UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-Q





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


SECURITIES  EXCHANGE
ACT OF 1934





For
the quarterly period ended March 31, 2009





OR





o  TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For
the transition period from  to .





Commission
File Number 000-30929







KERYX
BIOPHARMACEUTICALS, INC.


(Exact
name of registrant as specified in its charter)





Delaware
                (State
      or other jurisdiction of incorporation or organization)
              13-4087132
                (I.R.S.
      Employer Identification No.)





750
Lexington Avenue


New
York, New York 10022


(Address
including zip code of principal executive offices)





(212)
531-5965


(Registrant's
telephone number, including area code)





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


YesxNo£





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


x
Yes          ̈
No





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





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





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


Yes£Nox





There
were 47,895,626 shares of the registrant’s common stock, $0.001 par value,
outstanding as of May 5, 2009.








KERYX
BIOPHARMACEUTICALS, INC.


FORM
10-Q


FOR
THE QUARTER ENDED MARCH 31, 2009





TABLE
OF CONTENTS





PageSPECIAL
      CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
                  3PART
      I
                  FINANCIAL
      INFORMATIONItem
      1
                  Financial
      Statements
                  4Consolidated
      Balance Sheets as of March 31, 2009 (unaudited) and December 31,
      2008
                  4Consolidated
      Statements of Operations for the three months ended March 31, 2009 and
      2008 (unaudited)
                  5Consolidated
      Statement of Changes in Stockholders’ Deficiency for the three months
      ended March 31, 2009 (unaudited)
                  6Consolidated
      Statements of Cash Flows for the three months ended March 31, 2009 and
      2008 (unaudited)
                  7Notes
      to Consolidated Financial Statements (unaudited)
                  8Item
      2
                  Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  18Item
      3
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  26Item
      4
                  Controls
      and Procedures
                  27PART
      II
                  OTHER
      INFORMATIONItem
      1
                  Legal
      Proceedings
                  27Item
      1A
                  Risk
      Factors
                  27Item
      6
                  Exhibits
                  39


2





SPECIAL
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS





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




·
            expectations
      for increases or decreases in
expenses;




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




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




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




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




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




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




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




·
            ability
      to continue as a going concern;




·
            expected
      losses; and




·
            expectations
      for future capital requirements.





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





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


3


PART
I. FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS





Keryx
Biopharmaceuticals, Inc.


Consolidated
Balance Sheets as of March 31, 2009 and December 31, 2008


(in
thousands, except share and per share amounts)





March 31, 2009
                    
                    
                    December 31, 2008(Unaudited)AssetsCurrent
      assets:Cash and cash
      equivalents
                    
                    $
                    13,096
                    
                    
                    $
                    13,143Short-term investment
      securities
                    
                    
                    2,300
                    
                    
                    
                    2,299Interest
    receivable
                    
                    
                    50
                    
                    
                    
                    25Other current
    assets
                    
                    
                    455
                    
                    
                    
                    508Total current
    assets
                    
                    
                    15,901
                    
                    
                    
                    15,975Long-term
      investment securities
                    
                    
                    7,117
                    
                    
                    
                    7,185Property,
      plant and equipment, net
                    
                    
                    157
                    
                    
                    
                    182Goodwill
                    
                    
                    3,208
                    
                    
                    
                    3,208Other
      assets, net
                    
                    
                    62
                    
                    
                    
                    84Total assets
                    
                    $
                    26,445
                    
                    
                    $
                    26,634Liabilities
      and stockholders’ deficiencyCurrent
      liabilities:Accounts payable and accrued
      expenses
                    
                    $
                    4,099
                    
                    
                    $
                    4,613Accrued compensation and related
      liabilities
                    
                    
                    143
                    
                    
                    
                    496Current portion of deferred
      revenue
                    
                    
                    1,464
                    
                    
                    
                    1,464Liabilities of discontinued
      operations
                    
                    
                    120
                    
                    
                    
                    120Total current
      liabilities
                    
                    
                    5,826
                    
                    
                    
                    6,693Deferred
      revenue, net of current portion
                    
                    
                    16,981
                    
                    
                    
                    17,308Contingent
      equity rights
                    
                    
                    4,004
                    
                    
                    
                    4,004Other
      liabilities
                    
                    
                    101
                    
                    
                    
                    118Total liabilities
                    
                    
                    26,912
                    
                    
                    
                    28,123Commitments
      and contingenciesStockholders’
      deficiency:Preferred
      stock, $0.001 par value per share (5,000,000 shares authorized, no shares
      issued and outstanding)
                    
                    
                    —
                    
                    
                    
                    —Common
      stock, $0.001 par value per share (95,000,000 shares authorized,
      47,880,459 and 47,729,507 shares issued, 47,800,511 and 47,649,559 shares
      outstanding at March 31, 2009 and December 31, 2008,
      respectively)
                    
                    
                    48
                    
                    
                    
                    48Additional
      paid-in capital
                    
                    
                    331,309
                    
                    
                    
                    330,738Treasury
      stock, at cost, 79,948 shares at March 31, 2009 and December 31, 2008,
      respectively
                    
                    
                    (357
                    )
                    
                    
                    (357
                    )Accumulated
      deficit
                    
                    
                    (331,467
                    )
                    
                    
                    (331,918
                    )Total stockholders’
      deficiency
                    
                    
                    (467
                    )
                    
                    
                    (1,489
                    )Total liabilities and
      stockholders’ deficiency
                    
                    $
                    26,445
                    
                    
                    $
                    26,634





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


4


Keryx
Biopharmaceuticals, Inc.


Consolidated
Statements of Operations


for the
three months ended March 31, 2009 and 2008 (Unaudited)


(in
thousands, except share and per share amounts)





Three
      months ended
                        March 31,2009
                      
                      
                      2008Revenue:License
      revenue
                      
                      $
                      3,327
                      
                      
                      $
                      199Service
      revenue
                      
                      
                      3
                      
                      
                      
                      —Total
      revenue
                      
                      
                      3,330
                      
                      
                      
                      199Operating
      expenses:Research
      and development:Non-cash
    compensation
                      
                      
                      201
                      
                      
                      
                      (980
                      )Other research and
      development
                      
                      
                      1,374
                      
                      
                      
                      30,827Total
      research and development
                      
                      
                      1,575
                      
                      
                      
                      29,847Selling,
      general and administrative:Non-cash
    compensation
                      
                      
                      370
                      
                      
                      
                      1,717Other selling, general and
      administrative
                      
                      
                      1,041
                      
                      
                      
                      1,887Total
      selling, general and administrative
                      
                      
                      1,411
                      
                      
                      
                      3,604Total
      operating expenses
                      
                      
                      2,986
                      
                      
                      
                      33,451Operating
      income (loss)
                      
                      
                      344
                      
                      
                      
                      (33,252
                      )Interest
      and other income (expense), net
                      
                      
                      107
                      
                      
                      
                      (1,203
                      )Income
      (loss) from continuing operations before income taxes
                      
                      
                      451
                      
                      
                      
                      (34,455
                      )Income
      taxes
                      
                      
                      —
                      
                      
                      
                      —Income
      (loss) from continuing operations
                      
                      
                      451
                      
                      
                      
                      (34,455
                      )Loss
      from discontinued operations
                      
                      
                      —
                      
                      
                      
                      (81
                      )Net
      income (loss)
                      
                      $
                      451
                      
                      
                      $
                      (34,536
                      )Basic
      net income (loss) per common share:Continuing
    operations
                      
                      $
                      0.01
                      
                      
                      $
                      (0.79
                      )Discontinued
      operations
                      
                      
                      —
                      
                      
                      
                      (—
                      )*Basic
      net income (loss) per common share
                      
                      $
                      0.01
                      
                      
                      $
                      (0.79
                      )Diluted
      net income (loss) per common share:Continuing
    operations
                      
                      $
                      0.01
                      
                      
                      $
                      (0.79
                      )Discontinued
      operations
                      
                      
                      —
                      
                      
                      
                      (—
                      )*Diluted
      net income (loss) per common share
                      
                      $
                      0.01
                      
                      
                      $
                      (0.79
                      )Weighted
      average shares used in computing basic net income (loss) per common
      share
                      
                      
                      47,853,895
                      
                      
                      
                      43,718,077Weighted
      average shares used in computing diluted net income (loss) per common
      share
                      
                      
                      48,050,220
                      
                      
                      
                      43,718,077





* Amount
less than one cent.





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


5


Keryx
Biopharmaceuticals, Inc.


Consolidated
Statement of Changes in Stockholders’ Deficiency


for the
three months ended March 31, 2009 (Unaudited)


(in
thousands, except share amounts)





Common stock
                
                
                Additional
                  paid-inShares
                
                
                Amount
                
                
                capitalBalance
      at December 31, 2008
                
                
                47,729,507
                
                
                $
                48
                
                
                $
                330,738Changes
      during the period:Issuance
      of restricted stock
                
                
                268,539
                
                
                
                —
                *
                
                
                —Forfeiture
      of restricted stock
                
                
                (117,587
                )
                
                
                (—
                )*
                
                
                —Compensation
      in respect of options and restricted stock granted to employees, directors
      and third-parties
                
                
                —
                
                
                
                —
                
                
                
                571Net
      income
                
                
                —
                
                
                
                —
                
                
                
                —Balance
      at March 31, 2009
                
                
                47,880,459
                
                
                $
                48
                
                
                $
                331,309





Treasury stock
                
                
                AccumulatedShares
                
                
                Amount
                
                
                Deficit
                
                
                TotalBalance
      at December 31, 2008
                
                
                79,948
                
                
                $
                (357
                )
                
                $
                (331,918
                )
                
                $
                (1,489
                )Changes
      during the period:Issuance
      of restricted stock
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                *Forfeiture
      of restricted stock
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (—
                )*Compensation
      in respect of options and restricted stock granted to employees, directors
      and third-parties
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                571Net
      income
                
                
                —
                
                
                
                —
                
                
                
                451
                
                
                
                451Balance
      at March 31, 2009
                
                
                79,948
                
                
                $
                (357
                )
                
                $
                (331,467
                )
                
                $
                (467
                )





* Amount
less than one thousand dollars.





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


6


Keryx
Biopharmaceuticals, Inc.


