UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-Q





x 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES  EXCHANGE
ACT OF 1934





For
the quarterly period ended June 30, 2009





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 10022


(Address
including zip code of principal executive offices)





(212)
531-5965


(Registrant's
telephone number, including area code)





Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes x No  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


x
Yes          ̈ No





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.





Large
      accelerated filer   ̈
            Accelerated
      filer  ̈Non-accelerated
      filer     ̈ (Do not check if
      smaller reporting company)
            Smaller
      reporting company x





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


Yes  ̈ No x





There
were 47,838,960 shares of the registrant’s common stock, $0.001 par value,
outstanding as of August 7, 2009.








KERYX
BIOPHARMACEUTICALS, INC.


FORM
10-Q


FOR
THE QUARTER ENDED JUNE 30, 2009





TABLE
OF CONTENTS





PageSPECIAL
      CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
                3PART
      I
                FINANCIAL
      INFORMATION
                4Item
      1
                Financial
      Statements
                4Consolidated
      Balance Sheets as of June 30, 2009 (unaudited) and December 31,
      2008
                4Consolidated
      Statements of Operations for the three and six months ended June 30, 2009
      and 2008 (unaudited)
                5Consolidated
      Statement of Changes in Stockholders’ Equity (Deficiency) for the six
      months ended June 30, 2009 (unaudited)
                6Consolidated
      Statements of Cash Flows for the six months ended June 30, 2009 and 2008
      (unaudited)
                7Notes
      to Consolidated Financial Statements (unaudited)
                8Item
      2
                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                19Item
      3
                Quantitative
      and Qualitative Disclosures About Market Risk
                31Item
      4
                Controls
      and Procedures
                32PART
      II
                OTHER
      INFORMATION
                32Item
      1
                Legal
      Proceedings
                32Item
      1A
                Risk
      Factors
                33Item
      4
                Submission
      of Matters to a Vote of Security Holders
                43Item
      6
                Exhibits
                44


2





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 KRX-0401 (perifosine), ZerenexTM
      (ferric citrate), 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.


3


PART
I. FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS





Keryx
Biopharmaceuticals, Inc.


Consolidated
Balance Sheets as of June 30, 2009 and December 31, 2008


(in
thousands, except share and per share amounts)





June 30, 2009
                
                
                December 31, 2008(Unaudited)AssetsCurrent
      assets:Cash
      and cash equivalents
                
                $
                13,414
                
                
                $
                13,143Short-term
      investment securities
                
                
                —
                
                
                
                2,299Interest
      receivable
                
                
                4
                
                
                
                25Other
      current assets
                
                
                222
                
                
                
                508Total
      current assets
                
                
                13,640
                
                
                
                15,975Long-term
      investment securities
                
                
                7,117
                
                
                
                7,185Property,
      plant and equipment, net
                
                
                137
                
                
                
                182Goodwill
                
                
                3,208
                
                
                
                3,208Other
      assets, net
                
                
                62
                
                
                
                84Total
      assets
                
                $
                24,164
                
                
                $
                26,634Liabilities
      and stockholders’ equity (deficiency)Current
      liabilities:Accounts
      payable and accrued expenses
                
                $
                4,152
                
                
                $
                4,613Accrued
      compensation and related liabilities
                
                
                714
                
                
                
                496Current
      portion of deferred revenue
                
                
                156
                
                
                
                1,464Liabilities
      of discontinued operations
                
                
                —
                
                
                
                120Total
      current liabilities
                
                
                5,022
                
                
                
                6,693Deferred
      revenue, net of current portion
                
                
                —
                
                
                
                17,308Contingent
      equity rights
                
                
                4,004
                
                
                
                4,004Other
      liabilities
                
                
                84
                
                
                
                118Total
      liabilities
                
                
                9,110
                
                
                
                28,123Commitments
      and contingenciesStockholders’
      equity (deficiency):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,
      47,908,908 and 47,729,507 shares issued, 47,828,960 and 47,649,559 shares
      outstanding at June 30, 2009 and December 31, 2008,
      respectively)
                
                
                48
                
                
                
                48Additional
      paid-in capital
                
                
                332,698
                
                
                
                330,738Treasury
      stock, at cost, 79,948 shares at June 30, 2009 and December 31, 2008,
      respectively
                
                
                (357
                )
                
                
                (357
                )Accumulated
      deficit
                
                
                (317,335
                )
                
                
                (331,918
                )Total
      stockholders’ equity (deficiency)
                
                
                15,054
                
                
                
                (1,489
                )Total
      liabilities and stockholders’ equity (deficiency)
                
                $
                24,164
                
                
                $
                26,634





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


4


Keryx
Biopharmaceuticals, Inc.


Consolidated
Statements of Operations


for the
three and six months ended June 30, 2009 and 2008 (Unaudited)


(in
thousands, except share and per share amounts)





Three months ended
                  June 30,
                
                
                Six months ended
                  June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Revenue:License
      revenue
                
                $
                18,289
                
                
                $
                327
                
                
                $
                21,616
                
                
                $
                526Service
      revenue
                
                
                —
                
                
                
                62
                
                
                
                3
                
                
                
                62Other
      revenue
                
                
                75
                
                
                
                —
                
                
                
                75
                
                
                
                —Total
      revenue
                
                
                18,364
                
                
                
                389
                
                
                
                21,694
                
                
                
                588Operating
      expenses:Cost
      of services
                
                
                —
                
                
                
                14
                
                
                
                —
                
                
                
                14Research
      and development:Non-cash
      compensation
                
                
                361
                
                
                
                251
                
                
                
                562
                
                
                
                (729
                )Other
      research and development
                
                
                1,456
                
                
                
                4,242
                
                
                
                2,830
                
                
                
                35,069Total
      research and development
                
                
                1,817
                
                
                
                4,493
                
                
                
                3,392
                
                
                
                34,340Selling,
      general and administrative:Non-cash
      compensation
                
                
                1,028
                
                
                
                1,767
                
                
                
                1,398
                
                
                
                3,484Other
      selling, general and administrative
                
                
                1,528
                
                
                
                2,078
                
                
                
                2,569
                
                
                
                3,965Total
      selling, general and administrative
                
                
                2,556
                
                
                
                3,845
                
                
                
                3,967
                
                
                
                7,449Total
      operating expenses
                
                
                4,373
                
                
                
                8,352
                
                
                
                7,359
                
                
                
                41,803Operating
      income (loss)
                
                
                13,991
                
                
                
                (7,963
                )
                
                
                14,335
                
                
                
                (41,215
                )Interest
      and other income (expense), net
                
                
                141
                
                
                
                274
                
                
                
                248
                
                
                
                (929
                )Income
      (loss) from continuing operations before income taxes
                
                
                14,132
                
                
                
                (7,689
                )
                
                
                14,583
                
                
                
                (42,144
                )Income
      taxes
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Income
      (loss) from continuing operations
                
                
                14,132
                
                
                
                (7,689
                )
                
                
                14,583
                
                
                
                (42,144
                )Loss
      from discontinued operations
                
                
                —
                
                
                
                (8
                )
                
                
                —
                
                
                
                (89
                )Net
      income (loss)
                
                $
                14,132
                
                
                $
                (7,697
                )
                
                $
                14,583
                
                
                $
                (42,233
                )Basic
      net income (loss) per common share:Continuing
      operations
                
                $
                0.30
                
                
                $
                (0.17
                )
                
                $
                0.30
                
                
                $
                (0.96
                )Discontinued
      operations
                
                
                —
                
                
                
                (—
                )*
                
                
                —
                
                
                
                (—
                )*Basic
      net income (loss) per common share
                
                $
                0.30
                
                
                $
                (0.17
                )
                
                $
                0.30
                
                
                $
                (0.96
                )Diluted
      net income (loss) per common share:Continuing
      operations
                
                $
                0.29
                
                
                $
                (0.17
                )
                
                $
                0.30
                
                
                $
                (0.96
                )Discontinued
      operations
                
                
                —
                
                
                
                (—
                )*
                
                
                —
                
                
                
                (—
                )*Diluted
      net income (loss) per common share
                
                $
                0.29
                
                
                $
                (0.17
                )
                
                $
                0.30
                
                
                $
                (0.96
                )Weighted
      average shares used in computing basic net income (loss) per common
      share
                
                
                47,855,425
                
                
                
                44,095,873
                
                
                
                47,854,664
                
                
                
                43,906,974Weighted
      average shares used in computing diluted net income (loss) per common
      share
                
                
                48,189,552
                
                
                
                44,095,873
                
                
                
                48,149,600
                
                
                
                43,906,974





* Amount
less than one cent.


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


5


Keryx
Biopharmaceuticals, Inc.


Consolidated
Statement of Changes in Stockholders’ Equity (Deficiency)


for the
six months ended June 30, 2009 (Unaudited)


(in
thousands, except share amounts)





Common stock
                
                
                Additional
                  paid-inShares
                
                
                Amount
                
                
                capitalBalance
      at December 31, 2008
                
                
                47,729,507
                
                
                $
                48
                
                
                $
                330,738Changes
      during the period:Issuance
      of restricted stock
                
                
                478,539
                
                
                
                —
                *
                
                
                —Forfeiture
      of restricted stock
                
                
                (299,138
                )
                
                
                (—
                )*
                
                
                —Compensation
      in respect of options and restricted stock granted to employees, directors
      and third-parties
                
                
                —
                
                
                
                —
                
                
                
                1,960Net
      income
                
                
                —
                
                
                
                —
                
                
                
                —Balance
      at June 30, 2009
                
                
                47,908,908
                
                
                $
                48
                
                
                $
                332,698





Treasury stock
                
                
                AccumulatedShares
                
                
                Amount
                
                
                Deficit
                
                
                TotalBalance
      at December 31, 2008
                
                
                79,948
                
                
                $
                (357
                )
                
                $
                (331,918
                )
                
                $
                (1,489
                )Changes
      during the period:Issuance
      of restricted stock
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                *Forfeiture
      of restricted stock
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (—
                )*Compensation
      in respect of options and restricted stock granted to employees, directors
      and third-parties
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,960Net
      income
                
                
                —
                
                
                
                —
                
                
                
                14,583
                
                
                
                14,583Balance
      at June 30, 2009
                
                
                79,948
                
                
                $
                (357
                )
                
                $
                (317,335
                )
                
                $
                15,054





* Amount
less than one thousand dollars.





