the acquisition ($10.15 per share) multiplied by 3,376,855 shares,
which consist of the sum of the unissued amount of the Company’s common stock
deliverable to the ACCESS Oncology stockholders as milestone consideration
(3,372,422 shares) and to those preferred stockholders of ACCESS Oncology who
have yet to provide the necessary documentation to receive shares of the
Company’s common stock (4,433 shares).





NOTE
11 - STOCKHOLDERS’ EQUITY





Preferred
Stock





The
Company’s amended and restated certificate of incorporation allows it to issue
up to 5,000,000 shares of preferred stock, $0.001 par value, with rights senior
to those of the common stock.





Common
Stock





On June
20, 2007, at the 2007 Annual Meeting of Stockholders, the Company’s stockholders
approved an amendment to the Company’s amended and restated certificate of
incorporation increasing the shares of authorized common stock from 60,000,000
shares to 95,000,000 shares.





On March
29, 2006, the Company completed a registered direct offering of 4,500,000 shares
of its common stock to two institutional investors at $18.40 per share. Total
proceeds to the Company from this public offering were approximately $82.7
million, net of offering expenses of approximately $0.1 million.





During
2006, the Company issued 245,024 shares of its common stock, valued at
approximately $3,310,000, to AusAm, in connection with the Company’s purchase of
Accumin, which closed on April 6, 2006. See Note 6 - Goodwill.


F-22





Treasury
Stock





On
February 14, 2007, the Company’s former Chief Financial Officer surrendered to
the Company 5,973 shares of common stock in order to satisfy his tax withholding
obligation upon the vesting of 16,666 shares of restricted stock. The 5,973
shares of common stock are being held by the Company in Treasury, at a cost of
approximately $70,000, representing the fair market value on the date the shares
were surrendered.





On April
25, 2007, the Company’s former President surrendered to the Company 17,875
shares of common stock in order to satisfy his tax withholding obligation upon
the vesting of 50,000 shares of restricted stock. The 17,875 shares of common
stock are being held by the Company in Treasury, at a cost of approximately
$198,000, representing the fair market value on the date the shares were
surrendered.




Equity
Incentive Plans





The
Company has in effect the following stock option and incentive
plans.





a. The
1999 Stock Option Plan was adopted in November 1999.  Under the 1999
Stock Option Plan, the Company’s board of directors could grant stock-based
awards to directors, consultants and employees. The plan authorizes grants to
purchase up to 4,230,000 shares of authorized but unissued common stock. The
plan limits the term of each option, to no more than 25 years from the date of
the grant, unless otherwise authorized by the board. The plan permits the board
of directors or a committee appointed by the board to administer the
plan.  The administrator has the authority, in its discretion, to
determine the terms and conditions of any option granted to a Company service
provider, including the vesting schedule. As of December 31, 2008, no additional
shares of the Company’s common stock may be issued under the 1999 Stock Option
Plan.





b. The
2000 Stock Option Plan was adopted in June 2000.  Under the 2000 Stock
Option Plan the compensation committee of the Company’s board of directors is
authorized to grant stock-based awards to directors, consultants and employees.
The 2000 plan authorizes grants to purchase up to 4,455,000 shares of authorized
but unissued common stock. The plan limits the term of each option, to no more
than 10 years from the date of the grant, unless authorized by the
board.  As of December 31, 2008, up to 322,051 additional shares may
be issued under the 2000 Stock Option Plan.





c. The
2002 CEO Incentive Stock Option Plan was adopted in December
2002.  Under the 2002 CEO Incentive Stock Option Plan the Company’s
board of directors granted an option to the newly-appointed Chief Executive
Officer of the Company to purchase up to 2,002,657 shares of authorized but
unissued common stock. The option has a term of 10 years from the date of the
grant. The option granted to the newly appointed Chief Executive Officer was
part of a total grant of options issued pursuant to the 1999 Stock Option Plan,
the 2000 Stock Option Plan and the 2002 CEO Incentive Stock Option Plan, to
purchase a total of 4,050,000 shares of the Company’s common
stock.  As of December 31, 2008, the option granted under the 2002 CEO
Incentive Stock Option Plan has fully vested.  In the event of a
merger, acquisition or other change of control or in the event that the Company
terminates the Chief Executive Officer’s employment, either without cause or as
a result of his death or disability, or he terminates his employment for good
reason, the time period during which he shall be allowed to exercise such
options shall be extended to the shorter of two years from the date of the
termination of his employment or December 24, 2012.  No additional
shares of the Company’s common stock may be issued under the 2002 CEO Incentive
Stock Option Plan.





d. The
2004 President Incentive Stock Option Plan was adopted in February
2004.  Under the 2004 President Incentive Stock Option Plan the
Company’s board of directors granted an option to the then newly-appointed
President of the Company to purchase up to 1,000,000 shares of authorized but
unissued common stock. The option has a term of 10 years from the date of the
grant. The option granted to the then newly appointed President was made
pursuant to an employment agreement following the acquisition of ACCESS Oncology
in February 2004. Of this option, 166,667 was to vest over a three-year period
and 833,333 was to vest upon the earlier of the achievement of certain
performance-based milestones or February 5, 2011. As part of the 2008
Restructuring, on March 26, 2008, the Company notified its President that the
Company was terminating his employment, effective April 15, 2008. As a result,
500,000 options were forfeited and, as of December 31, 2008, 500,000 options
remain outstanding and vested under this plan, and will remain exercisable until
April 15, 2010. No additional shares of the Company’s common stock may be issued
under the 2004 President Incentive Stock Option Plan.


