**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 **Washington,
D.C. 20549**
 
 **FORM
10-K**
 
 x
    **ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934**
 
 **For
the fiscal year ended December 31, 2004.**
 **OR**
 
  ̈
    **TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934**
 
 **For
the transition period from ________ to ________.**
 
 **Commission
File Number 000-30929**
 **KERYX
BIOPHARMACEUTICALS, INC.**
 **(Exact
name of registrant as specified in its charter)**
 
 **Delaware**
      (State
      or other jurisdiction of
      incorporation
      or organization)
    **13-4087132**
      (I.R.S.
      Employer
      Identification
      No.)**750
      Lexington Avenue**
      **New
      York, New York**
      (Address
      of principal executive offices)
    **10022**
      (Zip
      Code)
 
 **Registrant’s
telephone number, including area code: (212) 531-5965**
 
 **Securities
registered pursuant to Section 12(b) of the Act:**
 None
 
 **Securities
registered pursuant to Section 12(g) of the Act:**
 Common
Stock, Par Value $0.001 Per Share
 (Title of
Class)
 
 Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No  ̈
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.  ̈
 
 Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes x No  ̈
 
 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 $305,130,826 as of
June 30, 2004, based on the closing sale price of such stock as reported on the
Nasdaq National Market.
 
 There
were 31,504,180 shares of the registrant’s common stock outstanding as of March
4, 2005.
 
 **DOCUMENTS
INCORPORATED BY REFERENCE**
 
 Portions
of the registrant’s Proxy Statement for the 2005 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, 2004**
 
 **TABLE
OF CONTENTS**
 
 ****
    
    **Page**SPECIAL
      CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
    1**PART
      I**ITEM
      1
    Business
    2ITEM
      2
    Properties
    22ITEM
      3
    Legal
      Proceedings
    23ITEM
      4
    Submission
      of Matters to a Vote of Security Holders
    23**PART
      II**ITEM
      5
    Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
    23ITEM
      6
    Selected
      Financial Data
    24ITEM
      7
    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
    25ITEM
      7A
    Quantitative
      and Qualitative Disclosure About Market Risk
    32ITEM
      8
    Financial
      Statements and Supplementary Data
    32ITEM
      9
    Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosures
    33ITEM
      9A
    Controls
      and Procedures
    34ITEM
      9B
    Other
      Information
    34**PART
      III**ITEM
      10
    Directors
      and Executive Officers of the Registrant
    34ITEM
      11
    Executive
      Compensation
    34ITEM
      12
    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
    34ITEM
      13
    Certain
      Relationships and Related Transactions
    34ITEM
      14
    Principal
      Accountant Fees and Services
    34**PART
      IV**ITEM
      15
    Exhibits
      and Financial Statement Schedules
    35SIGNATURES
 
 This
Annual Report on Form 10-K contains trademarks and trade names of Keryx
Biopharmaceuticals, Inc., including our name and logo.
 
 
 
   
    **SPECIAL
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS**
 
 Certain
matters discussed in this report, including matters discussed under the caption
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” may constitute forward-looking statements for purposes of the
Securities Act of 1933, as amended, or the Securities Act, and the Securities
Exchange Act of 1934, as amended, or the Exchange Act, and involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by such
forward-looking statements. The words “expect,” “anticipate,” “intend,” “plan,”
“believe,” “seek,” “estimate,” and similar expressions are intended to identify
such forward-looking statements. Our actual results may differ materially from
the results anticipated in these forward-looking statements due to a variety of
factors, including, without limitation, those discussed under the captions
“Business—Risk Factors,” “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and elsewhere in this report, as well as
factors which may be identified from time to time in our other filings with the
Securities and Exchange Commission, or the SEC, or in the documents where such
forward-looking statements appear. All written or oral forward-looking
statements attributable to us are expressly qualified in their entirety by these
cautionary statements. Such forward-looking statements include, but are not
limited to, those relating to:
  ·
    our
      expectations for increases or decreases in expenses;
  **·**
    our
      expectations for the development, manufacturing, and approval of KRX-101,
      KRX-0401, and our additional product candidates or any other products we
      may acquire or in-license;
  ·
    our
      expectations for incurring additional capital expenditures to expand our
      research and development capabilities;
  ·
    our
      expectations for generating revenue or becoming profitable on a sustained
      basis;
  ·
    our
      expectations or ability to enter into marketing and other partnership
      agreements;
  ·
    our
      expectations or ability to enter into product acquisition and in-licensing
      transactions;
  ·
    our
      estimates of the sufficiency of our existing cash and cash equivalents and
      investments to finance our operating and capital requirements;
  ·
    our
      expected losses; and
  ·
    our
      expectations for future capital requirements.
  The
forward-looking statements contained in this report reflect our views and
assumptions only as of the date this report is signed. Except as required by
law, we assume no responsibility for updating any forward-looking statements.
 
 We
qualify all of our forward-looking statements by these cautionary statements. In
addition, with respect to all of our forward-looking statements, we claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
 
 
  1
  **PART
I**
 
 *Unless
the context requires otherwise, references in this report to “Keryx,” the
“Company,” “we,” “us” and “our” refer to Keryx Biopharmaceuticals, Inc., its
predecessor company and our respective subsidiaries.*
 
 **ITEM
1. BUSINESS.**
 
 **Overview**
 
 We are a
biopharmaceutical company focused on the acquisition, development and
commercialization of novel pharmaceutical products for the treatment of
life-threatening diseases, including diabetes and cancer. We have two product
candidates in the later stages of clinical development: sulodexide, or KRX-101,
for the treatment of diabetic nephropathy, a life-threatening kidney disease
caused by diabetes, and perifosine, or KRX-0401, for the treatment of multiple
forms of cancer.
 
 Our lead
compound under development is KRX-101, to which we have an exclusive license in
North America, Japan and certain other markets. A randomized, double-blind,
placebo-controlled, Phase II study of the use of sulodexide for treatment of
diabetic nephropathy was conducted in 223 patients in Europe, and the results of
this study were published in the June 2002 issue of the Journal of the American
Society of Nephrology.  The results of this Phase II study showed a
dose-dependent reduction in proteinuria, or pathological urinary albumin
excretion rates. In 2001, the Food and Drug Administration, or FDA, granted
KRX-101 “Fast-Track” designation for the treatment of diabetic nephropathy, and,
in 2002, we announced that the FDA had agreed, in principle, to permit us to
avail ourselves of the accelerated approval process under subpart H of the FDA’s
regulations governing applications for the approval to market a new
drug.
 
 In the
third quarter of 2003, we announced that the Collaborative Study Group, or CSG,
the world’s largest standing renal clinical trial group comprised of academic
and tertiary nephrology care centers, would conduct the U.S.-based Phase II/III
clinical program for KRX-101 for the treatment of diabetic nephropathy. The CSG
has conducted multiple large-scale clinical trials resulting in over 40
publications in peer-reviewed journals. In addition, the CSG conducted the
pivotal studies for two of the three drugs that are currently approved for
treatment of diabetic nephropathy. In the fourth quarter of 2003, we initiated
the Phase II portion of our Phase II/III clinical program for KRX-101, and in
the third quarter of 2004, we completed the target enrollment for this Phase II
portion of the clinical program.
 
 In
January 2005, we announced that the CSG recommended that we proceed to the Phase
III portion of our Phase II/III clinical program of KRX-101, as planned. This
recommendation was based on the completion, by an independent Data Safety
Monitoring Committee, or DSMC, on January 4, 2005, of a safety evaluation of the
first interim analysis from the approximately 150-patient, randomized,
double-blind, placebo-controlled Phase II clinical trial of KRX-101, and an
efficacy assessment of the same data set conducted by the CSG.
 
 Pursuant
to this recommendation, and subject to the successful finalization of our
clinical plan with the FDA, we expect to commence our pivotal program, including
both Phase III and Phase IV studies for KRX-101, in the first half of 2005. The
clinical plan to support a new drug application, or NDA, for KRX-101 under
Subpart H (accelerated approval) as discussed with the FDA consists of: (i) a
Phase III trial in patients with microalbuminuria based on the surrogate marker
of regression of microalbuminuria; (ii) supportive data from previous clinical
studies; and (iii) substantial recruitment into our Phase IV confirmatory study
that will measure clinical outcomes in patients with overt nephropathy, or
macroalbuminuria. As part of our commitment to the FDA, we plan to commence the
Phase IV trial at approximately the same time as the start of the Phase III
trial.
 
 In the
first quarter of 2004, we completed the acquisition of ACCESS Oncology Inc.,
or  ACCESS Oncology, a privately-held, cancer-focused biotechnology
company. The acquired drug portfolio includes three clinical stage oncology
compounds, designated as KRX-0401, KRX-0402 and KRX-0403.
 
 KRX-0401
is a novel, first-in-class, oral signal transduction modifier that inhibits the
Akt pathway and other important pathways. It has demonstrated preliminary single
agent anti-tumor activity. KRX-0401 is currently in a Phase II clinical program
in which it is under evaluation as a single agent as well as in combination with
other anti-cancer treatments for multiple forms of cancer. The National Cancer
Institute, or NCI, a department of the National Institutes of Health, or NIH,
has completed a number of Phase II clinical trials studying KRX-0401 as a single
agent, conducted and funded by the NCI under a Cooperative Research and
Development Agreement, or CRADA, arrangement with us. To our knowledge, the NCI
and its collaborators have presented data from three of their Phase II studies
through the date hereof, including from Phase II studies involving sarcoma, head
and neck and breast cancers. Findings from these studies led the investigators
to conclude that the drug was safe and well-tolerated at the Phase II dose
utilized. In the sarcoma study, the investigators reported a partial response
(greater than 50% decrease in tumor mass) as well as several disease
stabilizations. With the responses seen in the Phase I trials, there are now
three sarcoma patients with durable partial responses. On the Phase II breast
cancer study, the investigators scored 3 of 15 evaluable patients as having
stable disease, one of which was classified as a mixed responder.
 
 2
  During
the second quarter of 2004, we announced the initiation of the Keryx-sponsored
Phase II program for KRX-0401. To date we have initiated several trials under
this program. The first
is a multi-center study that will evaluate the safety and efficacy of KRX-0401
as a single agent administered weekly to patients with non-small cell lung
cancer, or NSCLC, who have progressed despite standard therapy. We have also
initiated additional multi-center trials evaluating KRX-0401 in combination with
gemcitabine (Gemzar®), paclitaxel (Taxol®) and docetaxel (Taxotere®), all common
forms of chemotherapy used to treat multiple tumor types. Recently, we started
an “all-comers” Phase II clinical trial evaluating KRX-0401 as a single-agent
administered either weekly or daily in a variety of tumor types.
 
 Our
cancer portfolio also includes KRX-0402, an inhibitor of DNA repair, which is
also being studied by the NCI under a CRADA arrangement in multiple clinical
trials. In addition, the portfolio includes KRX-0403, which is a novel spindle
poison, or type of chemotherapy commonly used. We are currently evaluating
whether we will continue development of KRX-0403.
 
 As a part
of the acquisition of ACCESS Oncology, we acquired the Online Collaborative
Oncology Group, Inc., or OCOG, a subsidiary of ACCESS Oncology which provides
clinical trial management and site recruitment services to us as well as other
biotechnology and pharmaceutical companies.
 
 During
2004 and in the first quarter of 2005, we in-licensed two pre-clinical compounds
in accordance with our acquisition and in-licensing strategy, which have been
designated as KRX-0404 and KRX-0501, respectively. These compounds are in the
areas of oncology and neurology, respectively.
 
 To date,
we have not received approval for the sale of any of our drug candidates in any
market and, therefore, have not generated any revenues from our drug
candidates.
 
 **Our
Strategy**
 
 We are
focused on the acquisition, development and commercialization of novel
pharmaceutical products for the treatment of life-threatening diseases,
including diabetes and cancer. Under our strategy, we currently plan
to:
 
 ·
    launch
      our pivotal program for KRX-101, including our Phase III and Phase IV
      trials;
 
 ·
    continue
      ourKeryx-sponsored
      Phase II clinical trial programfor KRX-0401 exploring the use of KRX-0401 as a single-agent and in
      combination with other anti-cancer therapies in multiple cancer types;
 
 ·
    support
      additional scientific collaborations for KRX-101 and
    KRX-0401;
 
 ·
    conduct
      additional pre-clinical and clinical trials for our other product
      candidates; and
 
 ·
    seek
      to in-license or acquire additional clinical-stage
    compounds.
  **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.
 
 3
 ****
 **PRODUCTS
UNDER DEVELOPMENT**
 
 **KRX-101**
 
 ***Overview***
 
 We have
obtained a license to develop sulodexide, or KRX-101, to treat diabetic
nephropathy and other conditions. Diabetic nephropathy is a long-term
complication of diabetes in which the kidneys are progressively damaged.
Sulodexide, our lead drug candidate, is a glycosaminoglycan compound with
structural similarities to the broad family of marketed heparins and low
molecular weight heparins. Specifically, sulodexide is comprised of heparan
sulfate, also referred to as fast-moving heparin, dermatan sulfate and
slow-moving heparin. This drug has been marketed in a number of European, Asian
and South American countries for many years by our licensor for certain
cardiovascular conditions and has a well established safety profile at the doses
used for such indications. Additionally, it has been demonstrated in multiple
clinical trials conducted in Europe, including a randomized, double-blind,
placebo-controlled Phase II study, that KRX-101 can reduce urinary protein
excretion in patients with diabetic nephropathy. In the fourth quarter of 2003,
we announced the initiation of our KRX-101 U.S.-based Phase II/III clinical
program for the treatment of diabetic nephropathy. In the
third quarter of 2004, we completed the target enrollment for the Phase II
portion of this clinical program. This
trial is being conducted by the CSG. In January 2005, we announced that the CSG,
based on a safety and efficacy analysis of the interim Phase II data conducted
by an independent DSMC and the CSG, respectively, recommended that we proceed to
the Phase III portion of our Phase II/III clinical program of KRX-101 for the
treatment of diabetic nephropathy, as planned.
 
 We plan
to develop sulodexide in the United States, and possibly other countries where
we have exclusive rights under our license, for the treatment of diabetic
nephropathy and potentially for other indications.
 
 ***Market
Opportunity***
 
 According
to the American Diabetes Association, or ADA, there are 18.2 million people in
the United States, or approximately 6.3% of the population, who have diabetes.
Of this population, approximately 13 million have been diagnosed with the
disease, of whom approximately 90-95% have been diagnosed with diabetes
mellitus, type 2, referred to as DM2. DM2 results from the combination of
insulin deficiency and the body’s relative insensitivity to the insulin present,
as opposed to DM1, in which severe insulin deficiency results from destruction
of the insulin-producing beta cells of the pancreas. Moreover, an August 2003
study published by Datamonitor estimates that approximately 50% of all diabetics
in the U.S., or approximately 9 million people, have diabetic nephropathy.
Diabetes is the most common cause of End Stage Renal Disease, or ESRD, in the
United States and in many other developed nations and represents approximately
45% of all new cases of ESRD in the United States. Despite advances in clinical
care, including improvements in glycemic or blood sugar control and blood
pressure control, the number of DM1- and DM2-related cases of ESRD continues to
rise. In particular, the incidence of DM2-related ESRD is rapidly increasing.
Less than 20% of diabetics on dialysis in the United States survive for five
years, making the mortality of end-stage renal failure in this group higher than
most forms of cancer. Unfortunately, renal transplantation is an option for less
than 20% of diabetics with ESRD, as compared to 40-50% of non-diabetics,
principally due to age and concomitant vascular disease. Despite recent
advances, diabetic nephropathy remains a potentially catastrophic illness, for
which partial but insufficient treatment is currently available.
 
 ***Scientific
Background***
 
 Both DM1
and DM2 are characterized by insufficient insulin effect upon insulin-requiring
tissues. As insulin is required for normal metabolism of glucose, fat and
protein, diabetes is accompanied by abnormal blood levels of these substances.
In the short term, hyperglycemia, or elevated blood glucose, causes the classic
symptoms of diabetes: excessive thirst, frequent urination and weight loss. In
the long term, hyperglycemia, as well as other effects resulting from
insufficient insulin effect, can progressively damage critical anatomic
structures resulting in chronic diabetic complications. We are developing
sulodexide for the treatment of diabetic nephropathy, a long-term complication
of diabetes in which the kidneys are progressively damaged. This progressive
damage results in diminished kidney function progressing to ESRD, which
ultimately leads to death unless treated by dialysis and/or renal
transplant.
 
 The
kidney consists of two anatomically and functionally distinct components placed
in serial configuration. The first component is the glomerulus, which performs
the critical filtering function of the kidney. Blood is passed through delicate
microscopic glomerular capillary loops, which, acting as sieves, allow waste
chemicals and excess water to pass through into the glomerular filtrate while
retaining desirable components, such as blood cells and albumin, within the
blood. One of the key components of the glomerular capillary filtering membrane
is highly anionic, or negatively charged, glycosaminoglycan molecules that are
similar to the chemical components of sulodexide. The glomerular filtrate, which
is the precursor of what will
eventually be excreted as urine, flows into the next serial component, the
tubular interstitial structure. In the tubules, further water is extracted from
the filtrate and minerals and other body chemicals are absorbed from or secreted
into the filtrate.
 
 4
  In
diabetic nephropathy, it is the delicate glomerular loops that first sustain
damage as a result of the diabetic state. These harmful effects
include:
  ·
    The
      delicate filtering membranes of the glomerular loops thicken and their
      crucial anionic glycosaminoglycan molecules are either depleted or altered
      and lose some or all of their negative charge. As the glycosaminoglycan
      negative charge provides normal filtering selectivity to the glomerular
      membranes, their loss of negative charge results in the release of
      protein, usually albumin, from the blood into the filtrate and urine. The
      releases of abnormal amounts of protein or albumin into the urine are
      called proteinuria and albuminuria,
respectively.
  ·
    In
      addition, hyperglycemia induced overproduction of TGF beta, a regulatory
      protein, by the kidney induces scar formation in the area surrounding the
      glomerular capillaries. Over time, the extrinsic pressure of this scar
      tissue causes collapse of individual glomeruli, loss of functionality and
      release of albumin into the filtrate and
urine.
  In
normally functioning kidneys, interstitial structures are not exposed to
albumin. It is believed that the exposure of the interstitial structures to
albumin ultimately leads to a potent inflammatory and scarring response
(mediated in part by TGF beta) in the tubules, as well as in the surrounding
interstitial tissues. This scarring results in progressive diminution in kidney
function. As might be expected, increasing urinary albumin excretion closely
parallels this drop in kidney function. In ESRD, kidney function declines to the
point where dialysis or transplantation becomes necessary to sustain
life.
 
 KRX-101
belongs to a proposed new class of nephroprotective, or kidney protecting,
drugs, known as the glycosaminoglycans. A variety of members of this chemical
family have been shown to decrease pathological albumin excretion in diabetic
nephropathy in man. Some of the members of this chemical family include the
following approved drugs: standard heparin, low molecular weight heparin and
danaparoid. However, these agents all require therapy by injection and are all
potent anticoagulants, which are blood thinners capable of inducing bleeding.
Sulodexide, on the other hand, is given orally and, in this form, has
demonstrated little, if any, anticoagulant effects to date.
 
 ***Pre-Clinical
and Clinical Data***
 
 In
pre-clinical trials, glycosaminoglycan components similar or identical to those
that make up sulodexide have been evaluated using well accepted rodent models of
diabetic nephropathy, in both preventive protocols where the drug was given at a
time when diabetes was induced and prior to kidney damage, and treatment
protocols, where the drug was given after diabetic kidney damage was already
present. These glycosaminoglycans diminished the thickening of glomerular
capillary filtering membranes, replenished the crucial anionic, or albumin
repelling, charge, lowered urinary albumin leakage and decreased kidney
expression of the specific scar protein collagen IV, both in the preventive and
the treatment protocols, returning these parameters nearly to their normal
levels. In addition, data demonstrated that sulodexide suppresses the
hyperglycemia-induced, or high glucose-induced, overproduction of TGF beta, one
of the most specific inducers of kidney scarring in diabetic and other kidney
diseases. Thus, glycosaminoglycans similar or identical to the components of
sulodexide in pre-clinical models have prevented or reversed the hallmark
“upstream” pathological abnormalities that drive the engine of progressive
kidney dysfunction.
 
 There
have been more than 20 studies published assessing the safety and efficacy of
KRX-101 in humans. KRX-101 has been administered to more than 3,000 patients in
clinical trials conducted in Europe for the treatment of certain diabetic and
non-diabetic conditions and, to our knowledge, has not demonstrated any
significant side effects at the doses tested for those uses.
 
 European
researchers, with the support of a grant by Alfa Wassermann S.p.A., or Alpha
Wasserman, the licensor of KRX-101, conducted a randomized, double-blind,
placebo-controlled, Phase II study of the use of sulodexide to treat diabetic
nephropathy in 223 patients in Europe between 1996 and 1999. In this study, also
known as the DiNAS study, Type I and Type II diabetics with diabetic nephropathy
were treated daily for four months with 50, 100 and 200 milligram gelcaps of
KRX-101. These patients showed substantial dose-dependent reduction in
proteinuria or pathological urinary albumin excretion rates. In this study, the
higher the dose administered daily, the greater the demonstrated decrease in
albumin excretion. The DiNAS study was published in the June 2002 issue of the
Journal of the American Society of Nephrology.
 
  
 5
 
 **Development
Status**
 In June
2000, we filed an investigational new drug application, or IND, with the FDA for
permission to conduct a clinical trial for the treatment of patients with
diabetic nephropathy. In 2001, KRX-101 was granted Fast-Track designation for
the treatment of diabetic nephropathy, and, in 2002, we announced that the FDA
had agreed, in principle, to permit us to avail ourselves of the accelerated
approval process under subpart H of the FDA’s regulations governing applications
for the approval to market a new drug. Generally, subpart H allows for the use
of surrogate endpoints in Phase III trials to support the approval of an NDA
with confirmatory studies completed post-approval, and could greatly reduce the
development time to market.
 
 In the
fourth quarter of 2003, we announced the initiation of a multi-center clinical
trial, representing the Phase II portion of our U.S.-based Phase II/III clinical
program for the treatment of diabetic nephropathy. This randomized,
double-blind, placebo-controlled study will compare two doses (200mg and 400mg
daily) of KRX-101 versus placebo. The KRX-101 Phase II/III clinical program is
being conducted by the CSG, the world’s largest standing renal clinical trial
group. In the
third quarter of 2004, we completed the target enrollment for the Phase II
portion of this clinical program.
 
 In
January 2005, we announced that the CSG recommended that we proceed to the Phase
III portion of our Phase II/III clinical program of KRX-101 for the treatment of
diabetic nephropathy, as planned. This recommendation was based on the
completion, by an independent DSMC on January 4, 2005, of a safety evaluation of
the first interim analysis from the approximately 150-patient, randomized,
double-blind, placebo-controlled Phase II clinical trial of KRX-101, and an
efficacy assessment of the same data set conducted by the CSG.
 
 Pursuant
to this recommendation, and subject to the successful finalization of our
clinical plan with the FDA, we expect to commence our pivotal program, including
both Phase III and Phase IV studies for KRX-101, in the first half of 2005. The
clinical plan to support an NDA for KRX-101 under Subpart H (accelerated
approval) as discussed with the FDA consists of: (i) a Phase III trial in
patients with microalbuminuria based on the surrogate marker of regression of
microalbuminuria; (ii) supportive data from previous clinical studies; and (iii)
substantial recruitment into our Phase IV confirmatory study that will measure
clinical outcomes in patients with overt nephropathy, or macroalbuminuria. As
part of our commitment to the FDA, we plan to commence the Phase IV trial at
approximately the same time as the start of the Phase III trial.
 
 The
ultimate clinical timeline, and consequent cost, for further development of
KRX-101 will depend, in part, on reaching agreement with the FDA on the
specifics of our accelerated approval approach and meeting their conditions for
use of such program.
 
 **KRX-0401**
 
 ***Overview***
 
 KRX-0401
is a novel, first-in-class, oral signal transduction modifier that inhibits the
Akt pathway and other important pathways. It has demonstrated preliminary single
agent anti-tumor activity and is currently in a Phase II clinical program
where it is being studied both as a single agent and in combination with other
anti-cancer treatments for multiple forms of cancer.
 
 KRX-0401,
or perifosine, is the prototype of a new group of anti-cancer drugs referred to
as alkylphosphocholines that block proliferation and induce the apoptosis of
cancer cells. This effect is relatively specific for cancer cells compared to
normal cells. The mechanism of action for these drugs is not clear. They are
known to modulate signaling in a number of pathways known to function abnormally
during the development of cancer. One of the pathways inhibited by the
alkylphosphocholines is Akt, a pathway associated with tumor survival and
growth. Akt appears to be inherently activated in approximately 10-50% of most
tumor types and is also believed to be activated by, and thus confer resistance
to, most anti-cancer therapies. Based on its prevalence across cancer types and
importance in the control of cell survival and cell proliferation, Akt is
considered to be one of the most important cancer targets being researched
today.
 
 In
September 2002, ACCESS Oncology, which we acquired in February 2004, entered
into an exclusive commercial license agreement with Zentaris AG, a wholly owned
subsidiary of AEterna Zentaris Inc., to acquire a license to a series of U.S.
and foreign patents and patent applications relating to the composition of
matter and use of KRX-0401 in the treatment of cancer and other conditions. This
license agreement covers the United States, Canada and Mexico.
 
 ***Pre-Clinical
and Clinical Data***
 
 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. The drug is synergistic with radiotherapy and additive or synergistic
with cytotoxic such as cisplatin, Adriamycin, and cyclophosphamide. In these
experiments the combination regimens were superior to chemotherapy alone and
were well tolerated.
 
 6
  Five
Phase I studies of KRX-0401 have been completed, three in Europe by Zentaris and
two in the U.S. by the NCI as part of a CRADA. These trials demonstrated that
KRX-0401 can be safely given to humans with an acceptable toxicity profile and
no observed myelosuppression, or bone marrow suppression. The dose limiting
toxicity in the Phase I studies was gastrointestinal: nausea, vomiting and
diarrhea. In addition, some patients experienced fatigue, especially with
prolonged administration. In these Phase I studies, there was evidence of single
agent activity as evidenced by two durable partial responses (one of which
lasted more than six months and the other more than 18 months) out of 10
patients with previously treated, evaluable soft tissue sarcomas, a tumor type
relatively unresponsive to chemotherapy. In addition 21 patients were considered
by the investigators to have had disease stabilization for two or more months,
including patients with sarcomas (2), prostate cancer (3), non-small cell lung
cancer (2), breast cancer (2), colon cancer (2), melanoma (2), renal cancer (2),
ovarian cancer (1), salivary gland cancer (1), mesothelioma (2) and hepatoma
(2). The meaning of disease stabilization in an individual patient in a Phase I
study is difficult to assess because many of the patients do not have evaluable
disease and disease stabilization, unlike objective responses, may occur
spontaneously. Taken together, however, these data provide clinical evidence of
the anti-cancer effects of KRX-0401.
 
