UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





x
              ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For the fiscal year ended
      December 31, 2009.





OR





o
              TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For the transition period from
      ________ to ________.




Commission
File Number  000-30929





KERYX
BIOPHARMACEUTICALS, INC.





(Exact
name of registrant as specified in its charter)





Delaware
                (State
      or other jurisdiction of
                incorporation
      or organization)
              13-4087132
                (I.R.S.
      Employer
                Identification
      No.)750
      Lexington Avenue
                New
      York, New York
                (Address
      of principal executive offices)
              10022
                (Zip
      Code)





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





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





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





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


None





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


Yes  ̈ No x





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


Yes  ̈ No x





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





Indicate by check mark 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 during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files).  Yes  ̈ No  ̈





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





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





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





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


Yes  ̈ No x





The
aggregate market value of voting common stock held by non-affiliates of the
registrant (assuming, for purposes of this calculation, without conceding, that
all executive officers and directors are “affiliates”) was $40,208,840 as of
June 30, 2009, based on the closing sale price of such stock as reported on the
NASDAQ Capital Market.





There were 56,861,030 shares of the
registrant’s common stock outstanding as of March 15, 2010.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the registrant’s Proxy Statement for the 2010 Annual Meeting of Stockholders
are incorporated by reference in Part III of this Annual Report on Form
10-K.





KERYX
BIOPHARMACEUTICALS, INC.


ANNUAL
REPORT ON FORM 10-K


FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2009





TABLE
OF CONTENTS





PageSPECIAL
      CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
                1PART
      IITEM
      1
                Business
                2ITEM
      1A
                Risk
      Factors
                19ITEM
      1B
                Unresolved
      Staff Comments
                29ITEM
      2
                Properties
                29ITEM
      3
                Legal
      Proceedings
                29ITEM
      4
                [Removed
      and Reserved]
                30PART
      IIITEM
      5
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                30ITEM
      6
                Selected
      Financial Data
                33ITEM
      7
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                34ITEM
      7A
                Quantitative
      and Qualitative Disclosure About Market Risk
                43ITEM
      8
                Financial
      Statements and Supplementary Data
                43ITEM
      9
                Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosures
                43ITEM
      9A(T)
                Controls
      and Procedures
                44ITEM
      9B
                Other
      Information
                44PART
      IIIITEM
      10
                Directors,
      Executive Officers and Corporate Governance
                44ITEM
      11
                Executive
      Compensation
                44ITEM
      12
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                44ITEM
      13
                Certain
      Relationships and Related Transactions and Director
      Independence
                45ITEM
      14
                Principal
      Accountant Fees and Services
                45PART
      IVITEM
      15
                Exhibits
      and Financial Statement Schedules
                46





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





SPECIAL
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS





Certain
matters discussed in this report, including matters discussed under the caption
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” may constitute forward-looking statements for purposes of the
Securities Act of 1933, as amended, or the Securities Act, and the Securities
Exchange Act of 1934, as amended, or the Exchange Act, and involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by such
forward-looking statements. The words "anticipate," "believe," "estimate,"
"may," "expect" and similar expressions are generally intended to identify
forward-looking statements. Our actual results may differ materially from the
results anticipated in these forward-looking statements due to a variety of
factors, including, without limitation, those discussed under the captions “Risk
Factors,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and elsewhere in this report, as well as other factors
which may be identified from time to time in our other filings with the
Securities and Exchange Commission, or the SEC, or in the documents where such
forward-looking statements appear. All written or oral forward-looking
statements attributable to us are expressly qualified in their entirety by these
cautionary statements. Such forward-looking statements include, but are not
limited to, statements about our:




·
            expectations
      for increases or decreases in
expenses;




·
            expectations
      for the clinical and pre-clinical 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 our
      investment in an auction rate
security;




·
            expected
      losses; and




·
            expectations
      for future capital requirements.




The
forward-looking statements contained in this report reflect our views and
assumptions only as of the date this report is signed. Except as required by
law, we assume no responsibility for updating any forward-looking
statements.





We
qualify all of our forward-looking statements by these cautionary statements. In
addition, with respect to all of our forward-looking statements, we claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.


1


PART
I





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





ITEM
1. BUSINESS.





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 cancer and renal disease. We
are developing KRX-0401 (perifosine), a novel, potentially first-in-class, oral
anti-cancer agent that inhibits Akt activation in the phosphoinositide 3-kinase
(PI3K) pathway, and also affects a number of other key signal transduction
pathways, including the JNK pathway, all of which are pathways associated with
programmed cell death, cell growth, cell differentiation and cell survival.
KRX-0401 has demonstrated both safety and clinical efficacy in several tumor
types, both as a single agent and in combination with novel therapies. KRX-0401
is currently in a Phase 3 trial, under Special Protocol Assessment, or SPA, in
multiple myeloma, with a Phase 3 trial in refractory metastatic colorectal
cancer, under SPA, pending commencement, and in Phase 2 clinical development for
several other tumor types.





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
completed five Phase 2 clinical studies as a treatment for hyperphosphatemia
(elevated phosphate levels) in patients with end-stage renal disease, or ESRD.
Our Phase 3 program for Zerenex, under an SPA, is pending commencement. Zerenex
is also in Phase 2 development in Japan by our Japanese partner, Japan Tobacco
Inc. (“JT”) and Torii Pharmaceutical Co., Ltd. (“Torii”).





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
                      
                      Phase
      3 trial ongoing, under SPAColorectal
      Cancer
                      
                      Phase
      3 pending, under SPAMultiple
      other forms of cancer
                      
                      Phase
      2 trials ongoingZerenexTM
      (ferric citrate)
                      
                      Hyperphosphatemia
      in patients with end-stage renal disease
                      
                      U.S.
      Phase 3 program pending, under SPA
                        Japan
      Phase 2 ongoing by sublicensee (JT and
Torii)





OUR
STRATEGY





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





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





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





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





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


2


CORPORATE
INFORMATION





We were
incorporated in Delaware in October 1998. We commenced operations in November
1999, following our acquisition of substantially all of the assets and certain
of the liabilities of Partec Ltd., our predecessor company that began its
operations in January 1997. Our executive offices are located at 750 Lexington
Avenue, New York, New York 10022. Our telephone number is 212-531-5965, and our
e-mail address is info@keryx.com.





We
maintain a website with the address www.keryx.com.  We make available
free of charge through our Internet website our annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K, and any
amendments to these reports, as soon as reasonably practicable after we
electronically file such material with, or furnish such material to, the
SEC.  We are not including the information on our website as a part
of, nor incorporating it by reference into, this report.  You may read
and copy any materials we file at the SEC’s Public Reference Room at 100 F
Street, N.E., Washington, D.C. 20549 on official business days during the hours
of 10:00 a.m. to 3:00 p.m.  Please call the SEC at 1-800-SEC-0330 for
information on the Public Reference Room.  Additionally, the SEC
maintains a website that contains annual, quarterly, and current reports, proxy
statements, and other information that issuers (including us) file
electronically with the SEC.  The SEC’s website address is
http://www.sec.gov.





PRODUCTS
UNDER DEVELOPMENT





KRX-0401
(perifosine)





Overview





KRX-0401
(perifosine) is a novel, potentially first-in-class, oral anti-cancer agent that
inhibits Akt activation in the phosphoinositide 3-kinase (PI3K) pathway, and
also affects a number of other key signal transduction pathways, including the
JNK pathway, all of which are pathways associated with programmed cell death,
cell growth, cell differentiation and cell survival. The effects of KRX-0401 on
Akt are of particular interest because of the importance of this pathway in the
development of most cancers, with evidence that it is often activated in tumors
that are resistant to other forms of anticancer therapy, and the difficulty
encountered thus far in the discovery of drugs that will inhibit this pathway
without causing excessive toxicity. High levels of activated Akt (pAkt) are seen
frequently in many types of cancer and have been correlated with poor
prognosis.





To date,
over 2,000 patients have been treated with KRX-0401 in trials conducted both in
the United States and Europe. Its safety profile is distinctly different from
that of most cytotoxic agents. KRX-0401 does not appear to cause flu-like
symptoms, thrombocytopenia (decrease in platelets that may result in bleeding)
or alopecia (hair loss); all of these toxicities occur frequently with many of
the currently available treatments for cancer. The main side effects of KRX-0401
are nausea, vomiting, diarrhea and fatigue, but these are generally well-managed
particularly at lower daily doses (50 mg or 100 mg) that have induced tumor
regression. Responses have been seen with both daily and weekly regimens. At the
doses studied, the daily regimens were better tolerated.





Pre-Clinical
and Clinical Data Overview





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





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


3


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





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





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





Multiple
Myeloma Clinical Data





In
December 2009, at the American Society of Hematology annual meeting, in a poster
presentation by Dr. Paul Richardson, Clinical Director of the Multiple Myeloma
Center at Dana-Farber Cancer Institute in Boston, we announced updated data on
the clinical activity of KRX-0401 (perifosine) in combination with bortezomib
(with or without dexamethasone) in patients with relapsed/refractory multiple
myeloma. This trial was designed as a Phase 1/2 study. The Phase 1 portion
enrolled 18 patients and the Phase 2 portion enrolled 66 patients (for a total
of 84 patients), all with advanced multiple myeloma.





The
patients enrolled were heavily pre-treated with a median of 5 prior lines of
therapy (range 1 - 13), including;





·
            100%
      of patients had been treated with bortezomib (55% of the patients were
      previously treated with at least two bortezomib-based therapies (range 1 -
      4) and 81% were previously treated with bortezomib plus
      dexamethasone);


·
            98%
      of patients were previously treated with
  dexamethasone;


·
            94%
      of patients were previously treated with lenalidomide (Revlimid®)
      and/or thalidomide (Thalomid®);
      and


·
            58%
      of patients had prior stem cell
transplant.





Overall
Response Rate (ORR), defined as the percentage of patients achieving a complete,
partial or minor response (CR, PR or MR), was the primary endpoint, with Time to
Progression (TTP), Progression-Free Survival (PFS), Overall Survival (OS) and
Safety as secondary endpoints.





Seventy-three
patients were evaluable for efficacy.  Evaluable patients are defined
as those patients who had received at least two cycles of therapy on the
combination of perifosine with bortezomib.  Of the 73 evaluable
patients, 53 patients (73%) were previously refractory to bortezomib (defined as
progression on or within 60 days of treatment with a bortezomib-based regimen),
including 44 patients who were refractory to the combination of bortezomib +
dexamethasone.  Twenty evaluable patients (27%) were relapsed to a
prior bortezomib-based regimen.  Best response for all 73 evaluable
patients was as follows:




Evaluable Patients
                  
                  CR /nCR*
                  
                  PR
                  
                  MR
                  
                  ORR
                  
                  SD**All
      Evaluable Patients (n=73)
                  
                  3
                  
                  4%
                  
                  13
                  
                  18%
                  
                  14
                  
                  19%
                  
                  30
                  
                  41%
                  
                  30
                  
                  41%Bortezomib
      Relapsed (n=20)
                  
                  2
                  
                  10%
                  
                  7
                  
                  35%
                  
                  4
                  
                  20%
                  
                  13
                  
                  65%
                  
                  7
                  
                  35%Bortezomib
      Refractory (n=53)
                  
                  1
                  
                  2%
                  
                  6
                  
                  11%
                  
                  10
                  
                  19%
                  
                  17
                  
                  32%
                  
                  23
                  
                  43%





*
              nCR
      = Near Complete Response is defined as meeting the criteria for CR
      (non-detectable monoclonal protein by serum and urine), except with
      detectable monoclonal protein by immunofixation.**
              SD
      = Stable Disease for a minimum of 3
months.




4


Approximately
60% (45 / 73) of patients demonstrated progression (or SD for 4 cycles) at some
point in their treatment and received 20 mg dexamethasone, four times per week,
in addition to perifosine plus bortezomib. Responses occurred both with patients
taking perifosine in combination with bortezomib and with patients receiving the
combination plus dexamethasone.  Best response for each group was as
follows:





Best Response
                  
                  CR /nCR
                  
                  PR
                  
                  MR
                  
                  ORR*
                  
                  SD*Perifosine
      + Bortezomib (n=73)
                  
                  2
                  
                  3%
                  
                  10
                  
                  14%
                  
                  6
                  
                  8%
                  
                  18
                  
                  25%
                  
                  19
                  
                  26%Dexamethasone
      added (n=45)
                  
                  1
                  
                  2%
                  
                  6
                  
                  13%
                  
                  10
                  
                  22%
                  
                  17
                  
                  38%
                  
                  14
                  
                  31%


*
              5
      patients achieved an initial response on Perifosine + Bortezomib alone,
      and subsequently responded again with the addition of
      Dexamethasone.  3 additional patients achieved stable disease on
      Perifosine + Bortezomib alone, and subsequently achieved stable disease
      again with the addition of Dexamethasone.





Median
Progression-Free Survival (PFS) and Overall Survival (OS) data for all evaluable
patients was as follows:




Evaluable Patients
                      
                      Median PFS
                      
                      Median OSAll
      Evaluable Patients (n=73)
                      
                      6.4
      months
                        95%
      CI (5.3, 7.1)
                      
                      25
      months
                        95%
      CI (15.5,
NR)




NR = Not
Reached


NOTE
            Median
      PFS and median TTP were identical, as no patient deaths occurred prior to
      progression.  Kaplan Meier methodology was used to determine
      progression-free and overall survival
figures.





Median
PFS and OS for bortezomib relapsed vs. refractory were as follows:





Bortezomib Relapsed vs.
      Refractory
                      
                      Median PFS
                      
                      Median OSBortezomib
      Relapsed (n=20)
                      
                      8.8
      months
                        95%
      CI (6.3, 11.2)
                      
                      Not
      Reached at 38+ months
                        95%
      CI (25, NR)Bortezomib
      Refractory (n=53)
                      
                      5.7
      months
                        95%
      CI (4.3, 6.4)
                      
                      22.5
      months
                        95%
      CI (12.3,
NR)





NR
      = Not ReachedNOTE
            Median
      PFS and median TTP were identical, as no patient deaths occurred prior to
      progression. Kaplan Meier methodology was used to determine
      progression-free and overall survival
figures.





No
unexpected adverse events have been observed. Toxicities were manageable with
supportive care.





Multiple
Myeloma Phase 3 Registration Clinical Trial





In
December 2009, we initiated a Phase 3 registration clinical trial for KRX-0401
(perifosine) in relapsed / refractory multiple myeloma patients. The trial,
entitled, "A Phase 3 Randomized Study to Assess the Efficacy and Safety of
Perifosine Added to the Combination of Bortezomib (Velcade®)
and Dexamethasone in Multiple Myeloma Patients Previously Treated with
Bortezomib" is a randomized (1:1), double-blind, placebo-controlled trial
comparing the efficacy and safety of perifosine vs. placebo when combined with
bortezomib (Velcade®)
and dexamethasone. The trial will enroll approximately 400 patients with
relapsed or relapsed / refractory multiple myeloma. Patients will be randomized
to bortezomib at 1.3 mg/m2 days 1,
4, 8 and 11 every 21 days in combination with dexamethasone 20 mg on the day of
and day after bortezomib treatment, and either perifosine 50 mg daily or
placebo. Patients eligible for the Phase 3 trial must have been previously
treated with both bortezomib (Velcade®
) and an immunomodulatory agent (Revlimid®
and/or Thalomid®),
and been previously treated with one to four prior lines of therapy. The primary
endpoint is progression-free survival and secondary endpoints include overall
response rate, overall survival and safety.  Patients can be relapsed
from and refractory to all non-bortezomib based therapies, however, patients can
only be relapsed (progressed > 60 days after discontinuing therapy) from
prior bortezomib-based therapies.  The study is powered at 90% to
demonstrate the required difference in progression-free survival between the two
arms.  Approximately 265 events (defined as disease progression or
death) will trigger the un-blinding of the data. This trial is being conducted
pursuant to an SPA with the Food and Drug Administration
(FDA). Additionally, the FDA has granted perifosine Orphan Drug and Fast
Track designations in this indication.





The Phase
3 trial is being led by the Principal Investigator, Dr. Paul Richardson,
Clinical Director of the Jerome Lipper Multiple Myeloma Center, at Dana-Farber
Cancer Institute (DFCI) in Boston, MA and Dr. Kenneth C, Anderson, Chief,
Division of Hematologic Neoplasia at DFCI.  An estimated 40 to 50
centers throughout the United States and select centers outside of the United
States will be participating in this Phase 3 trial.


5


Multiple
Myeloma Market Opportunity




Multiple
myeloma, a cancer of the plasma cell, is an incurable but treatable disease.
Multiple myeloma is the second most-common hematologic cancer, representing 1%
of all cancer diagnoses and 2% of all cancer deaths. According to the American
Cancer Society, in 2009 there will have been an estimated 20,580 new cases of
multiple myeloma and an estimated 10,500 deaths from multiple myeloma in the
United States. To date, several FDA approved therapies exist for the treatment
of multiple myeloma. Despite this progress, patients continue to relapse, become
refractory to prior treatments and eventually die from their disease. Thus, new
therapies are needed to treat these patients and extend their
survival.





Colorectal
Cancer Clinical Data





In
January 2010, we announced updated data from a randomized, multi-center,
double-blind, 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 at the 2010 American Society of
Clinical Oncology (ASCO) Gastrointestinal Cancers Symposium, held in Orlando,
Florida in a poster entitled, “Randomized phase II study of perifosine in
combination with capecitabine (P-CAP) versus capecitabine plus placebo (CAP) in
patients with second- or third-line metastatic colon cancer (mCRC): Updated
results.” The data was initially presented at the ASCO 45th Annual Meeting in
June 2009.





In this
randomized, double-blind, placebo controlled study conducted at 11 centers
across the United States, heavily pre-treated patients with second- or
third-line metastatic colon cancer were randomized to receive capecitabine (a
chemotherapy used in advanced metastatic colon cancer which is marketed by Roche
as Xeloda®) at 825
mg/m2 BID
(total daily dose of 1650 mg/m2) on days
1 – 14 every 21 days plus either placebo or perifosine at 50 mg daily. The study
enrolled a total of 38 patients, 34 of which were third-line or greater. Of the
38 patients enrolled, 35 patients were evaluable for response (20 patients on
the perifosine + capecitabine arm and 15 patients on the placebo + capecitabine
arm). Three patients on the placebo + capecitabine arm were not evaluable for
response (2 patients were non-evaluable due to toxicity (days 14, 46) and 1 was
non-evaluable due to a new malignancy on day 6). All patients in the perifosine
+ capecitabine arm were evaluable for response.The median number of prior
treatment regimens for all 38 patients was two, with prior treatment regimens
for the P-CAP arm versus CAP arm shown in the table below.





Prior Treatments
                
                P-CAP (n=20)
                
                CAP  (n=18)
                
                All Patients (n=38)FOLFIRI
                
                18
      (90%)
                
                16
      (89%)
                
                34
      (89%)FOLFOX
                
                15
      (75%)
                
                13
      (72%)
                
                28
      (74%)FOLFIRI
      & FOLFOX
                
                13
      (65%)
                
                12
      (67%)
                
                25
      (66%)Avastin®
                
                15
      (75%)
                
                15
      (83%)
                
                30
      (79%)EGFR
      Antibody (1)
                
                9
      (45%)
                
                10
      (56%)
                
                19
      (50%)5-FU
      Refractory Status
                
                14
      (70%)
                
                13
      (72%)
                
                27
      (71%)Third
      Line or >
                
                18
      (90%)
                
                16
      (89%)
                
                34
      (89%)





(1)  Prior
treatment with Erbitux® and/or
Vectibix®





The
primary endpoint of this study was to measure Time to Progression
(TTP).  Overall Response Rate (ORR), defined as Complete Responses
(CR) + Partial Responses (PR) by RECIST, Overall Survival (OS) and safety were
measured as secondary endpoints.





The
reported efficacy results for all evaluable patients were as
follows:





Group
                                    
                                    n
                                    
                                    ORR %
                                      CR / PR
                                      (Duration of Response)
                                    
                                    > SD (min 12 wks)
                                      n (%)
                                    
                                    Median TTP
                                      Weeks
                                    
                                    Median OS*
                                      MonthsP-CAP
                                    
                                    20
                                    
                                    20%
                                      1
      CR (34 mos - ongoing)
                                      3
      PR (21, 19, 11 mos)
                                    
                                    15
      (75%)
                                    
                                    28
      [95% CI (12-48)]
                                    
                                    18
      [95% CI (10.8-25.7)]CAP
                                    
                                    15
                                    
                                    7%
                                      1
      PR (7 mos)
                                    
                                    6
      (40%)
                                    
                                    11
      [95% CI (9-15.9)]
                                    
                                    11
      [95% CI (5.3-16.9)]p-value
                                    
                                    
                                    
                                    p=0.036
                                    
                                    p=0.0012
                                    
                                    p=0.0136




*Survival
is calculated from date of randomization until the date of death from any cause,
whether or not additional therapies were received after removal from
treatment.
 NOTE:  Kaplan-Meier
method used to calculate both TTP and OS.  In addition, TTP and
Progression Free Survival (PFS) are identical for all patients in the
study.


6




Results
for the subset of patients who were refractory to a 5-FU (Fluorouracil)
chemotherapy-based treatment regimen are shown in the table
below.  5-FU is a core component of the standard of care FOLFIRI and
FOLFOX regimens, and capecitabine is a 5-FU pro-drug.





Group
                            
                            5-FU Ref
                              n (%)
                            
                            > SD (min 12 wks)
                              n (%)
                            
                            Median TTP
                              Weeks
                            
                            Median OS
                              MonthsP-CAP
                            
                            14
      (70%)
                            
                            1
      PR / 8 SD (64%)
                            
                            18
      [95% CI (12-36)]
                            
                            15.3
      [95% CI (8.4-26)]CAP
                            
                            11
      (73%)
                            
                            0
      PR / 3 SD (27%)
                            
                            10
      [95% CI (6.6-11)]
                            
                            6.8
      [95% CI (4.8-11.7)]p-value
                            
                            
                            
                            p=0.066
                            
                            p=0.0004
                            
                            p=0.0088





All 38
patients were evaluable for safety.  The P-CAP combination was
well-tolerated with Grade 3 and 4 adverse events of > 10% incidence for the
P-CAP arm versus CAP arm as follows: anemia (15% vs. 0%), fatigue (0% vs. 11%),
abdominal pain (5% vs. 11%), and hand-foot syndrome (30% vs. 0%). Of note,
incidence of Grade 1 and 2 hand-foot syndrome was similar in both the P-CAP and
CAP arms (25% vs. 22%, respectively). Hand-foot syndrome is a reported adverse
event with capecitabine monotherapy. Patients who remained on treatment longer
in the Phase 2 study had a greater chance to develop hand-foot syndrome as
illustrated by a median time to onset of Grade 3 and 4 hand-foot syndrome in the
P-CAP arm of 19 weeks.