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


6


Keryx
Biopharmaceuticals, Inc.


Consolidated
Statements of Cash Flows


for the
six months ended June 30, 2009 and 2008 (Unaudited)


(in
thousands)





Six months ended
                  June 30,2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
                
                $
                14,583
                
                
                $
                (42,233
                )Loss
      from discontinued operations
                
                
                —
                
                
                
                (89
                )Net
      income (loss) from continuing operations
                
                
                14,583
                
                
                
                (42,144
                )Adjustments
      to reconcile income (loss) from continuing operations to cash flows used
      in operating activities in continuing operations:Stock
      compensation expense
                
                
                1,960
                
                
                
                2,755Depreciation
      and amortization
                
                
                49
                
                
                
                66Impairment
      of investment securities
                
                
                68
                
                
                
                1,875Other
      impairment charges
                
                
                —
                
                
                
                11,037Changes
      in assets and liabilities, net of effects of acquisitions:Decrease
      in other current assets
                
                
                286
                
                
                
                129Decrease
      in accrued interest receivable
                
                
                21
                
                
                
                184Decrease
      in security deposits
                
                
                —
                
                
                
                242Decrease
      in other assets
                
                
                22
                
                
                
                —Decrease
      in accounts payable and accrued expenses
                
                
                (581
                )
                
                
                (9,109
                )Increase
      (decrease) increase in accrued compensation and related
      liabilities
                
                
                218
                
                
                
                (390
                )Decrease
      in other liabilities
                
                
                (34
                )
                
                
                (46
                )(Decrease)
      increase in deferred revenue
                
                
                (18,616
                )
                
                
                7,412Net
      cash used in operating activities in continuing operations
                
                
                (2,024
                )
                
                
                (27,989
                )Net
      cash used in operating activities in discontinued
    operations
                
                
                —
                
                
                
                (107
                )Net
      cash used in operating activities
                
                
                (2,024
                )
                
                
                (28,096
                )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of property, plant and equipment
                
                
                (4
                )
                
                
                (163
                )Investment
      in held-to-maturity short-term securities
                
                
                (1
                )
                
                
                (32
                )Proceeds
      from maturity of held-to-maturity short-term securities
                
                
                2,300
                
                
                
                12,842Investment
      in available-for-sale short-term securities
                
                
                —
                
                
                
                (12,000
                )Proceeds
      from sale of available-for-sale short-term securities
                
                
                —
                
                
                
                22,200Investment
      in held-to-maturity long-term securities
                
                
                —
                
                
                
                (1
                )Net
      cash provided by investing activities
                
                
                2,295
                
                
                
                22,846CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from exercise of options and warrants
                
                $
                —
                
                
                $
                222Net
      cash provided by financing activities
                
                
                —
                
                
                
                222NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                
                
                271
                
                
                
                (5,028
                )Cash
      and cash equivalents at beginning of period
                
                
                13,143
                
                
                
                19,065CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                
                $
                13,414
                
                
                $
                14,037





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


7


Keryx
Biopharmaceuticals, Inc.


Notes to
Consolidated Financial Statements (unaudited)


NOTE
1 - GENERAL





Basis
of Presentation





Keryx
Biopharmaceuticals, Inc. and subsidiaries (“Keryx” or the “Company”) is a
biopharmaceutical company focused on the acquisition, development and
commercialization of medically important pharmaceutical products for the
treatment of life-threatening diseases, including renal disease and cancer. Most
of the Company's biopharmaceutical development and substantially all of its
administrative operations during the three and six months ending June 30, 2009
and 2008 were conducted in the United States of America.





The
accompanying unaudited consolidated financial statements were prepared in
accordance with U.S. generally accepted accounting principles (“GAAP”) for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they may not include all of
the information and footnotes required by GAAP for complete financial
statements. All adjustments that are, in the opinion of management, of a normal
recurring nature and are necessary for a fair presentation of the consolidated
financial statements have been included. Nevertheless, these financial
statements should be read in conjunction with the Company's audited consolidated
financial statements contained in its Annual Report on Form 10-K for the year
ended December 31, 2008. The results of operations for the three and six months
ended June 30, 2009 are not necessarily indicative of the results that may be
expected for the entire fiscal year or any other interim period.





The
Company has incurred substantial operating losses since its inception and,
except for the three and six months ended June 30, 2009, expects to continue to
incur operating losses for the foreseeable future and may never become
profitable. As of June 30, 2009, the Company has an accumulated deficit of
$317.3 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 June 30, 2009, with the
additional $3.5 million of settlement proceeds from Alfa Wassermann S.p.A (see
Note 8), but exclusive of its holdings in auction rate securities, are
sufficient to meet the Company’s anticipated working capital needs and fund its
business plan through the end of the second quarter of 2010. However, if the
Company is not able to receive proceeds from some portion of its auction rate
securities by the third 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 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.





In
addition to the Company’s restructuring efforts in March 2008 (see Note 4 -
Restructuring), in an ongoing effort to further reduce costs, there have been
additional staff reductions through June 30, 2009. As of June 30, 2009, the
Company had 15 full and part-time employees.


8





The
Company’s common stock is listed on the NASDAQ Capital Marketand trades
under the symbol “KERX.” On June 17, 2009, the Company issued a press release
announcing that the Company received a letter from The NASDAQ Stock Market
confirming that it had regained compliance with the minimum bid price
requirement for continued listing on The NASDAQ Capital Market under Listing
Rule 5550(a)(2). The Company also received a letter from the NASDAQ Listing
Qualifications Hearings Panel (the “Panel”) confirming that it had demonstrated
a market value of listed securities over the required minimum of $35 million for
10 consecutive trading days, for continued listing on The NASDAQ Capital Market
under Listing Rule 5550(b)(2), and that the Panel had determined to continue the
listing of the Company’s securities on The NASDAQ Stock Market.





Changes
in Company Management





On April
23, 2009, the Company’s Board of Directors voted to terminate the employment of
Michael S. Weiss as the Company’s Chairman and Chief Executive Officer. Under
the terms of Mr. Weiss’ employment agreement with the Company dated December 23,
2002, as amended on December 26, 2008 (the “Employment Agreement”), he remained
an employee of the Company for a period of 90 days; however, during such notice
period, he did not serve as the Company’s Chairman and Chief Executive
Officer.





The
Employment Agreement provided that Mr. Weiss was entitled to receive as
severance (i) a lump-sum payment equal to one year's base salary, payable after
a six-month delay, as required under Section 409A of the tax code, (ii) payment
of his salary during the 90 days following formal notice of termination of
employment, and (iii) a pro rata bonus for the year of termination, determined
with respect to the amount to which Mr. Weiss would have been entitled for the
year of termination (based upon the achievement of corporate goals and
objectives) if he had remained employed throughout the calendar year, payable at
the time bonuses are paid to other executives. In addition, under the terms of
the Employment Agreement, all of Mr. Weiss’ outstanding stock options and shares
of restricted stock vested, and all stock options will remain exercisable for
two years following termination. In the second quarter of 2009, the Company
recorded approximately $551,000 of expense, in other selling, general and
administrative expenses, associated with the cash severance and salary during
the notice period (excluding a pro rata bonus, if any, which is not determinable
at this time), and approximately $660,000 in non-cash compensation expense
(selling, general and administrative) associated with the equity modifications
of Mr. Weiss’ outstanding stock options and shares of restricted
stock.





On April
23, 2009, Michael P. Tarnok, who has served on the Company’s Board of Directors
since September 2007, was appointed Interim Chairman and Chief Executive Officer
of the Company.





On
May 20, 2009, the Company announced that it appointed Ron Bentsur as Chief
Executive Officer of the Company. The terms of Mr. Bentsur’s employment are
being finalized and will be set forth in an employment agreement with the
Company.  As an inducement to his employment, on May 20, 2009, the
Company granted Mr. Bentsur options to purchase 600,000 shares of Company common
stock, at an exercise price equal to the fair market value of the stock as of
the date of grant.  The options will vest in equal annual installments
over a four-year period or upon an earlier change in control of the
Company.  The options were granted as an inducement award and were not
issued under the Company’s 2007 Incentive Plan. As of June 30, 2009, there are
no unrecorded obligations that would have been recorded in the three or six
months ended June 30, 2009, related to the employment agreement.





On June
16, 2009, Ron Bentsur was appointed to the Board of Directors of the Company by
unanimous vote of the Board of Directors, and Michael P. Tarnok was
appointed Chairman of the Board by unanimous vote of the Board of
Directors.





Cash
and Cash Equivalents





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





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 2 – Fair Value Measurements.
Other-than-temporary impairment charges are included in interest and other
income (expense), net.