 The NCI
has completed a number Phase II clinical trials studying KRX-0401 as a single
agent, conducted and funded by the NCI under a CRADA arrangement with us. To our
knowledge, the NCI and its collaborators have presented data from three of their
Phase II studies through the date hereof, including from Phase II studies
involving sarcoma, head and neck and breast cancers. Findings from these studies
led the investigators to conclude that the drug was safe and well-tolerated at
the Phase II dose utilized. The studies used dosing schedules in which a large
dose, or bolus dose was given on day one or once every 28 days followed by daily
doses either continuously or on days two to 21 of a four-week cycle. In these
studies, bolus doses ranged from 300 mg to 900 mg followed by daily doses of 100
- 150 mg. These studies confirm the safety profile of the bolus plus daily
regimens, which had limited grade 3 and no grade 4 gastrointestinal toxicity,
the dose limiting toxicity in most of the Phase I trials. However, studies using
a single bolus dose of 600 mg to 900 mg on day one and continuous daily KRX-0401
at a dose of 100 mg per day appeared to be better tolerated than studies that
used 150 mg per day on days two to 21 in each four-week cycle. In the sarcoma
study, the investigators reported a partial response (greater than 50% decrease
in tumor mass) as well as several disease stabilizations. With the responses
seen in the Phase I trials, there are now three sarcoma patients with durable
partial responses. This has led us to consider exploring additional studies in
sarcoma. On the Phase II breast cancer study, the investigators scored three of
15 evaluable patients as having stable disease. One of these patients had
measurable tumor regression which failed to reach the level of a partial
response by the time the patient elected to withdraw from the study because of
gastrointestinal toxicity. The breast cancer trial utilized the more toxic of
the regimens employed in these NCI Phase II studies.
 
 ***Development
Status***
 
 The NCI,
pursuant to the CRADA arrangement referred to above, has completed a Phase II
program for KRX-0401 evaluating it as a single-agent in prostate, breast, head
and neck and pancreatic cancers, as well as melanoma and sarcomas. In total,
nine clinical trials have been conducted across the six tumor types mentioned.
To our knowledge, three of the nine clinical trials have been reported. Our
expectation is that some of the remainder will be reported at various
conferences throughout 2005, including The American Society of Clinical Oncology
Annual Meeting.
 
 During
the second quarter of 2004, we announced the initiation of the Keryx-sponsored
Phase II program for KRX-0401 utilizing KRX-0401 as a single agent and in
combination with a number of standard anti-cancer therapies in multiple tumor
types.
 
 To date
we have initiated several trials under this program. The first is a multi-center
study that will evaluate the safety and efficacy of KRX-0401 as a single agent
administered weekly to patients with non-small cell lung cancer, or NSCLC, who
have progressed despite standard therapy. We have also initiated additional
multi-center trials evaluating KRX-0401 in combination with gemcitabine
(Gemzar®), paclitaxel (Taxol®) and docetaxel (Taxotere®), all common forms of
chemotherapy used to treat multiple tumor types. Recently, we started an
“all-comers” Phase II clinical trial evaluating KRX-0401 as a single-agent
administered either weekly or daily in a variety of tumor types.
 
 **ADDITIONAL
PRODUCT CANDIDATES**
 
 ***KRX-0402***
 
 KRX-0402
(O6-benzyl guanine or O6-BG) is a small molecule that was specifically designed
to block the repair protein,
AGT. AGT confers resistance to 06-alkylating agents, such as temozolomide and
BCNU, that are commonly used to treat brain cancer, melanoma and non-Hodgkin’s
lymphoma. Recent research has shown that KRX-0402 can also potentiate the
activity of other alkylating agents, such as cisplatinum and carboplatinum,
through an as of yet unconfirmed mechanism. These drugs are some of the most
widely used chemotherapy drugs and are commonly used to treat breast cancer,
non-small cell lung cancer and ovarian cancer. Accordingly, we believe that
KRX-0402 may have an important role in making cells more susceptible to the
damaging effects of alkylating agents, and that KRX-0402 may have utility in the
treatment of multiple forms of cancer. KRX-0402 is usually administered
intravenously. To date, approximately 400 patients have received KRX-0402 in
multiple clinical studies. Dose limiting toxicity for KRX-0402 in combination
with chemotherapy was bone marrow suppression. KRX-0402 alone has no identified
dose limiting toxicity. The NCI is currently conducting a randomized Phase III
clinical trial of KRX-0402 in patients with previously untreated glioblastoma.
Currently, we have plans to conduct additional company-sponsored clinical trials
for KRX-0402.
 
 7
 
 ***KRX-0403***
 
 KRX-0403
is a novel spindle poison in the vinca alkaloid class of drugs. We are currently
evaluating whether we will continue development of KRX-0403.
 
 ***KRX-0404***
 
 KRX-0404,
currently in pre-clinical development, is an alkylphosphocholine, but, in
contrast to KRX-0401, it is suitable for intravenous
administration.
 
 ***KRX-0501***
 
 KRX-0501,
currently in pre-clinical development, is an orally available small molecule in
pre-clinical development with the potential to treat neurological disorders via
its unique ability to enhance nerve growth factor, a naturally occurring protein
which is essential in the developments and survival of certain sympathetic and
sensory neurons in both the central and peripheral nervous systems.
 
 **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 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 internationally to cover methods of use, new chemical
compounds, pharmaceutical compositions and dosing of the compounds and
compositions and improvements in each of these. We also rely on trade secret
information, technical know-how, innovation and agreements with third parties to
continuously expand and protect our competitive position. We have a number of
patents and patent applications related to our compounds and other technology,
but we cannot be certain that issued patents will be enforceable or provide
adequate protection or that the pending patent applications will issue as
patents.
 
 Generally,
patent applications in the United States are maintained in secrecy for a period
of 18 months or more. Since publication of discoveries in the scientific or
patent literature often lag behind actual discoveries, we are not certain that
we were the first to make the inventions covered by each of our pending patent
applications or that we were the first to file those patent applications. The
patent positions of biotechnology and pharmaceutical companies are highly
uncertain and involve complex legal and factual questions. Therefore, we cannot
predict the breadth of claims allowed in biotechnology and pharmaceutical
patents, or their enforceability. To date, there has been no consistent policy
regarding the breadth of claims allowed in biotechnology patents. Third parties
or competitors may challenge or circumvent our patents or patent applications,
if issued. If our
competitors prepare and file patent applications in the United States that claim
technology also claimed by us, we may have to participate in interference
proceedings declared by the United States Patent and Trademark Office to
determine priority of invention, which could result in substantial cost, even if
the eventual outcome is favorable to us. Because
of the extensive time required for development, testing and regulatory review of
a potential product, it is possible that before we commercialize any of our
products, any related patent may expire or remain in existence for only a short
period following commercialization, thus reducing any advantage of the patent.
 
 If
patents are issued to others containing preclusive or conflicting claims and
these claims are ultimately determined to be valid,
we may be required to obtain licenses to these patents or to develop or obtain
alternative technology. 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 create substantial costs. An adverse outcome in
litigation could subject us to significant liabilities to third parties and
require us to seek licenses of the disputed rights from third parties or to
cease using the technology if such licenses are unavailable.
 
 8
  ***KRX-101***
 
 Pursuant
to our license for KRX-101, we have the rights to ten patent families, including
nine families of issued U.S. patents and foreign counterparts, and one family of
a pending U.S. patent application and foreign counterparts. Of the ten patent
families, five patent families cover processes for the manufacture of heparin
and glycosaminoglycans, and five patent families cover the use of KRX-101
(sulodexide) and glycosaminoglycans for the treatment of diabetic nephropathy,
neuropathy and retinopathy. These patent applications are being maintained
throughout the territories in which they were filed.
 
 In
addition to the licensed patents, we have filed in the name of Keryx, six patent
families of U.S. patent applications and foreign counterparts directed to the
use of KRX-101 and glycosaminoglycans for the treatment of various indications
such as HIV-related nephropathy, inflammatory bowel disease, bladder disease,
kidney disease and preeclampsia.
 
 The
licensed patents will expire at various times between 2012 and 2022. Currently,
the use of KRX-101 to treat diabetic nephropathy is covered by an issued U.S.
patent which expires in 2014 and a pending U.S. patent application which, if
allowed, will expire in 2022. Based on the provisions of the Patent Term
Extension Act, we currently believe that we would qualify for patent term
extension of at least three years, thereby extending our patent exclusivity, for
the issued U.S. patent to at least 2017 and for the pending U.S. patent
application, if allowed, to 2025. We, therefore, believe that we will have
sufficient time to commercially utilize the inventions directed to the treatment
of diabetic nephropathy.
 
 ***Clinical-Stage
Oncology Compounds, including KRX-0401***
 
 Pursuant
to our acquisition of ACCESS Oncology in February 2004, we have the exclusive
commercial rights to a series of patents and patent applications in the United
States, Canada and Mexico related to KRX-0401. These patents and patent
applications cover composition of matter and methods of treatment. In addition,
as a result of the acquisition, we have obtained the exclusive commercial rights
to a series of patents and patent applications related to KRX-0402 and KRX-0403.
 
 ***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 to provide
market exclusivity for certain of our drug candidates. The orphan drug
regulations of the FDA provide incentives to pharmaceutical and biotechnology
companies to develop and manufacture drugs for the treatment of rare diseases,
currently defined as diseases that exist in fewer than 200,000 individuals in
the United States, or, diseases that affect more than 200,000 individuals in the
United States but that the sponsor does not realistically anticipate will
generate a net profit. Under these provisions, a manufacturer of a designated
orphan drug can seek tax benefits, and the holder of the first FDA approval of a
designated orphan product will be granted a seven-year period of marketing
exclusivity for such FDA-approved orphan product. We believe that certain of the
indications for our drug candidates will be eligible for orphan drug
designation; however, we cannot assure you that our drugs will obtain such
orphan drug designation or will be the first to reach the market and provide us
with such market exclusivity protection.
 
 
 9
 **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.
 **
 ***Alfa
Wassermann S.p.A.***
 
 Under a
license agreement with Alfa Wassermann, we have the exclusive rights to KRX-101
for diabetic nephropathy, neuropathy and
retinopathy in the United States, Canada, Japan, Australia, New Zealand, South
Africa and Israel. The license entitles Alfa Wassermann to annual license fees
and certain milestone payments. Under the license, we must use our reasonable
best efforts to commercialize and market KRX-101. Alfa Wassermann must pay us a
royalty, to the extent that it or its sub-licensees receive revenues from
products that incorporate information or know-how that we develop. The license
terminates upon the later of the expiration of all underlying patent rights or
10 years from our first commercial sale of KRX-101.
 
 ***Collaborative
Study Group***
 
 In August
2003, we announced that the CSG will be conducting our U.S.-based Phase II/III
clinical program for KRX-101 for the treatment of diabetic nephropathy. The CSG
receives a monthly fee and reimbursement of expenses from us as compensation for
its work in connection with this clinical program. The CSG also has the right to
publish data arising from the clinical program. The agreement remains in force
as long as the clinical program is ongoing. We may terminate the agreement at
any time upon 30 days written notice, and the CSG has the right to terminate the
agreement upon our material breach of the agreement, unless cured within 30
days.
 
 ***Opocrin,
S.p.A.***
 
 Pursuant
to a license with Opocrin, S.p.A., a private drug manufacturer, we have a
non-exclusive worldwide license to the manufacturing process of KRX-101 for a
period of twelve years from the date of the first commercial sale of the
product. Notwithstanding this right, Opocrin shall have the right to terminate
the agreement on 60 days notice in the event that we have not submitted an NDA
to the FDA by December 31, 2007.
 
 ***AEterna
Zentaris Inc.***
 
 In
September 2002, we signed a commercial license agreement with Zentaris AG, a
wholly owned subsidiary of AEterna Zentaris Inc., relating to the development of
KRX-0401 covering
composition of matter and methods of treatment. This
agreement grants us the exclusive rights to KRX-0401 in the United States,
Canada and Mexico. Zentaris is entitled to certain royalty payments, as well as
additional compensation upon successful achievement of certain milestones. The
license terminates upon the later of the expiration of all underlying patent
rights or 10 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.
 
 ***Paligent,
Inc.***
 
 In
October 2000, we entered into a worldwide, exclusive commercial sub-license
agreement with Procept, Inc., or Procept, a wholly owned subsidiary of Paligent,
Inc., relating to the development and marketing of KRX-0402. Under the license
agreement, we have assumed responsibility for the development and marketing of
KRX-0402. Procept is entitled to certain milestone payments, as well as royalty
payments on net sales of KRX-0402. The license terminates upon the expiration of
all underlying patent rights.
 
 ***Prescient
NeuroPharma Inc.***
 
 In
December 2001, we entered into an exclusive commercial sub-license agreement
with Prescient NeuroPharma Inc., or Prescient, relating to the development and
marketing of KRX-0403. The KRX-0403 license agreement provides for worldwide
sublicense rights, with the exception of the Far East. Prescient is entitled to
certain milestone payments under the terms of the agreement. In addition, the
agreement provides that we will make certain milestone and royalty payments on
net sales of KRX-0403. The agreement with Prescient terminates on the later of
the date the last patent expires in the patent portfolio or the end of the
orphan drug designation period by the FDA, if applicable.
 
 **COMPETITION**
 
 Competition
in the pharmaceutical and biotechnology industries is intense. Our
competitors include pharmaceuticals 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.
  
 10
  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.
 
 **SUPPLY
AND MANUFACTURING**
 
 We
currently have no manufacturing capabilities. In 2003, we entered into a
contract manufacturing agreement with a U.S.-based manufacturer for the supply
of KRX-101 drug product. We believe that this contract manufacturer will be
adequate to satisfy our current clinical and initial commercial supply needs.
However, we will need to confirm a reproducible manufacturing process that will
ensure consistent quality of KRX-101 across multiple batches and sources. As
with all heparin-like compounds, the end product is highly sensitive to the
manufacturing process utilized. Accordingly, the creation of a reproducible
process will be required for the successful commercialization of KRX-101. We
cannot be certain that we will be successful in this endeavor.
 
 The
creation of a reproducible process is also critical in successfully sourcing
KRX-101 from multiple suppliers either to create back-up manufacturing
capabilities and/or to meet market demand. We have discussed the issue of
multi-sourcing with the FDA and they have indicated that they would likely
permit such multi-sourcing provided the manufacturing process used by multiple
manufacturers remains uniform.
 
 The
materials used to manufacture KRX-101, like all heparin-like compounds, are
derived from porcine mucosa. Long-term supplies for KRX-101 could be affected by
limitations in the supply of porcine mucosa and the demand for other heparin
products. Diseases affecting the world supply of pigs could have an actual or
perceived negative impact on our ability to source, make or sell KRX-101. All of
these factors could have an adverse affect on the commercial success of
KRX-101.
 
 In
addition, we have established contract manufacturing relationships for the
supply of KRX-0401 and KRX-0402.
 
 At the
time of commercial sale, to the extent possible and commercially practicable, we
plan 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 numbers 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 our contractor’s 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 inspections by the FDA, the Drug
Enforcement Agency and corresponding state agencies to ensure strict compliance
with cGMP and other state and federal regulations. Our contractors in Europe
face similar challenges from the numerous European Union and member state
regulatory agencies. We do not have control over third-party manufacturers’
compliance with these regulations and standards, other than through contractual
obligations.
 
 If we
need to change manufacturers, 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.
 ****
 
 11
 **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, or the Federal  Food, Drug, and Cosmetic Act . 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. The approval
process takes many years, requires the expenditure of substantial resources and
may involve ongoing requirements for post-marketing studies or surveillance.
Before commencing clinical trials in humans, we must submit an IND to the FDA
containing, among other things, pre-clinical data, chemistry, manufacturing and
control information, and an investigative plan. Our submission of an IND may not
result in FDA authorization to commence a clinical trial.
 
 The FDA
may permit expedited development, evaluation, and marketing of new therapies
intended to treat persons with serious or life-threatening conditions for which
there is an unmet medical need under its fast track drug development programs. A
sponsor can apply for fast track designation at the time of submission of an
IND, or at any time prior to receiving marketing approval of the NDA. To receive
fast track designation, an applicant must demonstrate:
  ·
    that
      the drug is intended to treat a serious or life-threatening
      condition;
  ·
    that
      the drug is intended to treat a serious aspect of the condition;
      and
  ·
    that
      the drug has the potential to address unmet medical needs, and this
      potential is being evaluated in the planned drug development
      program.
  The FDA
must respond to a request for fast track designation within 60 calendar days of
receipt of the request. Over the course of drug development, a product in a fast
track development program must continue to meet the criteria for fast track
designation. Sponsors of products in fast track drug development programs must
be in regular contact with the reviewing division of the FDA to ensure that the
evidence necessary to support marketing approval will be developed and presented
in a format conducive to an efficient review. Sponsors of products in fast track
drug development programs ordinarily are eligible for priority review and also
may be permitted to submit portions of an NDA to the FDA for review before the
complete application is submitted. In 2001, KRX-101 received fast track
designation.
 
 Sponsors
of drugs designated as fast track also may seek approval under the FDA’s
accelerated approval regulations under subpart H. Pursuant to subpart H, the FDA
may grant marketing approval for a new drug product on the basis of adequate and
well-controlled clinical trials establishing that the drug product has an effect
on a surrogate endpoint that is reasonably likely, based on epidemiologic,
therapeutic, pathophysiologic, or other evidence, to predict clinical benefit or
on the basis of an effect on a clinical endpoint other than survival or
irreversible morbidity.   Approval will be subject to the requirement that
the applicant study the drug further to verify and describe its clinical benefit
where there is uncertainty as to the relation of the surrogate endpoint to
clinical benefit or uncertainty as to the relation of the observed clinical
benefit to ultimate outcome.  Post-marketing studies are usually underway
at the time an applicant files the NDA.  When required to be conducted,
such post-marketing studies must also be adequate and well-controlled.  The
applicant must carry out any such post-marketing studies with due diligence.
 
 In
November of 2002, we announced that the FDA agreed in principal that the NDA for
KRX-101 may be filed under subpart H. Final approval will be based on a
determination by the FDA of the safety and efficacy of KRX-101 based on a
surrogate endpoint. We have submitted a subpart H clinical development plan to
the FDA for the clinical development of KRX-101 for diabetic nephropathy. A
final agreement on the specifics of our clinical program for that development
plan is pending finalization with the FDA, but we cannot give any assurance that
an acceptable final agreement on the specifics of such clinical program will
ever be reached with the FDA. Additionally, the subpart H process is complex and
requires careful execution. Many companies who have been granted the right to
utilize an accelerated approval approach have failed to obtain
approval.
 
 12
 
 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
      I*:
      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
      II*:
      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
      III*:
      Studies establish safety and efficacy in an expanded patient population.
  ·
    *Phase
      IV*:
      The FDA may require a Phase IV to conduct post-marketing studies for
      purposes of gathering additional evidence of safety and
      efficacy.
  The
length of time necessary to complete clinical trials varies significantly and
may be difficult to predict. Clinical results are frequently susceptible to
varying interpretations that may delay, limit or prevent regulatory approvals.
Additional factors that can cause delay or termination of our clinical trials,
or that may increase the costs of these trials, include:
  ·
    slow
      patient enrollment due to the nature of the clinical trial plan, the
      proximity of patients to clinical sites, the eligibility criteria for
      participation in the study or other
factors;
  ·
    inadequately
      trained or insufficient personnel at the study site to assist in
      overseeing and monitoring clinical trials or delays in approvals from a
      study site’s review board;
  ·
    longer
      treatment time required to demonstrate efficacy or determine the
      appropriate product dose;
  ·
    insufficient
      supply of the drug candidates;
  ·
    adverse
      medical events or side effects in treated patients;
and
  ·
    ineffectiveness
      of the drug candidates.
  In
addition, the FDA may place a clinical trial on hold or terminate it if it
concludes that subjects are being exposed to an unacceptable health risk. Any
drug is likely to produce some toxicity or undesirable side effects in animals
and in humans when administered at sufficiently high doses and/or for a
sufficiently long period of time. Unacceptable toxicity or side effects may
occur at any dose level at any time in the course of studies in animals designed
to identify unacceptable effects of a drug candidate, known as toxicological
studies, or clinical trials of drug candidates. The appearance of any
unacceptable toxicity or side effect could cause us or regulatory authorities to
interrupt, limit, delay or abort the development of any of our drug candidates
and could ultimately prevent approval by the FDA or foreign regulatory
authorities for any or all targeted indications.
 
 Before
receiving FDA approval to market a product, we must demonstrate that the product
is safe and effective for its intended use by submitting to the FDA an NDA
containing the pre-clinical and clinical data that have been accumulated,
together with chemistry and manufacturing and controls specifications and
information, and proposed labeling, among other things. The FDA may refuse to
accept an NDA for filing if certain content criteria are not met and, even after
accepting an NDA, the FDA may often require additional information, including
clinical data, before approval of marketing a product.
 
 As part
of the approval process, the FDA must inspect and approve each manufacturing
facility. Among the conditions of approval is the requirement that a
manufacturer’s quality control and manufacturing procedures conform to current
Good Manufacturing Practices, or cGMP. Manufacturers must expend time, money and
effort to ensure compliance with cGMP, and the FDA conducts periodic inspections
to certify compliance. It may be difficult for our manufacturers or us to comply
with the applicable
cGMP and other FDA regulatory requirements. If we, or our contract
manufacturers, fail to comply, then the FDA will not allow us to market products
that have been affected by the failure.
 
 13
  If the
FDA grants approval, the approval will be limited to those disease states,
conditions and patient populations for which the product is safe and effective,
as demonstrated through clinical studies. Further, a product may be marketed
only in those dosage forms and for those indications approved in the NDA.
Certain changes to an approved NDA, including, with certain exceptions, any
changes to labeling, require approval of a supplemental application before the
drug may be marketed as changed. Any products that we manufacture or distribute
pursuant to FDA approvals are subject to continuing regulation by the FDA,
including compliance with cGMP and the reporting of adverse experiences with the
drugs. The nature of marketing claims that the FDA will permit us to make in the
labeling and advertising of our products will be limited to those specified in
an FDA approval, and the advertising of our products will be subject to
comprehensive regulation by the FDA. Claims exceeding those that are approved
will constitute a violation of the Federal Food, Drug, and Cosmetic Act.
Violations of the Federal Food, Drug, and Cosmetic Act or regulatory
requirements at any time during the product development process, approval
process, or after approval may result in agency enforcement actions, including
withdrawal of approval, recall, seizure of products, injunctions, fines and/or
civil or criminal penalties. Any agency enforcement action could have a material
adverse effect on our business.
 
 Should we
wish to market our products outside the United States, we must receive marketing
authorization from the appropriate 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. If the regulatory authority is satisfied that a company has presented
adequate evidence of safety, quality and efficacy, the regulatory authority will
grant a marketing authorization. This foreign regulatory approval process
involves all of the risks associated with FDA approval discussed
above.
 
 Failure
to comply with applicable federal, state and foreign laws and regulations would
likely have a material adverse effect on our business. In addition, federal,
state and foreign laws and regulations regarding the manufacture and sale of new
drugs are subject to future changes. We cannot predict the likelihood, nature,
effect or extent of adverse governmental regulation that might arise from future
legislative or administrative action, either in the United States or
abroad.
 
 **RESEARCH
AND DEVELOPMENT**
 
 Company-sponsored
research and development expenses (excluding non-cash compensation and acquired
in-process research and development expenses) totaled $9,523,000 in 2002,
$5,996,000 in 2003, and $9,805,000 in 2004, respectively. “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, testing, and enhancement of our product candidates, as well
as expenses related to in-licensing or acquisition of new product candidates.
 
 **EMPLOYEES**
 
 We
currently have 27 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.
  14
  **RISK
FACTORS**
 
 ****
 You
should carefully consider the following risks and uncertainties. If any of the
following occurs, our business, financial condition or operating results could
be materially harmed. These factors could cause the trading price of our common
stock to decline, and you could lose all or part of your investment.
 
 **Risks
Related to Our Business**
 
 ***We
have a limited operating history and have incurred substantial operating losses
since our inception. We expect to continue to incur losses in the future and may
never become profitable.***
 
 We have a
limited operating history. You should consider our prospects in light of the
risks and difficulties frequently encountered by early stage companies. In
addition, we have incurred operating losses since our inception and expect to
continue to incur operating losses for the foreseeable future and may never
become profitable. As of December 31, 2004, we had an accumulated deficit of
approximately $87.6 million. As we expand our research and development efforts,
we will incur increasing losses. We may continue to incur substantial operating
losses even if we begin to generate revenues from our drug candidates or
technologies.
 
 We have
not yet commercialized any products or technologies and cannot be sure we will
ever be able to do so. Even if we commercialize one or more of our drug
candidates or technologies, we may not become profitable. Our ability to achieve
profitability depends on a number of factors, including our ability to complete
our development efforts, obtain regulatory approval for our drug candidates and
successfully commercialize our drug candidates and technologies.
 
 ***If
we are unable to successfully complete our clinical trial programs, or if such
clinical trials take longer to complete than we project, our ability to execute
our current business strategy will be adversely affected.***
 
 Whether
or not and how quickly we complete clinical trials is dependent in part upon the
rate at which we are able to engage clinical trial sites and, thereafter, the
rate of enrollment of patients. Patient enrollment is a function of many
factors, including the size of the patient population, the proximity of patients
to clinical sites, the eligibility criteria for the study and the existence of
competitive clinical trials. If we experience delays in identifying and
contracting with sites and/or in patient enrollment in our clinical trial
programs, we may incur additional costs and delays in our development programs,
and may not be able to complete our clinical trials on a cost-effective basis.
 
 Additionally,
we have submitted a subpart H clinical development plan to the FDA for the
clinical development of KRX-101 for diabetic nephropathy. A final agreement on
the specifics of our clinical program for that development plan is pending
finalization with the FDA, but we cannot give any assurance that an acceptable
final agreement on the specifics of such clinical program will ever be reached
with the FDA. Additionally, the FDA has previously commented that, based on the
novelty of the approach that we have discussed with them, they may want to refer
our proposed approach to the Cardio-Renal Advisory Committee.
 
 Moreover,
even if we are able to reach final agreement with the FDA regarding the
specifics of an accelerated approval approach, no assurance can be given that we
will be able to meet the requirements set forth in such agreement. The subpart H
process is complex and requires careful execution. Many companies who have been
granted the right to utilize an accelerated approval approach have failed to
obtain approval. The clinical timeline, scope and consequent cost for the
development of KRX-101 will depend, in part, on the final outcome of our
discussions with the FDA. Moreover, negative or inconclusive results from the
clinical trials we hope to conduct or adverse medical events could cause us to
have to repeat or terminate the clinical trials. Accordingly, we may not be able
to complete the clinical trials within an acceptable time frame, if at all.
 
 ***If
our drug candidates do not receive the necessary regulatory approvals, we will
be unable to commercialize our drug candidates.***
 
 We have
not received, and may never receive, regulatory approval for commercial sale for
any of our drug candidates. We will need to conduct significant additional
research and human testing before we can apply for product approval with the FDA
or with regulatory authorities of other countries. Pre-clinical testing and
clinical development are long, expensive and uncertain processes. Satisfaction
of regulatory requirements typically depends on the nature, complexity and
novelty of the product and requires the expenditure of substantial resources.
Data obtained from pre-clinical and clinical tests can be interpreted in
different ways, which could delay, limit or prevent regulatory approval. It may
take us many years to complete the
testing of our drug candidates and failure can occur at any stage of this
process. Negative or inconclusive results or medical events during a clinical
trial could cause us to delay or terminate our development efforts.
 
