This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. All statements other than statements of historical facts are "forward looking statements" for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new products or licensing or collaborative arrangements, any statements regarding future economic conditions or performance, and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as "believes," "may," "will," "expects," "plans," "anticipates," "estimates," "potential," or "continue" or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained in this report are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including the risk factors set forth below, and for the reasons described elsewhere in this report. All forward-looking statements and reasons why results may differ included in this report are made as of the date hereof, and we assume no obligation to update these forward-looking statements or reasons why actual results might differ.

OVERVIEW

The information included in this management's discussion and analysis of financial conditions should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission (SEC), and our unaudited Consolidated Financial Statements for the three months ended March 31, 2009, as well as other disclosures, including the disclosures under "Risk Factors," that have been included in this Quarterly Report on Form 10-Q.

Facet Biotech Corporation (we, us, our, the Company) is a biotechnology company that takes a disciplined, biology-driven approach to identify and develop oncology therapeutics. We have core competencies in tumor biology and antibody engineering, as evidenced by our pipeline of four clinical-stage candidates, all of which are products of our research efforts, as well as our proprietary protein engineering technology platform. Our business strategy focuses primarily on the following areas: (i) focusing our efforts in oncology, (ii) advancing our existing pipeline, (iii) expanding our pipeline and (iv) refining our protein engineering platform technologies.

Basis of Presentation

Facet Biotech was organized as a Delaware corporation in July 2008 by PDL BioPharma, Inc. (PDL) as a wholly owned subsidiary of PDL. PDL organized the Company in preparation for the Spin-off of the Company, which was effected on December 18, 2008 (the Spin-off). Prior to the Spin-off, PDL's Biotechnology Business was not operated by a legal entity separate from PDL and a direct ownership relationship did not exist among all the components comprising the Biotechnology Business. We describe the Biotechnology Business transferred to us by PDL in connection with the Spin-off as though the Biotechnology Business were our business for all historical periods described. However, Facet Biotech had not conducted any operations prior to the Spin-off. References in this quarterly report to the historical assets, liabilities, products, business or activities of our business are intended to refer to the historical assets, liabilities, products, business or activities of the Biotechnology Business as those were conducted as part of PDL prior to the Spin-off.

We have prepared the condensed consolidated financial statements for the three months ended March 31, 2008 using PDL's historical cost basis of the various activities that comprise the Biotechnology Business as a component of PDL and reflect the results of operations and cash flows of the Biotechnology Business as a component of PDL. The statements of operations for the three months ended March 31, 2008 include expense allocations for general corporate overhead functions historically shared with PDL, including finance, legal, human resources, investor relations and other administrative functions, which include the costs of salaries, benefits, stock-based compensation and other related costs, as well as consulting and other professional services. Where appropriate, these allocations were made on a specific identification basis. Otherwise, the expenses related to services provided to the Biotechnology Business by PDL were allocated to Facet Biotech based on the relative percentages, as compared to PDL's other businesses, of headcount or another appropriate methodology depending on the nature of each item of cost to be allocated.

Research and Development Programs

We currently have several investigational compounds in various stages of development for the treatment of cancer and immunologic diseases, three of which we are developing with our collaboration partners; two with Biogen Idec Inc. and one with Bristol-Myers Squibb Company (BMS). The table below lists the antibodies for which we are pursuing development activities either on our own or in collaboration with other companies. These product candidates are at early stages of development, and none of our product candidates have been approved by the United States Food and Drug Administration (FDA) or commercialized in the indication in which our trials are focused. Not all clinical trials for each product candidate are listed below. The development and commercialization of our product candidates are subject to numerous risks and uncertainties, as noted in our "Risk Factors" of this Quarterly Report. For details on the development status of each product in the table below, please refer to Item 1 in our Annual Report on Form 10-K for the year ended December 31, 2008 as well as the Recent Developments section of this report below.

