Our management's discussion and analysis of our financial condition and results of operations include the identification of certain trends and other statements that may predict or anticipate future business or financial results that are subject to important factors that could cause our actual results to differ materially from those indicated. See Item 1A, "Risk Factors."

Overview

We are a biopharmaceutical development company dedicated to improving the lives of patients by developing novel therapeutics for the treatment of cancer. We have taken a systematic approach to identifying and validating promising therapeutics and are now focused on developing and advancing these potential drug candidates through clinical development.

We are currently focusing the majority of our human and financial resources on our oncology therapeutics. We also maintain a portfolio of protein, antibody, and small molecule therapeutics, and targets in various stages of development in the area of oncology.

• Belinostat-is a small molecule therapeutic, formerly referred to as PXD101, which inhibits the activity of the enzyme HDAC and is being evaluated for the treatment of solid and hematologic cancers either alone or in combination with other active chemotherapeutic drugs and newer targeted agents. We are actively conducting clinical trials evaluating intravenous and oral belinostat for:

                                                     Initiation of Patient
       Indication          Phase       Regimen            Enrollment                  Status

T-cell lymphomas            II       Monotherapy         January 2006        Enrollment ongoing.
                                                                             Updated results
                                                                             anticipated in the first
                                                                             half of 2008.

Ovarian cancer              II       Combination         November 2006       Enrollment complete.
                                   with paclitaxel                           Updated results
                                       and/or                                anticipated in the first
                                     carboplatin                             half of 2008.

Bladder cancer              II       Combination           June 2007         Enrollment ongoing.
                                   with paclitaxel
                                       and/or
                                     carboplatin

Solid tumors                Ib       Combination        September 2005       Enrollment ongoing.
                                        with
                                   5-fluorouracil
                                      ("5-FU")

Soft tissue sarcoma        I/II      Combination           May 2007          Enrollment ongoing.
                                        with
                                     doxorubicin

Acute myeloid leukemia     I/II      Combination          August 2007        Enrollment ongoing.
                                   with idarubicin

Advanced solid tumors        I     Oral belinostat        August 2006        Enrollment ongoing.
                                     monotherapy

Under a Clinical Trial Agreement, or CTA, that we signed with the National Cancer Institute, or NCI, the NCI is sponsoring ten clinical trials evaluating intravenous belinostat for the treatment of:

                                                                             Initiation of Patient
         Indication            Phase                 Regimen                      Enrollment
Advanced solid tumors or
lymphomas                       Ib     Combination with Velcade®                  March 2006
Acute Myelogenous Leukemia      II     Monotherapy                                 June 2006
Advanced solid tumors           Ib     Combination with cis-retinoic acid          June 2006
Mesothelioma                    II     Monotherapy                                 June 2006
Hepatocellular carcinoma       I/II    Monotherapy                                 July 2006
Advanced hematologic
malignancies                     I     Combination with azacitidine               August 2006
B-cell lymphomas                II     Monotherapy                                August 2006
Ovarian                         II     Monotherapy                               November 2006
Myelodysplastic syndrome        II     Monotherapy                               November 2006
Thymoma / thymic carcinoma      II     Monotherapy                               December 2007

• CR011-vcMMAE-is a fully-human monoclonal antibody resulting from our collaboration with Amgen Fremont and utilizes ADC technology licensed from Seattle Genetics to attach MMAE to yield CR011-vcMMAE. In June 2006, we announced that the IND for CR011-vcMMAE was cleared by the FDA and dosing of patients in a Phase I/II clinical trial had begun. The open-label, multi-center, dose escalation study is evaluating the safety, tolerability and pharmacokinetics of CR011-vcMMAE for patients with unresectable Stage III or Stage IV melanoma who have failed no more than one prior line of cytotoxic therapy. The first part of the trial has been evaluating cohorts of patients receiving increasing doses of CR011-vcMMAE to assess safety and determine the MTD. The trial has treated 25 patients with doses of up to 1.88 mg/kg CR011-vcMMAE administered intravenously once every three weeks. The dose escalation assessment of CR011-vcMMAE is ongoing with patients treated at doses up to 2.63 mg/kg. After determination of the MTD, up to approximately 32 additional patients are expected to be enrolled and treated at the MTD to further define safety and activity of CR011-vcMMAE in this efficacy portion of the trial;

• Velafermin-is a protein therapeutic we were investigating for the prevention of oral mucositis. We have discontinued the development of this protein after our Phase II dose-confirmatory clinical trial did not meet its primary endpoint. Patients enrolled in this study are being followed for approximately one year post treatment to satisfy protocol-specified safety monitoring. Therefore, the study will not be clinically complete until approximately September 2008. No new obligations will be initiated with this program.