 15
 
 
 
 Furthermore,
interim results of preclinical or clinical studies do not necessarily predict
their final results, and acceptable results in early studies might not be seen
in later studies. Drug candidates in later stages of clinical development may
fail to show the desired safety and efficacy traits despite having progressed
through initial clinical testing. Specifically, we recently received the
recommendation to proceed, as planned, into our pivotal Phase III and Phase IV
program for KRX-101 from the Collaborative Study Group. This recommendation was
made pursuant to a safety and efficacy assessment of a first interim analysis of
data from our ongoing Phase II study for KRX-101. There can be no assurance that
the full data from the Phase II study will track the data from the first interim
analysis of the Phase II study upon which the recommendation to move forward was
made. Moreover, this recommendation to move into our pivotal program, as well as
any further results from our Phase II trial, if they are positive, may not be
indicative of results from future clinical trials and the risk remains that the
pivotal program for KRX-101 may generate efficacy data that will be insufficient
for the approval of the drug, or may raise safety concerns that may prevent
approval of the drug.
 
 Clinical
trials also have a high risk of failure. A number of companies in the
pharmaceutical industry, including biotechnology companies, have suffered
significant setbacks in advanced clinical trials, even after achieving promising
results in earlier trials. If we experience delays in the testing or approval
process or if we need to perform more or larger clinical trials than originally
planned, our financial results and the commercial prospects for our drug
candidates may be materially impaired. In addition, we have limited experience
in conducting and managing the clinical trials necessary to obtain regulatory
approval in the United States and abroad and, accordingly, may encounter
unforeseen problems and delays in the approval process.
 
 ***Because
we license our proprietary technologies, termination of these agreements would
prevent us from developing our drug candidates.***
 
 We do not
own any of our drug candidates. We have licensed the patent rights to these
drugs candidates from others. These license agreements require us to meet
development or financing milestones and impose development and commercialization
due diligence requirements on us. In addition, under these agreements, we must
pay royalties on sales of products resulting from licensed technologies and pay
the patent filing, prosecution and maintenance costs related to the licenses. If
we do not meet our obligations in a timely manner or if we otherwise breach the
terms of our agreements, our licensors could terminate the agreements, and we
would lose the rights to our drug candidates.
 
 ***If
we do not establish or maintain drug development and marketing arrangements with
third parties, we may be unable to commercialize our technologies into products.***
 
 We are an
emerging company and do not possess all of the capabilities to fully
commercialize our product candidates on our own. From time to time, we may need
to contract with third parties to:
  ·
    assist
      us in developing, testing and obtaining regulatory approval for and
      commercializing some of our compounds and technologies; and
  ·
    market
      and distribute our drug candidates.
  We can
provide no assurance that we will be able to successfully enter into agreements
with such partners on terms that are acceptable to us. If we are unable to
successfully contract with third parties for these services when needed, or if
existing arrangements for these services are terminated, whether or not through
our actions, or if such third parties do not fully perform under these
arrangements, we may have to delay, scale back or end one or more of our drug
development programs or seek to develop or commercialize our technologies
independently, which could result in delays. Further, such failure could result
in the termination of license rights to one or more of our technologies.
Moreover, if these development or marketing agreements take the form of a
partnership or strategic alliance, such arrangements may provide our
collaborators with significant discretion in determining the efforts and
resources that they will apply to the development and commercialization of
products based on our technologies. Accordingly, to the extent that we rely on
third parties to research, develop or commercialize products based on our
technologies, we are unable to control whether such products will be
scientifically or commercially successful.
 ******
 
 16
 ******
 ***Even
if we obtain FDA approval to market our product candidates, if our products fail
to achieve market acceptance, we will never record meaningful
revenues.***
 **
 Even if
our products are approved for sale, they may not be commercially successful in
the marketplace. Market acceptance of our product candidates will depend on a
number of factors, including:
  ·
    perceptions
      by members of the health care community, including physicians, of the
      safety and efficacy of our product candidates;
  ·
    the
      rates of adoption of our products by medical practitioners and the target
      populations for our products;
  ·
    the
      potential advantages that our product candidates offer over existing
      treatment methods;
  ·
    the
      cost-effectiveness of our product candidates relative to competing
      products;
  ·
    the
      availability of government or third-party payor reimbursement for our
      product candidates;
  ·
    the
      side effects or unfavorable publicity concerning our products or similar
      products; and
  ·
    the
      effectiveness of our sales, marketing and distribution efforts.
  Because
we expect sales of our product candidates, if approved, to generate
substantially all of our revenues in the long-term, the failure of our drugs to
find market acceptance would harm our business and could require us to seek
additional financing or other sources of revenue.
 
 ***We
rely on third parties to manufacture our products. If these third parties do not
successfully manufacture our products, our business will be
harmed.***
 
 We have
no experience in manufacturing products for clinical or commercial purposes and
do not have any manufacturing facilities. We intend to continue to use third
parties to manufacture our products for use in clinical trials and for future
sales. We may not be able to enter into future third-party contract
manufacturing agreements on acceptable terms, if at all.
 
 Contract
manufacturers often encounter difficulties in scaling up production, including
problems involving production yields, quality control and assurance, shortage of
qualified personnel, compliance with FDA and foreign regulations, production
costs and development of advanced manufacturing techniques and process controls.
Our third-party manufacturers may not perform as agreed or may not remain in the
contract manufacturing business for the time required by us to successfully
produce and market our drug candidates. In addition, our contract manufacturers
will be subject to ongoing periodic, unannounced inspections by the FDA and
corresponding foreign governmental agencies to ensure strict compliance with,
among other things, current good manufacturing practices, in addition to other
governmental regulations and corresponding foreign standards. We will not have
control over, other than by contract, third-party manufacturers’ compliance with
these regulations and standards. Switching or engaging multiple manufacturers
may be difficult because the number of potential manufacturers is limited and,
particularly in the case of KRX-101, the process by which multiple manufacturers
make the drug substance must be identical at each manufacturing facility. It may
be difficult for us to find and engage replacement or multiple manufacturers
quickly and on terms acceptable to us, if at all. Moreover, if we need to change
manufacturers, the FDA and corresponding foreign regulatory agencies must
approve these manufacturers in advance, which will involve testing and
additional inspections to ensure compliance with FDA and foreign regulations and
standards.
 
 If
third-party manufacturers fail to deliver the required quantities of our drug
candidates on a timely basis and at commercially reasonable prices, we will not
be able to commercialize our products as planned.
 
 We have
entered into a contract manufacturing relationship with a U.S.-based contract
manufacturer for KRX-101 which we believe will be adequate to satisfy our
current clinical and initial commercial supply needs; however, as we transition
the manufacturing of KRX-101 to our U.S.-based contract manufacturer, we will
need to create a reproducible manufacturing process that will ensure consistent
manufacture of KRX-101 across multiple batches and sources. As with all
heparin-like compounds, the end product is highly sensitive to the manufacturing
process utilized. Accordingly, the creation of a reproducible process will be
required for the successful commercialization of KRX-101. There can be no
assurance that we will be successful in this endeavor.
 ******
 
 17
 
 *If we are not able to obtain the raw
materials required for the manufacture of our lead product candidate, KRX-101,
our ability to develop and market this product candidate will be substantially
harmed.*
 
 Source
materials for KRX-101, our lead product candidate, are derived from porcine
mucosa. Long-term supplies for KRX-101 could be affected by limitations in the
supply of porcine mucosa and the demand for other heparin products, over which
we will have no control. Additionally, diseases affecting the world supply of
pigs could have an actual or perceived negative impact on our ability, or the
ability of our contract manufacturers, to source, make and/or sell KRX-101. Such
negative impact could materially affect the commercial success of KRX-101.
 
 ***If
our competitors develop and market products that are less expensive, more
effective or safer than our product candidates, our commercial opportunities may
be reduced or eliminated.***
 
 The
pharmaceutical industry is highly competitive. Our competitors include
pharmaceutical companies and biotechnology companies, as well as universities
and public and private research institutions. In addition, companies that are
active in different but related fields represent substantial competition for us.
Many of our competitors have significantly greater capital resources, larger
research and development staffs and facilities and greater experience in drug
development, regulation, manufacturing and marketing than we do. These
organizations also compete with us to recruit qualified personnel, attract
partners for joint ventures or other collaborations, and license technologies
that are competitive with ours. As a result, our competitors may be able to more
easily develop technologies and products that could render our technologies or
our drug candidates obsolete or noncompetitive. To
compete successfully in this industry we must identify novel and unique drugs or
methods of treatment and then complete the development of those drugs as
treatments in advance of our competitors.
 
 Our
commercial opportunities may be reduced or eliminated if our competitors develop
and market products that are less expensive, more effective or safer than our
drug candidates. Other companies have products or drug candidates in various
stages of pre-clinical or clinical development to treat diseases for which we
are also seeking to discover and develop drug candidates. Some of these
potential competing drugs are further advanced in development than our drug
candidates and may be commercialized earlier. Even if we are successful in
developing effective drugs, our products may not compete successfully with
products produced by our competitors.
 
 ***If
we lose our key personnel or are unable to attract and retain additional
personnel, our operations could be disrupted and our business could be harmed.***
 
 We
currently have 27 full and part-time employees. To successfully develop our drug
candidates, we must be able to attract and retain highly skilled personnel. In
addition, if we lose the services of our current personnel, in particular,
Michael S. Weiss, our Chairman and Chief Executive Officer, our ability to
continue to execute on our business plan could be materially impaired. In
addition, while we have an employment agreement with Mr. Weiss, this agreement
would not prevent him from terminating his employment with us.
 
 ***Any
acquisitions we make may dilute your equity or require a significant amount of
our available cash and may not be scientifically or commercially successful.***
 
 As part
of our business strategy, we may effect acquisitions to obtain additional
businesses, products, technologies, capabilities and personnel. If we make one
or more significant acquisitions in which the consideration includes stock or
other securities, your equity in us may be significantly diluted. If we make one
or more significant acquisitions in which the consideration includes cash, we
may be required to use a substantial portion of our available cash.
 
 Acquisitions
involve a number of operational risks, including:
  ·
    difficulty
      and expense of assimilating the operations, technology and personnel of
      the acquired business;
  ·
    inability
      to retain the management, key personnel and other employees of the
      acquired business;
  ·
    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
      acquisition;
  ·
    diversion
      of management attention; and
  ·
    potential
      impairment of substantial goodwill and write-off of in-process research
      and development costs, adversely affecting our reported results of
      operations.
  
 18
 ******
 ***We
face product liability risks and may not be able to obtain adequate insurance.***
 
 The use
of our drug candidates in clinical trials, and the sale of any approved
products, exposes us to liability claims. Although we are not aware of any
historical or anticipated product liability claims against us, if we cannot
successfully defend ourselves against product liability claims, we may incur
substantial liabilities or be required to cease clinical trials of our drug
candidates or limit commercialization of any approved products.
 
 We
believe that we have obtained sufficient product liability insurance coverage
for our clinical trials. We intend to expand our insurance coverage to include
the commercial sale of any approved products if marketing approval is obtained;
however, insurance coverage is becoming increasingly expensive. We may not be
able to maintain insurance coverage at a reasonable cost. We may not be able to
obtain additional insurance coverage that will be adequate to cover product
liability risks that may arise. Regardless of merit or eventual outcome, product
liability claims may result in:
  ·
    decreased
      demand for a product;
  ·
    injury
      to our reputation;
  ·
    inability
      to continue to develop a drug candidate;
  ·
    withdrawal
      of clinical trial volunteers; and
  ·
    loss
      of revenues.
  Consequently,
a product liability claim or product recall may result in losses that could be
material.
 
 *In
connection with providing our**clinical
trial management and site recruitment*** ***services,
we may be exposed to liability that could have a material adverse effect on our
financial condition and results of operations.***
 
 OCOG, a
subsidiary we acquired through our acquisition of ACCESS Oncology, provides
clinical trial management and site recruitment services to us as well as other
biotechnology and pharmaceutical companies. In
conducting the activities of OCOG, any failure on our part to comply with
applicable governmental regulations or contractual obligations could expose us
to liability to our clients and could have a material adverse effect on us. We
also could be held liable for errors or omissions in connection with the
services we perform. In addition, the wrongful or erroneous delivery of health
care information or services may expose us to liability. We could be materially
and adversely affected if we were required to pay damages or bear the costs of
defending any such claims.
 
 **Risks
Related to Our Financial Condition**
 
 ***Our
current cash, cash equivalents and short-term securities may not be adequate to
support our operations for the next 24 to 30 months as we have estimated.***
 
 We
believe that our $49.9 million in cash, cash equivalents, interest receivable
and short-term securities as of December 31, 2004, will be sufficient to enable
us to meet our planned operating needs and capital expenditures for
approximately the next 24 to 30 months. Our
forecast of the period of time through which our cash, cash equivalents and
short-term securities will be adequate to support our operations is a
forward-looking statement that involves risks and uncertainties. The actual
amount of funds we will need to operate is subject to many factors, some of
which are beyond our control. These factors include the following:
  ·
    the
      timing of expenses associated with manufacturing and product development
      of the proprietary drug candidates within our portfolio and those that may
      be in-licensed, partnered or acquired;
  ·
    the
      timing of the in-licensing, partnering and acquisition of new product
      opportunities;
  ·
    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 licensing arrangements;
   19
  ·
    the
      costs involved in prosecuting and enforcing patent claims and other
      intellectual property rights; and
  ·
    the
      amount of any funds expended to repurchase our common
    stock.
  ***If
we are unable to obtain additional funds on terms favorable to us, or at all,
our business would be harmed.***
 
 We expect
to use, rather than generate, funds from operations for the foreseeable future.
Based on our current plans, we believe our existing cash and cash equivalents
will be sufficient to fund our operating expenses and capital requirements for
approximately the next 24 to 30 months; however, the actual amount of funds that
we will need prior to or after that date will be determined by many factors,
some of which are beyond our control. As a result, we may need funds sooner or
in different amounts than we currently anticipate, depending upon:
  ·
    the
      progress of our development activities;
  ·
    the
      progress of our research activities;
  ·
    the
      number and scope of our development programs;
  ·
    our
      ability to establish and maintain current and new licensing or acquisition
      arrangements;
  ·
    our
      ability to achieve our milestones under our licensing arrangements;
  ·
    the
      costs involved in enforcing patent claims and other intellectual property
      rights; and
  ·
    the
      costs and timing of regulatory approvals.
  If our
capital resources are insufficient to meet future capital requirements, we will
have to raise additional funds. If we are unable to obtain additional funds on
terms favorable to us or at all, we may be required to cease or reduce our
operating activities or sell or license to third parties some or all of our
technology. If we raise additional funds by selling additional shares of our
capital stock, the ownership interests of our stockholders will be diluted. If
we raise additional funds through the sale or license of our technology, we may
be unable to do so on terms favorable to us.
 
 ***Our
prior restructurings may result in additional Israeli-related liabilities.***
 
 In
September 2001, one of our Israeli subsidiaries received the status of an
“Approved Enterprise,” a status which grants certain tax benefits in Israel in
accordance with the “Law for the Encouragement of Capital Investments, 1959.”
Through December 31, 2003, our Israeli subsidiary, which ceased operations in
2003, has received tax benefits in the form of exemptions of approximately
$744,000 as a result of our subsidiary’s status as an “Approved Enterprise.” As
part of the restructuring implemented during 2003, we closed down our Jerusalem
laboratory facility. In October 2003, the subsidiary received a letter from the
Israeli Ministry of Industry and Trade that its Approved Enterprise status was
cancelled as of July 2003 and that past benefits would not need to be repaid.
The Israeli tax authorities have yet to confirm this position; however, we
believe that, based on the letter received from the Ministry of Industry and
Trade, it is unlikely that past benefits will need to be repaid, and therefore,
we have not recorded any charge with respect to this potential liability. There
can be no assurances that the Israeli tax authorities will confirm this
position. As a result, we may be liable to repay some or all of the tax benefits
received to date, which could adversely affect our cash flow and results of
operations.
 
 In July
2003, our Israeli subsidiaries vacated their Jerusalem facility and relocated to
smaller facilities. The landlord of the Jerusalem facility has alleged that we
were immediately liable to pay the landlord a sum in excess of $1.1 million as a
result of the alleged breach of the lease agreement for the Jerusalem facility.
The amount demanded by the landlord includes rent for the entire remaining term
of the lease (through 2005), as well as property taxes and other costs. In
August 2003, the landlord claimed a bank guarantee, in the amount of $222,000,
which was previously provided as security in connection with the lease
agreement, making the net amount potentially due to the landlord $776,000. To
date, no litigation has been initiated, and, to our knowledge, the landlord has
succeeded in leasing most, if not all, of the space to one or more new tenants.
 
 ******
 
 20
 
 **Risks
Related to Our Intellectual Property**

***If
we are unable to adequately protect our intellectual property, third parties may
be able to use our technology, which could adversely affect our ability to
compete in the market.***
 
 Our
commercial success will depend in part on our ability and the ability of our
licensors to obtain and maintain patent protection on our drug products and
technologies and successfully defend these patents and technologies against
third-party challenges. The patent positions of pharmaceutical and biotechnology
companies can be highly uncertain and involve complex legal and factual
questions. No consistent policy regarding the breadth of claims allowed in
biotechnology patents has emerged to date. Accordingly, the patents we use may
not be sufficiently broad to prevent others from practicing our technologies or
from developing competing products. Furthermore, others may independently
develop similar or alternative technologies or design around our patented
technologies. The patents we use may be challenged or invalidated or may fail to
provide us with any competitive advantage.
 
 Moreover,
we rely on trade secrets to protect technology where we believe patent
protection is not appropriate or obtainable. Trade secrets are difficult to
protect. While we require our employees, collaborators and consultants to enter
into confidentiality agreements, this may not be sufficient to adequately
protect our trade secrets or other proprietary information. In addition, we
share ownership and publication rights to data relating to some of our drug
candidates with our research collaborators and scientific advisors. If we cannot
maintain the confidentiality of this information, our ability to receive patent
protection or protect our trade
secrets or other  proprietary
information will be at risk.
 
 ***Litigation
or third-party claims of intellectual property infringement could require us to
spend substantial time and money defending such claims and adversely affect our
ability to develop and commercialize our products.***
 
 Third
parties may assert that we are using their proprietary technology without
authorization. In addition, third parties may have or obtain patents in the
future and claim that our technologies infringe their patents. If we are
required to defend against patent suits brought by third parties, or if we sue
third parties to protect our patent rights, we may be required to pay
substantial litigation costs, and our management’s attention may be diverted
from operating our business. In addition, any legal action against our licensors
or us that seeks damages or an injunction of our commercial activities relating
to the affected technologies could subject us to monetary liability and require
our licensors or us to obtain a license to continue to use the affected
technologies. We cannot predict whether our licensors or we would prevail in any
of these types of actions or that any required license would be made available
on commercially acceptable terms, if at all.
 
 **Risks
Related to Our Common Stock**
 
 ***Concentration
of ownership of our common stock among our existing executive officers,
directors and principal stockholders may prevent new investors from influencing
significant corporate decisions.***
 
 As of
December 31, 2004, our executive officers, directors and principal stockholders
(including their affiliates) beneficially owned, in the aggregate, approximately
24.3% of our outstanding common stock, including, for this purpose, currently
exercisable options and warrants held by our executive officers, directors and
principal stockholders. **** As a
result, these persons, acting together, may have the ability to significantly
influence  the
outcome of all matters submitted to our stockholders for approval, including the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of our assets. In addition, such persons, acting together,
may have the ability to effectively control our management and affairs.
Accordingly, this concentration of ownership may depress the market price of our
common stock.
 
 ***Future
sales of our common stock could depress the market for our common
stock.***
 
 Sales of
a substantial number of shares of our common stock, or the perception by the
market that those sales could occur, could cause the market price of our common
stock to decline or could make it more difficult for us to raise funds through
the sale of equity in the future. On September 29, 2004, we filed with the SEC a
shelf registration statement on Form S-3, which the SEC declared effective on
October 13, 2004, providing for the offering of up to five million shares of our
common stock. Future sales pursuant to this registration statement could depress
the market for our common stock.
 
 Additionally,
our executive officers, directors, and principal stockholders beneficially
owned, in the aggregate, approximately 24.3% of our common stock as of December
31, 2004, including currently exercisable warrants and options held by them. If
some or all of them should decide to sell a substantial number of their
holdings, it could have a material adverse effect on the market for our common
stock.
 
 ***Our
stock price can be volatile, which increases the risk of litigation, and may
result in a significant decline in the value of your investment.***
 
 The
trading price of our common stock is likely to be highly volatile and subject to
wide fluctuations in price in response to various factors, many of which are
beyond our control. These factors include:
 
 21
  ·
    developments
      concerning our drug candidates;
  ·
    announcements
      of technological innovations by us or our competitors;
  ·
    introductions
      or announcements of new products by us or our competitors;
  ·
    announcements
      by us of significant acquisitions, strategic partnerships, joint ventures
      or capital commitments;
  ·
    changes
      in financial estimates by securities analysts;
  ·
    actual
      or anticipated variations in quarterly operating results;
  ·
    expiration
      or termination of licenses, research contracts or other collaboration
      agreements;
  ·
    conditions
      or trends in the regulatory climate and the biotechnology and
      pharmaceutical industries;
  ·
    changes
      in the market valuations of similar companies; and
  ·
    additions
      or departures of key personnel.
  In
addition, equity markets in general, and the market for biotechnology and life
sciences companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of companies traded in those markets. These broad market and
industry factors may materially affect the market price of our common stock,
regardless of our development and operating performance. In the past, following
periods of volatility in the market price of a company’s securities, securities
class-action litigation has often been instituted against that company. Such
litigation, if instituted against us, could cause us to incur substantial costs
to defend such claims and divert management’s attention and resources, which
could seriously harm our business.
 
 *The
concentration of stock ownership by our executive officers, directors and
principle stockholders and certain anti**-takeover
provisions in our charter documents and Delaware law could make a third-party
acquisition of us difficult. This could limit the price investors might be
willing to pay in the future for our common stock.*
 
 As of
December 31, 2004, our executive officers, directors and principal stockholders
(including their affiliates) beneficially owned, in the aggregate, approximately
24.3% of our outstanding common stock, including, for this purpose, currently
exercisable options and warrants held by our executive officers, directors and
principal stockholders. In addition, provisions  in our
amended and restated certificate of incorporation and bylaws could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, or control us. These
factors could limit the price that certain investors might be willing to pay in
the future for shares of our common stock. Our amended and restated certificate
of incorporation allows us to issue preferred stock with rights senior to those
of the common stock. The issuance of preferred stock could decrease the amount
of earnings and assets available for distribution to the holders of our common
stock or could adversely affect the rights and powers, including voting rights,
of such holders. In certain circumstances, such issuance could have the effect
of decreasing the market price of our common stock. Our amended
and restated bylaws eliminate the right of stockholders to call a special
meeting of stockholders, which could make it more difficult for stockholders to
effect certain corporate actions. Any of
these provisions could also have the effect of delaying or preventing a change in
control.
 
  **ITEM
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. In addition, we are currently
evaluating various possibilities of leasing approximately 2,000 square feet of
space in the San Francisco, California area, to accommodate our oncology group,
which is currently based in San Francisco. We recorded a $50,000 facility
expense, in the year ended December 31, 2004, for the use of the personal
facility of our President for several of our employees located in San Francisco.
We anticipate that these facilities will be sufficient for our needs during the
next several years.
 
 22
 ****
 **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.
 
 **ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**
 
 We did
not submit any matters to a vote of our security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of
2004.
 
 **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 National Market and trades under the symbol
“KERX.” Trading of our common stock commenced on July 28, 2000, following the
completion of our initial public offering.
 
 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, 2004**
    
    **High**
    
    **Low**Fourth
      Quarter
    
    $
    13.80
    
    $
    9.65Third
      Quarter
    
    $
    12.90
    
    $
    7.13Second
      Quarter
    
    $
    19.07
    
    $
    10.57First
      Quarter
    
    $
    15.42
    
    $
    4.59
 
 **Fiscal
      Year Ended December 31, 2003**
    
    **High**
    
    **Low**Fourth
      Quarter
    
    $
    5.46
    
    $
    3.23Third
      Quarter
    
    $
    3.85
    
    $
    2.15Second
      Quarter
    
    $
    2.68
    
    $
    1.10First
      Quarter
    
    $
    1.60
    
    $
    1.28
 
 ***Holders***
 
 The
number of record holders of our common stock as of March 4, 2005 was 64.
 
 ***Dividends***
 
 We have
never declared or paid any cash dividends on our common stock and do not
anticipate paying any cash dividends in the foreseeable future. Any future
determination to pay dividends will be at the discretion of our board of
directors.
 
 ***Securities
Authorized for Issuance Under Equity Compensation
Plans***
 
 The
following table provides information as of December 31, 2004, 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 Non-Plan, the 2002 CEO Incentive Stock Option Plan, the 2004
President Incentive Plan and the
2004 Long-Term Incentive Plan.
   23
 **Equity
      Compensation Plan
      Information****Plan
      Category**
    
    **Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights**
    
    **Weighted-average
      exercise price of outstanding options, warrants and
      rights**
    
    **Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a)****(a)**
    
    **(b)**
    
    **(c)**Equity
      compensation plans approved by security holders
    
    
    4,476,964
    
    $
    2.86
    
    
    4,232,822Equity
      compensation plans not approved by security holders
    
    
    3,716,210
    
    $
    2.64
    
    
    22,500Total
    
    
    8,193,174
    
    $
    2.76
    
    
    4,255,322
 
 For
information about all of our stock option plans, see Note 7 to our Consolidated
Financial Statements .
  ****
 **ITEM
6. SELECTED FINANCIAL DATA.**
 
 The
following Statement of Operations Data for the years ended December 31, 2004,
2003, 2002, 2001 and 2000, and Balance Sheet Data as of December 31, 2004, 2003,
2002, 2001 and 2000, 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,****2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000**(in
      thousands, except per share data)**Statement
      of Operations Data:****Service
      revenue**
    
    $
    809
    
    $
    --
    
    $
    --
    
    $
    --
    
    $
    --**Operating
      expenses:**Cost
      of services
    
    
    835
    
    
    --
    
    
    --
    
    
    --
    
    
    --Research
      and development:Non-cash
      compensation
    
    
    413
    
    
    (486
    )
    
    (1,382
    )
    
    (17
    )
    
    3,186Non-cash
      acquired in-process researchand
      development
    
    
    18,800
    
    
    --
    
    
    --
    
    
    --
    
    
    --Other
      research and development
    
    
    9,805
    
    
    5,996
    
    
    9,523
    
    
    7,416
    
    
    3,500Total
      research and development
    
    
    29,018
    
    
    5,510
    
    
    8,141
    
    
    7,399
    
    
    6,686General
      and administrative:Non-cash
      compensation
    
    
    1,087
    
    
    188
    
    
    (4
    )
    
    139
    
    
    2,668Other
      general and administrative
    
    
    3,581
    
    
    3,684
    
    
    4,108
    
    
    4,302
    
    
    3,232Total
      general and administrative
    
    
    4,668
    
    
    3,872
    
    
    4,104
    
    
    4,441
    
    
    5,900**Total
      operating expenses**
    
    
    34,521
    
    
    9,382
    
    
    12,245
    
    
    11,840
    
    
    12,586**Operating
      loss**
    
    
    (33,712
    )
    
    (9,382
    )
    
    (12,245
    )
    
    (11,840
    )
    
    (12,586
    )**Other
      income (expense):**Interest
      and other income, net
    
    
    770
    
    
    247
    
    
    513
    
    
    2,231
    
    
    1,317Income
      taxes
    
    
    (1
    )
    
    27
    
    
    (51
    )
    
    (197
    )
    
    (220
    )**Net
      loss**
    
    $
    (32,943
    )
    $
    (9,108
    )
    $
    (11,783
    )
    $
    (9,806
    )
    $
    (11,489
    )**Net
      loss per common share**Basic
      and diluted
    
    $
    (1.10
    )
    $
    (0.43
    )
    $
    (0.59
    )
    $
    (0.50
    )
    $
    (0.89
    )
  ****
    
    **As of December
    31,****2004**
    
    
    **2003**
    
    
    **2002**
    
    
    **2001**
    
    
    **2000**(in
      thousands)**Balance
      Sheet Data:**Cash,
      cash equivalents, interest receivableand
      investment securities
    
    $
    49,878
    
    $
    31,414
    
    $
    24,131
    
    $
    37,856
    
    $
    48,900Working
      capital
    
    
    46,538
    
    
    30,982
    
    
    22,350
    
    
    35,235
    
    
    37,908Total
      assets
    
    
    50,862
    
    
    32,223
    
    
    29,103
    
    
    43,067
    
    
    50,264Long-term
      obligations
    
    
    92
    
    
    --
    
    
    256
    
    
    766
    
    
    304Contingent
      equity rights
    
    
    4,004
    
    
    --
    
    
    --
    
    
    --
    
    
    --Total
      stockholders’ equity
    
    
    42,804
    
    
    31,226
    
    
    26,330
    
    
    39,215
    
    
    48,867
  24
  **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 “Business - 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” and “Item 8. Financial Statements and Supplementary
Data” appearing elsewhere in this report.
 
