The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and notes to those statements included in Item 8 of Part II of this Form 10-K.

Overview

We are a biopharmaceutical company dedicated to developing, manufacturing and commercializing important medicines for patients with cancer and other life-threatening conditions. We operate in three business segments: Products, Royalties and Contract Manufacturing. We have a portfolio of four marketed products, Oncaspar, DepoCyt, Abelcet and Adagen. Our drug development programs utilize several innovative approaches, including our industry-leading PEGylation technology platform and the Locked Nucleic Acid (LNA) technology. Our PEGylation technology was used to develop two of our products, Oncaspar and Adagen, and has created a royalty revenue stream from licensing partnerships for other products developed using the technology. We also engage in contract manufacturing opportunities for several pharmaceutical companies to broaden our revenue base.

Summary-level overview year ended December 31, 2008 compared to 2007

Total revenues, in 2008 rose to $196.9 million compared to $185.6 million in 2007. Net product sales and contract manufacturing revenues both rose in 2008, contributing approximately $19.1 million to total revenue growth for the year. Partially offsetting this increase was an 11-percent decline, or $7.8 million, in royalty revenues during 2008. In August 2007, we sold a 25-percent interest in PEG-INTRON royalties, so an overall decrease in royalty revenues of 11 percent indicates underlying growth in the segment. Gross margins were slightly improved in 2008 compared to 2007 with efficiencies stemming from the consolidation of our manufacturing facilities beginning to be experienced late in 2008. Spending was up in both research and development and general and administrative areas. The primary cause of the incremental general and administrative costs was the evaluation of strategic alternatives and efforts to improve our capital structure totaling approximately $5.0 million in 2008. We incurred $2.1 million of restructuring charges which was $5.6 million less than in 2007 and interest expense was lower in 2008 than in 2007 by $4.7 million due primarily to the repayment of our 4.5% notes. Also, significantly affecting the year-to-year comparison, was the gain in 2007 of $88.7 million on the sale of the 25-percent interest in PEG-INTRON royalties.

Summary-level overview year ended December 31, 2007 compared to 2006

Total revenues of $185.6 million were unchanged in 2007 compared to 2006. Products segment revenues remained constant as a group. A reduction in 2007 fourth-quarter royalty revenues from PEG-INTRON due to the sale of a 25-percent interest therein in August 2007 was offset by a rise in contract manufacturing revenues for the year. Income before tax for the year ended December 31, 2007 was $85.0 million compared to $22.1 million in 2006. Major operating factors contributing to the rise were the gain on the sale of the royalty interest of $88.7 million partially offset by $7.7 million of restructuring costs. Company-wide spending on research and development rose approximately $11.7 million in 2007 compared to 2006, but acquired in-process research and development expenditures of $11.0 million experienced in 2006 were not repeated in 2007. Other major effects include: $7.0 million of legal costs related to securing the supply of Oncaspar raw material in 2006, not incurred in 2007; a $13.8 million gain on sale of equity securities in 2006 not recurring in 2007 and lower interest expense in 2007 of $4.7 million compared to 2006, due to the refinancing and repurchases of our debt.

Further discussion of these and other revenue and profitability fluctuations is contained in the segment analyses that follow.

The percentage changes throughout Management's Discussion and Analysis are based on amounts stated in thousands of dollars and not the rounded millions of dollars reflected in this section. Following is a reconciliation of segment profitability to consolidated (loss) income before income tax provision (millions of dollars):

Overview


                                                                 Year Ended
                                               December           December           December
                                                 2008               2007               2006
Products segment profit                       $    20.1         $     8.0           $    20.5
Royalties segment profit                           59.5             156.0 (1)            70.6
Contract Manufacturing segment profit               7.2               4.4                 2.3
Corporate and other expenses                      (89.2 )           (83.4 )             (71.3 )

(Loss) income before income tax provision     $    (2.4 )       $    85.0           $    22.1

(1) Includes $88.7 million gain on sale of 25-percent interest in PEG-INTRON royalties.

We do not allocate certain corporate income and expenses not directly identifiable with the respective segments, including exploratory and preclinical research and development expenses, general and administrative expenses, depreciation, investment income, interest income, interest expense or income taxes. Research and development expense is considered a corporate expense unless it relates to an existing marketed product or a product candidate enters Phase III clinical trials at which time related costs would be chargeable to one of our operating segments.