Consolidated
Statements of Cash Flows


for the
three months ended March 31, 2009 and 2008 (Unaudited)


(in
thousands)





Three
      months ended
                    March 31,2009
                  
                  
                  2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
                  
                  $
                  451
                  
                  
                  $
                  (34,536
                  )Loss
      from discontinued operations
                  
                  
                  —
                  
                  
                  
                  (81
                  )Net
      income (loss) from continuing operations
                  
                  
                  451
                  
                  
                  
                  (34,455
                  )Adjustments
      to reconcile income (loss) from continuing operations to cash flows used
      in operating activities in continuing operations:Stock
      compensation expense
                  
                  
                  571
                  
                  
                  
                  737Depreciation
      and amortization
                  
                  
                  25
                  
                  
                  
                  34Impairment
      of investment securities
                  
                  
                  68
                  
                  
                  
                  1,811Other
      impairment charges
                  
                  
                  —
                  
                  
                  
                  11,037Changes
      in assets and liabilities, net of effects of acquisitions:Decrease
      in other current assets
                  
                  
                  53
                  
                  
                  
                  14(Increase)
      in accrued interest receivable
                  
                  
                  (25
                  )
                  
                  
                  (180
                  )(Increase)
      in license receivable
                  
                  
                  —
                  
                  
                  
                  (8,000
                  )Decrease
      in security deposits
                  
                  
                  —
                  
                  
                  
                  241Decrease
      in other assets
                  
                  
                  22
                  
                  
                  
                  —(Decrease)
      in accounts payable and accrued expenses
                  
                  
                  (514
                  )
                  
                  
                  (2,327
                  )(Decrease)
      in accrued compensation and related liabilities
                  
                  
                  (353
                  )
                  
                  
                  (140
                  )(Decrease)
      in other liabilities
                  
                  
                  (17
                  )
                  
                  
                  (23
                  )(Decrease)
      increase in deferred revenue
                  
                  
                  (327
                  )
                  
                  
                  7,801Net
      cash used in operating activities in continuing operations
                  
                  
                  (46
                  )
                  
                  
                  (23,450
                  )Net
      cash used in operating activities in discontinued
    operations
                  
                  
                  —
                  
                  
                  
                  (100
                  )Net
      cash used in operating activities
                  
                  
                  (46
                  )
                  
                  
                  (23,550
                  )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of property, plant and equipment
                  
                  
                  —
                  
                  
                  
                  (163
                  )Investment
      in held-to-maturity short-term securities
                  
                  
                  (1
                  )
                  
                  
                  (21
                  )Proceeds
      from maturity of held-to-maturity short-term securities
                  
                  
                  —
                  
                  
                  
                  22Investment
      in available-for-sale short-term securities
                  
                  
                  —
                  
                  
                  
                  (12,000
                  )Proceeds
      from sale of available-for-sale short-term securities
                  
                  
                  —
                  
                  
                  
                  22,200Investment
      in held-to-maturity long-term securities
                  
                  
                  —
                  
                  
                  
                  (1
                  )Net
      cash (used in) provided by investing activities
                  
                  
                  (1
                  )
                  
                  
                  10,037CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from exercise of options and warrants
                  
                  $
                  —
                  
                  
                  $
                  222Net
      cash provided by financing activities
                  
                  
                  —
                  
                  
                  
                  222NET
      DECREASE IN CASH AND CASH EQUIVALENTS
                  
                  
                  (47
                  )
                  
                  
                  (13,291
                  )Cash
      and cash equivalents at beginning of period
                  
                  
                  13,143
                  
                  
                  
                  19,065CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                  
                  $
                  13,096
                  
                  
                  $
                  5,774





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


7


Keryx
Biopharmaceuticals, Inc.


Notes to
Consolidated Financial Statements (unaudited)


NOTE
1 - GENERAL





Basis
of Presentation





Keryx
Biopharmaceuticals, Inc. and subsidiaries (“Keryx” or the “Company”) is a
biopharmaceutical company focused on the acquisition, development and
commercialization of medically important, novel pharmaceutical products for the
treatment of life-threatening diseases, including renal disease and cancer. Most
of the Company's biopharmaceutical development and substantially all of its
administrative operations during the three months ending March 31, 2009 and 2008
were conducted in the United States of America.





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





The
Company has incurred substantial operating losses since its inception and,
except for the three months ended March 31, 2009, expects to continue to incur
operating losses for the foreseeable future and may never become profitable. As
of March 31, 2009, the Company has an accumulated deficit of $331.5 million and
a deficiency in equity of $0.5 million. The Company is dependent upon
significant financing to provide the working capital necessary to execute its
business plan. The Company has not yet commercialized any of its drug candidates
and cannot be sure if it will ever be able to do so. Even if the Company
commercializes one or more of its drug candidates, the Company may not become
profitable. The Company’s ability to achieve profitability depends on a number
of factors, including its ability to obtain regulatory approval for its drug
candidates, successfully complete any post-approval regulatory obligations and
successfully commercialize its drug candidates alone or in partnership. The
Company may continue to incur substantial operating losses even if it begins to
generate revenues from its drug candidates, if approved. The Company currently
anticipates that its cash, cash equivalents and investment securities as of
March 31, 2009, exclusive of its holdings in auction rate securities, are
sufficient to meet the Company’s anticipated working capital needs and fund its
business plan into the first quarter of 2010. However, if the Company is not
able to receive proceeds from some portion of its auction rate securities by the
first quarter of 2010, the Company may not have the ability to continue as a
going concern for any significant period beyond that point. The actual amount of
funds that the Company will need to operate is subject to many factors,
including the timing, design and conduct of clinical trials for the Company’s
drug candidates. The Company is evaluating market conditions to determine the
appropriate timing and extent to which it will seek to obtain additional debt,
equity or other type of financing. If the Company determines that it is
necessary to seek additional funding, there can be no assurance that it will be
able to obtain any such funding on terms that are acceptable to the Company, if
at all.





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





In
addition to the Company’s restructuring efforts in March 2008 (see Note 4 -
Restructuring), in an ongoing effort to further reduce costs, there have been
additional staff reductions through March 31, 2009. As of March 31, 2009, the
Company had 16 full and part-time employees.


8


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





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





On March
3, 2009, the Company received notice from The NASDAQ Stock Market indicating
that it had failed to regain compliance with NASDAQ Marketplace Rule 4310(c)(3).
Therefore, The NASDAQ Stock Market determined to delist the Company’s common
stock from the NASDAQ Capital Market unless the Company appealed the delisting
determination to a hearing. On March 9, 2009, the Company requested a hearing to
appeal the determination of The NASDAQ Stock Market to delist the Company’s
common stock to a NASDAQ Listings Qualification Panel (“Panel”), which
automatically stayed the delisting of the Company’s common stock pending
issuance of the Panel's decision. The hearing took place on April 30, 2009,
however, the Company has not received the Panel’s decision. At the Panel
hearing, the Company asked the Panel to provide it with additional time to
regain compliance with NASDAQ Marketplace Rule 4310(c)(3). There can be no
assurance that such a request will be granted or that the Panel will permit the
Company to continue to list its common stock on the NASDAQ Capital Market, or
that in the future the Company will meet the listing requirements of the NASDAQ
Capital Market, including, without limitation, bid price, stockholders’ equity
and/or market value of listed securities minimum requirements. Additionally, the
Company’s efforts to continue to meet the listing requirements may be limited by
current market conditions, including volatility in the market. If the Company’s
common stock is delisted from the NASDAQ Capital Market, there may be a limited
market for the Company’s stock, trading in the Company’s stock may become more
difficult and the Company’s share price could decrease even further. In
addition, if the Company’s common stock is delisted, the Company’s ability to
raise additional capital may be impaired.





Cash
and Cash Equivalents





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





Investment
Securities





The
Company records its investments as either held-to-maturity or
available-for-sale. Held-to-maturity investments are recorded at amortized cost.
Available-for-sale investment securities (which are comprised of auction rate
securities) are recorded at fair value. See Note 2 – Fair Value Measurements.
Other-than-temporary impairment charges are included in interest and other
income (expense), net.





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





(in thousands)
                      
                      March 31, 2009
                      
                      
                      December 31, 2008Short-term
      investment securities:Obligations
      of domestic governmental agencies (mature May 2009)
      (held-to-maturity)
                      
                      $
                      2,300
                      
                      
                      $
                      2,299Long-term
      investment securities:Auction
      rate securities (mature between 2037 and 2047) (available-for-sale)
      ($10.0 million par value)
                      
                      $
                      7,117
                      
                      
                      $
                      7,185





9




Revenue
Recognition





The
Company recognizes license revenue consistent with the provisions of Staff
Accounting Bulletin (“SAB”) No. 104 and Emerging Issues Task Force (“EITF”)
Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” The
Company analyzes each element of its licensing agreement to determine the
appropriate revenue recognition. The terms of the license agreement may include
payment to the Company of non-refundable up-front license fees, milestone
payments if specified objectives are achieved, and/or royalties on product
sales. The Company recognizes revenue from upfront payments over the period of
significant involvement under the related agreements unless the fee is in
exchange for products delivered or services rendered that represent the
culmination of a separate earnings process and no further performance obligation
exists under the contract. The Company recognizes milestone payments as revenue
upon the achievement of specified milestones only if (1) the milestone
payment is non-refundable, (2) substantive effort is involved in achieving
the milestone, (3) the amount of the milestone is reasonable in relation to
the effort expended or the risk associated with achievement of the milestone,
and (4) the milestone is at risk for both parties. If any of these
conditions are not met, the Company defers the milestone payment and recognizes
it as revenue over the estimated period of performance under the
contract.





Service
revenue consists of clinical trial management and site recruitment services.
Revenues generated from providing clinical trial management and site recruitment
services are recognized at the time such services are provided. Deferred revenue
is incurred when the Company receives a deposit or prepayment for services to be
performed at a later date.





Stock-Based
Compensation





The
Company adopted SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”) on
January 1, 2006 using the modified prospective transition method. SFAS No. 123R
requires all share-based payments to employees, and to non-employee directors as
compensation for service on the Board of Directors, to be recognized as
compensation expense in the consolidated financial statements based on the fair
values of such payments. Stock-based compensation expense recognized each period
is based on the value of the portion of share-based payment awards that is
ultimately expected to vest during the period. SFAS No. 123R requires
forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates.





The
Company accounts for equity instruments issued to third party service providers
(non-employees) in accordance with the fair value method prescribed by the
provisions of EITF Issue No. 96-18, “Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling
Goods or Services” (“EITF 96-18”).