 **OVERVIEW**
 
 We are a
biopharmaceutical company focused on the acquisition, development and
commercialization of novel pharmaceutical products for the treatment of
life-threatening diseases, including diabetes and cancer. We have two product
candidates in the later stages of clinical development: sulodexide, or KRX-101,
for the treatment of diabetic nephropathy, a life-threatening kidney disease
caused by diabetes, and perifosine, or KRX-0401, for the treatment of multiple
forms of cancer.
 
 We were
incorporated in Delaware in October 1998. We commenced operations in November
1999, following our acquisition of substantially all of the assets and certain
of the liabilities of Partec Ltd., our predecessor company that began operations
in January 1997. Since commencing operations, our activities have been primarily
devoted to developing our technologies and drug candidates, acquiring
clinical-stage compounds, raising capital, purchasing assets for our facilities,
and recruiting personnel. We are a development stage company and have no product
sales to date. Our major sources of working capital have been proceeds from
various private placements of equity securities, option and warrant exercises,
and from our initial public offering.
 
 We are a
development stage company and have devoted substantially all of our efforts to
the discovery, in-licensing and development of drug candidates. We have incurred
negative cash flow from operations each year since our inception. We anticipate
incurring negative cash flows from operating activities for the foreseeable
future. We have spent, and expect to continue to spend, substantial amounts in
connection with implementing our business strategy, including our planned
product development efforts, our clinical trials and potential in-licensing and
acquisition opportunities.
 
 Our
revenues consist of clinical trial management and site recruitment services.
Revenues from providing these services are recognized as the services are
provided. Deferred revenue is incurred when we receive a deposit or prepayment
for services to be performed at a later date.
 
 Our cost
of services consist of all costs specifically associated with client programs
such as salaries, benefits paid to personnel, payments to third-party vendors
and systems and other support facilities associated with delivering services to
our clients. Cost of services are recognized as services are
performed.
 
 Our
research and development expenses consist primarily of salaries and related
personnel costs, fees paid to consultants and outside service providers for
clinical and laboratory development, facilities-related and other expenses
relating to the design, development, testing, and enhancement of our product
candidates, as well as expenses related to in-licensing and acquisition of new
product candidates. We expense our research and development costs as they are
incurred.
 
 Our
general and administrative expenses consist primarily of salaries and related
expenses for executive, finance and other administrative personnel, recruitment
expenses, professional fees and other corporate expenses, including investor
relations, general legal activities and facilities related expenses. We
anticipate that general and administrative expenses will increase for the
foreseeable future as we expand our operating activities and as a result of
increased costs associated with being a publicly-traded company.
 
 Our
results of operations include non-cash compensation expense as a result of the
grants of stock, stock options and warrants. Compensation expense for fixed
award options and warrants granted to employees and directors represents the
intrinsic value (the difference between the stock price of the common stock and
the exercise price of the options or warrants) of the options and warrants at
the date of grant. For variable awards, we consider the difference between the
stock price at reporting date and the exercise price, in the case where a
measurement date has not been reached. The compensation cost is recorded over
the respective vesting periods of the individual stock options and warrants. The
expense is included in the respective categories of expense in the statement of
operations. We expect to incur significant non-cash compensation expense in the
future; however, because some of the options and warrants issued to employees,
consultants and other third-parties either do not vest immediately or vest upon
the achievement of certain milestones, the total expense is
uncertain.
 
 
 25
  Our
ongoing clinical trials will be lengthy and expensive. Even if these trials show
that our drug candidates are effective in treating certain indications, there is
no guarantee that we will be able to record commercial sales of any of our
product candidates in the near future. In addition, we expect losses to continue
as we continue to fund in-licensing and development of new drug candidates. As
we continue our development efforts, we may enter into additional third-party
collaborative agreements and may incur additional expenses, such as licensing
fees and milestone payments. As a result, our quarterly results may fluctuate
and a quarter-by-quarter comparison of our operating results may not be a
meaningful indication of our future performance.
 
 **RESULTS
OF OPERATIONS**
 
 **Years
Ended December 31, 2004 and 2003**
 
 *Revenue.* Service
revenue for the year ended December 31, 2004, was $809,000 as compared to no
revenue for the year ended December 31, 2003. Service revenue for the year ended
December 31, 2004 was generated by OCOG, a subsidiary acquired through our
acquisition of ACCESS Oncology in the first quarter of 2004. We do not expect
our service revenue to have a material impact on our financial results during
the next year.
 
 *Cost
of Services Expense* . Cost of
services expense for the year ended December 31, 2004 was $835,000 as compared
to no cost of services expense for the year ended December 31, 2003. Cost of
services expense for the year ended December 31, 2004 was generated by OCOG, a
subsidiary acquired through our acquisition of ACCESS Oncology in the first
quarter of 2004. We do not expect our cost of services expenses to have a
material impact on our financial results during the next year.
 
 *Non-Cash
Compensation Expense (Research and Development).* Non-cash
compensation expense related to stock option grants and warrant issuances was
$413,000 for the year ended December 31, 2004, as compared to negative $486,000
for the year ended December 31, 2003. This increase in non-cash compensation
expense was primarily due to the issuance of options to consultants accounted
for using the fair value method as well as due to the adjustment to fair market
value of previously-issued options to consultants.
 
 *Non-Cash
Acquired In-Process Research and Development Expense* . As
required by Financial Accounting Standards Board Interpretation No. 4,
“Applicability of FASB Statement No. 2 to Business Combinations Accounted for by
the Purchase Method," or FIN 4, the Company recorded a charge of $18,800,000 in
the year ended December 31, 2004 for the estimate of the portion of the purchase
price of ACCESS Oncology allocated to acquired in-process research and
development. A project-by-project valuation was performed with the assistance of
independent valuation specialists to determine the fair value of research and
development projects of ACCESS Oncology which were in-process, but not yet
completed.
 
 *Other
Research and Development Expenses* . Other
research and development expenses increased by $3,809,000 to $9,805,000 for the
year ended December 31, 2004, as compared to expenses of $5,996,000 for the year
ended December 31, 2003. The increase in other research and development expenses
was due primarily to a $3,990,000 increase in expenses related to KRX-101, which
includes one-half, or $500,000, of a one-time bonus paid to our Chief Executive
Officer pursuant to his employment agreement for the
achievement of a milestone , a
$2,853,000 increase in expenses related to our oncology drug portfolio, and an
increase in our licensing costs of $550,000 for the in-licensing of a
pre-clinical compound. This increase was partially offset by the absence of a
$2,358,000 non-cash impairment charge associated with our 2003 restructuring
that was taken during the comparative period last year, as well as the absence
of $964,000 in expenses related to early-stage research and development which
ceased in 2003.
 
 We expect
our other research and development costs to increase over the next year as a
result of our U.S.-based clinical program for KRX-101 and the clinical program
for KRX-0401, including the planned commencement of additional single agent and
combination trials, as well as possible development programs for the other drug
candidates within our portfolio.
 
 *Non-Cash
Compensation Expense (General and Administrative).* Non-cash
compensation expense related to stock option grants was $1,087,000 for the year
ended December 31, 2004, as compared to expenses of $188,000 for the year ended
December 31, 2003. This increase in non-cash compensation expense was primarily
due to the issuance of previously granted options to purchase shares of our
common stock to two non-employee directors at an exercise price less than market
price at issue date (but equal to market price at grant date) and due to the
issuance of options to consultants accounted for using the fair value method, as
well as due to the adjustment to fair market value of previously-issued options
to consultants.
 
 
 26
 
 *Other
General and Administrative Expenses* . Other
general and administrative expenses decreased by $103,000 to $3,581,000 for the
year ended December 31, 2004, as compared to expenses of $3,684,000 for the year
ended December 31, 2003. The decrease in general and administrative expenses was
due primarily to the absence of a $124,000 non-cash impairment charge as well as
the absence of $561,000 in accelerated depreciation of leasehold improvements
associated with our 2003 restructuring that was taken during the comparative
period last year. The decrease was partially offset by increased payroll
expenses relating to one-half, or $500,000, of a one-time bonus to our Chief
Executive Officer for the achievement of a certain milestone pursuant to his
employment agreement. The compensation of our Chief Executive Officer is
allocated equally between other research and development expenses and other
general and administrative expenses to reflect the allocation of his
responsibilities and activities for the company.
 
 We expect
our other general and administrative costs to increase modestly over the next
year primarily as a result of our support for our clinical development programs,
as well as increased costs associated with complying with public company
requirements.
 
 *Interest
and Other Income, Net* .
Interest and other income, net, increased by $523,000 to $770,000 for the year
ended December 31, 2004, as compared to income of $247,000 for the year ended
December 31, 2003. The increase resulted from a higher level of invested funds
due to the completion of two private placement transactions that closed in
November 2003 and February 2004, respectively, as well as due to the general
increase in short-term market interest rates when compared to the comparative
period last year, partially offset by financing expenses related to notes
payable assumed in the acquisition of ACCESS Oncology, which we repaid
subsequent to closing the acquisition. In addition, the increase in interest and
other income, net was due to a one-time payment of $107,000 from a related party
service agreement that terminated in 2004.
 
 *Income
Taxes* . Income
tax expense increased by $28,000 to $1,000 for the year ended December 31, 2004,
as compared to a credit of $27,000 for year ended December 31, 2003. Our income
tax expense for the year ended December 31, 2004, results from state taxes
imposed on our capital. Our income tax expense of negative $27,000 for the year
ended December 31, 2003, was primarily due to the reversal of taxable income
recorded in one of our Israeli subsidiaries partially offset by the elimination
of net deferred tax assets of our Israeli subsidiaries, associated with the
cessation of our activities in Israel. The reversal of taxable income and the
write-off were non-recurring items.
 
 **Years
Ended December 31, 2003 and 2002**
 
 *Revenue* . We did
not have any revenue for the years ended December 31, 2003 and December 31,
2002.
 
 *Cost
of Services Expense.* We did
not have any cost of services expenses for the years ended December 31, 2003 and
December 31, 2002.
 
 *Non-cash
Compensation Expense (Research and Development)* .
Non-cash compensation expense related to stock option grants and warrant
issuances was negative $486,000 for the year ended December 31, 2003 as compared
to negative $1,382,000 for the year ended December 31, 2002. This negative
non-cash compensation expense was primarily due to the reversal of previously
recorded compensation expense of milestone-based options of $526,000 following
the termination of a license agreement.
 
 *Non-Cash
Acquired In-Process Research and Development Expense* .
W e did not
have any non-cash acquired in-process research and development expenses for the
years ended December 31, 2003 and December 31, 2002.
 
 *Other
Research and Development Expenses* . Other
research and development expenses decreased by $3,527,000 to $5,996,000 for the
year ended December 31, 2003, as compared to expenses of $9,523,000 for the year
ended December 31, 2002. The decrease in research and development expenses was
due primarily to a $2,033,000 reduction in payroll and related costs and a
$3,918,000 reduction in lab-related expenses, technology license payments,
sponsored research, pre-clinical and consulting fees associated primarily with
early stage research and development projects, as a result of the 2003 and 2002
restructurings, as well as the cessation of clinical trial expenses associated
with the KRX-101 HIVAN trial in South Africa that was terminated in 2002. These
decreases were partially offset by the non-cash impairment charge of $2,358,000
associated with our decision to cease our Jerusalem laboratory activities, as
described below and an increase in expenses related to the preparation and
initiation of our U.S.-based clinical program for KRX-101.
 
 *Non-cash
Compensation Expense (General and Administrative)* .
Non-cash compensation expense related to stock option grants was $188,000 for
the year ended December 31, 2003 as compared to negative $4,000 for the year
ended December 31, 2002. This increase in non-cash compensation expense was
primarily due to the revaluation of previously issued options to
consultants.
 
 27
 
 *Other
General and Administrative Expenses* . Other
general and administrative expenses decreased by $424,000 to $3,684,000 for the
year ended December 31, 2003, as compared to expenses of $4,108,000 for the year
ended December 31, 2002. The decrease in general and administrative expenses was
due primarily to a $1,125,000 reduction in payroll and related costs as a result
of reduced personnel associated with the 2003 restructuring and the 2002
restructuring. The decrease in general and administrative expenses was partially
offset by $561,000 of accelerated depreciation of leasehold improvements in the
Jerusalem facility, increased business development expenses, and a $124,000
non-cash impairment charge associated with our decision to sell certain fixed
assets located in the Jerusalem facility.
 
 *Interest
and Other Income, Net* .
Interest and other income, net, decreased by $266,000 to $247,000 for the year
ended December 31, 2003, as compared to income of $513,000 for the year ended
December 31, 2002. The decrease resulted from a lower level of invested funds
and the general decline in market interest rates when compared to the prior
year.
 
 *Income
Taxes* . Income
tax expense decreased by $78,000 to a credit of $27,000 for the year ended
December 31, 2003, as compared to expenses of $51,000 for the year ended
December 31, 2002. The decrease in income tax expense was primarily due to the
reversal of taxable income recorded in one of our Israeli subsidiaries partially
offset by the elimination of net deferred tax assets of our Israeli
subsidiaries, associated with the cessation of our activities in Israel. Income
tax expense for the comparative period is attributable to taxable income from
the continuing operations of our subsidiaries in Israel.
 
 **2003
AND 2002 RESTRUCTURINGS**
 
 In 2003,
we implemented and completed a strategic reorganization, which we sometimes
refer to as the “2003 restructuring.” As a result of this reorganization, we
ceased all early-stage research and development activities, ceased operations in
our Jerusalem lab facility and completed the disposition of our fixed assets in
Israel. The 2003 restructuring included a 17-person reduction in our workforce,
primarily in Israel. As part of the 2003 restructuring, we reevaluated our
long-lived assets in accordance with SFAS No. 144 and recorded a non-cash
impairment charge of $2,482,000 for the year ended December 31, 2003, of which
$2,358,000 was included in research and development expenses and $124,000 was
included in general and administrative expenses. The impairment charge included
a write-off of $1,695,000 in fixed assets and $787,000 in intangible assets. In
addition, with our decision to vacate the Jerusalem facility, we reevaluated and
significantly shortened the useful life of the leasehold improvements associated
with our administrative facilities, resulting in accelerated depreciation of
$561,000 for the year ended December 31, 2003. In addition, upon vacating the
facility in Jerusalem, the landlord of that facility claimed a bank guarantee in
the amount of $222,000 that was previously provided as security in connection
with the lease agreement. At December 31, 2004 and 2003, respectively, there
were no liabilities associated with the 2003 restructuring accrued for on our
balance sheet.
 
 During
2002, we implemented a strategic reorganization, which was designed to
substantially reduce early stage research expenditures, which we sometimes refer
to as the “2002 restructuring.” The 2002 restructuring included a 46-person
reduction in our workforce, primarily in Israel. As part of the restructuring,
we took a charge in 2002 of $228,000, relating to severance not accrued as part
of its ongoing accrual made for employee severance benefits throughout the
employment term in accordance with Israeli law, $79,000 of which was included in
research and development expenses and $149,000 of which was included in general
and administrative expenses. As of December 31, 2003, $82,000 in severance
obligations related to the 2002 restructuring was included in accrued
compensation and related liabilities and was subsequently paid during the first
quarter of 2004. At December 31, 2004, there were no liabilities associated with
the 2002 restructuring accrued for on our balance sheet.
 
 The
following table summarizes restructuring expenses that were incurred by us in
2003 and 2002 that were not part of our ongoing accrual for employee severance
benefits made throughout the employment term in accordance with Israeli law. No
restructuring expenses were incurred in 2004.
 
 (in
      thousands)
    
    **2004**
    
    **2003**
    
    **2002**Other
      research and development:Impairment
      charge
    
    $
    --
    
    $
    2,358
    
    $
    --Realization
      of bank guarantee in connection with lease agreement
    
    
    --
    
    
    144
    
    
    --Severance
      charge
    
    
    --
    
    
    4
    
    
    79Total
      other research and development
    
    
    --
    
    
    2,506
    
    
    79Other
      general and administrative:
 Impairment
      charge
    
    
    --
    
    
    124
    
    
    --Realization
      of bank guarantee in connection with lease agreement
    
    
    --
    
    
    78
    
    
    --Severance
      charge
    
    
    --
    
    
    --
    
    
    149Accelerated
      depreciation
    
    
    --
    
    
    561
    
    
    --Total
      other general and administrative
    
    
    --
    
    
    763
    
    
    149Total
    
    $
    --
    
    $
    3,269
    
    $
    228
 
 28
 **LIQUIDITY
AND CAPITAL RESOURCES**
 
 We have
financed our operations from inception primarily through our initial public
offering, various private placement transactions, and option and warrant
exercises. As of December 31, 2004, we had received net proceeds of $46.3
million from our initial public offering, net proceeds of approximately $60.4
million from private placements of common and preferred stock and convertible
notes, including the conversion of $3.2 million of loans into contributed
capital, and proceeds of $5.3 million from the exercise of options and warrants.
 
 We
believe that the funds raised will provide us with capital to support our
current and planned clinical programs for KRX-101, KRX-0401 and our other
oncology drug candidates within our portfolio for approximately the next 24 to
30 months. Additionally, we also believe that our cash position provides us with
added flexibility in our in-licensing and product acquisition program to
strengthen our portfolio with additional clinical-stage drug candidates.
 
 As of
December 31, 2004, we had $49.9 million in cash, cash equivalents, interest
receivable, and short-term securities, an increase of $18.5 million from
December 31, 2003. Cash used in operating activities for the year ended December
31, 2004 was $12.0 million, as compared to $7.3 million for the year ended
December 31, 2003. This increase in cash used in operating activities was due
primarily to increased expenditures associated with the execution of our
business plan as well as the payment of certain liabilities assumed in the
acquisition of ACCESS Oncology. For the year ended December 31, 2004, net cash
used in investing activities of $10.4 million was primarily the result of the
purchase of investment securities following the private placement transaction
that closed in February 2004. For the year ended December 31, 2004, net cash
provided by financing activities of $30.4 million was primarily the result of
the net proceeds of $31.7 million and $5.0 million generated from our private
placement transaction that closed in February 2004 and the exercise of options
and warrants, respectively, offset by the payment of notes payable and accrued
interest assumed in the acquisition of ACCESS Oncology.
 
 We
believe that our $49.9 million in cash, cash equivalents, interest receivable
and short-term securities as of December 31, 2004 will be sufficient to enable
us to meet our planned operating needs and capital expenditures for
approximately the next 24 to 30 months. Our cash and cash equivalents and
short-term securities as of December 31, 2004 are invested in highly liquid
investments such as cash, money market accounts and short-term U.S. corporate,
government debt and auction notes securities. As of December 31, 2004, we are
unaware of any known trends or any known demands, commitments, events, or
uncertainties that will, or that are reasonably likely to, result in a material
increase or decrease in our required liquidity. We expect that our liquidity
needs throughout 2005 will continue to be funded from existing cash, cash
equivalents, and short-term securities.
 
 On
September 29, 2004, we filed a shelf registration statement on Form S-3 with the
SEC, which the SEC declared effective on October 13, 2004. The registration
statement provides for the offering of up to five million shares of our common
stock. We may offer these securities from time to time in response to market
conditions or other circumstances if we believe such a plan of financing is in
the best interest of the company and our stockholders. We believe that the
availability to conduct such offerings enhances our ability to raise additional
capital to finance our operations.
 
 **OFF-BALANCE
SHEET ARRANGEMENTS**
 
 We have
not entered into any transactions with unconsolidated entities whereby we have
financial guarantees, subordinated retained interests, derivative instruments or
other contingent arrangements that expose us to material continuing risks,
contingent liabilities, or any other obligations under a variable interest in an
unconsolidated entity that provides us with financing, liquidity, market risk or
credit risk support.
 
 **OBLIGATIONS
AND COMMITMENTS**
 
 As of
December 31, 2004, we have known contractual obligations, commitments and
contingencies of $6,888,000. Of this amount, $3,867,000 relates to research and
development agreements (primarily relating to our U.S.-based clinical program
for KRX-101), of which $3,235,000 is due within the next year, with the
remaining balance due as per the schedule below. The additional $3,021,000
relates to our current and recently signed operating lease obligations, of which
$237,000 is due within the next year, with the remaining balance due as per the
schedule below. In September 2004, we signed a new lease agreement in the same
building for our corporate headquarters in New York City for approximately
11,700 square feet, over a period of 5.5 years, at an average rent of
approximately $542,000 per year. The new
lease will supersede our current lease, which will expire upon our occupation of
the new space.
 
 29
  **Payment
      due by period****Contractual
      obligations**
    
    **Total**
    
    **Less
      than**
      **1
      year**
    
    **1-3**
      **years**
    
    **3-5**
      **years**
    
    **More
      than**
      **5
      years**Research and development
      agreements
    
    $
    3,867,000
    
    $
    3,235,000
    
    $
    632,000
    
    
    --
    
    
    --Operating
      leases
    
    
    3,021,000
    
    
    237,000
    
    
    1,193,000
    
    
    1,193,000
    
    
    398,000Total
    
    $
    6,888,000
    
    $
    3,472,000
    
    $
    1,825,000
    
    $
    1,193,000
    
    $
    398,000
 
 Additionally,
we have undertaken to make contingent milestone payments to certain of our
licensors of up to approximately $62.4 million over the life of the licenses, of
which approximately $43.3 million will be due upon or following regulatory
approval of the drugs. In certain cases, such payments will reduce any royalties
due on sales of related products. In the event that the milestones are not
achieved, we remain obligated to pay one licensor $50,000 annually until the
license expires. We have also committed to pay to the former stockholders of
ACCESS Oncology certain contingent equity rights if its drug candidates meet
development milestones. In addition, pursuant to an employment agreement, our
Chief Executive Officer is entitled to receive a one-time $2.0 million
performance-based cash bonus upon the achievement of a certain market
capitalization or working capital milestone event. These commitments are not
included in the table above.
 
 **CRITICAL
ACCOUNTING POLICIES**
 
 The
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amount of assets and liabilities and related disclosure of
contingent assets and liabilities at the date of our financial statements and
the reported amounts of revenues and expenses during the applicable period.
Actual results may differ from these estimates under different assumptions or
conditions.
 
 We define
critical accounting policies as those that are reflective of significant
judgments and uncertainties and which may potentially result in materially
different results under different assumptions and conditions. In applying these
critical accounting policies, our management uses its judgment to determine the
appropriate assumptions to be used in making certain estimates. These estimates
are subject to an inherent degree of uncertainty. Our critical accounting
policies include the following:
 
 *Stock
Compensation* . We have
granted options to employees, directors and consultants, as well as warrants to
other third parties. In applying Statement of Financial Accounting Standards No.
123, “Accounting for Stock-Based Compensation,” or SFAS No. 123, we use the
Black-Scholes pricing model to calculate the fair market value of our options
and warrants. The Black-Scholes model takes into account volatility in the price
of our stock, the risk-free interest rate, the estimated life of the option or
warrant, the closing market price of our stock and the exercise price. We have
assumed for the purposes of the Black-Scholes calculation that an option will be
exercised one year and two years after it fully vests for consultants and
employees, respectively. We base our estimates of our stock price volatility on
the volatility during the period prior to the grant of the option or warrant;
however, this estimate is neither predictive nor indicative of the future
performance of our stock. For purposes of the calculation, we assumed that no
dividends would be paid during the life of the options and warrants.
 
 In
accordance with EITF 96-18 “Accounting for Equity Instruments that are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services,” total compensation expense for options issued to consultants is
determined at the “measurement date.” The expense is recognized over the vesting
period for the options. Until the measurement date is reached, the total amount
of compensation expense remains uncertain. We record option compensation based
on the fair value of the options at the reporting date. These options are then
revalued, or the total compensation is recalculated based on the then current
fair value, at each subsequent reporting date. This results in a change to the
amount previously recorded in respect of the option grant, and additional
expense or a negative expense may be recorded in subsequent periods based on
changes in the assumptions used to calculate fair value, such as changes in
market price, until the measurement date is reached and the compensation expense
is finalized.
 
 We
account for stock-based employee and director compensation arrangements in
accordance with the provisions of APB Opinion No. 25, “Accounting for Stock
Issued to Employees,” or APB 25, and the Financial Accounting Standards Board,
or FASB, Interpretation No. 44, “Accounting for Certain Transactions Involving
Stock Compensation,” or FIN 44, as allowed by SFAS No. 123. We also comply with
the disclosure provisions of SFAS No. 123 and SFAS No. 148, “Accounting for
Stock-Based Compensation-Transition and Disclosure,” or SFAS No.
148.
 
 30
 
 
 *Accounting
Related to the Valuation of Acquired In-Process Research and
Development.* As
required by Financial Accounting Standards Board Interpretation No. 4,
“Applicability of FASB Statement No. 2 to Business Combinations Accounted for by
the Purchase Method," or FIN 4, we recorded a charge of $18,800,000 for the
estimate of the portion of the ACCESS Oncology purchase price allocated to
acquired in-process research and development.
 
