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 a potential drug candidate through clinical development. We are currently focusing the majority of our human and financial resources on our oncology therapeutic area.

In February 2009, we announced our plan to undertake a review of strategic alternatives that could enhance shareholder value. These alternatives range from selling or licensing CR011, to acquiring additional assets or business lines, to selling the company. There is no assurance that this process will result in any changes to our current business plan or lead to any specific action or transaction.

Royalties or other revenue generated from commercial sales of products developed through the application of our technologies or expertise is 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 CR011, and interest income.

We expect to continue incurring expenses relating to our research and development efforts as we focus on clinical trials required for the development of CR011-vcMMAE. Conducting clinical trials is a lengthy, time-consuming and expensive process and 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.

CR011 is a fully-human monoclonal antibody resulting from our collaboration with Amgen Fremont that utilizes antibody-drug conjugate, or ADC, technology licensed from Seattle Genetics to attach monomethylauristatin E, or vcMMAE, to yield CR011-vcMMAE. CR011 targets glycoprotein NMB, or GPNMB, a protein located specifically on the surface of cells including melanoma. After CR011-vcMMAE binds to the target protein, the ADC is transported inside the cancer cell where MMAE is cleaved from the

antibody and activated in the cell. We are currently conducting a clinical development program evaluating CR011-vcMMAE for:

                                                              Initiation of Patient
        Indication            Phase          Regimen               Enrollment                    Status

Metastatic melanoma           I/II     0.03 to 2.63 mg/kg           June 2006         Enrollment completed. Updated
                                      every three weeks in                            results anticipated in the
                                       Phase I; 1.88 mg/kg                            first half of 2009.
                                      every three weeks in
                                            Phase II

                                      Weekly and two out of         Sept 2007         Preliminary results
                                        every three week                              anticipated in the first half
                                            regimens                                  of 2009.

Breast cancer                 I/II      Every three weeks           June 2008         Enrollment ongoing.
                                             regimen                                  Preliminary results
                                                                                      anticipated in the first half
                                                                                      of 2009.

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 investment valuation, 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:

Investment Valuation

We invest in short-term and long-term marketable securities, principally corporate notes, government securities and other asset backed securities, in which our excess cash balances are invested.

As described in Note 8 to our consolidated financial statements, a substantial portion of our financial assets have been classified as Level 2. Inherent in Level 2 securities valuation are quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. Judgments and estimates are used in pricing Level 2 securities. While we believe the valuation methodologies are appropriate, the use of valuation methodologies is judgmental and changes in methodologies can have a material impact on our results of operations.

All of the securities in our investment portfolio are priced by our investment manager, an independent third party. On a quarterly basis, we obtain a second price for each security to compare to the price obtained from our investment manager. As of December 31, 2008 there have been no material variances in the prices obtained from these two sources, and as such we have used the pricing provided by our investment manager.

In accounting for investments, we evaluate if a decline in the fair value of a marketable security below our cost basis is other-than-temporary, and if so, we record an impairment charge in our consolidated statement of income. The factors that we consider in our assessments for our investments in debt securities include the fair market value of the security, the duration of the security's decline, and our ability and intent to hold to maturity. The determination of whether a loss is other than temporary is judgmental and can have a material impact on our financial results.

Our investment portfolio has not been adversely materially impacted by the recent disruption in the credit markets. However, if there is continued and expanded disruption in the credit markets this may have a potential impact on the determination of the fair value of financial instruments. Additionally, there can be no assurance that our investment portfolio will not be adversely affected in the future.

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 2008, we recognized the remaining $1.2 million of collaboration revenue related to the grant of exclusive worldwide rights by our former 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 were entitled to receive 50% of initial payments received by TopoTarget from such third party. During 2006, we received $1.3 million which previously was 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. In January 2008, TopoTarget was informed by the third party it had terminated the development of the preclinical compound pursuant to its license agreement with TopoTarget, and all unrecognized revenue was recognized upon termination.

Collaboration revenue during 2007 was generated by the recognition of collaboration revenue related to the grant of exclusive worldwide rights by our former collaboration partner TopoTarget to an unrelated third party of a preclinical HDAC inhibitor for potential use in the field of dermatology. Collaboration revenue during 2006 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. 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. 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 simplified method to estimate expected term of stock options as allowed under SAB 110. 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 consolidated financial statements included in this Annual Report on Form 10-K.