9





The
following table summarizes the Company’s investment securities at June 30, 2009
and December 31, 2008:





(in thousands)
                      
                      June 30, 2009
                      
                      
                      December 31, 2008Short-term
      investment securities:Obligations
      of domestic governmental agencies (matured May 2009)
      (held-to-maturity)
                      
                      $
                      —
                      
                      
                      $
                      2,299Long-term
      investment securities:Auction
      rate securities (mature between 2037 and 2047) (available-for-sale)
      ($10.0 million par value)
                      
                      $
                      7,117
                      
                      
                      $
                      7,185





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 terms of the license agreement may include
payment to the Company of non-refundable up-front license fees, milestone
payments if specified objectives are achieved, and/or royalties on product
sales. The Company recognizes revenue from upfront 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 recognizes milestone payments as revenue
upon the achievement of specified milestones only if (1) the milestone
payment is non-refundable, (2) substantive effort is involved in achieving
the milestone, (3) the amount of the milestone is reasonable in relation to
the effort expended or the risk associated with achievement of the milestone,
and (4) the milestone is at risk for both parties. If any of these
conditions are not met, the Company defers the milestone payment and recognizes
it as revenue over the estimated period of performance under the contract (see
Note 5).





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 fees and payments arising from technology transfer,
termination and settlement agreements related to the Company’s prior license
agreements. Other revenues are recognized at the time such fees and payments are
earned.





Stock-Based
Compensation





The
Company adopted SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”) on
January 1, 2006 using the modified prospective transition method. 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. 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.





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”).


10


Income
Taxes





As of
June 30, 2009, the Company has U.S. net operating loss carryforwards of
approximately $276 million which expire from 2019 through 2028. 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. 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.





The
Company has not recorded any income tax provision for the three and six months
ended June 30, 2009, since pursuant to the provisions of SFAS 109, “Accounting
for Income Taxes,” the Company has estimated that its estimated annual effective
income tax rate will be zero.





The
Company is not aware of any FIN 48 tax liabilities which would impact the
financial statements.





Basic
and Diluted Net Income (Loss) per Common Share





The
Company follows the provisions of SFAS 128, “Earnings per Share.” Basic net
income or loss per share is based upon the weighted average number of common
shares outstanding during the period. Diluted net income or loss per share is
based upon the weighted average number of common shares outstanding during the
period, plus the effect of additional weighted average common equivalent shares
outstanding during the period when the effect of adding such shares is dilutive.
Common equivalent shares result from the assumed exercise of outstanding stock
options and warrants (the proceeds of which are then assumed to have been used
to repurchase outstanding stock using the treasury stock method). In addition,
under SFAS No. 123R, the assumed proceeds under the treasury stock method
include the average unrecognized compensation expense of stock options that are
in-the-money. This results in the “assumed” buyback of additional shares,
thereby reducing the dilutive impact of stock options and warrants. Common
equivalent shares have not been included in the net loss per share calculations
for the three and six months ended June 30, 2008 because the effect of including
them would have been anti-dilutive. Total potential gross common equivalent
shares consisted of the following:





June 30, 2009
                  
                  
                  March 31, 2009Stock
      options
                  
                  
                  365,652
                  
                  
                  
                  305,652Warrants
                  
                  
                  72,564
                  
                  
                  
                  72,564Total
                  
                  
                  438,216
                  
                  
                  
                  378,216





Basic and
diluted net income (loss) per share were determined as follows:





Three months ended
                  June 30,
                
                
                Six months ended
                  June 30,(in thousands, except share and per share amounts)
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008Basic:Income
      (loss) from continuing operations
                
                $
                14,132
                
                
                $
                (7,689
                )
                
                $
                14,583
                
                
                $
                (42,144
                )Loss
      from discontinued operations
                
                
                —
                
                
                
                (8
                )
                
                
                —
                
                
                
                (89
                )Net
      income (loss)
                
                $
                14,132
                
                
                $
                (7,697
                )
                
                $
                14,583
                
                
                $
                (42,233
                )Weighted
      average shares outstanding
                
                
                47,855,425
                
                
                
                44,095,873
                
                
                
                47.854.664
                
                
                
                43,906,974Basic
      net income (loss) per common share:Continuing
      operations
                
                $
                0.30
                
                
                $
                (0.17
                )
                
                $
                0.30
                
                
                $
                (0.96
                )Discontinued
      operations
                
                
                —
                
                
                
                (—
                )*
                
                
                —
                
                
                
                (—
                )*Basic
      net income (loss) per common share
                
                $
                0.30
                
                
                $
                (0.17
                )
                
                $
                0.30
                
                
                $
                (0.96
                )Diluted:Income
      (loss) from continuing operations
                
                $
                14,132
                
                
                $
                (7,689
                )
                
                $
                14,583
                
                
                $
                (42,144
                )Loss
      from discontinued operations
                
                
                —
                
                
                
                (8
                )
                
                
                —
                
                
                
                (89
                )Net
      income (loss)
                
                $
                14,132
                
                
                $
                (7,697
                )
                
                $
                14,583
                
                
                $
                (42,233
                )Weighted
      average shares outstanding
                
                
                47,855,425
                
                
                
                44,095,873
                
                
                
                47,854,664
                
                
                
                43,906,974Effect
      of dilutive options and warrants
                
                
                334,127
                
                
                
                —
                
                
                
                294,936
                
                
                
                —Weighted
      average shares outstanding assuming dilution
                
                
                48,189,552
                
                
                
                44,095,873
                
                
                
                48,149,600
                
                
                
                43,906,974Diluted
      net income (loss) per common share:Continuing
      operations
                
                $
                0.29
                
                
                $
                (0.17
                )
                
                $
                0.30
                
                
                $
                (0.96
                )Discontinued
      operations
                
                
                —
                
                
                
                (—
                )*
                
                
                —
                
                
                
                (—
                )*Diluted
      net income (loss) per common share
                
                $
                0.29
                
                
                $
                (0.17
                )
                
                $
                0.30
                
                
                $
                (0.96
                )


11





The
Company did not include the securities in the following table in the computation
of diluted net income (loss) per common share because the securities were
anti-dilutive during the corresponding period:





Three months ended
                  June 30,
                
                
                Six months ended
                  June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Stock
      options
                
                
                9,259,472
                
                
                
                9,524,640
                
                
                
                9,319,472
                
                
                
                9,524,640Warrants
                
                
                —
                
                
                
                321,976
                
                
                
                —
                
                
                
                321,976Total
                
                
                9,259,472
                
                
                
                9,846,616
                
                
                
                9,319,472
                
                
                
                9,846,616





Comprehensive
Loss





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





Accounting
for Manufacturing Suite





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 the six
months ended June 30, 2008, to write the assets down to their fair value of
$300,000, the amount for which the assets were subsequently sold during 2008.
The sale of the assets offset a related 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 six
months ended June 30, 2008, for costs related to the required restoration of the
leased facility to its original condition. See Note 4 –
Restructuring.





Impairment
of Goodwill





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 was 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.





Subsequent
Events





The
Company has performed a review of events subsequent to the balance sheet date
through August 11, 2009, the date the financial statements were available for
issuance.


12


NOTE
2 – 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
June 30, 2009, $7.1 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 June 30, 2009, 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 $0
and $0.1 million during the three months ended June 30, 2009 and 2008,
respectively, and $0.1 and $1.9 million during the six months ended June 30,
2009 and 2008, respectively, 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 income (expense), net. The estimated fair value
of the Company’s remaining auction rate securities is $7.1 million at June 30,
2009.





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.





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.


13





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 June 30, 2009:





Financial assets at fair value
                    as of June 30, 2009(in thousands)
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3Money
      market funds (1)
                  
                  $
                  13,414
                  
                  
                  $
                  —
                  
                  
                  $
                  —Auction
      rate securities (2)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  7,117Total
                  
                  $
                  13,414
                  
                  
                  $
                  —
                  
                  
                  $
                  7,117





(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)
            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 six months ended June 30, 2009:





(in thousands)
                  
                  Available-for-sale
                    long-term
                    investmentsBalance
      at January 1, 2009
                  
                  $
                  7,185Total
      impairment charges included in net loss
                  
                  
                  (68
                  )Balance
      at June 30, 2009
                  
                  $
                  7,117





NOTE
3 – STOCKHOLDERS' EQUITY





Equity
Incentive Plans





The
following table summarizes stock option activity for the six months ended June
30, 2009:





Number
                  of shares
                
                
                Weighted-
                  average
                  exercise price
                
                
                Weighted-
                  average
                  Contractual
                  Term
                
                
                Aggregate
                  Intrinsic
                  Value(in years)Outstanding
      at December 31, 2008
                
                
                9,114,459
                
                
                $
                7.19Granted
                
                
                640,000
                
                
                
                0.39
                
                
                
                4.8Exercised
                
                
                —
                
                
                
                —
                
                
                
                
                
                
                $
                —Forfeited
                
                
                (112,597
                )
                
                
                7.26Expired
                
                
                (16,738
                )
                
                
                12.55Outstanding
      at June 30, 2009
                
                
                9,625,124
                
                
                $
                6.72
                
                
                
                3.7
                
                
                $
                599,722Vested
      and expected to vest at June 30, 2009
                
                
                9,589,409
                
                
                $
                6.73
                
                
                
                3.6
                
                
                $
                588,667Exercisable
      at June 30, 2009
                
                
                8,467,809
                
                
                $
                6.86
                
                
                
                3.0
                
                
                $
                269,722





Upon the
exercise of stock options, the Company issues new shares. As of June 30, 2009,
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.