Income
Taxes





The
Company has not recorded any income tax provision for the three months ended
March 31, 2009, since pursuant to the provisions of SFAS 109, “Accounting for
Income Taxes,” the Company has estimated that its estimated annual effective
income tax rate will be zero.


Basic
and Diluted Earnings (Loss) per Common Share





The
Company follows the provisions of SFAS 128, “Earnings per Share”. Basic net
earnings or loss per share is based upon the weighted average number of common
shares outstanding during the period. Diluted net income or loss per share is
based upon the weighted average number of common shares outstanding during the
period, plus the effect of additional weighted average common equivalent shares
outstanding during the period when the effect of adding such shares is dilutive.
Common equivalent shares result from the assumed exercise of outstanding stock
options and warrants (the proceeds of which are then assumed to have been used
to repurchase outstanding stock using the treasury stock method). In addition,
under SFAS No. 123R, the assumed proceeds under the treasury stock method
include the average unrecognized compensation expense of stock options that are
in-the-money. This results in the “assumed” buyback of additional shares,
thereby reducing the dilutive impact of stock options and warrants. Common
equivalent shares have not been included in the net loss per share calculations
for the three months ended March 31, 2008 because the effect of including
them would have been anti-dilutive. Total potential gross common equivalent
shares consisted of the following:


March 31, 2009Stock
      options
                    
                    
                    305,652Warrants
                    
                    
                    72,564Total
                    
                    
                    378,216




10




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





Three
      months ended
                      March 31,(in thousands, except share and per share
      amounts)
                    
                    2009
                    
                    
                    2008Basic:Income
      (loss) from continuing operations
                    
                    
                    451
                    
                    
                    
                    (34,455
                    )Loss
      from discontinued operations
                    
                    
                    —
                    
                    
                    
                    (81
                    )Net
      income (loss)
                    
                    $
                    451
                    
                    
                    $
                    (34,536
                    )Weighted
      average shares outstanding
                    
                    
                    47,853,895
                    
                    
                    
                    43,718,077Basic
      net income (loss) per common share:Continuing
    operations
                    
                    $
                    0.01
                    
                    
                    $
                    (0.79
                    )Discontinued
      operations
                    
                    
                    —
                    
                    
                    
                    (—
                    )*Basic
      net income (loss) per common share
                    
                    $
                    0.01
                    
                    
                    $
                    (0.79
                    )Diluted:Income
      (loss) from continuing operations
                    
                    
                    451
                    
                    
                    
                    (34,455
                    )Loss
      from discontinued operations
                    
                    
                    —
                    
                    
                    
                    (81
                    )Net
      income (loss)
                    
                    $
                    451
                    
                    
                    $
                    (34,536
                    )Weighted
      average shares outstanding
                    
                    
                    47,853,895
                    
                    
                    
                    43,718,077Effect
      of dilutive options and warrants
                    
                    
                    196,325
                    
                    
                    
                    —Weighted
      average shares outstanding assuming dilution
                    
                    
                    48,050,220
                    
                    
                    
                    43,718,077Diluted
      net income (loss) per common share:Continuing
    operations
                    
                    $
                    0.01
                    
                    
                    $
                    (0.79
                    )Discontinued
      operations
                    
                    
                    —
                    
                    
                    
                    (—
                    )*Diluted
      net income (loss) per common share
                    
                    $
                    0.01
                    
                    
                    $
                    (0.79
                    )





Comprehensive
Loss





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





Accounting
for Manufacturing Suite





The
Company spent approximately $11.3 million in capital expenditures building a
manufacturing suite for Sulonex. With the cessation of the Company’s development
of Sulonex in March 2008, the Company took an impairment charge of $11.0
million, which is included in other research and development expenses in the
three months ended March 31, 2008, to write the assets down to their fair value
of $300,000, the amount for which the assets were subsequently sold during 2008.
The sale of the assets offset a related payable and, therefore, cash was not
received by the Company. In addition, the Company recognized a $2.1 million
expense, which is included in other research and development expenses in the
three months ended March 31, 2008, for costs related to the required restoration
of the leased facility to its original condition. See Note 4 –
Restructuring.





Impairment
of Goodwill





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


11





NOTE
2 – FAIR VALUE MEASUREMENTS





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





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





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





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





As of
March 31, 2009, $7.1 million of the Company’s investment securities were auction
rate securities and represent interests in student loan-backed securities. The
auction rate securities are recorded at their fair value and classified as
long-term investments. Auction rate securities are structured to provide
liquidity through a Dutch auction process that resets the applicable interest
rate at pre-determined calendar intervals, generally every 28 days. This
mechanism has historically allowed existing investors either to rollover their
holdings, whereby they would continue to own their respective securities, or
liquidate their holdings by selling such securities at par. This auction process
has historically provided a liquid market for these securities; however, the
uncertainties in the credit markets have affected all of the Company’s holdings
in auction rate securities. Since February 2008, the auctions for the auction
rate securities held by the Company have not had sufficient buyers to cover
investors’ sell orders, resulting in unsuccessful auctions. When an auction is
unsuccessful, the interest rate is re-set to a level pre-determined by the loan
documents and remains in effect until the next auction date, at which time the
process repeats. While all but one of these investments were rated A or higher
at March 31, 2009, the Company is uncertain as to when, or if, the liquidity
issues relating to these investments will improve. The Company assessed the fair
value of its auction rate securities portfolio. As a result of this valuation
process, as described below, the Company recorded impairment charges totaling
$0.1 million and $1.8 million during the three months ended March 31, 2009 and
2008, respectively, for other-than-temporary declines in the value of its
auction rate securities. These other-than-temporary impairment charges were
included in interest and other income (expense), net. The estimated fair value
of the Company’s remaining auction rate securities is $7.1 million at March 31,
2009.





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


12





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





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





The
following table provides the fair value measurements of applicable Company
financial assets according to the fair value levels defined by SFAS No. 157 as
of March 31, 2009:





Financial
      assets at fair value
                        as
      of March 31, 2009(in thousands)
                      
                      Level 1
                      
                      
                      Level 2
                      
                      
                      Level 3Money
      market funds (1)
                      
                      $
                      12,892
                      
                      
                      $
                      —
                      
                      
                      $
                      —Short-term
      investment securities (held-to-maturity) (2)
                      
                      
                      2,300
                      
                      
                      
                      —
                      
                      
                      
                      —Auction
      rate securities (3)
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      7,117Total
                      
                      $
                      15,192
                      
                      
                      $
                      —
                      
                      
                      $
                      7,117


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


(2)
            Amortized
      cost approximates fair value.


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





The
following table summarizes the change in carrying value associated with Level 3
financial assets for the three months ended March 31, 2009:





(in thousands)
                      
                      Available-for-sale
                        long-term
                        investmentsBalance
      at January 1, 2009
                      
                      $
                      7,185Total
      impairment charges included in net loss
                      
                      
                      (68
                      )Balance
      at March 31, 2009
                      
                      $
                      7,117





NOTE
3 – STOCKHOLDERS' DEFICIENCY





Equity
Incentive Plans





The
following table summarizes stock option activity for the three months ended
March 31, 2009:





Number
                of shares
              
              
              Weighted-
                average
                exercise price
              
              
              Weighted-
                average
                Contractual
                Term
              
              
              Aggregate
                Intrinsic
                Value(in
      years)Outstanding
      at December 31, 2008
              
              
              9,114,459
              
              
              $
              7.19Granted
              
              
              —
              
              
              
              —Exercised
              
              
              —
              
              
              
              —
              
              
              
              
              
              $
              —Forfeited
              
              
              (88,942
              )
              
              
              6.38Expired
              
              
              —
              
              
              
              —Outstanding
      at March 31, 2009
              
              
              9,025,517
              
              
              $
              7.19
              
              
              
              5.4
              
              
              $
              12,226Vested
      and expected to vest at March 31, 2009
              
              
              9,000,825
              
              
              $
              7.18
              
              
              
              5.3
              
              
              $
              12,226Exercisable
      at March 31, 2009
              
              
              8,186,154
              
              
              $
              6.80
              
              
              
              5.1
              
              
              $
              12,226




13




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





Certain
employees and consultants have been awarded restricted stock under the 2004
Long-Term Incentive Plan and 2007 Incentive Plan. The restricted stock vests
primarily over a period of two to four years. The following table summarizes
restricted share activity for the three months ended March 31,
2009:





Number
      of
                  Shares
                
                
                Weighted
                  Average
                  Grant
      Date
                  Fair Value
                
                
                Aggregate
                  Intrinsic
                  ValueOutstanding
      at December 31, 2008
                
                
                3,982,572
                
                
                $
                0.36Granted
                
                
                268,539
                
                
                
                0.23Vested
                
                
                —
                
                
                
                —
                
                
                $
                —Forfeited
                
                
                (117,587
                )
                
                
                0.49Outstanding
      at March 31, 2009
                
                
                4,133,524
                
                
                $
                0.35
                
                
                $
                578,693





Shares
available for the issuance of stock options or other stock-based awards under
the Company’s stock option and incentive plans were 2,471,918 shares at March
31, 2009.





Warrants





Warrants
                
                
                Weighted-
                  average
                  exercise price
                
                
                Aggregate
                  Intrinsic
                  ValueOutstanding
      at December 31, 2008
                
                
                72,564
                
                
                $
                0.01Issued
                
                
                —
                
                
                
                —Exercised
                
                
                —
                
                
                
                —Canceled
                
                
                —
                
                
                
                —Outstanding
      at March 31, 2009
                
                
                72,564
                
                
                $
                0.01
                
                
                $
                9,673





Stock-Based
Compensation





The
Company incurred $571,000 and $737,000 of non-cash compensation expense related
to equity incentive grants during the three months ended March 31, 2009 and
2008, respectively. The fair value of stock options granted is estimated at the
date of grant using the Black-Scholes pricing model. The expected term of
options granted is derived from historical data and the expected vesting period.
Expected volatility is based on the historical volatility of the Company’s
common stock. The risk-free interest rate is based on the U.S. Treasury yield
for a period consistent with the expected term of the option in effect at the
time of the grant. The Company has assumed no expected dividend yield, as
dividends have never been paid to stock or option holders and will not be paid
for the foreseeable future.





There
were no options granted in the three months ended March 31, 2009.