Metastatic
Colorectal Cancer Phase 3 Registration Clinical Trial





In
February 2010, we announced that we reached agreement with the FDA regarding an
SPA on the design of a Phase 3 trial KRX-0401 (perifosine) in patients with
refractory metastatic colorectal cancer. The Phase 3 X-PECT(Xeloda® +PerifosineEvaluation inColorectal cancerTreatment) trial will be a
randomized (1:1), double-blind trial comparing the efficacy and safety of
perifosine + capecitabine vs. placebo + capecitabine in approximately 430
patients with refractory metastatic colorectal cancer. Patients must have failed
available therapies including 5-fluorouracil (5-FU), oxaliplatin (Eloxatin®),
irinotecan, bevacizumab (Avastin®) and, if
K-Ras wild-type (WT), failed therapy with prior cetuximab (Erbitux®) or
panitumumab (Vectibix®). For
oxaliplatin-based therapy, failure of therapy will also include patients who
discontinued due to toxicity. The primary endpoint is overall survival (OS),
with secondary endpoints including overall response rate (ORR: complete
responses + partial responses), progression-free survival (PFS) and safety. The
median OS for the X-PECT study’s targeted patient population, that has failed
prior therapies as described above, is expected to be approximately 5 months.
The X-PECT study will be powered at 90% to detect a statistically significant
difference in OS, with an assumed median OS for the control arm of 5-6 months
and 7-8 months for the perifosine arm. Approximately 360 events of death will
trigger the un-blinding of the study. Approximately 40 to 50 U.S. sites will
participate in the study. The study is expected to begin in the second quarter
of 2010.





Colorectal
Cancer Market Opportunity





According
to the American Cancer Society, colorectal cancer is the third most common form
of cancer diagnosed in the United States. It is estimated that over 146,000
people were diagnosed with some form of colorectal cancer with over 49,000
patients dying from colorectal cancer in 2009. Surgery is often the main
treatment for early stage colorectal cancer. When colorectal cancer metastasizes
(spreads to other parts of the body such as the liver) chemotherapy is commonly
used. Treatment of patients with recurrent or advanced colorectal cancer depends
on the location of the disease. Chemotherapy regimens (i.e. FOLFOX or FOLFIRI
either with or without bevacizumab) have been shown to increase survival rates
in patients with metastatic/advanced colorectal cancer. Currently, there are
seven approved drugs for patients with metastatic colorectal cancer:
5-fluorouracil (5-FU), capecitabine (Xeloda®),
irinotecan (Camptosar®),
oxaliplatin (Eloxatin®),
bevacizumab (Avastin®),
cetuximab (Erbitux®), and
panitumumab (Vectibix®).
Depending on the stage of the cancer, two or more of these types of treatment
may be combined at the same time or used after one another. For example, FOLFOX
combines 5-FU, leucovorin and oxaliplatin, whereas FOLFIRI combines 5-FU,
leucovorin and irinotecan. Bevacizumab, a VEGF monoclonal antibody, is commonly
administered with chemotherapy. Typically, patients who fail 5-FU, oxaliplatin,
irinotecan, and bevacizumab-containing therapies, and who have wild-type KRAS
status receive EGFR monoclonal antibody therapy with either cetuximab or
panitumumab. Once patients progress on these agents, there are no further
standard treatment options.


7


Renal
Cell Carcinoma Clinical Data





On
September 26, 2009, Dr. Thomas E. Hutson, Director of the Genitourinary Oncology
Program at Baylor-Sammons Cancer Center in Dallas, TX, presented updated Phase 2
results demonstrating KRX-0401 (perifosine) single agent efficacy in patients
with metastatic renal cell carcinoma, in a presentation entitled, "Phase 2 study
of perifosine in patients with metastatic renal cell carcinoma progressing after
prior therapy with both a VEGF Receptor Inhibitor and an mTOR inhibitor." Data
from this study was first presented at the American Society of Clinical Oncology
(ASCO) annual meeting in May 2009. The presentation included results from a
subgroup of patients who failed both a VEGF receptor inhibitor (sunitinib or
sorafenib) and an mTOR inhibitor (temsirolimus or everolimus). Evaluable
patients (n=16) were defined as those who had greater than 7 days of treatment
(2 additional patients withdrew consent within 7 days). Patients received 100 mg
of perifosine daily until progression or unacceptable toxicity. The primary
endpoint of this study was clinical benefit, defined as response rate (CR / PR
by RECIST) or percent of patients progression-free for at least 3 months. Median
progression-free survival (PFS) and overall survival were also analyzed for
efficacy. Safety was a secondary endpoint. Perifosine was well-tolerated with
the most common adverse events being gastrointestinal discomfort and fatigue.
Best response to single agent perifosine was as follows:





N
                                  
                                  PR
                                    N (%)
                                  
                                  SD > 12 wks
                                    N (%)
                                  
                                  PD < 12 wks
                                    N (%)
                                  
                                  Median PFS
                                  
                                  Overall Survival16
                                  
                                  1
      (6%)
                                  
                                  7
      (44%)
                                  
                                  8
      (50%)
                                  
                                  16
      wks [95% CI (11.7, 28)]
                                  
                                  Not
      Reached
                                    (14/16
      alive) at 22+
months


PR:
Partial response;  SD: Stable disease;  PD: Progressive
disease





Waldenstrom’s
Macroglobulinemia Clinical Data





In an
article entitled “Clinical and Translational Studies of a Phase II Trial of the
Novel Oral Akt Inhibitor Perifosine in Relapsed or Relapsed/Refractory
Waldenstrom’s Macroglobulinemia” which appeared in the February 1, 2010 issue of
Clinical Cancer Research, we reported Phase 2 data demonstrating the single
agent activity of KRX-0401 (Perifosine) for the treatment of advanced
Waldenstrom’s Macroglobulinemia (“Waldenstrom’s”). In the Phase 2 study, 37
patients were treated with KRX-0401 (perifosine) 150 mg daily for 6 cycles. In
this study, 41% of the patients had 3 or more lines of prior therapy and 78% had
2 or more prior lines of therapy. Such prior therapies include nucleoside
analogues, bortezomib, alkylating agents and rituximab (Rituxan®), which
are not approved for, but are often used in the treatment of Waldenstrom’s.
Stable or responding patients were allowed to continue therapy until
progression. Of the 37 patients, 4 achieved a partial response (11%), 9 achieved
a minimal response (24%), and 20 showed stable disease (54%). Overall, 89%
(33/37) of patients treated with single agent perifosine were reported to have
stable disease or better, while 11% (4 patients) demonstrated
progression.  The median progression-free survival in the study was
12.6 months (90% C.I. (10.2, 22.7)), with a median overall survival of 26 months
(90% C.I. (26 – upper limit not reached)). Perifosine was generally
well-tolerated with gastrointestinal symptoms and fatigue reported as the most
common adverse events related to therapy.





Also
described in the article are translational studies using gene expression
profiling and immunohistochemistry on pre- versus post-treatment patient
samples. Results showed that in the majority of samples tested, there was a
significant reduction of phospho-GSK3/b (downstream from Akt)
using immunohistochemistry. Similarly, results demonstrated that perifosine
significantly inhibited the expression of multiple members of the NF-kB family
of genes, confirming previous in vitro studies showing activity of perifosine
targeting this pathway.





Other
Indications





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 is the first clinical study evaluating KRX-0401 in
pediatric patients. The study is nearing completion of enrollment at Memorial
Sloan-Kettering Cancer Center in New York City, and is being fully funded by an
external grant provided by a private organization.





In
October 2009, we announced the initiation of a Phase 2 clinical study to
evaluate KRX-0401 (perifosine) as a single agent treatment for relapsed or
refractory Chronic Lymphocytic Leukemia (CLL) and Small Lymphocytic Lymphoma
(SLL). This Phase 2 study is currently enrolling patients at Duke University and
is being externally funded.


8


ZerenexTM (ferric
citrate)





Overview





Zerenex
(ferric citrate) is an oral, iron-based compound that has the capacity to bind
to phosphate and form non-absorbable complexes. Zerenex has completed five Phase
2 clinical studies as a treatment for hyperphosphatemia (elevated phosphate
levels) in patients with ESRD, and a Phase 3 program for Zerenex, under an SPA,
is pending commencement. Zerenex is also in Phase 2 development in Japan by our
Japanese partner, JT and Torii.





Market
Opportunity





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





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





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





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





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





The need for alternative
phosphate-binding agents has long been recognized, especially given the
increasing prevalence of ESRD as well as shortcomings with current therapies.
Zerenex has the potential to be an effective and safe treatment in lowering
and/or maintaining serum phosphorus levels between 3.5 and 5.5 mg/dL in patients
with ESRD and hyperphosphatemia.





Clinical
Data





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





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





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


9


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





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





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


*mean
(standard deviation)





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





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





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


10


In
addition, Zerenex has been studied in two previous Phase 2 clinical trials using
single fixed dose regimens. In both studies, Zerenex was able to significantly
reduce serum phosphorous (p <0.005), and the degree of reduction appeared to
be generally comparable to calcium-based products which were used as positive
control arms in those studies. The studies were not designed to compare Zerenex
to calcium-based products, therefore, no formal assessment can be made of the
comparative efficacy.





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.





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.





Following
the results of the U.S. Phase 2 study of Zerenex announced in June 2009, the top
line efficacy and safety results from this Phase 2 study were submitted to the
FDA, and discussed at a 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. 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.





On
September 23, 2009, we announced results of the Open Label Extension (OLE) trial
of Zerenex for the treatment of elevated serum phosphorous levels, or
hyperphosphatemia, in patients with ESRD on dialysis. The OLE trial, conducted
in Taiwan, enrolled 29 of the 37 Taiwanese patients that had completed the
randomized, multi-center, multi-national (United States and Taiwan) dose-ranging
Phase 2 study. This OLE represents the first trial to examine the long-term
safety and efficacy of Zerenex as a phosphate binder. The treatment period in
all previous Zerenex Phase 2 clinical trials did not exceed 28
days.


11


The OLE
trial provided for a daily dose, ranging from 2 to 6 g/day of Zerenex, for a
period of up to one year following completion of the 28-day, dose-ranging Phase
2 study. The average duration of the patients' participation in the OLE trial
was 306 +/- 85 days.





Data from
the OLE trial indicated that the mean serum phosphorus level throughout the
trial was 5.22 +/- 0.18 mg/dL, and the mean product of calcium times phosphate
(CaxP) was 49.06 +/- 2.15 mg(2)/dL(2), both within the normal range as
recommended by the KDOQI guidelines. In addition, during the OLE trial, the
administration of IV iron as a supplement was withheld in 8 patients (27.6%) for
periods ranging from 3 to 6 months and the administration of EPO was withheld in
8 patients (27.6%) for short periods because the hemoglobin, hematocrit, and
iron parameters were within normal clinical ranges as assessed by the
investigator. There were no signs of potential iron overload in the study
patients, and there were no Zerenex-related serious adverse events as noted by
the investigator.





Phase
3 Registration Clinical Program





In
January 2010, we announced that we reached an agreement with the FDA regarding
an SPA on the design of a Phase 3 clinical program for Zerenex. In accordance
with the SPA agreement with the FDA, the Phase 3 clinical program for Zerenex
will consist of two clinical studies, as follows:





·
            Short-term
      efficacy study: A multicenter, randomized, open-label clinical trial with
      a planned enrollment of approximately 150 patients on hemodialysis, who
      will be randomized to fixed doses of Zerenex, ranging from 1 gram per day
      to 8 grams per day, for a treatment period of 28 days. Patients will
      undergo a 2-week washout period prior to randomization.  The
      primary endpoint of the study will be to demonstrate a dose response in
      the change of serum phosphorous from baseline (end of washout period) to
      end of the treatment period (day 28). This short-term study is
      pending commencement, with data expected in the second half of
      2010.





·
            Long-term
      safety and efficacy study: A multicenter, randomized, open-label, safety
      and efficacy clinical trial with a planned enrollment of approximately 300
      patients on hemodialysis or peritoneal dialysis. The long term study
      will consist of a 2-week washout period followed by a 52-week safety
      assessment in which patients will be randomized 2:1 to receive either
      Zerenex or the same dose of phosphate binder administered immediately
      prior to washout. The 52-week safety assessment will be followed by a
      4-week efficacy assessment in which only patients randomized to treatment
      with Zerenex during the safety assessment will be randomized to continue
      treatment with either Zerenex or placebo for a 4-week period. The
      long-term study is expected to begin in
  mid-2010.





COSTS
AND TIME TO COMPLETE PRODUCT DEVELOPMENT





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





Product candidate
              
              Target indication
              
              Development status
              
              Expected
                completion
                of phase
              
              Estimated cost to
                complete phaseKRX-0401
      (perifosine)
              
              Multiple
      myeloma
                Colorectal
      cancer
              
              Phase
      3, under SPA
                Phase
      3 pending, under SPA
              
              2H
      2011
                2H
      2011
              
              $12
      million
                $11
      millionZerenexTM
      (ferric citrate)
              
              Hyperphosphatemia
      in patients with end-stage renal disease
              
              U.S.
      Phase 3 program pending under SPA
              
              1H
      2012
              
              $12
      million





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


12


INTELLECTUAL
PROPERTY AND PATENTS





General





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





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





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





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





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




13





The
patent rights that we own or have licensed relating to our product candidates
are limited in ways that may affect our ability to exclude third parties from
competing against us if we obtain regulatory approval to market these product
candidates. In particular:


●
            Our
      composition of matter patent covering KRX-0401 (perifosine) expires in
      2013 and we cannot assure that we can obtain an extension to 2018 (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 other patents that we may hold, such as method of use
      patents.





●
            Our
      method of use patents only protect the products 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.





Proof of
direct infringement by a competitor for method of use patents can also prove
difficult because the competitors making and marketing a product typically do
not engage in the patented use.  Additionally, proof that a competitor
contributes to or induces infringement of a patented method of use by another
can also prove difficult because an off-label use of a product could prohibit a
finding of contributory infringement and inducement of infringement requires
proof of intent by the competitor.





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 directly infringe or contribute to or induce infringement of
method of use patents, such infringement is difficult to prevent or
prosecute.





In
addition, the limited patent protection described above may adversely affect the
value of our product candidates and may inhibit our ability to obtain a
corporate partner at terms acceptable to us, if at all.





Other
Intellectual Property Rights





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





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





We cannot
assure that any other drug candidates we may acquire or in-license, will obtain
such orphan drug designation or that we will be the first to receive FDA
approval for such drugs so as to be eligible for market exclusivity
protection.


14





LICENSING
AGREEMENTS AND COLLABORATIONS




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


AEterna
Zentaris Inc.





In
September 2002, we signed a commercial license agreement with Zentaris AG, a
wholly owned subsidiary of AEterna Zentaris Inc. (“Zentaris”), relating to the
development of perifosine covering composition of matter and methods of
treatment. This agreement grants us the exclusive rights to perifosine
(KRX-0401) in the United States, Canada and Mexico. To date, we have paid an
aggregate of $1.8 million to Zentaris and Zentaris is eligible to receive
additional payments of up to an aggregate of $17.0 million upon our successful
achievement of certain clinical development, regulatory and sales milestones, in
addition to royalty payments on net sales of perifosine. The license terminates
upon the later of the expiration of all underlying patent rights or ten years
from the first commercial sale of KRX-0401 in any of the covered territories. We
also have the right to extend the agreement for an additional five years beyond
the expiration of all underlying patents.





Panion
& BF Biotech, Inc.





In
November 2005, we entered into a license agreement with Panion & BF Biotech,
Inc. (“Panion”). Under the license agreement, we have acquired the exclusive
worldwide rights, excluding certain Asian-Pacific countries, for the development
and marketing of ferric citrate (Zerenex). To date, we have paid an aggregate of
$3.6 million to Panion and Panion is eligible to receive additional payments of
up to an aggregate of $8.0 million upon our successful achievement of certain
clinical development and regulatory milestones, in addition to royalty payments
on net sales of Zerenex. The license terminates upon the expiration of all
underlying patent rights.





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





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





COMPETITION





Competition
in the pharmaceutical and biotechnology industries is intense. Our competitors
include pharmaceutical companies and biotechnology companies, as well as
universities and public and private research institutions.  In
addition, companies that are active in different but related fields represent
substantial competition for us.  Many of our competitors have
significantly greater capital resources, larger research and development staffs
and facilities and greater experience in drug development, regulation,
manufacturing and marketing than we do. These organizations also compete with us
to recruit qualified personnel, attract partners for joint ventures or other
collaborations, and license technologies that are competitive with
ours.   To compete successfully in this industry we must identify
novel and unique drugs or methods of treatment and then complete the development
of those drugs as treatments in advance of our competitors.





The drugs
that we are attempting to develop will have to compete with existing therapies.
In addition, a large number of companies are pursuing the development of
pharmaceuticals that target the same diseases and conditions that we are
targeting. Other companies have products or drug candidates in various stages of
pre-clinical or clinical development to treat diseases for which we are also
seeking to discover and develop drug candidates. Some of these potential
competing drugs are further advanced in development than our drug candidates and
may be commercialized earlier. Additional information can be found under “Risk
Factors” within this report.





SUPPLY
AND MANUFACTURING





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





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





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


15


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





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





Contract
manufacturers are subject to ongoing periodic and unannounced inspections by the
FDA, the Drug Enforcement Administration and corresponding state agencies to
ensure strict compliance with cGMP and other state and federal regulations. Our
contractors in Europe face similar challenges from the numerous European Union
and member state regulatory agencies and authorized bodies. We do not have
control over third-party manufacturers’ compliance with these regulations and
standards, other than through contractual obligations. If they are deemed out of
compliance with cGMPs, product recalls could result, inventory could be
destroyed, production could be stopped and supplies could be delayed or
otherwise disrupted.





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





GOVERNMENT
AND INDUSTRY REGULATION





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





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





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





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





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





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


16


The FDA
must respond to a request for fast track designation within 60 calendar days of
receipt of the request. Over the course of drug development, a product in a fast
track development program must continue to meet the criteria for fast track
designation. Sponsors of products in fast track drug development programs must
be in regular contact with the reviewing division of the FDA to ensure that the
evidence necessary to support marketing approval will be developed and presented
in a format conducive to an efficient review. Sponsors of products in fast track
drug development programs ordinarily are eligible for priority review of a
completed application in 6-months or less and also may be permitted to submit
portions of a NDA to the FDA for review before the complete application is
submitted.




Sponsors
of drugs designated as fast track also may seek approval under the FDA’s
accelerated approval regulations.  Under this authority, the FDA may
grant marketing approval for a new drug product on the basis of adequate and
well-controlled clinical trials establishing that the drug product has an effect
on a surrogate endpoint that is reasonably likely, based on epidemiologic,
therapeutic, pathophysiologic, or other evidence, to predict clinical benefit or
on the basis of an effect on a clinical endpoint other than survival or
irreversible morbidity.   Approval will be subject to the requirement that
the applicant study the drug further to verify and describe its clinical benefit
where there is uncertainty as to the relation of the surrogate endpoint to
clinical benefit or uncertainty as to the relation of the observed clinical
benefit to ultimate outcome.  Post-marketing studies are usually underway
at the time an applicant files the NDA.  When required to be conducted,
such post-marketing studies must also be adequate and well-controlled.  The
applicant must carry out any such post-marketing studies with due
diligence.  Many companies who have been granted the right to utilize
an accelerated approval approach have failed to obtain approval. Moreover,
negative or inconclusive results from the clinical trials we hope to conduct or
adverse medical events could cause us to have to repeat or terminate the
clinical trials. Accordingly, we may not be able to complete the clinical trials
within an acceptable time frame, if at all, and, therefore, could not submit the
NDA to the FDA or foreign regulatory authorities for marketing
approval.





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




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





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





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





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





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





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





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





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





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





·
            insufficient
      supply of the drug candidates;





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





·
            ineffectiveness
      of the drug candidates.


17


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





Sponsors
of drugs may apply for a Special Protocol Assessment (SPA) from the
FDA.  The SPA process is a procedure by which the FDA provides
official evaluation and written guidance on the design and size of proposed
protocols that are intended to form the basis for a new drug application.
However, final marketing approval depends on the results of efficacy, the
adverse event profile and an evaluation of the benefit/risk of treatment
demonstrated in the Phase 3 trial. The SPA agreement may only be changed through
a written agreement between the sponsor and the FDA, or if the FDA becomes aware
of a substantial scientific issue essential to product safety or
efficacy.





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





It is
also becoming more common for the FDA to request a Risk Evaluation and
Mitigation Strategy (REMS) as part of a NDA. The REMS plan contains post-market
obligations of the sponsor to train prescribing physicians, monitor off-label
drug use, and conduct sufficient Phase 4 follow-up studies and registries to
ensure the continued safe use of the drug.





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





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





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





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


18


RESEARCH
AND DEVELOPMENT





Company-sponsored
research and development expenses (excluding non-cash compensation and
discontinued operations) totaled $74,883,000 in 2007, $38,075,000 in 2008 and
$7,372,000 in 2009. “Other research and development expenses” consist primarily
of salaries and related personnel costs, fees paid to consultants and outside
service providers for clinical and laboratory development, facilities-related
and other expenses relating to the design, development, manufacture, testing,
and enhancement of our drug candidates and technologies, as well as expenses
related to in-licensing of new product candidates.  See “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Overview.”





EMPLOYEES





As of
March 15, 2010, we had 15 full- and part-time employees. None of our employees
are represented by a collective bargaining agreement, and we have never
experienced a work stoppage. We consider our relations with our employees to be
good.








ITEM
1A.         RISK
FACTORS





You
should carefully consider the following risks and uncertainties. If any of the
following occurs, our business, financial condition or operating results could
be materially harmed. These factors could cause the trading price of our common
stock to decline, and you could lose all or part of your
investment.





Risks Related to Our
Business





We
have a limited operating history and have incurred substantial operating losses
since our inception. We expect to continue to incur losses in the future and may
never become profitable.





We have a
limited operating history. You should consider our prospects in light of the
risks and difficulties frequently encountered by early stage companies. In
addition, we have incurred substantial operating losses since our inception and
expect to continue to incur operating losses for the foreseeable future and may
never become profitable. As of December 31, 2009, we had an accumulated deficit
of approximately $321.4 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 we are
studying. Certain clinical trials are designed to continue until a
pre-determined number of events have occurred in the patients enrolled. Trials
such as this are subject to delays stemming from patient withdrawal and from
lower than expected event rates.  They may also incur additional 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 in a cost-effective or timely manner. In addition, conducting
multi-national studies adds another level of complexity and risk.  We
are subject to events affecting countries outside the United
States. Negative or inconclusive results from the clinical trials we
conduct or unanticipated adverse medical events could cause us to have to repeat
or terminate the clinical trials. We may also opt to change the delivery method,
formulation or dosage which could affect efficacy results for the drug
candidate. For example, our new one gram caplet formulation for Zerenex has not
been tested in our 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.