On May
20, 2009, the Company granted Ron Bentsur options to purchase 600,000 shares of
Company common stock at an exercise price of $0.35, the fair market value of the
stock on the date of grant. The options will vest in equal annual
installments over a four-year period or upon an earlier change in control of the
Company. The options were granted as an inducement award and were not
issued under the Company’s 2007 Incentive Plan.


14





Certain
employees, directors and consultants have been awarded restricted stock under
the 2004 Long-Term Incentive Plan and 2007 Incentive Plan. Generally, the
restricted stock vests over a period of two to four years. The following table
summarizes restricted share activity for the six months ended June 30,
2009:





Number of
                    Shares
                  
                  
                  Weighted
                    Average
                    Grant Date
                    Fair Value
                  
                  
                  Aggregate
                    Intrinsic
                    ValueOutstanding
      at December 31, 2008
                  
                  
                  3,982,572
                  
                  
                  $
                  0.36Granted
                  
                  
                  478,539
                  
                  
                  
                  0.43Vested
                  
                  
                  (2,700,567
                  )
                  
                  
                  0.30
                  
                  
                  $
                  1,307,712Forfeited
                  
                  
                  (299,138
                  )
                  
                  
                  0.32Outstanding
      at June 30, 2009
                  
                  
                  1,461,406
                  
                  
                  $
                  0.50
                  
                  
                  $
                  1,315,265





Shares
available for the issuance of stock options or other stock-based awards under
the Company’s stock option and incentive plans were 2,443,862 shares at June 30,
2009.





Warrants





Warrants
                  
                  
                  Weighted-
                    average
                    exercise price
                  
                  
                  Aggregate
                    Intrinsic
                    ValueOutstanding
      at December 31, 2008
                  
                  
                  72,564
                  
                  
                  $
                  0.01Issued
                  
                  
                  —
                  
                  
                  
                  —Exercised
                  
                  
                  —
                  
                  
                  
                  —Canceled
                  
                  
                  —
                  
                  
                  
                  —Outstanding
      at June 30, 2009
                  
                  
                  72,564
                  
                  
                  $
                  0.01
                  
                  
                  $
                  64,821





Stock-Based
Compensation





The
Company incurred $1,389,000 and $2,018,000 of non-cash compensation expense
related to equity incentive grants during the three months ended June 30, 2009
and 2008, respectively, and $1,960,000 and $2,755,000 during the six months
ended June 30, 2009 and 2008, respectively. The fair value of stock options
granted is estimated at the date of grant using the Black-Scholes pricing 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
                
                Three months ended June 30,
                
                
                Six months ended June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Risk-free
      interest rates
                
                
                2.0
                %
                
                
                2.9
                %
                
                
                2.0
                %
                
                
                2.6
                %Dividend
      yield
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Volatility
                
                
                123.3
                %
                
                
                111.0
                %
                
                
                123.3
                %
                
                
                76.3
                %Weighted-average
      expected term
                
                4.8
      years
                
                
                2.0
      years
                
                
                4.8
      years
                
                
                4.3
      years





The
weighted average grant date fair value of options granted for the three months
ended June 30, 2009 and 2008 was $0.32 and $0.28 per option, respectively, and
for the six months ended June 30, 2009 and 2008 was $0.32 and $2.40 per option.
The Company used historical information to estimate forfeitures within the
valuation model. As of June 30, 2009, there was $1.8 million and $0.6 million of
total unrecognized compensation cost related to non-vested stock options and
restricted stock, respectively, which is expected to be recognized over
weighted-average periods of 1.8 years and 2.1 years, respectively. These amounts
do not include, as of June 30, 2009, 175,000 options outstanding 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.


15





On April
23, 2009, the Company’s Board of Directors voted to terminate the employment of
Michael S. Weiss as the Company’s Chairman and Chief Executive Officer (see Note
1). Under the terms of Mr. Weiss’ employment agreement, 1,800,000 shares of
restricted stock vested, which is included in the restricted share activity
table above. In addition, all of Mr. Weiss’ outstanding stock options vested and
will remain exercisable for two years following termination. In the second
quarter of 2009, the Company recorded approximately $660,000 in non-cash
compensation expense (selling, general and administrative) associated with the
equity modifications of Mr. Weiss’ outstanding stock options and shares of
restricted stock.





NOTE
4 – 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 six months
ended June 30, 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,
the Company’s current Chief Financial Officer, 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 comparable six months ended June 30,
2008:





Six months ended(in thousands)
                  
                  June 30, 2008Research
      and developmentImpairment
      of manufacturing facility
                  
                  $
                  11,037Manufacturing
      facility restoration provision
                  
                  
                  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





At
December 31, 2008 and June 30, 2009, there were no remaining restructuring
liabilities.


16


NOTE
5 - LICENSE AGREEMENT





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. Effective as of June 8, 2009, the Company
entered into an Amended and Restated Sublicense Agreement (the “Revised
Agreement”) with JT and Torii, which, among other things, provided for the
elimination of all significant on-going obligations under the sublicense
agreement. Accordingly, in accordance with the Company’s revenue recognition
policies, all remaining deferred revenue pertaining to this sublicense has been
recognized in the three months ended June 30, 2009.





Prior to
the Revised Agreement, an upfront payment of $12.0 million, which was received
in October 2007, was 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 represented the
estimated period over which the Company had certain significant ongoing
responsibilities under the original sublicense agreement. An additional
milestone payment of $8.0 million, for the achievement of certain milestones
reached in March 2008, was received in April 2008, and was being recognized as
license revenue on a straight-line basis over the life of the original agreement
(as discussed above). As a result of the signing of the Revised Agreement, as
discussed above, the unamortized portion of the upfront payment of $12.0 million
and the additional milestone payment of $8.0 million, approximately $18.0
million, was recognized in the three months ended June 30, 2009.





In March
2009, the Company’s Japanese partner, JT and Torii, informed the Company that
they had initiated a Phase 2 clinical study of Zerenex in Japan, which triggered
a $3.0 million non-refundable milestone payment, which was received by the
Company in March 2009. As a result, the Company recorded license revenue of $3.0
million in accordance with its revenue recognition policy, which is included in
the six months ended June 30, 2009.





The
Company may receive up to an additional $77.0 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.





NOTE
6 – 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)
                  
                  Six months ended
                    June 30, 2008Diagnostic
      revenue
                  
                  $
                  —Operating
      expenses:Cost
      of diagnostics sold
                  
                  
                  —Research
      and development
                  
                  
                  2Selling,
      general and administrative
                  
                  
                  87Total
      operating expenses
                  
                  
                  89Loss
      from discontinued operations
                  
                  $
                  (89
                  )


17





The
assets and liabilities of discontinued operations are stated separately as of
June 30, 2009 and December 31, 2008 on the accompanying consolidated balance
sheets. The major assets and liabilities categories are as follows:





(in thousands)
                        
                        June 30, 2009
                        
                        
                        December 31, 2008AssetsAssets
      of discontinued operations
                        
                        $
                        —
                        
                        
                        $
                        —LiabilitiesAccounts
      payable and accrued expenses
                        
                        $
                        120
                        
                        
                        $
                        120Liabilities
      of discontinued operations
                        
                        $
                        120
                        
                        
                        $
                        120





NOTE
7 – SEGMENT INFORMATION





The
Company 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
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 three month and six month periods were as
follows:





RevenueThree months ended June 30,
                  
                  
                  Six months ended June 30,(in thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Services
                  
                  $
                  —
                  
                  
                  $
                  62
                  
                  
                  $
                  3
                  
                  
                  $
                  62Products
                  
                  
                  18,364
                  
                  
                  
                  327
                  
                  
                  
                  21,691
                  
                  
                  
                  526Total
                  
                  $
                  18,364
                  
                  
                  $
                  389
                  
                  
                  $
                  21,694
                  
                  
                  $
                  588





Operating income (loss)Three months ended June 30,
                
                
                Six months ended June 30,(in thousands)
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008Services
                
                $
                —
                
                
                
                48
                
                
                $
                3
                
                
                
                48Products
                
                
                13,991
                
                
                
                (8,011
                )
                
                
                14,332
                
                
                
                (41,263
                )Total
                
                $
                13,991
                
                
                $
                (7,963
                )
                
                $
                14,335
                
                
                $
                (41,215
                )





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





Income (loss) from continuing operationsThree months ended June 30,
                
                
                Six months ended June 30,(in thousands)
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008Operating
      income (loss) of reportable segments
                
                $
                13,991
                
                
                $
                (7,963
                )
                
                $
                14,335
                
                
                $
                (41,215
                )Interest
      and other income (expense), net
                
                
                141
                
                
                
                274
                
                
                
                248
                
                
                
                (929
                )Income
      taxes
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Consolidated
      income (loss) from continuing operations
                
                $
                14,132
                
                
                $
                (7,689
                )
                
                $
                14,583
                
                
                $
                (42,144
                )





Assets (1)(in thousands)
                  
                  June 30, 2009
                  
                  
                  December 31, 2008Services
                  
                  $
                  —
                  
                  
                  $
                  —Products
                  
                  
                  3,629
                  
                  
                  
                  3,982Total
      assets of reportable segments
                  
                  
                  3,629
                  
                  
                  
                  3,982Cash,
      cash equivalents, interest receivable and investment
      securities
                  
                  
                  20,535
                  
                  
                  
                  22,652Consolidated
      total assets
                  
                  $
                  24,164
                  
                  
                  $
                  26,634


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


18





The
carrying amount of goodwill by reportable segment as of June 30, 2009 and
December 31, 2008 was as follows:





Goodwill(in thousands)
                
                June 30, 2009
                
                
                December 31, 2008Services
                
                
                —
                
                
                
                —Products
                
                $
                3,208
                
                
                $
                3,208Total
                
                $
                3,208
                
                
                $
                3,208





NOTE
8 – SUBSEQUENT EVENT





On August
4, 2009, the Company announced that it settled a dispute with Alfa Wassermann
S.p.A. over issues arising from the terminated license agreement for Sulonex
(sulodexide). Under the terms of the settlement agreement, Alfa Wassermann will
pay the Company US$3,500,000 (of which US$2,750,000 was received on July 31,
2009, and US$750,000 will be paid on or before July 30, 2010), and the Company
is required to deliver to Alfa Wassermann all of its data, information and other
intellectual property related to Sulonex.