Results of Operations

Year 2008 Compared to Year 2007

The following table sets forth a comparison of the components of our net income
for the years ended December 31, 2008 and 2007 (in millions):



                                                                             $            %
                                                  2008         2007       Change        Change
Collaboration revenue                            $  1.2       $  0.1      $   1.1            *
Research and development expenses                  15.1         36.8        (21.7 )        (59 )%
General and administrative expenses                 5.2         11.7         (6.5 )        (56 )%
Restructuring charges                               0.5         11.3        (10.8 )        (96 )%
Gain on sale of intangible asset                   36.4           -          36.4            *
Interest income                                     3.4          5.6         (2.2 )        (39 )%
Interest expense                                    1.7          5.2         (3.5 )        (67 )%
Realized (loss) gain on sale of
available-for-sale investments, net                (0.4 )        0.7         (1.1 )          *
Gain on extinguishment of debt                      7.0          8.4         (1.4 )        (17 )%
Income tax (provision) benefit                     (0.3 )        0.2          0.5            *
Income from discontinued operations                  -          75.4        (75.4 )       (100 )%

Net income                                       $ 24.8       $ 25.4

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

Collaboration revenue. The increase in collaboration revenue for the year ended December 31, 2008, as compared to the year ended December 31, 2007 was due to the recognition of $1.2 million 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 had terminated the development of the preclinical compound pursuant to which we formerly received collaboration revenue. Therefore, all unrecognized collaboration revenue was recognized. We do not expect any collaboration revenue in 2009.

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; and allocated facility costs. Our research and development efforts in 2008 were 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 as a whole.

Below is a summary that reconciles our total research and development expenses for the years ended December 31, 2008 and 2007 by the major categories (in millions):

                                                                     $          %
                                                 2008     2007    Change      Change
      Contractual and manufacturing costs       $  6.4   $ 20.9   $ (14.5 )      (69 )%
      Salary and benefits                          4.2      9.1      (4.9 )      (54 )%
      Supplies                                     0.1      0.7      (0.6 )      (86 )%
      License fees and milestone payments          1.6      0.1       1.5          *
      Depreciation and amortization                 -       1.2      (1.2 )     (100 )%
      Allocated facility costs                     2.8      4.8      (2.0 )      (42 )%

      Total research and development expenses   $ 15.1   $ 36.8

The decrease in our research and development expenses for the year ended December 31, 2008 as compared to the year ended December 31, 2007 was due to the Transfer Agreement entered into in the second quarter 2008 with TopoTarget A.S. which effectively sold our rights to belinostat, a Phase I/II HDAC inhibitor and any other HDAC inhibitors, such that we would no longer incur additional clinical trial expenses. In 2007, we incurred expenses through the second quarter for our Biopharmaceutical Sciences Process facility, or BPS, which was closed July 27, 2007, and expenses through the fourth quarter 2007 related to velafermin clinical trials which were terminated in the fourth quarter. The reductions in 2008 compared to 2007 included a decrease in supplies caused by the closure of BPS, 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 due to the closure of some facilities. We had an increase in license fees and milestone payments in 2008 as compared to 2007, due to milestone expenses incurred relating to our collaboration agreements with Amgen Fremont and Seattle Genetics for advancing CR011-vcMMAE to Phase II. We anticipate our research and development expenses for 2009 will decrease as compared to 2008 in the contractual and manufacturing costs expense category due to the sale of our rights to develop belinostat and in the personnel costs category due to a reduction in workforce in December 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, 2008, as well as the current direct research and development expenses for the years ended December 31, 2008 and 2007 which were incurred on or after we started conducting a Phase I clinical trial for CR011-vcMMAE (in millions):

Clinical Development Costs for CR011-vcMMAE

          Cumulative as of
          December 31,
          2008 (since            Year Ended      Year Ended
          commencement          December 31,    December 31,
          of Phase I trial)         2008            2007         Indication
                                                                 Metastatic
                                                                  Melanoma/
          $ 15.0                $         7.9   $         2.7   Breast Cancer

We expect that the direct research and development expenses incurred in connection with our development of CR011-vcMMAE in 2009 will be consistent with expenses in 2008.