Products Segment

Products segment profitability (millions of dollars):


                                                                Year Ended
                                 December           %            December            %            December
                                   2008           Change           2007           Change            2006
Revenues                        $   113.8            13         $   100.7              -         $   101.0
Cost of product sales                45.4             9              41.8              9              38.3
Research and development             14.6            38              10.6             45               7.3
Selling and marketing                30.9            (3 )            31.9             (6 )            34.1
Amortization of intangibles           0.7            (6 )             0.7             (5 )             0.8
Restructuring charge                  2.1           (73 )             7.7           n.m.                 -

Segment profit                  $    20.1           151         $     8.0            (61 )       $    20.5

Revenues

Sales performance of individual products is provided below (millions of
dollars):


                                             Year Ended
              December           %            December           %            December
Product         2008           Change           2007           Change           2006
Oncaspar     $    50.1            29         $    38.7            25         $    30.9
DepoCyt            9.0             5               8.6             4               8.3
Abelcet           26.9            (7 )            28.9           (21 )            36.5
Adagen            27.8            13              24.5            (3 )            25.3

Totals       $   113.8            13         $   100.7             -         $   101.0

Year ended December 31, 2008 compared to 2007

Net product sales grew approximately 13 percent during 2008, rising to $113.8 million from $100.7 million in 2007. Our oncology product, Oncaspar, for the first-line treatment of patients with acute lymphoblastic leukemia (ALL) and Adagen, our treatment for immunodeficiency, accounted for the majority of this increase. Oncaspar volume increased 5 percent year-over-year with the remaining Oncaspar revenue growth being attributable to a price increase effective in the first quarter of 2008. This price increase was necessitated by significantly higher raw material cost and expenses related to the development of manufacturing process improvements and transfer of technology from our supplier. See Cost of product sales and Research and development expenses below for further discussion regarding increased production costs and production process enhancements. Adagen sales were favorably affected by a first-quarter 2008 price increase. Abelcet, for the treatment of invasive fungal infections, continues to experience competitive pressures in the marketplace. The 7 percent decline in Abelcet net sales was the result of approximately 3 percent volume reduction and approximately 4 percent decrease in average net selling price. Sales of DepoCyt, for treatment of lymphomatous meningitis, and Adagen have historically experienced period-to-period fluctuations due to their small patient bases.

Year ended December 31, 2007 compared to 2006

Net product sales of $100.7 million for 2007 were largely unchanged on an aggregate basis from the total reached in 2006, however, the composition of sales by product reflected some significant shifts. Sales of Oncaspar, grew $7.8 million or 25 percent in 2007 to $38.7 million. The growth in volume of Oncaspar during

Cost of product sales

Cost of sales of marketed products for the year ended December 31, 2008 increased to $45.4 million, compared to $41.8 million for the year 2007. Costs rose at a slower rate than did revenues resulting in a decrease in cost of product sales as a percentage of sales, to approximately 40 percent in 2008 from approximately 41 percent in 2007. A number of significant events occurring in the manufacturing facilities, processes and sourcing of materials combined to make 2008 a transition year for cost of products sold.

During the second-quarter of 2008, we incurred $1.9 million of accelerated amortization associated with a $5.0 million licensing milestone payment that was triggered during that quarter in connection with our rights to market and distribute Oncaspar. We immediately recorded the $1.9 million of amortization to reflect the benefit derived from the intangible over the entire life of the agreement. The residual $3.1 million of this milestone payment is being recognized in cost of sales over its remaining life of 6 years. In 2007, we incurred a $1.9 million charge for validation batches produced in connection with the transfer of production of Oncaspar and Adagen from our South Plainfield, New Jersey facility to our Indianapolis, Indiana facility.

The cost of producing Oncaspar, as a percentage of Oncaspar sales, rose nearly 14 percent during 2008 compared to 2007 due primarily to the effects of raw material price increases under a December 2006 supply agreement. The full effect of this cost increase was not reflected in cost of products sold until the latter half of 2007 as compared to a full year in 2008. Largely offsetting the rise in Oncaspar costs were improvements in the cost of manufacture of Adagen and Abelcet which together comprise nearly half of total net sales. The improvements in the year-to-year comparisons of Adagen and Abelcet cost profiles are due in large part to certain batch write-offs experienced during 2007, including the validation batches referred to above in connection with the transfer of production to our Indianapolis facility. Overall, gross margins were favorably affected by increased selling prices effected early in 2008. Manufacturing efficiencies from the consolidation of our production facilities were not experienced until the fourth quarter of 2008 due to the timing of the completion of the consolidation. Their full effect should be realized in 2009, however, we expect some moderation of this favorable influence to come by way of increasing raw materials prices.