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





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





The
following discussion and analysis contains forward-looking statements about our
plans and expectations of what may happen in the future. Forward-looking
statements are based on a number of assumptions and estimates that are
inherently subject to significant risks and uncertainties, and our results could
differ materially from the results anticipated by our forward-looking statements
as a result of many known or unknown factors, including, but not limited to,
those factors discussed in “Risk Factors.” See also the “Special Cautionary
Notice Regarding Forward-Looking Statements” set forth at the beginning of this
report.





You
should read the following discussion and analysis in conjunction with the
unaudited consolidated financial statements, and the related footnotes thereto,
appearing elsewhere in this report, and in conjunction with management’s
discussion and analysis and the audited consolidated financial statements
included in our annual report on Form 10-K for the year ended December 31,
2008.





OVERVIEW





We are a
biopharmaceutical company focused on the acquisition, development and
commercialization of medically important pharmaceutical products for the
treatment of life-threatening diseases, including renal disease and cancer. We
are developing KRX-0401 (perifosine), a novel, potentially first-in-class, oral
anti-cancer agent that inhibits the phosphoinositide 3-kinase (PI3K)/Akt
pathway, a key signaling cascade that has been shown to induce cell growth and
cell transformation. KRX-0401 has demonstrated both safety and clinical efficacy
in several adult and pediatric tumor types, both as a single agent and in
combination with novel therapies. 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, with a Phase 3 in multiple myeloma, under
Special Protocol Assessment, or SPA, pending commencement.





We are
also developing ZerenexTM (ferric citrate), an oral, iron-based compound that has
the capacity to bind to phosphate and form non-absorbable complexes. Zerenex has
recently completed a U.S. Phase 2 clinical program as a treatment for
hyperphosphatemia (elevated phosphate levels) in patients with end-stage renal
disease, or ESRD, and we are in the process of finalizing the U.S. Phase 3
program for Zerenex in consultation with the FDA. Zerenex is also in Phase 2
development in Japan by our Japanese partner, Japan Tobacco Inc. (“JT”) and
Torii Pharmaceutical Co., Ltd. (“Torii”).


19


We also
actively engage in business development activities that include seeking
strategic relationships for our product candidates, as well as evaluating
compounds and companies for in-licensing or acquisition. 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, JT and
Torii.





The table
below summarizes the status of our product pipeline.





Product candidate
                  
                  Target indication
                  
                  Development statusKRX-0401 (perifosine)
                  
                  Multiple myeloma
                    Multiple other forms of
    cancer
                  
                  Phase 3 pending, under SPA.
                    Phase 2 trials ongoing.ZerenexTM
      (ferric citrate)
                  
                  Hyperphosphatemia
      in patients with
                    end-stage renal
      disease
                  
                  U.S.
      Phase 2 complete;
                    U.S.
      Phase 3 program pending;
                    Japan
      Phase 2 ongoing by sublicensee (JT and
Torii).





KRX-0401
(perifosine)





Multiple
Myeloma





On August
3, 2009, we announced that we had reached agreement with the FDA regarding a
Special Protocol Assessment (SPA) on the design of a Phase 3 trial for KRX-0401
(perifosine) in relapsed or relapsed / refractory multiple myeloma patients
previously treated with bortezomib (VELCADE®). The
SPA provides agreement that the Phase 3 study design adequately addresses
objectives in support of a regulatory submission. The trial, entitled, “A Phase
3 Randomized Study to Assess the Efficacy and Safety of Perifosine Added to the
Combination of Bortezomib and Dexamethasone in Multiple Myeloma Patients
Previously Treated with Bortezomib” will be a double-blind, placebo-controlled
trial comparing the efficacy and safety of KRX-0401 versus placebo when combined
with bortezomib and dexamethasone. The trial, powered at 90%, will enroll
approximately 400 patients with relapsed or relapsed / refractory multiple
myeloma. The primary endpoint is progression-free survival and secondary
endpoints include overall response rate, overall survival and safety. Drs. Paul
Richardson and Kenneth Anderson, from the Jerome Lipper Multiple Myeloma Center,
Dana-Farber Cancer Institute, have agreed to lead the Phase 3
trial.





Metastatic Colon
Cancer





In June
2009, we announced positive data from a randomized, multi-center,
placebo-controlled, Phase 2 study of KRX-0401 (perifosine) in combination with
capecitabine (Xeloda(R))
versus capecitabine plus placebo in patients with second- or third-line
metastatic colon cancer. The data was presented in a poster during the
Gastrointestinal Cancer — Colorectal session at the 45th Annual
Meeting of the American Society of Clinical Oncology (ASCO), held in Orlando,
Florida. In this randomized, double-blind, placebo-controlled study conducted at
11 centers across the United States, patients with 2nd or
3rd
line metastatic colon cancer were randomized to receive capecitabine
(Xeloda(R)), an
approved drug for metastatic colon cancer, at a dose of 825 mg/m2 BID
(total daily dose of 1650 mg/m2) on days
1 to 14 every 21 days, plus either KRX-0401 (perifosine) or placebo at 50 mg
daily. Treatment was continued until progression. The study enrolled a total of
38 patients, of which 35 patients were evaluable for response (20 patients on
the capecitabine plus perifosine arm and 15 patients on the capecitabine plus
placebo arm). The three patients not evaluable for response were all in the
capecitabine plus placebo arm; 2 patients were inevaluable due to toxicity (days
14, 46) and 1 patient was inevaluable due to a new malignancy on day
6.





The
median prior treatment regimens was two, with prior treatment regimens as
follows: 91% of the patients received prior FOLFIRI (Irinotecan + 5FU +
Leucovorin); 74% prior FOLFOX (Oxaliplatin + 5FU + Leucovorin); 63% were
previously treated with both FOLFIRI and FOLFOX; 77% received prior Avastin(R); and
43% prior Erbitux(R).  Prior
treatment with single agent capecitabine was excluded.





The
primary endpoints of this study were to measure 1) Time to Progression (TTP); 2)
Overall Response Rate (ORR), defined as the percentage of patients achieving a
Complete Response (CR) or Partial Response (PR) by RECIST, and 3) Clinical
Benefit Rate (CBR) defined as the percentage of patients on treatment for
greater than three months with at least Stable Disease. Safety of perifosine
plus capecitabine vs. capecitabine + placebo in this patient population was
evaluated as a secondary endpoint. Perifosine in combination with capecitabine
was well tolerated with hand/foot syndrome (14%) and anemia (11%) as the highest
reported grade 3/4 adverse events.


20


Best
response and median time to progression of capecitabine plus perifosine vs.
capecitabine plus placebo were as follows:
 
 Group
                                            
                                            n
                                            
                                            CR
                                              n (%)
                                            
                                            PR
                                              n (%)
                                            
                                            ORR
                                              n (%)
                                            
                                            Stable
                                              Disease
                                              > 12 wks
                                              n (%)
                                            
                                            CBR*
                                              n (%)
                                            
                                            Median TTPXeloda
      + Perifosine
                                            
                                            20
                                            
                                            1
      (5%)
                                            
                                            3
      (15%)
                                            
                                            4
      (20%)
                                            
                                            11
      (55%)
                                            
                                            15
      (75%)
                                            
                                            28.9
      weeks
                                              {95%
      CI (13, 48.1)}Xeloda
      + Placebo
                                            
                                            15
                                            
                                            0
                                            
                                            1
      (7%)
                                            
                                            1
      (7%)
                                            
                                            5
      (33%)
                                            
                                            6
      (40%)
                                            
                                            11
      weeks
                                              {95%
      CI (9, 15.9)}
 *
              CBR:  Clinical
      Benefit Rate as defined by ORR + Stable
Disease
 
 Perifosine
plus capecitabine more than doubled time to progression vs. capecitabine +
placebo with a statistically significant p-value = 0.0006. In addition,
perifosine plus capecitabine more than doubled the ORR and almost doubled the
Clinical Benefit Rate vs. capecitabine plus placebo.
 
 Although
not a primary endpoint in the study, overall survival was analyzed with results
as follows:
 
 Group
                              
                              Median Overall Survival*
                              
                              % ChangeXeloda
      + Perifosine
                              
                              22
      months [95% CI (12.1, NR)]
                              
                              35%
      increase**Xeloda
      + Placebo
                              
                              16.3
      months [95% CI (5.3, 17.1)]
 *
              Survival
      calculated from date of randomization until date of death from any cause,
      whether or not additional therapies were received after removal from
      treatment.
 **
              As
      of May 2009, median overall survival in the perifosine plus capecitabine
      patient group is ongoing with 10 of the 20 patients in this arm still
      alive.
 