Black-Scholes Option Valuation
      Assumptions
                  
                  Three months ended March
31,2009
                  
                  
                  2008Risk-free
      interest rates
                  
                  
                  —
                  
                  
                  
                  2.5%Dividend
      yield
                  
                  
                  —
                  
                  
                  
                  —Volatility
                  
                  
                  —
                  
                  
                  
                  65.0%Weighted-average
      expected term
                  
                  
                  —
                  
                  
                  5.0
      years




14




The
weighted average grant date fair value of options granted for the three months
ended March 31, 2008 was $3.10 per option. The Company used historical
information to estimate forfeitures within the valuation model. As of March 31,
2009, there was $3.1 million and $0.7 million of total unrecognized compensation
cost related to non-vested stock options and restricted stock, respectively,
which is expected to be recognized over weighted-average periods of 1.9 years
and 2.3 years, respectively. These amounts do not include, as of March 31, 2009,
175,000 and 1,800,000 options and restricted shares outstanding, respectively,
which are milestone-based and vest upon certain corporate milestones, such as
FDA approval of the Company’s drug candidates, market capitalization targets,
and change in control. Stock-based compensation will be measured and recorded if
and when a milestone occurs. Due to the termination of employment of the
Company’s chief executive officer on April 23, 2009, the 1,800,000
milestone-based restricted shares noted above shall vest and the associated
stock-based compensation will be recorded in the three months ended June 30,
2009 (see Note 8 – Subsequent Event).





NOTE
4 – RESTRUCTURING





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





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





The
following table summarizes restructuring costs that were provided for and/or
incurred by the Company during the comparable three months ended March 31,
2008:





Three
      months ended(in thousands)
                  
                  March 31, 2008Research
      and developmentImpairment
      of manufacturing facility
                  
                  $
                  11,037Manufacturing
      facility restoration provision
                  
                  
                  2,063Severance
                  
                  
                  624Non-cash
      compensation
                  
                  
                  (1,569
                  )Total
      research and development
                  
                  
                  12,155Selling,
      general and administrativeSeverance
                  
                  
                  99Total
      selling, general and administrative
                  
                  
                  99Total
      restructuring costs
                  
                  $
                  12,254





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





15




NOTE
5 - LICENSE AGREEMENT





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





An
upfront payment of $12.0 million, which was received in October 2007, is being
recognized as license revenue on a straight-line basis over the life of the
agreement, which is through the expiration of the last-to-expire patent covered
by the agreement in 2023, and represents the estimated period over which the
Company will have certain ongoing responsibilities under the sublicense
agreement. The Company recorded license revenue of approximately $194,000 and
$194,000 for the three months ended March 31, 2009 and 2008, respectively, and,
at March 31, 2009 and December 31, 2008, has deferred revenue of approximately
$10.8 million and $11.0 million, respectively, associated with this $12.0
million payment (approximately $774,000 of which has been classified as a
current liability at March 31, 2009 and December 31, 2008).





An
additional milestone payment of $8.0 million, for the achievement of certain
milestones reached in March 2008, was received in April 2008, and is being
recognized as license revenue on a straight-line basis over the life of the
agreement (as discussed above). The Company recorded license revenue of
approximately $133,000 and $5,000 for the three months ended March 31, 2009 and
2008, respectively, and, at March 31, 2009 and December 31, 2008, has deferred
revenue of approximately $7.5 million and $7.6 million, respectively, associated
with this $8.0 million payment (approximately $533,000 of which has been
classified as a current liability at March 31, 2009 and December 31,
2008).





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





The
Company may receive up to an additional $77.0 million in payments upon the
achievement of pre-specified milestones. In addition, upon commercialization, JT
and Torii will make royalty payments to the Company on net sales of ferric
citrate in Japan.





NOTE
6 – DISCONTINUED OPERATIONS





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





Summarized
selected financial information for discontinued operations are as
follows:





Three
      months ended
                    March 31, 2008(in thousands)Diagnostic
      revenue
                  
                  $
                  —Operating
      expenses:Cost
      of diagnostics sold
                  
                  
                  —Research
      and development
                  
                  
                  1Selling,
      general and administrative
                  
                  
                  80Total
      operating expenses
                  
                  
                  81Loss
      from discontinued operations
                  
                  $
                  (81
                  )


16




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


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





NOTE
7 – SEGMENT INFORMATION





The
Company has two reportable segments: Services and Products. The Services
business provides clinical trial management and site recruitment services to
other biotechnology and pharmaceutical companies. The Products business focuses
on the acquisition, development and commercialization of medically important,
novel pharmaceutical products for the treatment of life-threatening diseases,
including renal disease and cancer, and also includes license revenue, other
revenue and associated costs.





Segment
information for the three month periods were as follows:





RevenueThree Months Ended March
31,(in thousands)
                  
                  2009
                  
                  
                  2008Services
                  
                  $
                  3
                  
                  
                  $
                  —Products
                  
                  
                  3,327
                  
                  
                  
                  199Total
                  
                  $
                  3,330
                  
                  
                  $
                  199





Operating
      income (loss)Three months ended March
31,(in thousands)
                  
                  2009
                  
                  
                  2008Services
                  
                  $
                  3
                  
                  
                  $
                  —Products
                  
                  
                  341
                  
                  
                  
                  (33,252
                  )Total
                  
                  $
                  344
                  
                  
                  $
                  (33,252
                  )





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





Income
      (loss) from continuing operationsThree months ended March
31,(in thousands)
                
                2009
                
                
                2008Operating
      income (loss) of reportable segments
                
                $
                344
                
                
                $
                (33,252
                )Interest
      and other income (expense), net
                
                
                107
                
                
                
                (1,203
                )Income
      taxes
                
                
                —
                
                
                
                —Consolidated
      income (loss) from continuing operations
                
                $
                451
                
                
                $
                (34,455
                )





Assets
      (1)(in thousands)
                  
                  March 31, 2009
                  
                  
                  December 31, 2008Services
                  
                  $
                  —
                  
                  
                  $
                  —Products
                  
                  
                  3,882
                  
                  
                  
                  3,982Total
      assets of reportable segments
                  
                  
                  3,882
                  
                  
                  
                  3,982Cash,
      cash equivalents, interest receivable and investment
      securities
                  
                  
                  22,563
                  
                  
                  
                  22,652Consolidated
      total assets
                  
                  $
                  26,445
                  
                  
                  $
                  26,634


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




17


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





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





NOTE
8 – SUBSEQUENT EVENT





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





The
Employment Agreement provides that Mr. Weiss will be entitled to receive as
severance (i) a lump-sum payment equal to one year's base salary, payable after
a six-month delay, as required under Section 409A of the tax code, (ii) payment
of his salary during the 90 days following formal notice of termination of
employment, and (iii) a pro rata bonus for the year of termination, determined
with respect to the amount to which Mr. Weiss would have been entitled for the
year of termination (based upon the achievement of corporate goals and
objectives) if he had remained employed throughout the calendar year, payable at
the time bonuses are paid to other executives. In addition, under the terms of
the Employment Agreement, all of Mr. Weiss’ outstanding stock
options and shares of restricted stock will vest, and all stock options will
remain exercisable for two years following termination. In the second quarter of
2009, the Company will record approximately $541,000 of expense, in other
selling, general and administrative expenses, associated with the cash severance
and salary during the notice period (excluding a pro rata bonus, if any, which
is not determinable at this time), and approximately $660,000 in non-cash
compensation expense (selling, general and administrative) associated with the
vesting and extended time-to-exercise of Mr. Weiss’ outstanding stock options
and shares of restricted stock.





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





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





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





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





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





18




OVERVIEW




We are a
biopharmaceutical company focused on the acquisition, development and
commercialization of medically important, novel pharmaceutical products for the
treatment of life-threatening diseases, including renal disease and cancer. We
are developing ZerenexTM (ferric citrate), an oral, iron-based compound that has
the capacity to bind to phosphate and form non-absorbable complexes. Zerenex has
recently completed a Phase 2 clinical program as a treatment for
hyperphosphatemia (elevated phosphate levels) in patients with end-stage renal
disease, or ESRD. We are also developing KRX-0401 (perifosine), a novel,
potentially first-in-class, oral anti-cancer agent that modulates Akt, a protein
in the body associated with tumor survival and growth. KRX-0401 also modulates a
number of other key signal transduction pathways, including the JNK and MAPK
pathways, which are pathways associated with programmed cell death, cell growth,
cell differentiation and cell survival. KRX-0401 is currently in Phase 2
clinical development for multiple tumor types. We also actively engage in
business development activities that include seeking strategic relationships for
our product candidates and for our company, as well as evaluating compounds and
companies for in-licensing or acquisition. To date, we have not received
approval for the sale of any of our drug candidates in any market and,
therefore, have not generated any product sales from our drug candidates. We
have generated, and expect to continue to generate, revenue from the licensing
of rights to Zerenex in Japan to our Japanese partner, Japan Tobacco Inc. (“JT”)
and Torii Pharmaceutical Co., Ltd. (“Torii”).


The table
below summarizes the status of our product pipeline.





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





In March
2009, our Japanese partner, JT and Torii, informed us that they had initiated a
Phase 2 clinical study of Zerenex in Japan, which triggered a $3.0 million
non-refundable milestone payment which was received by us in March
2009.





General
Corporate





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





The
Employment Agreement provides that Mr. Weiss will be entitled to receive as
severance (i) a lump-sum payment equal to one year's base salary, payable after
a six-month delay, as required under Section 409A of the tax code, (ii) payment
of his salary during the 90 days following formal notice of termination of
employment, and (iii) a pro rata bonus for the year of termination, determined
with respect to the amount to which Mr. Weiss would have been entitled for the
year of termination (based upon the achievement of corporate goals and
objectives) if he had remained employed throughout the calendar year, payable at
the time bonuses are paid to other executives. In addition, under the terms of
Employment Agreement, all of Mr. Weiss’ outstanding stock
options and shares of restricted stock will vest, and all stock options will
remain exercisable for two years following termination. In the second quarter of
2009, we will record approximately $541,000 of expense, in other selling,
general and administrative expenses, associated with the cash severance and
salary during the notice period (excluding a pro rata bonus, if any, which is
not determinable at this time), and approximately $660,000 in non-cash
compensation expense (selling, general and administrative) associated with the
vesting and extended time-to-exercise of Mr. Weiss’ outstanding stock options
and shares of restricted stock.





On April
23, 2009, Michael P. Tarnok was appointed our Interim Chairman and Chief
Executive Officer. Mr. Tarnok has served on our Board of Directors since
September 2007.