19


In
December 2009, we initiated a Phase 3 pivotal clinical trial for KRX-0401
(perifosine) in relapsed / refractory multiple myeloma patients pursuant to a
SPA with the FDA. In January 2010, we announced that we had reached an agreement
with the FDA regarding a SPA on the design of a Phase 3 clinical program for
Zerenex (ferric citrate) in patients with end-stage renal disease. In February
2010, we announced that we had reached an agreement with the FDA regarding a SPA
on the design of a Phase 3 trial for KRX-0401 (perifosine) in patients with
refractory metastatic colorectal cancer. Many companies which have been granted
SPAs and/or the right to utilize fast track or accelerated approvals have
ultimately failed to obtain final approval to market their drugs. Since we are
seeking approvals under SPAs, based on protocol designs negotiated with the
agency, we may be subject to enhanced scrutiny. Additionally, even if the
primary endpoint is achieved, a SPA does not guarantee approval. The FDA may
raise issues of safety, study conduct, bias, deviation from the protocol,
statistical power, patient completion rates, changes in scientific or medical
parameters or internal inconsistencies in the data prior to making its final
decision. The FDA may also seek the guidance of an outside advisory committee
prior to making its final decision.





Additionally,
we have never filed a 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 remain unanswered by the time we file our NDA.
Unless the FDA opts not to pursue these questions, submission of a 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.  It 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. The
FDA may pose additional questions or request further clinical substantiation. 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 perform
additional safety studies or analyses, which could delay the development of the
drug or lead to a decision to discontinue development of the drug. The
submission of data to the FDA from our long-term rat and canine pre-clinical
studies are prerequisites for our initiation of a long-term Phase 3 clinical
trial for Zerenex, and any safety signals could potentially delay the start of
such clinical trial 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 traits of safety and efficacy despite positive results in
initial clinical testing. Results from earlier studies may not be indicative of
results from future clinical trials. The risk remains that a pivotal program may
generate efficacy data that will be insufficiently persuasive 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. There can be no assurance that safety
and/or efficacy concerns from the prior data were not overlooked or
misinterpreted, which in subsequent, larger studies might appear and prevent
approval of such drug candidates. We may not be able to replicate in our planned
Phase 3 clinical program for Zerenex, the efficacy and safety results for
Zerenex observed in the previous Phase 2 clinical trials and the Open Label
Extension (OLE) clinical trial.  The positive effects of Zerenex on IV
iron and EPO use observed in the OLE clinical trial may not be reproducible. In
addition, we may not be able to replicate in the Phase 3 trials for KRX-0401,
the efficacy and safety results for KRX-0401 observed in previous clinical
trials. In addition, we will need to re-input our safety information on KRX-0401
into a database compliant with Good Clinical Practice.  We can provide
no assurance that safety concerns will not subsequently arise.


20


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.  Accordingly, we may
encounter unforeseen problems and delays in the approval process. Although we
may engage a clinical research organization with experience in conducting
regulatory trials, errors in the conduct, monitoring and/or auditing could
potentially invalidate the results.





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.


21


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.





If, in
the future, the market conditions for raising capital deteriorate, we may be
forced to 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.





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





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





Other Risks Related to Our
Business





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





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




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


22




Even
if we obtain FDA approval to market our drug products, if they fail to achieve
market acceptance, we may 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, KRX-0401 (perifosine), if approved in the United States would
compete with other anti-cancer agents, such as mTOR inhibitors. Pfizer Inc.,
Novartis AG and Ariad Pharmaceuticals are developing mTOR inhibitors for use in
cancer and Pfizer’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), Merck & Co.,
Inc., Millennium Pharmaceuticals, Inc. (a wholly-owned subsidiary of Takeda
Pharmaceutical Company), Novartis AG, Onyx Pharmaceuticals, Inc. and OSI
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. 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.


23


Our
commercial opportunities may be reduced or eliminated if our competitors develop
and market products that are less expensive, more effective or safer than our
drug products. Other companies have drug candidates in various stages of
pre-clinical or clinical development to treat diseases for which we are also
seeking to discover and develop drug products. Some of these potential competing
drugs are further advanced in development than our drug candidates and may be
commercialized earlier. Even if we are successful in developing effective drugs,
our products may not compete successfully with products produced by our
competitors.





If
we lose our key personnel or are unable to attract and retain additional
personnel, our operations could be disrupted and our business could be
harmed.





As of
March 15, 2010, 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.  Although we have an employment agreement with Mr. Bentsur,
such agreement does not prevent him from terminating his employment with
us.





Any
acquisitions we make may require a significant amount of our available cash and
may not be scientifically or commercially successful.





As part
of our business strategy, we may effect acquisitions to obtain additional
businesses, products, technologies, capabilities and personnel. If we make one
or more significant acquisitions in which the consideration includes cash, we
may be required to use a substantial portion of our available cash.





Acquisitions involve a number of
operational risks, including:





●
            difficulty
      and expense of assimilating the operations, technology and personnel of
      the acquired business;





●
            our
      inability to retain the management, key personnel and other employees of
      the acquired business;





●
            our
      inability to maintain the acquired company's relationship with key third
      parties, such as alliance partners;





●
            exposure
      to legal claims for activities of the acquired business prior to the
      acquisition;





●
            the
      diversion of our management's attention from our core business;
      and





●
            the
      potential impairment of goodwill and write-off of in-process research and
      development costs, adversely affecting our reported results of
      operations.





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





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





●
            government
      and health administration
authorities;





●
            private
      health insurers;





●
            managed
      care programs; and





●
            other
      third-party payors.





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


24


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 pricing of healthcare products and
services in the United States or internationally, the reimportation of drugs
into the U.S. from other countries (where they are then sold at a lower price),
and the amount of reimbursement available from governmental agencies or other
third party payors. Health care reform legislation currently being considered in
the U.S. House of Representatives and the Senate could have a substantial impact
on the pharmaceutical industry. For example, proposals to impose an annual fee
on manufacturers of branded prescription pharmaceuticals could impact our
products. 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.





For
example, the Centers for Medicare & Medicaid Services has proposed that
Medicare payment for phosphate binders be bundled into the packaged composite
rate paid by Medicare to dialysis clinics as reimbursement for most of the
dialysis-related services provided to Medicare patients. If these product
classes are bundled into the composite rate as proposed, separate Medicare
reimbursement will no longer be available for phosphate binders. It is too early
to project the impact bundling may have on the phosphate binder
industry.





On
September 27, 2007, the Food and Drug Administration Amendments Act of 2007 was
enacted, giving the FDA enhanced post-market authority, including the authority
to require post-marketing studies and clinical trials, labeling changes based on
new safety information, and compliance with risk evaluations and mitigation
strategies approved by the FDA. The FDA's exercise of its new authority could
result in delays or increased costs during the period of product development,
clinical trials and regulatory review and approval, increased costs to assure
compliance with new post-approval regulatory requirements, and potential
restrictions on the sale or distribution of approved products.





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.


25


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. OCOG has not entered into a new third-party
service contracts since 2005 and does not plan to enter into any further service
contracts. In conducting the activities of OCOG, any failure on our part to
comply with applicable governmental regulations or contractual obligations could
expose us to liability to our clients and could have a material adverse effect
on us. We also could be held liable for errors or omissions in connection with
the services we perform. In addition, the wrongful or erroneous delivery of
health care information or services may expose us to liability. If we were
required to pay damages or bear the costs of defending any such claims, the
losses could be material.





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





The
development, manufacturing, pricing, sales, and reimbursement of our products,
together with our general operations, are subject to extensive regulation by
federal, state and other authorities within the United States and numerous
entities outside of the United States. We are a relatively small company with 15
full and part-time employees as of March 15, 2010. 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 December 31, 2009, exclusive of our auction rate security investment,
anticipated milestones to be received, and expected exercises of expiring
options and warrants, are sufficient to meet our anticipated working capital
needs and fund our business plan for approximately 20 to 24 months from December
31, 2009. 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 investment
      in an auction rate security; and





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





If our
capital resources are insufficient to meet future capital requirements, we will
have to raise additional funds. If we are unable to obtain additional funds on
terms favorable to us or at all, we may be required to cease or reduce our
operating activities or sell or license to third parties some or all of our
intellectual property. If we raise additional funds by selling additional shares
of our capital stock, the ownership interests of our stockholders will be
diluted. If we need to raise additional funds through the sale or license of our
intellectual property, we may be unable to do so on terms favorable to us, if at
all.


26


With
respect to our one remaining auction rate security investment, we will continue
to attempt to sell this security until the auction is successful. If
uncertainties in the credit and capital markets continue, these markets
deteriorate further or this security experiences any credit rating downgrades,
we may incur additional impairment charges with respect to this auction rate
security investment, which could negatively affect our financial condition, cash
flow and reported earnings. We continue to monitor the fair value of our one
remaining auction rate security investment 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 security
investment 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 other patents that we may hold, such as method of use
      patents.





●
            Our
      method of use patents only protect the products 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.





Proof of
direct infringement by a competitor for method of use patents can also prove
difficult because the competitors making and marketing a product typically do
not engage in the patented use.  Additionally, proof that a competitor
contributes to or induces infringement of a patented method of use by another
can also prove difficult because an off-label use of a product could prohibit a
finding of contributory infringement and inducement of infringement requires
proof of intent by the competitor.





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 directly infringe or contribute to or induce infringement of
method of use patents, 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.


27


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.
In September 2009, we announced that KRX-0401 (perifosine) has received
Orphan-Drug designation from the FDA for the treatment of multiple myeloma. We
believe that KRX-0401 (perifosine) may be eligible for additional orphan drug
designations; however, we cannot assure that KRX-0401, or any other drug
candidates we may acquire or in-license, will obtain such orphan drug
designations.





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.





On August
28, 2009, we filed with the SEC a shelf registration statement on Form S-3 (File
No. 333-161607)), that was declared effective by the SEC on September 23, 2009,
providing for the offering of up to $40 million of our common stock and warrants
to purchase our common stock. Subsequent to the registered direct offering that
was completed on September 30, 2009, there remains approximately $12.2 million
of our common stock and warrants available for sale on this shelf registration
statement. Future sales pursuant to this registration statement could depress
the market for our common stock.





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 2,872,422 shares of our common stock
to former stockholders of ACCESS Oncology upon the achievement of certain
development and sales milestones.





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.


28




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
1B. UNRESOLVED STAFF COMMENTS





None.





ITEM
2. PROPERTIES.





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





ITEM
3. LEGAL PROCEEDINGS.





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





In March
2010, we settled a dispute 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. ICON was claiming that we owed it
$816,647 in unpaid invoices, much of which is made up of charges for annual
storage fees incurred after the effective date of termination of the agreements.
Under the terms of the settlement agreement, we paid ICON $400,000 in settlement
of all claims.


29




In
October 2009, we filed a statement of claim with the Financial Institution
Regulatory Authority (“FINRA”) to commence an arbitration proceeding against an
SEC registered broker-dealer. In this arbitration proceeding, we seek
damages arising from that broker-dealer’s recommendations and purchases of
auction rate securities for our cash management account. The claim will be
determined by a panel of three FINRA arbitrators. In January 2010, the
broker-dealer filed an answer to the statement of claim and denied liability.
The parties are in the process of selecting an arbitration panel.





ITEM
4.  [Removed and Reserved]





PART II





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





Market
Information





Our
common stock is listed on the NASDAQ Capital Marketand
trades under the symbol “KERX.”





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





Fiscal Year Ended December 31,
      2009
                
                High
                
                
                LowFourth
      Quarter
                
                $
                3.20
                
                
                $
                1.76Third
      Quarter
                
                $
                2.69
                
                
                $
                0.71Second
      Quarter
                
                $
                1.35
                
                
                $
                0.16First
      Quarter
                
                $
                0.32
                
                
                $
                0.11





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





Holders





The
number of record holders of our common stock as of March 15, 2010 was
71.





Dividends





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




30


Securities
Authorized for Issuance Under Equity Compensation Plans
 
 The
following table provides information as of December 31, 2009, regarding the
securities authorized for issuance under our equity compensation plans,
consisting of the 1999 Stock Option Plan, as amended, the 2000 Stock Option
Plan, as amended, the 2002 CEO Incentive Stock Option Plan, the 2004 President
Incentive Plan, the 2004 Long-Term Incentive Plan, the 2007 Incentive Plan and
the 2009 CEO Incentive Plan.


Equity Compensation Plan InformationPlan Category
                              
                              Number of
                                  securities to be
                                  issued upon
                                  exercise of
                                  outstanding options
                              
                              
                              Weighted-average
                                  exercise price of
                                  outstanding
                                  options
                              
                              
                              Number of
                                  securities
                                  remaining
                                  available for
                                  future issuance
                                  under equity
                                  compensation
                                  plans (excluding
                                  securities reflected
                                  in column (a))(a)
                              
                              
                              (b)
                              
                              
                              (c)Equity
      compensation plans approved by security holders
                              
                              
                              6,250,915
                              
                              
                              $
                              8.73
                              
                              
                              
                              2,628,018Equity
      compensation plans not approved by security holders
                              
                              
                              3,102,657
                              
                              
                              $
                              2.40
                              
                              
                              
                              —Total
                              
                              
                              9,353,572
                              
                              
                              $
                              6.63
                              
                              
                              
                              2,628,018





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




31





COMMON
STOCK PERFORMANCE GRAPH





The
following graph compares the cumulative total stockholder return on our common
stock for the period from December 31, 2004 through December 31, 2009, with the
cumulative total return over such period on (i) the United States Index of The
NASDAQ Stock Market and (ii) the Biotechnology Index of The NASDAQ Stock Market.
The graph assumes an investment of $100 on December 31, 2004, in our common
stock (at the closing market price) and in each of the indices listed above, and
assumes the reinvestment of all dividends. Measurement points are December 31 of
each year.










32




ITEM 6. SELECTED FINANCIAL DATA.





The
following Statement of Operations Data for the years ended December 31, 2009,
2008, 2007, 2006 and 2005, and Balance Sheet Data as of December 31, 2009, 2008,
2007, 2006 and 2005, as set forth below are derived from our audited
consolidated financial statements. This financial data should be read in
conjunction with “Item 7.  Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and “Item 8.  Financial
Statements and Supplementary Data.”





Years ended December 31,2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005(in
      thousands, except per share data)Statement
      of Operations Data:Revenue:License
      revenue
                
                $
                21,616
                
                
                $
                1,180
                
                
                $
                204
                
                
                $
                —
                
                
                $
                —Service
      revenue
                
                
                3
                
                
                
                103
                
                
                
                52
                
                
                
                431
                
                
                
                574Other
      revenue
                
                
                3,575
                
                
                
                —
                
                
                
                727
                
                
                
                —
                
                
                
                —Total
      revenue
                
                
                25,194
                
                
                
                1,283
                
                
                
                983
                
                
                
                431
                
                
                
                574Operating
      expenses:Cost
      of services
                
                
                —
                
                
                
                27
                
                
                
                124
                
                
                
                390
                
                
                
                819Research
      and development:Non-cash
      compensation
                
                
                1,233
                
                
                
                (67
                )
                
                
                3,574
                
                
                
                6,504
                
                
                
                594Other
      research and development
                
                
                7,372
                
                
                
                38,075
                
                
                
                74,883
                
                
                
                55,751
                
                
                
                24,182Total
      research and development
                
                
                8,605
                
                
                
                38,008
                
                
                
                78,457
                
                
                
                62,255
                
                
                
                24,776Selling,
      general and administrative:Non-cash
      compensation
                
                
                1,867
                
                
                
                6,815
                
                
                
                7,086
                
                
                
                8,408
                
                
                
                775Other
      selling, general and administrative
                
                
                4,904
                
                
                
                7,474
                
                
                
                9,141
                
                
                
                8,519
                
                
                
                3,416Total
      selling, general and administrative
                
                
                6,771
                
                
                
                14,289
                
                
                
                16,227
                
                
                
                16,927
                
                
                
                4,191Total
      operating expenses
                
                
                15,376
                
                
                
                52,324
                
                
                
                94,808
                
                
                
                79,572
                
                
                
                29,786Operating
      income (loss)
                
                
                9,818
                
                
                
                (51,041
                )
                
                
                (93,825
                )
                
                
                (79,141
                )
                
                
                (29,212
                )Other
      income (expense):Interest
      and other income (expense), net
                
                
                667
                
                
                
                (1,665
                )
                
                
                4,555
                
                
                
                6,393
                
                
                
                2,317Income
      taxes
                
                
                —
                
                
                
                —
                
                
                
                (36
                )
                
                
                —
                
                
                
                —Income
      (loss) from continuing operations
                
                
                10,485
                
                
                
                (52,706
                )
                
                
                (89,306
                )
                
                
                (72,748
                )
                
                
                (26,895
                )Income
      (loss) from discontinued operations
                
                
                —
                
                
                
                (175
                )
                
                
                (756
                )
                
                
                (1,016
                )
                
                
                —Net
      income (loss)
                
                $
                10,485
                
                
                $
                (52,881
                )
                
                $
                (90,062
                )
                
                $
                (73,764
                )
                
                $
                (26,895
                )Basic
      and diluted income (loss) per common share:Continuing
      operations
                
                $
                0.21
                
                
                $
                (1.17
                )
                
                $
                (2.05
                )
                
                $
                (1.74
                )
                
                $
                (0.78
                )Discontinued
      operations
                
                
                —
                
                
                
                (0.01
                )
                
                
                (0.02
                )
                
                
                (0.02
                )
                
                
                —Basic
      and diluted income (loss) per common share
                
                $
                0.21
                
                
                $
                (1.18
                )
                
                $
                (2.07
                )
                
                $
                (1.76
                )
                
                $
                (0.78
                )





As of December 31,2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005(in
      thousands)Balance
      Sheet Data:Cash,
      cash equivalents, interest receivable and short-term investment
      securities
                
                $
                34,000
                
                
                $
                15,467
                
                
                $
                62,386
                
                
                $
                112,920
                
                
                $
                86,783Working
      capital
                
                
                29,489
                
                
                
                9,282
                
                
                
                42,319
                
                
                
                102,774
                
                
                
                83,890Long-term
      investment securities
                
                
                1,914
                
                
                
                7,185
                
                
                
                2,296
                
                
                
                12,690
                
                
                
                13,950Total
      assets
                
                
                40,818
                
                
                
                26,634
                
                
                
                81,061
                
                
                
                140,313
                
                
                
                105,097Deferred
      revenue, net of current portion
                
                
                —
                
                
                
                17,308
                
                
                
                11,022
                
                
                
                —
                
                
                
                —Other
      liabilities
                
                
                50
                
                
                
                118
                
                
                
                202
                
                
                
                294
                
                
                
                322Contingent
      equity rights
                
                
                2,639
                
                
                
                4,004
                
                
                
                4,004
                
                
                
                4,004
                
                
                
                4,004Total
      stockholders’ equity (deficiency)
                
                
                32,097
                
                
                
                (1,489
                )
                
                
                44,422
                
                
                
                123,821
                
                
                
                94,678




33





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





The
following discussion and analysis contains forward-looking statements about our
plans and expectations of what may happen in the future. Forward-looking
statements are based on a number of assumptions and estimates that are
inherently subject to significant risks and uncertainties, and our results could
differ materially from the results anticipated by our forward-looking statements
as a result of many known or unknown factors, including, but not limited to,
those factors discussed in “Item 1A. Risk Factors.”
See also the “Special Cautionary Notice Regarding Forward-Looking Statements”
set forth at the beginning of this report.





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





Overview





We are a
biopharmaceutical company focused on the acquisition, development and
commercialization of medically important pharmaceutical products for the
treatment of life-threatening diseases, including cancer and renal disease. We
are developing KRX-0401 (perifosine), a novel, potentially first-in-class, oral
anti-cancer agent that inhibits Akt activation in the phosphoinositide 3-kinase
(PI3K) pathway, and also affects a number of other key signal transduction
pathways, including the JNK pathway, all of which are pathways associated with
programmed cell death, cell growth, cell differentiation and cell survival.
KRX-0401 has demonstrated both safety and clinical efficacy in several tumor
types, both as a single agent and in combination with novel therapies. KRX-0401
is currently in a Phase 3 trial, under Special Protocol Assessment, or SPA, in
multiple myeloma, with a Phase 3 trial in refractory metastatic colorectal
cancer, under SPA, pending commencement, and in Phase 2 clinical development for
several other tumor types. 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 completed five Phase 2 clinical studies as
a treatment for hyperphosphatemia (elevated phosphate levels) in patients with
end-stage renal disease, or ESRD, and our Phase 3 program for Zerenex, under an
SPA, is pending commencement. Zerenex is also in Phase 2 development in Japan by
our Japanese partner, JT and Torii. 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.





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 in 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.




34




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 cost
of services consists of all costs specifically associated with our clinical
trial management and site recruitment client programs such as salaries, benefits
paid to personnel, payments to third-party vendors and other support facilities
associated with delivering services to our clients. Costs of services are
recognized as services are performed.





Our
research and development expenses consist primarily of salaries and related
personnel costs, fees paid to consultants and outside service providers for
clinical and laboratory development, facilities-related and other expenses
relating to the design, development, manufacture, testing, and enhancement of
our drug candidates and technologies, as well as expenses related to
in-licensing of new product candidates. We expense our research and development
costs as they are incurred. Other research and development expenses, which
excludes non-cash compensation and discontinued operations, for the years ended
December 31, 2009, 2008 and 2007 were $7,372,000, $38,075,000 and $74,883,000,
respectively.





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




Years
      ended December 31,2009
                
                
                2008
                
                
                2007KRX-0401
      (perifosine)
                
                $
                1,930,000
                
                
                $
                7,045,000
                
                
                $
                15,210,000Zerenex
                
                
                3,647,000
                
                
                
                3,423,000
                
                
                
                4,825,000Other
                
                
                679,000
                
                
                
                677,000
                
                
                
                2,088,000Terminated
      programs (including Sulonex)
                
                
                1,116,000
                
                
                
                26,930,000
                
                
                
                52,760,000Total
                
                $
                7,372,000
                
                
                $
                38,075,000
                
                
                $
                74,883,000





Amounts
in the above table exclude discontinued operations.





Our
general and administrative expenses consist primarily of salaries and related
expenses for executive, finance and other administrative personnel, recruitment
expenses, professional fees and other corporate expenses, including investor
relations, legal activities and facilities-related expenses.





Our
results of operations include non-cash compensation expense as a result of the
grants of stock options and restricted stock. 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 expenses.





For
awards of options and restricted stock to consultants and other third-parties,
compensation expense is determined at the “measurement date.” 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. 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.





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.