 21
  Renal Cell
Carcinoma
 
 In May
2009, we announced data on the clinical activity of KRX-0401 (perifosine) as a
treatment for advanced renal cell carcinoma (RCC). The data was presented in a
poster session at the 45th Annual Meeting of the American Society of Clinical
Oncology (ASCO), held in Orlando, Florida. The study enrolled a total of 50
patients, of which 46 patients were evaluable for response. Evaluable patients
were defined as those who had greater than seven days of treatment. The primary
endpoint of this study was clinical benefit, defined as response rate (RECIST),
and progression-free survival (PFS) in RCC patients who failed a prior VEGF
receptor inhibitor (sunitinib or sorafenib). Safety of perifosine in this
patient population was evaluated as a secondary endpoint. Best response to
single agent perifosine was as follows:
 Group
                                      
                                      n
                                      
                                      PR
                                        n (%)
                                      
                                      Stable
                                        Disease
                                        > 12 wks
                                        n (%)
                                      
                                      CBR*
                                        n (%)
                                      
                                      Median PFS
                                        (SD or greater)All
      patients
                                      
                                      46
                                      
                                      5
      (11%)
                                      
                                      16
      (35%)
                                      
                                      21
      (46%)
                                      
                                      33
      weeks
                                        [95%
      CI (24, 60)]
 
 *
              CBR:
      Clinical Benefit Rate defined as patients with Stable Disease or Partial
      Response.
 
 The
median PFS for all 46 patients was 12.5 weeks [95% CI (11.9, 19)]. The median
overall survival has not been reached with 33 of 46 patients (72%) still alive
as of May 2009.
 
 Also
reported was the patient subgroup who had failed both a VEGF receptor inhibitor
(sunitinib or sorafenib) and an mTOR inhibitor (either everolimus or
temsirolimus). For this group, best response and median PFS to single agent
perifosine was as follows:
 
 Group
                                    
                                    n
                                    
                                    PR
                                      n (%)
                                    
                                    Stable
                                      Disease
                                      > 12 wks
                                      n (%)
                                    
                                    CBR*
                                      n (%)
                                    
                                    Median PFS
                                      (SD or greater)VEGF
      + mTOR
                                    
                                    16
                                    
                                    1
      (6%)
                                    
                                    7
      (44%)
                                    
                                    8
      (50%)
                                    
                                    16
      weeks
                                      [95%
      CI (11.7, 33.6)]
 
 Three
patients out of the group of patients previously treated with and failed both a
VEGF and an mTOR inhibitor remain on active treatment, out 5, 9 and 17 months as
of May 2009.
 
 Pediatric Solid
Tumors
 
 In July
2009, we announced the initiation of a Phase 1 clinical study to evaluate
KRX-0401 (perifosine) as a single agent treatment for recurrent solid tumors in
pediatric patients. This Phase 1 study is now open for enrollment at Memorial
Sloan-Kettering Cancer Center in New York City. The study is being fully funded
by an external grant provided by a private organization.
 
 Zerenex
(ferric citrate)
 
 Effective
on June 8, 2009, we entered into an Amended and Restated Sublicense Agreement
(the “Revised Agreement”) with JT and Torii. The parties had originally
entered into a sublicense agreement on September 26, 2007. As a result of the
Revised Agreement, we no longer have significant on-going involvement or
obligations under the sublicense agreement. As such, in accordance with our
revenue recognition policies, all deferred revenue balances pertaining to this
sublicense agreement have been recognized as revenue in the three months ended
June 30, 2009.
 
 In June
2009, we announced results of the U.S. Phase 2 study of Zerenex for the
treatment of elevated serum phosphorous levels, or hyperphosphatemia, in
patients with end-stage renal disease (ESRD) on thrice weekly
hemodialysis.  The study was a multicenter, open-label clinical trial,
which enrolled 55 patients. The primary objective of this study was to assess
the tolerability and safety of Zerenex with doses ranging from approximately 1
gram per day to 12 grams per day.
 
 The top
line efficacy and safety results from this Phase 2 study were submitted to the
FDA, and discussed at a recent face to face meeting with the Division of
Cardiovascular and Renal Drug Products. The FDA also reviewed the final reports
for the 90-day rat and 16-week canine toxicology studies. The FDA indicated that
the results of the Phase 2 study and the toxicology studies were adequate to
support entry into a Phase 3 program. Keryx is in the process of finalizing the
Phase 3 program in consultation with the FDA.
 
 The FDA
also reviewed the protocols for the ongoing chronic toxicology studies (6-month
rat and 42-week canine), which can be completed after the U.S. Phase 3 program
has begun.
  22
  In the
first part of the Phase 2 study, 34 ESRD patients who were taking approximately
6 to 15 tablets/capsules per day of calcium acetate, calcium carbonate,
lanthanum carbonate or sevelamer hydrochloride or any combination of these
agents were eligible for enrollment and immediately switched to a starting dose
of 4.5 grams per day of Zerenex. In the second part of the study, 21 ESRD
patients who were taking greater than 12 tablets/capsules per day of calcium
acetate, calcium carbonate, lanthanum carbonate or sevelamer hydrochloride or
any combination of these agents were eligible for enrollment and immediately
switched to a starting dose of 6.0 grams per day of Zerenex.  Patients
were treated with Zerenex for four weeks and were titrated weekly to achieve and
maintain normal serum phosphorus levels, between 3.5 to 5.5 mg/dL, the
therapeutic goal.
 
 Although
designed primarily as a safety study, key efficacy parameters were evaluated,
with results as follows:
 
 At
baseline:
 
 ·
              Baseline
      mean +/- standard deviation (SD) serum phosphorus was approximately 5.9
      +/- 1.5 mg/dL immediately prior to the switch to
  Zerenex;
 
 ·
              The
      average daily dose of PhosLo(R)
      (calcium acetate) was 6.9 grams per day and for Renagel(R)
      (sevelamer hydrochloride) was 9.9 grams per day, for patients not on
      combination therapy prior to the switch to
  Zerenex.
 
 Following the treatment
period (four weeks on Zerenex):
 
 ·
              At
      the end of the treatment period (after four weeks on Zerenex) the mean +/-
      SD serum phosphorus was approximately 5.4 +/- 1.3
  mg/dL;
 
 ·
              The
      average daily dose of Zerenex at the end of four weeks of treatment was
      6.8 grams per day;
 
 In the
subset of 29 patients who had a serum phosphorus above the normal range (>
5.5 mg/dL) at baseline, immediately prior to the switch to Zerenex, the mean
(SD) baseline serum phosphorus was 7.0 (1.1) mg/dL, and at the end of treatment
with Zerenex the mean (SD) serum phosphorus was 5.6 (1.6) mg/dL;
 
 In the
Phase 2 study, there were four serious adverse events which were deemed
unrelated to Zerenex.  Darkened stool was reported in the study and
was associated with the presence of iron in the gastrointestinal tract. With the
exception of the reporting of darkened stool as an (asymptomatic) adverse event,
the gastrointestinal adverse event profile was similar in incidence to that
reported for other currently marketed phosphate binders.  There was no
increase in serum calcium noted in the study.
 
 General
Corporate
 
 On
May 20, 2009, we announced the appointment of Ron Bentsur as our Chief
Executive Officer. The terms of Mr. Bentsur’s employment are being finalized and
will be set forth in an employment agreement with us. As an inducement to
his employment, on May 20, 2009, we granted Mr. Bentsur options to purchase
600,000 shares of our common stock, at an exercise price equal to the fair
market value of the stock on the date of grant. The options will vest in
equal annual installments over a four-year period or upon an earlier change in
control of Keryx. The options were granted as an inducement award and were
not issued under our 2007 Incentive Plan.
 
 On June
16, 2009, Ron Bentsur was appointed to our Board of Directors by a unanimous
vote of our directors, and Michael P. Tarnok was appointed Chairman of the
Board by unanimous vote of our directors. Mr. Tarnok has served on our
Board of Directors since September 2007.
 
 On June
17, 2009, we issued a press release announcing that we had received a letter
from The NASDAQ Stock Market confirming that we had regained compliance with the
minimum bid price requirement for continued listing on The NASDAQ Capital Market
under Listing Rule 5550(a)(2). We also received a letter from the NASDAQ Listing
Qualifications Hearings Panel (the “Panel”) confirming that we had demonstrated
a market value of listed securities over the required minimum of $35 million for
10 consecutive trading days, for continued listing on The NASDAQ Capital Market
under Listing Rule 5550(b)(2), and that the Panel has determined to continue the
listing of our securities on The NASDAQ Stock Market.
  23




On August
4, 2009, we announced that we and Alfa Wassermann S.p.A. settled a dispute over
issues arising from the terminated license agreement for Sulonex (sulodexide).
Under the terms of the settlement agreement, Alfa Wassermann will pay Keryx
US$3,500,000 (of which US$2,750,000 was received on July 31, 2009, and
US$750,000 will be paid to Keryx on or before July 30, 2010), and we are
required to deliver to Alfa Wassermann all of our data, information and other
intellectual property related to Sulonex.





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 and milestone payments
arising from our agreement with JT and Torii. We recognize upfront license fee
revenues ratably over the estimated period which we will have certain
significant ongoing responsibilities under the sublicense agreement, with
unamortized amounts recorded as deferred revenue. We recognize milestone
payments as revenue upon the achievement of specified milestones only if (1) the
milestone payment is non-refundable, (2) substantive effort is involved in
achieving the milestone, (3) the amount of the milestone is reasonable in
relation to the effort expended or the risk associated with achievement of the
milestone, and (4) the milestone is at risk for both parties. If any of these
conditions are not met, we defer the milestone payment and recognize it as
revenue over the estimated period of performance under the contract as we
complete our performance obligations.





