Forward-Looking Statements
The forward-looking statements in this report involve significant risks, assumptions and uncertainties, and a number of factors, both foreseen and unforeseen, could cause actual results to differ materially from our current expectations. Forward-looking statements include those that express a plan, belief, expectation, estimation, anticipation, intent, contingency, future development or similar expression. The analysis of the data from our Phase 3 ASPEN trial of Riquent showed that the trial did not reach statistical significance with respect to its primary endpoint, delaying time to renal flare or for either secondary endpoint, improvement in proteinuria or time to major SLE flare and we decided to stop the study. Additional risk factors include the uncertainty and timing of initiating a strategic transaction to maximize the value of our remaining assets and continuing as a going concern. Accordingly, you should not rely upon forward-looking statements as predictions of future events. The outcome of the events described in these forward-looking statements are subject to the risks, uncertainties and other factors described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the "Risk Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 2008, and in other reports and registration statements that we file with the Securities and Exchange Commission from time to time and as updated in Part II, Item 1.A. "Risk Factors" contained in this Quarterly Report on Form 10-Q. We expressly disclaim any intent to update forward-looking statements.
Overview and Recent Developments
Since our inception in May 1989, we have devoted substantially all of our resources to the research and development of technology and potential drugs to treat antibody-mediated diseases. We have never generated any revenue from product sales and have relied on public and private offerings of securities, revenue from collaborative agreements, equipment financings and interest income on invested cash balances for our working capital.
On January 4, 2009, we entered into a development and commercialization agreement (the "Development Agreement") with BioMarin CF Limited ("BioMarin CF"), a wholly-owned subsidiary of BioMarin Pharmaceutical Inc. ("BioMarin Pharma"). Under the terms of the Development Agreement, BioMarin CF was granted co-exclusive rights to develop and commercialize Riquent in the United States, Europe and all other territories of the world, excluding the Asia Pacific region, and the non-exclusive right to manufacture Riquent anywhere in the world. In connection with the Development Agreement, we also entered into a securities purchase agreement with BioMarin Pharma. In January 2009, BioMarin CF paid us a non-refundable commencement payment of $7.5 million pursuant to the Development Agreement and BioMarin Pharma paid us $7.5 million in exchange for a newly designated series of our preferred stock pursuant to the securities purchase agreement. As described below, the Development Agreement was terminated on March 27, 2009.
In February 2009, we were informed by an Independent Monitoring Board for the Riquent Phase 3 ASPEN study that the monitoring board completed its review of the first interim efficacy analysis of Riquent and determined that continuing the study was futile. We subsequently unblinded the data and found that there was no statistical difference in the primary endpoint, delaying time to renal flare, between the Riquent-treated group and the placebo-treated group, although there was a significant difference in the reduction of antibodies to double-stranded DNA. There were 56 renal flares in 587 patients treated with either 300-mg or 900-mg of Riquent, and 28 renal flares in 283 patients treated with placebo.
Based on these results, we immediately discontinued the Riquent Phase 3 ASPEN study and the further development of Riquent. We had previously devoted substantially all of our research, development and clinical efforts and financial resources toward the development of Riquent. In connection with the termination of our clinical trials for Riquent, we subsequently initiated steps to significantly reduce our operating costs, including the termination of 75 employees, which was effected in April 2009. We also ceased the manufacture of Riquent at our facility in San Diego, California, as well as all regulatory activities associated with Riquent. Pursuant to SFAS No. 112, Employers' Accounting for Postemployment Benefits and SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, we recorded a charge of approximately $1.1 million in the quarter ended March 31, 2009, of which $0.7 million was included in research and development and $0.4 million was included in general and administrative expense. This amount is expected to be paid out by the end of the second quarter of 2009.

Following the futile results of the first interim efficacy analysis of Riquent, BioMarin CF has elected to not exercise its full license rights to the Riquent program under the Development Agreement. Thus, the Development Agreement between the parties terminated on March 27, 2009 in accordance with its terms. Pursuant to the securities purchase agreement between us and BioMarin Pharma, the Company's Series B-1 preferred shares purchased by BioMarin Pharma were converted into 10,173,120 shares of common stock. Additionally, all rights to Riquent have been returned to us.
In light of our decision to discontinue development of our Riquent clinical program, we are seeking to maximize the value of our remaining assets. We are currently evaluating our strategic alternatives, which include the following:
• Sell or out-license our remaining assets, including our SSAO compounds, although we do not expect to receive any significant value for them;

• Pursue other potential strategic transactions, which could include mergers, license agreements or other collaborations, with third parties; or

• Implement an orderly wind down of the Company if other alternatives are not deemed viable and in the best interests of the Company.