In addition, we have several potential protein, antibody, and small molecule therapeutics that have been evaluated in animal studies. We will continue to evaluate strategic opportunities for these assets through partnerships, licensing, or the filing of IND applications in the future.

Summary

We expect to generate value for our shareholders by developing novel therapeutics. We seek to become profitable by commercializing a subset of therapeutics stemming from our development pipeline, and establishing partnerships with pharmaceutical and biotechnology companies for the development and commercialization of other therapeutics from our development pipeline. Our failure to successfully develop and commercialize pharmaceutical products would materially and adversely affect our business, financial condition, cash and investments balances and results of operations. Royalties or other revenue generated from commercial sales of products developed through the application of our technologies and expertise are not expected for several years, if at all. We expect that our revenue or income sources for at least the next several years may be limited to potential milestones and other potential payments related to partnering one of our drug candidates, and interest income.

While we will continue to explore alternative sources to finance our business activities, including the possibility of public securities offerings and/or private strategic-driven common stock offerings, we cannot be certain that in the future these sources will be available when needed or that our actual cash requirements will not be greater than anticipated. In appropriate strategic situations, we may seek financial assistance from other sources, including the sale of certain assets, contributions by others to joint ventures, and other collaborative or licensing arrangements for the development and testing of products under development. However, should we be unable to obtain future financing either through the methods described above or through other means, we may be unable to meet the critical objective of our long-term business plan, which is to successfully develop and market pharmaceutical products, and may be unable to continue operations. This result could cause our shareholders to lose all or a substantial portion of their investment.

We expect to continue incurring substantial expenses relating to our research and development efforts, as we focus on: preclinical studies and clinical trials required for the development of therapeutic protein, antibody and small molecule product candidates; external programs identified by our platform as being promising and synergistic with our products and expertise. Conducting clinical trials is a lengthy, time-consuming and expensive process. We will incur substantial expenses for, and devote a significant amount of time to, these studies. As a result, we expect to incur continued losses over the next several years. Results of operations for any period may be unrelated to the results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating results.

Critical Accounting Policies and Use of Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates, including those related to prepaid expenses, accrued expenses, revenue recognition, and stock based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 1 to our consolidated financial statements, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements:

Revenue Recognition

Overview

We recognize revenue when all four criteria are met: (1) persuasive evidence that an arrangement exists; (2) delivery of the products has occurred or services have been rendered; (3) the selling price is fixed or determinable; and
(4) the collectibility is reasonably assured, in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, "Revenue Recognition," which sets forth guidelines for the timing of revenue recognition based upon factors such as passage of title, installation, payment and customer acceptance. Determination of criteria (2) and (3) are based on management's judgment regarding delivery of products and the fee charged for products delivered.

Collaboration Revenue

During 2007, we recognized collaboration revenue related to the grant of exclusive worldwide rights by our collaboration partner TopoTarget to an unrelated third party of a preclinical HDAC inhibitor for potential use in the field of dermatology. Under our collaboration agreement with TopoTarget, we are entitled to receive 50% of

initial payments received by TopoTarget from such third party. During 2006, we received $1.3 million which is currently being amortized on a straight line basis commencing in November 2006, the month the agreement was signed, through April 2022, the date the first original patent will expire in the United States. However, in the event that the third party terminates its license agreement with TopoTarget, all unrecognized revenue will be recognized upon termination. We estimated the time period and method of amortization in recording revenue under this agreement. In January 2008, TopoTarget was informed by the third party that it will be terminating the development of the preclinical compound in 2008 and as such the remaining unrecognized revenue of $1.2 million as of December 31, 2007 is expected to be recognized by us in 2008.

Collaboration revenue during 2006 and 2005 was generated primarily under our Pharmacogenomics Agreement with Bayer, or the Bayer Agreement. Payments received under the terms of the Bayer Agreement consisted of non-refundable fixed quarterly payments received in advance under the Bayer Agreement, which was completed in 2006.

The non-refundable fixed quarterly payments received in advance under the Bayer Agreement related to our future performance of services and were deferred and recognized as revenue when the future performance occurred, based upon the satisfaction of defined metrics of completion, as outlined in the Bayer Agreement, which included proportional performance and project specific deliverables. These metrics were reviewed internally each month to determine the work performed, deliverables met, and, if required, deliverables accepted by Bayer. We estimated the time period over which services were provided and the level of effort in each period. We made judgments based upon the facts and circumstances known to us at the time and in accordance with generally accepted accounting principles.