35




Our
ongoing clinical trials will be lengthy and expensive. Even if these trials show
that our drug candidates are effective in treating certain indications, there is
no guarantee that we will be able to record commercial sales of any of our drug
candidates in the near future. In addition, we expect losses to continue as we
continue to fund in-licensing and development of new drug candidates. As we
continue our development efforts, we may enter into additional third-party
collaborative agreements and may incur additional expenses, such as licensing
fees and milestone payments. In addition, we may need to establish the
commercial infrastructure required to manufacture, market and sell our drug
candidates following approval, if any, by the FDA, which would result in us
incurring additional expenses. As a result, our quarterly results may fluctuate
and a quarter-by-quarter comparison of our operating results may not be a
meaningful indication of our future performance.





RESULTS
OF OPERATIONS





Years
Ended December 31, 2009 and 2008





License Revenue. License
revenue increased by $20,436,000 to $21,616,000 for the year ended December 31,
2009, as compared to $1,180,000 for the year ended December 31, 2008. The
increase in license revenue during the year ended December 31, 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. The Amended and Restated Sublicense
Agreement, among other things, provided for the elimination of all significant
on-going obligations under the sublicense agreement. In addition, during the
year ended December 31, 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. We may recognize additional license revenue
in 2010 pursuant to development milestones of Zerenex in Japan.





Service Revenue. Service
revenue decreased by $100,000 to $3,000 for the year ended December 31, 2009, as
compared to service revenue of $103,000 for the year ended December 31, 2008. We
do not expect our service revenue to have a material impact on our financial
results during 2010.





Other Revenue. Other revenue
for the year ended December 31, 2009 was $3,575,000, of which $3,500,000 was due
to the settlement of our dispute with Alfa Wassermann, in July 2009, over issues
arising from the terminated license agreement for Sulonex (sulodexide) and
$75,000 was related to a payment earned in June 2009 from a December 2008
license termination agreement for KRX-0501. Payments associated with these
terminated licenses are recognized as earned since we have no on-going
responsibilities under the terminated license agreements or the termination
agreement. There was no other revenue for the year ended December 31, 2008. We
do not expect to recognize other revenue during 2010.





Non-Cash Compensation Expense
(Research and Development). Non-cash compensation expense (research and
development) related to equity incentive grants increased by $1,300,000 to
$1,233,000 for the year ended December 31, 2009, as compared to a credit of
$67,000 for the year ended December 31, 2008. Non-cash compensation expense in
the year ended December 31, 2008 included a $1,233,000 credit to expense related
to the reversal of costs for 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
$30,703,000 to $7,372,000 for the year ended December 31, 2009, as compared to
$38,075,000 for the year ended December 31, 2008. The decrease in other research
and development expenses was due primarily to a $26,856,000 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 year ended December 31, 2008 are an $11,037,000 impairment
charge related to the write-down of the assets of the Sulonex manufacturing
suite to their fair value following the cessation of our development of Sulonex,
and a $2,063,000 expense for costs relating to the required restoration of the
leased manufacturing facility to its original condition. For more information
regarding these expenses please see Note 17 – Restructuring below. In addition
to the $26,856,000 decrease in other research and development expenses related
to Sulonex discussed above, there was a decrease of $5,115,000 in research and
development expenses related to KRX-0401, primarily due to reductions in
headcount and other research and development expenses related to the development
program, partially offset by a $1,460,000 one-time accrual for a terminated
early-stage pipeline product candidate. We expect our other research and
development costs to increase substantially in 2010, as compared to 2009, due
our Phase 3 clinical programs for KRX-0401 and Zerenex.





Non-Cash Compensation Expense
(Selling, General and Administrative). Non-cash compensation expense
(selling, general and administrative) related to equity incentive grants
decreased by $4,948,000 to $1,867,000 for the year ended December 31, 2009, as
compared to an expense of $6,815,000 for the year ended December 31, 2008. The
decrease was primarily due to a $5,313,000 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, offset by
$660,000 in non-cash compensation associated with the equity modifications of
Mr. Weiss’ outstanding stock options and shares of restricted
stock.




36




Other Selling General and
Administrative Expenses. Other selling, general and administrative
expenses decreased by $2,570,000 to $4,904,000 for the year ended December 31,
2009, as compared to an expense of $7,474,000 for the year ended December 31,
2008. The decrease was due primarily to a $1,237,000 decrease in legal fees and
litigation costs and a reduction of expenses in the year ended December 31,
2009, as compared to the prior year, as a result of the 2008 Restructuring,
partially offset by approximately $833,000 of expense in the year ended December
31, 2009, for severance, pro rata bonus and notice pay related to the
termination of our former chief executive officer on April 23, 2009. The year
ended December 31, 2008, included a one-time premium payment for insurance of
$1,151,000. We expect our other selling, general and administrative expenses in
2010 to remain at a comparable level to those reported in 2009, excluding
one-time charges.





Interest and Other Income (Expense),
Net. Interest and other income (expense), net, increased by $2,332,000 to
income of $667,000 for the year ended December 31, 2009, as compared to an
expense of $1,665,000 for the year ended December 31, 2008. The year ended
December 31, 2008, included $3,196,000 of impairment charges related to our
investments in auction rate securities. Interest income related to our
investments decreased in the year ended December 31, 2009, as compared to the
year ended December 31, 2008, due to a lower level of invested funds and lower
interest rates as compared to the prior year.





Years
Ended December 31, 2008 and 2007





License Revenue. License
revenue increased by $976,000 to $1,180,000 for the year ended December 31,
2008, as compared to $204,000 for the year ended December 31, 2007. License
revenue is related to the amortization of a portion of the license fees of $12.0
million and milestone payment of $8.0 million associated with our sublicense
agreement with JT and Torii. Prior to the amendment in 2009, such amounts were
recognized as license revenue on a straight-line basis over the life of the
agreement, which is through the expiration of the last-to-expire patent covered
by the agreement in 2023, and represented the estimated period over which we had
certain ongoing responsibilities under the original sublicense agreement. The
increase in license revenue was due to a full year of amortization in 2008, as
compared to a partial period of amortization in 2007.





Service Revenue. Service
revenue increased by $51,000 to $103,000 for the year ended December 31, 2008,
as compared to service revenue of $52,000 for the year ended December 31, 2007.
The increase in service revenue was primarily due to the timing and extent of
services performed in accordance with our service contracts.





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





Cost of Services. Cost of
services decreased by $97,000 to $27,000 for the year ended December 31, 2008,
as compared to an expense of $124,000 for the year ended December 31,
2007.





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





Other Research and Development
Expenses. Other research and development expenses decreased by
$36,808,000 to $38,075,000 for the year ended December 31, 2008, as compared to
$74,883,000 for the year ended December 31, 2007. The decrease in other research
and development expenses was due primarily to a $22,872,000 decrease in research
and development expenses related the Sulonex program which was terminated in
March 2008. Included in the research and development expenses related to Sulonex
for the year ended December 31, 2008 are an $11,037,000 impairment charge
related to the write-down of the assets of the Sulonex manufacturing suite to
their fair value following the cessation of our development of Sulonex, and a
$2,063,000 expense for costs relating to the required restoration of the leased
manufacturing facility to its original condition. For more information regarding
these expenses please see “Note 17 - Restructuring” to our consolidated
financial statements. Including the impairment charge and restoration expense
discussed above, other research and development expenses related to Sulonex were
$26,500,000 and $49,372,000 during the years ended December 31, 2008 and 2007,
respectively.  In addition to the $22,872,000 decrease in other
research and development expenses related to Sulonex discussed above, there were
decreases of $8,165,000, $1,402,000 and $1,411,000 in expenses related to
KRX-0401, Zerenex and our other research and development programs, respectively,
primarily due to reductions in headcount and other expenses related to these
development programs.




37




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





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





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





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





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





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.





On
September 30, 2009, we completed a registered direct offering to certain
investors of 8,000,000 shares of our common stock and warrants to purchase up to
a total of 2,800,000 shares of our common stock for gross proceeds of
approximately $20 million. The common stock and warrants were sold in units,
with each unit consisting of one share of common stock and a warrant to purchase
0.35 of a share of common stock. The purchase price per unit was $2.50. Subject
to certain ownership limitations, the warrants are exercisable at any time on or
after the initial issue date and on or prior to October 1, 2010, at an exercise
price of $2.65 per warrant share. In addition, the placement agent received a
warrant to purchase up to 108,000 shares of our common stock at an exercise
price of $3.125 per warrant share, exercisable at any time on or prior to
October 1, 2010. Total proceeds to us from this public offering were
approximately $18.4 million, net of offering costs of approximately $1.6
million. The shares and warrants were sold under a shelf registration statement
on Form S-3 (File No. 333-161607) filed with the SEC on August 28, 2009, and
declared effective by the SEC on September 23, 2009. The registration statement
provides for the offering of up to $40 million of our common stock and warrants.
Subsequent to this registered direct offering, there remains approximately $12.2
million of our common stock and warrants available for sale under the shelf
registration statement. We may offer the remaining securities under our shelf
registration from time to time in response to market conditions or other
circumstances if we believe such a plan of financing is in our best interests
and the best interests of our stockholders. We believe that the shelf
registration provides us with the flexibility to raise additional capital to
finance our operations as needed.





As of
December 31, 2009, we had $34.0 million in cash, cash equivalents, interest
receivable, and short-term investment securities, an increase of $18.5 million
from December 31, 2008. In addition, at December 31, 2009, we had $1.9 million
invested in a non-current auction rate security, as discussed below. We
currently anticipate that our cash, cash equivalents and investment securities
as of December 31, 2009, exclusive of our auction rate security investment,
anticipated milestones to be received, and expected exercises of expiring
options and warrants, are sufficient to meet our anticipated working capital
needs and fund our business plan for approximately 20 to 24 months from December
31, 2009.





Cash used
in operating activities in continuing operations for the year ended December 31,
2009 was $5.5 million, as compared to $38.6 million for the year ended December
31, 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, 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, and
$2.75 million of the $3.5 million settlement award received from Alfa Wassermann
($0.75 million will be paid to us on or before July 30, 2010).




38




For the
year ended December 31, 2009, net cash used in investing activities of $9.7
million was primarily the result of the investment in held-to-maturity
short-term securities. For the year ended December 31, 2009, net cash provided
by financing activities totaled $18.5 million and was primarily due to our
registered direct offering of common stock and warrants completed in September
2009.





As of
December 31, 2009, we have a $1.9 million long-term investment in one auction
rate student loan-backed security. 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 our investments
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. We are uncertain as to when, or if, the liquidity issue relating to our
one remaining auction rate security will improve. Quarterly, we assess the fair
value of our auction rate securities portfolio. As a result of this valuation
process, we recorded impairment charges totaling $0.1 and $3.2 million during
the years ended December 31, 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. For the year ended December 31, 2009, we reported other
comprehensive income of $0.2 million for a temporary unrealized gain related to
the increase in estimated fair value for our one remaining auction rate security
investment. The estimated fair value of our one remaining auction rate security
investment ($3.0 million par value) is $1.9 million at December 31,
2009.





In 2009,
we sold four of our auction rate security investments. The securities had a
combined par value of $7.0 million and a combined adjusted book value of $5.4
million. Proceeds to us from the sale of these securities were $5.6 million,
representing a gain of $0.2 million over adjusted book value. We will continue
to attempt to sell our one remaining auction rate security until the auction is
successful; however, there is no assurance as to when, or if, the market for
auction rate securities will recover. The fair value of our auction rate
security investment could change significantly based on market conditions and
continued uncertainties in the credit markets. If these uncertainties continue,
or if this security experiences credit rating downgrades, we may incur
additional impairment charges with respect to this auction rate security, which
could negatively affect our financial condition, cash flow and reported
earnings, and the lack of liquidity of our remaining auction rate security
investment could have a material impact on our ability to fund our
operations.





OFF-BALANCE
SHEET ARRANGEMENTS





We have
not entered into any transactions with unconsolidated entities whereby we have
financial guarantees, subordinated retained interests, derivative instruments or
other contingent arrangements that expose us to material continuing risks,
contingent liabilities, or any other obligations under a variable interest in an
unconsolidated entity that provides us with financing, liquidity, market risk or
credit risk support.





OBLIGATIONS
AND COMMITMENTS





As of
December 31, 2009, we have known contractual obligations, commitments and
contingencies of $4,800,000. Of this amount, $4,341,000 relates to research and
development agreements (relating to our KRX-0401 and Zerenex clinical programs),
of which $2,284,000 is due within the next year. Certain of these commitments
are contingent upon our continuing development of our drug candidates. The
additional $459,000 relates to our operating lease obligations, of which all is
due within the next year.





Payment due by periodContractual obligations
                
                Total
                
                
                Less than
                  1 year
                
                
                1-3
                  years
                
                
                3-5
                  years
                
                
                More than
                  5 yearsResearch
      and development agreements
                
                $
                4,341,000
                
                
                $
                2,284,000
                
                
                $
                2,057,000
                
                
                $
                —
                
                
                $
                —Operating
      leases
                
                
                459,000
                
                
                
                459,000
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
                
                $
                4,800,000
                
                
                $
                2,743,000
                
                
                $
                2,057,000
                
                
                $
                —
                
                
                $
                —


We have
undertaken to make contingent milestone payments to certain of our licensors of
up to approximately $41.1 million over the life of the licenses, of which
approximately $36.6 million will be due upon or following regulatory approval of
the licensed drugs. We have also committed to pay to the former stockholders of
ACCESS Oncology certain contingent equity rights (up to 2,872,422 shares of our
common stock) if KRX-0401 meets certain development milestones. The contingent
equity rights have been recognized as a non-current liability on the
consolidated balance sheet. The uncertainty relating to the timing of the
commitments described in this paragraph prevents us from including them in the
table above.


39




CRITICAL
ACCOUNTING POLICIES





The
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amount of assets and liabilities and related disclosure of
contingent assets and liabilities at the date of our financial statements and
the reported amounts of revenues and expenses during the applicable period.
Actual results may differ from these estimates under different assumptions or
conditions.





We define
critical accounting policies as those that are reflective of significant
judgments and uncertainties and which may potentially result in materially
different results under different assumptions and conditions. In applying these
critical accounting policies, our management uses its judgment to determine the
appropriate assumptions to be used in making certain estimates. These estimates
are subject to an inherent degree of uncertainty. Our critical accounting
policies include the following:





Stock Compensation. We have
granted stock options and restricted stock to employees, directors and
consultants, as well as warrants to other third parties. For 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.





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.




40




Revenue Recognition.We
recognize license revenue in accordance with the revenue recognition guidance of
the Codification. 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.





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 December 31, 2009, there was approximately $3.2 million
of goodwill on our consolidated balance sheet. Goodwill is reviewed for
impairment annually, or when events arise that could indicate that an impairment
exists. We test for goodwill impairment 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 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 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.  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. With the cessation of our
development of Sulonex in March 2008, we recognized an impairment charge of
$11.0 million, which is included in other research and development expenses in
the year ended December 31, 2008, to write the assets down to their fair value
of $300,000, the amount for which the assets were sold in June
2008.




41




Impairment of Investment
Securities. As of December 31, 2009, we have a $1.9 million long-term
investment in one auction rate student loan-backed security. Auction rate
securities are recorded at their fair value and classified as long-term
investments. The uncertainties in the credit markets have affected our
investments 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. We are uncertain as to when, or if, the liquidity issue
relating to our one remaining auction rate security investment will improve.
Quarterly, we assess 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 $3.2 million during the years ended December 31, 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. For the year ended
December 31, 2009, we reported other comprehensive income of $0.2 million for a
temporary unrealized gain related to the increase in estimated fair value for
our one remaining auction rate security investment. The estimated fair value of
our one remaining auction rate security investment ($3.0 million par value) is
$1.9 million at December 31, 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 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 one remaining auction rate security investment could change
significantly based on market conditions and continued uncertainties in the
credit markets. If these uncertainties continue, or if this security experiences
credit rating downgrades, we may incur additional impairment charges with
respect to our auction rate security investment. We continue to monitor the fair
value of our auction rate security investment and relevant market conditions and
will recognize additional impairment charges if future circumstances warrant
such charges.





We review
investment securities for impairment and 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.




42


RECENTLY
ISSUED ACCOUNTING STANDARDS
 
 On
September 30, 2009, we adopted changes issued by the Financial Accounting
Standards Board, or FASB, to the authoritative hierarchy of GAAP. These changes
establish the FASB Accounting Standards Codification, or Codification, as the
source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with GAAP. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. The FASB will no longer issue new standards in the form of
Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts;
instead the FASB will issue Accounting Standards Updates, or ASUs. ASUs will not
be authoritative in their own right as they will only serve to update the
Codification. These changes and the Codification itself do not change GAAP.
Other than the manner in which new accounting guidance is referenced, the
adoption of these changes had no impact on our consolidated financial
statements.


In
October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue
Arrangements. This ASU eliminates the requirement to establish the fair value of
undelivered products and services and instead provides for separate revenue
recognition based upon management’s estimate of the selling price for an
undelivered item when there is no other means to determine the fair value of
that undelivered item. The ASU also eliminates the use of the residual method
and instead requires an entity to allocate revenue using the relative selling
price method. Additionally, the guidance expands disclosure requirements with
respect to multiple-deliverable revenue arrangements. This ASU is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. We are currently evaluating
the potential impact of this standard on our consolidated financial
statements.





ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK





The
primary objective of our investment activities is to preserve principal while
maximizing our income from investments and minimizing our market risk. We invest
in government and investment-grade corporate debt in accordance with our
investment policy, and also currently have an illiquid investment in an auction
rate security. Some of the securities in which we invest have market risk. This
means that a change in prevailing interest rates, and/or credit risk, may cause
the fair value of the investment to fluctuate. For example, if we hold a
security that was issued with a fixed interest rate at the then-prevailing rate
and the prevailing interest rate later rises, the fair value of our investment
will probably decline. As of December 31, 2009, our portfolio of financial
instruments consists of cash equivalents and short-term interest bearing
securities, including money market funds and government debt, and a long-term
auction rate security investment. Due to the short-term nature of our money
market funds and held-to-maturity investments, we believe we have no material
exposure to interest rate risk, and/or credit risk, arising from our money
market funds and held-to-maturity investments.





As of
December 31, 2009, we have a $1.9 million long-term investment in one auction
rate student loan-backed security. Auction rate securities are recorded at their
fair value and classified as long-term investments. The uncertainties in the
credit markets have affected our investments 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. We are uncertain as to when, or
if, the liquidity issue relating to our one remaining auction rate security
investment will improve. We will continue to attempt to sell our one remaining
auction rate security until the auction is successful. If uncertainties in the
credit and capital markets continue, these markets deteriorate further or this
security experiences any credit rating downgrades, we may incur additional
impairment charges with respect to this auction rate security investment, which
could negatively affect our financial condition, cash flow and reported
earnings. We continue to monitor the fair value of our auction rate security
investment 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 security investment
would decline approximately $190,000. However, auction rate securities have
different features and are subject to different risks and therefore, any market
decline may impact our investment security to a different degree. In
addition, the estimated fair value of the auction rates securities may differ
from the values that would have been used had a ready market existed, and the
differences could be material to the consolidated financial
statements.





ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





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





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





Not
applicable.




43




ITEM
9A(T). CONTROLS AND PROCEDURES.





Evaluation
of Disclosure Controls and Procedures.As of December 31, 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 December 31, 2009, our disclosure controls and procedures
were effective.





Management's
Report on Internal Control over Financial Reporting.Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) or Rule 15d-15(f) under
the Exchange Act). Our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2009. In making this
assessment, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission, known as COSO, in Internal
Control-Integrated Framework. Our management has concluded that, as of
December 31, 2009, our internal control over financial reporting was
effective based on these criteria. This annual report does not include an
attestation report of the Company’s independent registered public accounting
firm regarding internal control over financial reporting. Management’s report
was not subject to attestation by the Company’s independent registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permits the Company to provide only management’s report in this
annual report.





Changes
in Internal Control Over Financial Reporting.There were no changes in
our internal control over financial reporting during the quarter ended December
31, 2009, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.





Limitations on the Effectiveness of
Controls.Our management, including our Chief Executive Officer and Chief
Financial Officer, does not expect that our disclosure controls and procedures
or our internal control over financial reporting will prevent all errors and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within our company have been
detected.





ITEM
9B. OTHER INFORMATION





Not
Applicable.





Part III





ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





The information required by this Item is incorporated herein by
reference from our Proxy Statement for our 2010 Annual Meeting of
Stockholders.





ITEM
11. EXECUTIVE COMPENSATION





The
information required by this Item is incorporated herein by reference from our
Proxy Statement for our 2010 Annual Meeting of Stockholders.





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





The information required by this Item is incorporated herein by
reference from our Proxy Statement for our 2010 Annual Meeting of
Stockholders.




44




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




The information required by this Item is incorporated herein by
reference from our Proxy Statement for our 2010 Annual Meeting of
Stockholders.





ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.





The
information required by this Item is incorporated herein by reference from our
Proxy Statement for our 2010 Annual Meeting of Stockholders.




45




PART
IV


ITEM
15.  EXHIBITS and FINANCIAL STATEMENT SCHEDULES





(a)     1.      Consolidated
Financial Statements





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





Contents
                    
                    PageReports
      of Independent Registered Public Accounting Firms
                    
                    F-1Consolidated
      Balance Sheets as of December 31, 2009 and 2008
                    
                    F-3Consolidated
      Statements of Operations for the years ended December 31, 2009, 2008 and
      2007
                    
                    F-4Consolidated
      Statements of Changes in Stockholders’ Equity (Deficiency) for the years
      ended December 31, 2009, 2008 and 2007
                    
                    F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2009, 2008 and
      2007
                    
                    F-6Notes
      to the Consolidated Financial Statements
                    
                    F-8





2.      Consolidated
Financial Statement Schedules





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





3.      Exhibits





ExhibitNumber
                
                Exhibit
      Description2.1
                
                Agreement
      and Plan of Merger by and among Keryx Biopharmaceuticals, Inc., AXO
      Acquisition Corp., and ACCESS Oncology, Inc. dated as of January 7, 2004,
      filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated
      January 8, 2004, filed on January 15, 2004 (File No. 000-30929), and
      incorporated herein by reference.2.2
                
                First
      Amendment to the Agreement and Plan of Merger by and among Keryx
      Biopharmaceuticals, Inc., AXO Acquisition Corp., and ACCESS Oncology, Inc.
      dated as of February 5, 2004, filed as Exhibit 2.2 to the Registrant’s
      Current Report on Form 8-K dated February 5, 2004, filed on February 20,
      2004 (File No. 000-30929), and incorporated herein by
      reference.3.1
                
                Amended
      and Restated Certificate of Incorporation of Keryx Biopharmaceuticals,
      Inc., filed as Exhibit 3.1 to the Registrant's Quarterly Report on Form
      10-Q for the quarter ended June 30, 2004, filed on August 12, 2004 (File
      No. 000-30929), and incorporated herein by reference.3.2
                
                Amended
      and Restated Bylaws of Keryx Biopharmaceuticals, Inc., filed as Exhibit
      3.2 to the Registrant’s Annual Report on Form 10-K for the year ended
      December 31, 2001, filed on March 26, 2002 (File No. 000-30929), and
      incorporated herein by reference.3.3
                
                Amendment
      to Amended and Restated Certificate of Incorporation of Keryx
      Biopharmaceuticals, Inc., dated July 24, 2007, filed as Exhibit 3.3 to the
      Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
      2007, filed on August 9, 2007 and incorporated herein by
      reference.4.1
                
                Specimen
      Common Stock Certificate, filed as Exhibit 4.1 to the Registrant’s First
      Amendment to the Registration Statement on Form S-1 filed on June 30, 2000
      (File No. 333-37402), and incorporated herein by
  reference.