In addition, we have two inactive programs for which we incurred costs in 2008:

Velafermin-is a protein therapeutic we were investigating for the prevention of oral mucositis. We discontinued the development of this protein in the fourth quarter of 2007, after our Phase II dose-confirmatory clinical trial did not meet its primary endpoint. We incurred $1.4 million of costs related to closing out the velafermin program for the year ended December 31, 2008 compared to $13.2 million of costs for the year ended December 31, 2007. As of December 31, 2008, we had incurred cumulative costs of $51.7 million. As patients from this study were being followed for approximately one year post treatment for protocol-specified safety monitoring, the study was clinically complete at the end of September 2008. We do not anticipate incurring additional future costs for this program.

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. As of December 31, 2008 we had incurred cumulative costs of $48.1 million. On April 21, 2008, we announced the sale of our ownership in and development rights to belinostat to TopoTarget, and as such, we do not expect to incur any additional expenses in 2009 associated with this program.

Currently, our potential pharmaceutical products require significant research and development efforts and preclinical testing, and will require extensive evaluation in clinical trials prior to submitting an application to

regulatory agencies for their commercial use. Although we are conducting human studies with respect to CR011-vcMMAE, we may not be successful in developing or commercializing this or other products. Our product candidates are subject to the risks of failure inherent in the development and commercialization of pharmaceutical products and we cannot currently provide reliable estimates as to when, if ever, our product candidates will generate revenue and cash flows.

Completion of research and development, preclinical testing and clinical trials may take many years. Estimates of completion periods for any of our major research and development projects are highly speculative and variable, and dependent on the nature of the disease indication, how common the disease is among the general populace, and the results of the research. For example, preclinical testing and clinical trials can often go on for an indeterminate period of time since the results of tests are continually monitored, with each test considered "complete" only when sufficient data has been accumulated to assess whether the next phases of clinical trials are warranted or whether the effort should be abandoned. Typically, Phase I clinical trials are expected to last between 12 and 24 months, Phase II clinical trials are expected to last between 24 and 36 months and Phase III clinical trials are expected to last between 24 and 60 months. The most significant time and costs associated with clinical development are the Phase III trials as they tend to be the longest and largest studies conducted during the drug development process.

In addition, many factors may delay the commencement and speed of completion of preclinical testing and clinical trials, including, but not limited to, the number of patients participating in the trial, the duration of patient follow-up required, the number of clinical sites at which the trials are conducted, and the length of time required to locate and enroll suitable patient subjects. The successful completion of our development programs and the successful development of our product candidates are highly uncertain and are subject to numerous challenges and risks. Therefore, we cannot presently estimate anticipated completion dates for any of our projects.

Due to the variability in the length of time necessary to develop a product candidate, the uncertainties related to the cost of projects and the need to obtain governmental approval for commercialization, accurate and meaningful estimates of the ultimate costs to bring our product candidates to market are not available. If our major research and development projects are delayed, then we can expect to incur additional costs in conducting our preclinical testing and clinical trials, and that it will be a longer period of time before we might achieve profitability from our operating activities. Accordingly, the timing of the potential market approvals for our existing product candidate CR011-vcMMAE, may have a significant impact on our capital requirements.

General and administrative expenses. The decrease in general and administrative expenses for the year ended December 31, 2008, as compared to the year ended December 31, 2007, was due to a decrease in personnel, a decrease in consulting costs and lower patent legal fees all related to restructuring activities that occurred through the third quarter 2007. Our general and administrative expenses in 2009 are expected to remain consistent as compared to 2008.

Restructuring charges. During December 2008, we underwent a reduction in workforce and recorded restructuring charges of $0.5 million. This amount is related to employee separation costs payable in cash during the first half of 2009. In 2007, we underwent corporate restructurings to reduce operating costs and to focus resources on the advancement of our therapeutic pipeline through clinical development, resulting in full year 2007 restructuring charges of $11.3 million.

Gain on sale of intangible asset. The gain on sale of intangible asset of $36.4 million for the year ended December 31, 2008 was a result of the sale of . . .