F-23





e. The
2004 Long-Term Incentive Plan was adopted in June 2004 by the Company’s
stockholders.  Under the 2004 Long-Term Incentive Plan, the
compensation committee of the Company’s board of directors is authorized to
grant stock-based awards to directors, consultants and employees. The 2004 plan
authorizes grants to purchase up to 4,000,000 shares of authorized but unissued
common stock. The plan limits the term of each option, to no more than 10 years
from the date of their grant.  As of December 31, 2008, up to an
additional 835,408 shares may be issued under the 2004 Long-Term Incentive
Plan.





f. The
2007 Incentive Plan was adopted in June 2007 by the Company’s stockholders.
Under the 2007 Incentive Plan, the compensation committee of the Company’s board
of directors is authorized to grant stock-based awards to directors,
consultants, employees and officers. The 2007 Incentive Plan authorizes grants
to purchase up to 6,000,000 shares of authorized but unissued common stock. The
plan limits the term of each option to no more than 10 years from the date of
their grant. As of December 31, 2008, up to an additional 1,376,469 shares may
be issued under the 2007 Incentive Plan.





The
following table summarizes stock option activity for the years ended December
31, 2008, 2007 and 2006:





Number
                    of shares
                  
                  
                  Weighted-
                    average
                    exercise price
                  
                  Weighted-
                    average
                    Contractual
                    Term
                  
                  Aggregate
                    Intrinsic
                    Value(in
      years)Outstanding
      at December 31, 2005
                  
                  
                  8,024,652
                  
                  
                  $
                  4.26Granted
                  
                  
                  3,699,660
                  
                  
                  
                  14.49Exercised
                  
                  
                  (824,103
                  )
                  
                  
                  2.41Forfeited
      & expired
                  
                  
                  (115,496
                  )
                  
                  
                  7.91Outstanding
      at December 31, 2006
                  
                  
                  10,784,713
                  
                  
                  
                  7.87Granted
                  
                  
                  1,235,769
                  
                  
                  
                  9.67Exercised
                  
                  
                  (138,412
                  )
                  
                  
                  1.96Forfeited
                  
                  
                  (544,730
                  )
                  
                  
                  14.48Expired
                  
                  
                  (468,167
                  )
                  
                  
                  11.31Outstanding
      at December 31, 2007
                  
                  
                  10,869,173
                  
                  
                  
                  7.69Granted
                  
                  
                  243,800
                  
                  
                  
                  4.28Exercised
                  
                  
                  (75,000
                  )
                  
                  
                  2.96
                  
                  
                  
                  $
                  259,900Forfeited
                  
                  
                  (1,326,214
                  )
                  
                  
                  10.29Expired
                  
                  
                  (597,300
                  )
                  
                  
                  8.74Outstanding
      at December 31, 2008
                  
                  
                  9,114,459
                  
                  
                  $
                  7.19
                  
                  5.6
                  
                  $
                  36,678Vested
      and expected to vest at December 31, 2008
                  
                  
                  9,084,275
                  
                  
                  $
                  7.18
                  
                  5.6
                  
                  $
                  36,678Exercisable
      at December 31, 2008
                  
                  
                  7,939,549
                  
                  
                  $
                  6.62
                  
                  5.3
                  
                  $
                  36,678





The
following table summarizes information about stock options outstanding at
December 31, 2008:





Options outstanding
                  
                  
                  Options exercisableRange
      of
                    exercise prices
                  
                  Number
                    outstanding
                  
                  
                  Weighted-
                    average
                    remaining
                    contractual
                    life (years)
                  
                  
                  Weighed-
                    average
                    exercise
                    price
                  
                  
                  Number
                    exercisable
                  
                  
                  Weighed-
                    average
                    exercise
                    price$
      0.10 - $   2.14
                  
                  
                  4,134,319
                  
                  
                  
                  4.8
                  
                  
                  $
                  1.23
                  
                  
                  
                  4,104,319
                  
                  
                  $
                  1.243.01
      -      8.98
                  
                  
                  660,051
                  
                  
                  
                  7.9
                  
                  
                  
                  7.07
                  
                  
                  
                  249,360
                  
                  
                  
                  6.479.25
      -    12.81
                  
                  
                  1,731,350
                  
                  
                  
                  4.7
                  
                  
                  
                  10.62
                  
                  
                  
                  1,560,774
                  
                  
                  
                  10.6013.00
      -    18.06
                  
                  
                  2,588,739
                  
                  
                  
                  6.9
                  
                  
                  
                  14.43
                  
                  
                  
                  2,025,096
                  
                  
                  
                  14.48$
      0.10 - $ 18.06
                  
                  
                  9,114,459
                  
                  
                  
                  5.6
                  
                  
                  $
                  7.19
                  
                  
                  
                  7,939,549
                  
                  
                  $
                  6.62


F-24


Upon the
exercise of stock options, the Company issues new shares. As of December 31,
2008, 3,328,833 options issued to employees and directors, and 93,000 options
issued to consultants, are milestone-based, of which 3,203,833 options issued to
employees and directors, and 43,000 options issued to consultants, are vested
and exercisable.





Certain
employees and consultants have been awarded restricted stock under the 2004
Long-Term Incentive Plan and 2007 Incentive Plan. The time-vesting restricted
stock grants vest primarily over a period of two to four years. The following
table summarizes restricted share activity for the years ended December 31,
2008, 2007 and 2006:





Number of
                      Shares
                    
                    
                    Weighted
                      Average
                      Grant Date
                      Fair Value
                    
                    
                    Aggregate
                      Intrinsic
                      ValueOutstanding
      at December 31, 2005
                    
                    
                    —
                    
                    
                    
                    —Granted
                    
                    
                    100,000
                    
                    
                    $
                    15.30Vested
                    
                    
                    —
                    
                    
                    
                    —Forfeited
                    
                    
                    —
                    
                    
                    
                    —Outstanding
      at December 31, 2006
                    
                    
                    100,000
                    
                    
                    
                    15.30Granted
                    
                    
                    195,000
                    
                    
                    