Our major
sources of working capital have been proceeds from various private placements of
equity securities, option and warrant exercises, public offerings of our common
stock, interest income, and, beginning in 2007, from the upfront and milestone
payments from our Sublicense Agreement with JT and Torii and miscellaneous
payments from our other prior licensing activities. We have devoted
substantially all of our efforts to the identification, in-licensing,
development and partnering of drug candidates. We have incurred negative cash
flow from operations each year since our inception. We anticipate incurring
negative cash flows from operating activities for the foreseeable future. We
have spent, and expect to continue to spend, substantial amounts in connection
with implementing our business strategy, including our product development
efforts, our clinical trials, partnership and licensing
activities.


19





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





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





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





Our
research and development expenses consist primarily of salaries and related
personnel costs, fees paid to consultants and outside service providers for
clinical and laboratory development, facilities-related and other expenses
relating to the design, development, manufacture, testing, and enhancement of
our drug candidates and technologies, as well as expenses related to
in-licensing of new product candidates. We expense our research and development
costs as they are incurred.





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





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





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


20


RESULTS
OF OPERATIONS





Three
months ended March 31, 2009 and March 31, 2008





License Revenue. License
revenue increased by $3,128,000 to $3,327,000 for the three months ended March
31, 2009, as compared to $199,000 for the three months ended March 31, 2008.
During the three months ended March 31, 2009, we recognized $3.0 million in
license revenue from a milestone received from JT and Torii due to their
initiation of a Phase 2 clinical study of Zerenex in Japan. For the comparable
period, license revenue is related to the amortization of a portion of the
license fees of $12.0 million and milestone payments of $8.0 associated with our
sublicense agreement with JT and Torii. Such amounts were recognized as license
revenue on a straight-line basis over the life of the agreement, which is
through the expiration of the last-to-expire patent covered by the agreement in
2023, and represents the estimated period over which we will have certain
ongoing responsibilities under the sublicense agreement.





Service Revenue. Service
revenue increased by $3,000 to $3,000 for the three months ended March 31, 2009,
as compared to no service revenue for the three months ended March 31, 2008. We
do not expect our service revenue to have a material impact on our financial
results during the remainder of 2009.





Non-Cash Compensation Expense
(Research and Development). Non-cash compensation expense (research and
development) related to equity incentive grants increased by $1,181,000 to
$201,000 for the three months ended March 31, 2009, as compared to a credit of
$980,000 for the three months ended March 31, 2008. Non-cash compensation
expense in the three months ended March 31, 2008 included a $1,233,000 credit to
expense related to stock options and restricted stock issued to our former
President, who was terminated as part of the 2008 Restructuring.





Other Research and Development
Expenses. Other research and development expenses decreased by
$29,453,000 to $1,374,000 for the three months ended March 31, 2009, as compared
to $30,827,000 for the three months ended March 31, 2008. The decrease in other
research and development expenses was due primarily to a $25,894,000 million
reduction in expenses related to the cessation of the development of Sulonex in
March 2008. Included in the research and development expenses related to Sulonex
for the three months ended March 31, 2008 are an $11,037,000 impairment charge
related to the write-down of the assets of the Sulonex manufacturing suite to
their fair value following the cessation of our development of Sulonex, and a
$2,063,000 expense for costs relating to the required restoration of the leased
manufacturing facility to its original condition. For more information regarding
these expenses please see “Note 4 - Restructuring” above. In addition to the
$25,894,000 decrease in other research and development expenses related to
Sulonex discussed above, there were decreases of $2,671,000, and $344,000 in
expenses related to KRX-0401 and Zerenex, respectively, primarily due to
reductions in headcount and other expenses related to these development
programs.  We expect our other research and development costs to
increase for the remainder of 2009 due to our preparation for a Phase 3 clinical
program for one of our drug candidates.





Non-Cash Compensation Expense
(Selling, General and Administrative). Non-cash compensation expense
(selling, general and administrative) related to equity incentive grants
decreased by $1,347,000 to $370,000 for the three months ended March 31, 2009,
as compared to an expense of $1,717,000 for the three months ended March 31,
2008. The decrease was primarily due to a $1,157,000 decrease in non-cash
compensation expense associated with the completion of vesting of options
previously granted to our former chief executive officer. We expect our non-cash
compensation expense (selling, general and administrative) to increase in the
second quarter due to approximately $660,000 of non-cash expense related to the
termination of our chief executive officer on April 23, 2009.





Other Selling General and
Administrative Expenses. Other selling, general and administrative
expenses decreased by $846,000 to $1,041,000 for the three months ended March
31, 2009, as compared to an expense of $1,887,000 for the three months ended
March 31, 2008. The decrease was primarily related to a reduction of expenses as
a result of the 2008 Restructuring. We expect our other selling, general and
administrative costs to increase in the second quarter due to approximately
$541,000 of expense for severance and notice pay related to the termination of
our chief executive officer on April 23, 2009 (excluding a pro rata bonus, if
any, which is not determinable at this time).





Interest and Other Income (Expense),
Net. Interest and other income (expense), net, increased by $1,310,000 to
income of $107,000 for the three months ended March 31, 2009, as compared to an
expense of $1,203,000 for the three months ended March 31, 2008. For the three
months ended March 31, 2009 and 2008, we recorded an impairment charge of
$68,000 and $1,811,000, respectively, related to our investments in auction rate
securities. The increase in interest and other income (expense) was primarily
due to a reduced impairment charge associated with our auction rate securities
during the current period as compared to the comparable period last year, offset
by a lower level of invested funds as compared to the comparable period last
year.


21





LIQUIDITY
AND CAPITAL RESOURCES





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





As of
March 31, 2009, we had $15,446,000 in cash, cash equivalents, interest
receivable, and short-term investment securities, a decrease of $21,000 from
December 31, 2008. In addition, at March 31, 2009, we had $7,117,000 in
non-current auction rate securities, as discussed below. Cash used in operating
activities in continuing operations for the three months ended March 31, 2009
was $46,000, as compared to $23.6 million for the three months ended March 31,
2008. This decrease was due primarily to the cessation of the Sulonex program in
March 2008 and the 2008 Restructuring, partially offset by a $3.0 million
non-refundable milestone payment from JT and Torii associated with the
initiation of a Phase 2 trial for Zerenex in Japan.





For the
three months ended March 31, 2009, net cash used in investing activities of
$1,000 was primarily the result of the investment in short-term securities in
our investment portfolio. For the three months ended March 31, 2009, there was
no net cash provided by financing activities.





As of
March 31, 2009, $7.1 million of our investment securities were auction rate
securities and represent interests in student loan-backed securities. The
auction rate securities are recorded at their fair value and classified as
long-term investments. Auction rate securities are structured to provide
liquidity through a Dutch auction process that resets the applicable interest
rate at pre-determined calendar intervals, generally every 28 days. This
mechanism has historically allowed existing investors either to rollover their
holdings, whereby they would continue to own their respective securities, or
liquidate their holdings by selling such securities at par. This auction process
has historically provided a liquid market for these securities; however, the
uncertainties in the credit markets have affected all of our holdings in auction
rate securities. Since February 2008, the auctions for our auction rate
securities have not had sufficient buyers to cover investors’ sell orders,
resulting in unsuccessful auctions. When an auction is unsuccessful, the
interest rate is re-set to a level pre-determined by the loan documents and
remains in effect until the next auction date, at which time the process
repeats. While all but one of these investments were rated A or higher at March
31, 2009, we are uncertain as to when, or if, the liquidity issues relating to
these investments will improve. We assessed the fair value of our auction rate
securities portfolio. As a result of this valuation process, we recorded
impairment charges totaling $0.1 and $1.8 million during the three months ended
March 31, 2009 and 2008, respectively, for other-than-temporary declines in the
value of our auction rate securities. These other-than-temporary impairment
charges were included in interest and other income (expense), net. The estimated
fair value of our remaining auction rate securities is $7.1 million at March 31,
2009.





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





We have
incurred substantial operating losses since our inception and, except for the
three months ended March 31, 2009, expect to continue to incur operating losses
for the foreseeable future and may never become profitable. As of March 31,
2009, we have an accumulated deficit of $331.5 million and a deficiency in
equity of $0.5 million. We are dependent upon significant financing to provide
the working capital necessary to execute our business plan. We have not yet
commercialized any of our drug candidates and cannot be sure if we will ever be
able to do so. Even if we commercialize one or more of our drug candidates, we
may not become profitable. Our ability to achieve profitability depends on a
number of factors, including our ability to obtain regulatory approval for our
drug candidates, successfully complete any post-approval regulatory obligations
and successfully commercialize our drug candidates alone or in partnership. We
may continue to incur substantial operating losses even if we begin to generate
revenues from our drug candidates, if approved. We currently anticipate that our
cash, cash equivalents and investment securities as of March 31, 2009 are
sufficient to meet our anticipated working capital needs and fund our business
plan into the first quarter of 2010. However, if we are not able to receive
proceeds from some portion of our auction rate securities by the first quarter
of 2010, we may not have the ability to continue as a going concern for any
significant period beyond that point. The actual amount of funds that we will
need to operate is subject to many factors, including the timing, design and
conduct of clinical trials for our drug candidates. We are evaluating market
conditions to determine the appropriate timing and extent to which we will seek
to obtain additional debt, equity or other type of financing. If we determine
that it is necessary to seek additional funding, there can be no assurance that
we will be able to obtain any such funding on terms that are acceptable to us,
if at all.


22





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





OFF-BALANCE
SHEET ARRANGEMENTS





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





CRITICAL
ACCOUNTING POLICIES





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





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





Stock Compensation. We have
granted stock options and restricted stock to employees, directors and
consultants, as well as warrants to other third parties. In applying SFAS No.
123R to employee and director grants, the value of each option award is
estimated on the date of grant using the Black-Scholes option-pricing model. The
Black-Scholes model takes into account volatility in the price of our stock, the
risk-free interest rate, the estimated life of the option, the closing market
price of our stock and the exercise price. We base our estimates of our stock
price volatility on the historical volatility of our common stock and our
assessment of future volatility; however, these estimates are neither predictive
nor indicative of the future performance of our stock. For purposes of the
calculation, we assumed that no dividends would be paid during the life of the
options and warrants. The estimates utilized in the Black-Scholes calculation
involve inherent uncertainties and the application of management judgment. In
addition, we are required to estimate the expected forfeiture rate and only
recognize expense for those equity awards expected to vest. As a result, if
other assumptions had been used, our recorded stock-based compensation expense
could have been materially different from that reported.  In addition,
because some of the options and warrants issued to employees, consultants and
other third-parties vest upon the achievement of certain milestones, the total
expense is uncertain.