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.





Our other
revenues consist of fees and payments arising from technology transfer,
termination and settlement agreements related to our prior license
agreements.





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





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.





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.


24




In
addition, certain options and restricted stock issued to employees, consultants
and other third-parties vest upon the achievement of certain milestones,
therefore the total expense is uncertain until the milestone is
met.





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





Three
months ended June 30, 2009 and June 30, 2008





License Revenue. License
revenue increased by $17,962,000 to $18,289,000 for the three months ended June
30, 2009, as compared to $327,000 for the three months ended June 30, 2008. The
increase in license revenue during the three months ended June 30, 2009, was due
to the recognition of deferred revenue related to the JT and Torii sublicense
agreement originally signed in September 2007, and amended and restated on June
8, 2009. The Amended and Restated Sublicense Agreement, among other things,
provided for the elimination of all significant on-going obligations under the
sublicense agreement. Accordingly, all remaining deferred revenue pertaining to
this sublicense has been recognized in the three months ended June 30,
2009.





Service Revenue. There was no
service revenue in the three months ended June 30, 2009, as compared to service
revenue of $62,000 for the three months ended June 30, 2008. We do not expect
our service revenue to have a material impact on our financial results during
the remainder of 2009.





Other Revenue. Other revenue
for the three months ended June 30, 2009 was $75,000, and was related to a
payment earned in June 2009 from a December 2008 license termination agreement
for KRX-0501. Payments associated with this license termination agreement are
recognized as earned since we have no on-going responsibilities under the
terminated license agreement or the termination agreement. There was no other
revenue for the three months ended June 30, 2008. We do not expect our other
revenue to have a material impact on our financial results during the remainder
of 2009.





Non-Cash Compensation Expense
(Research and Development). Non-cash compensation expense (research and
development) related to equity incentive grants increased by $110,000 to
$361,000 for the three months ended June 30, 2009, as compared to $251,000 for
the three months ended June 30, 2008. The increase in non-cash compensation
expense in the three months ended June 30, 2009, as compared to June 30, 2008,
was primarily related to reduced expense in the three months ended June 30, 2008
due to forfeitures of equity awards by terminated research and development
personnel associated with the 2008 restructuring.





Other Research and Development
Expenses. Other research and development expenses decreased by $2,786,000
to $1,456,000 for the three months ended June 30, 2009, as compared to
$4,242,000 for the three months ended June 30, 2008. The decrease in other
research and development expenses was due primarily to a $1,756,000 reduction in
research and development expenses related to KRX-0401, primarily due to
reductions in headcount and other expenses related to this development program,
and a $996,000 reduction in research and development expenses related to the
cessation of the development of Sulonex in March 2008. We expect our other
research and development costs to increase for the remainder of 2009 due to the
preparation for, and initiation of, our expected Phase 3 clinical programs for
our drug candidates.


25


Non-Cash Compensation Expense
(Selling, General and Administrative). Non-cash compensation expense
(selling, general and administrative) related to equity incentive grants
decreased by $739,000 to $1,028,000 for the three months ended June 30, 2009, as
compared to an expense of $1,767,000 for the three months ended June 30, 2008.
The decrease was primarily due to a $1,368,000 decrease in non-cash compensation
related to equity incentive grants previously issued to Mr. Weiss, our former
chief executive officer, who was terminated on April 23, 2009, partially offset
by $660,000 in non-cash compensation associated with the equity modifications of
Mr. Weiss’ outstanding stock options and shares of restricted
stock.





Other Selling General and
Administrative Expenses. Other selling, general and administrative
expenses decreased by $550,000 to $1,528,000 for the three months ended June 30,
2009, as compared to an expense of $2,078,000 for the three months ended June
30, 2008. The decrease was primarily related to a reduction of expenses as a
result of the 2008 Restructuring, offset by approximately $551,000 of expense
for severance and notice pay related to the termination of our former chief
executive officer on April 23, 2009. We expect our other selling, general and
administrative expenses to decrease for the remainder of 2009.





Interest and Other Income (Expense),
Net. Interest and other income (expense), net, decreased by $133,000 to
$141,000 for the three months ended June 30, 2009, as compared to $274,000 for
the three months ended June 30, 2008. The decrease in interest and other income
(expense) was primarily due a lower level of invested funds and lower interest
rates as compared to the comparable period last year.





Six
months ended June 30, 2009 and June 30, 2008





License Revenue. License
revenue increased by $21,090,000 to $21,616,000 for the six months ended June
30, 2009, as compared to $526,000 for the six months ended June 30, 2008. The
increase in license revenue during the six months ended June 30, 2009, was
primarily due to the recognition of all remaining deferred revenue related to
the JT and Torii sublicense agreement originally signed in September 2007, and
amended and restated on June 8, 2009, as discussed above. In addition, during
the six months ended June 30, 2009, we recognized $3.0 million in license
revenue from a milestone received from JT and Torii due to their initiation of a
Phase 2 clinical study of Zerenex in Japan.





Service Revenue. Service
revenue decreased by $59,000 to $3,000 for the six months ended June 30, 2009,
as compared to service revenue of $62,000 for the six months ended June 30,
2008. We do not expect our service revenue to have a material impact on our
financial results during the remainder of 2009.





Other Revenue. Other revenue
for the six months ended June 30, 2009 was $75,000, and was related to a payment
earned in June 2009 from a December 2008 license termination agreement for
KRX-0501. Payments associated with this license termination agreement are
recognized as earned since we have no on-going responsibilities under the
terminated license agreement or the termination agreement. There was no other
revenue for the six months ended June 30, 2008. We do not expect our other
revenue to have a material impact on our financial results during the remainder
of 2009.





Non-Cash Compensation Expense
(Research and Development). Non-cash compensation expense (research and
development) related to equity incentive grants increased by $1,291,000 to
$562,000 for the six months ended June 30, 2009, as compared to a credit of
$729,000 for the six months ended June 30, 2008. Non-cash compensation expense
in the six months ended June 30, 2008 included a $1,233,000 credit to expense
related to stock options and restricted stock issued to our former President,
who was terminated as part of the 2008 Restructuring.





Other Research and Development
Expenses. Other research and development expenses decreased by
$32,239,000 to $2,830,000 for the six months ended June 30, 2009, as compared to
$35,069,000 for the six months ended June 30, 2008. The decrease in other
research and development expenses was due primarily to a $26,890,000 reduction
in research and development expenses related to the cessation of the development
of Sulonex in March 2008. Included in the research and development expenses
related to Sulonex for the six months ended June 30, 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 4 -
Restructuring” above. In addition to the $26,890,000 decrease in other research
and development expenses related to Sulonex discussed above, there were
decreases of $4,426,000, and $242,000 in research and development expenses
related to KRX-0401 and Zerenex, respectively, primarily due to reductions in
headcount and other expenses related to these development programs. We expect
our other research and development costs to increase for the remainder of 2009
due to the preparation for, and initiation of, our expected Phase 3 clinical
programs for our drug candidates.


26




Non-Cash Compensation Expense
(Selling, General and Administrative). Non-cash compensation expense
(selling, general and administrative) related to equity incentive grants
decreased by $2,086,000 to $1,398,000 for the six months ended June 30, 2009, as
compared to an expense of $3,484,000 for the six months ended June 30, 2008. The
decrease was primarily due to a $2,525,000 decrease in non-cash compensation
related to equity incentive grants previously issued to Mr. Weiss, our former
chief executive officer, who was terminated on April 23, 2009, partially offset
by $660,000 in non-cash compensation associated with the equity modifications of
Mr. Weiss’ outstanding stock options and shares of restricted
stock.





Other Selling General and
Administrative Expenses. Other selling, general and administrative
expenses decreased by $1,396,000 to $2,569,000 for the six months ended June 30,
2009, as compared to an expense of $3,965,000 for the six months ended June 30,
2008. The decrease was primarily related to a reduction of expenses as a result
of the 2008 Restructuring, offset by approximately $551,000 of expense for
severance and notice pay related to the termination of our chief executive
officer on April 23, 2009. We expect our other selling, general and
administrative expenses to decrease for the remainder of 2009.





Interest and Other Income (Expense),
Net. Interest and other income (expense), net, increased by $1,177,000 to
income of $248,000 for the six months ended June 30, 2009, as compared to an
expense of $929,000 for the six months ended June 30, 2008. The six months ended
June 30, 2008, includes $1,875,000 of impairment charges related to our
investments in auction rate securities. In addition, interest income related to
our investments decreased in the six months ended June 30, 2009, as compared to
the six months ended June 30, 2008, due a lower level of invested funds and
lower interest rates as compared to the comparable period last
year.





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
June 30, 2009, we had $13.4 million in cash, cash equivalents, interest
receivable, and short-term investment securities, a decrease of $2.0 million
from December 31, 2008. In addition, at June 30, 2009, we had $7.1 million in
non-current auction rate securities, as discussed below. Cash used in operating
activities in continuing operations for the six months ended June 30, 2009 was
$2.0 million, as compared to $28.0 million for the six months ended June 30,
2008. This decrease in cash used in operating activities was due primarily to
the cessation of the Sulonex program in March 2008, the 2008 Restructuring, and
a $3.0 million non-refundable milestone payment received from JT and Torii
associated with their initiation of a Phase 2 trial for Zerenex in
Japan.





For the
six months ended June 30, 2009, net cash provided by investing activities of
$2.3 million was primarily the result of proceeds from the maturity of our
investments in short-term securities. For the six months ended June 30, 2009,
there was no net cash provided by financing activities.