46
  10.1†
                  
                  Employment
      Agreement between Keryx Biopharmaceuticals, Inc. and Michael S. Weiss
      dated as of December 23, 2002, filed as Exhibit 10.1 to the Registrant’s
      Quarterly Report of Form 10-Q for the quarter ended March 31, 2003 filed
      on May 15, 2003 (File No. 000-30929), and incorporated herein by
      reference.10.2†
                  
                  1999
      Stock Option Plan, as amended, filed as Exhibit 10.2 to the Registrant’s
      Quarterly Report of Form 10-Q for the quarter ended March 31, 2003 filed
      on May 15, 2003 (File No. 000-30929) and incorporated herein by
      reference.10.3†
                  
                  2000
      Stock Option Plan, as amended, filed as Exhibit 10.3 to the Registrant’s
      Quarterly Report of Form 10-Q for the quarter ended March 31, 2003 filed
      on May 15, 2003 (File No. 000-30929) and incorporated herein by
      reference.10.4†
                  
                  2002
      CEO Incentive Stock Option Plan, filed as Exhibit 10.4 to the Registrant’s
      Quarterly Report of Form 10-Q for the quarter ended March 31, 2003 filed
      on May 15, 2003 (File No. 000-30929) and incorporated herein by
      reference.10.5!
                  
                  License
      Agreement dated September 18, 2002 between Zentaris AG and AOI Pharma,
      Inc, filed as Exhibit 10.38 to the Registrant’s Annual Report on Form 10-K
      for the year ended December 31, 2003, filed on March 30, 2004, and
      incorporated herein by reference.10.6!
                  
                  Addendum
      Agreement to License and Cooperation Agreement for Perifosine dated
      December 3, 2003 between Zentaris AG and AOI Pharma, Inc., filed as
      Exhibit 10.39 to the Registrant’s Annual Report on Form 10-K for the year
      ended December 31, 2003, filed on March 30, 2004, and incorporated herein
      by reference.10.7
                  
                  Cooperative
      Research and Development Agreement between the National Cancer Institute
      and ASTA Medica Inc., as amended, filed as Exhibit 10.40 to the
      Registrant’s Annual Report on Form 10-K for the year ended December 31,
      2003, filed on March 30, 2004, and incorporated herein by
      reference.10.8†
                  
                  Keryx
      Biopharmaceuticals, Inc. 2004 Long-Term Incentive Plan, filed with the
      Registrant’s Definitive Proxy Statement for the Annual Meeting of
      Stockholders on June 10, 2004, filed on April 29, 2004, and incorporated
      herein by reference.10.9!
                  
                  License
      Agreement between Keryx Biopharmaceuticals, Inc. and Panion & BF
      Biotech, Inc. dated as of November 7, 2005, filed as Exhibit 10.21 to the
      Registrant’s Annual Report on Form 10-K for the year ended December 31,
      2005, filed on March 8, 2006, and incorporated herein by
      reference.10.10†
                  
                  Amendment
      to the Keryx Biopharmaceuticals, Inc. 2004 Long-Term Incentive Plan dated
      April 11, 2006, filed as Exhibit 10.1 to the Registrant’s Quarterly Report
      on Form 10-Q for the quarter ended June 30, 2006, filed on August 9, 2006,
      and incorporated herein by reference.10.11!
                  
                  Sub-license
      Agreement by and among Keryx Biopharmaceuticals, Inc., Japan Tobacco Inc.,
      and Torii Pharmaceutical Co., Ltd. dated September 26, 2007, filed as
      Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
      quarter ended September 30, 2007, filed on November 9, 2007, and
      incorporated herein by reference.10.12†
                  
                  Employment
      Agreement between Dr. I. Craig Henderson and Keryx Biopharmaceuticals,
      Inc. dated April 25, 2007, filed as Exhibit 10.3 to the Registrant’s
      Annual Report on Form 10-Q for the quarter ended March 31, 2007, filed on
      May 7, 2007, and incorporated herein by reference.10.13!
                  
                  Amended
      and Restated License Agreement by and between Panion & BF Biotech,
      Inc. and Keryx Biopharmaceuticals, Inc. dated March 17, 2008, filed as
      Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
      quarter ended March 31, 2008, filed on May 12, 2008, and incorporated
      herein by reference.10.14!
                  
                  First
      Amendment to Amended and Restated License Agreement by and between Panion
      & BF Biotech, Inc. and Keryx Biopharmaceuticals, Inc. dated March 17,
      2008.10.15!
                  
                  Amended
      and Restated License Agreement dated June 8, 2009, by and between Keryx
      Biopharmaceuticals, Inc., Japan Tobacco, Inc. and Japan Torii
      Pharmaceutical Co. Ltd., filed as Exhibit 10.1 to the Registrant’s
      quarterly report on Form 10-Q for the quarter ended June 30, 2009, filed
      on August 8, 20009, and incorporated herein by
  reference.
  47
  10.16
                  
                  Settlement
      Agreement and General Release between Keryx Biopharmaceuticals, Inc. and
      Alfa Wassermann S.p.A. filed as Exhibit 10.2 to the Registrant’s quarterly
      report on Form 10-Q for the quarter ended June 30, 2009, filed on August
      8, 20009, and incorporated herein by reference.10.17†
                  
                  Employment
      Agreement with Ron Bentsur dated September 14, 2009, filed as Exhibit 10.1
      to the Registrant’s Form 8-K filed on September 16, 2009, and incorporated
      herein by reference.21.1
                  
                  List
      of subsidiaries of Keryx Biopharmaceuticals, Inc.23.1
                  
                  Consent
      of UHY LLP.23.2
                  
                  Consent
      of KPMG LLP.24.1
                  
                  Power
      of Attorney of Director and Officers of Keryx Biopharmaceuticals, Inc.
      (included herein).31.1
                  
                  Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
      March 25, 2010.31.2
                  
                  Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
      March 25, 2010.32.1
                  
                  Certification
      of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated March 25,
      2010.32.2
                  
                  Certification
      of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated March 25,
      2010.
 !                Confidential
treatment has been granted with respect to the omitted portions of this
exhibit.


†               Indicates
management contract or compensatory plan or arrangement.





48





Keryx
Biopharmaceuticals, Inc.


Consolidated
Financial Statements as of December 31, 2009







Contents
                      
                      PageReports
      of Independent Registered Public Accounting Firms
                      
                      F-1Consolidated
      Balance Sheets as of December 31, 2009 and 2008
                      
                      F-3Consolidated
      Statements of Operations for the years ended December 31, 2009, 2008 and
      2007
                      
                      F-4Consolidated
      Statements of Changes in Stockholders’ Equity (Deficiency) for the years
      ended December 31, 2009, 2008 and 2007
                      
                      F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2009, 2008 and
      2007
                      
                      F-6Notes
      to the Consolidated Financial Statements
                      
                      F-8










Report
of Independent Registered Public Accounting Firm




To the
Board of Directors and


Stockholders
of Keryx Biopharmaceuticals, Inc.




We have
audited the accompanying consolidated balance sheet of Keryx Biopharmaceuticals,
Inc. and subsidiaries (the “Company”) as of December 31, 2009 and the related
consolidated statements of operations, changes in stockholders’ equity, and cash
flows for the year ended December 31, 2009. The Company’s management is
responsible for these consolidated financial statements. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Keryx Biopharmaceuticals,
Inc and subsidiaries as of December 31, 2009 and the results of its operations
and its cash flows for  the year then ended in conformity with
accounting principles generally accepted in the United States of
America.




/s/ UHY
LLP





New York,
New York


March 25,
2010




F-1





Report
of Independent Registered Public Accounting Firm




The Board
of Directors and Stockholders
 Keryx
Biopharmaceuticals, Inc.:
  We have
audited the accompanying consolidated balance sheet of Keryx Biopharmaceuticals,
Inc. and subsidiaries (the “Company”), as of December 31, 2008, and the
related consolidated statements of operations, stockholders’ deficiency, and
cash flows for each of the years in the two-year period ended December 31,
2008.  These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Keryx Biopharmaceuticals,
Inc. and subsidiaries as of December 31, 2008, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has incurred
substantial recurring losses from operations, a deficiency in equity, limited
cash, cash equivalents, and short-term investment securities, and illiquid
investments in auction rate securities that raise substantial doubt about its
ability to continue as a going concern. Management’s plans in regard to these
matters was to evaluate market conditions to determine the appropriate timing
and extent to which it would seek to obtain additional debt, equity or
other type of financing. The consolidated financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
 
 As
discussed in Note 4 to the consolidated financial statements, the Company has
changed its method of accounting for the fair value of financial assets and
liabilities in 2008 due to the adoption of a new accounting requirement issued
by the Financial Accounting Standards Board.
  
 /s/ KPMG
LLP
  New York,
New York
 March 31,
2009




F-2




Keryx
Biopharmaceuticals, Inc.


Consolidated
Balance Sheets as of December 31,


(in
thousands, except share and per share amounts)





2009
                  
                  
                  2008AssetsCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  16,386
                  
                  
                  $
                  13,143Short-term
      investment securities
                  
                  
                  17,548
                  
                  
                  
                  2,299Interest
      receivable
                  
                  
                  66
                  
                  
                  
                  25Other
      current assets
                  
                  
                  1,521
                  
                  
                  
                  508Total
      current assets
                  
                  
                  35,521
                  
                  
                  
                  15,975Long-term
      investment securities
                  
                  
                  1,914
                  
                  
                  
                  7,185Property,
      plant and equipment, net
                  
                  
                  94
                  
                  
                  
                  182Goodwill
                  
                  
                  3,208
                  
                  
                  
                  3,208Other
      assets, net
                  
                  
                  81
                  
                  
                  
                  84Total
      assets
                  
                  $
                  40,818
                  
                  
                  $
                  26,634Liabilities
      and stockholders’ equity (deficiency)Current
      liabilities:Accounts
      payable and accrued expenses
                  
                  $
                  5,001
                  
                  
                  $
                  4,613Accrued
      compensation and related liabilities
                  
                  
                  755
                  
                  
                  
                  496Current
      portion of deferred revenue
                  
                  
                  156
                  
                  
                  
                  1,464Liabilities
      of discontinued operations
                  
                  
                  120
                  
                  
                  
                  120Total
      current liabilities
                  
                  
                  6,032
                  
                  
                  
                  6,693Deferred
      revenue, net of current portion
                  
                  
                  —
                  
                  
                  
                  17,308Contingent
      equity rights
                  
                  
                  2,639
                  
                  
                  
                  4,004Other
      liabilities
                  
                  
                  50
                  
                  
                  
                  118Total
      liabilities
                  
                  
                  8,721
                  
                  
                  
                  28,123Commitments
      and contingencies (Note 14)Stockholders’
      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,
      56,560,478 and 47,729,507 shares issued, 56,480,530 and 47,649,559 shares
      outstanding at December 31, 2009 and 2008, respectively)
                  
                  
                  57
                  
                  
                  
                  48Additional
      paid-in capital
                  
                  
                  353,650
                  
                  
                  
                  330,738Treasury
      stock, at cost, 79,948 shares at December 31, 2009 and 2008,
      respectively
                  
                  
                  (357
                  )
                  
                  
                  (357
                  )Accumulated
      other comprehensive income
                  
                  
                  180
                  
                  
                  
                  —Accumulated
      deficit
                  
                  
                  (321,433
                  )
                  
                  
                  (331,918
                  )Total
      stockholders’ equity (deficiency)
                  
                  
                  32,097
                  
                  
                  
                  (1,489
                  )Total
      liabilities and stockholders’ equity (deficiency)
                  
                  $
                  40,818
                  
                  
                  $
                  26,634





The
accompanying notes are an integral part of the consolidated financial
statements.
  F-3





Keryx
Biopharmaceuticals, Inc.


Consolidated
Statements of Operations for the Year Ended December 31,





(in
thousands, except share and per share amounts)





2009
                
                
                2008
                
                
                2007Revenue:License
      revenue
                
                $
                21,616
                
                
                $
                1,180
                
                
                $
                204Service
      revenue
                
                
                3
                
                
                
                103
                
                
                
                52Other
      revenue
                
                
                3,575
                
                
                
                —
                
                
                
                727Total
      revenue
                
                
                25,194
                
                
                
                1,283
                
                
                
                983Operating
      expenses:Cost
      of services
                
                
                —
                
                
                
                27
                
                
                
                124Research
      and development:Non-cash
      compensation
                
                
                1,233
                
                
                
                (67
                )
                
                
                3,574Other
      research and development
                
                
                7,372
                
                
                
                38,075
                
                
                
                74,883Total
      research and development
                
                
                8,605
                
                
                
                38,008
                
                
                
                78,457Selling,
      general and administrative:Non-cash
      compensation
                
                
                1,867
                
                
                
                6,815
                
                
                
                7,086Other
      selling, general and administrative
                
                
                4,904
                
                
                
                7,474
                
                
                
                9,141Total
      selling, general and administrative
                
                
                6,771
                
                
                
                14,289
                
                
                
                16,227Total
      operating expenses
                
                
                15,376
                
                
                
                52,324
                
                
                
                94,808Operating
      income (loss)
                
                
                9,818
                
                
                
                (51,041
                )
                
                
                (93,825
                )Interest
      and other income (expense), net
                
                
                667
                
                
                
                (1,665
                )
                
                
                4,555Income
      (loss) from continuing operations before income taxes
                
                
                10,485
                
                
                
                (52,706
                )
                
                
                (89,270
                )Income
      taxes
                
                
                —
                
                
                
                —
                
                
                
                36Income
      (loss) from continuing operations
                
                
                10,485
                
                
                
                (52,706
                )
                
                
                (89,306
                )Loss
      from discontinued operations
                
                
                —
                
                
                
                (175
                )
                
                
                (756
                )Net
      income (loss)
                
                $
                10,485
                
                
                $
                (52,881
                )
                
                $
                (90,062
                )Basic
      net income (loss) per common share:Continuing
      operations
                
                $
                0.21
                
                
                $
                (1.17
                )
                
                $
                (2.05
                )Discontinued
      operations
                
                
                —
                
                
                
                (0.01
                )
                
                
                (0.02
                )Basic
      net income (loss) per common share
                
                $
                0.21
                
                
                $
                (1.18
                )
                
                $
                (2.07
                )Diluted
      net income (loss) per common share:Continuing
      operations
                
                $
                0.21
                
                
                $
                (1.17
                )
                
                $
                (2.05
                )Discontinued
      operations
                
                
                —
                
                
                
                (0.01
                )
                
                
                (0.02
                )Diluted
      net income (loss) per common share
                
                $
                0.21
                
                
                $
                (1.18
                )
                
                $
                (2.07
                )Weighted
      average shares used in computing basic net income (loss) per common
      share
                
                
                49,940,730
                
                
                
                44,902,398
                
                
                
                43,583,950Weighted
      average shares used in computing diluted net income (loss) per common
      share
                
                
                50,498,982
                
                
                
                44,902,398
                
                
                
                43,583,950





The
accompanying notes are an integral part of the consolidated financial
statements.
  F-4


Keryx
Biopharmaceuticals, Inc.


Consolidated
Statements of Changes in Stockholders’ Equity (Deficiency)


for
the Years Ended December 31, 2009, 2008 and 2007





(in
thousands, except share amounts)





Additional
                  
                  
                  
                  
                  
                  
                  
                  
                  AccumulatedCommon stock
                  
                  
                  paid-in
                  
                  
                  Treasury stock
                  
                  
                  other comp
                  
                  
                  AccumulatedShares
                  
                  
                  Amount
                  
                  
                  capital
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  income
                  
                  
                  deficit
                  
                  
                  TotalBalance
      at December 31, 2006
                  
                  
                  43,516,669
                  
                  
                  
                  44
                  
                  
                  $
                  312,841
                  
                  
                  
                  56,100
                  
                  
                  $
                  (89
                  )
                  
                  $
                  -
                  
                  
                  $
                  (188,975
                  )
                  
                  $
                  123,821Cancellation
      of common stock held in escrow
                  
                  
                  (15,646
                  )
                  
                  
                  (-
                  )*
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (-
                  )*Issuance
      of restricted stock
                  
                  
                  195,000
                  
                  
                  
                  -
                  *
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  *Forfeiture
      of restricted stock
                  
                  
                  (83,334
                  )
                  
                  
                  (-
                  )*
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (-
                  )*Surrender
      of common stock for tax withholding
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  23,848
                  
                  
                  
                  (268
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (268
                  )Issuance
      of common stock in connection with exercise of options
                  
                  
                  138,412
                  
                  
                  
                  -
                  *
                  
                  
                  271
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  271Compensation
      in respect of options and restricted stock granted to employees, directors
      and third-parties
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10,660
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10,660Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (90,062
                  )
                  
                  
                  (90,062
                  )Balance
      at December 31, 2007
                  
                  
                  43,751,101
                  
                  
                  $
                  44
                  
                  
                  $
                  323,772
                  
                  
                  
                  79,948
                  
                  
                  $
                  (357
                  )
                  
                  $
                  -
                  
                  
                  $
                  (279,037
                  )
                  
                  $
                  44,422Issuance
      of restricted stock
                  
                  
                  3,976,906
                  
                  
                  
                  4
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4Forfeiture
      of restricted stock
                  
                  
                  (73,500
                  )
                  
                  
                  (-
                  )*
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (-
                  )*Issuance
      of common stock in connection with exercise of options
                  
                  
                  75,000
                  
                  
                  
                  -
                  *
                  
                  
                  222
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  222Compensation
      in respect of options and restricted stock granted to employees, directors
      and third-parties
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,744
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,744Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (52,881
                  )
                  
                  
                  (52,881
                  )Balance
      at December 31, 2008
                  
                  
                  47,729,507
                  
                  
                  $
                  48
                  
                  
                  $
                  330,738
                  
                  
                  
                  79,948
                  
                  
                  $
                  (357
                  )
                  
                  $
                  -
                  
                  
                  $
                  (331,918
                  )
                  
                  $
                  (1,489
                  )Issuance
      of common stock in public offering (net of offering costs of
      $1,557)
                  
                  
                  8,000,000
                  
                  
                  
                  8
                  
                  
                  
                  15,553
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  15,561Issuance
      of common stock warrants in public offering
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,877
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,877Issuance
      of common stock in connection with acquisition
                  
                  
                  500,000
                  
                  
                  
                  1
                  
                  
                  
                  1,364
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,365Issuance
      of restricted stock
                  
                  
                  578,539
                  
                  
                  
                  -
                  *
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  *Forfeiture
      of restricted stock
                  
                  
                  (361,742
                  )
                  
                  
                  (-
                  )*
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (-
                  )*Issuance
      of common stock in connection with exercise of warrants
                  
                  
                  64,174
                  
                  
                  
                  -
                  *
                  
                  
                  -
                  *
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  *Issuance
      of common stock in connection with exercise of options
                  
                  
                  50,000
                  
                  
                  
                  -
                  *
                  
                  
                  18
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  18Compensation
      in respect of options and restricted stock granted to employees, directors
      and third-parties
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,100
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,100Unrealized
      gain on long-term investment securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  180
                  
                  
                  
                  -
                  
                  
                  
                  180Net
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10,485
                  
                  
                  
                  10,485Balance
      at December 31, 2009
                  
                  
                  56,560,478
                  
                  
                  $
                  57
                  
                  
                  $
                  353,650
                  
                  
                  
                  79,948
                  
                  
                  $
                  (357
                  )
                  
                  $
                  180
                  
                  
                  $
                  (321,433
                  )
                  
                  $
                  32,097





*
Amount less than one thousand dollars.





The
accompanying notes are an integral part of the consolidated financial
statements.
  F-5





Keryx
Biopharmaceuticals, Inc.


Consolidated
Statements of Cash Flows for the Year Ended December 31,





(in
thousands)





2009
                
                
                2008
                
                
                2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
                
                $
                10,485
                
                
                $
                (52,881
                )
                
                $
                (90,062
                )Loss
      from discontinued operations
                
                
                —
                
                
                
                (175
                )
                
                
                (756
                )Income
      (loss) from continuing operations
                
                
                10,485
                
                
                
                (52,706
                )
                
                
                (89,306
                )Adjustments
      to reconcile income (loss) from continuing operations to cash flows used
      in operating activities of continuing operations:Stock
      compensation expense
                
                
                3,100
                
                
                
                6,748
                
                
                
                10,660Depreciation
      and amortization
                
                
                92
                
                
                
                111
                
                
                
                130Gain
      on sale of investment securities
                
                
                (173
                )
                
                
                (81
                )
                
                
                —Impairment
      of investment securities
                
                
                68
                
                
                
                3,196
                
                
                
                —Other
      impairment charges
                
                
                —
                
                
                
                11,037
                
                
                
                —Changes
      in assets and liabilities, net of effects of acquisitions:(Increase)
      decrease in other current assets
                
                
                (1,013
                )
                
                
                749
                
                
                
                706(Increase)
      decrease in accrued interest receivable
                
                
                (41
                )
                
                
                258
                
                
                
                242Decrease
      in security deposits
                
                
                —
                
                
                
                260
                
                
                
                —Decrease
      in other assets
                
                
                3
                
                
                
                —
                
                
                
                —Increase
      (decrease) in accounts payable and accrued expenses
                
                
                388
                
                
                
                (14,059
                )
                
                
                8,790Increase
      (decrease) in accrued compensation and related liabilities
                
                
                259
                
                
                
                (758
                )
                
                
                (281
                )Decrease
      in other liabilities
                
                
                (68
                )
                
                
                (84
                )
                
                
                (92
                )(Decrease)
      increase in deferred revenue
                
                
                (18,616
                )
                
                
                6,727
                
                
                
                11,845Net
      cash used in operating activities of continuing operations
                
                
                (5,516
                )
                
                
                (38,602
                )
                
                
                (57,306
                )Net
      cash used in operating activities of discontinued
    operations
                
                
                —
                
                
                
                (131
                )
                
                
                (239
                )Net
      cash used in operating activities
                
                
                (5,516
                )
                
                
                (38,733
                )
                
                
                (57,545
                )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of property, plant and equipment
                
                
                (4
                )
                
                
                (146
                )
                
                
                (3,159
                )Investment
      in held-to-maturity short-term securities
                
                
                (17,593
                )
                
                
                (33
                )
                
                
                (6,136
                )Proceeds
      from maturity of held-to-maturity short-term securities
                
                
                2,343
                
                
                
                20,869
                
                
                
                24,020Investment
      in available-for-sale short-term securities
                
                
                —
                
                
                
                (12,000
                )
                
                
                (56,700
                )Proceeds
      from sale of available-for-sale short-term securities
                
                
                —
                
                
                
                22,200
                
                
                
                76,200Proceeds
      from sale of available-for-sale long-term securities
                
                
                5,557
                
                
                
                1,700
                
                
                
                —Investment
      in held-to-maturity long-term securities
                
                
                —
                
                
                
                (1
                )
                
                
                (6,372
                )Proceeds
      from maturity of held-to-maturity long-term securities
                
                
                —
                
                
                
                —
                
                
                
                3Net
      cash (used in) provided by investing activities of continuing
      operations
                
                
                (9,697
                )
                
                
                32,589
                
                
                
                27,856Net
      cash provided by investing activities of discontinued
      operations
                
                
                —
                
                
                
                —
                
                
                
                15Net
      cash (used in) provided by investing activities
                
                
                (9,697
                )
                
                
                32,589
                
                
                
                27,871





The
accompanying notes are an integral part of the consolidated financial
statements.
  F-6
  Keryx
Biopharmaceuticals, Inc.