23


In
accordance with EITF 96-18, “Accounting for Equity Instruments that are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services,” total compensation expense for options and restricted stock issued to
consultants is determined at the “measurement date.” The expense is recognized
over the vesting period for the options and restricted stock. Until the
measurement date is reached, the total amount of compensation expense remains
uncertain. We record stock-based compensation expense based on the fair value of
the equity awards at the reporting date. These equity awards are then revalued,
or the total compensation is recalculated based on the then current fair value,
at each subsequent reporting date. This results in a change to the amount
previously recorded in respect of the equity award grant, and additional expense
or a reversal of expense may be recorded in subsequent periods based on changes
in the assumptions used to calculate fair value, such as changes in market
price, until the measurement date is reached and the compensation expense is
finalized.





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





Revenue Recognition.We
recognize license revenue consistent with the provisions of Staff Accounting
Bulletin (“SAB”) No. 104 and Emerging Issues Task Force (“EITF”) Issue
No. 00-21, “Revenue Arrangements with Multiple Deliverables.” We analyze
each element of our licensing agreement to determine the appropriate revenue
recognition. The terms of the license agreement may include payment to us of
non-refundable up-front license fees, milestone payments if specified objectives
are achieved, and/or royalties on product sales. We recognize revenue from
upfront payments over the period of significant involvement under the related
agreements unless the fee is in exchange for products delivered or services
rendered that represent the culmination of a separate earnings process and no
further performance obligation exists under the contract. We recognize milestone
payments as revenue upon the achievement of specified milestones only if
(1) the milestone payment is non-refundable, (2) substantive effort is
involved in achieving the milestone, (3) the amount of the milestone is
reasonable in relation to the effort expended or the risk associated with
achievement of the milestone, and (4) the milestone is at risk for both
parties. If any of these conditions are not met, we defer the milestone payment
and recognize it as revenue over the estimated period of performance under the
contract.





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





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





Accounting Related to
Goodwill. As of March 31, 2009, there was approximately $3.2 million of
goodwill on our consolidated balance sheet. SFAS No. 142, “Goodwill and Other
Intangible Assets,” or SFAS No. 142, addresses how intangible assets that are
acquired individually or with a group of other assets (but not those acquired in
a business combination) should be accounted for in financial statements upon
their acquisition. This statement also addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. SFAS No. 142 requires goodwill be tested
using a two-step process. The first step compares the fair value of the
reporting unit with the unit's carrying value, including goodwill. When the
carrying value of the reporting unit is greater than fair value, the unit’s
goodwill may be impaired, and the second step must be completed to measure the
amount of the goodwill impairment charge, if any. In the second step, the
implied fair value of the reporting unit’s goodwill is compared with the
carrying amount of the unit’s goodwill. If the carrying amount is greater than
the implied fair value, the carrying value of the goodwill must be written down
to its implied fair value.





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


24


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





We had
entered into a relationship with SPL, a U.S.-based contract manufacturer, for
Sulonex to build a larger scale manufacturing suite within their current
facility, which they would operate on our behalf. We spent approximately $11.3
million in capital expenditures building the suite. In accordance with the
guidance in SFAS No. 144, with the cessation of our development of Sulonex in
March 2008, we recognized an impairment charge of $11.0 million, which is
included in other research and development expenses in the three months ended
March 31, 2009, to write the assets down to their fair value of $300,000, the
amount for which the assets were sold during the three months ended June 30,
2008.





Impairment of Investment
Securities. As of March 31, 2009, $7.1 million of our investment
securities were auction rate securities and represent interests in student
loan-backed securities. The auction rate securities are recorded at their fair
value and classified as long-term investments. The uncertainties in the credit
markets have affected all of our holdings in auction rate securities. Since
February 2008, the auctions for our auction rate securities have not had
sufficient buyers to cover investors’ sell orders, resulting in unsuccessful
auctions. When an auction is unsuccessful, the interest rate is re-set to a
level pre-determined by the loan documents and remains in effect until the next
auction date, at which time the process repeats. While all but one of these
investments were rated A or higher at March 31, 2009, we are uncertain as to
when, or if, the liquidity issues relating to these investments will improve. We
assessed the fair value of our auction rate securities portfolio. As a result of
this valuation process, as described below, we recorded impairment charges
totaling $0.1 million and $1.8 million during the three months ended March 31,
2009 and 2008, respectively, for other-than-temporary declines in the value of
our auction rate securities. These other-than-temporary impairment charges were
included in interest and other income (expense), net.





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





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




25


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





Accounting For Income Taxes.
In preparing our consolidated financial statements, we are required to estimate
our income taxes in each of the jurisdictions in which we operate. This process
involves management estimation of our actual current tax exposure and assessment
of temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities. We must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income and, to the extent we believe that
recovery is not likely, we must establish a valuation allowance. To the extent
we establish a valuation allowance or increase this allowance in a period, we
must include an expense within the tax provision in the consolidated statement
of operations. Significant management judgment is required in determining our
provision for income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax assets. We have fully
offset our deferred tax assets with a valuation allowance. Our lack of earnings
history and the uncertainty surrounding our ability to generate taxable income
prior to the reversal or expiration of such deferred tax assets were the primary
factors considered by management in maintaining the valuation
allowance.





ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





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





As of
March 31, 2009, $7.1 million of our investment securities were auction rate
securities and represent interests in student loan-backed securities. The
auction rate securities are recorded at their fair value and classified as
long-term investments. The uncertainties in the credit markets have affected all
of our holdings in auction rate securities. Since February 2008, the auctions
for our auction rate securities have not had sufficient buyers to cover
investors’ sell orders, resulting in unsuccessful auctions. When an auction is
unsuccessful, the interest rate is re-set to a level pre-determined by the loan
documents and remains in effect until the next auction date, at which time the
process repeats. While all but one of these investments were rated A or higher
at March 31, 2009, we are uncertain as to when, or if, the liquidity issues
relating to these investments will improve. We will continue to attempt to sell
our auction rate securities until the auctions are successful. If uncertainties
in the credit and capital markets continue, these markets deteriorate further or
we experience any credit rating downgrades on the auction rate securities in our
portfolio, we may incur additional impairment charges with respect to our
auction rate securities portfolio, which could negatively affect our financial
condition, cash flow and reported earnings. We continue to monitor the fair
value of our auction rate securities and relevant market conditions and will
recognize additional impairment charges if future circumstances warrant such
charges.





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


26


ITEM
4. CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





As of
March 31, 2009, management carried out, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer, an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act). Our disclosure controls and procedures are designed to provide
reasonable assurance that information we are required to disclose in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in applicable rules and forms.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of March 31, 2009, our disclosure controls and
procedures were effective.





Internal
Control Over Financial Reporting





There
were no changes in our internal control over financial reporting during the
quarter ended March 31, 2009, that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.





PART
II. OTHER INFORMATION





ITEM
1.  LEGAL PROCEEDINGS





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





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





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





ITEM
1A. RISK FACTORS





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




27


Risks Related to Our
Business





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





We have a
limited operating history. You should consider our prospects in light of the
risks and difficulties frequently encountered by early stage companies. In
addition, we have incurred substantial operating losses since our inception and
expect to continue to incur operating losses for the foreseeable future and may
never become profitable. As of March 31, 2009, we had an accumulated deficit of
approximately $331.5 million and a deficiency in equity of $0.5 million. As we
continue our research and development efforts, we will incur increasing losses.
We may continue to incur substantial operating losses even if we begin to
generate revenues from our drug candidates.





We have
not yet commercialized any of our drug candidates and cannot be sure we will
ever be able to do so. Even if we commercialize one or more of our drug
candidates, we may not become profitable. Our ability to achieve profitability
depends on a number of factors, including our ability to complete our
development efforts, obtain regulatory approval for our drug candidates,
successfully complete any post-approval regulatory obligations and successfully
commercialize our drug candidates.





Risks Associated with Our
Product Development Efforts





If
we are unable to successfully complete our clinical trial programs, or if such
clinical trials take longer to complete than we project, our ability to execute
our current business strategy will be adversely affected.





Whether
or not and how quickly we complete clinical trials is dependent in part upon the
rate at which we are able to engage clinical trial sites and, thereafter, the
rate of enrollment of patients, and the rate we collect, clean, lock and analyze
the clinical trial database. Patient enrollment is a function of many factors,
including the size of the patient population, the proximity of patients to
clinical sites, the eligibility criteria for the study, the existence of
competitive clinical trials, and whether existing or new drugs are approved for
the indication we are studying. We are aware that other companies are planning
clinical trials that will seek to enroll patients with the same diseases as we
are studying. Certain clinical trials are designed to continue until a
pre-determined number of events have occurred to the patients enrolled. Trials
such as this are subject to delays stemming from patient withdrawal and from
lower than expected event rates and may also incur increased costs if enrollment
is increased in order to achieve the desired number of events. If we experience
delays in identifying and contracting with sites and/or in patient enrollment in
our clinical trial programs, we may incur additional costs and delays in our
development programs, and may not be able to complete our clinical trials on a
cost-effective or timely basis. In addition, conducting multi-national studies
adds another level of complexity and risk as we are subject to events affecting
countries outside the United States. Moreover, negative or inconclusive
results from the clinical trials we conduct or adverse medical events could
cause us to have to repeat or terminate the clinical trials. Accordingly, we may
not be able to complete the clinical trials within an acceptable time frame, if
at all.





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





Pre-clinical
testing and clinical development are long, expensive and uncertain processes. If
our drug candidates do not receive the necessary regulatory approvals, we will
be unable to commercialize our drug candidates.





We have
not received, and may never receive, regulatory approval for the commercial sale
of any of our drug candidates. We will need to conduct significant additional
research and human testing before we can apply for product approval with the FDA
or with regulatory authorities of other countries. Pre-clinical testing and
clinical development are long, expensive and uncertain processes. Satisfaction
of regulatory requirements typically depends on the nature, complexity and
novelty of the product and requires the expenditure of substantial resources.
Data obtained from pre-clinical and clinical tests can be interpreted in
different ways, which could delay, limit or prevent regulatory approval. It may
take us many years to complete the testing of our drug candidates and failure
can occur at any stage of this process. Negative or inconclusive results or
medical events during a clinical trial could cause us to delay or terminate our
development efforts.