As of
June 30, 2009, $7.1 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 June
30, 2009, 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 $0.1 and $1.9 million during the six months ended
June 30, 2009 and 2008, respectively, 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 income (expense), net. The estimated
fair value of our remaining auction rate securities is $7.1 million at June 30,
2009.


27




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 June 30, 2009, we have an accumulated deficit of $317.3
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 June 30, 2009, with the additional
$3.5 million of settlement proceeds from Alfa Wassermann, but exclusive of our
holdings in auction rate securities, are sufficient to meet our anticipated
working capital needs and fund our business plan through the end of the second
quarter of 2010. However, if we are not able to receive proceeds from some
portion of our auction rate securities by the third 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.





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
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.





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:


28




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.





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 Emerging Issues Task Force (“EITF”) Issue No.
00-21, “Revenue Arrangements with Multiple Deliverables.” We analyze each
element of our licensing agreement to determine the appropriate revenue
recognition. The terms of the license agreement may include payment to us of
non-refundable up-front license fees, milestone payments if specified objectives
are achieved, and/or royalties on product sales. We recognize revenue from
upfront 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 recognize milestone
payments as revenue upon the achievement of specified milestones only if (1) the
milestone payment is non-refundable, (2) substantive effort is involved in
achieving the milestone, (3) the amount of the milestone is reasonable in
relation to the effort expended or the risk associated with achievement of the
milestone, and (4) the milestone is at risk for both parties. If any of these
conditions are not met, we defer the milestone payment and recognize it as
revenue over the estimated period of performance under the
contract.





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.


29




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.





We
recognize other revenues at the time such fees and payments are
earned.





Accounting Related to
Goodwill. As of June 30, 2009, 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.





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 six months ended June
30, 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 June 30, 2009, $7.1 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 June 30, 2009, 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 $0.1 and $1.9 million during the six months ended June 30, 2009 and
2008, respectively, 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 income (expense), net.


30




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. 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.





ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





The
primary objective of our investment activities is to preserve principal while
maximizing our income from investments and minimizing our market risk. We invest
in government and investment-grade corporate debt and auction 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 June 30, 2009, our
portfolio of financial instruments consists of cash equivalents and long-term
auction rate securities. Due to the short-term nature of our money market funds,
we believe we have no material exposure to interest rate risk, and/or credit
risk, arising from our money market funds.


31


As of
June 30, 2009, $7.1 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 June 30, 2009, 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
4. CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





As of
June 30, 2009, management carried out, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial 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 Chief Financial
Officer concluded that, as of June 30, 2009, our disclosure controls and
procedures were effective.





Internal
Control Over Financial Reporting





There
were no changes in our internal control over financial reporting during the
quarter ended June 30, 2009, that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.




PART
II. OTHER INFORMATION





ITEM
1. 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 April 2008, we notified Alfa
Wasserman S.p.A. of our intention to terminate the License Agreement for
sulodexide. 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 were in material breach of the
agreement for failing to diligently develop sulodexide by terminating the Phase
4 clinical trial. On August 4, 2009, we announced that we and Alfa Wassermann
settled the dispute described above. Under the terms of the settlement
agreement, Alfa Wassermann will pay Keryx US$3,500,000 (of which US$2,750,000
million was received on July 31, 2009, and US$750,000 will be paid to Keryx on
or before July 30, 2010), and Keryx is required to deliver to Alfa Wassermann
all of its data, information and other intellectual property related to
sulodexide.
 
 We are
presently engaged in an arbitration proceeding with ICON Central Laboratories
(“ICON”), the central laboratory we used for the clinical development of Sulonex
(sulodexide), 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 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 have asserted a counterclaim for a
refund of the unused portions of the annual storage fees already paid to
ICON.


32




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 June 30, 2009, we had an accumulated deficit of
approximately $317.3 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.





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. 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. We may change the delivery method or
dosage levels which could affect efficacy results for the drug candidate. For
example, our new one gram caplet formulation for Zerenex has not been tested in
previous clinical trials, and therefore, there is no assurance that this new
formulation will be safe and efficacious in a clinical trial setting.
Accordingly, we may not be able to complete the clinical trials within an
acceptable time frame, if at all.


33




On August
3, 2009, we announced that we had reached agreement with the FDA regarding an
Special Protocol Assessment, or SPA, on the design of a Phase 3 trial for
KRX-0401 (perifosine) in relapsed or relapsed / refractory multiple myeloma
patients previously treated with bortezomib (VELCADE®). Many
companies who have been granted an SPA and/or the right to utilize an
accelerated approval approach have failed to obtain approval. Since we are
seeking accelerated approval under an SPA, we may be subject to enhanced
scrutiny. Additionally, even if the primary endpoint is achieved, an SPA does
not guarantee approval. The FDA may raise issues of safety, study conduct,
changes in scientific or medical evidence or sentiment or internal inconsistency
in the data prior to making their final decision. The FDA may also seek the
guidance of an advisory panel prior to making their final decision.





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.


34




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. Moreover, issues that may arise in our current transition to a
commercial batch manufacturer for Zerenex can lead to delays in our planned
clinical trials and development timelines, and could affect our ability to
complete our clinical trials on a cost-effective or timely basis, if at
all.





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
and drug product 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.


35




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.





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.


36




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.





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, and Novartis’ mTOR inhibitor,
everolimus, have 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. (a wholly-owned subsidiary of Takeda Pharmaceutical
Company), 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 phosphoinositide 3-kinase (PI3K)/Akt
pathway.


37




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
July 31, 2009, we had 15 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, Ron Bentsur, our Chief Executive Officer, our ability
to continue to execute on our business plan could be materially
impaired.





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;


38





·
            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.





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.


39




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 15
full and part-time employees as of July 31, 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.





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 June 30, 2009, with the additional $3.5 million of settlement proceeds,
but exclusive of our holdings in auction rate securities, are sufficient to meet
our anticipated working capital needs and fund our business plan through the end
of the second quarter of 2010. However, if we are not able to receive proceeds
from some portion of our auction rate securities by the third 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 our Annual
Report on Form 10-K for the year ended December 31, 2008, 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.


40




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 (the
      maximum term of extension under the patent term restoration program). 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.




41


·
            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.





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.





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, which is enrollment of the first patient in a Phase 3
(or other pivotal) clinical trial for KRX-0401 (perifosine). We may also
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.





42




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.





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.





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





On June
16, 2009, we held our annual meeting of stockholders. The following matters were
voted on by the stockholders: the election of directors, and the ratification of
the appointment of UHY LLP as our independent registered public accounting firm
for the year ending December 31, 2009. At the meeting, Kevin J. Cameron, Wyche
Fowler, Jr., Jack Kaye and Michael P. Tarnok were re-elected to the
Board.





The vote
with respect to each nominee is set forth below:


Nominee
                          
                          Total Votes For
                          
                          
                          Total Votes WithheldKevin
      J. Cameron
                          
                          
                          30,443,243
                          
                          
                          
                          770,673Wyche
      Fowler, Jr.
                          
                          
                          30,377,353
                          
                          
                          
                          836,563Jack
      Kaye
                          
                          
                          30,426,485
                          
                          
                          
                          787,431Michael
      P. Tarnok
                          
                          
                          29,953,435
                          
                          
                          
                          1,260,481
 
 The vote
with respect to the ratification of the appointment of UHY LLP as our
independent registered public accounting firm for the year ending December 31,
2009, is set forth below.
 
 Total Votes For
                      
                      Total Votes Withheld
                      
                      
                      Abstention and Broker
    Non-Votes30,581,212
                      
                      
                      229,289
                      
                      
                      
                      403,415


43




ITEM 6. EXHIBITS





The
exhibits listed on the Exhibit Index are included with this
report.





3.1
                Amended
      and Restated Certificate of Incorporation of Keryx Biopharmaceuticals,
      Inc., filed as Exhibit 3.1 to the Registrant's Annual Report on Form 10-Q
      for the quarter ended September 30, 2004, filed on August 12, 2004, and
      incorporated herein by reference.3.2
                Amended
      and Restated Bylaws of Keryx Biopharmaceuticals, Inc., filed as Exhibit
      3.2 to the Registrant’s Annual Report on Form 10-K for the year ended
      December 31, 2001, filed on March 26, 2002, 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.10.1*
                Amended
      and Restated Sublicense Agreement by and among the Company, Japan Tobacco,
      Inc.  and Torii Pharmaceutical Co., Ltd., dated June 8,
      2009.10.2
                Settlement
      Agreement and General Release between the Company and Alfa Wassermann
      S.p.A. dated July 30, 2009.31.1
                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
      August 12, 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
      August 12, 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 August
      12, 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 August
      12, 2009.





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


44


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





KERYX
      BIOPHARMACEUTICALS, INC.Date:
      August 12, 2009
                        By:
                        /s/ James F. OlivieroChief
      Financial OfficerPrincipal
      Financial and Accounting
Officer


45





EXHIBIT
INDEX





The following exhibits are included as
part of this Quarterly Report on Form 10-Q:





10.1*
                Amended
      and Restated Sublicense Agreement by and among the Company, Japan Tobacco,
      Inc. and Torii Pharmaceutical Co., Ltd., dated June 8,
    2009.10.2
                Settlement
      Agreement and General Release between the Company and Alfa Wassermann
      S.p.A. dated July 30, 2009.31.1
                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
      August 12, 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
      August 12, 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 August 12,
      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 August 12,
      2009.





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


46