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





(in
thousands)





2009
                    
                    
                    2008
                    
                    
                    2007CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from public offerings, net
                    
                    $
                    18,438
                    
                    
                    $
                    —
                    
                    
                    $
                    —Proceeds
      from exercise of options and warrants
                    
                    
                    18
                    
                    
                    
                    222
                    
                    
                    
                    271Purchase
      of treasury stock
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (268
                    )Net
      cash provided by financing activities
                    
                    
                    18,456
                    
                    
                    
                    222
                    
                    
                    
                    3NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                    
                    
                    3,243
                    
                    
                    
                    (5,922
                    )
                    
                    
                    (29,671
                    )Cash
      and cash equivalents at beginning of year
                    
                    
                    13,143
                    
                    
                    
                    19,065
                    
                    
                    
                    48,736CASH
      AND CASH EQUIVALENTS AT END OF YEAR
                    
                    $
                    16,386
                    
                    
                    $
                    13,143
                    
                    
                    $
                    19,065NON
      - CASH TRANSACTIONSIssuance
      of common stock in connection with contingent equity
rights
                    
                    $
                    1,365
                    
                    
                    $
                    —
                    
                    
                    $
                    —Issuance
      of warrants to placement agent in public offering
                    
                    
                    100
                    
                    
                    
                    —
                    
                    
                    
                    —Sale
      of manufacturing facility assets in settlement of
liability
                    
                    
                    —
                    
                    
                    
                    300
                    
                    
                    
                    —SUPPLEMENTARY
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid for income taxes
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    36





The
accompanying notes are an integral part of the consolidated financial
statements.
  F-7


Keryx
Biopharmaceuticals, Inc.


Notes
to the Consolidated Financial Statements





NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





DESCRIPTION
OF BUSINESS





Keryx
Biopharmaceuticals, Inc. and subsidiaries (“Keryx” or the “Company”) is a
biopharmaceutical company focused on the acquisition, development and
commercialization of medically important pharmaceutical products for the
treatment of life-threatening diseases, including cancer and renal disease. The
Company owns a 100% interest in each of ACCESS Oncology, Inc. (“ACCESS
Oncology”), Neryx Biopharmaceuticals, Inc., and Accumin Diagnostics, Inc.
(“ADI”), all U.S. corporations incorporated in the State of Delaware. Most of
the Company's biopharmaceutical development and substantially all of its
administrative operations during 2009, 2008 and 2007 were conducted in the
United States of America.





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) one year's base salary, (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. 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 year ended December 31, 2009, the Company
recorded approximately $833,000 of expense, in other selling, general and
administrative expenses, associated with the cash severance, pro rata bonus and
salary during the notice period (of which approximately $245,000 is included in
accrued compensation at December 31, 2009 and was paid in January 2010).
Additionally, in the year ended December 31, 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.





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 set
forth in an employment agreement with the Company dated September 14,
2009. 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 of $0.35, 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.





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.





LIQUIDITY





The
Company has incurred substantial operating losses since its inception and,
except for 2009, expects to continue to incur operating losses for the
foreseeable future and may never become profitable. As of December 31, 2009, the
Company has an accumulated deficit of $321.4 million. The Company is dependent
upon significant financing to provide the working capital necessary to execute
its business plan. The Company currently anticipates that its cash, cash
equivalents and investment securities as of December 31, 2009, exclusive of its
auction rate security investment, anticipated milestones to be received, and
expected exercises of expiring options and warrants, are sufficient to meet the
Company’s anticipated working capital needs and fund its business plan for
approximately 20 to 24 months from December 31, 2009. 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 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.


F-8


On
September 30, 2009, the Company completed a registered direct offering to
certain investors of 8,000,000 shares of its common stock and warrants to
purchase up to a total of 2,800,000 shares of its common stock for gross
proceeds of approximately $20 million. The common stock and warrants were sold
in units, with each unit consisting of one share of common stock and a warrant
to purchase 0.35 of a share of common stock. The purchase price per unit was
$2.50. Subject to certain ownership limitations, the warrants are exercisable at
any time on or after the initial issue date and on or prior to October 1, 2010,
at an exercise price of $2.65 per warrant share. In addition, the placement
agent received a warrant to purchase up to 108,000 shares of common stock at an
exercise price of $3.125 per warrant share, exercisable at any time on or prior
to October 1, 2010. Total proceeds to the Company from this public offering were
approximately $18.4 million, net of offering costs of approximately $1.6
million. The shares and warrants were sold under a shelf registration statement
filed with the SEC on August 28, 2009, and declared effective by the SEC on
September 23, 2009. The registration statement provides for the offering of up
to $40 million of the Company's common stock and warrants. Subsequent to this
registered direct offering, there remains approximately $12.2 million of the
Company's common stock and warrants available for sale under the shelf
registration statement. The Company may offer the remaining securities under its
shelf registration from time to time in response to market conditions or other
circumstances if it believes such a plan of financing is in the best interest of
the Company and its stockholders.  The Company believes that the shelf
registration provides it with the flexibility to raise additional capital to
finance its operations as needed.





The
Company’s common stock is listed on the NASDAQ Capital Marketand trades
under the symbol “KERX.”





RECENTLY
ISSUED ACCOUNTING STANDARDS





On
September 30, 2009, the Company adopted changes issued by the Financial
Accounting Standards Board (“FASB”) to the authoritative hierarchy of GAAP.
These changes establish the FASB Accounting Standards Codification
(“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with GAAP. Rules and interpretive releases of
the Securities and Exchange Commission (“SEC”) under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. The
FASB will no longer issue new standards in the form of Statements, FASB Staff
Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue
Accounting Standards Updates (“ASUs”). ASUs will not be authoritative in their
own right as they will only serve to update the Codification. These changes and
the Codification itself do not change GAAP. Other than the manner in which new
accounting guidance is referenced, the adoption of these changes had no impact
on the Company’s consolidated financial statements.





In
October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue
Arrangements. This ASU eliminates the requirement to establish the fair value of
undelivered products and services and instead provides for separate revenue
recognition based upon management’s estimate of the selling price for an
undelivered item when there is no other means to determine the fair value of
that undelivered item. The ASU also eliminates the use of the residual method
and instead requires an entity to allocate revenue using the relative selling
price method. Additionally, the guidance expands disclosure requirements with
respect to multiple-deliverable revenue arrangements. This ASU is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. The Company is currently
evaluating the potential impact of this standard on its consolidated financial
statements.





PRINCIPLES
OF CONSOLIDATION





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




F-9




USE
OF ESTIMATES





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





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





Investment
securities at December 31, 2009 and 2008 consist of short-term government
securities and long-term auction rate securities. The Company classifies its
short-term and long-term debt securities as held-to-maturity, with the exception
of auction rate securities, which are classified as available-for-sale.
Held-to-maturity securities are those securities in which the Company has the
ability and intent to hold the security until maturity. Held-to-maturity
securities are recorded at amortized cost, adjusted for the amortization or
accretion of premiums or discounts. Premiums and discounts are amortized or
accreted over the life of the related held-to-maturity security as an adjustment
to yield using the effective interest method. Available-for-sale investment
securities (which are comprised of auction rate securities) are recorded at fair
value. See Note 4 – Fair Value Measurements.





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





PROPERTY,
PLANT AND EQUIPMENT





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





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





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





PATENT
COSTS





The Company expenses
patent maintenance costs as incurred.The Company has classified its
patent expenses in other selling, general and administrative.





REVENUE
RECOGNITION





The
Company recognizes license revenue in accordance with the revenue recognition
guidance of the Codification. 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 9 – License Agreements).




F-10




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. See Note 9 – License Agreements.





COST
OF SERVICES





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





RESEARCH
AND DEVELOPMENT COSTS





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





Effective
January 1, 2008, the Company requires that nonrefundable advance payments for
goods or services that will be used or rendered for future research and
development activities be deferred and amortized over the period that the goods
are delivered or the related services are performed, subject to an assessment of
recoverability. This did not have an effect on the Company’s results of
operations and financial position.





INCOME
TAXES





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




F-11







The
Company and its subsidiaries file income tax returns in the U.S. federal
jurisdiction and in various states.  The Company has tax net operating
loss carryforwards that are subject to examination for a number of years beyond
the year in which they were generated for tax purposes. Since a portion of these
net operating loss carryforwards may be utilized in the future, many of these
net operating loss carryforwards will remain subject to
examination.





STOCK
- BASED COMPENSATION





The
Company recognizes all share-based payments to employees and to non-employee
directors as compensation for service on the Board of Directors 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. Forfeitures are estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.





For
share-based payments to consultants and other third-parties, compensation
expense is determined at the “measurement date.” 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. The Company records
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.





BASIC
AND DILUTED NET INCOME (LOSS) PER COMMON 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,
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 years ended
December 31, 2008 and 2007, because the effect of including them would have been
anti-dilutive.





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





For the year ended December 31(in thousands, except share and per share amounts)
                      
                      2009
                      
                      
                      2008
                      
                      
                      2007Basic:Income
      (loss) from continuing operations
                      
                      $
                      10,485
                      
                      
                      $
                      (52,706
                      )
                      
                      $
                      (89,306
                      )Loss
      from discontinued operations
                      
                      
                      —
                      
                      
                      
                      (175
                      )
                      
                      
                      (756
                      )Net
      income (loss)
                      
                      $
                      10,485
                      
                      
                      $
                      (52,881
                      )
                      
                      $
                      (90,062
                      )Weighted
      average shares outstanding
                      
                      
                      49,940,730
                      
                      
                      
                      44,902,398
                      
                      
                      
                      43,583,950Basic
      net income (loss) per common share:Continuing
    operations
                      
                      $
                      0.21
                      
                      
                      $
                      (1.17
                      )
                      
                      $
                      (2.05
                      )Discontinued
      operations
                      
                      
                      —
                      
                      
                      
                      (0.01
                      )
                      
                      
                      (0.02
                      )Basic
      net income (loss) per common share
                      
                      $
                      0.21
                      
                      
                      $
                      (1.18
                      )
                      
                      $
                      (2.07
                      )Diluted:Income
      (loss) from continuing operations
                      
                      $
                      10,485
                      
                      
                      $
                      (52,706
                      )
                      
                      $
                      (89,306
                      )Loss
      from discontinued operations
                      
                      
                      —
                      
                      
                      
                      (175
                      )
                      
                      
                      (756
                      )Net
      income (loss)
                      
                      $
                      10,485
                      
                      
                      $
                      (52,881
                      )
                      
                      $
                      (90,062
                      )Weighted
      average shares outstanding
                      
                      
                      49,940,730
                      
                      
                      
                      44,902,398
                      
                      
                      
                      43,583,950Effect
      of dilutive options and warrants
                      
                      
                      558,252
                      
                      
                      
                      —
                      
                      
                      
                      —Weighted
      average shares outstanding assuming dilution
                      
                      
                      50,498,982
                      
                      
                      
                      44,902,398
                      
                      
                      
                      43,583,950Diluted
      net income (loss) per common share:Continuing
    operations
                      
                      $
                      0.21
                      
                      
                      $
                      (1.17
                      )
                      
                      $
                      (2.05
                      )Discontinued
      operations
                      
                      
                      —
                      
                      
                      
                      (0.01
                      )
                      
                      
                      (0.02
                      )Diluted
      net income (loss) per common share
                      
                      $
                      0.21
                      
                      
                      $
                      (1.18
                      )
                      
                      $
                      (2.07
                      )




F-12





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





For the year ended December 312009
                    
                    
                    2008
                    
                    
                    2007Stock
      options
                    
                    
                    8,417,920
                    
                    
                    
                    9,114,459
                    
                    
                    
                    10,869,173Warrants
                    
                    
                    2,908,000
                    
                    
                    
                    72,564
                    
                    
                    
                    321,976Total
                    
                    
                    11,325,920
                    
                    
                    
                    9,187,023
                    
                    
                    
                    11,191,149





COMPREHENSIVE
INCOME (LOSS)





Comprehensive
income (loss) is composed of net income (loss) and other comprehensive income.
Other comprehensive income, for the year ended December 31, 2009, is comprised
of unrealized gains on the Company’s available-for-sale long-term investment
securities that are excluded from net income and reported separately in
stockholders’ equity. Comprehensive income (loss) and its components are as
follows:





For the year ended December 31(in thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Net
      income (loss)
                  
                  $
                  10,485
                  
                  
                  $
                  (52,881
                  )
                  
                  $
                  (90,062
                  )Unrealized
      gain on available-for-sale long-term investment securities
                  
                  
                  180
                  
                  
                  
                  —
                  
                  
                  
                  —Comprehensive
      income (loss)
                  
                  $
                  10,665
                  
                  
                  $
                  (52,881
                  )
                  
                  $
                  (90,062
                  )





ACQUISITIONS





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





IMPAIRMENT





Long
lived assets are reviewed for an impairment loss when circumstances indicate
that the carrying value of long-lived tangible and intangible assets with finite
lives may not be recoverable. Management’s policy in determining whether an
impairment indicator exists, a triggering event, comprises measurable operating
performance criteria as well as qualitative measures. If an analysis is
necessitated by the occurrence of a triggering event, the Company makes certain
assumptions in determining the impairment amount. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to
future cash flows expected to be generated by the asset or used in its disposal.
If the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized. During the first quarter of 2007, management
reviewed both its original and projected revenue estimates associated with the
ADI diagnostic tool. As a result of this analysis, the Company concluded that
the asset was impaired and recorded an impairment charge of approximately
$600,000 to write-down identifiable intangible long-lived assets associated with
ADI. The charge was recorded in loss from discontinued operations. As
further discussed in Note 5, the Company recorded an impairment charge of $11.0
million during the year ended December 31, 2008 related to the write-down of
fixed assets following the cessation of its development of
Sulonex.


F-13





Goodwill
is reviewed for impairment annually, or when events arise that could indicate
that an impairment exists. The Company tests for goodwill impairment 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 and 2009, management
conducted its annual assessments of goodwill and concluded that there were no
impairments to its goodwill. The Company will continue to perform impairment
tests annually, at December 31, and whenever events or changes in circumstances
suggest that the carrying value of an asset may not be recoverable.





CONCENTRATIONS
OF CREDIT RISK





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





SUBSEQUENT
EVENTS





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





NOTE
2 – CASH AND CASH EQUIVALENTS





(in thousands)
                    
                    December 31, 2009
                    
                    
                    December 31, 2008Money
      market funds
                    
                    $
                    13,400
                    
                    
                    $
                    12,159Checking
      and bank deposits
                    
                    
                    2,986
                    
                    
                    
                    984Total
                    
                    $
                    16,386
                    
                    
                    $
                    13,143





Cash is
maintained in FDIC insured accounts at credit qualified financial institutions.
At times, such amounts may exceed the FDIC insurance limits. In October 2008,
the FDIC increased its insurance from $100,000 per depositor to $250,000, and to
an unlimited amount for non-interest bearing accounts. The coverage increase,
which is temporary, extends through December 31, 2013 for interest bearing
accounts and June 30, 2010 for non-interest bearing accounts. At December 31,
2009 uninsured cash balances totaled approximately $14.8
million.


F-14


NOTE
3 - INVESTMENT SECURITIES
 
 The
Company records its investments as either held-to-maturity or
available-for-sale. Held-to-maturity investments are recorded at amortized cost.
Available-for-sale investment securities (which are comprised of auction rate
securities) are recorded at fair value (see Note 4 – Fair Value Measurements).
Other-than-temporary impairment charges are included in interest and other
income (expense), net, and unrealized gains, if determined to be temporary, are
included in accumulated other comprehensive income in stockholders’ equity. The
following tables summarize the Company’s investment securities at December 31,
2009 and December 31, 2008:


December 31, 2009(in thousands)
                    
                    Amortized cost,
                      as adjusted
                    
                    
                    Gross
                      unrealized
                      holding gains
                    
                    
                    Gross
                      unrealized
                      holding losses
                    
                    
                    Estimated
                      fair valueShort-term
      investments:Obligations
      of domestic governmental agencies (mature between January 2010 and March
      2010) (held-to-maturity)
                    
                    $
                    12,532
                    
                    
                    $
                    —
                    *
                    
                    $
                    (1
                    )
                    
                    $
                    12,531Bank
      deposits (matures July 2010) (held-to-maturity)
                    
                    
                    5,016
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    5,016Total
      short-term investment securities
                    
                    $
                    17,548
                    
                    
                    $
                    —
                    *
                    
                    $
                    —
                    
                    
                    $
                    17,547Long-term
      investments:Auction
      rate security (matures 2038) (available-for-sale)
                    
                    $
                    1,914
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    1,914


*Amount
less than one thousand dollars.





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





NOTE
4 – FAIR VALUE MEASUREMENTS





As of
January 1, 2008, the Company adopted an accounting standard that defines fair
value, establishes a fair value hierarchy for assets and liabilities measured at
fair value and requires expanded disclosures about fair value measurement. As a
result, the Company measures certain financial assets and liabilities at fair
value on a recurring basis in the financial statements. The hierarchy ranks the
quality and reliability of inputs, or assumptions, used in the determination of
fair value and requires financial assets and liabilities carried at fair value
to be classified and disclosed in one of the following three
categories:





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





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





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





As of
December 31, 2009, the Company has a $1.9 million long-term investment in one
auction rate student loan-backed security. 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 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. The Company is uncertain as to
when, or if, the liquidity issue relating to its one remaining auction rate
security investment will improve. Quarterly, the Company assesses 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 $0.1 and
$3.2 million during the years ended December 31, 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. For the year ended December 31, 2009, the Company
reported other comprehensive income of $0.2 million for a temporary unrealized
gain related to the increase in estimated fair value for the Company’s one
remaining auction rate security. The estimated fair value of the Company’s one
remaining auction rate security investment ($3.0 million par value) is $1.9
million at December 31, 2009.


F-15





In 2009,
the Company sold four of its auction rate security investments. The securities
had a combined par value of $7.0 million and a combined adjusted book value of
$5.4 million. Proceeds to the Company from the sale of these securities were
$5.6 million, representing a gain of $0.2 million over adjusted book
value.





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





The
Company reviews investment securities for impairment and to determine the
classification of the impairment as temporary or other-than-temporary. Losses
are recognized in the Company’s consolidated statement of operations when a
decline in fair value is determined to be other-than-temporary. The Company
reviews its investments on an ongoing basis for indications of possible
impairment. Once identified, the determination of whether the impairment is
temporary or other-than-temporary requires significant judgment. The Company
believes that the impairment charges related to its auction rate securities
investments are other-than-temporary.  The primary factors the Company
considers in classifying an impairment include the extent and time the fair
value of each investment has been below cost and the Company’s ability to hold
such investment to maturity.





The
following table provides the fair value measurements of applicable Company
financial assets as of December 31, 2009 and 2008:





Financial assets at fair value
                            as of December 31, 2009(in thousands)
                          
                          Level 1
                          
                          
                          Level 2
                          
                          
                          Level 3Money
      market funds (1)
                          
                          $
                          13,400
                          
                          
                          $
                          —
                          
                          
                          $
                          —Obligations
      of domestic governmental agencies (held-to-maturity) (2)
                          
                          
                          12,532
                          
                          
                          
                          —
                          
                          
                          
                          —Bank
      deposits (held-to-maturity)
                          
                          
                          5,016
                          
                          
                          
                          —
                          
                          
                          
                          —Auction
      rate security (3)
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          1,914Total
                          
                          $
                          30,948
                          
                          
                          $
                          —
                          
                          
                          $
                          1,914
  Financial
      assets at fair value
                                                              as
      of December 31, 2008(in thousands)
                                                            
                                                            Level 1
                                                            
                                                            
                                                            Level 2
                                                            
                                                            
                                                            Level 3Money
      market funds (1)
                                                            
                                                            $
                                                            12,159
                                                            
                                                            
                                                            $
                                                            —
                                                            
                                                            
                                                            $
                                                            —Obligations
      of domestic governmental agencies (held-to-maturity) (2)
                                                            
                                                            
                                                            2,299
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Auction
      rate securities (3)
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            7,185Total
                                                            
                                                            $
                                                            14,458
                                                            
                                                            
                                                            $
                                                            —
                                                            
                                                            
                                                            $
                                                            7,185


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


(2)
            Amortized
      cost approximates fair value.


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


F-16


The
following table summarizes the change in carrying value associated with Level 3
financial assets for the years ended December 31, 2008 and
2009:


(in thousands)
                  
                  Available-for-sale
                    long-term
                    investmentsBalance
      at January 1, 2008
                  
                  $
                  —Transfer
      into Level 3 at original cost (1)
                  
                  
                  12,000Sale
      of security
                  
                  
                  (1,700
                  )Realized
      gain on sale of security
                  
                  
                  81Total
      impairment charges included in net loss
                  
                  
                  (3,196
                  )Balance
      at December 31, 2008
                  
                  
                  7,185Total
      impairment charges included in net income (loss)
                  
                  
                  (68
                  )Sales
      of securities
                  
                  
                  (5,556
                  )Realized
      gain on sales of securities
                  
                  
                  173Other
      comprehensive income (temporary unrealized gain)
                  
                  
                  180Balance
      at December 31, 2009
                  
                  $
                  1,914




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


NOTE
5 - PROPERTY, PLANT AND EQUIPMENT





(in thousands)
                  
                  December 31, 2009
                  
                  
                  December 31, 2008Leasehold
      improvements
                  
                  $
                  20
                  
                  
                  $
                  20Office
      furniture and equipment
                  
                  
                  315
                  
                  
                  
                  315Computers,
      software and related equipment
                  
                  
                  440
                  
                  
                  
                  436775
                  
                  
                  
                  771Accumulated
      depreciation and amortization
                  
                  
                  (681
                  )
                  
                  
                  (589
                  )Net
      book value
                  
                  $
                  94
                  
                  
                  $
                  182





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
year ended December 31, 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
year ended December 31, 2008, for costs related to the required restoration of
the leased facility to its original condition. See Note 17 –
Restructuring.