28





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





Clinical
trials have a high risk of failure. A number of companies in the pharmaceutical
industry, including biotechnology companies, have suffered significant setbacks
in advanced clinical trials, even after achieving what appeared to be promising
results in earlier trials. If we experience delays in the testing or approval
process or if we need to perform more or larger clinical trials than originally
planned, our financial results and the commercial prospects for our drug
candidates may be materially impaired. In addition, we have limited experience
in conducting and managing the clinical trials necessary to obtain regulatory
approval in the United States and abroad and, accordingly, may encounter
unforeseen problems and delays in the approval process. Though we may engage a
clinical research organization with experience in conducting regulatory trials,
errors in the conduct, monitoring and/or auditing could invalidate the results
from a regulatory perspective.





Because
all of our proprietary technologies are licensed to us by third parties,
termination of these license agreements would prevent us from developing our
drug candidates.





We do not
own any of our drug candidates. We have licensed the rights, patent or
otherwise, to our drugs candidates from third parties. These license agreements
require us to meet development milestones and impose development and
commercialization due diligence requirements on us. In addition, under these
agreements, we must pay royalties on sales of products resulting from licensed
technologies and pay the patent filing, prosecution and maintenance costs
related to the licenses. If we do not meet our obligations in a timely manner or
if we otherwise breach the terms of our license agreements, our licensors could
terminate the agreements, and we would lose the rights to our drug candidates.
From time to time, in the ordinary course of business, we may have disagreements
with our licensors or collaborators regarding the terms of our agreements or
ownership of proprietary rights, which could lead to delays in the research,
development and commercialization of our drug candidates or could require or
result in litigation or arbitration, which would be time-consuming and
expensive.





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





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





Contract
manufacturers often encounter difficulties in scaling up production, including
problems involving raw material supplies, production yields, quality control and
assurance, shortage of qualified personnel, compliance with FDA and foreign
regulations, production costs and development of advanced manufacturing
techniques and process controls.  These risks become more acute as we
scale up for commercial quantities, where a reliable source of raw material
supplies becomes critical to commercial success.  For example, given
the large quantity of materials required for ferric citrate production, as we
approach commercialization for Zerenex we will need to ensure an adequate supply
of starting materials that meet quality, quantity and cost
standards.  Failure to achieve this level of supply can jeopardize the
successful commercialization of the product.


29


Our
third-party manufacturers may not perform as agreed or may not remain in the
contract manufacturing business for the time required by us to successfully
produce and market our drug candidates. In addition, our contract manufacturers
will be subject to ongoing periodic and unannounced inspections by the FDA and
corresponding foreign governmental agencies to ensure strict compliance with
current Good Manufacturing Practices, as well as other governmental regulations
and corresponding foreign standards. The same issues apply to contract
analytical services which we use for testing of our products. We will not have
control over, other than by contract and periodic oversight, third-party
manufacturers' compliance with these regulations and standards. We are currently
developing analytical tools for ferric citrate active pharmaceutical ingredient
and drug product testing. Failure to develop effective analytical
tools could result in regulatory or technical delay or could jeopardize our
ability to begin Phase 3 clinical trials and/or obtain FDA approval. Switching
or engaging multiple third-party contractors to produce our products may be
difficult because the number of potential manufacturers may be limited and the
process by which multiple manufacturers make the drug substance must be
identical at each manufacturing facility. It may be difficult for us to find and
engage replacement or multiple manufacturers quickly and on terms acceptable to
us, if at all. For Zerenex, we currently rely on a sole source of ferric citrate
active pharmaceutical ingredient. The loss of this sole source of supply would
result in significant additional costs and delays in our development program.
Moreover, if we need to change manufacturers after commercialization, the FDA
and corresponding foreign regulatory agencies must approve these manufacturers
in advance, which will involve testing and additional inspections to ensure
compliance with FDA and foreign regulations and standards.





If
we do not establish or maintain manufacturing, drug development and marketing
arrangements with third parties, we may be unable to commercialize our
products.





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





●
            manufacture
      our product candidates;





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





●
            market
      and distribute our drug products.





We can
provide no assurance that we will be able to successfully enter into agreements
with such third parties on terms that are acceptable to us, if at all. If we are
unable to successfully contract with third parties for these services when
needed, or if existing arrangements for these services are terminated, whether
or not through our actions, or if such third parties do not fully perform under
these arrangements, we may have to delay, scale back or end one or more of our
drug development programs or seek to develop or commercialize our products
independently, which could result in delays. Furthermore, such failure could
result in the termination of license rights to one or more of our products. If
these manufacturing, development or marketing agreements take the form of a
partnership or strategic alliance, such arrangements may provide our
collaborators with significant discretion in determining the efforts and
resources that they will apply to the development and commercialization of our
products. Accordingly, to the extent that we rely on third parties to research,
develop or commercialize our products, we are unable to control whether such
products will be scientifically or commercially successful. Additionally, if
these third parties fail to perform their obligations under our agreements with
them or fail to perform their work in a satisfactory manner, in spite of our
efforts to monitor and ensure the quality of such work, we may face delays in
achieving the regulatory milestones required for commercialization of one or
more drug candidates.





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





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




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




30





Other Risks Related to Our
Business





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





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





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





Even
if we obtain FDA approval to market our drug products, if they fail to achieve
market acceptance, we will never record meaningful revenues.





Even if
our products are approved for sale, they may not be commercially successful in
the marketplace. Market acceptance of our drug products will depend on a number
of factors, including:





●
            perceptions
      by members of the health care community, including physicians, of the
      safety and efficacy of our product
candidates;





●
            the
      rates of adoption of our products by medical practitioners and the target
      populations for our products;





●
            the
      potential advantages that our products offer over existing treatment
      methods;





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





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





●
            the
      side effects or unfavorable publicity concerning our products or similar
      products; and





●
            the
      effectiveness of our sales, marketing and distribution
      efforts.





Because
we expect sales of our products, if approved, to generate substantially all of
our revenues in the long-term, the failure of our drugs to find market
acceptance would harm our business and could require us to seek additional
financing or other sources of revenue.


31


If
our competitors develop and market products that are less expensive, more
effective or safer than our drug products, our commercial opportunities may be
reduced or eliminated.




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





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





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





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





As of May
5, 2009, we had 15 full and part-time employees. To successfully develop our
drug candidates, we must be able to attract and retain highly skilled personnel.
Our limited resources may hinder our efforts to attract and retain highly
skilled personnel. In addition, if we lose the services of our current
personnel, our ability to continue to execute on our business plan could be
materially impaired.





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





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





Acquisitions involve a number of
operational risks, including:





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





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


●
              our
      inability to maintain the acquired company's relationship with key third
      parties, such as alliance partners;
 
 ●
              exposure
      to legal claims for activities of the acquired business prior to the
      acquisition;
 
 ●
              the
      diversion of our management's attention from our core business;
      and
 
 ●
              the
      potential impairment of goodwill and write-off of in-process research and
      development costs, adversely affecting our reported results of
      operations.


32




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





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





●
            government
      and health administration
authorities;





●
            private
      health insurers;





●
            managed
      care programs; and





●
            other
      third-party payors.





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





Health care
reform measures could adversely affect our business.





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





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





The use
of our drug candidates in clinical trials, the future sale of any approved drug
candidates and new technologies, and our sale of Accumin prior to its
discontinuation, exposes us to liability claims. Although we are not aware of
any historical or anticipated product liability claims against us, if we cannot
successfully defend ourselves against product liability claims, we may incur
substantial liabilities or be required to cease clinical trials of our drug
candidates or limit commercialization of any approved products.





We
believe that we have obtained sufficient product liability insurance coverage
for our clinical trials and the sale of Accumin prior to its discontinuation. We
intend to expand our insurance coverage to include the commercial sale of any
approved products if marketing approval is obtained; however, insurance coverage
is becoming increasingly expensive. We may not be able to maintain insurance
coverage at a reasonable cost. We also may not be able to obtain additional
insurance coverage that will be adequate to cover product liability risks that
may arise. Regardless of merit or eventual outcome, product liability claims may
result in:


●
              decreased
      demand for a product;
 
 ●
              injury
      to our reputation;
 
 ●
              our
      inability to continue to develop a drug
  candidate;
 
 ●
              withdrawal
      of clinical trial volunteers; and
 
 ●
              loss
      of revenues.




Consequently,
a product liability claim or product recall may result in losses that could be
material.


33





In
connection with providing our clinical trial management and site recruitment
services, we may be exposed to liability that could have a material adverse
effect on our financial condition and results of operations.





The
Online Collaborative Oncology Group, Inc., or OCOG, a subsidiary we acquired
through our acquisition of ACCESS Oncology in 2004, provides clinical trial
management and site recruitment services to us as well as other biotechnology
and pharmaceutical companies. In conducting the activities of OCOG, any failure
on our part to comply with applicable governmental regulations or contractual
obligations could expose us to liability to our clients and could have a
material adverse effect on us. We also could be held liable for errors or
omissions in connection with the services we perform. In addition, the wrongful
or erroneous delivery of health care information or services may expose us to
liability. If we were required to pay damages or bear the costs of defending any
such claims, the losses could be material.





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





The
development, manufacturing, pricing, sales, and reimbursement of our products,
together with our general operations, are subject to extensive regulation by
federal, state and other authorities within the United States and numerous
entities outside of the United States. We are a relatively small company with 15
full and part-time employees as of May 5, 2009. We also have significantly fewer
employees than many other companies that have a product candidate in clinical
development, and we rely heavily on third parties to conduct many important
functions. While we believe that our corporate compliance program is sufficient
to ensure compliance with applicable regulations, we cannot assure you that we
are or will be in compliance with all potentially applicable regulations. If we
fail to comply with any of these regulations we could be subject to a range of
regulatory actions, including suspension or termination of clinical trials, the
failure to approve a product candidate, restrictions on our products or
manufacturing processes, withdrawal of products from the market, significant
fines, or other sanctions or litigation.





Risks Related to Our
Financial Condition





Our
current cash, cash equivalents and investment securities may not be adequate to
support our operations for the length of time that we have
estimated.