Accrued and Prepaid Expenses

We review new and open contracts, communicate with our applicable personnel to identify services that have been performed on our behalf and estimate the level of service performed and the associated costs incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost for accrued expenses. We also review, with our applicable personnel, services that have been performed when payment was required in advance and estimate the level of service performed and the associated cost incurred. The majority of our service providers invoice us monthly in arrears for services performed, however, some required advanced payments. We make estimates of our accrued and prepaid expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. We also periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. To date, we have not adjusted our estimates at any particular balance sheet date in any material amount. Examples of estimated accrued and prepaid expenses include:

• fees paid to contract research organizations in connection with preclinical and toxicology studies and clinical trials;

• fees paid to investigative sites in connection with clinical trials;

• fees paid to contract manufacturers in connection with the production of clinical trial materials; and

• professional service fees.

We base our accrued and prepaid expenses related to clinical trials on our estimates of the services received and efforts expended related to clinical trials all pursuant to contracts with multiple research institutions and clinical research organizations that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. We estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we will adjust accordingly. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates.

Stock-Based Compensation

We utilized the modified prospective transition method to adopt Statement of Financial Accounting Standards No. 123 (revised 2004) "Share Based Payment", or SFAS 123R on January 1, 2006. Under this method, the provisions of SFAS 123R apply to all awards granted or modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption, determined under the original provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Share-Based Payment", or SFAS 123, are recorded in net income (loss) in the periods after the date of adoption. Prior to January 2006, we accounted for stock options under the intrinsic value method described in Accounting Principals Board Opinion No. 25, or APB 25, and related Interpretations as permitted by SFAS 123. When applying the intrinsic value method to stock options, we did not record stock-based compensation cost in net income (loss) because the exercise price of our stock options equaled the market price of the underlying stock on the date of grant. Estimates in recording employee stock option expense include utilizing the Black-Scholes option valuation method to estimate the fair value of stock options granted to employees and the number of options that will be forfeited due to employee terminations. The Black-Scholes option valuation method requires inputs for the following three factors: (1) volatility, (2) risk-free interest rate, and
(3) expected term of the option. We use historical volatility to determine the expected stock price volatility factor; risk-free interest rates are based on the U.S. Treasury yield curve in effect at the time of grant, for the period corresponding to the approximate expected term of the options; and the expected term has been calculated using the criteria outlined in SAB 107. We estimate future forfeitures of stock options primarily based on historical experience. For additional information on stock-based compensation, please see Note 1 to our condensed consolidated financial statements included in this Annual Report on Form 10-K.

Results of Operations

Year 2007 Compared to Year 2006

The following table sets forth a comparison of the components of our net income
(loss) for the years ended December 31, 2007 and 2006 (in millions):



                                                                               $             %
                                               2007           2006          Change         Change
Collaboration revenue                         $   0.1        $   2.3        $  (2.2 )         (96 )%
Research and development expenses                36.8           44.0           (7.2 )         (16 )%
General and administrative expenses              11.7           13.6           (1.9 )         (14 )%
Restructuring and related charges                11.3            0.0           11.3             *
Interest income                                   5.6            7.2           (1.6 )         (22 )%
Interest expense                                  5.2            9.4           (4.2 )         (45 )%
Realized gain on sale of
available-for-sale investments, net               0.7            0.0            0.7             *
Gain on extinguishment of debt                    8.4            0.0            8.4             *
Income tax benefit                                0.2            0.4           (0.2 )         (50 )%

Loss from continuing operations                 (50.0 )        (57.1 )         (7.1 )         (12 )%
Income (loss) from discontinued
operations                                       75.4           (2.7 )         78.1             *

Net income (loss)                             $  25.4        $ (59.8 )

* Based on prior year amounts, percentage change does not provide meaningful information.

Collaboration revenue. The decrease in collaboration revenue for year ended December 31, 2007, as compared to the year ended December 31, 2006 was due to the completion of work under the Bayer Agreement during 2006. We do not expect to recognize any additional collaboration revenue during 2008, with the exception of collaboration revenue related to the amortization of the $1.3 million received during 2006 from TopoTarget's licensing agreement with an unrelated third party. In January 2008, TopoTarget was informed by the third party that it will be terminating the development of the preclinical compound pursuant to which we receive collaboration revenue. Due to the termination of this agreement, we expect to recognize approximately $1.2 million of collaboration revenue in 2008.