Depreciation
expense for the years ended December 31, 2009, 2008 and 2007 was approximately
$92,000, $111,000 and $130,000, respectively.  The following table
summarizes depreciation expense for the years ended December 31, 2009, 2008 and
2007.





For the year ended December 31(in thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Depreciation
      expense:Cost
      of services
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —Research
      and development
                  
                  
                  55
                  
                  
                  
                  84
                  
                  
                  
                  86General
      and administrative
                  
                  
                  37
                  
                  
                  
                  27
                  
                  
                  
                  44Total
                  
                  $
                  92
                  
                  
                  $
                  111
                  
                  
                  $
                  130





F-17


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


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





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





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





NOTE
7 - OTHER ASSETS





(in thousands)
                  
                  December 31, 2009
                  
                  
                  December 31, 2008Patents
      and other intangible assets
                  
                  $
                  352
                  
                  
                  $
                  352Long-term
      deposits
                  
                  
                  62
                  
                  
                  
                  62Deferred
      registration fees
                  
                  
                  19
                  
                  
                  
                  22433
                  
                  
                  
                  436Accumulated
      amortization
                  
                  
                  (352
                  )
                  
                  
                  (352
                  )$
                  81
                  
                  
                  $
                  84





Amortization
expense for the years ended December 31, 2009, 2008 and 2007 was approximately
$0, $0, and $14,000, respectively. The Company does not expect to record
amortization expenses going forward, as all intangible assets are fully
amortized.





NOTE 8–
DISCONTINUED OPERATIONS





In
September 2008, the Company terminated its license agreement related to the ADI
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.
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)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Diagnostic
      revenue
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  66Operating
      expenses:Cost
      of diagnostics sold
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  38Research
      and development
                  
                  
                  —
                  
                  
                  
                  4
                  
                  
                  
                  6Selling,
      general and administrative
                  
                  
                  —
                  
                  
                  
                  171
                  
                  
                  
                  778Total
      operating expenses
                  
                  
                  —
                  
                  
                  
                  175
                  
                  
                  
                  822Loss
      from discontinued operations
                  
                  $
                  —
                  
                  
                  $
                  (175
                  )
                  
                  $
                  (756
                  )





The
Company recognizes an impairment loss when circumstances indicate that the
carrying value of long-lived tangible and intangible assets with finite lives
may not be recoverable. Management reviews various quantitative and qualitative
factors in determining whether an impairment indicator exists, a triggering
event. If an analysis is necessitated by the occurrence of a triggering event,
the Company makes certain assumptions in determining the impairment amount.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future cash flows expected to be generated by the
asset or used in its disposal. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized. During the
first quarter of 2007, management reviewed both its original and projected
revenue estimates associated with the ADI diagnostic tool. As a result of the
projected cash flows of the diagnostic tool, the Company concluded that the
intangible asset was impaired and recorded an impairment charge of approximately
$600,000 to write-down identifiable intangible long-lived assets associated with
ADI. The charge was included in selling, general and administrative expenses and
reflected within the Company’s discontinued
operations.


F-18





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





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





NOTE
9 - LICENSE AGREEMENTS





In
September 2007, the Company entered into a Sublicense Agreement with Japan
Tobacco Inc. (“JT”) and Torii Pharmaceutical Co., Ltd. (“Torii”), JT's
pharmaceutical business subsidiary, under which JT and Torii obtained the
exclusive sublicense rights for the development and commercialization of ferric
citrate in Japan, which is being developed in the United States under the trade
name Zerenex. JT and Torii are responsible for the future development and
commercialization costs in Japan. 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 year ended December 31, 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 year ended December 31, 2009.





In March
2009, 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 year
ended December 31, 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.





In July
2009, the Company 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
$3,500,000 (of which $2,750,000 was received on July 31, 2009, and $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.


F-19





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





NOTE
10 – CONTINGENT EQUITY RIGHTS





On
February 5, 2004, the Company acquired ACCESS Oncology, a related party, for a
purchase price of approximately $19,502,000.  The purchase price
included the Company’s assumption of certain liabilities of ACCESS Oncology
equal to approximately $8,723,000, the issuance of shares of the Company’s
common stock valued at approximately $6,325,000, contingent equity rights valued
at approximately $4,004,000 and transaction costs of approximately
$450,000.





At the
effective time of the merger, each share of ACCESS Oncology common stock,
including shares issuable upon the exercise of options exercised before March 1,
2004, and upon the exercise of outstanding warrants, was converted into the
right to share in the contingent equity rights pro rata with the other holders
of ACCESS Oncology common stock. Pursuant to the merger agreement, 623,145
shares of the Company’s common stock valued at approximately $6,325,000 have
been issued to the former preferred stockholders of ACCESS Oncology. An
additional 4,433 shares of the Company’s common stock are issuable to those
preferred stockholders of ACCESS Oncology who have yet to provide the necessary
documentation to receive shares of the Company’s common stock.





On
December 16, 2009, the Company announced the initiation of a Phase 3
registration trial of KRX-0401 (perifosine) for treatment of patients with
advanced multiple myeloma. The achievement of this event triggered contingent
milestone stock consideration payable to the former stockholders of ACCESS
Oncology in the amount of an aggregate of 500,000 shares of Keryx common stock
valued at $1,365,000.





The
remaining contingent equity rights will be paid upon the achievement of the
following milestones:





·
            750,000
      shares of the Company’s common stock upon the first new drug application
      acceptance by the Food and Drug Administration, or FDA, for any of the
      acquired ACCESS Oncology drug
candidates;




·
            1,750,000
      shares of the Company’s common stock upon the first FDA approval of any of
      the acquired ACCESS Oncology drug candidates;
  and




·
            372,422
      shares of the Company’s common stock following the first 12-month period
      that sales of all of the acquired ACCESS Oncology drug candidates combined
      exceeds $100 million.





In no
event will the Company issue more than 4,000,000 shares of its common stock
pursuant to the merger agreement. These 4,000,000 shares include 1,127,578
shares issued or issuable to date and any contingent shares as described above.
Accordingly, the remaining amount of the Company’s common stock deliverable to
the former ACCESS Oncology stockholders as milestone consideration will be no
more than 2,872,422 shares. The former preferred stockholders of ACCESS Oncology
do not have a share of the milestone consideration. The Company’s stockholders
approved the issuance of shares of its common stock payable as contingent
milestone consideration at the 2004 annual meeting of stockholders, which took
place on June 10, 2004.





The
ACCESS Oncology acquisition has been accounted for as a purchase by the Company.
On the date of the acquisition, the excess of the net assets acquired over the
purchase price represented negative goodwill of approximately $4,004,000. Since
the negative goodwill was a result of not recognizing contingent consideration
(i.e., the contingent equity rights), the lesser of the negative goodwill
($4,004,000) and the maximum value of the contingent equity rights at the date
of the acquisition ($34,275,000) was recorded as a liability, thereby
eliminating the negative goodwill. The maximum value of the contingent equity
rights at the date of acquisition of $34,275,000 was based on the
volume-adjusted weighted average closing price per share of the Company’s common
stock measured over the last seven trading days immediately preceding the
closing of the acquisition ($10.15 per share) multiplied by 3,376,855 shares,
which consisted of the sum of the unissued amount of the Company’s common stock
deliverable to the ACCESS Oncology stockholders as milestone consideration
(3,372,422 shares) and to those preferred stockholders of ACCESS Oncology who
have yet to provide the necessary documentation to receive shares of the
Company’s common stock (4,433 shares). On December 16, 2009, upon the issuance
of 500,000 shares of contingent milestone consideration discussed above, the
value of the contingent equity rights was reduced by $1,365,000 to
$2,639,000.


F-20


NOTE
11 - STOCKHOLDERS’ EQUITY





Preferred
Stock





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





Common
Stock





On
September 30, 2009, the Company completed a registered direct offering to
certain investors of 8,000,000 shares of its common stock and warrants to
purchase up to a total of 2,800,000 shares of its common stock for gross
proceeds of approximately $20 million. The common stock and warrants were sold
in units, with each unit consisting of one share of common stock and a warrant
to purchase 0.35 of a share of common stock. The purchase price per unit was
$2.50. Subject to certain ownership limitations, the warrants are exercisable at
any time on or after the initial issue date and on or prior to October 1, 2010,
at an exercise price of $2.65 per warrant share. In addition, the placement
agent received a warrant to purchase up to 108,000 shares of common stock at an
exercise price of $3.125 per warrant share, exercisable at any time on or prior
to October 1, 2010. Total proceeds to the Company from this public offering were
approximately $18.4 million, net of offering costs of approximately $1.6
million. The shares and warrants were sold under a shelf registration statement
on Form S-3 (File No. 333-161607) filed with the SEC on August 28, 2009, and
declared effective by the SEC on September 23, 2009. The registration statement
provides for the offering of up to $40 million of the Company's common stock and
warrants.





Subsequent
to this registered direct offering, there remains approximately $12.2 million of
the Company's common stock and warrants available for sale under the shelf
registration statement. The Company may offer the remaining securities under its
shelf registration from time to time in response to market conditions or other
circumstances if it believes such a plan of financing is in the best interest of
the Company and its stockholders.  The Company believes that the shelf
registration provides it with the flexibility to raise additional capital to
finance its operations as needed.





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





Treasury
Stock





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





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


F-21


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


a. The
1999 Stock Option Plan was adopted in November 1999.  Under the 1999
Stock Option Plan, the Company’s board of directors could grant stock-based
awards to directors, consultants and employees. The plan authorizes grants to
purchase up to 4,230,000 shares of authorized but unissued common stock. The
plan limits the term of each option, to no more than 25 years from the date of
the grant, unless otherwise authorized by the board. The plan permits the board
of directors or a committee appointed by the board to administer the
plan.  The administrator has the authority, in its discretion, to
determine the terms and conditions of any option granted to a Company service
provider, including the vesting schedule. As of December 31, 2009, no additional
shares of the Company’s common stock may be issued under the 1999 Stock Option
Plan.





b. The
2000 Stock Option Plan was adopted in June 2000. Under the 2000 Stock Option
Plan the compensation committee of the Company’s board of directors is
authorized to grant stock-based awards to directors, consultants and employees.
The 2000 plan authorizes grants to purchase up to 4,455,000 shares of authorized
but unissued common stock. The plan limits the term of each option, to no more
than 10 years from the date of the grant, unless authorized by the
board.  As of December 31, 2009, up to 362,051 additional shares may
be issued under the 2000 Stock Option Plan.





c. The
2002 CEO Incentive Stock Option Plan was adopted in December 2002. Under the
2002 CEO Incentive Stock Option Plan the Company’s board of directors granted an
option to the former Chief Executive Officer of the Company, Michael S. Weiss,
to purchase up to 2,002,657 shares of authorized but unissued common stock. The
option had a term of 10 years from the date of the grant. The option granted to
Mr. Weiss was part of a total grant of options issued pursuant to the 1999 Stock
Option Plan, the 2000 Stock Option Plan and the 2002 CEO Incentive Stock Option
Plan, to purchase a total of 4,050,000 shares of the Company’s common stock. On
April 23, 2009, the Company’s board of directors voted to terminate the
employment of Mr. Weiss as the Company’s Chairman and Chief Executive Officer.
As a result, as of December 31, 2009, 2,002,657 options remain outstanding and
vested under this plan, and will remain exercisable until two years from the
date of the termination of his employment. No additional shares of the Company’s
common stock may be issued under the 2002 CEO Incentive Stock Option
Plan.





d. The
2004 President Incentive Stock Option Plan was adopted in February
2004.  Under the 2004 President Incentive Stock Option Plan the
Company’s board of directors granted an option to the former President of the
Company to purchase up to 1,000,000 shares of authorized but unissued common
stock. The option had a term of 10 years from the date of the grant. The option
granted to the then newly appointed President was made pursuant to an employment
agreement following the acquisition of ACCESS Oncology in February 2004. Of this
option, 166,667 was to vest over a three-year period and 833,333 was to vest
upon the earlier of the achievement of certain performance-based milestones or
February 5, 2011. As part of the 2008 Restructuring, on March 26, 2008, the
Company notified its President that the Company was terminating his employment,
effective April 15, 2008. As a result, 500,000 options were forfeited and, as of
December 31, 2009, 500,000 options remain outstanding and vested under this
plan, and will remain exercisable until April 15, 2010. No additional shares of
the Company’s common stock may be issued under the 2004 President Incentive
Stock Option Plan.





e. The
2004 Long-Term Incentive Plan was adopted in June 2004 by the Company’s
stockholders.  Under the 2004 Long-Term Incentive Plan, the
compensation committee of the Company’s board of directors is authorized to
grant stock-based awards to directors, consultants and employees. The 2004 plan
authorizes grants to purchase up to 4,000,000 shares of authorized but unissued
common stock. The plan limits the term of each option, to no more than 10 years
from the date of their grant.  As of December 31, 2009, up to an
additional 1,046,215 shares may be issued under the 2004 Long-Term Incentive
Plan.





f. The
2007 Incentive Plan was adopted in June 2007 by the Company’s stockholders.
Under the 2007 Incentive Plan, the compensation committee of the Company’s board
of directors is authorized to grant stock-based awards to directors,
consultants, employees and officers. The 2007 Incentive Plan authorizes grants
to purchase up to 6,000,000 shares of authorized but unissued common stock. The
plan limits the term of each option to no more than 10 years from the date of
their grant. As of December 31, 2009, up to an additional 1,219,752 shares may
be issued under the 2007 Incentive Plan.





g. The
2009 CEO Incentive Plan was adopted in May 2009.  Under the 2009 CEO
Incentive Plan, the Company’s board of directors granted an option to Ron
Bentsur, the Company’s newly-appointed Chief Executive Officer, to purchase up
to 600,000 shares of authorized but unissued common stock. The option has a term
of 10 years from the date of grant. The option will vest in equal annual
installments over a four-year period or upon an earlier change in control of the
Company.


F-22





Shares
available for the issuance of stock options or other stock-based awards under
the Company’s stock option and incentive plans were 2,628,018 shares at December
31, 2009.





Stock
Options





The
following table summarizes stock option activity for the years ended December
31, 2009, 2008 and 2007:





Number
                    of shares
                  
                  
                  Weighted-
                    average
                    exercise price
                  
                  
                  Weighted-
                    average
                    Contractual
                    Term
                  
                  
                  Aggregate
                    Intrinsic
                    Value(in
      years)Outstanding
      at December 31, 2006
                  
                  
                  10,784,713
                  
                  
                  $
                  7.87Granted
                  
                  
                  1,235,769
                  
                  
                  
                  9.67Exercised
                  
                  
                  (138,412
                  )
                  
                  
                  1.96Forfeited
                  
                  
                  (544,730
                  )
                  
                  
                  14.48Expired
                  
                  
                  (468,167
                  )
                  
                  
                  11.31Outstanding
      at December 31, 2007
                  
                  
                  10,869,173
                  
                  
                  
                  7.69Granted
                  
                  
                  243,800
                  
                  
                  
                  4.28Exercised
                  
                  
                  (75,000
                  )
                  
                  
                  2.96
                  
                  
                  
                  
                  
                  $
                  259,900Forfeited
                  
                  
                  (1,326,214
                  )
                  
                  
                  10.29Expired
                  
                  
                  (597,300
                  )
                  
                  
                  8.74Outstanding
      at December 31, 2008
                  
                  
                  9,114,459
                  
                  
                  
                  7.19Granted
                  
                  
                  700,000
                  
                  
                  
                  0.55Exercised
                  
                  
                  (50,000
                  )
                  
                  
                  0.36
                  
                  
                  
                  
                  
                  $
                  85,300Forfeited
                  
                  
                  (159,467
                  )
                  
                  
                  6.75Expired
                  
                  
                  (251,420
                  )
                  
                  
                  11.16Outstanding
      at December 31, 2009
                  
                  
                  9,353,572
                  
                  
                  $
                  6.63
                  
                  
                  
                  3.3
                  
                  
                  $
                  6,513,185Vested
      and expected to vest at December 31, 2009
                  
                  
                  9,321,998
                  
                  
                  $
                  6.64
                  
                  
                  
                  3.3
                  
                  
                  $
                  6,468,325Exercisable
      at December 31, 2009
                  
                  
                  8,316,711
                  
                  
                  $
                  6.87
                  
                  
                  
                  2.6
                  
                  
                  $
                  5,174,085





The
following table summarizes information about stock options outstanding at
December 31, 2009:





Options outstanding
                    
                    
                    Options exercisableRange of
                      exercise prices
                    
                    Number
                      outstanding
                    
                    
                    Weighted-
                      average
                      remaining
                      contractual
                      life (years)
                    
                    
                    Weighed-
                      average
                      exercise
                      price
                    
                    
                    Number
                      exercisable
                    
                    
                    Weighed-
                      average
                      exercise
                      price$    
      0.10 - $       2.19
                    
                    
                    4,784,319
                    
                    
                    
                    3.6
                    
                    
                    $
                    1.14
                    
                    
                    
                    4,104,319
                    
                    
                    $
                    1.244.59
      -          8.98
                    
                    
                    497,171
                    
                    
                    
                    4.0
                    
                    
                    
                    7.57
                    
                    
                    
                    426,504
                    
                    
                    
                    7.419.25
      -        14.64
                    
                    
                    4,072,082
                    
                    
                    
                    2.8
                    
                    
                    
                    12.96
                    
                    
                    
                    3,785,888
                    
                    
                    
                    12.90$
          0.10 - $  
      14.64
                    
                    
                    9,353,572
                    
                    
                    
                    3.3
                    
                    
                    $
                    6.63
                    
                    
                    
                    8,316,711
                    
                    
                    $
                    6.87





Upon the
exercise of stock options, the Company issues new shares of its common stock. As
of December 31, 2009, 3,328,833 options issued to employees, and 93,000 options
issued to consultants, are milestone-based, of which 3,203,833 options issued to
employees, and 43,000 options issued to consultants, are vested and
exercisable.


F-23


Restricted
Stock
 
 Certain
employees, directors and consultants have been awarded restricted stock under
the 2004 Long-Term Incentive Plan and 2007 Incentive Plan. The time-vesting
restricted stock grants vest primarily over a period of three to four years. The
following table summarizes restricted share activity for the years ended
December 31, 2009, 2008 and 2007:


Number of
                    Shares
                  
                  
                  Weighted
                    Average
                    Grant Date
                    Fair Value
                  
                  
                  Aggregate
                    Intrinsic
                    ValueOutstanding
      at December 31, 2006
                  
                  
                  100,000
                  
                  
                  $
                  15.30Granted
                  
                  
                  195,000
                  
                  
                  
                  10.28Vested
                  
                  
                  (73,332
                  )
                  
                  
                  11.77Forfeited
                  
                  
                  (83,334
                  )
                  
                  
                  15.30Outstanding
      at December 31, 2007
                  
                  
                  138,334
                  
                  
                  
                  10.09Granted
                  
                  
                  3,976,906
                  
                  
                  
                  0.33Vested
                  
                  
                  (59,168
                  )
                  
                  
                  9.04
                  
                  
                  $
                  27,075Forfeited
                  
                  
                  (73,500
                  )
                  
                  
                  10.19Outstanding
      at December 31, 2008
                  
                  
                  3,982,572
                  
                  
                  
                  0.36Granted
                  
                  
                  578,539
                  
                  
                  
                  0.76Vested
                  
                  
                  (2,707,233
                  )
                  
                  
                  0.32
                  
                  
                  $
                  1,325,377Forfeited
                  
                  
                  (361,742
                  )
                  
                  
                  0.34Outstanding
      at December 31, 2009
                  
                  
                  1,492,136
                  
                  
                  $
                  0.59
                  
                  
                  $
                  3,730,340





On
September 14, 2009, the Company entered in an employment agreement with Ron
Bentsur, its Chief Executive Officer. The agreement terminates on May 20, 2012,
provided, however, that Mr. Bentsur’s opportunity to earn the milestone awards
described below will be effective until May 20, 2014, subject to certain early
termination events. Mr. Bentsur has the opportunity to earn certain
milestone awards as follows:





(1)
100,000 shares of restricted stock were granted to Mr. Bentsur on September 22,
2009, for the achievement of a $1.00 share price of the Company’s common stock
for 120 consecutive days (based upon the average closing price of the Company’s
common stock for a 120-day period after May 20, 2009). The restricted stock
will vest in equal installments over each of the first three anniversaries of
the date of grant provided that Mr. Bentsur remains an employee of the Company
during such vesting period, or immediately upon achievement of milestone #2
below.




(2)
250,000 shares of restricted stock will be granted to Mr. Bentsur upon the
achievement of a $2.50 share price of the Company’s common stock for 120
consecutive days (based upon the average closing price of the Company’s common
stock for a 120-day period after May 20, 2009). Such restricted stock will
vest in equal installments over each of the first three anniversaries of the
date of grant provided that Mr. Bentsur remains an employee of Keryx during such
vesting period.




(3)
400,000 shares of restricted stock will be granted to Mr. Bentsur upon the
first to occur of (a) the Company’s filing of an accepted new drug application,
or NDA, with the U.S. Food and Drug Administration for Zerenex or Perifosine, or
(b) the Company’s outlicensing of Zerenex or Perifosine in the U.S. to a third
party.  Such restricted stock will vest in equal installments over
each of the first three anniversaries of the date of grant provided that Mr.
Bentsur remains an employee of the Company during such vesting period. This
milestone #3 may be achieved with respect to NDAs or qualifying outlicenses for
multiple indications of the same product, but not for subsequent outlicenses of
the product relating to an indication for which the milestone is met. Upon
achievement of milestone #4 below with respect to a product, the restricted
stock granted for one indication of the product under milestone #3 above will
vest in full.





(4) 500,000
shares of restricted stock will be granted to Mr. Bentsur, upon the first
to occur of (a) the Company’s first commercial sale of Zerenex or Perifosine in
the U.S. off an approved NDA, (b) the Company’s receipt of the first royalty
upon the commercial sale of Zerenex or Perifosine in the U.S. by a partner to
whom the Company has sold exclusive or non-exclusive commercial rights, or (c)
the Company’s complete outlicensing of the entire product rights of Zerenex or
Perifosine in the U.S. Such restricted stock will vest on the first
anniversary of the date of grant provided that Mr. Bentsur remains an employee
of the Company during such vesting period.