We
currently anticipate that our cash, cash equivalents and investment securities
as of March 31, 2009, exclusive of our holdings in auction rate securities, are
sufficient to meet our anticipated working capital needs and fund our business
plan into the first quarter of 2010. However, if we are not able to receive
proceeds from some portion of our auction rate securities by the first quarter
of 2010, we may not have the ability to continue as a going concern for any
significant period beyond that point. We are evaluating market conditions to
determine the appropriate timing and extent to which we will seek to obtain
additional debt, equity or other type of financing. If we determine that it is
necessary to seek additional funding, there can be no assurance that we will be
able to obtain any such funding on terms that are acceptable to us, if at
all.





In
addition, the report of our independent registered public accounting firm
covering our 2008 Consolidated Financial Statements, included in our Annual
Report on Form 10-K for the year ended December 31, 2008, contains an
explanatory paragraph that makes reference to uncertainty about our ability to
continue as a going concern. Future reports may continue to contain this
explanatory paragraph. Our forecast of the period of time through which our
cash, cash equivalents and investment securities will be adequate to support our
operations is a forward-looking statement that involves risks and uncertainties.
The actual amount of funds we will need to operate is subject to many factors,
some of which are beyond our control. These factors include the
following:


34


●
            the
      timing, design and conduct of, and results from, clinical trials for our
      drug candidates;





●
            the
      timing of expenses associated with manufacturing and product development
      of the proprietary drug candidates within our portfolio and those that may
      be in-licensed, partnered or
acquired;





●
            the
      timing of the in-licensing, partnering and acquisition of new product
      opportunities;





●
            the
      progress of the development efforts of parties with whom we have entered,
      or may enter, into research and development
  agreements;





●
            our
      ability to achieve our milestones under our licensing
      arrangements;





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





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





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





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





Risks Related to Our
Intellectual Property and Third-Party Contracts





If
we are unable to adequately protect our intellectual property, third parties may
be able to use our intellectual property, which could adversely affect our
ability to compete in the market.





Our
commercial success will depend in part on our ability and the ability of our
licensors to obtain and maintain patent protection on our drug products and
technologies and successfully defend these patents against third-party
challenges. The patent positions of pharmaceutical and biotechnology companies
can be highly uncertain and involve complex legal and factual questions. No
consistent policy regarding the breadth of claims allowed in biotechnology
patents has emerged to date. Accordingly, the patents we use may not be
sufficiently broad to prevent others from practicing our technologies or from
developing competing products. Furthermore, others may independently develop
similar or alternative drug products or technologies or design around our
patented drug products and technologies. The patents we use may be challenged or
invalidated or may fail to provide us with any competitive
advantage.





We rely
on trade secrets to protect our intellectual property where we believe patent
protection is not appropriate or obtainable. Trade secrets are difficult to
protect. While we require our employees, collaborators and consultants to enter
into confidentiality agreements, this may not be sufficient to adequately
protect our trade secrets or other proprietary information. In addition, we
share ownership and publication rights to data relating to some of our drug
products and technologies with our research collaborators and scientific
advisors. If we cannot maintain the confidentiality of this information, our
ability to receive patent protection or protect our trade secrets or other
proprietary information will be at risk.


35


The
intellectual property that we own or have licensed relating to our product
candidates are limited, which could adversely affect our ability to compete in
the market and adversely affect the value of our product
candidates.





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





●
            Our
      composition of matter patent covering KRX-0401 (perifosine) expires in
      2013 and we cannot assure you that we can obtain an extension to 2018 (the
      maximum term of extension under the patent term restoration program). We
      do not hold a composition of matter patent covering Zerenex. Composition
      of matter patents can provide protection for pharmaceutical products to
      the extent that the specifically covered compositions are important. Upon
      expiration of our composition of matter patent for KRX-0401, or for
      Zerenex, where we do not have a composition of matter patent, competitors
      who obtain the requisite regulatory approval can offer products with the
      same composition as our products so long as the competitors do not
      infringe any method of use patents that we may
  hold.





●
            For
      our product candidates, the principal patent protection that covers or
      those we expect will cover, our product candidate is a method of use
      patent. This type of patent only protects the product when used or sold
      for the specified method. However, this type of patent does not limit a
      competitor from making and marketing a product that is identical to our
      product that is labeled for an indication that is outside of the patented
      method, or for which there is a substantial use in commerce outside the
      patented method.





Moreover,
physicians may prescribe such a competitive identical product for indications
other than the one for which the product has been approved, or off-label
indications, that are covered by the applicable patents. Although such off-label
prescriptions may infringe or induce infringement of method of use patents, the
practice is common and such infringement is difficult to prevent or
prosecute.





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





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





We may be
forced to initiate litigation to enforce our contractual and intellectual
property rights, or we may be sued by third parties asserting claims based on
contract, tort or intellectual property infringement. In addition, third parties
may have or may obtain patents in the future and claim that our drug products or
technologies infringe their patents. If we are required to defend against suits
brought by third parties, or if we sue third parties to protect our rights, we
may be required to pay substantial litigation costs, and our management's
attention may be diverted from operating our business. In addition, any legal
action against our licensors or us that seeks damages or an injunction of our
commercial activities relating to our drug products or technologies could
subject us to monetary liability and require our licensors or us to obtain a
license to continue to use our drug products or technologies. We cannot predict
whether our licensors or we would prevail in any of these types of actions or
that any required license would be made available on commercially acceptable
terms, if at all.





Risks Related to Our Common
Stock





Future
sales or other issuances of our common stock could depress the market for our
common stock.





Sales of
a substantial number of shares of our common stock, or the perception by the
market that those sales could occur, could cause the market price of our common
stock to decline or could make it more difficult for us to raise funds through
the sale of equity in the future.





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


36


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





Our
stock price can be volatile, which increases the risk of litigation, and may
result in a significant decline in the value of your investment.





The
trading price of our common stock is likely to be highly volatile and subject to
wide fluctuations in price in response to various factors, many of which are
beyond our control. These factors include:





●
            developments
      concerning our drug candidates;





●
            announcements
      of technological innovations by us or our
  competitors;





●
            introductions
      or announcements of new products by us or our
  competitors;





●
            announcements
      by us of significant acquisitions, strategic partnerships, joint ventures
      or capital commitments;





●
            changes
      in financial estimates by securities
analysts;





●
            actual
      or anticipated variations in quarterly operating results and
      liquidity;





●
            expiration
      or termination of licenses, research contracts or other collaboration
      agreements;





●
            conditions
      or trends in the regulatory climate and the biotechnology and
      pharmaceutical industries;





●
            changes
      in the market valuations of similar companies;
  and





●
            additions
      or departures of key personnel.





In
addition, equity markets in general, and the market for biotechnology and life
sciences companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of companies traded in those markets. These broad market and
industry factors may materially affect the market price of our common stock,
regardless of our development and operating performance. In the past, following
periods of volatility in the market price of a company's securities, securities
class-action litigation has often been instituted against that company. Such
litigation, if instituted against us, could cause us to incur substantial costs
to defend such claims and divert management's attention and resources, which
could seriously harm our business.





Certain
anti-takeover provisions in our charter documents and Delaware law could make a
third-party acquisition of us difficult. This could limit the price investors
might be willing to pay in the future for our common stock.





Provisions
in our amended and restated certificate of incorporation and bylaws could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, or control us. These
factors could limit the price that certain investors might be willing to pay in
the future for shares of our common stock. Our amended and restated certificate
of incorporation allows us to issue preferred stock with the approval of our
stockholders. The issuance of preferred stock could decrease the amount of
earnings and assets available for distribution to the holders of our common
stock or could adversely affect the rights and powers, including voting rights,
of such holders. In certain circumstances, such issuance could have the effect
of decreasing the market price of our common stock. Our amended and restated
bylaws eliminate the right of stockholders to call a special meeting of
stockholders, which could make it more difficult for stockholders to effect
certain corporate actions. Any of these provisions could also have the effect of
delaying or preventing a change in control.


37


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





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





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





On March
3, 2009, we received notice from The NASDAQ Stock Market indicating that we had
failed to regain compliance with NASDAQ Marketplace Rule 4310(c)(3). Therefore,
The NASDAQ Stock Market determined to delist our common stock from the NASDAQ
Capital Market unless we appealed the delisting determination to a hearing. On
March 9, 2009, we requested a hearing to appeal the determination of The NASDAQ
Stock Market to delist our common stock to a NASDAQ Listings Qualification Panel
(“Panel”), which automatically stayed the delisting of our common stock pending
issuance of the Panel's decision. The hearing took place on April 30, 2009,
however, we have not received the Panel’s decision. At the Panel hearing, we
asked the Panel to provide us with additional time to regain compliance with
NASDAQ Marketplace Rule 4310(c)(3). There can be no assurance that such a
request will be granted or that the Panel will permit us to continue to list our
common stock on the NASDAQ Capital Market, or that in the future we will meet
the listing requirements of the NASDAQ Capital Market, including, without
limitation, bid price, stockholders’ equity and/or market value of listed
securities minimum requirements. Additionally, our efforts to continue to meet
the listing requirements may be limited by current market conditions, including
volatility in the market.





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





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





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


38


ITEM 6. EXHIBITS





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





3.1
            Amended
      and Restated Certificate of Incorporation of Keryx Biopharmaceuticals,
      Inc., filed as Exhibit 3.1 to the Registrant's Annual Report on Form 10-Q
      for the quarter ended September 30, 2004, filed on August 12, 2004, and
      incorporated herein by reference.3.2
            Amended
      and Restated Bylaws of Keryx Biopharmaceuticals, Inc., filed as Exhibit
      3.2 to the Registrant’s Annual Report on Form 10-K for the year ended
      December 31, 2001, filed on March 26, 2002, and incorporated herein by
      reference.3.3
            Amendment
      to Amended and Restated Certificate of Incorporation of Keryx
      Biopharmaceuticals, Inc., dated July 24, 2007, filed as Exhibit 3.3 to the
      Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
      2007, filed on August 9, 2007 and incorporated herein by
      reference.31.1
            Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
      May 13, 2009.31.2
            Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
      May 13, 2009.32.1
            Certification
      of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 13, 2009.32.2
            Certification
      of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 13, 2009.


39


SIGNATURES





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





KERYX
      BIOPHARMACEUTICALS, INC.Date:May 13,
      2009
              By:
              /s/ James F. OlivieroChief
      Financial OfficerPrincipal
      Financial and Accounting
Officer


40





EXHIBIT
INDEX





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





31.1
            Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
      May 13, 2009.31.2
            Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
      May 13, 2009.32.1
            Certification
      of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 13, 2009.32.2
            Certification
      of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 13, 2009.




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