 A
project-by-project valuation using the guidance in Statement of Financial
Accounting Standards No. 141, “Business Combinations” and the AICPA Practice Aid
“Assets Acquired in a Business Combination to Be Used In Research and
Development Activities: A Focus on Software, Electronic Devices and
Pharmaceutical Industries” was performed with the assistance of independent
valuation specialists to determine the fair value of research and development
projects of ACCESS Oncology which were in-process, but not yet
completed.
 
 The fair
value was determined using the income approach on a project-by-project basis.
This method starts with a forecast of the expected future net cash flows. These
cash flows are then adjusted to present value by applying an appropriate
discount rate that reflects the project’s stage of completion and other risk
factors. These other risk factors can include the nature of the product, the
scientific data associated with the technology, the current patent situation and
market competition.
 
 The
forecast of future cash flows required the following assumptions to be
made:
  ·
    revenue
      that is likely to result from specific in-process research and development
      projects, including estimated patient populations, estimated selling
      prices, estimated market penetration and estimated market share and
      year-over-year growth rates over the product life
  cycles;
  ·
    cost
      of sales related to the potential products using industry data or other
      sources of market data;
  ·
    sales
      and marketing expense using industry data or other market
      data;
  ·
    general
      and administrative expenses; and
  ·
    research
      and development expenses.
  The
valuations are based on information that were available as of the acquisition
date and the expectations and assumptions deemed reasonable by our management.
No assurance can be given, however, that the underlying assumptions or events
associated with such assets will occur as projected. For these reasons, among
others, the actual results may vary from the projected results.
 
 *Accounting
For Income Taxes* . In
preparing our consolidated financial statements, we are required to estimate our
income taxes in each of the jurisdictions in which we operate. This process
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 statement of operations.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have fully offset our
U.S. deferred tax assets with a valuation allowance. Our lack of earnings
history and the uncertainty surrounding our ability to generate taxable income
prior to the reversal or expiration of such deferred tax assets were the primary
factors considered by management in establishing the valuation allowance. In
prior periods, our wholly-owned Israeli subsidiaries had generated taxable
income in respect of services provided within the group, and therefore we
believed in the past that our deferred tax assets relating to the Israeli
subsidiaries would be realized. With the cessation of operating activities in
Israel during 2003 and the resulting absence of taxable income from the Israeli
subsidiaries, the deferred tax asset was written off in 2003. Our current income
tax expense results from state taxes imposed on our capital.
 
 
 31
 
 *Impairment*. We have
adopted SFAS No. 144*,
“Accounting for the Impairment or Disposal of Long-Lived
Assets,”*orSFAS No. 144, since January 1, 2002. SFAS No. 144 requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future cash flows expected to
be generated by the asset or used in its disposal. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
 
 **RECENTLY
ISSUED ACCOUNTING STANDARDS**
 
 In
December 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 123R, Share-Based Payment. SFAS 123R replaces SFAS 123, Stock-Based
Compensation, issued in 1995. SFAS 123R requires that the fair value of the
grant of employee stock options be reported as an expense. Historically, we have
disclosed in our footnotes the pro forma expense effect of stock options granted
under our stock option plans in Note 1, Organization and Summary of Significant
Accounting Policies: Stock-Based Compensation. We plan to adopt SFAS 123R when
required in the third quarter of 2005. The estimated impact of adopting SFAS
123R will have a material impact 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 and auction notes securities
in accordance with our investment policy. Some of these securities in which we
invest may have market risk. This means that a change in prevailing interest
rates may cause the principal amount of the investment to fluctuate. For
example, if we hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the principal
amount of our investment will probably decline. As of December 31, 2004, our
portfolio of financial instruments consists of cash equivalents and short-term
interest bearing securities, including corporate debt, money market funds,
government debt and auction notes securities. The average duration of all of our
held-to-maturity investments held as of December 31, 2004, was less than one
year. The re-pricing of our auction notes within thirty days allows these
securities to function as short-term investments. Due to the short-term nature
of all of our investments, we believe we have no material exposure to interest
rate risk arising from our investments.
 
 **ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.**
 
 Our
consolidated financial statements as of December 31, 2004, are included in Item
15 of this report and are presented beginning on page F-1 of this report. The
following table sets forth unaudited selected operating results for each of the
four fiscal quarters in the years ended December 31, 2004, and December 31,
2003. We believe that the following selected quarterly information includes all
adjustments, consisting only of normal, recurring adjustments, which we consider
necessary to present this information fairly. You should read this financial
information in conjunction with the financial statements and related notes
appearing elsewhere in this report. Our results of operations have fluctuated in
the past and are likely to continue to fluctuate greatly from quarter to quarter
in the future. Therefore, results of operations for any previous periods are not
necessarily indicative of results of operations to be recorded in the
future.
 
 
 **2004****Mar.
      31**
    
    **June
      30**
    
    **Sept.
      30**
    
    **Dec.
      31**(in
      thousands, except per share data)**Service
      revenue**
    
    $
    95
    
    $
    150
    
    $
    397
    
    $
    167**Operating
      expenses:**Cost
      of services
    
    
    80
    
    
    123
    
    
    416
    
    
    216Research
      and development:Non-cash
      compensation
    
    
    202
    
    
    23
    
    
    70
    
    
    118Non-cash
      acquired in-process researchand
      development
    
    
    18,800
    
    
    --
    
    
    --
    
    
    --Other
      research and development
    
    
    1,652
    
    
    2,067
    
    
    2,594
    
    
    3,492Total
      research and development
    
    
    20,654
    
    
    2,090
    
    
    2,664
    
    
    3,610General
      and administrative:Non-cash
      compensation
    
    
    185
    
    
    621
    
    
    161
    
    
    120Other
      general and administrative
    
    
    1,093
    
    
    745
    
    
    596
    
    
    1,147
 Total
      general and administrative
    
    
    1,278
    
    
    1,366
    
    
    757
    
    
    1,267**Total
      operating expenses**
    
    
    22,012
    
    
    3,579
    
    
    3,837
    
    
    5,093**Operating
      loss**
    
    
    (21,917
    )
    
    (3,429
    )
    
    (3,440
    )
    
    (4,926
    )**Other
      income (expense)**Interest
      and other income, net
    
    
    95
    
    
    170
    
    
    187
    
    
    318Income
      taxes
    
    
    (1
    )
    
    --
    
    
    --
    
    
    --**Net
      loss**
    
    $
    (21,823
    )
    $
    (3,259
    )
    $
    (3,253
    )
    $
    (4,608
    )**Net
      loss per common share**Basic
      and diluted
    
    $
    (0.78
    )
    $
    (0.11
    )
    $
    (0.11
    )
    $
    (0.15
    )
 
 
 32
 **2003****Mar.
      31**
    
    **June
      30**
    
    **Sept.
      30**
    
    **Dec.
      31**(in
      thousands, except per share data)**Service
      revenue**
    
    $
    --
    
    $
    --
    
    $
    --
    
    $
    --**Operating
      expenses:**Cost
      of services
    
    
    --
    
    
    --
    
    
    --
    
    
    --Research
      and development:Non-cash
      compensation
    
    
    (266
    )
    
    (249
    )
    
    --
    
    
    29Non-cash
      acquired in-process researchand
      development
    
    
    --
    
    
    --
    
    
    --
    
    
    --Other
      research and development
    
    
    3,371
    
    
    554
    
    
    810
    
    
    1,261Total
      research and development
    
    
    3,105
    
    
    305
    
    
    810
    
    
    1,290General
      and administrative:Non-cash
      compensation
    
    
    2
    
    
    50
    
    
    17
    
    
    119Other
      general and administrative
    
    
    664
    
    
    1,205
    
    
    763
    
    
    1,052Total
      general and administrative
    
    
    666
    
    
    1,255
    
    
    780
    
    
    1,171**Total
      operating expenses**
    
    
    3,771
    
    
    1,560
    
    
    1,590
    
    
    2,461**Operating
      loss**
    
    
    (3,771
    )
    
    (1,560
    )
    
    (1,590
    )
    
    (2,461
    )**Other
      income (expense)**Interest
      and other income, net
    
    
    85
    
    
    65
    
    
    34
    
    
    63Income
      taxes
    
    
    (102
    )
    
    (14
    )
    
    --
    
    
    143**Net
      loss**
    
    $
    (3,788
    )
    $
    (1,509
    )
    $
    (1,556
    )
    $
    (2,255
    )**Net
      loss per common share**Basic
      and diluted
    
    $
    (0.19
    )
    $
    (0.07
    )
    $
    (0.07
    )
    $
    (0.10
    )
 
 
 **ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND** **FINANCIAL
DISCLOSURE.**
 
 Not
applicable.
 
 
 33
 ****
**ITEM
9A. CONTROLS AND PROCEDURES.**

*Evaluation
of Disclosure Controls and Procedures.*Based on
their evaluation as of December 31, 2004, our Chief Executive Officer and
Principal Financial Officer, have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecuritiesExchange
Actof 1934,
as amended) were
effective to ensure that the information required to be disclosed by us in our
reports that we file or submit to the SEC was recorded, processed, summarized
and reported properly, within the time periods specified in the SEC’s rules and
forms.
 *Management's
Report on Internal Control over Financial Reporting.* Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended). Our management assessed the
effectiveness of our internal control over financial reporting as of
December 31, 2004. 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, 2004, our internal
control over financial reporting is effective based on these criteria. Our
independent registered public accounting firm, KPMG LLP, issued an attestation
on our assessment of our internal control over financial reporting, which is
included herein.
 
 *Changes
in Internal Control Over Financial Reporting.*There were no changes in our
internal controls over financial reporting during the quarter ended
December 31, 2004, that have materially affected, or are reasonably likely
to materially affect our internal controls over financial reporting.
 
 *Limitations
on the Effectiveness of Controls.*Our management, including our Chief
Executive Officer and Principal Financial Officer, does not expect that our
disclosure controls and procedures or our internal controls 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 AND EXECUTIVE OFFICERS OF THE COMPANY**
 
 The
information required by this Item regarding our directors and officers is
incorporated herein by reference from our Proxy Statement for our 2005 Annual
Meeting of Stockholders.
 
 **ITEM
11. EXECUTIVE COMPENSATION**
 
 The
information required by this Item regarding executive compensation is
incorporated herein by reference from our Proxy Statement for our 2005 Annual
Meeting of Stockholders.
 
 **ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS**
 
 The
information required by this Item regarding the security ownership of certain of
our beneficial owners and our management is incorporated herein by reference
from our Proxy Statement for our 2005 Annual Meeting of
Stockholders.
 
 **ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**
 
 The
information required by this Item regarding certain relationships and related
transactions is incorporated herein by reference from our Proxy Statement for
our 2005 Annual Meeting of Stockholders.
 
 **ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.**
 
 The
information required by this Item regarding principal accountant fees and
services is incorporated herein by reference to our Proxy Statement for our 2005
Annual Meeting of Stockholders.
 
  34
  **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**
    **Page**Reports
      of Independent Registered Public Accounting Firm
    F-1Consolidated
      Balance Sheets as of December 31, 2004 and 2003
    F-3Consolidated
      Statements of Operations for the years ended December 31, 2004, 2003 and
      2002, and the period from December 3, 1996 to December 31,
      2004
    F-4Consolidated
      Statements of Changes in Stockholders’ Equity for the years ended December
      31, 2004, 2003, and 2002, and the period from December 3, 1996 to December
      31, 2004
    F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2004, 2003 and
      2002, and the period from December 3, 1996 to December 31,
      2004
    F-10Notes
      to the Consolidated Financial Statements
    F-12
 
 **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**
 
 **Exhibit****Number**
    
    **Exhibit
      Description**2.1
    
    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 (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 (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 Annual 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.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.4.2
    
    Form
      of Warrant for the Purchase of Shares of Common Stock between certain
      holders of Series A Preferred Stock and Keryx Biopharmaceuticals, Inc.,
      dated as of December 14, 1999, filed as Exhibit 4.9 to the Registrant’s
      Registration Statement on Form S-1 filed on May 19, 2000 (File No.
      333-37402), and incorporated herein by reference.
   35
  4.3
    
    Form
      of Common Stock Purchase Warrant dated November 20, 2003, issued to the
      purchasers under the Securities Purchase Agreement, filed as Exhibit 10.3
      to the Registrant’s Registration Statement on Form S-3 filed on December
      12, 2003 (File No. 333-111143), and incorporated herein by
      reference.4.4
    
    Securities
      Purchase Agreement dated November 12, 2003 among Keryx Biopharmaceuticals,
      Inc. and the Purchasers identified on the signature pages thereof, filed
      as Exhibit 10.1 to the Company’s Registration Statement on Form S-3 filed
      on December 12, 2003 (File No. 333-111143), and incorporated herein by
      reference.4.5
    
    Registration
      Rights Agreement dated November 17, 2003 among Keryx Biopharmaceuticals,
      Inc. and the Purchasers identified on the signature pages thereof, filed
      as Exhibit 10.2 to the Registrant’s Registration Statement on Form S-3
      filed on December 12, 2003 (File No. 333-111143), and incorporated herein
      by reference.4.6
    
    Securities
      Purchase Agreement dated February 12, 2004 among Keryx Biopharmaceuticals,
      Inc. and the Purchasers identified on the signature pages thereof, filed
      as Exhibit 10.1 to the Company’s Registration Statement on Form S-3 filed
      on March 16, 2004 (File No. 333-113654), and incorporated herein by
      reference.4.7
    
    Registration
      Rights Agreement dated February 17, 2004 among Keryx Biopharmaceuticals,
      Inc. and the Purchasers identified on the signature pages thereof, filed
      as Exhibit 10.2 to the Registrant’s Registration Statement on Form S-3
      filed on March 16, 2004 (File No. 333-113654), and incorporated herein by
      reference.10.1†
    
    Employment
      Agreement with I. Craig Henderson, M.D., dated as of January 31, 2004.
      filed as Exhibit 10.1 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.10.2†
    
    Severance
      Agreement between Morris Laster, M.D. and Keryx Biopharmaceuticals, Inc.,
      dated February 27, 2003, filed as Exhibit 10.1 to the Registrant’s Annual
      Report on Form 10-K for the year ended December 31, 2002 filed on March
      31, 2003 (File No. 000-30929), and incorporated herein by
      reference.10.3†
    
    Severance
      Agreement between Benjamin Corn, M.D. and Keryx Biopharmaceuticals Inc.,
      dated February 23, 2003, filed as Exhibit 10.2 to the Registrant’s Annual
      Report on Form 10-K for the year ended December 31, 2002 filed on March
      31, 2003 (File No. 333-37402), and incorporated herein by
      reference.10.4!
    
    License
      Agreement between Alfa Wassermann S.p.A. and Partec Ltd., dated as of
      November 12, 1998, filed as Exhibit 10.7 to the Registrant’s Second
      Amendment to the Registration Statement on Form S-1 filed on July 24, 2000
      (File No. 333-37402), and incorporated by reference.10.5!
    
    License
      Agreement between Opocrin S.p.A. and Keryx Biopharmaceuticals, Inc., dated
      September 25, 2002, filed as Exhibit 10.9 to the Registrant’s Quarterly
      Report on Form 10-Q for the quarter ended September 30, 2002 filed on
      November 12, 2002 (File No. 000-30929), and incorporated herein by
      reference.10.6
    
    Form
      of KRX-101 Scientific Advisory Board Agreement, filed as Exhibit 10.20 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 be
      reference.10.7
    
    Lease
      Agreement between RMPA Nechasim, Ltd. and Keryx (Israel) Ltd., dated as of
      December 21, 2000, filed as Exhibit 10.27 to the Registrant’s Annual
      Report on Form 10-K for the year ended December 31, 2000 filed on March
      30, 2001 (File No. 000-30929), and incorporated herein by reference.10.8
    
    Sub-lease
      Agreement between Keryx Biopharmaceuticals, Inc. and Zero Stage Capital,
      Inc., dated June 20, 2001, filed as Exhibit 10.34 to the Registrant’s
      Annual Report on Form 10-K for the year ended December 31, 2001 filed on
      March 26, 2002 (File No. 000-30929), and incorporated herein by reference.10.9†
    
    Employment
      Agreement between Ron Bentsur and Keryx Biopharmaceuticals, Inc., dated as
      of June 23, 2003, filed as Exhibit 10.1 to the Company’s Quarterly Report
      on Form 10-Q for the quarter ended June 30, 2003 filed on August 14, 2003
      (File No. 000-30929), and incorporated herein by reference.
   36
  10.10†
    
    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.10.11†
    
    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.10.12†
    
    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.10.13†
    
    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.10.14†
    
    Employment
      Agreement with I. Craig Henderson, M.D., dated January 1,2001,
      filed as Exhibit 10.31 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.10.15
    
    Sub-license
      Agreement dated October 13, 2000 between Procept, Inc. and AOI
      Pharmaceuticals, Inc.,
      filed as Exhibit 10.32 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.10.16
    
    Amendment
      to Sub-license agreement dated February 28, 2002 between AOI
      Pharmaceuticals, Inc. and Procept, Inc.,
      filed as Exhibit 10.33 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.10.17
    
    Patent
      License Agreement dated February 28, 2002 between Procept, Inc. and United
      State Public Health Services, as amended,
      filed as Exhibit 10.34 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.10.18
    
    Release
      Agreement dated February 28, 2002 among AOI Pharmaceuticals, Inc.,
      Procept, Inc., and United States Public Health Services,
      filed as Exhibit 10.35 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.10.19
    
    Comprehensive
      Release Agreement dated May 29, 2002 among AOI Pharmaceuticals, Inc.,
      Procept, Inc., United States Public Health Services and the University of
      Chicago,
      filed as Exhibit 10.36 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.10.20!
    
    Sub-license
      Agreement between Prescient NeuroPharma, Inc. and ACCESS Oncology, Inc.
      dated December 24,2001,
      filed as Exhibit 10.37 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.10.21!
    
    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.10.22!
    
    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.10.23
    
    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.10.24
    
    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.
   37
  21.1
    
    List
      of subsidiaries of Keryx Biopharmaceuticals, Inc.23.1
    
    Consent
      of KPMG LLP.24.1
    
    Power
      of Attorney of Director and Officers of Keryx Biopharmaceuticals, Inc.
      (included herein).31.1
    
    Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
      March 14, 2005.31.2
    
    Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
      March 14, 2005.32.1
    
    Certification
      of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated March 14,
      2005.32.2
    
    Certification
      of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated March 14,
      2005.
  
 !
    Confidential
      treatment has been granted with respect to the omitted portions of this
      exhibit.
  †
    Indicates
      management contract or compensatory plan or
arrangement.
 
 
  
   38
   **Keryx
Biopharmaceuticals, Inc. (A Development Stage Company)**
 **Consolidated
Financial Statements as of December 31, 2004**
 
  Contents
    PageReports
      of Independent Registered Public Accounting Firm
    F-1Consolidated
      Balance Sheets as of December 31, 2004 and 2003
    F-3Consolidated
      Statements of Operations for the years ended December 31, 2004, 2003 and
      2002, and the period from December 3, 1996 to December 31,
      2004
    F-4Consolidated
      Statements of Changes in Stockholders’ Equity for the years ended December
      31, 2004, 2003, and 2002, and the period from December 3, 1996 to December
      31, 2004
    F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2004, 2003 and
      2002, and the period from December 3, 1996 to December 31,
      2004
    F-10Notes
      to the Consolidated Financial Statements
    F-12
 
 
 
 
 
   
   **Keryx
Biopharmaceuticals, Inc. (A Development Stage Company)**
 **Consolidated
Financial Statements as of December 31, 2004**
 
 **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 sheets of Keryx
Biopharmaceuticals, Inc. and subsidiaries (the “Company”), a development stage
company, as of December 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the
years in the three-year period ended December 31, 2004, and for the period from
December 3, 1996 to December 31, 2004. 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, a development stage company, as of December 31, 2004 and
2003, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2004, and for the period from
December 3, 1996 to December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
March 14, 2005 expressed an unqualified opinion on management’s assessment of,
and the effective operation of, internal control over financial
reporting.
 
 
 /s/  KPMG
LLP
 
 New York,
New York
 March 14,
2005
 
  F-1
  **
 **Report
of Independent Registered Public Accounting Firm**
 
 To the
Board of Directors and Stockholders of
 Keryx
Biopharmaceuticals, Inc.:
 
 We have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting, that Keryx
Biopharmaceuticals, Inc. and subsidiaries (the “Company”),
a development stage company, maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the Company’s internal control
over financial reporting based on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
 
 A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with U.S.
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 
 In our
opinion, management’s assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2004, is fairly stated,
in all material respects, based on, criteria established in Internal
Control-Integrated Framework issued by the COSO. Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on criteria established
in Internal Control-Integrated Framework issued by COSO.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Keryx
Biopharmaceuticals, Inc. and subsidiaries as of December 31, 2004 and 2003, and
the related consolidated statements of operations, stockholders’ equity, and
cash flows for each of the years in the three-year period ended December 31,
2004, and for the period from December 3, 1996 to December 31, 2004, and our
report dated March 14, 2005 expressed an unqualified opinion on those
consolidated financial statements.
 
 /s/  KPMG
LLP
 New York,
New York
 March 14,
2005
  F-2
  
 **Keryx
Biopharmaceuticals, Inc. (A Development Stage Company)**
 **Consolidated
Balance Sheets as of December 31**
 
 (in
thousands, except share and per share amounts)
 
 **2004**
    
    **2003****Assets**Current
      assetsCash
      and cash equivalents
    
    $
    29,699
    
    $
    21,672Short-term
      investment securities
    
    
    20,035
    
    
    9,631Note
      and accrued interest receivable from related party
    
    
    --
    
    
    352Accrued
      interest receivable
    
    
    144
    
    
    111Other
      receivables and prepaid expenses
    
    
    622
    
    
    213Total
      current assets
    
    
    50,500
    
    
    31,979Property,
      plant and equipment, net
    
    
    145
    
    
    24Other
      assets (primarily intangible assets), net
    
    
    217
    
    
    220Total
      assets
    
    $
    50,862
    
    $
    32,223**Liabilities
      and stockholders’ equity**Current
      liabilitiesAccounts
      payable and accrued expenses
    
    $
    3,079
    
    $
    894Accrued
      compensation and related liabilities
    
    
    743
    
    
    103Deferred
      revenue
    
    
    140
    
    
    --Total
      current liabilities
    
    
    3,962
    
    
    997Contingent
      equity rights
    
    
    4,004
    
    
    --Other
      liabilities
    
    
    92
    
    
    --Total
      liabilities
    
    
    8,058
    
    
    997Commitments
      and contingencies (Note 11)Stockholders’
      equityCommon
      stock, $0.001 par value per share (60,000,000 and 40,000,000 shares
      authorized, 31,373,280 and 25,016,873 shares issued, 31,317,180 and
      24,960,773 shares outstanding at December 31, 2004, and 2003,
      respectively)
    
    
    31
    
    
    25Additional
      paid-in capital
    
    
    132,643
    
    
    86,042Treasury
      stock, at cost, 56,100 shares at December 31, 2004, and 2003,
      respectively
    
    
    (89
    )
    
    (89
    )Unearned
      compensation
    
    
    (2,228
    )
    
    (142
    )Deficit
      accumulated during the development stage
    
    
    (87,553
    )
    
    (54,610
    )Total
      stockholders’ equity
    
    
    42,804
    
    
    31,226Total
      liabilities and stockholders’ equity
    
    $
    50,862
    
    $
    32,223
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
 
  F-3
  **Keryx
Biopharmaceuticals, Inc. (A Development Stage Company)**
 **Consolidated
Statements of Operations for the Year Ended December 31**
 
 (in
thousands, except share and per share amounts)
 
 **2004**
    
    **2003**
    
    **2002**
    
    **Amounts
      accumulated during the********development****stage**Revenue:Service
      revenue
    
    $
    809
    
    $
    --
    
    $
    --
    
    $
    809Management
      fees from related party
    
    
    --
    
    
    --
    
    
    --
    
    
    300Total
      revenue
    
    
    809
    
    
    --
    
    
    --
    
    
    1,109Operating
      expenses:Cost
      of services
    
    
    835
    
    
    --
    
    
    --
    
    
    835Research
      and development:Non-cash
      compensation
    
    
    413
    
    
    (486
    )
    
    (1,382
    )
    
    7,140Non-cash
      acquired in-process research and development
    
    
    18,800
    
    
    --
    
    
    --
    
    
    18,800Other
      research and development
    
    
    9,805
    
    
    5,996
    
    
    9,523
    
    
    39,712Total
      research and development expenses
    
    
    29,018
    
    
    5,510
    
    
    8,141
    
    
    65,652General
      and administrative:Non-cash
      compensation
    
    
    1,087
    
    
    188
    
    
    (4
    )
    
    4,666Other
      general and administrative
    
    
    3,581
    
    
    3,684
    
    
    4,108
    
    
    21,670Total
      general and administrative expenses
    
    
    4,668
    
    
    3,872
    
    
    4,104
    
    
    26,336Total
      operating expenses
    
    
    34,521
    
    
    9,382
    
    
    12,245
    
    
    92,823Operating
      loss
    
    
    (33,712
    )
    
    (9,382
    )
    
    (12,245
    )
    
    (91,714
    )Interest
      and other income, net
    
    
    770
    
    
    247
    
    
    513
    
    
    4,652Net
      loss before income taxes
    
    
    (32,942
    )
    
    (9,135
    )
    
    (11,732
    )
    
    (87,062
    )Income
      taxes
    
    
    1
    
    
    (27
    )
    
    51
    
    
    491Net
      loss
    
    $
    (32,943
    )
    $
    (9,108
    )
    $
    (11,783
    )
    $
    (87,553
    )Basic
      and diluted loss per common share
    
    $
    (1.10
    )
    $
    (0.43
    )
    $
    (0.59
    )
    $
    (5.46
    )Weighted
      average shares used in computing basic and diluted net loss per common
      share
    
    
    30,053,647
    
    
    21,367,088
    
    
    19,897,939
    
    
    16,037,815
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
 
  F-4
  
 **Keryx
Biopharmaceuticals, Inc. (A Development Stage Company)**
 **Consolidated
Statements of Changes in Stockholders’ Equity**
 (in
thousands, except share amounts)
 
 
 **Series
      A convertible****preferred
      stock**
    
    **Common
      stock**
    
    **Additionalpaid-in**
      **capital****Shares**
    
    **Amount**
    
    **Shares**
    
    **Amount**Balance
      at December 31, 2001
    
    
    --
    
    $
    --
    
    
    19,846,694
    
    $
    19
    
    $
    74,025Changes
      during the year:Issuance
      of common stock to technology licensors for technology
    license
    
    
    --
    
    
    --
    
    
    48,491
    
    
    1
    
    
    358Purchase
      of common stock
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --Exercise
      of warrants
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --Exercise
      of options
    
    
    --
    
    
    --
    
    
    18,000
    
    
    --*
    
    
    2Compensation
      in respect of options and warrants granted to employees, directors and
      third-parties
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    (2,318
    )Net
      loss
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --Balance
      at December 31, 2002
    
    
    --
    
    $
    --
    
    
    19,913,185
    
    $
    20
    
    $
    72,067
 
 
 **Unearned**
      **compensation**
    
    **Deficit
      accumulated during the**
      **development**
      **stage****Treasury
      stock****Shares**
    
    **Amount**
    
    
    
    **Total**Balance
      at December 31, 2001
    
    
    --
    
    $
    --
    
    $
    (1,110
    )
    $
    (33,719
    )
    $
    39,215Changes
      during the year:Issuance
      of common stock to technology licensors for technology
    license
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    359Purchase
      of common stock
    
    
    46,300
    
    
    (77
    )
    
    --
    
    
    --
    
    
    (77
    )Exercise
      of warrants
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --Exercise
      of options
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    2Compensation
      in respect of options and warrants granted to employees, directors and
      third-parties
    
    
    --
    
    
    --
    
    
    932
    
    
    --
    
    
    (1,386
    )Net
      loss
    
    
    --
    
    
    --
    
    
    --
    
    
    (11,783
    )
    
    (11,783
    )Balance
      at December 31, 2002
    
    
    46,300
    
    $
    (77
    )
    $
    (178
    )
    $
    (45,502
    )
    $
    26,330
 
 *Amount less than one
thousand dollars.
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
 
  F-5
  **Keryx
Biopharmaceuticals, Inc. (A Development Stage Company)**
 **Consolidated
Statements of Changes in Stockholders’ Equity (continued)**
 
 (in
thousands, except share amounts)
 
 
 **Series
      A convertible**
      **preferred
      stock**
    
    **Common
      stock**
    
    **Additional
      paid-in**
      **capital****Shares**
    
    **Amount**
    
    **Shares**
    
    **Amount**Balance
      at December 31, 2002
    
    
    --
    
    $
    --
    
    
    19,913,185
    
    $
    20
    
    $
    72,067Changes
      during the year:Issuance
      of common stock in private placement (net of issuance expenses of
      $867)
    
    
    --
    
    
    --
    
    
    3,529,412
    
    
    3
    
    
    14,130Purchase
      of common stock
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --Exercise
      of options
    
    
    --
    
    
    --
    
    
    1,574,276
    
    
    2
    
    
    179Compensation
      in respect of options and warrants granted to employees, directors and
      third-parties
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    (334
    )Net
      loss
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --Balance
      at December 31, 2003
    
    
    --
    
    $
    --
    
    
    25,016,873
    
    $
    25
    
    $
    86,042
 
 
 **Treasury
      stock**
    
    **Unearned**
      **compensation**
    
    **Deficit
      accumulated during the development**
      **stage****Shares**
    
    **Amount**
    
    
    
    **Total**Balance
      at December 31, 2002
    
    
    46,300
    
    $
    (77
    )
    $
    (178
    )
    $
    (45,502
    )
    $
    26,330Changes
      during the year:Issuance
      of common stock in private placement (net of issuance expenses of
      $867)
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    14,133Purchase
      of common stock
    
    
    9,800
    
    
    (12
    )
    
    --
    
    
    --
    
    
    (12
    )Exercise
      of options
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    181Compensation
      in respect of options and warrants granted to employees, directors and
      third-parties
    
    
    --
    
    
    --
    
    
    36
    
    
    --
    
    
    (298
    )Net
      loss
    
    
    --
    
    
    --
    
    
    --
    
    
    (9,108
    )
    
    (9,108
    )Balance
      at December 31, 2003
    
    
    56,100
    
    $
    (89
    )
    $
    (142
    )
    $
    (54,610
    )
    $
    31,226
 
  The
accompanying notes are an integral part of the consolidated financial
statements.
 