In considering our strategic alternatives, we do not expect to realize any value from our Riquent program and we have therefore closed our New Drug Application ("NDA") for Riquent with the Food and Drug Administration ("FDA") and have withdrawn our orphan drug designation for Riquent in Europe.
Following the negative results of the ASPEN trial, we recorded a significant charge for the impairment of our Riquent assets in 2008, including our Riquent-related patents, and it is unlikely that we will realize any substantive value from these assets in the future. Additionally, there is a substantial risk that we may not successfully implement any of these strategic alternatives, and even if we determine to pursue one or more of these alternatives, we may be unable to do so on acceptable terms. Any such transactions may be highly dilutive to our existing stockholders and may deplete our limited remaining capital resources.
In January 2009, we sold all of our auction rate securities to our broker-dealer, UBS A.G. ("UBS") at par value of $10.0 million. As of December 31, 2008, we had previously recognized a total impairment charge of $2.3 million as a result of the illiquidity of these securities, which was fully offset by a realized gain of $2.3 million from UBS's repurchase agreement that provides for a put option on these securities. Following the sale of these investments, we no longer hold any auction-rate securities. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including those related to patent costs, clinical/regulatory expenses and the fair value of our financial instruments. We base our estimates on historical experience and on 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 materially from these estimates under different assumptions or conditions.
We believe the following critical accounting policies involve significant judgments and estimates used in the preparation of our condensed consolidated financial statements (see also Note 1 to our unaudited condensed consolidated financial statements included in Part I).

Revenue recognition
The Development Agreement contained multiple potential revenue elements, including non-refundable upfront fees. We apply the revenue recognition criteria outlined in Staff Accounting Bulletin ("SAB"), No. 104, Revenue Recognition, Emerging Issues Task Force ("EITF") Issue 00-21, Revenue Arrangements with Multiple Deliverables ("EITF 00-21"), and EITF Issue No. 07-1, Accounting for Collaborative Arrangements (EITF No. 07-1). In applying these revenue recognition criteria, we consider a variety of factors in determining the appropriate method of revenue recognition under these arrangements, such as whether the elements are separable, whether there are determinable fair values and whether there is a unique earnings process associated with each element of a contract.
Impairment and useful lives of long-lived assets We regularly review our long-lived assets for impairment. Our long-lived assets include costs incurred to file our patent applications. We evaluate the recoverability of long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. At the time such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. The estimation of the undiscounted future cash flows associated with long-lived assets requires judgment and assumptions that could differ materially from the actual results.
Costs related to issued patents are amortized using the straight-line method over the lesser of the remaining useful life of the related technology or the remaining patent life, commencing on the date the patent is issued. Legal costs and expenses incurred in connection with pending patent applications have been capitalized. We expense all costs related to abandoned patent applications. If we elect to abandon any of our currently issued or unissued patents, the related expense could be material to our results of operations for the period of abandonment. The estimation of useful lives for long-lived assets requires judgment and assumptions that could differ materially from the actual results. In addition, our results of operations could be materially impacted if we begin amortizing the costs related to unissued patents.
For the year ended December 31, 2008, as a result of the futility determination in the ASPEN trial, we recorded a non-cash charge for the impairment of long-lived assets of $2.8 million to write down the value of our long-lived assets to their estimated fair values. No additional impairment losses have been recorded on our long-lived assets for the three months ended March 31, 2009. Accrued clinical/regulatory expenses
We review and accrue clinical trial and regulatory-related expenses based on work performed, which relies on estimates of total costs incurred based on patient enrollment, sites activated and other events. We follow this method because reasonably dependable estimates of the costs applicable to various stages of a clinical trial can be made. Accrued clinical/regulatory costs are subject to revisions as trials progress to completion. Revisions are charged to expense in the period in which the facts that give rise to the revision become known. Historically, revisions have not resulted in material changes to research and development costs.
Share-based compensation
We adopted Statement of Financial Accounting Standard ("SFAS") No. 123R, Share-Based Payment("SFAS 123R") using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006. Share-based compensation expense recognized under SFAS 123R was approximately $0.5 million and $1.1 million for the three-month periods ended March 31, 2009 and 2008, respectively. As of March 31, 2009, there was approximately $4.9 million of total unrecognized compensation cost related to non-vested share-based payment awards granted under all equity compensation plans. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We currently expect to recognize the remaining unrecognized compensation cost over a weighted-average period of 1.4 years. Additional share-based compensation expense for any new share-based payment awards granted after March 31, 2009 under all equity compensation plans cannot be predicted at this time because it will depend on, among other matters, the amounts of share-based payment awards granted in the future.

Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the employee and director stock options granted by us have characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in our opinion the existing valuation models may not provide an accurate measure of the fair value of the employee and director stock options granted by us. Although the fair value of the employee and director stock options granted by us is determined in accordance with SFAS 123R using an option-pricing model, that value may not be indicative of the fair value observed in a willing-buyer/willing-seller market transaction. Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (FASB) ratified the consensus reached by the EITF on EITF No. 07-1. EITF No. 07-1 requires collaborators to present the results of activities for which they act as the principal on a gross basis and report any payments received from (made to) other collaborators based on other applicable U.S. GAAP or, in the absence of other applicable U.S. GAAP, based on analogy to authoritative accounting literature or a reasonable, rational, and consistently applied accounting policy election. Further, EITF No. 07-1 clarified that the determination of whether transactions within a collaborative arrangement are part of a vendor-customer (or analogous) relationship subject to EITF No. Issue 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products). On January 1, 2009, we adopted the provisions of EITF No. 07-1 which did not have a material effect on our unaudited condensed consolidated financial statements for the three months ended March 31, 2009.
Results of Operations
For the three months ended March 31, 2009, revenue increased to $8.1 million as a result of the Development Agreement entered into with BioMarin CF in January 2009. The Development Agreement was terminated in March 2009 following the negative results from our Riquent Phase 3 ASPEN study.
For the three months ended March 31, 2009, research and development expense decreased to $9.9 million from $11.3 million for the same period in 2008 as a result of the discontinuation of the Riquent Phase 3 ASPEN study. This decrease was partially offset by an increase in termination expense, mainly relating to severance, of approximately $0.7 million related to the termination of research and development personnel. During April 2009, 65 research and development personnel were terminated.
For the three months ended March 31, 2009, general and administrative expense increased to $2.5 million from $1.9 million for the same period in 2008. This increase is primarily the result of an increase in termination expense, mainly relating to severance, of approximately $0.4 million related to the termination of general and administrative personnel as well as an increase in consulting and professional services. During April 2009, 10 general and administrative personnel were terminated.
Interest income, net, decreased to $0.03 million for the three months ended March 31, 2009, from $0.3 million for the same period in 2008. The decrease was primarily due to lower average balances of cash, cash equivalents and short-term investments and lower average interest rates as compared to 2008. Realized loss on investments, net, of $0.7 million for the three months ended March 31, 2008 primarily consisted of the other-than-temporary impairment loss on our auction rate securities recorded in the first quarter of 2008, in connection with the adoption of SFAS 157. These securities were sold to UBS at par value in January 2009.
Liquidity and Capital Resources
From inception through March 31, 2009, we have incurred a cumulative net loss of approximately $419.9 million and have financed our operations through public and private offerings of securities, revenues from collaborative agreements, equipment financings and interest income on invested cash balances. From inception through March 31, 2009, we have raised approximately $410.8 million in net proceeds from sales of equity securities.

At March 31, 2009, we had $17.6 million in cash and cash equivalents as compared to $19.4 million of cash, cash equivalents and short-term investments at December 31, 2008. Our working capital at March 31, 2009 was $6.1 million, as compared to $3.0 million at December 31, 2008. The decrease in cash, cash equivalents and short-term investments resulted from the use of our financial resources to fund our clinical trial and manufacturing activities and for other general corporate purposes. This decrease was partially offset by the non-refundable commencement payment of $7.5 million received from BioMarin CF under the Development Agreement and the proceeds of $7.5 million from the sale of 339,104 shares of our preferred stock to BioMarin Pharma under the securities purchase agreement in January 2009.
As of March 31, 2009, approximately $3.8 million of equipment ($0.2 million net of depreciation and 2008 impairment charges) secured our notes payable and capital lease obligations. We lease certain equipment under operating leases. We also lease two adjacent buildings in San Diego, California covering a total of approximately 54,000 square feet. Both building leases expire on July 31, 2009. Pursuant to one of the leases, we are responsible for completing modifications to the leased building prior to lease expiration. Management has accrued a reasonable estimate for the cost of these modifications as of March 31, 2009, however, should the landlord take a more aggressive position on the interpretation of the lease expiration obligations and prevail, the additional costs could be significant.
The following table summarizes our contractual obligations at March 31, 2009 (in thousands). Long-term debt obligations include interest.

                                                                    Payment due by period
                                                Less than                                           More than
                                 Total           1 Year          1-3 Years        3-5 Years          5 Years
Long-Term Debt Obligations     $      341      $       180      $       161      $         -      $           -
Capital Lease Obligations              51               15               36                -                  -
Operating Lease Obligations           429              278              140               11                  -
Purchase Obligations                   50               50                -                -                  -

Total                          $      871      $       523      $       337      $        11      $           -

We intend to use our financial resources to fund our current obligations and to pursue other strategic alternatives that may become available to us. In the future, it is possible that we will not have adequate resources to support continued operations and we will need to cease operations.
Our future capital uses and requirements depend on numerous forward-looking factors. These factors include but are not limited to the following:
• our ability to sell, out-license or otherwise dispose of our assets, including our SSAO compounds, although we do not expect to receive any significant value for them;

• our ability to consummate a merger with another company; or

• our ability to negotiate favorable settlement terms with our creditors, as well as any actions that may be taken by our creditors, which could force us to wind down the Company.

There can be no assurance that we will be able to enter into any strategic transactions on acceptable terms, if any, and our negotiating position may worsen as we continue to utilize our existing resources. Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our consolidated financial condition, changes in our consolidated financial condition, expenses, consolidated results of operations, liquidity, capital expenditures or capital resources.