In 2007, cost of products sold, as a percentage of net sales, rose to approximately 41 percent from 38 percent in 2006. In December 2006, we entered into supply and license agreements with Ovation for the active ingredient used in the production of Oncaspar. A resulting license fee of $17.5 million caused a $2.3 million increase in 2007 amortization expense charged to Oncaspar cost of products sold. Higher supplier costs of materials and negative production variances contributed to lower Adagen and Abelcet margins, respectively, in 2007. Also, the ongoing transfer of production of Oncaspar and Adagen from our South Plainfield facility to our Indianapolis facility, discussed under restructuring below, resulted in $1.9 million of cost related to required production test batches to validate the new production processes and assure continued product quality and stability.

Research and development expenses

Research and development spending related to marketed products has been directed largely towards securing and maintaining a reliable supply of the ingredients used in the production of Oncaspar and Adagen. Products segment research and development expense increased $4.0 million or 38 percent during 2008

Selling and marketing expenses

Selling and marketing expenses consist primarily of salaries and benefits for our sales and marketing personnel, as well as other commercial expenses and marketing programs to support our sales force. Also included in selling and marketing expenses are the costs associated with our medical affairs function, including a medical science liaison group.

Selling and marketing expenses declined $1.0 million or approximately 3 percent in 2008 when compared to 2007 due in large part to the consolidation and realignment of our sales forces in late 2007. Also included in selling and marketing expenses are the costs associated with our medical affairs program, offsetting to some degree the savings from the sales force realignment. For the year 2007, selling expenses were $2.2 million or 6 percent lower than in 2006. Selling and marketing expenses in 2006 had been somewhat higher due to focuses placed at that time on the first-line approval of Oncaspar for acute lymphoblastic leukemia and a repositioning of Abelcet.

Amortization of acquired intangibles

Amortization expense of approximately $0.7 million in 2008 and 2007 and $0.8 million in 2006 was principally related to Abelcet intangible assets.

Restructuring

During the first quarter of 2007, we announced plans to consolidate our manufacturing operations in our Indianapolis location. This action was taken as part of our continued efforts to streamline operations. Also, during 2007, we combined our previous two specialized sales forces into one. As a result of these two initiatives, we incurred restructuring charges of $2.1 million during the year ended December 31, 2008 and $7.7 million in the year ended December 31, 2007. All restructuring charges have been related to the Products segment.

Employee termination costs, consisting of severance and related benefits, amounted to $1.3 million for the manufacturing restructuring during 2008 and $2.2 million in 2007. Severance payments related to the manufacturing restructuring commenced during 2008 with the successful transfer of production to the Company's Indianapolis facility and closure of the South Plainfield facility and are expected to continue into 2009. The 2007 sales force realignment resulted in approximately $0.4 million of employee termination costs, all of which were paid out during 2007. Payments to terminated employees in connection with the manufacturing program have amounted to $2.3 million. Also, during 2008, prior accruals for certain benefits provided to exiting employees were adjusted downward by $0.2 million based on actual utilization. The severance liability as of December 31, 2008 was $1.2 million.

Write-down of manufacturing assets and other costs associated with the manufacturing restructuring in 2008 totaled approximately $0.8 million. The majority of these costs relate to the acceleration of amortization of leasehold improvements at the South Plainfield facility in 2008 resulting from a reassessment of the estimated time to complete the manufacturing consolidation. During 2007, we also accelerated the depreciation

Our use of the leased South Plainfield facility has ended, but we continue to incur monthly rental costs related to the facility aggregating $0.2 million annually which we began charging to general and administrative expense in the fourth quarter of 2008. Prior to the fourth quarter of 2008, while the facility was operational, these costs were included in cost of inventory. We may experience additional restructuring charges associated with the lease or its termination prior to the contractual expiration of the lease in October 2012.

Royalties Segment

Royalties segment profitability (millions of dollars):


                                                                                  Year Ended
                                                December             %             December             %             December
                                                  2008             Change            2007             Change            2006
Royalty revenue                                 $   59.5              (11 )       $    67.3               (5 )        $   70.6
Gain on sale of royalty interest                       -             n.m.              88.7             n.m.                 -

Segment profit                                  $   59.5             n.m.         $   156.0             n.m.          $   70.6

Revenues

The majority of royalty revenue relates to sales of PEG-INTRON, a PEG-enhanced version of Schering-Plough's alpha interferon product, INTRON A, which is used for the treatment of chronic hepatitis C. Other royalty revenues and certain licensing revenues relate to the application of our technology to third-party products including those under a cross-license agreement with Nektar Therapeutics, Inc. (Nektar) under which we receive a share of the royalties and licensing income received by Nektar. There are currently three third-party products for which Nektar has granted sublicenses to our PEGylation technology and for which we are participating in royalty and licensing income revenues:
Hoffmann-La Roche's Pegasys for treatment of hepatitis C, UCB's Cimzia for the treatment of Crohn's disease and OSI and Pfizer's Macugen for the treatment of neovascular (wet) age-related macular degeneration. Our royalties on net sales of Pegasys, which exceeded $2.0 million in 2008, will end in October 2009.