 
  F-6
  **Keryx
Biopharmaceuticals, Inc. (A Development Stage Company)**
 **Consolidated
Statements of Changes in Stockholders’ Equity (continued)**
 
 (in
thousands, except share amounts)
 
 
 **Series
      A convertible**
      **preferred
      stock**
    
    **Common
      stock**
    
    **Additional
      paid-in**
      **capital****Shares**
    
    **Amount**
    
    **Shares**
    
    **Amount**Balance
      at December 31, 2003
    
    
    --
    
    $
    --
    
    
    25,016,873
    
    $
    25
    
    $
    86,042Changes
      during the year:Issuance
      of common stock in private placement (net of issuance expenses of
      $338)
    
    
    --
    
    
    --
    
    
    3,200,000
    
    
    3
    
    
    31,659Issuance
      of common stock in connection with acquisition
    
    
    --
    
    
    --
    
    
    623,145
    
    
    1
    
    
    6,324Exercise
      of warrants
    
    
    --
    
    
    --
    
    
    348,824
    
    
    --*
    
    
    2,093Exercise
      of options
    
    
    --
    
    
    --
    
    
    2,184,438
    
    
    2
    
    
    2,939Compensation
      in respect of options and warrants granted to employees, directors and
      third-parties
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    3,586Net
      loss
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --Balance
      at December 31, 2004
    
    
    --
    
    $
    --
    
    
    31,373,280
    
    $
    31
    
    $
    132,643
 
 
 **Treasury
      stock**
    
    **Unearned**
      **compensation**
    
    **Deficit
      accumulated during the development**
      **s****tage****Shares**
    
    **Amount**
    
    
    
    **Total**Balance
      at December 31, 2003
    
    
    56,100
    
    $
    (89
    )
    $
    (142
    )
    $
    (54,610
    )
    $
    31,226Changes
      during the year:Issuance
      of common stock in private placement (net of issuance expenses of
      $338)
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    31,662Issuance
      of common stock in connection with acquisition
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    6,325Exercise
      of warrants
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    2,093Exercise
      of options
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    2,941Compensation
      in respect of options and warrants granted to employees, directors and
      third-parties
    
    
    --
    
    
    --
    
    
    (2,086
    )
    
    --
    
    
    1,500Net
      loss
    
    
    --
    
    
    --
    
    
    --
    
    
    (32,943
    )
    
    (32,943
    )Balance
      at December 31, 2004
    
    
    56,100
    
    $
    (89
    )
    $
    (2,228
    )
    $
    (87,553
    )
    $
    42,804
 
 *Amount less than one
thousand dollars.
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
 
  F-7
  **Keryx
Biopharmaceuticals, Inc. (A Development Stage Company)**
 **Consolidated
Statements of Changes in Stockholders’ Equity (continued)**
 (in
thousands, except share amounts)
 
 
 **Series
      A convertible**
      **preferred
      stock**
    
    **Common
      stock**
    
    **Additional
      paid-in**
      **capital****Shares**
    
    **Amount**
    
    **Shares**
    
    **Amount****Amounts
      accumulated during the development stage(December 3, 1996 to December
      31, 2004):**Contributed
      capital
    
    
    --
    
    $
    --
    
    
    --
    
    $
    --
    
    $
    3,181Conversion
      of convertible notes of Partec into stock in Keryx
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    2,973Issuance
      of Series A convertible preferred stock to investors at $100 per share for
      cash (net of issuance expenses of $552)
    
    
    89,180
    
    
    --*
    
    
    --
    
    
    --
    
    
    8,338Issuance
      of Series A convertible preferred stock at $0.001 par value to note
      holders in exchange for note of predecessor
    
    
    29,465
    
    
    --*
    
    
    --
    
    
    --
    
    
    --Issuance
      of common stock to technology licensors for technology
    license
    
    
    --
    
    
    --
    
    
    1,256,797
    
    
    2
    
    
    358Issuance
      of common stock in private placement (net of issuance expenses of
      $1,205)
    
    
    --
    
    
    --
    
    
    6,729,412
    
    
    6
    
    
    45,789Issuance
      of common stock in connection with acquisition
    
    
    --
    
    
    --
    
    
    623,145
    
    
    1
    
    
    6,324Receipt
      on account of shares issued in prior years
    
    
    --
    
    
    --
    
    
    6,900,000
    
    
    7
    
    
    --Conversion
      of Series A convertible preferred stock to common stock
    
    
    (118,645
    )
    
    (--)*
    
    
    6,114,962
    
    
    6
    
    
    (6
    )Issuance
      of common stock in initial public offering, including exercise of
      overallotment (net of issuance expenses of $5,702)
    
    
    --
    
    
    --
    
    
    5,200,000
    
    
    5
    
    
    46,293Purchase
      of common stock
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --Exercise
      of warrants
    
    
    --
    
    
    --
    
    
    596,250
    
    
    --*
    
    
    2,104Exercise
      of options
    
    
    --
    
    
    --
    
    
    3,952,714
    
    
    4
    
    
    3,143Compensation
      in respect of options and warrants granted to employees, directors and
      third-parties
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    13,444Warrants
      of common stock issued to related party as finder’s fee in private
      placement
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    114Warrants
      for common stock issued to note holders in exchange for note of
      predecessor
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    588Net
      loss
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --Balance
      at December 31, 2004
    
    
    --
    
    $
    --
    
    
    31,373,280
    
    $
    31
    
    $
    132,643
 
 *Amount less than one
thousand dollars.
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
  F-8
  **Keryx
Biopharmaceuticals, Inc. (A Development Stage Company)**
 **Consolidated
Statements of Changes in Stockholders’ Equity (continued)**
 (in
thousands, except share amounts)
 **Treasury
      stock**
    
    **Unearned**
      **compensation**
    
    **Deficit
      accumulated during the development**
      **stage**
    
    **Total****Shares**
    
    **Amount****Amounts
      accumulated during the development stage(December 3, 1996 to December
      31, 2004):**Contributed
      capital
    
    
    --
    
    $
    --
    
    $
    --
    
    $
    --
    
    $
    3,181Conversion
      of convertible notes of Partec into stock in Keryx
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    2,973Issuance
      of Series A convertible preferred stock to investors at $100 per share for
      cash (net of issuance expenses of $552)
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    8,338Issuance
      of Series A convertible preferred stock at $0.001 par value to note
      holders in exchange for note of predecessor
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --*Issuance
      of common stock to technology licensors for technology
    license
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    360Issuance
      of common stock in private placement (net of issuance expenses of
      $1,205)
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    45,795Issuance
      of common stock in connection with acquisition
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    6,325Receipt
      on account of shares issued in prior years
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    7Conversion
      of Series A convertible preferred stock to common stock
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    (--)*Issuance
      of common stock in initial public offering, including exercise of
      overallotment (net of issuance expenses of $5,702)
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    46,298Purchase
      of common stock
    
    
    56,100
    
    
    (89
    )
    
    --
    
    
    --
    
    
    (89
    )Exercise
      of warrants
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    2,104Exercise
      of options
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    3,147Compensation
      in respect of options and warrants granted to employees, directors and
      third-parties
    
    
    --
    
    
    --
    
    
    (2,228
    )
    
    --
    
    
    11,216Warrants
      of common stock issued to related party as finder’s fee in private
      placement
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    114Warrants
      for common stock issued to note holders in exchange for note of
      predecessor
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    588Net
      loss
    
    
    --
    
    
    --
    
    
    --
    
    
    (87,553
    )
    
    (87,553
    )Balance
      at December 31, 2004
    
    
    56,100
    
    $
    (89
    )
    $
    (2,228
    )
    $
    (87,553
    )
    $
    42,804
 
 *Amount less than one
thousand dollars.
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
  F-9
  **Keryx
Biopharmaceuticals, Inc. (A Development Stage Company)**
 **Consolidated
Statements of Cash Flows for the Year Ended December 31**
 
 (in
thousands)
 
 **2004**
    
    **2003**
    
    **2002**
    
    **Amounts**
      **accumulated**
      **during
      the**
      **development**
      **stage**CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
    
    $
    (32,943
    )
    $
    (9,108
    )
    $
    (11,783
    )
    $
    (87,553
    )Adjustments
      to reconcile cash flows used in operating activities:Acquired
      in-process research and development
    
    
    18,800
    
    
    --
    
    
    --
    
    
    18,800Stock
      compensation expense (negative expense)
    
    
    1,500
    
    
    (298
    )
    
    (1,386
    )
    
    11,806Issuance
      of common stock to technology licensor
    
    
    --
    
    
    --
    
    
    359
    
    
    359Interest
      on convertible notes settled through issuance of preferred
      shares
    
    
    --
    
    
    --
    
    
    --
    
    
    253Depreciation
      and amortization
    
    
    155
    
    
    940
    
    
    953
    
    
    2,421Loss
      on disposal of property, plant and equipment
    
    
    --
    
    
    86
    
    
    56
    
    
    170Impairment
      charges
    
    
    --
    
    
    2,482
    
    
    --
    
    
    2,482Exchange
      rate differences
    
    
    (3
    )
    
    13
    
    
    26
    
    
    94Changes
      in assets and liabilities, net of effects of acquisitions:Decrease
      (increase) in other receivables and prepaid expenses
    
    
    (43
    )
    
    54
    
    
    198
    
    
    (251
    )Decrease
      (increase) in accrued interest receivable
    
    
    (33
    )
    
    95
    
    
    (3
    )
    
    (144
    )Changes
      in deferred tax provisions and valuation allowance
    
    
    --
    
    
    102
    
    
    13
    
    
    --Increase
      (decrease) in accounts payable and accrued expenses
    
    
    874
    
    
    22
    
    
    (750
    )
    
    1,766Increase
      (decrease) in income taxes payable
    
    
    --
    
    
    (177
    )
    
    (100
    )
    
    --Increase
      (decrease) in accrued compensation and related liabilities
    
    
    68
    
    
    (1,317
    )
    
    710
    
    
    171Increase
      (decrease) in liability in respect of employee severance
      obligations
    
    
    --
    
    
    (188
    )
    
    (578
    )
    
    --(Decrease)
      in other liabilities
    
    
    (63
    )
    
    --
    
    
    --
    
    
    (63
    )Increase
      (decrease) in deferred revenue
    
    
    (316
    )
    
    --
    
    
    --
    
    
    (316
    )Net
      cash used in operating activities
    
    
    (12,004
    )
    
    (7,294
    )
    
    (12,285
    )
    
    (50,005
    )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of property, plant and equipment
    
    
    (24
    )
    
    (3
    )
    
    (1,155
    )
    
    (4,427
    )Proceeds
      from disposals of property, plant and equipment
    
    
    --
    
    
    387
    
    
    37
    
    
    424Decrease
      (increase) in note and accrued interest receivable from related
      party
    
    
    (4
    )
    
    (352
    )
    
    --
    
    
    (356
    )Investment
      in other assets
    
    
    (8
    )
    
    (65
    )
    
    (99
    )
    
    (1,196
    )Proceeds
      from (additions to) deposits in respect of employee severance
      obligations
    
    
    --
    
    
    416
    
    
    (125
    )
    
    --Proceeds
      from sale and maturity of (investment in) held-to-maturity short-term
      securities
    
    
    (5,379
    )
    
    944
    
    
    3,733
    
    
    (15,010
    )Investment
      in available-for-sale short-term securities
    
    
    (6,025
    )
    
    
    
    
    
    
    
    (6,025
    )Proceeds
      from sale of available-for-sale short-term securities
    
    
    1,000
    
    
    --
    
    
    --
    
    
    1,000Net
      cash provided by (used in) investing activities
    
    
    (
      10,440
    )
    
    1,327
    
    
    2,391
    
    
    (25,590
    )
 
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
  F-10
  **Keryx
Biopharmaceuticals, Inc. (A Development Stage Company)**
 **Consolidated
Statements of Cash Flows for the Year Ended December 31
(continued)**
 (in
thousands)
 
 **2004**
    
    **2003**
    
    **2002**
    
    **Amounts**
      **accumulated**
      **during
      the**
      **development**
      **stage**CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from short-term loans
    
    $
    --
    
    $
    --
    
    $
    --
    
    $
    500Proceeds
      from long-term loans
    
    
    --
    
    
    --
    
    
    --
    
    
    3,251Payment
      of assumed notes payable and accrued interest in connection with the
      ACCESS Oncology acquisition
    
    
    (6,322
    )
    
    --
    
    
    --
    
    
    (6,322
    )Issuance
      of convertible note, net
    
    
    --
    
    
    --
    
    
    --
    
    
    2,150Issuance
      of preferred shares, net
    
    
    --
    
    
    --
    
    
    --
    
    
    8,453Receipts
      on account of shares previously issued
    
    
    --
    
    
    --
    
    
    --
    
    
    7Proceeds
      from initial public offering, net
    
    
    --
    
    
    --
    
    
    --
    
    
    46,298Proceeds
      from private placements, net
    
    
    31,662
    
    
    14,133
    
    
    --
    
    
    45,795Proceeds
      from exercise of options and warrants
    
    
    5,034
    
    
    181
    
    
    2
    
    
    5,251Purchase
      of treasury stock
    
    
    --
    
    
    (12
    )
    
    (77
    )
    
    (89
    )Net
      cash provided by (used in) financing activities
    
    
    30,374
    
    
    14,302
    
    
    (75
    )
    
    105,294Cash
      acquired in acquisition
    
    
    94
    
    
    --
    
    
    --
    
    
    94Effect
      of exchange rate on cash
    
    
    3
    
    
    (13
    )
    
    (26
    )
    
    (94
    )NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    8,027
    
    
    8,322
    
    
    (9,995
    )
    
    29,699Cash
      and cash equivalents at beginning of year
    
    
    21,672
    
    
    13,350
    
    
    23,345
    
    
    --CASH
      AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    29,699
    
    $
    21,672
    
    $
    13,350
    
    $
    29,699NON
      - CASH TRANSACTIONSIssuance
      of common stock in connection with acquisition
    
    $
    6,325
    
    $
    --
    
    $
    --
    
    $
    6,325Issuance
      of contingent equity rights in connection with acquisition
    
    
    4,004
    
    
    --
    
    
    --
    
    
    4,004Assumption
      of liabilities in connection with acquisition
    
    
    8,723
    
    
    --
    
    
    --
    
    
    8,723Conversion
      of short-term loans into contributed capital
    
    
    --
    
    
    --
    
    
    --
    
    
    500Conversion
      of long-term loans into contributed capital
    
    
    --
    
    
    --
    
    
    --
    
    
    2,681Conversion
      of long-term loans into convertible notes of Partec
    
    
    --
    
    
    --
    
    
    --
    
    
    570Conversion
      of convertible notes of Partec and accrued interest into stock in
      Keryx
    
    
    --
    
    
    --
    
    
    --
    
    
    2,973Issuance
      of warrants to related party as finder’s fee in private
      placement
    
    
    --
    
    
    --
    
    
    --
    
    
    114Declaration
      of stock dividend
    
    
    --
    
    
    --
    
    
    --
    
    
    3Purchase
      of property, plant and equipment and other assets on
credit
    
    
    --
    
    
    --
    
    
    47
    
    
    --SUPPLEMENTARY
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid for interest
    
    $
    1,026
    
    $
    1
    
    $
    --*
    
    $
    1,166Cash
      paid for income taxes
    
    $
    1
    
    $
    60
    
    $
    132
    
    $
    432
 
 * Amount
less than one thousand dollars.
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
  F-11
  **Keryx
Biopharmaceuticals, Inc. (A Development Stage Company)**
 **Notes
to the Consolidated Financial Statements**
 
 ****
 **NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES**
 
 **DESCRIPTION
OF BUSINESS**
 
 Keryx
Biopharmaceuticals, Inc. (“Keryx” or the “Company”) is a biopharmaceutical
company focused on the acquisition, development and commercialization of novel
pharmaceutical products for the treatment of life-threatening diseases,
including diabetes and cancer. The Company was incorporated in Delaware in
October 1998 (under the name Paramount Pharmaceuticals, Inc., which was later
changed to Lakaro Biopharmaceuticals, Inc. in November 1999, and finally to
Keryx Biopharmaceuticals, Inc. in January 2000). The Company commenced
activities in November 1999, and since then has operated in one segment of
operations, namely the development and commercialization of clinical compounds
and core technologies for the life sciences.
 
 Until
November 1999, most of the Company’s activities were carried out by Partec
Limited, an Israeli corporation formed in December 1996, and its subsidiaries
SignalSite Inc. (85% owned), SignalSite Israel Ltd. (wholly-owned), Vectagen
Inc. (87.25% owned) and Vectagen Israel Ltd. (wholly-owned) (hereinafter
collectively referred to as “Partec”). In November 1999, the Company acquired
substantially all of the assets and liabilities of Partec and, as of that date,
the activities formerly carried out by Partec were performed by the Company. On
the date of the acquisition, Keryx and Partec were entities under common control
(the controlling interest owned approximately 79.7% of Keryx and approximately
76% of Partec) and accordingly, the assets and liabilities were recorded at
their historical cost basis by means of an “as if” pooling, with Partec being
presented as a predecessor company. Consequently, these financial statements
include the activities performed in previous periods by Partec by aggregating
the relevant historical financial information with the financial statements of
the Company as if they had formed a discrete operation under common management
for the entire development stage.
 
 The
Company owns a 100% interest in each of ACCESS Oncology, Inc. and Neryx
Biopharmaceuticals, Inc., both U.S. corporations incorporated in the State of
Delaware, Keryx (Israel) Ltd., organized in Israel, Keryx Biomedical
Technologies Ltd., organized in Israel, and K.B.I. Biopharmaceuticals Ltd.,
organized in Israel. In 2003, the Company’s three subsidiaries in Israel ceased
operations and are currently in the process of being closed down. Substantially
all of the Company’s biopharmaceutical development and administrative activities
during 2004 and 2003 were conducted in the United States of America.
 
 On
February 5, 2004, the Company completed the acquisition of ACCESS Oncology, Inc.
and its subsidiaries (“ACCESS Oncology”). The transaction was structured as a
merger of AXO Acquisition Corp., a Delaware corporation and the Company’s
wholly-owned subsidiary, with and into ACCESS Oncology, with ACCESS Oncology
remaining as the surviving corporation and a wholly-owned subsidiary of the
Company. The transaction was accounted for under the purchase method of
accounting. See Note 6 - ACCESS Oncology Acquisition for additional information.
The assets and liabilities of ACCESS Oncology that the Company acquired and
assumed pursuant to the acquisition have been included in the Company’s
consolidated financial statements effective February 5, 2004.
 
 The
Company has not generated any revenues from its planned principal operations and
is dependent upon significant financing to provide the working capital necessary
to execute its business plan. If the Company determines it is necessary to seek
additional funding, there can be no assurance that the Company will be able to
obtain any such funding on terms that are acceptable to it, if at all.
 
 **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.
 
 **USE
OF ESTIMATES**
 
 The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and judgments that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the applicable reporting
period. Actual results could differ from those estimates. Such differences could
be material to the financial statements.
 
 F-12
  The
Company believes its application of accounting policies, and the estimates
inherently required therein, are reasonable. These accounting policies and
estimates are regularly reevaluated, and adjustments are made when facts and
circumstances dictate a change. Historically, the Company has found its
application of accounting policies to be appropriate, and actual results have
not differed materially from those determined using necessary
estimates.
 
 **FOREIGN
CURRENCY TRANSLATION**
 
 The
financial statements of the Israeli subsidiaries have been prepared using the
U.S. dollar as the functional currency. Transactions in foreign currency
(primarily in New Israeli Shekels - “NIS”) are recorded at the representative
exchange rate as of the transaction date, except for activities relating to
balance sheet items, which are recorded at the appropriate exchange rate of the
corresponding balance sheet item. Monetary assets and liabilities in foreign
currency are stated on the basis of the representative rate of exchange at the
balance sheet date. Non-monetary assets and liabilities in foreign currency are
stated at historical exchange rates. All exchange gains and losses from
remeasurement of monetary balance sheet items denominated in non-dollar
currencies are reflected in the statement of operations as they arise.
 
 **CASH
AND CASH EQUIVALENTS**
 
 The
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
 
 **INVESTMENT
SECURITIES**
 
 Investment
securities at December 31, 2004 and 2003 consist of short-term government,
auction notes and corporate debt securities. The Company classifies its
short-term debt securities as held-to-maturity, with the exception of auction
notes 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.
 
 A decline
in the market value of any held-to-maturity 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 earnings and a new cost basis for the
security is established. 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. Dividend and interest income are recognized
when earned.
 
 **NOTE
AND ACCRUED INTEREST RECEIVABLE**
 
 Note and
accrued interest receivable are recorded at contractual value plus accrued
interest. Note and accrued interest receivable related to a short-term
promissory note purchased from ACCESS Oncology, a related party and,
subsequently, a subsidiary of the Company. Upon the completion of the merger,
the promissory notes were assumed by the Company.
 
 **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)Office
      furniture and equipment
    
    
    3-7Computers,
      software and related equipment
    
    
    3
  
 F-13
 ****
 **INTANGIBLE
ASSETS**
 
 The
Company expenses patent costs as incurred. Historically, certain acquired
patents have been recorded at cost and are being amortized over a four-year
period. The Company continually evaluates whether events and circumstances
warrant the recognition of a reduction of carrying amounts.
 
 **REVENUE
RECOGNITION**
 
 Revenues
consist 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. Management fees accumulated
during the development stage arose from provision of management services to a
related company and were recognized ratably over the period for which the
services were provided.
 
 **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.
 
 **INCOME
TAXES**
 
 Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary and permanent differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income 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.
 
 **STOCK
- BASED COMPENSATION (IN THOUSANDS, EXCEPT SHARE AND PER SHARE
AMOUNTS)**
 
 The
Company applies the intrinsic value-based method of accounting prescribed by the
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”), and related interpretations, including FASB
Interpretation 44, “Accounting for Certain Transactions involving Stock
Compensation, an Interpretation of APB Opinion No. 25,” to account for its
fixed-plan stock options for employees and directors. Under this method,
compensation expense is recorded on the date of grant only if the current market
price of the underlying stock exceeded the exercise price. Statement of
Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based
Compensation” (“SFAS No. 123”) is applied to stock options and warrants granted
to persons other than employees and directors. The Company has adopted the
disclosure requirements of SFAS No. 123 and SFAS No. 148, “Accounting for
Stock-Based Compensation—Transition and Disclosure,” (“SFAS No. 148”) for awards
to its directors and employees.
 
 The
following is a pro forma unaudited presentation of reported net loss and net
loss per share, calculated to show adjusted values had the compensation expenses
for stock options granted under the Company’s stock option plans been determined
based on fair value at the grant dates consistent with the method of SFAS No.
123:
  
 F-14
 **For
      the year ended December 31**
    
    **Amounts
      accumulated during the development**(in
      thousands, except per share amounts)
    
    **2004**
    
    **2003**
    
    **2002**
    
    **stage**Net
      loss, as reported
    
    $
    (32,943
    )
    $
    (9,108
    )
    $
    (11,783
    )
    $
    (87,553
    )Add:
      Stock-based compensation expense to employees and directors determined
      under the intrinsic value-based method, as included in reported net
      loss
    
    
    687
    
    
    80
    
    
    104
    
    
    9,707Deduct:
      Stock-based compensation expense to employees and directors determined
      under fair value based method
    
    
    (3,770
    )
    
    (1,286
    )
    
    (1,282
    )
    
    (16,419
    )Pro
      forma net loss
    
    $
    (36,026
    )
    $
    (10,314
    )
    $
    (12,961
    )
    $
    (94,265
    )Basic
      and diluted loss per common share:As
      reported
    
    $
    (1.10
    )
    $
    (0.43
    )
    $
    (0.59
    )
    $
    (5.46
    )Pro
      forma
    
    $
    (1.20
    )
    $
    (0.48
    )
    $
    (0.65
    )
    $
    (5.88
    )
 
 The value
of these options has been estimated using the Black-Scholes model. The weighted
average fair market value of options granted during the year ended December 31,
2004, as of the date of the grant, was $4.38. The assumptions used in the
calculation of the fair value of options granted during the year ended December
31, 2004 were a weighted average expected term of 4.8 years, a weighted average
expected volatility rate of 84.24% and a weighted average risk-free interest
rate of 2.85%. The weighted average fair market value of options granted during
the year ended December 31, 2003, as of the date of the grant, was $0.93. The
assumptions used in the calculation of the fair value of options granted during
the year ended December 31, 2003 were a weighted average expected term of 4.0
years, a weighted average expected volatility rate of 82.74% and a weighted
average risk-free interest rate of 2.39%. The assumptions used in the
calculation of the fair value for compensation expense during the year ended
December 31, 2002 were a weighted average expected life of 1-4 years, an
expected volatility rate of 78.65-83.09% and a risk-free interest rate of
1.5%-3.5%.
 **NET
LOSS PER SHARE**
 
 Basic net
loss per share is computed by dividing the losses allocable to common
stockholders by the weighted average number of shares of common stock
outstanding for the period. Diluted net loss per share does not reflect the
effect of shares of common stock to be issued upon exercise of stock options and
warrants, as their inclusion would be anti-dilutive. The options and warrants
exercisable as of December 31, 2004, 2003 and 2002, which are not included in
the computation of net loss per share amounts, were 3,807,576, 3,510,230, and
4,466,612 , respectively.
 