                    10.28Vested
                    
                    
                    (73,332
                    )
                    
                    
                    11.77Forfeited
                    
                    
                    (83,334
                    )
                    
                    
                    15.30Outstanding
      at December 31, 2007
                    
                    
                    138,334
                    
                    
                    
                    10.09Granted
                    
                    
                    3,976,906
                    
                    
                    
                    0.33Vested
                    
                    
                    (59,168
                    )
                    
                    
                    9.04
                    
                    
                    $
                    27,075Forfeited
                    
                    
                    (73,500
                    )
                    
                    
                    10.19Outstanding
      at December 31, 2008
                    
                    
                    3,982,572
                    
                    
                    $
                    0.36
                    
                    
                    $
                    876,166





As of
December 31, 2008, 1,800,000 shares of restricted stock, which are issued to the
Company’s chief executive officer, are milestone-based, of which none have
vested.





Shares
available for the issuance of stock options or other stock-based awards under
the Company’s stock option and incentive plans were 2,533,928 shares at December
31, 2008.





Warrants





The
following table summarizes warrant activity for the years ended December 31,
2008, 2007 and 2006:





Warrants
                
                
                Weighted-
                  average
                  exercise price
                
                
                Aggregate
                  Intrinsic
                  ValueOutstanding
      at December 31, 2005
                
                
                321,976
                
                
                $
                4.65Issued
                
                
                —
                
                
                
                —Exercised
                
                
                —
                
                
                
                —Canceled
                
                
                —
                
                
                
                —Outstanding
      at December 31, 2006
                
                
                321,976
                
                
                
                4.65Issued
                
                
                —
                
                
                
                —Exercised
                
                
                —
                
                
                
                —Canceled
                
                
                —
                
                
                
                —Outstanding
      at December 31, 2007
                
                
                321,976
                
                
                
                4.65Issued
                
                
                —
                
                
                
                —Exercised
                
                
                —
                
                
                
                —Expired
                
                
                (249,412
                )
                
                
                6.00Outstanding
      at December 31, 2008
                
                
                72,564
                
                
                $
                0.01
                
                
                $
                15,478





The terms
of outstanding warrants as of December 31, 2008 are as follows:





Warrants outstanding
                  
                  
                  Warrants exercisableRange
      of
                    exercise prices
                  
                  Number
                    outstanding
                  
                  
                  Weighted-
                    average
                    remaining
                    contractual
                    life (years)
                  
                  
                  Weighed-
                    average
                    exercise
                    price
                  
                  
                  Number
                    exercisable
                  
                  
                  Weighed-average
                    exercise
                    price$ 
       0.01
                  
                  
                  72,564
                  
                  
                  
                  1.0
                  
                  
                  $
                  0.01
                  
                  
                  
                  72,564
                  
                  
                  $
                  0.01




F-25




Stock-Based
Compensation





The fair
value of stock options granted is estimated at the date of grant using the
Black-Scholes model. The expected term of options granted is derived from
historical data and the expected vesting period. Expected volatility is based on
the historical volatility of the Company’s common stock. The risk-free interest
rate is based on the U.S. Treasury yield for a period consistent with the
expected term of the option in effect at the time of the grant. The Company has
assumed no expected dividend yield, as dividends have never been paid to stock
or option holders and will not be paid for the foreseeable future.





Black-Scholes Option Valuation Assumptions
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006Risk-free
      interest rates
                  
                  
                  2.6%
                  
                  
                  
                  4.1%
                  
                  
                  
                  4.7%Dividend
      yield
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Volatility
                  
                  
                  76.3%
                  
                  
                  
                  68.4%
                  
                  
                  
                  78.3%Weighted-average
      expected term
                  
                  4.3
      years
                  
                  
                  4.8
      years
                  
                  
                  3.1
      years





The
weighted average grant date fair value of options granted was $2.40, $5.69 and
$7.79 per option for the years ended December 31, 2008, 2007 and 2006,
respectively. The Company used historical information to estimate forfeitures
within the valuation model. As of December 31, 2008, there was $3.9 million and
$0.8 million of total unrecognized compensation cost related to non-vested stock
options and restricted stock, respectively, which is expected to be recognized
over a weighted-average period of 2.2 years and 2.4 years, respectively. The
amounts do not include, as of December 31, 2008, 175,000 and 1,800,000 options
and restricted shares outstanding, respectively, which are milestone-based and
vest upon certain corporate milestones, such as FDA approval of the Company’s
drug candidates, market capitalization targets, and change in control.
Stock-based compensation will be measured and recorded if and when a milestone
occurs.





The
following table summarizes stock-based compensation expense information about
stock options and restricted stock for the years ended December 31, 2008, 2007
and 2006:





Year ended December 31,(in thousands)
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006Stock-based
      compensation expense associated with restricted stock (1)
                    
                    $
                    (114
                    )
                    
                    $
                    1,028
                    
                    
                    $
                    189Stock-based
      compensation expense associated with option grants (2)
                    
                    
                    6,862
                    
                    
                    
                    9,632
                    
                    
                    
                    14,723$
                    6,748
                    
                    
                    $
                    10,660
                    
                    
                    $
                    14,912


(1)
              Includes
      a $290,000 credit to compensation expense related to restricted stock
      issued the Company’s former President, who was terminated as part of the
      2008 Restructuring.


(2)
              Includes
      additional non-cash share-based compensation expense during the year ended
      December 31, 2006 of $1,697, relating to previous grants made to a former
      officer and two former directors. The Board of Directors agreed to modify
      their option agreements in 2006 such that their vesting and exercisability
      has been extended beyond the terms of their original
      agreements.





NOTE
12 – INCOME TAXES





As of
December 31, 2008, the Company has U.S. net operating loss carryforwards of
approximately $253.4 million which expire from 2019 through 2028. In addition,
as of the date of the acquisition, ACCESS Oncology had U.S. net operating loss
carryforwards of $14.9 million that start to expire in December
2019.