Total royalty revenue in 2008 was $59.5 million, down 11 percent from the 2007 level. Royalties associated with PEG-INTRON were approximately 15 percent lower than the prior year. The decline reflects the sale during 2007 of a 25-percent interest in the PEG-INTRON royalties partially offset by improvement in the underlying sales of PEG-INTRON by Schering-Plough. This is consistent with Schering-Plough's public filings wherein they indicate higher sales in international markets, including a favorable impact from foreign exchange which was tempered by lower sales in Japan and the U.S. Royalty growth from Cimzia, Pegasys and Oncaspar in non-U.S. markets also bolstered revenues for the segment in 2008.

Total royalty revenue of $67.3 million in 2007 was 5 percent lower than the $70.6 million reported in 2006. The decline was primarily attributable to the fact that we sold a 25-percent interest in royalties payable to it by Schering-Plough Corporation on net sales of PEG-INTRON occurring after June 30, 2007. In our fourth quarter of 2007, because of the one-quarter lag in royalty revenue recognition and the sale of 25 percent of the revenue stream, we reported just 75 percent of the total royalty revenues generated from sales of PEG-INTRON for the quarter ended September 30, 2007, compared to full recognition in all quarters of 2006. Apart from the decrease in percentage of royalties received, there was a modest rise in sales of PEG-INTRON. Increased Pegasys royalties were offset by the effects of competition for Macugen in the U.S.

The gain on the sale of the 25-percent interest in PEG-INTRON royalties, net of related costs, was $88.7 million. The purchaser of the royalty interest will be obligated to pay an additional $15.0 million to us in the first quarter of 2012 if it achieves a certain threshold level of royalties on sales of PEG-INTRON occurring

The future revenues to be received from the use of our technology are dependent upon numerous factors outside of our control such as competition and the effectiveness of marketing by our licensees. These factors include the approval of new agents like Hematide, new uses and geographies for PEG-INTRON and Cimzia and changing competition.

Costs and expenses

Current royalty revenues do not require any material specific administrative costs. At some point in the future, costs associated with initiation of new out-licensing agreements that could result in our receipt of a royalty stream and, if necessary, costs necessary to maintain the underlying technology may be charged to the Royalties segment.

Contract Manufacturing Segment

Contract manufacturing revenues are primarily comprised of revenues from the
manufacture of MYOCET and Abelcet for Cephalon for the European market, and the
manufacture of an injectable multivitamin, MVI, for Hospira, Inc. (Hospira). We
entered into two additional manufacturing agreements in late 2006.

Contract manufacturing segment profitability (millions of dollars):


                                                    Year Ended
                    December            %            December            %            December
                      2008           Change            2007           Change            2006
Revenues            $   23.6              34         $   17.6              25         $   14.1
Cost of sales           16.4              23             13.2              12             11.8

Segment profit      $    7.2              66         $    4.4              91         $    2.3

Revenues

Contract manufacturing revenue for 2008 was $6.0 million or 34 percent higher than the revenues generated during 2007. Contract manufacturing revenue in 2008 was favorably affected by $0.9 million of compensation received in 2008 for certain non-routine services and timing of shipments to our customers (adversely affecting 2007 and having a favorable effect on 2008).

We do not anticipate the level of revenues recorded in 2008 will be achieved in 2009. In addition, our contract with Hospira for the manufacture of MVI is scheduled to terminate effective April 30, 2010. MVI currently contributes more than a third of the segment's revenues. Also, our agreements with Cephalon for the manufacture of MYOCET and Abelcet are scheduled to expire in January 2010 and November 2011, respectively, unless the parties agree to renew.

Contract manufacturing revenue for 2007 rose 25 percent to $17.6 million over the $14.1 million recorded in 2006 reflecting, in part, management's efforts to generate additional business in this segment and the reflection of a full year of business under two contracts entered into near the end of 2006. Also, the 2006 revenue amount was adversely affected by a $1.2 million billing adjustment.

Cost of sales

Cost of sales for contract manufacturing for 2008 was $16.4 million or approximately 69 percent of sales compared to $13.2 million or approximately 75 percent of sales for 2007. Two events have had a significant favorable influence on these cost comparisons. Cost of sales for 2008, as a percentage of sales, was favorably affected by the above-referenced non-routine services which contributed $0.9 million of revenues. These services were performed in 2007 but recognition was delayed until all criteria for revenue recognition were met. In addition, cost of sales for 2007 was adversely affected by certain start-up costs related to a new

Non-U.S. Revenue

. . .