Research and development expenses. Research and development expenses consist primarily of: contractual and manufacturing costs; salary and benefits; license fees and milestone payments; supplies; drug supply; depreciation and amortization; and allocated facility costs. Historically, our research and development efforts have been concentrated on three major project areas:
clinical trials; preclinical drug candidates; and collaborations. However, upon completion of our work on the Bayer Agreement during the second quarter of 2006, and subsequent to our decision in the first quarter of 2007 to focus our resources exclusively on generating clinical trial results from our lead oncology drug development programs, our research and development efforts are now being concentrated solely on clinical trials. We budget and monitor our research and development costs by expense category, rather than by project, because these costs often benefit multiple projects and/or our technology platform.

Below is a summary that reconciles our total research and development expenses for the years ended December 31, 2007 and 2006 by the major categories (in millions):

                                                                     $          %
                                                 2007     2006    Change      Change
      Contractual and manufacturing costs       $ 20.9   $ 19.6   $   1.3          7 %
      Salary and benefits                          9.1     11.0      (1.9 )      (17 )%
      Supplies                                     0.7      1.9      (1.2 )      (63 )%
      License fees and milestone payments          0.1      1.3      (1.2 )      (92 )%
      Depreciation and amortization                1.2      2.8      (1.6 )      (57 )%
      Allocated facility costs                     4.8      7.4      (2.6 )      (35 )%

      Total research and development expenses   $ 36.8   $ 44.0

The decrease in our research and development expenses for the year ended December 31, 2007 as compared to the year ended December 31, 2006 was due to our decision in the first quarter of 2007 to focus our resources exclusively on generating clinical trial results from our lead oncology drug development programs, as well as the second quarter 2007 restructuring, which included the closing of our Biopharmaceutical Sciences Process facility, or BPS, and the third quarter 2007 restructuring related to the termination of velafermin and personnel reductions. The reductions included a decrease in supplies, a decrease in salary and benefits caused by a reduction in personnel, a decrease in depreciation and amortization from a reduction in lab equipment and a decrease in allocated facility costs. We did have an increase in contractual and manufacturing costs due to higher clinical trial expenses related to velafermin and new Phase I/II studies for belinostat in 2007 compared to 2006. We anticipate our research and development expenses for 2008 will decrease as compared to research and development expenses for 2007 in contractual and manufacturing costs as we have discontinued clinical trials in velafermin and will only incur patient follow up cost through 2008.

As soon as we advance a potential clinical candidate into clinical trials, we begin to track the direct research and development expenses associated with that potential clinical candidate. The following table shows the cumulative direct research and development expenses as of December 31, 2007, as well as the current direct research and development expenses for the years ended December 31, 2007 and 2006 which were incurred on or after we started conducting a Phase I clinical trial for a clinical candidate (in millions):

                                                                  Clinical Development Costs
                                                   Cumulative as of
                                                     December 31,
                                                      2007 (since            Year Ended          Year Ended
  Therapeutic Area and                               commencement           December 31,        December 31,
   Clinical Candidate             Class            of Phase I trial)            2007                2006             Indication
Oncology
Belinostat                    Small Molecule      $              44.1      $         13.6      $         11.4      Various Cancers

CR011-vcMMAE                  Antibody-Drug                                                                          Metastatic
                                Conjugate         $               7.1      $          2.7      $          4.4         Melanoma

Cancer Supportive Care
Velafermin                       Protein          $              50.3      $         13.2      $         11.5      Oral Mucositis

We expect that the direct research and development expenses incurred in connection with our development of belinostat to decrease in 2008 as compared to 2007 due to the several clinical trials completing enrollment in 2008. We will support a Phase III or registrational program that we expect to initiate in the second half of 2008, pending positive data from the ongoing Phase II trial expected during the first half of 2008. We expect that the direct research and development expenses incurred in connection with our development of CR011-vcMMAE will increase in 2008 as compared to 2007. The expected increase during 2008 is related to higher enrollment of patients into our ongoing Phase I/II trial, and milestone payments due in 2008 upon initiating a Phase II trial, pending positive data from the ongoing Phase I/II trials. We expect that the direct research and development expenses incurred in connection with our development of velafermin will decrease in 2008 as compared to 2007. Although we completed enrollment in our Phase II trial in August 2007 and discontinued further investment in our velafermin program, additional costs associated with planned safety follow up visits and other trial close out activities will be incurred through the third quarter of 2008.

Currently, our potential pharmaceutical products require significant research . . .