(5) 100,000
shares of restricted stock will be granted to Mr. Bentsur upon each event
of the Company’s outlicensing Zerenex in a foreign market, other than Japan,
resulting in a greater than $10 million non-refundable cash payment to the
Company with a gross deal value to the Company of at least $50
million.  Such restricted stock will vest in equal installments over
each of the first three anniversaries of the date of grant provided that Mr.
Bentsur remains an employee of the Company during such vesting
period.





As of
December 31, 2009, Mr. Bentsur has been granted a total of 100,000 shares of
restricted stock based on the milestone awards listed above. On March 23, 2010,
upon achievement of the second milestone, listed above, Mr. Bentsur was granted
250,000 shares of restricted stock, and the 100,000 restricted shares previously
granted to Mr. Bentsur for the first milestone were immediately
vested.


F-24





Warrants





The
following table summarizes warrant activity for the years ended December 31,
2009, 2008 and 2007:





Warrants
                  
                  
                  Weighted-
                    average
                    exercise price
                  
                  
                  Aggregate
                    Intrinsic
                    ValueOutstanding
      at December 31, 2006
                  
                  
                  321,976
                  
                  
                  $
                  4.65Issued
                  
                  
                  —
                  
                  
                  
                  —Exercised
                  
                  
                  —
                  
                  
                  
                  —Canceled
                  
                  
                  —
                  
                  
                  
                  —Outstanding
      at December 31, 2007
                  
                  
                  321,976
                  
                  
                  
                  4.65Issued
                  
                  
                  —
                  
                  
                  
                  —Exercised
                  
                  
                  —
                  
                  
                  
                  —Expired
                  
                  
                  (249,412
                  )
                  
                  
                  6.00Outstanding
      at December 31, 2008
                  
                  
                  72,564
                  
                  
                  
                  0.01Issued
                  
                  
                  2,908,000
                  
                  
                  
                  2.67Exercised
                  
                  
                  (64,174
                  )
                  
                  
                  0.01
                  
                  
                  $
                  134,335Expired
                  
                  
                  (8,390
                  )
                  
                  
                  0.01Outstanding
      at December 31, 2009
                  
                  
                  2,908,000
                  
                  
                  $
                  2.67
                  
                  
                  $
                  —





The terms
of outstanding warrants as of December 31, 2009 are as follows:





Warrants outstanding
                    
                    
                    Warrants exercisableRange of
                      exercise prices
                    
                    Number
                      outstanding
                    
                    
                    Weighted-
                      average
                      remaining
                      contractual
                      life (years)
                    
                    
                    Weighed-
                      average
                      exercise
                      price
                    
                    
                    Number
                      exercisable
                    
                    
                    Weighed-
                      average
                      exercise
                      price$
                    2.65
                    
                    
                    2,800,000
                    
                    
                    
                    0.75
                    
                    
                    $
                    2.65
                    
                    
                    
                    2,800,000
                    
                    
                    $
                    2.653.125
                    
                    
                    108,000
                    
                    
                    
                    0.75
                    
                    
                    
                    3.125
                    
                    
                    
                    108,000
                    
                    
                    
                    3.125





As
discussed above, as part of the registered direct offering completed on
September 30, 2009, the Company issued warrants to purchase up to 2,800,000
shares of the Company's common stock. The warrants have an exercise price of
$2.65 per warrant share and, subject to certain ownership limitations, are
exercisable at any time on or after the initial issue date and on or prior to
October 1, 2010. The grant date fair value was $1.03 per warrant, for a total
fair value of $2,877,000, which is included in additional paid-in capital on the
consolidated balance sheet. In addition, the Company issued to the placement
agent in the transaction warrants to purchase up to 108,000 shares of its common
stock at an exercise price of $3.125 per warrant share, exercisable at any time
on or prior to October 1, 2010, with a grant date fair value of $0.93 per
warrant. The fair value of the warrants described above is estimated at the date
of grant using the Black-Scholes pricing model. For as long as the warrants
issued in the registered direct offering are outstanding, if there is no
effective registration statement covering the resale of the warrant shares by
the holders, such warrants may be exercisable, in whole or in part, at such time
by means of a “cashless exercise.”


F-25


Stock-Based
Compensation
 
 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
                  
                  2009
                  
                  2008
                  
                  2007Risk-free
      interest rates
                  
                  2.0%
                  
                  2.6%
                  
                  4.1%Dividend
      yield
                  
                  —
                  
                  —
                  
                  —Volatility
                  
                  123.7%
                  
                  76.3%
                  
                  68.4%Weighted-average
      expected term
                  
                  4.7
      years
                  
                  4.3
      years
                  
                  4.8
      years





The
weighted average grant date fair value of options granted was $0.44, $2.40 and
$5.69 per option for the years ended December 31, 2009, 2008 and 2007,
respectively. The Company used historical information to estimate forfeitures
within the valuation model. As of December 31, 2009, there was $1.0 million and
$0.8 million of total unrecognized compensation cost related to non-vested stock
options and restricted stock, respectively, which is expected to be recognized
over a weighted-average period of 1.9 years and 2.0 years, respectively. The
amounts do not include, as of December 31, 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.





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.





The
following table summarizes stock-based compensation expense information about
stock options and restricted stock for the years ended December 31, 2009, 2008
and 2007:





Year ended December 31,(in thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Stock-based
      compensation expense associated with restricted stock (1)
                  
                  $
                  1,220
                  
                  
                  $
                  (114
                  )
                  
                  $
                  1,028Stock-based
      compensation expense associated with option grants (2)
                  
                  
                  1,880
                  
                  
                  
                  6,862
                  
                  
                  
                  9,632$
                  3,100
                  
                  
                  $
                  6,748
                  
                  
                  $
                  10,660


(1)
              Includes
      a $290,000 credit to compensation expense in the year ended December 31,
      2008, related to restricted stock issued the Company’s former President,
      who was terminated as part of the 2008
  Restructuring.


(2)
            Includes
      $660,000 of non-cash compensation expense in the year ended December 31,
      2009, related to equity modifications of stock options and restricted
      stock issued to the previous Chief Executive Officer, who was terminated
      in April 2009.





NOTE
12 – INCOME TAXES





The
Company accounts for income taxes under the asset and liability method. Deferred
tax assets and liabilities are determined based on differences between the
financial reporting and tax basis of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. A valuation allowance is established when necessary to
reduce deferred tax assets to the amount expected to be realized. In determining
the need for a valuation allowance, management reviews both positive and
negative evidence, including current and historical results of operations,
future income projections and the overall prospects of the Company's business.
Based upon management's assessment of all available evidence, the Company
believes that it is more-likely-than-not that the deferred tax assets will not
be realizable; and therefore, a valuation allowance is established. The
valuation allowance for deferred tax assets was $133.1million and $141.8 million
as of December 31, 2009 and 2008, respectively.





As of
December 31, 2009, the Company has U.S. net operating loss carryforwards
("NOL's") of approximately $270.6 million, of which approximately $36.5 million
were derived from certain stock option exercises and any such benefit realized
will be credited to additional paid in capital. For income tax purposes, these
NOL's will expire in the years 2019 through 2029. Due to the Company’s various
equity transactions, the utilization of certain NOL's could be subject to annual
limitations imposed by Internal Revenue Code Section 382 relating to the change
of control provision and/or the separate return limitation year losses
limitation.


F-26





The
Company recorded
$36,000 in income tax expense for the year ended December 31, 2007, as a result
of Israeli income tax withheld associated with the Yissum revenue (see Note
9). No income tax expense was attributable to income from continuing
operations for the years ended December 31, 2009 and 2008. Income tax expense
differed from amounts computed by applying the US federal income tax rate of 35%
to pretax loss as follows:





For the year ended December 31,(in thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Income
      (losses) from continuing operations before income taxes, as reported in
      the
                    consolidated
      statements of operations
                  
                  $
                  10,485
                  
                  
                  $
                  (52,706
                  )
                  
                  $
                  (89,270
                  )Computed
      “expected” tax expense (benefit)
                  
                  
                  3,670
                  
                  
                  
                  (18,447
                  )
                  
                  
                  (31,245
                  )Increase
      (decrease) in income taxes resulting from:Expected
      expense (benefit) from state & local taxes
                  
                  
                  846
                  
                  
                  
                  (4,869
                  )
                  
                  
                  (4,563
                  )Change
      in state and local effective tax rate
                  
                  
                  4,876
                  
                  
                  
                  (4,387
                  )
                  
                  
                  4,533Unrecognized
      compensation deduction
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  7,053Permanent
      differences
                  
                  
                  (125
                  )
                  
                  
                  523
                  
                  
                  
                  447Withholding
      tax
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  36Other
                  
                  
                  83
                  
                  
                  
                  (60
                  )
                  
                  
                  159Prior
      year true-up
                  
                  
                  (658
                  )Change
      in the balance of the valuation allowance for deferred tax assets
                    allocated
      to income tax expense
                  
                  
                  (8,692
                  )
                  
                  
                  27,240
                  
                  
                  
                  23,616$
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  36





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





For the year ended December 31,(in thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Deferred
      tax expense (benefit)
                  
                  $
                  8,520
                  
                  
                  $
                  (27,154
                  )
                  
                  $
                  (23,883
                  )Federal
      deferred tax benefit relating to the exercise of stock
    options
                  
                  
                  172
                  
                  
                  
                  (86
                  )
                  
                  
                  267(Decrease)
      Increase in the valuation allowance for deferred tax asset
                  
                  
                  (8,692
                  )
                  
                  
                  27,240
                  
                  
                  
                  23,616$
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —





The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2009 and 2008
are presented below.





(in thousands)
                  
                  December 31, 2009
                  
                  
                  December 31, 2008Deferred
      tax assets (liabilities):Net
      operating loss carryforwards
                  
                  $
                  116,533
                  
                  
                  $
                  119,880Non-cash
      compensation
                  
                  
                  14,001
                  
                  
                  
                  13,528Deferred
      revenue
                  
                  
                  —
                  
                  
                  
                  4,737Unrealized
      loss on securities
                  
                  
                  1,242
                  
                  
                  
                  1,292Research
      and development
                  
                  
                  330
                  
                  
                  
                  939Intangible
      assets due to different amortization methods
                  
                  
                  761
                  
                  
                  
                  1,009Accrued
      compensation
                  
                  
                  104
                  
                  
                  
                  299Other
      temporary differences
                  
                  
                  98
                  
                  
                  
                  77Deferred
      tax asset, excluding valuation allowance
                  
                  
                  133,069
                  
                  
                  
                  141,761Less
      valuation allowance
                  
                  
                  (133,069
                  )
                  
                  
                  (141,761
                  )Net
      deferred tax assets
                  
                  $
                  —
                  
                  
                  $
                  —




F-27





The
Company files income tax returns in the U.S federal and various state and local
jurisdictions. For federal and state income tax purposes, the 2007, 2008 and
2009 tax years remain open for examination under the normal three year statute
of limitations. The audits of the Company's U.S. federal income tax returns for
2004 through 2006 were completed in 2008 and the unrecognized tax benefits
balance was reduced from $7.05 million to $0 at December 31, 2008. Currently,
the Company's New York City tax returns for tax years 2006 and 2007 are under
audit. The Company believes that it is more-likely-than-not that its tax
positions on the 2006 and 2007 New York City income tax returns will prevail,
and therefore, no uncertain tax position liabilities are recorded for
2009.





Effective
January 1, 2007, the Company adopted guidance under ASC Topic 740-10 which
clarifies the accounting and disclosure for uncertainty in income taxes.
The adoption of this interpretation did not have a material impact on the
Company’s financial statements.





The
Company is continuing its practice of recognizing interest and penalties related
to income tax matters in income tax expense. There was no accrual for interest
and penalties related to uncertain tax positions for 2009, 2008 and
2007. The Company does not believe that there will be a material change in
its unrecognized tax positions over the next twelve months. All of the
unrecognized tax benefits, if recognized, would be offset by the valuation
allowance.





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





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





For the year ended December 31,(in thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Interest
      income
                  
                  $
                  315
                  
                  
                  $
                  1,349
                  
                  
                  $
                  4,550Other
      income
                  
                  
                  247
                  
                  
                  
                  101
                  
                  
                  
                  5Gain
      on sale of auction rate securities
                  
                  
                  173
                  
                  
                  
                  81
                  
                  
                  
                  —Impairment
      expense of auction rate securities
                  
                  
                  (68
                  )
                  
                  
                  (3,196
                  )
                  
                  
                  —$
                  667
                  
                  
                  $
                  (1,665
                  )
                  
                  $
                  4,555





In 2009
and in 2008, the Company recorded impairment charges totaling $68,000 and
$3,196,000 for other-than-temporary declines in the fair value of its auction
rate securities (see Note 3 – Investment Securities, and Note 4 – Fair Value
Measurements). Other income consists of rental income from the sublease of a
portion of the Company’s leased space.





NOTE
14 - COMMITMENTS AND CONTINGENCIES





Research
& Development Agreements





The
Company has entered into various research and development agreements (relating to the
Company’s development of KRX-0401 and Zerenex)under which it is
obligated to make payments of approximately $4,341,000 through June 2012. The
following table shows future research and development payment obligations by
period as of December 31, 2009.





(in thousands)
                        
                        2010
                        
                        
                        2011
                        
                        
                        2012
                        
                        
                        2013
                        
                        
                        2014Research
      and development agreements
                        
                        $
                        2,284
                        
                        
                        $
                        1,543
                        
                        
                        $
                        514
                        
                        
                        
                        —
                        
                        
                        
                        —





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


F-28


Leases
 
 The
Company leases its office space under a lease agreement that expires in October
2010. Total rental expense was approximately $540,000, $658,000 and $723,000 for
the years ended December 31, 2009, 2008, and 2007, respectively. The Company
recognized sublet income of $247,000 and $101,000 for the years ended December
31, 2009 and 2008 related to office sharing agreements.


Future
minimum lease commitments as of December 31, 2009, in the aggregate total
approximately $459,000 through October 2010. The following table shows future
minimum lease commitments by period as of December 31, 2009.





(in thousands)
                  
                  2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  2013
                  
                  
                  2014Operating
      leases
                  
                  $
                  459
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —





During
2004, the Company entered into a lease arrangement with its former President for
the utilization of part of his residence for office space associated with the
Company’s former employees in San Francisco, California.  The lease was
terminated effective April 15, 2008, as part of the 2008 Restructuring. The
Company expensed $16,000 and $65,000 in 2008 and 2007, pursuant to the terms of
this former arrangement. All amounts were paid prior to December 31,
2008.





Royalty
and Contingent Milestone Payments





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





The
Company has undertaken to make contingent milestone payments to certain of its
licensors of up to approximately $41.1 million over the life of the licenses, of
which approximately $36.6 million will be due upon or following regulatory
approval of the licensed drugs. The Company has also committed to pay to the
former stockholders of ACCESS Oncology certain contingent equity rights (up to
2,872,422 shares of the Company’s common stock) if KRX-0401 meets certain
development and sales milestones. The contingent equity rights have been
recognized as a non-current liability on the consolidated balance sheet. See
Note 10 – Contingent Equity Rights. The uncertainty relating to the timing of
the commitments described in this paragraph prevents the Company from including
them in the tables above.





NOTE
15 – SEGMENT INFORMATION





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





Segment
information for the years ended December 31, 2009, 2008 and 2007 was as
follows:





Revenue(in thousands)
                
                2009
                
                
                2008
                
                
                2007Services
                
                $
                3
                
                
                $
                103
                
                
                $
                52Products
                
                
                25,191
                
                
                
                1,180
                
                
                
                931Total
                
                $
                25,194
                
                
                $
                1,283
                
                
                $
                983





Operating
      income (loss)(in thousands)
                
                2009
                
                
                2008
                
                
                2007Services
                
                $
                3
                
                
                $
                76
                
                
                $
                (72
                )Products
                
                
                9,815
                
                
                
                (51,117
                )
                
                
                (93,753
                )Total
                
                $
                9,818
                
                
                $
                (51,041
                )
                
                $
                (93,825
                )


F-29





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





Income (loss) from continuing operations(in thousands)
                
                2009
                
                
                2008
                
                
                2007Operating
      income (losses) of reportable segments
                
                $
                9,818
                
                
                $
                (51,041
                )
                
                $
                (93,825
                )Interest
      and other income (expense)
                
                
                667
                
                
                
                (1,665
                )
                
                
                4,555Income
      taxes
                
                
                —
                
                
                
                —
                
                
                
                (36
                )Consolidated
      income (loss) from continuing operations
                
                $
                10,485
                
                
                $
                (52,706
                )
                
                $
                (89,306
                )





Assets (1)As of December 31,(in thousands)
                  
                  2009
                  
                  
                  2008Services
                  
                  $
                  —
                  
                  
                  $
                  —Products
                  
                  
                  4,904
                  
                  
                  
                  3,982Total
      assets of reportable segments
                  
                  
                  4,904
                  
                  
                  
                  3,982Cash,
      cash equivalents, interest receivable and investment
      securities
                  
                  
                  35,914
                  
                  
                  
                  22,652Assets
      of discontinued operations
                  
                  
                  —
                  
                  
                  
                  —Consolidated
      total assets
                  
                  $
                  40,818
                  
                  
                  $
                  26,634


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





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





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





NOTE
16 - LITIGATION





In March
2010, the Company settled a dispute with ICON Central Laboratories (“ICON”), the
central laboratory it 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. ICON was claiming that the Company
owed it $816,647 in unpaid invoices, much of which is made up of charges for
annual storage fees incurred after the effective date of termination of the
agreements. Under the terms of the settlement agreement, the Company paid ICON
$400,000 in settlement of all claims, which, at December 31, 2009, was included
in accounts payable and accrued expenses on the Company’s balance
sheet.





In
October 2009, the Company filed a statement of claim with the Financial
Institution Regulatory Authority (“FINRA”) to commence an arbitration proceeding
against an SEC registered broker-dealer. In this arbitration proceeding, the
Company is seeking damages arising from that broker-dealer’s recommendations and
purchases of auction rate securities for the Company’s cash management account.
The claim will be determined by a panel of three FINRA arbitrators. In January
2010, the broker-dealer filed an answer to the statement of claim and denied
liability. The parties are in the process of selecting an arbitration
panel.


F-30


NOTE
17 – RESTRUCTURING





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





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





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





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





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


F-31


NOTE
18 – QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)





2009Mar. 31
                
                
                June 30
                
                
                Sept. 30
                
                
                Dec. 31(in thousands, except per share data)Revenue:License
      revenue
                
                $
                3,327
                
                
                $
                18,289
                
                
                $
                —
                
                
                $
                —Service
      revenue
                
                
                3
                
                
                
                —
                
                
                
                —
                
                
                
                —Other
      revenue
                
                
                —
                
                
                
                75
                
                
                
                3,500
                
                
                
                —Total
      revenue
                
                
                3,330
                
                
                
                18,364
                
                
                
                3,500
                
                
                
                —Operating
      expenses:Cost
      of services
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Research
      and development:Non-cash
      compensation
                
                
                201
                
                
                
                361
                
                
                
                388
                
                
                
                283Other
      research and development
                
                
                1,374
                
                
                
                1,456
                
                
                
                1,527
                
                
                
                3,015Total
      research and development
                
                
                1,575
                
                
                
                1,817
                
                
                
                1,915
                
                
                
                3,298Selling,
      general and administrative:Non-cash
      compensation
                
                
                370
                
                
                
                1,028
                
                
                
                250
                
                
                
                219Other
      selling, general and administrative
                
                
                1,041
                
                
                
                1,528
                
                
                
                904
                
                
                
                1,431Total
      selling, general and administrative
                
                
                1,411
                
                
                
                2,556
                
                
                
                1,154
                
                
                
                1,650Total
      operating expenses
                
                
                2,986
                
                
                
                4,373
                
                
                
                3,069
                
                
                
                4,948Operating
      income (loss)
                
                
                344
                
                
                
                13,991
                
                
                
                431
                
                
                
                (4,948
                )Other
      income (expense)Interest
      and other income (expense), net
                
                
                107
                
                
                
                141
                
                
                
                129
                
                
                
                290Income
      taxes
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Income
      (loss) from continuing operations
                
                
                451
                
                
                
                14,132
                
                
                
                560
                
                
                
                (4,658
                )Loss
      from discontinued operations
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Net
      income (loss)
                
                $
                451
                
                
                $
                14,132
                
                
                $
                560
                
                
                $
                (4,658
                )Basic
      net income (loss) per common shareContinuing
      operations
                
                
                0.01
                
                
                
                0.30
                
                
                
                0.01
                
                
                
                (0.08
                )Discontinued
      operations
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Basic
      net income (loss) per common share
                
                $
                0.01
                
                
                $
                0.30
                
                
                $
                0.01
                
                
                $
                (0.08
                )Diluted
      net income (loss) per common shareContinuing
      operations
                
                
                0.01
                
                
                
                0.29
                
                
                
                0.01
                
                
                
                (0.08
                )Discontinued
      operations
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Diluted
      net income (loss) per common share
                
                $
                0.01
                
                
                $
                0.29
                
                
                $
                0.01
                
                
                $
                (0.08
                )






F-32





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





*Amount
less than once cent


F-33




SIGNATURES





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




Date:  March
25, 2010





KERYX
      BIOPHARMACEUTICALS, INC.By:
                  /s/
      Ron BentsurRon
      Bentsur
                    Chief
      Executive Officer and
Director





POWER OF
ATTORNEY





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





Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
Form 10-K has been signed by the following persons on behalf of the Registrant
on March 25, 2010, and in the capacities indicated:





Signatures
                          
                          Title/s/
      Ron Bentsur
                          
                          Chief
      Executive Officer and DirectorRon
      Bentsur
                          
                          (principal
      executive officer)/s/
      James F. Oliviero
                          
                          Chief
      Financial OfficerJames
      F. Oliviero
                          
                          (principal
      financial and accounting officer)/s/
      Michael P. Tarnok
                          
                          Chairman
      of the Board of DirectorsMichael
      P. Tarnok/s/
      Kevin Cameron
                          
                          DirectorKevin
      Cameron/s/
      Senator Wyche Fowler, Jr.
                          
                          DirectorSenator
      Wyche Fowler, Jr./s/
      Jack Kaye
                          
                          DirectorJack
      Kaye





EXHIBIT
INDEX





ExhibitNumber
                    
                    Exhibit Description21.1
                    
                    List
      of subsidiaries of Keryx Biopharmaceuticals, Inc.23.1
                    
                    Consent
      of UHY LLP.23.2
                    
                    Consent
      of KPMG LLP.24.1
                    
                    Power
      of Attorney of Director and Officers of Keryx Biopharmaceuticals, Inc.
      (included herein).31.1
                    
                    Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
      March 25, 2010.31.2
                    
                    Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
      March 25, 2010.32.1
                    
                    Certification
      of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated March 25,
      2010.32.2
                    
                    Certification
      of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated March 25,
      2010.