 **IMPAIRMENT
OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF**
 
 The
Company accounts for impairment using the provisions of SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No.
144”). This Statement requires that long-lived assets subject to amortization be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future cash flows expected to be generated by the asset or used in
its disposal. If the carrying amount of an asset exceeds its estimated future
cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Assets to be
disposed of are separately presented in the balance sheet and reported at the
lower of the carrying amount or fair value less costs to sell, and are no longer
depreciated.
 
 **BUSINESS
ACQUISITIONS**
 
 The
Company accounts for acquired businesses using the purchase method of accounting
which requires that the assets acquired and liabilities assumed be recorded at
the date of acquisition at their respective fair values. Our 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.
 
 
 F-15
  The
acquisition of ACCESS Oncology (see Note 6 - ACCESS Oncology Acquisition)
resulted in negative goodwill. Since the negative goodwill was a result of not
recognizing contingent consideration (i.e., the contingent equity rights), the
lesser of the negative goodwill and the maximum value of the contingent equity
rights at the date of the acquisition was recorded as if it were a liability,
thereby eliminating the negative goodwill.
 
 **CONCENTRATIONS
OF CREDIT RISK**
 
 The
Company does not have significant off-balance-sheet risk or credit risk
concentrations. The Company maintains its cash and cash equivalents and
short-term investments with multiple financial institutions and invests in
investment-grade securities with maturities of less than twenty-four
months.
 
 **RECENTLY
ISSUED ACCOUNTING STANDARDS**
 
 In
December 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 123R, Share-Based Payment. SFAS 123R replaces SFAS 123, Stock-Based
Compensation, issued in 1995. SFAS 123R requires that the fair value of the
grant of employee stock options be reported as an expense. Historically, the
Company has disclosed in its footnotes the pro forma expense effect of stock
options granted under the Company’s stock option plans in Note 1, Organization
and Summary of Significant Accounting Policies: Stock-Based Compensation. The
Company plans to adopt SFAS 123R when required in the third quarter of 2005. The
estimated impact of adopting SFAS 123R will have a material impact on the
Company’s consolidated financial statements.
 
 **NOTE
2 - CASH AND CASH EQUIVALENTS**
 
 (in
      thousands)
    
    **December
      31, 2004**
    
    **December
      31, 2003**Money
      market funds
    
    $
    12,904
    
    $
    17,069Securities
      (original maturity less than 90 days)
    
    
    1,249
    
    
    --Checking
      and bank deposits
    
    
    15,546
    
    
    4,603Total
    
    
    29,699
    
    
    21,672
 
 F-16
 **NOTE
3 - INVESTMENT SECURITIES**
 
 The
following tables summarize the Company’s investment securities at December 31,
2004 and December 31, 2003 (regarding assumptions used for estimated fair value,
see “Note 8 - Fair Value of Financial Instruments.”):
 
 **December
      31,
      2004**(in
      thousands)
    
    **Amortized
      cost**
    
    **Gross**
      **unrealized**
      **holding
      gains**
    
    **Gross**
      **unrealized**
      **holding
      losses**
    
    **Estimated**
      **fair
      value**Short-term
      investments:Obligations
      of domestic governmental agencies (mature between February and September
      2005)
    
    $
    12,911
    
    $
    --
    
    $
    (66
    )
    $
    12,845Auction
      notes **
    
    
    5,025
    
    
    --
    
    
    --
    
    
    5,025US
      corporate debt securities (mature between January and April
      2005)
    
    
    2,099
    
    
    --*
    
    
    (2
    )
    
    2,097$
    20,035
    
    $
    --*
    
    $
    (68
    )
    $
    19,967
  **December
      31,
      2003**(in
      thousands)
    
    **Amortized
      cost**
    
    **Gross**
      **unrealized**
      **holding
      gains**
    
    **Gross**
      **unrealized**
      **holding
      losses**
    
    **Estimated**
      **fair
      value**Short-term
      investments:Obligations
      of domestic governmental agencies (mature between January and August
      2004)
    
    $
    5,535
    
    $
    3
    
    $
    --*
    
    $
    5,538US
      corporate debt securities (mature between January and June
      2004)
    
    
    4,096
    
    
    --
    
    
    (3
    )
    
    4,093$
    9,631
    
    $
    3
    
    $
    (3
    )
    $
    9,631
 *
    Amount
      less than one thousand dollars.
 **
    Amortized
      cost approximates fair value. Unrealized gains and losses are not
      material.
 
 **NOTE
4 - PROPERTY, PLANT AND EQUIPMENT**
 
 (in
      thousands)
    
    **December
      31, 2004**
    
    **December
      31, 2003**Office
      furniture and equipment
    
    $
    104
    
    $
    11Computers,
      software and related equipment
    
    
    158
    
    
    63262
    
    
    74Accumulated
      depreciation and amortization
    
    
    (117
    )
    
    (50
    )Net
      book value
    
    $
    145
    
    $
    24
 
 Depreciation
expense for the years ended December 31, 2004, 2003 and 2002 was approximately
$67,000, $841,000 and $893,000, respectively. The following table summarizes
depreciation expense for the years ended December 31, 2004, 2003 and 2002.
 
 **For
      the year ended December 31**(in
      thousands)
    
    **2004**
    
    **2003**
    
    **2002**Depreciation
      expense:Cost
      of services
    
    $
    7
    
    $
    --
    
    $
    --Research
      and development
    
    
    44
    
    
    188
    
    
    605General
      and administrative
    
    
    16
    
    
    653
    
    
    288Total
    
    $
    67
    
    $
    841
    
    $
    893
 
 During
2003, as part of the Company’s decision to vacate the Jerusalem facility, the
Company reevaluated and significantly shortened the useful life of the leasehold
improvements associated with its administrative facilities, resulting in
accelerated depreciation of approximately $561,000 for the year ended December
31, 2003. Following the accelerated depreciation, the leasehold improvements
were completely written off in 2003. In addition, as part of the 2003
restructuring, the Company recorded a non-cash impairment charge of
approximately $1,695,000 for the year ended December 31, 2003, of which
approximately $1,571,000 was included in research and development expenses and
approximately $124,000 was included in general and administrative expenses.
 
 F-17
 **NOTE
5 - OTHER ASSETS**
 
 (in
      thousands)
    
    **December
      31, 2004**
    
    **December
      31, 2003**Patents
      and other intangible assets
    
    $
    352
    
    $
    1,187Long-term
      deposits
    
    
    59
    
    
    --Deferred
      registration fees
    
    
    26
    
    
    --437
    
    
    1,187Impairment
      loss
    
    
    --
    
    
    (787
    )Accumulated
      patent amortization
    
    
    (220
    )
    
    (180
    )$
    217
    
    $
    220
 
 Amortization
expense for the years ended December 31, 2004, 2003 and 2002 was approximately
$88,000, $99,000 and $59,000, respectively. The Company expects amortization
expense for the years ended December 31, 2005, 2006 and 2007 to be approximately
$88,000, $44,000 and $0, respectively.
 
 As part
of the 2003 restructuring, the Company recorded a non-cash impairment charge of
approximately $787,000 for the year ended December 31, 2003, all of which was
included in research and development expenses.
 
 **NOTE
6** **-
ACCESS ONCOLOGY ACQUISITION**
 
 On
February 5, 2004, the Company acquired ACCESS Oncology, a related party, for a
purchase price of approximately $19,502,000, which included the Company’s
assumption of certain liabilities of ACCESS Oncology equal to approximately
$8,723,000, the issuance of shares of the Company’s common stock valued at
approximately $6,325,000, contingent equity rights valued at approximately
$4,004,000 and transaction costs of approximately $450,000.
 
 At the
effective time of the merger, each share of ACCESS Oncology common stock,
including shares issuable upon the exercise of options exercised before March 1,
2004, and upon the exercise of outstanding warrants, was converted into the
right to share in the contingent equity rights pro rata with such other holders
of ACCESS Oncology common stock. Pursuant to the merger agreement, 623,145
shares of the Company’s common stock valued at approximately $6,325,000 have
been issued to the preferred stockholders of ACCESS Oncology. An additional
4,433 shares of the Company’s common stock are issuable to those preferred
stockholders of ACCESS Oncology who have yet to provide the necessary
documentation to receive shares of the Company’s common stock.
 
 The
contingent equity rights will be paid upon the achievement of the following
milestones:
  ·
    500,000
      shares of the Company’s common stock upon enrollment of the first patient
      in a Keryx-sponsored Phase III (or other pivotal) clinical trial for any
      of the acquired ACCESS Oncology drug
candidates;
  ·
    750,000
      shares of the Company’s common stock upon the first new drug application
      acceptance by the Food and Drug Administration, or FDA, for any of the
      acquired ACCESS Oncology drug candidates;
  ·
    1,750,000
      shares of the Company’s common stock upon the first FDA approval of any of
      the acquired ACCESS Oncology drug candidates;
and
  ·
    372,422
      shares of the Company’s common stock following the first 12-month period
      that sales of all of the acquired ACCESS Oncology drug candidates combined
      exceeds $100 million.
  In no
event will the Company issue more than 4,000,000 shares of its common stock
pursuant to the merger agreement. These 4,000,000 shares include 627,578 shares
issued or issuable to date and any contingent shares as described above.
Accordingly, the amount of the Company’s common stock deliverable to the ACCESS
Oncology stockholders as milestone consideration will be no more than 3,372,422
shares of the Company’s common stock, which is the portion of the common stock
deliverable as contingent consideration pursuant to the merger agreement. The
Company’s stockholders approved the issuance of shares of its common stock
payable as contingent milestone consideration at the 2004 annual meeting of
stockholders, which took place on June 10, 2004.
 
 The
ACCESS Oncology acquisition has been accounted for as a purchase by the Company
under U.S. generally accepted accounting principles. Under the purchase method
of accounting, the assets and liabilities assumed from ACCESS Oncology are
recorded at the date of acquisition at their respective fair values. The
consolidated financial statements and reported results of operations of the
Company issued after completion of the acquisition will reflect these values but
will not be restated retroactively to reflect the historical financial position
or results of operations of ACCESS Oncology.
 
 
 F-18
 
 The
following represents the purchase price for ACCESS Oncology:
 
 (in
      thousands, except share and per share amounts)Assumed
      liabilities
    
    
    
    
    $
    8,723Number
      of shares of Keryx common stock issued
    
    
    623,145Multiplied
      by Keryx’s volume-adjusted weighted average closing price per share
      measured over the last seven trading days immediately preceding the
      closing
    
    $
    10.15
    
    
    6,325Contingent
      equity rights
    
    
    
    
    
    4,004Other
      transaction costs
    
    
    
    
    
    450Total
      purchase price
    
    
    
    
    $
    19,502
 
 The
excess of the net assets acquired over the purchase price represented negative
goodwill of approximately $4,004,000. Since the negative goodwill is a result of
not recognizing contingent consideration (i.e., the contingent equity rights),
the lesser of the negative goodwill ($4,004,000) and the maximum value of the
contingent equity rights at the date of the acquisition ($34,275,000) has been
recorded as a liability, thereby eliminating the negative goodwill. The value of
the contingent equity rights of $34,275,000 was based on the volume-adjusted
weighted average closing price per share of the Company’s common stock measured
over the last seven trading days immediately preceding the closing of the
acquisition ($10.15 per share) multiplied by 3,376,855 shares, which consist of
the sum of the unissued amount of the Company’s common stock deliverable to the
ACCESS Oncology stockholders as milestone consideration (3,372,422 shares) and
to those preferred stockholders of ACCESS Oncology who have yet to provide the
necessary documentation to receive shares of the Company’s common stock (4,433
shares).
 
 The
purchase price allocation, which is considered final, is based on an estimate of
the fair value of net assets acquired.
 
 (in
      thousands)Allocation
      of purchase price:Net
      assets acquired
    
    $
    725Adjusted
      for write-off of existing intangible assets
    
    
    23Net
      tangible assets acquired
    
    
    702Acquired
      in-process research and development charge
    
    
    18,800Purchase
      price
    
    $
    19,502
 
 As
required by FASB Interpretation No. 4, "Applicability of FASB Statement No. 2 to
Business Combinations Accounted for by the Purchase Method" ("FIN 4"), the
Company recorded a charge in 2004 of $18,800,000 for the portion of the purchase
price allocated to acquired in-process research and development.
 
 A
project-by-project valuation using the guidance in SFAS No. 141, "Business
Combinations" and the AICPA Practice Aid "Assets Acquired in a Business
Combination to Be Used In Research and Development Activities: A Focus on
Software, Electronic Devices and Pharmaceutical Industries" was performed with
the assistance of independent valuation specialists to determine the fair value
of research and development projects of ACCESS Oncology which were in-process,
but not yet completed.
 
 The fair
value was determined using the income approach on a project-by-project basis.
This method starts with a forecast of the expected future net cash flows. These
cash flows are then adjusted to present value by applying an appropriate
discount rate that reflects the project’s stage of completion and other risk
factors. These other risk factors can include the nature of the product, the
scientific data associated with the technology, the current patent situation and
market competition.
 
 The
forecast of future cash flows required the following assumptions to be
made:
  ·
    revenue
      that is likely to result from specific in-process research and development
      projects, including estimated patient populations, estimated selling
      prices, estimated market penetration and estimated market share and
      year-over-year growth rates over the product life
  cycles;
  F-19
   ·
    cost
      of sales related to the potential products using industry data or other
      sources of market data;
  ·
    sales
      and marketing expense using industry data or other sources of market
      data;
  ·
    general
      and administrative expenses; and
  ·
    research
      and development expenses.
  The
valuations are based on information that is available as of the acquisition date
and the expectations and assumptions that have been deemed reasonable by our
management. No assurance can be given, however, that the underlying assumptions
or events associated with such assets will occur as projected. For these
reasons, among others, the actual results may vary from the projected results.
 
 The
following unaudited pro forma financial information presents the combined
results of operations of the Company and ACCESS Oncology as if the acquisition
had occurred as of the beginning of the periods presented. The unaudited pro
forma financial information is not necessarily indicative of what the Company’s
consolidated results of operations actually would have been had it completed the
acquisition at the dates indicated. In addition, the unaudited pro forma
financial information does not purport to project the future results of
operations of the combined company.
 
 (in
      thousands, except per share amounts)
    
    **2004**
    
    **2003**Revenue
    
    $
    911
    
    $
    786Net
      loss
    
    $
    (14,086
    )
    $
    (12,113
    )Basic
      and diluted loss per common share
    
    $
    (0.47
    )
    $
    (0.55
    )
 
 The
unaudited pro forma financial information above reflects the elimination of
balances and transactions between the Company and ACCESS Oncology, which upon
completion of the merger would be considered intercompany balances and
transactions. The entries include the elimination of certain interest income and
expense and the elimination of the reimbursement of salaries and related
facility costs of two employees of ACCESS Oncology, both of which net to
zero.
 
 The
unaudited pro forma financial information above excludes the non-recurring,
non-cash charge of $18,800,000 related to acquired in-process research and
development in the year ended December 31, 2004.
 
  F-20
  **NOTE
7 - 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**
 
 In June
2004, the Company’s stockholders approved an amendment to the Company’s amended
and restated certificate of incorporation increasing by 20 million the number of
shares of authorized common stock to 60 million shares.
 
 In June
2004, the Company’s stockholders approved the delisting of the Company’s common
stock from the Alternative Investment Market of the London Stock Exchange, which
became effective on August 10, 2004.
 
 During
2004, the Company issued 623,145 shares of its common stock, valued at
approximately $6,325,000 million, to the preferred stockholders of ACCESS
Oncology, in connection with the Company’s merger with ACCESS Oncology, which
closed on February 5, 2004. 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. In addition, up to 3,372,422 shares of the Company’s common stock
are deliverable to the ACCESS Oncology stockholders as contingent milestone
consideration pursuant to the merger agreement. The Company’s stockholders
approved the issuance of shares of its common stock payable as contingent
milestone consideration in June 2004 (see Note 6 above).
 
 On
February 17, 2004, the Company completed a private placement of approximately
3.2 million shares of its common stock to institutional investors at $10.00 per
share. Total net proceeds of this private placement were approximately $31.7
million, net of offering expenses of approximately $0.3 million. In connection
with this private placement, the Company filed a Registration Statement on Form
S-3 (File No. 333-113654) on March 16, 2004, and Amendment No. 1 to the
Registration Statement on Form S-3/A on April 1, 2004, which was declared
effective by the SEC on May 3, 2004.
 
 On
November 20, 2003, the Company completed a private placement of approximately
3.5 million shares of its common stock together with warrants for the purchase
of an aggregate of 705,883 shares of its common stock at an exercise price of
$6.00 per share. Total proceeds of this private placement were approximately
$14.1 million, net of offering expenses of approximately $0.9 million. In
addition, the Company issued to the placement agent a warrant to purchase 50,000
shares of its common stock at an exercise price of $6.00. In connection with the
private placement, the Company filed a Registration Statement of Form S-3 (File
No. 333-111133) on December 12, 2003, and Amendment
No. 1 to the Registration Statement on Form S-3/A on December 19, 2003, which
was declared effective by the SEC  on
December 19, 2003.
 
 The
Company completed its initial public offering of 4.6 million shares of its
common stock at $10.00 per share pursuant to a Registration Statement on Form
S-1 (File No. 333-37402), which was effective on July 28, 2000. Additionally,
the underwriters exercised their over-allotment option and purchased an
additional 600,000 shares of the Company’s common stock, at $10.00 per share, on
August 30, 2000. Total proceeds of this offering, including the exercise of the
over-allotment option, were approximately $46.3 million, net of underwriting
fees and offering expenses of approximately $5.7 million.
 
 The
Company repurchased 9,800 shares of its common stock at an aggregate cost of
approximately $12,000 and 46,300 shares of its common stock at an aggregate cost
of approximately $77,000 during the years ended December 31, 2003 and 2002,
respectively, pursuant to the stock repurchase program approved by the Company’s
Board of Directors in November 2002. At December 31, 2003, the stock repurchase
program ended.
 
 During
2002, the Company issued a total of 48,491 unregistered shares of its common
stock with a weighted average fair value at grant date of approximately,
$359,000, or $7.40 per share, to third parties.
 
  F-21
  **STOCK
OPTION PLANS**
 
 The
Company has in effect the following stock option plans. Options granted
typically vest over a three to four year period.
 
 The
Company has in effect the following stock option plans.
 
 a.
    The
      “1999 Stock Option Plan” adopted in November 1999, pursuant to which 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 a term of no more than twenty-five (25) years
      from the date of the grant, unless authorized by the board. The plan is
      administered by the board of directors or a committee appointed by the
      Board, which 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.
 
 b.
    The
      “2000 Stock Option Plan” adopted in June 2000, pursuant to which the
      compensation committee of the Company’s board of directors could 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 a term
      of no more than 10 years from the date of the grant, unless authorized by
      the board.
 
 c.
    The
      “Non-Plan” adopted in February 2000, pursuant to which the Company’s board
      of directors granted options, which are not part of any plan, to
      non-employee directors of the Company to purchase up to 240,000 shares of
      authorized but unissued common stock. The options issued by the board of
      directors pursuant to the Non-Plan have a life of 10 years from the date
      of their grant.
 
 d.
    The
      “2002 CEO Incentive Stock Option Plan” adopted in December 2002, pursuant
      to which the Company’s board of directors granted an option to the
      newly-appointed Chief Executive Officer of the Company to purchase up to
      2,002,657 shares of authorized but unissued common stock. The option has a
      term of no more than 10 years plus one day from the date of the grant,
      unless otherwise authorized by the Company’s board of directors. The
      option granted to the newly appointed Chief Executive Officer was part of
      a total grant of options issued pursuant to the 1999 Stock Option Plan,
      the 2000 Stock Option Plan and the 2002 CEO Incentive Stock Option Plan,
      to purchase a total of 4,050,000 shares of the Company’s common stock. Of
      these options, one-third (or 1,350,000) vest over a three-year period and
      two-thirds (or 2,700,000) vest upon the earlier of the achievement of
      certain performance-based milestones or December 23, 2012. In addition, in
      the event of a merger, acquisition or other change of control or in the
      event that the Company terminates the Chief Executive Officer’s
      employment, either without cause or as a result of his death or
      disability, or he terminates his employment for good reason, the
      exercisability of any of the options described in this paragraph that are
      unexercisable at the time of such event or termination shall accelerate
      and the time period during which he shall be allowed to exercise such
      options shall be extended to the shorter of two years from the date of the
      termination of his employment or December 24, 2012. Additionally, the
      Company’s board of directors shall have the discretion to accelerate all
      or a portion of these options at any time.
 
 e.
    The
      “2004 President Incentive Stock Option Plan” adopted in February 2004,
      pursuant to which the Company’s board of directors granted an option to
      the newly-appointed President of the Company to purchase up to 1,000,000
      shares of authorized but unissued common stock. The option has a term of
      no more than 10 years plus one day from the date of the grant, unless
      otherwise authorized by the Company’s board of directors. The option
      granted to the newly appointed President was made pursuant to an
      employment following the acquisition of ACCESS Oncology, Inc. in February
      2004. Of these options, 166,667 vest over a three-year period and 833,333
      vest upon the earlier of the achievement of certain performance-based
      milestones or January 2, 2014. In addition, in the event of a merger,
      acquisition or other change of control or in the event that the Company
      terminates the President’s employment, either without cause or as a result
      of his death or disability, or he terminates his employment for good
      reason, the exercisability of any of the options described in this
      paragraph that are unexercisable at the time of such event or termination
      shall accelerate and the time period during which he shall be allowed to
      exercise such options shall be extended to the shorter of two years from
      the date of the termination of his employment or January 2, 2014.
      Additionally, the Company’s board of directors shall have the discretion
      to accelerate all or a portion of these options at any
time.
 
 
 F-22
  f.
    The
      “2004 Long-Term Incentive Plan” adopted in June 2004, pursuant to which
      the compensation committee of the Company’s board of directors could 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 a term
      of no more than 10 years from the date of their grant.
 
 The
following table summarizes stock options authorized by the Company as of
December 31, 2004.
 
 **Stock
      option plan**
    
    **Exercise**
      **price
      per**
      **share**
    
    **Authorized**
    
    **Outstanding**
    
    **Exercised**
    
    **Exercisable**
    
    **Available**
      **for
      grant**1999
      Stock Option Plan
    
    $
    0.10
      -   1.30
    
    
    4,230,000
    
    
    855,595
    
    
    3,329,405
    
    
    681,924
    
    
    --2000
      Stock Option Plan
    
    
    1.07
      - 19.00
    
    
    4,455,000
    
    
    2,963,869
    
    
    600,809
    
    
    1,662,658
    
    
    890,322Non
      Plan
    
    
    0.33
    
    
    240,000
    
    
    195,000
    
    
    22,500
    
    
    195,000
    
    
    22,5002002
      CEO Incentive Stock Option Plan
    
    
    1.30
    
    
    2,002,657
    
    
    2,002,657
    
    
    --
    
    
    1,001,329
    
    
    --2004
      President Incentive Plan
    
    
    4.59
    
    
    1,000,000
    
    
    1,000,000
    
    
    --
    
    
    166,667
    
    
    --2004
      Long-Term Incentive Plan
    
    
    1.92
      - 12.35
    
    
    4,000,000
    
    
    657,500
    
    
    --
    
    
    100,000
    
    
    3,342,500Totals
    
    
    
    
    
    15,927,657
    
    
    7,674,621
    
    
    3,952,714
    
    
    3,807,576
    
    
    4,255,322
 
 A summary
of the status of the Company’s stock options as of December 31, 2004, 2003,
2002, and changes during the years then ended is presented in the tables
below.
 
 **Outstanding
      stock options****Shares**
      **available**
    
    **Number**
      **of
      shares**
    
    **Weighted-**
      **average**
      **exercise
      price**Balance,
      December 31, 2001
    
    
    3,562,904
    
    
    5,186,096
    
    $
    1.76Authorized
    
    
    2,002,657Granted
    
    
    (4,398,884
    )
    
    4,398,884
    
    
    1.40Exercised
    
    
    --
    
    
    (18,000
    )
    
    0.10Canceled
    
    
    221,953
    
    
    (221,953
    )
    
    5.15Balance,
      December 31, 2002
    
    
    1,388,630
    
    
    9,345,027
    
    
    1.51Restatement
    
    
    (45,000
    )Authorized
    
    
    --Granted
    
    
    (1,005,000
    )
    
    1,005,000
    
    
    1.35Exercised
    
    
    --
    
    
    (1,574,276
    )
    
    0.12Canceled
    
    
    771,442
    
    
    (771,442
    )
    
    5.10Balance,
      December 31, 2003
    
    
    1,110,072
    
    
    8,004,309
    
    
    1.42Authorized
    
    
    5,000,000Granted
    
    
    (1,870,000
    )
    
    1,870,000
    
    
    6.42Exercised
    
    
    --
    
    
    (2,184,438
    )
    
    1.35Canceled
    
    
    15,250
    
    
    (15,250
    )
    
    8.15Balance,
      December 31, 2004
    
    
    4,255,322
    
    
    7,674,621
    
    
    2.64Exercisable
      at December 31, 2002
    
    
    
    
    
    4,466,612
    
    $
    1.12Exercisable
      at December 31, 2003
    
    
    
    
    
    3,510,230
    
    $
    1.54Exercisable
      at December 31, 2004
    
    
    
    
    
    3,807,576
    
    $
    1.75
 
  
 F-23
 **For
      the year ended December
      31****2004**
    
    **2003**
    
    **2002**Weighted-average
      fair value of options granted during the period at an exercise price equal
      to market price at issue date
    
    $
    4.37
    
    $
    0.83
    
    $
    1.02Weighted-average
      exercise price of options granted during the period at an exercise price
      equal to market price at issue date
    
    $
    6.42
    
    $
    1.35
    
    $
    1.38Weighted-average
      fair value of options granted during the period at an exercise price
      greater than market price at issue date
    
    
    N/A
    
    $
    2.46
    
    $
    1.48Weighted-average
      exercise price of options granted during the period at an exercise price
      greater than market price at issue date
    
    
    N/A
    
    $
    1.38
    
    $
    1.97
 
 During
2004, the compensation committee of the Company’s board of directors granted
options to purchase 1,870,000 shares of the Company’s common stock to the
Company’s employees, directors and consultants (including an option to purchase
1,000,000 shares granted to I. Craig Henderson, M.D., the Company’s President,
who joined the Company pursuant to the acquisition of ACCESS Oncology in
February 2004). In addition, options to purchase 150,000 shares of our common
stock that were contingently granted to two non-employee directors in June 2003
were issued under the 2004 Long-Term Incentive Plan which was approved, on June
10, 2004, at the 2004 annual meeting of stockholders.
 