The
Company has established a valuation allowance against its net deferred tax
assets due to the Company’s history of pre-tax losses and the resulting
likelihood that the deferred tax assets are not realizable. The valuation
allowance for deferred tax assets was $141.8 million and $118.4 million as of
December 31, 2008 and 2007, respectively. At December 31, 2008, deferred tax
assets have not been recorded on net operating loss carryforwards for certain
stock option deductions of $5.1 million.  If the entire deferred tax
asset were realized, $15.9 million would be allocated to paid-in-capital related
to the tax effect of compensation deductions from the exercise of employee and
consultant stock options. Due to the Company’s various equity transactions, the
utilization of certain tax loss carryforwards could be subject to annual
limitations imposed by Internal Revenue Code Section 382 relating to the change
of control provision.


F-26





The
Company recorded
$36,000 in income tax expense for the year ended December 31, 2007, as a result
of Israeli income tax withheld associated with the Yissum revenue (see Note
9). No income tax expense was attributable to income from continuing
operations for the year ended December 31, 2008 and the year ended December 31,
2006. Income tax expense differed from amounts computed by applying the US
federal income tax rate of 35% to pretax loss as follows:





For the year ended December 31,(in thousands)
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006Losses
      from continuing operations before income taxes, as reported in the
      consolidated statements of operations
                  
                  $
                  (52,706
                  )
                  
                  $
                  (89,270
                  )
                  
                  $
                  (72,748
                  )Computed
      “expected” tax benefit
                  
                  
                  (18,447
                  )
                  
                  
                  (31,245
                  )
                  
                  
                  (25,462
                  )Increase
      (decrease) in income taxes resulting from:Expected
      benefit from state & local taxes
                  
                  
                  (4,869
                  )
                  
                  
                  (4,563
                  )
                  
                  
                  (8,050
                  )Change
      in state and local effective tax rate
                  
                  
                  (4,387
                  )
                  
                  
                  4,533
                  
                  
                  
                  (831
                  )Unrecognized
      compensation deduction
                  
                  
                  —
                  
                  
                  
                  7,053
                  
                  
                  
                  —Permanent
      differences
                  
                  
                  523
                  
                  
                  
                  447
                  
                  
                  
                  1,067Withholding
      tax
                  
                  
                  —
                  
                  
                  
                  36
                  
                  
                  
                  —Other
                  
                  
                  (60
                  )
                  
                  
                  159
                  
                  
                  
                  —Change
      in the balance of the valuation allowance for deferred tax assets
      allocated to income tax expense
                  
                  
                  27,240
                  
                  
                  
                  23,616
                  
                  
                  
                  33,276$
                  —
                  
                  
                  $
                  36
                  
                  
                  $
                  —





The
significant components of deferred income tax expense (benefit) attributable to
loss from operations are as follows:





For the year ended December
    31,(in thousands)
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006Deferred
      tax benefit
                  
                  $
                  (27,154
                  )
                  
                  $
                  (23,883
                  )
                  
                  $
                  (36,670
                  )Federal
      deferred tax benefit relating to the exercise of stock
    options
                  
                  
                  (86
                  )
                  
                  
                  267
                  
                  
                  
                  3,394Increase
      in the valuation allowance for deferred tax assets
                  
                  
                  27,240
                  
                  
                  
                  23,616
                  
                  
                  
                  33,276$
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —





The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2008 and 2007
are presented below.





(in thousands)
                  
                  December 31, 2008
                  
                  
                  December 31, 2007Deferred
      tax assets/(liabilities):Net
      operating loss carryforwards
                  
                  $
                  113,752
                  
                  
                  $
                  93,554Net
      operating loss carryforwards (ACCESS Oncology)
                  
                  
                  6,128
                  
                  
                  
                  6,128Non-cash
      compensation
                  
                  
                  13,528
                  
                  
                  
                  10,980Deferred
      revenue
                  
                  
                  4,737
                  
                  
                  
                  5,069Unrealized
      loss on securities
                  
                  
                  1,292
                  
                  
                  
                  —Research
      and development
                  
                  
                  939
                  
                  
                  
                  1,397Intangible
      assets due to different amortization methods
                  
                  
                  1,009
                  
                  
                  
                  1,203Accrued
      compensation
                  
                  
                  299
                  
                  
                  
                  30Other
      temporary differences
                  
                  
                  77
                  
                  
                  
                  67Deferred
      tax asset, excluding valuation allowance
                  
                  
                  141,761
                  
                  
                  
                  118,428Less
      valuation allowance
                  
                  
                  (141,761
                  )
                  
                  
                  (118,428
                  )Net
      deferred tax assets
                  
                  $
                  —
                  
                  
                  $
                  —




F-27


The
Company may be subject to audits by various federal, state and foreign taxing
authorities. The Company regularly reevaluates its tax positions and the
associated interest and penalties, if applicable, resulting from audits of
federal, state and foreign income tax filings, as well as changes in tax law
that would reduce the technical merits of the position to below more likely than
not. Unrecognized tax benefits arise when the estimated benefit recorded in the
financial statements differs from the amounts taken, or expected to be taken, in
a tax return because of the uncertainties described above. Audits of the
Company’s U.S. federal income tax returns for 2004 through 2006 were
completed in 2008. As a result, the Company’s balance of unrecognized tax
benefits was reduced from $7.05 million to $0 at December 31, 2008.





The
Company accounts for interest and penalties related to uncertain tax positions,
if any, in selling, general and administrative expense. As of December 31, 2008
the Company has not accrued any interest and penalties.