Product Candidate         Indication/Description        Program Status        Collaborator
Daclizumab                Multiple sclerosis       Phase 2                     Biogen Idec
Volociximab (M200)        Solid tumors             Phase 1/2                   Biogen Idec
Elotuzumab (HuLuc63)      Multiple myeloma         Phase 1                             BMS
PDL192                    Solid tumors             Phase 1                               -
PDL241                    Immunologic diseases     Preclinical                           *
Other preclinical         Oncology                 Multiple candidates                   -
research candidates                                under evaluation

Recent Developments

The following represents the significant events or developments that have occurred in the first quarter of 2009 and up to the date of the filing of this quarterly report:

† In January 2009, we undertook a restructuring effort pursuant to which we will eliminate approximately 80 positions. After the implementation of this 2009 restructuring plan, our workforce will be comprised of approximately 200 employment positions. We expect to recognize costs related to severance and post-termination benefits totaling approximately $3.6 million, of which we recognized $3.5 million in the first quarter of 2009.

† During April and early May 2009, we consolidated nearly all of our operations into one of our two leased facilities in Redwood City, and we will recognize lease-related restructuring charges in the second quarter of 2009 in connection with our vacating one of the two buildings. At this time, we are not able to make a good faith estimate of the amount or range of amounts of these charges. (See Note 10 to the Condensed Consolidated Financial Statements for further discussion of this charge.)

† In the first quarter for 2009, we and Biogen Idec announced that the FDA and European regulatory agencies agreed to consider an expanded SELECT study as one pivotal trial, thus requiring us to conduct only one additional registration-enabling study. As a result, we are preparing to amend the SELECT trial to increase the sample size from 300 to 600 patients and change the primary endpoint to annualized relapse rate.

Summary Financial Results for the First Quarter of 2009 and Outlook

In the first quarter of 2009, our total revenues were $9.6 million, an increase from $4.7 million in the comparable period in 2008. Our total expenses in the first quarter of 2009 were $38.5 million, representing an increase from the $17.4 million in operating expenses reported in the comparable 2008 period. This increase was due to the $49.7 million reduction in operating expenses in the first quarter of 2008 as a result of the gain that we recognized on the sale of our former manufacturing and related administrative facilities in Brooklyn Park, Minnesota and the related assets (the Manufacturing Assets). Excluding this gain, operating expenses decreased by $28.5 million compared to the first quarter of 2008.

Our net loss for the first quarter of 2009 was $29.2 million, compared to $13.2 million in the prior-year comparable period. In the first three months of 2009, net cash used in operating activities was $20.0 million, a decrease from $57.1 million used in operating activities in the comparable period in 2008. At March 31, 2009, we had cash, cash equivalents, marketable securities and restricted cash of $383.4 million, compared to $403.4 million at December 31, 2008.

We expect that in the near-term, our total revenues will be marginally higher than amounts recognized in 2008, driven primarily by revenues recognized under our BMS collaboration. Future revenues will vary from period to period and will depend substantially on (1) whether we are successful in our existing collaborations and receive milestone payments thereunder, (2) whether we enter into new collaboration agreements or out-license agreements, (3) the potential milestone payments we receive related to our out-licensing agreements,
(4) whether and to what extent expected development timelines change, which would impact the rate at which we recognize revenue related to certain previously received collaboration payments, and (5) the level of royalties we receive under the asset purchase agreement with EKR Therapeutics, Inc. (EKR), which was assigned to us by PDL in connection with the Spin-off. Our future collaboration revenues also will vary depending on which party in any collaboration is incurring the majority of development costs in any period (see our policy for revenues recognized under our collaboration agreements in Note 1 to the Condensed Consolidated Financial Statements).

Once we complete our restructuring activities in mid-2009, we expect our total operating expenses to be significantly lower than prior periods and increases or decreases thereof to correlate generally with the number of products we have under development and the phases of such development programs. Future operating expenses also will depend on whether we acquire the rights to additional products through in-licensing agreements or other means or enter into new collaboration agreements and will vary from period to period depending on which party in our existing collaboration, and any potential new collaboration, is incurring the majority of development costs in any period.

In addition, in April 2009, we granted approximately 688,000 fully-vested stock options to our employees (Value Transfer Grants). Consistent with the intent of these grants as disclosed in prior filings with the SEC, the Value Transfer Grants were provided to our employees to compensate them for the estimated value of vested PDL stock options that were forfeited in connection with the Spin-off. We expect the total fair value of the Value Transfer Grants to be between $4 and $5 million, as calculated using the Black-Scholes valuation model. As these stock options were fully vested as of the grant date, we will recognize 100 percent of the fair value of the Value Transfer Grants as stock-based compensation expense in the second quarter of 2009.

CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

There have been no material changes in our critical accounting policies, estimates and judgments during the quarter ended March 31, 2009 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2008.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2009 and 2008

Revenues

Revenues consist of (1) license and milestone revenues from collaborations,
(2) reimbursement of research and development (R&D) expenses under collaborations and (3) other revenues. Other revenues include license, maintenance and milestone revenues from the out-licensing of our technologies, humanization revenues and royalties.

                                                       Three Months Ended
                                                           March 31,
(in thousands)                                          2009         2008     % Change
License and milestone revenues from collaborations   $    3,045    $  1,825         67 %
Reimbursement of R&D expenses from collaborations         4,192         857        389 %
Other                                                     2,362       2,000         18 %
Total revenues                                       $    9,599    $  4,682        105 %

Total revenues increased by $4.9 million during the quarter ended March 31, 2009 from the comparable 2008 period due primarily to an additional $1.0 million and $4.2 million of license revenues and reimbursement of research and development (R&D) expenses, respectively, recognized under our collaboration with BMS, which was executed in the third quarter of 2008, and the recognition of $1.7 million of royalties received under our agreement with EKR. Such increases in revenues were partially offset by a reduction in revenues of $0.6 million under our collaboration with Biogen Idec from the first quarter of 2008, due principally to increased expenses incurred by Biogen Idec under our collaboration in 2009 (see discussion below), and a $1.4 million reduction in milestone and other revenues in 2009 from the first quarter of 2008.

With respect to the reimbursement of development costs, each quarter, we and our collaborators reconcile the development costs each party has incurred, and we record either a net receivable or a net payable in our consolidated financial statements. For each quarterly period, if we have a net receivable from a collaborator, we recognize revenues by such amount, and if we have a net payable to our collaborator, we recognize additional research and development expenses by such amount. Therefore, our revenues and research and development expenses may fluctuate depending on which party in the collaboration is incurring the majority of the development costs in any particular quarterly period.

Costs and Expenses



                               Three Months Ended
                                   March 31,
(in thousands)                  2009         2008     % Change
Research and development     $    24,065   $ 45,237        (47 )%
General and administrative        10,259     12,765        (20 )%
Restructuring charges              4,205      5,547          *
Asset impairment charges               -      3,521          *
Gain on sale of assets                 -    (49,671 )        *
Total costs and expenses     $    38,529   $ 17,399        121 %

Research and Development Expenses

Our R&D activities include (1) Research, (2) Process Sciences, Manufacturing and Quality, and (3) Preclinical Sciences and Clinical Development. Our research activities include progressing candidates with validated targets and biological pathways from the preclinical stage to the clinic, utilizing translational research to better inform the clinical investigation of our therapeutics and refining our protein engineering technology platform. Our process sciences, manufacturing and quality activities include process, pharmaceutical and analytical development as well as supply chain and quality functions. Preclinical sciences and clinical development are comprised of preclinical development, toxicology, pharmacokinetics, bioanalytics and clinical development, which includes regulatory, safety, medical writing, biometry, U.S. and European

clinical operations and program management. Our total R&D expenses for the first quarter of 2009 grouped by functional area within our R&D organization were as follows:

                                                 Three Months Ended
(in thousands)                                     March 31, 2009
Preclinical sciences and clinical development   $             11,955
Process sciences, manufacturing and quality                    7,105
Research                                                       5,005

Total R&D expenses                              $             24,065

We track our costs and expenses on a functional area basis and, as a result, we do not have detailed or complete cost breakdowns for our development programs. However, commencing in 2009, our financial systems now allow us to develop estimates of the direct costs associated with each of our active clinical and preclinical programs (Direct Program Costs), which include out-of-pocket expenses as well as estimated employee-related costs. Out-of-pocket costs include costs of conducting our clinical trials, such as fees to clinical research organizations (CROs) and clinical investigators, and monitoring, data management, drug supply and manufacturing expenses, costs of conducting preclinical studies and technology licensing fees. The employee-related costs were estimated by applying an average per-employee cost for our research and development organization to the number of direct employees dedicated to the programs during the quarter ended March 31, 2009. Our Direct Program Costs do not include: (i) allocations of research and development management or overhead costs, (ii) allocations of facilities and information technology (IT) expenses,
(iii) depreciation expenses, (iv) amortization of intangible assets, or
(iv) stock-based compensation. The following table reflects our estimated Direct Program Costs for each of our active clinical and preclinical development programs, as well as Other Direct R&D Costs and Costs Allocated to R&D, as described in the footnotes below, for the first quarter of 2009:

                                        Three Months Ended
(in thousands)                            March 31, 2009
Estimated Direct Program Costs:
Daclizumab (1)                         $              2,820
Elotuzumab (2)                                        4,589
Volociximab (3)                                       1,165
PDL 241                                               1,469
PDL 192                                               1,121
Other R&D Programs (4)                                1,818
                                                              % of Total R&D Costs
Total estimated direct program costs   $             12,982                     54 %

Other Direct R&D Costs (5)                            3,703                     15 %

Costs Allocated to R&D:
Depreciation and amortization                         1,118                      5 %
Corporate overhead (6)                                5,876                     24 %
Stock compensation                                      386                      2 %

Total R&D expenses                     $             24,065

R&D expenses decreased by $21.2 million from the first quarter of 2008 to the first quarter of 2009 due primarily to lower employee-related and overhead expenses in 2009 resulting from the impact of both the sale of the Manufacturing Assets during the first quarter of 2008 and our restructuring activities. This reduction in costs was also driven by a decrease in volociximab development costs and partially offset by increases in development costs for elotuzumab and daclizumab due to the progress of these programs.

General and Administrative Expenses

General and administrative expenses generally consist of costs of personnel, professional services, consulting and other expenses related to our administrative functions, including finance, information technology, facilities, legal, human resources, business development and marketing, and an allocation of facility and overhead costs. The $2.5 million decrease in general and administrative expenses during the first quarter of 2009 in comparison to 2008 was driven by lower legal and other expenses associated with the broader strategic initiatives that were underway during the first quarter of 2008 as well as lower employee-related expenses in 2009 resulting from the 2008 and 2009 restructuring and other cost reduction activities.

Restructuring Charges

The restructuring charges incurred during the first quarter of 2009 related to $3.5 million of expenses recognized in connection with our 2009 restructuring activities, $0.5 million in connection with the closure of our offices in Paris, France during the first quarter of 2009 and $0.2 million in charges related to transition employees under our 2008 Restructuring Plan. The $5.5 million of restructuring charges incurred during the first quarter of 2008 related solely to our 2008 restructuring activities. The decrease in restructuring charges during the first quarter of 2009 in comparison to 2008 is primarily attributable to the lower number of employees terminated under the 2009 plan in comparison to the 2008 plan. See Note 5 to the Condensed Consolidated Financial Statements for additional information.

Gain on Sale of Assets

In March 2008, we sold our Manufacturing Assets to an affiliate of Genmab A/S (Genmab) for total cash proceeds of $240 million. We recognized a pre-tax gain of $49.7 million upon the close of the sale in March 2008.

Asset Impairment Charges

Total asset impairment charges recognized during the three months ended March 31, 2009 and 2008 were zero and $3.5 million, respectively. During the first quarter of 2008, such charges primarily represented the cost of certain research equipment that we expected to have no future useful life and certain information technology projects that we terminated that had no future benefit to us as a result of our restructuring activities.

Interest and Other Income and Interest Expense



                                                   Three Months Ended
                                                       March 31,
(in thousands)                                    2009            2008        % Change
Interest and other income                     $        180    $          3       *
Interest expense                                      (422 )          (434 )     *
Total interest and other income, net and
interest expense                              $       (242 )  $       (431 )     *

Interest and other income relates to interest earned on our cash and available-for-sale securities accounts during the periods. The increase in interest income during the first quarter of 2009 from the first quarter of 2008 is due to our investment in the first quarter of 2009 of the $405 million cash distribution to us from PDL in December 2008 in connection with the Spin-off. Interest expense consists primarily of a portion of our lease payments on one of our two leased facilities in Redwood City, California. For accounting purposes, we are considered to be the owner of the leased property and we have recorded the fair value of the building and a corresponding long-term financing liability on our Consolidated Balance Sheets.

Income Taxes

Prior to July 2008, the operations of Facet Biotech were included in PDL's consolidated U.S. federal and state income tax returns and in tax returns of certain PDL foreign subsidiaries. Prior to the Spin-off on December 18, 2008, our provision for income taxes was determined as if Facet Biotech had filed tax returns separate and apart from PDL. We do not expect to record any federal or state income tax expense during 2009 based upon our projected U.S. tax loss for . . .