 The
following table summarizes information about stock options outstanding at
December 31, 2004:
 
 **Options
      outstanding**
    
    **Options
      exercisable****Range
      of**
      **exercise
      prices**
    
    **Number**
      **outstanding**
    
    **Weighted-**
      **average**
      **remaining**
      **contractual**
      **life
      (years)**
    
    **Weighed-**
      **average**
      **exercise**
      **price**
    
    **Number**
      **exercisable**
    
    **Weighed-average**
      **exercise**
      **price**$
    0.10
    
    
    482,752
    
    
    14.4
    
    $
    0.10
    
    
    482,752
    
    $
    0.100.11
      -   0.50
    
    
    195,000
    
    
    5.0
    
    
    0.33
    
    
    195,000
    
    
    0.330.51
      -   3.00
    
    
    4,885,151
    
    
    8.1
    
    
    1.31
    
    
    2,679,627
    
    
    1.323.01
      -   5.75
    
    
    1,468,218
    
    
    8.8
    
    
    4.62
    
    
    304,885
    
    
    4.735.76
      - 10.00
    
    
    164,000
    
    
    8.6
    
    
    8.52
    
    
    50,500
    
    
    8.7010.01
      - 19.00
    
    
    479,500
    
    
    9.0
    
    
    11.62
    
    
    94,813
    
    
    11.897,674,621
    
    
    
    
    
    
    
    
    3,807,576
 
 At
December 31, 2004, 3,670,077 options issued to directors and employees and
282,637 options issued to consultants have been exercised. The terms of the
outstanding options at December 31, 2004 are as follows:
 
 **TO
DIRECTORS AND EMPLOYEES**
 
 **Options
      outstanding**
    
    **Options
      exercisable****Range
      of**
      **exercise
      prices**
    
    **Number**
      **outstanding**
    
    **Weighted-**
      **average**
      **remaining**
      **contractual**
      **life
      (years)**
    
    **Weighed-**
      **average**
      **exercise**
      **price**
    
    **Number**
      **exercisable**
    
    **Weighed-average**
      **exercise**
      **price**$
    0.10
    
    
    472,752
    
    
    14.3
    
    $
    0.10
    
    
    472,752
    
    $
    0.100.11
      -   0.50
    
    
    195,000
    
    
    5.0
    
    
    0.33
    
    
    195,000
    
    
    0.330.51
      -   3.00
    
    
    4,829,651
    
    
    8.1
    
    
    1.31
    
    
    2,637,847
    
    
    1.323.01
      -   5.75
    
    
    1,403,218
    
    
    8.8
    
    
    4.62
    
    
    298,025
    
    
    4.715.76
      - 10.00
    
    
    128,000
    
    
    8.5
    
    
    8.81
    
    
    37,000
    
    
    8.8010.01
      - 19.00
    
    
    367,000
    
    
    8.8
    
    
    11.87
    
    
    92,000
    
    
    11.927,395,621
    
    
    
    
    
    
    
    
    3,732,624
 
 As of
December 31, 2004, 3,733,333 options issued to directors and employees are
milestone-based.
 F-24
  **TO
CONSULTANTS**
 
 **Options
      outstanding**
    
    **Options
      exercisable****Range
      of**
      **exercise
      prices**
    
    **Number**
      **outstanding**
    
    **Weighted-**
      **average**
      **remaining**
      **contractual**
      **life
      (years)**
    
    **Weighed-**
      **average**
      **exercise**
      **price**
    
    **Number**
      **exercisable**
    
    **Weighed-average**
      **exercise**
      **price**$
    0.10
    
    
    10,000
    
    
    19.5
    
    $
    0.10
    
    
    10,000
    
    $
    0.100.11
      -   0.50
    
    
    --
    
    
    N/A
    
    
    N/A
    
    
    --
    
    
    N/A0.51
      -   3.00
    
    
    55,500
    
    
    8.5
    
    
    1.57
    
    
    41,780
    
    
    1.773.01
      -   5.75
    
    
    65,000
    
    
    9.0
    
    
    4.59
    
    
    6,860
    
    
    5.315.76
      - 10.00
    
    
    36,000
    
    
    8.9
    
    
    7.50
    
    
    13,500
    
    
    8.4310.01
      - 19.00
    
    
    112,500
    
    
    9.5
    
    
    10.80
    
    
    2,812
    
    
    10.77279,000
    
    
    
    
    
    
    
    
    74,952
 
 As of
December 31, 2004, 75,000 options issued to consultants are milestone-based.
 
 The
Company applies APB Opinion No. 25 in accounting for its options granted to
directors and employees. For the years ended December 31, 2004, 2003 and 2002,
the Company has recorded non-cash compensation expense of approximately
$667,000, $65,000 and $105,000, respectively.
 
 The
Company applies EITF 96-18 “Accounting for Equity Instruments that are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services,” in accounting for its options granted to consultants. For the years
ended December 31, 2004, 2003 and 2002, the Company recorded non-cash
compensation expense of approximately $833,000, $163,000 and a credit of
$132,000, respectively. Unvested options are revalued at every reporting period
and amortized over the vesting period in order to determine the compensation
expense. The value of these options has been estimated using the Black-Scholes
model under the assumptions stated above (see Note 1).
 
 **WARRANTS**
 
 A summary
of the status of the Company’s warrants issued as of December 31, 2004, 2003,
2002, and changes during the years then ended is presented in the tables
below.
 
 **Warrants**
    
    **Weighted-**
      **average**
      **exercise
      price**Balance,
      December 31, 2001
    
    
    544,801
    
    $
    0.42Issued
    
    
    500,000
    
    
    6.19Exercised
    
    
    --
    
    
    --Canceled
    
    
    --
    
    
    --Balance,
      December 31, 2002
    
    
    1,044,801
    
    
    3.18Issued
    
    
    755,883
    
    
    6.00Exercised
    
    
    --
    
    
    --Canceled
    
    
    (558,307
    )
    
    5.75Balance,
      December 31, 2003
    
    
    1,242,377
    
    
    3.74Issued
    
    
    --
    
    
    --Exercised
    
    
    (348,824
    )
    
    6.00Canceled
    
    
    (375,000
    )
    
    0.01Balance,
      December 31, 2004
    
    
    518,553
    
    $
    4.86
  
 F-25
 **For
      the year ended December 31****2004**
    
    **2003**
    
    **2002**Weighted-average
      fair value of warrants granted during the period at an exercise price
      equal to market price at issue date
    
    
    NA
    
    
    NA
    
    $
    2.33Weighted-average
      exercise price of warrants granted during the period at an exercise price
      equal to market price at issue date
    
    
    NA
    
    
    NA
    
    $
    6.19Weighted-average
      fair value of warrants granted during the period at an exercise price
      greater than market price at issue date
    
    
    NA
    
    $
    3.45
    
    
    NAWeighted-average
      exercise price of warrants granted during the period at an exercise price
      greater than market price at issue date
    
    
    NA
    
    $
    6.00
    
    
    NA
 
 As of
December 31, 2004, 596,246 warrants have been exercised and no warrants have
been cancelled as part of cashless exercises. The terms of outstanding warrants
as of December 31, 2004 are as follows:
 
 **Warrants
      outstanding**
    
    **Warrants
      exercisable****Range
      of**
      **exercise
      prices**
    
    **Number**
      **outstanding**
    
    **Weighted-**
      **average**
      **remaining**
      **contractual**
      **life
      (years)**
    
    **Weighed-**
      **average**
      **exercise**
      **price**
    
    **Number**
      **exercisable**
    
    **Weighed-average**
      **exercise**
      **price**$
    0.0067
      - 1.94
    
    
    111,494
    
    
    4.2
    
    $
    0.68
    
    
    111,494
    
    $
    0.686.00
    
    
    407,059
    
    
    4.0
    
    
    6.00
    
    
    407,059
    
    
    6.00518,553
    
    
    4.1
    
    $
    4.86
    
    
    518,553
    
    $
    4.86
 
 As part
of the private placement completed on November 20, 2003, the Company issued
warrants for the purchase of an aggregate of 705,883 shares of its common stock
at an exercise price of $6.00. In addition, the Company issued to the placement
agent in the transaction a warrant to purchase up to 50,000 shares of its common
stock at an exercise price of $6.00. At the time of grant, the fair market value
of each warrant was $3.46 per share. The warrants have a term of exercise of
five years. As of December 31, 2004, 348,824 warrants have been exercised by the
holders.
 
 The
Company applies EITF 96-18 in accounting for its warrants granted to
non-employees and non-directors. For the years ended December 31, 2004, 2003 and
2002, the Company recorded non-cash compensation expense of $0, a credit of
$527,000 and a credit of $1,358,000, respectively. Unvested warrants are
revalued at every reporting period and amortized over the vesting period in
order to determine the compensation expense.
 
 The value
of these warrants has been estimated using the Black-Scholes model. No warrants
were issued in 2004. The assumptions used in the calculation of the fair value
for compensation expense during the year ended December 31, 2003 were a weighted
average expected life of 5 years, an expected volatility rate of 84.80% and a
risk-free interest rate of 3.2%. The assumptions used in the calculation of the
fair value for compensation expense during the year ended December 31, 2002 were
a weighted average expected life of 0-3 years, an expected volatility rate of
78.65-83.09% and a risk-free interest rate of 1.5%-3.5%.
 
 
 
 F-26
 **NOTE
8 - FAIR VALUE OF FINANCIAL INSTRUMENTS**

The
Company’s financial instruments at December 31, 2004 and 2003 consisted of cash
and cash equivalents, investment securities, note and accrued interest
receivable, accrued interest receivable, other receivables, and accounts payable
and accrued expenses.
 
 The
carrying amounts of all the financial instruments noted above, except for
investment securities, approximate fair value for all years presented due to the
relatively short maturity of these instruments. The carrying amount for
investment securities (held to maturity) are based on the amortized cost for
these investments at the reporting date. The difference between the carrying
value and fair value of investment securities held-to-maturity is set forth in
Note 3 above. The carrying amount of available-for-sale investment securities
(auction notes) is based on cost, which approximates fair value due to the rate
re-pricing mechanism.
 
 **NOTE
9 - INCOME TAXES**
 
 As of
December 31, 2004, the Company has U.S. net operating loss carryforwards of
approximately $65.3 million which expire from 2019 through 2024. In addition, as
of the date of the acquisition, ACCESS Oncology had U.S. net operating loss
carryforwards of $14.9 million that start to expire in December 2019. Deferred
tax assets of Partec were lost upon assumption of operations by the Company (see
Note 1 - Organization and Summary of Significant Accounting Policies).
 
 The
Company has established a valuation allowance against its net deferred tax
assets due to the Company’s pre-tax losses and the resulting likelihood that the
deferred tax asset is not realizable. The valuation allowance for deferred tax
assets was $38.9 million and $19.8 million as of December 31, 2004 and 2003,
respectively. If the entire deferred tax asset were realized, $7.1 million would
be allocated to paid-in-capital related to the tax effect of compensation
deductions from the exercise of employee and consultant stock options. Due to
the Company’s various equity transactions, the utilization of certain tax loss
carryforwards is subject to annual limitations imposed by Internal Revenue Code
Section 382 relating to the change of control provision.
 
 In prior
periods, the Company’s wholly-owned Israeli subsidiaries had generated taxable
income in respect of services provided within the group, and therefore, the
Company believed in the past that its deferred tax assets relating to the
Israeli subsidiaries would be realized. With the cessation of operating
activities in Israel during 2003 and the resulting absence of taxable income
from the Israeli subsidiaries, the deferred tax asset was written off in
2003.
 
 In
September 2001, one of the Company’s Israeli subsidiaries received the status of
an “Approved Enterprise,” a status which grants certain tax benefits in Israel
in accordance with the “Law for the Encouragement of Capital Investments, 1959.”
Since inception, the Company’s Israeli subsidiary, which ceased operations in
2003, has received tax benefits in the form of exemptions of approximately
$744,000 as a result of our subsidiary’s status as an “Approved Enterprise.” As
part of the restructuring implemented during 2003 (see Note 12 - Restructuring),
the Company closed down its Jerusalem laboratory facility. In October 2003, the
subsidiary received a letter from the Israeli Ministry of Industry and Trade
that its Approved Enterprise status was cancelled as of July 2003 and that past
benefits would not need to be repaid. The Israeli tax authorities have yet to
confirm this position; however, the Company believes that, based on the letter
received from the Ministry of Industry and Trade, it is unlikely that past
benefits will need to be repaid, and therefore, the Company has not recorded any
charge with respect to this potential liability.
 
 The tax
expense reported in prior periods primarily related to the subsidiaries in
Israel. Income tax expense attributable to income from continuing operations was
$1,000, $(27,000) and $51,000, for the years ended December 31, 2004, 2003 and
2002, respectively, and differed from amounts computed by applying the US
federal income tax rate of 35% to pretax loss.
 
 **For
      the year ended December 31,**(in
      thousands)
    
    **2004**
    
    **2003**
    
    **2002**Losses
      before taxes on income, as reported in the consolidated statements of
      operations
    
    $
    (32,943
    )
    $
    (9,135
    )
    $
    (11,732
    )Computed
      “expected” tax benefit
    
    
    (11,530
    )
    
    (3,197
    )
    
    (4,106
    )Increase
      (decrease) in income taxes resulting from:Expected
      benefit from state & local taxes
    
    
    (2,853
    )
    
    (868
    )
    
    (1,115
    )Change
      in state and local effective tax rate
    
    
    --
    
    
    1,601
    
    
    --Permanent
      differences – IPR&D
    
    
    6,586
    
    
    1
    
    
    (107
    )Effect
      of foreign operations
    
    
    143
    
    
    901
    
    
    (581
    )Change
      in the balance of the valuation allowance for deferred tax assets
      allocated to income tax expense
    
    
    7,654
    
    
    1,535
    
    
    5,960$
    --
    
    $
    (27
    )
    $
    51
 
 
 
 F-27
 
 The
significant components of deferred income tax expense (benefit) attributable to
income from continuing operations are as follows:
 
 **For
      the year ended December 31,**(in
      thousands)
    
    **2004**
    
    **2003**
    
    **2002**Deferred
      tax benefit
    
    $
    (19,104
    )
    $
    (1,433
    )
    $
    (5,947
    )Federal
      deferred tax benefit relating to the exercise of stock
    options
    
    
    5,926
    
    
    --
    
    
    --Federal
      deferred tax benefit relating to ACCESS Oncology
    
    
    5,524
    
    
    --
    
    
    --Increase
      in the valuation allowance for deferred tax assets
    
    
    7,654
    
    
    1,535
    
    
    5,960$
    --
    
    $
    102
    
    $
    13
 
 The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2004 and 2003
are presented below.
 
 (in
      thousands)
    
    **December
      31, 2004**
    
    **December
      31, 2003**Deferred
      tax assets/(liabilities):Net
      operating loss carryforwards
    
    $
    26,903
    
    $
    12,083Net
      operating loss carryforwards (ACCESS Oncology)
    
    
    6,128
    
    
    --Non-cash
      compensation
    
    
    2,281
    
    
    4,250Research
      and development
    
    
    2,748
    
    
    3,128Depreciation
      and amortization
    
    
    538
    
    
    372Accrued
      compensation
    
    
    278
    
    
    --Other
      temporary differences
    
    
    68
    
    
    7Net
      deferred tax asset, excluding valuation allowance
    
    
    38,944
    
    
    19,840Less
      valuation allowance
    
    
    (38,944
    )
    
    (19,840
    )Net
      deferred tax assets
    
    $
    --
    
    $
    --
 
 **NOTE
10 - INTEREST AND OTHER INCOME, NET**
 
 The
components of interest and other income, net are as follows:
 
 (in
      thousands)
    
    **2004**
    
    **2003**
    
    **2002**Interest
      income
    
    $
    690
    
    $
    272
    
    $
    582Interest
      expense and other bank charges
    
    
    (27
    )
    
    (25
    )
    
    (69
    )Other
      income
    
    
    107
    
    
    --
    
    
    --$
    770
    
    $
    247
    
    $
    513
 
 In 2004,
other income consisted of a one-time payment of $107,000 from a related-party
service agreement that terminated in 2004.
 
 F-28
 
 **NOTE
11 - COMMITMENTS AND CONTINGENCIES**
 
 **Research
& Development Agreements**
 
 The
Company has entered into various research and development agreements (primarily
relating to our U.S.-based clinical program for KRX-101) under
which it is obligated to make payments of approximately $3,867,000 through
December 2006. The following table shows future research and development payment
obligations by period as of December 31, 2004.
 
 (in
      thousands)
    
    2005
    
    2006
    
    After
      2006Research and
      development agreements
    
    $
    3,235
    
    $
    632
    
    $
    --
 
 **Leases**
 
 The
Company leases its office space under lease agreements that expire through 2010. In
September 2004, the Company signed a new lease agreement in the
same building for its
corporate headquarters in New York City for approximately 11,700 square feet,
over a period of 5.5 years, at an average rent of approximately $542,000 per
year. The new lease will supersede the Company’s current lease, which will
expire upon its occupation of the new space.
 
 Total
rental expense was approximately $240,000, $614,000 and $511,000 for the years
ended December 31, 2004, 2003, and 2002, respectively. The Company is currently
evaluating various possibilities of leasing approximately 2,000 square feet of
space in the San Francisco, California area, to accommodate the Company’s
oncology group, which is currently based in San Francisco. The Company recorded
a $50,000 facility expense, in the year ended December 31, 2004, for the use of
the personal facility of the President of the Company for several Company
employees located in San Francisco. This amount is included in accounts payable
and accrued liabilities at December 31, 2004.
 
 Future
minimum lease commitments as of December 31, 2004 are approximately $3,021,000
through 2010. The following table shows future minimum lease commitments by
period as of December 31, 2004.
 
 (in
      thousands)
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    After
      2009Operating
      leases
    
    $
    237
    
    $
    597
    
    $
    596
    
    $
    597
    
    $
    596
    
    $
    398
 
 **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. In addition,
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 $62.4 million over the life of the licenses, of
which approximately $43.3 million will be due upon or following regulatory
approval of the drugs. In certain cases, such payments will reduce any royalties
due on sales of related products. In the event that the milestones are not
achieved, the Company remains obligated to pay one licensor $50,000 annually
until the license expires. As of
December 31, 2004, the Company has recorded a total of $1,200,000 in license and
milestone payments in regard to these license agreements.
 
 The
Company has also committed to pay to the former stockholders of ACCESS Oncology
certain contingent equity rights if its drug candidates meet development
milestones (see Note 6 -- Access Oncology Acquisition).
 
 In
addition, pursuant to an employment agreement, the Company’s Chief Executive
Officer is entitled to receive a one-time $2.0 million performance-based cash
bonus upon the achievement of a certain working capital or market capitalization
milestone event.
  
 F-29
 ****
 **NOTE
12 - RESTRUCTURING**
 
 In 2003,
the Company implemented and completed a strategic reorganization, which the
Company sometimes refers to as the “2003 restructuring.” As a result of this
reorganization the Company ceased all early-stage research and development
activities, ceased operations in its Jerusalem lab facility and completed the
disposition of its fixed assets in Israel. The 2003 restructuring included a
17-person reduction in the Company’s workforce, primarily in Israel. As part of
the 2003 restructuring, the Company reevaluated its long-lived assets in
accordance with SFAS No. 144 and recorded a non-cash impairment charge of
approximately $2,482,000 for the year ended December 31, 2003, of which
approximately $2,358,000 was included in research and development expenses and
approximately $124,000 was included in general and administrative expenses. The
impairment charge included a write-off of approximately $1,695,000 in fixed
assets and approximately $787,000 in intangible assets. In addition, with the
Company’s decision to vacate the Jerusalem facility, the Company reevaluated and
significantly shortened the useful life of the leasehold improvements associated
with its administrative facilities, resulting in accelerated depreciation of
approximately $561,000 for the year ended December 31, 2003. In addition, upon
vacating the facility in Jerusalem, the landlord of that facility claimed a bank
guarantee in the amount of approximately $222,000 that was previously provided
as security in connection with the lease agreement. At December 31, 2004 and
2003, respectively, there were no liabilities associated with the 2003
restructuring accrued for on the Company’s balance sheet.
 
 During
2002, the Company implemented a strategic reorganization, which was designed to
substantially reduce early stage research expenditures, which the Company
sometimes refers to as the “2002 restructuring.” The 2002 restructuring included
a 46-person reduction in the Company’s workforce, primarily in Israel. As part
of the restructuring, the Company took a charge in 2002 of approximately
$228,000, relating to severance not accrued as part of its ongoing accrual made
for employee severance benefits throughout the employment term in accordance
with Israeli law, approximately $79,000 of which was included in research and
development expenses and approximately $149,000 of which was included in general
and administrative expenses. As of December 31, 2003, approximately $82,000 in
severance obligations related to the 2002 restructuring was included in accrued
compensation and related liabilities and was subsequently paid during the first
quarter of 2004. At December 31, 2004, there were no liabilities associated with
the 2002 restructuring accrued for on the Company’s balance sheet. The following
table summarizes the activity with respect the Company’s liability in respect of
employee severance obligations as associated with the Company’s 2002
restructuring.
 
 (in
      thousands)
    
    **Balance
      at****December
      31, 2003**
    
    **Additional****accrual**
    
    **Severance
      paid**
    
    **Balance
      at****December
      31, 2004**Liability
      in respect of employee severance obligations
    
    $
    82
    
    $
    --
    
    $
    (82
    )
    $
    --
 
 The
following table summarizes restructuring expenses that were incurred by the
Company in 2003 and 2002 that were not part of the Company’s ongoing accrual for
employee severance benefits made throughout the employment term in accordance
with Israeli law. No restructuring expenses were incurred in 2004.
 
 (in
      thousands)
    
    **2004**
    
    **2003**
    
    **2002**Other
      research and development:Impairment
      charge
    
    $
    --
    
    $
    2,358
    
    $
    --Realization
      of bank guarantee in connection with lease agreement
    
    
    --
    
    
    144
    
    
    --Severance
      charge
    
    
    --
    
    
    4
    
    
    79Total
      other research and development
    
    
    --
    
    
    2,506
    
    
    79Other
      general and administrative:Impairment
      charge
    
    
    --
    
    
    124
    
    
    --Realization
      of bank guarantee in connection with lease agreement
    
    
    --
    
    
    78
    
    
    --Severance
      charge
    
    
    --
    
    
    --
    
    
    149Accelerated
      depreciation
    
    
    --
    
    
    561
    
    
    --Total
      other general and administrative
    
    
    --
    
    
    763
    
    
    149Total
    
    $
    --
    
    $
    3,269
    
    $
    228
 
 ****
 F-30
 ****
 **NOTE
13 - SUBSEQUENT EVENTS (UNAUDITED)**
 
 In
January 2005, the Company announced that the Collaborative Study Group (CSG)
recommended that it proceed to the Phase III portion of its Phase II/III
clinical program of KRX-101 for the treatment of diabetic nephropathy, as
planned. This recommendation was based on the completion, by an independent Data
Safety Monitoring Committee, or DSMC, on January 4, 2005, of a safety evaluation
of the first interim analysis from the approximately 150-patient, randomized,
double-blind, placebo-controlled Phase II clinical trial of KRX-101, and an
efficacy assessment of the same data set conducted by the CSG.
 
 Pursuant
to this recommendation, and subject to the Company’s successful finalization of
its clinical plan with the FDA, the Company expects to commence its pivotal
program, including both Phase III and Phase IV studies for KRX-101, in the first
half of 2005. The clinical plan to support an NDA for KRX-101 under Subpart H
(accelerated approval) as discussed with the FDA consists of: (i) a Phase III
trial in patients with microalbuminuria based on the surrogate marker of
regression of microalbuminuria; (ii) supportive data from previous clinical
studies; and (iii) substantial recruitment into the Company’s Phase IV
confirmatory study that will measure clinical outcomes in patients with overt
nephropathy, or macroalbuminuria. As part of the Company’s commitment to the
FDA, it plans to commence the Phase IV trial at approximately the same time as
the start of the Phase III trial.
 
 The
KRX-101 Phase II/III clinical program is being conducted by the CSG, the world’s
largest standing renal clinical trial group, whose execution of the ACE
Inhibition trial in Type 1 Diabetic Nephropathy and the trial of Irbesartan (an
A2 Receptor Blocker or ARB) in Type 2 Diabetic Nephropathy (I.D.N.T.) both led
to FDA approval and the recommendation of these agents as standards of care by
the American Diabetes Association.
 
  
    F-31
  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.
 
 **KERYX
      BIOPHARMACEUTICALS, INC.**Date: March 14,
2005
    By:
    /s/ Michael S. Weiss**Michael S.
      WeissChairman and Chief Executive
Officer**
  POWER OF
ATTORNEY
 
 KNOW ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints each of Michael S. Weiss and Ron Bentsur, 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 (including post-effective amendments)
to this registration statement, 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 14, 2005, and in the capacities indicated:
 
 **Signatures**
    
    **Title**/s/
      Michael S. Weiss
    
    Chairman
      and Chief Executive OfficerMichael
      S. Weiss
    
    (principal
      executive officer)/s/
      Ron Bentsur
    
    Vice
      President Finance and Investor RelationsRon
      Bentsur
    
    (principal
      financial and accounting officer)/s/
      I. Craig Henderson, M.D.
    
    President
      and DirectorI.
      Craig Henderson, M.D./s/
      Malcolm Hoenlein
    
    DirectorMalcolm
      Hoenlein/s/
      Lawrence Jay Kessel, M.D.
    
    DirectorLawrence
      Jay Kessel, M.D./s/
      Peter Salomon, M.D.
    
    DirectorPeter
      Salomon, M.D./s/
      Eric A. Rose, M.D.
    
    DirectorEric
      A. Rose, M.D./s/
      Lindsay A. Rosenwald, M.D.
    
    DirectorLindsay
      A. Rosenwald, M.D.
 
   
   **EXHIBIT
INDEX**
  21.1
    
    List
      of subsidiaries of Keryx Biopharmaceuticals, Inc.23.1
    
    Consent
      of KPMG LLP.24.1
    
    Power
      of Attorney of Director and Officers of Keryx Biopharmaceuticals, Inc.
      (included herein).31.1
    
    Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
      March 14, 2005.
 31.2
    
    Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
      March 14, 2005.32.1
    
    Certification
      of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated March 14,
      2005.32.2
    
    Certification
      of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated March 14,
      2005.