NOTE
13 – INTEREST AND OTHER (EXPENSE) INCOME, NET





The
components of interest and other (expense) income, net are as
follows:





For the year ended December 31,(in thousands)
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006Interest
      income
                  
                  $
                  1,349
                  
                  
                  $
                  4,550
                  
                  
                  $
                  6,378Other
      income
                  
                  
                  101
                  
                  
                  
                  5
                  
                  
                  
                  15Gain
      on sale of auction rate securities
                  
                  
                  81
                  
                  
                  
                  —
                  
                  
                  
                  —Impairment
      expense of auction rate securities
                  
                  
                  (3,196
                  )
                  
                  
                  —
                  
                  
                  
                  —$
                  (1,665
                  )
                  
                  $
                  4,555
                  
                  
                  $
                  6,393





In 2008,
the Company recorded impairment charges totaling $3,196,000 for
other-than-temporary declines in the fair value of its auction rate securities
(see Note 3 – Investment Securities, and Note 4 – Fair Value Measurements). In
2008, other income consisted of rental income, and in 2007 and 2006, other
income consisted of rental income from a related-party that terminated in
2007.





NOTE
14 - COMMITMENTS AND CONTINGENCIES





Research
& Development Agreements





The
Company has entered into various research and development agreements (relating to the
Company’s development of Zerenex and KRX-0401)under which it is
obligated to make payments of approximately $413,000 through December 2009. The
following table shows future research and development payment obligations by
period as of December 31, 2008.





(in thousands)
                
                2009
                
                
                2010
                
                
                2011
                
                
                2012
                
                
                2013Research
      and development agreements
                
                $
                413
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —





The table
above includes certain commitments that are contingent upon the Company
continuing development of its drug candidates.


F-28


Leases





The
Company leases its office space under a lease agreement that expires in October
2010. Total rental expense was approximately $658,000, $723,000 and $658,000 for
the years ended December 31, 2008, 2007, and 2006, respectively. The Company
recognized sublet income of $101,000 for the year ended December 31, 2008
related to office sharing agreements.





Future
minimum lease commitments as of December 31, 2008, in the aggregate total
approximately $1,056,000 through 2010. The following table shows future minimum
lease commitments by period as of December 31, 2008.





(in thousands)
                  
                  2009
                  
                  
                  2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  2013Operating
      leases
                  
                  $
                  597
                  
                  
                  $
                  459
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —





During
2004, the Company entered into a lease arrangement with its former President,
Dr. Craig Henderson, for the utilization of part of his residence for office
space associated with the Company’s former employees in San Francisco,
California.  The lease was terminated effective April 15, 2008 as part of
the 2008 Restructuring. The Company has expensed $16,000, $65,000 and $49,000 in
2008, 2007 and 2006, respectively, pursuant to the terms of this arrangement,
which $28,000 was included in accounts payable and accrued expenses in the
accompanying balance sheet as of December 31, 2007. All amounts due have been
paid prior to December 31, 2008.





Royalty
and Contingent Milestone Payments





The
Company has licensed the patent rights to its drug candidates from others. These
license agreements require the Company to make contingent milestone
payments to certain of its licensors. Inaddition, under these
agreements, the Company must pay royalties on sales of products resulting from
licensed technologies.





The
Company has undertaken to make contingent milestone payments to certain of its
licensors of up to approximately $40.8 million over the life of the licenses, of
which approximately $36.4 million will be due upon or following regulatory
approval of the licensed drugs. The Company has also committed to pay to the
former stockholders of ACCESS Oncology certain contingent equity rights (up to
3,372,422 shares of the Company’s common stock) if KRX-0401 meets certain
development milestones. Of the 3,372,422 shares, 500,000 of these shares would
be payable upon achieving the first development milestone. A substantial portion
of the contingent shares would be payable to related parties of the Company. The
contingent equity rights have been recognized as a non-current liability on the
consolidated balance sheet. The uncertainty relating to the timing of the
commitments described in this paragraph prevents the Company from including them
in the table Research and Development Agreements above.





NOTE 15
– BONUS TO OFFICER





Pursuant
to his employment agreement, the Chief Executive Officer of
the Company was entitled to receive a one-time $2 million cash bonus due
to the achievement of a corporate milestone that occurred, and was expensed
and paid in 2006.  Of this amount, $1,000,000 was included in other
research and development expenses and $1,000,000 was included in other selling,
general and administrative expenses for the year ended December 31,
2006.





NOTE
16 – SEGMENT INFORMATION





Until
September 2008, the Company had three reportable segments, which included the
Diagnostics segment. Following the termination of the Accumin diagnostic
product, the Company now has two reportable segments: Services and Products. The
Services business provides clinical trial management and site recruitment
services to other biotechnology and pharmaceutical companies. The Products
business focuses on the acquisition, development and commercialization of
medically important, novel pharmaceutical products for the treatment of
life-threatening diseases, including renal disease and cancer, and also includes
license revenue, other revenue and associated costs.





Segment
information for the years ended December 31, 2008, 2007 and 2006 was as
follows:





Revenue(in thousands)
                
                2008
                
                
                2007
                
                
                2006Services
                
                $
                103
                
                
                $
                52
                
                
                $
                431Products
                
                
                1,180
                
                
                
                931
                
                
                
                —Total
                
                $
                1,283
                
                
                $
                983
                
                
                $
                431


F-29


Operating
      loss(in thousands)
                
                2008
                
                
                2007
                
                
                2006Services
                
                $
                76
                
                
                $
                (72
                )
                
                $
                41Products
                
                
                (51,117
                )
                
                
                (93,753
                )
                
                
                (79,182
                )Total
                
                $
                (51,041
                )
                
                $
                (93,825
                )
                
                $
                (79,141
                )





A
reconciliation of the totals reported for the operating segments to the
consolidated loss from continuing operations is as follows:





Loss
      from continuing operations(in thousands)
                
                2008
                
                
                2007
                
                
                2006Operating
      losses of reportable segments
                
                $
                (51,041
                )
                
                $
                (93,825
                )
                
                $
                (79,141
                )Interest
      and other (expense) income
                
                
                (1,665
                )
                
                
                4,555
                
                
                
                6,393Income
      taxes
                
                
                —
                
                
                
                (36
                )
                
                
                —Consolidated
      loss from continuing operations
                
                $
                (52,706
                )
                
                $
                (89,306
                )
                
                $
                (72,748
                )





Assets
      (1)As
      of December 31,(in thousands)
                  
                  2008
                  
                  
                  2007Services
                  
                  
                  —
                  
                  
                  
                  —Products
                  
                  
                  3,982
                  
                  
                  
                  16,293Total
      assets of reportable segments
                  
                  
                  3,982
                  
                  
                  
                  16,293Cash,
      cash equivalents, interest receivable and investment
      securities
                  
                  
                  22,652
                  
                  
                  
                  64,681Assets
      of discontinued operations
                  
                  
                  —
                  
                  
                  
                  87Consolidated
      total assets
                  
                  $
                  26,634
                  
                  
                  $
                  81,061


(1)
            Assets
      for the Company’s reportable segments include fixed assets, goodwill,
      accounts receivable and prepaid
expenses.





The
carrying amount of goodwill by reportable segment as of December 31, 2008 and
2007 was as follows:





Goodwill(in thousands)
                
                December 31, 2008
                
                
                December 31, 2007Services
                
                
                —
                
                
                
                —Products
                
                $
                3,208
                
                
                $
                3,208Total
                
                $
                3,208
                
                
                $
                3,208


F-30




NOTE
17 - LITIGATION
 
 In July
2003, Keryx (Israel) Ltd., one of the Company’s Israeli subsidiaries, vacated
its Jerusalem facility, after giving advance notice to RMPA Properties Ltd., the
landlord. On May 1, 2005, the landlord filed suit in the Circuit Court of
Jerusalem in Jerusalem, Israel, claiming that Keryx (Israel) Ltd., among other
parties, was liable as a result of the alleged breach of the lease agreement. On
March 3, 2009, the Company entered into a settlement agreement with R.M.P.A.
Properties Ltd., with respect to the dispute. In accordance with the settlement
agreement, in March 2009, the Company paid the landlord a total sum of $260,000
for a full release of all claims and obligations under the lease agreement.
Accordingly, $260,000 was included in accounts payable and accrued expenses at
December 31, 2008.




The
Company prevailed in an arbitration proceeding with Alfa Wasserman concerning
certain terms of the 1998 License Agreement between Alfa Wasserman and the
Company related to the provision of data to Alfa Wasserman and consultation
regarding management of the licensed patents. An arbitration hearing was held in
October 2007 and the arbitrator issued his decision on March 25, 2008, rejecting
Alfa Wasserman’s claims that the Company was in material breach of the License
Agreement. The arbitrator determined that each party would bear its own costs
for the arbitration.





In April
2008, the Company notified Alfa Wasserman of its intention to terminate the
License Agreement. The Company offered to transfer to Alfa Wasserman all
regulatory applications as provided in the License Agreement and demanded
payment by Alfa Wasserman of 25% of the Company’s development costs associated
with sulodexide, as provided in the License Agreement. Alfa Wasserman itself
served a notice of termination of the License Agreement on the alleged grounds
that the Company is in material breach of the agreement for failing to
diligently develop sulodexide by terminating the Phase 4 clinical trial. By
seeking to terminate the License Agreement, Alfa Wasserman is thereby seeking to
avoid reimbursement to Keryx of development costs. The Company intends to submit
its claim for development costs and Alfa Wasserman’s claim of material breach to
arbitration for resolution.





In April
2008, the Company commenced an action in the U.S. District Court for the
Southern District of New York against Panion & BF Biotech, Inc. (“Panion”)
for breaching the manufacturing provisions of the March 14, 2008 Amended and
Restated License Agreement between the Company and Panion, and the implied
covenant of good faith and fair dealing contained therein. The Company sought
declaratory and injunctive relief and damages against Panion.  Panion
asserted counterclaims against the Company for alleged breach of the agreement
and the implied covenant of good faith and fair dealing contained therein and
for alleged breach of fiduciary duties, and sought declaratory and injunctive
relief and damages in the amount of “at least one million dollars.” The Company
replied, denying Panion’s counterclaims. In November 2008, the parties agreed to
settle their dispute. The parties entered into a first amendment to the Amended
and Restated License Agreement by which Panion granted the Company additional
manufacturing and development rights, and the Company paid Panion $200,000 in
November 2008. Following execution of the settlement agreement and first
amendment to the Amended and Restated License Agreement, the parties entered a
voluntary dismissal of the action, including Panion’s asserted
counterclaims.





The
Company in-licensed KRX-0501 from Krenitsky Pharmaceuticals, Inc. (“Krenitsky”)
in 2005. In October 2008, Krenitsky commenced an action in the United States
District Court, Middle District of North Carolina, Durham Division, against the
Company, requesting a declaratory judgment from the court determining that (i)
the Company breached the 2005 License Agreement between Krenitsky and the
Company, (ii) Krenitsky was within its legal rights to terminate the License
Agreement for cause, (iii) the Company has no further rights or interests in the
licensed patents, and (iv) Krenitsky has no further obligations to the Company
under the License Agreement. In December 2008, the parties agreed to settle
their dispute and as a result have entered into a License Termination,
Technology Transfer and Settlement Agreement, whereby the license agreement was
terminated and certain know-how was transferred to Krenitsky in exchange for a
portion of any future license and milestone payments received by Krenitsky
related to KRX-0501 and a royalty on sales of the drug, if any. Following
execution of the Termination, Technology Transfer and Settlement Agreement, the
parties entered a voluntary dismissal of the action.





The
Company is presently engaged in an arbitration proceeding with ICON Central
Laboratories (“ICON”), the central laboratory it used for the clinical
development of Sulonex, concerning certain fees related mainly to the provision
of storage services pursuant to a series of service agreements. In March 2008,
the Company terminated the agreements. ICON is claiming that the Company owes it
$816,647 in unpaid invoices, much of which is made up of charges for annual
storage fees. It is the Company’s position that it should not have to pay for
storage fees incurred after the effective date of the termination of the
agreements, and the Company intends to vigorously defend this proceeding on this
basis, and to assert a counterclaim for a refund of the unused portions of the
annual storage fees already paid to ICON.





F-31




NOTE
18 – RESTRUCTURING




On March 26, 2008, the Company
implemented a strategic restructuring plan to reduce its cash burn rate and
re-focus its development efforts (the “2008 Restructuring”). The 2008
Restructuring, which was prompted by the negative outcome of the Company’s
pivotal SUN-MICRO Phase 3 clinical trial of SulonexTM (sulodexide) for the
treatment of diabetic nephropathy, announced on March 7, 2008, and subsequent
decision by the Company to terminate the ongoing SUN-MACRO Phase 4 clinical
trial, was intended to conserve the financial resources of the Company and
enable it to focus its efforts on programs and opportunities that management
believed were most likely to provide long-term shareholder value. The 2008
Restructuring included a workforce reduction of approximately 50% as compared to
the Company’s workforce at December 31, 2007. Following the workforce reduction,
the Company had approximately 25 full and part-time employees.





As part
of the 2008 Restructuring, on March 26, 2008, the Company notified its
President, I. Craig Henderson, M.D., that the Company was terminating his
employment, effective April 15, 2008. Dr. Henderson remained in his position as
a member of the Company’s Board of Directors until the annual meeting in June
2008. The Company recognized a $1,569,000 credit to expense, in the year ended
December 31, 2008, related to the forfeiture of stock options and restricted
stock issued to Dr. Henderson. In addition, the Company reached a mutual
agreement with its Chief Accounting Officer, Mark Stier, that Mr. Stier resigned
effective June 30, 2008. His responsibilities were assumed by James F. Oliviero,
Vice President, Finance, who was appointed Principal Financial and Accounting
Officer on May 6, 2008.





The
following table summarizes restructuring costs that were provided for and/or
incurred by the Company during the year ended December 31, 2008:





(in thousands)
                    
                    2008Research
      and developmentImpairment
      of manufacturing facility
                    
                    $
                    11,037Manufacturing
      facility restoration
                    
                    
                    2,063Severance
                    
                    
                    624Non-cash
      compensation
                    
                    
                    (1,569
                    )Total
      research and development
                    
                    
                    12,155Selling,
      general and administrativeSeverance
                    
                    
                    99Total
      selling, general and administrative
                    
                    
                    99Total
      restructuring costs
                    
                    $
                    12,254





During
2008, the Company paid out $2,063,000 for the manufacturing facility restoration
and $723,000 for severance obligations.  At December 31, 2008, there
were no remaining restructuring liabilities.





F-32


NOTE
19 – QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)





2008Mar.
      31
              
              
              June
      30
              
              
              Sept.
      30
              
              
              Dec.
      31(in
      thousands, except per share data)Revenue:License
      revenue
              
              $
              199
              
              
              $
              327
              
              
              $
              327
              
              
              $
              327Service
      revenue
              
              
              —
              
              
              
              62
              
              
              
              41
              
              
              
              —Other
      revenue
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Total
      revenue
              
              
              199
              
              
              
              389
              
              
              
              368
              
              
              
              327Operating
      expenses:Cost
      of services
              
              
              —
              
              
              
              14
              
              
              
              13
              
              
              
              —Research
      and development:Non-cash
      compensation
              
              
              (980
              )
              
              
              251
              
              
              
              334
              
              
              
              328Other
      research and development
              
              
              30,827
              
              
              
              4,242
              
              
              
              2,208
              
              
              
              798Total
      research and development
              
              
              29,847
              
              
              
              4,493
              
              
              
              2,542
              
              
              
              1,126Selling,
      general and administrative:Non-cash
      compensation
              
              
              1,717
              
              
              
              1,767
              
              
              
              1,662
              
              
              
              1,669Other
      selling, general and administrative
              
              
              1,887
              
              
              
              2,078
              
              
              
              2,284
              
              
              
              1,225Total
      selling, general and administrative
              
              
              3,604
              
              
              
              3,845
              
              
              
              3,946
              
              
              
              2,894Total
      operating expenses
              
              
              33,451
              
              
              
              8,352
              
              
              
              6,501
              
              
              
              4,020Operating
      loss
              
              
              (33,252
              )
              
              
              (7,963
              )
              
              
              (6,133
              )
              
              
              (3,693
              )Other
      income (expense)Interest
      and other (expense) income, net
              
              
              (1,203
              )
              
              
              274
              
              
              
              (622
              )
              
              
              (114
              )Income
      taxes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Loss
      from continuing operations
              
              
              (34,455
              )
              
              
              (7,689
              )
              
              
              (6,755
              )
              
              
              (3,807
              )Loss
      from discontinued operations
              
              
              (81
              )
              
              
              (8
              )
              
              
              (86
              )
              
              
              —Net
      loss
              
              $
              (34,536
              )
              
              $
              (7,697
              )
              
              $
              (6,841
              )
              
              $
              (3,807
              )Net
      loss per common shareContinuing
      operations
              
              
              (0.79
              )
              
              
              (0.17
              )
              
              
              (0.15
              )
              
              
              (0.08
              )Discontinued
      operations
              
              
              (—
              )*
              
              
              (—
              )*
              
              
              (—
              )*
              
              
              —Basic
      and diluted loss per common share
              
              $
              (0.79
              )
              
              $
              (0.17
              )
              
              $
              (0.15
              )
              
              $
              (0.08
              )




*Amount
less than once cent





2007Mar.
      31
              
              
              June
      30
              
              
              Sept.
      30
              
              
              Dec.
      31(in
      thousands, except per share data)Revenue:License
      revenue
              
              $
              —
              
              
              $
              —
              
              
              $
              41
              
              
              $
              163Service
      revenue
              
              
              12
              
              
              
              14
              
              
              
              11
              
              
              
              15Other
      revenue
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              727Total
      revenue
              
              
              12
              
              
              
              14
              
              
              
              52
              
              
              
              905Operating
      expenses:Cost
      of services
              
              
              32
              
              
              
              30
              
              
              
              28
              
              
              
              34Research
      and development:Non-cash
      compensation
              
              
              995
              
              
              
              1,178
              
              
              
              735
              
              
              
              666Other
      research and development
              
              
              17,444
              
              
              
              15,684
              
              
              
              15,965
              
              
              
              25,790Total
      research and development
              
              
              18,439
              
              
              
              16,862
              
              
              
              16,700
              
              
              
              26,456Selling,
      general and administrative:Non-cash
      compensation
              
              
              2,006
              
              
              
              1,407
              
              
              
              1,780
              
              
              
              1,893Other
      selling, general and administrative
              
              
              2,115
              
              
              
              2,354
              
              
              
              2,062
              
              
              
              2,610Total
      selling, general and administrative
              
              
              4,121
              
              
              
              3,761
              
              
              
              3,842
              
              
              
              4,503Total
      operating expenses
              
              
              22,592
              
              
              
              20,653
              
              
              
              20,570
              
              
              
              30,993Operating
      loss
              
              
              (22,580
              )
              
              
              (20,639
              )
              
              
              (20,518
              )
              
              
              (30,088
              )Other
      income (expense)Interest
      and other (expense) income, net
              
              
              1,441
              
              
              
              1,200
              
              
              
              1,017
              
              
              
              897Income
      taxes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (36
              )Loss
      from continuing operations
              
              
              (21,139
              )
              
              
              (19,439
              )
              
              
              (19,501
              )
              
              
              (29,227
              )Loss
      from discontinued operations
              
              
              (674
              )
              
              
              (21
              )
              
              
              (27
              )
              
              
              (34
              )Net
      loss
              
              $
              (21,813
              )
              
              $
              (19,460
              )
              
              $
              (19,528
              )
              
              $
              (29,261
              )Net
      loss per common shareContinuing
      operations
              
              
              (0.49
              )
              
              
              (0.45
              )
              
              
              (0.45
              )
              
              
              (0.67
              )Discontinued
      operations
              
              
              (0.01
              )
              
              
              (—
              )*
              
              
              (—
              )*
              
              
              (—
              )*Basic
      and diluted loss per common share
              
              $
              (0.50
              )
              
              $
              (0.45
              )
              
              $
              (0.45
              )
              
              $
              (0.67
              )




*Amount
less than once cent


F-33




NOTE
20 – SUBSEQUENT EVENT (UNAUDITED)




In March
2009, the Company’s Japanese partner, JT and Torii, informed the Company that
they had initiated a Phase 2 clinical study in Japan, which triggered a $3
million non-refundable milestone payment which was received by the Company in
March 2009.


F-34




SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.




Date:  March
31, 2009





KERYX
      BIOPHARMACEUTICALS, INC.By:
                  /s/
      Michael S. WeissMichael
      S. Weiss
                    Chairman
      and Chief Executive
Officer




POWER OF
ATTORNEY





KNOW ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints each of Michael S. Weiss and James F. Oliviero, his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and his name, place and stead, in any and all
capacities, to sign any or all amendments to this annual report on Form 10-K,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the SEC, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or any of his substitutes,
may lawfully do or cause to be done by virtue hereof.





Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
Form 10-K has been signed by the following persons on behalf of the Registrant
on March 31, 2009, and in the capacities indicated:





Signatures
                                
                                Title/s/
      Michael S. Weiss
                                
                                Chairman
      and Chief Executive OfficerMichael
      S. Weiss
                                
                                (principal
      executive officer)/s/
      James F. Oliviero
                                
                                Vice
      President, FinanceJames
      F. Oliviero
                                
                                (principal
      financial and accounting officer)/s/
      Kevin Cameron
                                
                                DirectorKevin
      Cameron/s/
      Senator Wyche Fowler, Jr.
                                
                                DirectorSenator
      Wyche Fowler, Jr./s/
      Malcolm Hoenlein
                                
                                DirectorMalcolm
      Hoenlein/s/
      Jack Kaye
                                
                                DirectorJack
      KayeDirectorEric
      A. Rose, M.D./s/
      Michael P. Tarnok
                                
                                DirectorMichael
      P. Tarnok





EXHIBIT
INDEX





ExhibitNumber
                      
                      Exhibit
      Description10.16*
                      
                      First
      Amendment to Amended and Restated License Agreement by and between Panion
      & BF Biotech, Inc. and Keryx Biopharmaceuticals, Inc. dated March 17,
      2008.21.1
                      
                      List
      of subsidiaries of Keryx Biopharmaceuticals, Inc.23.1
                      
                      Consent
      of KPMG LLP.24.1
                      
                      Power
      of Attorney of Director and Officers of Keryx Biopharmaceuticals, Inc.
      (included herein).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
      March 31, 2009.31.2
                      
                      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
      March 31, 2009.32.1
                      
                      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 March 31,
      2009.32.2
                      
                      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 March 31,
      2009.*
                      
                      Confidential
      treatment has been requested with respect to the omitted portions of this
      exhibit.