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 cutting-edge technologies, including our industry-leading PEGylation technology platform and the Locked Nucleic Acid 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 for several pharmaceutical companies to broaden our revenue base.

Results of Operations

Three-Month and Six-Month Periods Ended June 30, 2009 and 2008

Overview

For the three months ended June 30, 2009, all operating segments were profitable although the profitability of each was lower than that of the corresponding period of the preceding year while corporate and other expenses held relatively stable. This resulted in a pretax operating loss of $5.0 million for the second quarter of 2009 compared to a $1.6 million loss for the three months ended June 30, 2008. In the Products Segment, the favorable effects of revenue growth and cost of sales improvements were more than offset by higher spending on research and development. Royalty revenues in the second quarter of 2009 were lower for both PEG-INTRON and Pegasys when compared to the second quarter of 2008. Contract manufacturing revenues from nearly all contracts were lower during the second quarter of 2009 than in the comparative prior-year period.

On a six-month year-to-date basis, the Products Segment profit growth experienced during the first quarter of 2009 more than offset the second-quarter decline contributing to a company-wide pretax income of $1.2 million. Royalties and contract manufacturing profitability were lower for the first six months of 2009 than for the first six months of 2008. Corporate and other expenses, in the aggregate, were nearly unchanged in the six-month comparison although a gain of $4.5 million, net of the write-off of deferred offering costs, on the repurchase of notes payable during the first quarter of 2009 favorably affected the comparison.

Greater analysis of operating results on a segment-by-segment basis follows. Percentage changes below and throughout this Management's Discussion and Analysis are based on thousands of dollars and not the rounded millions of dollars reflected throughout this section.

Following is a reconciliation of segment profitability to consolidated (loss) income before income tax (millions of dollars):

                                   Three Months Ended June 30,        Six Months Ended June 30,
                                    2009                 2008             2009             2008
Products Segment profit       $          3.6     $            4.3   $        12.8    $         7.3
Royalty Segment profit                  13.9                 15.0            27.5             29.7
Contract Manufacturing
 Segment profit                          0.8                  2.8             2.9              4.8
Corporate and other expenses*          (23.3 )              (23.7 )         (42.0 )          (41.7 )
(Loss) income before income
 tax provision                $         (5.0 )   $           (1.6 ) $         1.2    $         0.1

* We do not allocate certain corporate income and expenses not directly identifiable with the respective segments, including general and administrative expenses, treasury activities and exploratory and preclinical research and development expenses. 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):

                            Three Months Ended June 30,         Six Months Ended June 30,
                                            %                                  %
                              2009        Change      2008        2009       Change     2008
Revenues                 $      29.9          2    $  29.2   $      59.6        5    $  56.6
Cost of sales                   10.4        (23 )     13.6          18.2      (27 )     25.2
Research and development         9.4        175        3.4          15.1      110        7.2
Selling and marketing            6.4        (10 )      7.0          12.9      (11 )     14.5
Amortization                     0.1          -        0.1           0.3        -        0.3
Restructuring charge               -       (100 )      0.8           0.3      (87 )      2.1
Segment profit           $       3.6        (14 )  $   4.3   $      12.8       76    $   7.3

   Revenues

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

              Three Months Ended June 30,          Six Months Ended June 30,
                           %                                    %
Product      2009       Change        2008         2009       Change      2008
Oncaspar $     14.0         6    $      13.2   $     28.1       10    $     25.5
DepoCyt         2.6         8            2.4          5.1       17           4.4
Abelcet         5.5       (17 )          6.6         11.4      (16 )        13.6
Adagen          7.8        12            7.0         15.0       14          13.1
Totals   $     29.9         2    $      29.2   $     59.6        5    $     56.6

The 2 percent growth in net product sales for the three months ended June 30, 2009 compared to the same period of 2008 was attributable primarily to higher revenues from our oncology product, Oncaspar, which grew 6 percent based primarily on volume growth and Adagen, for treatment of severe combined immunodeficiency disease, which rose 12 percent. On a year-to-date basis, net product sales grew by 5 percent, led by Oncaspar which rose 10 percent compared to the same period of 2008 and Adagen which rose 14 percent. Continued growth in sales of Oncaspar is reflective of its adoption in adult and young adult populations. Sales of DepoCyt, for treatment of lymphomatous meningitis, and Adagen tend to fluctuate from quarter-to-quarter given their very small targeted patient populations, although both products benefited from 2009 price increases. Abelcet, for treatment of invasive fungal infections, continues to experience competitive pressures in the marketplace from other therapeutics. We are also experiencing pricing pressure from other competitors. Abelcet sales were down 10 percent due to volume declines and approximately 6 percent due to lower average selling price in 2009 year to date compared to the same period of 2008.

Cost of sales

Cost of sales of marketed products for the three months ended June 30, 2009 was $10.4 million, or 35 percent of sales, compared to $13.6 million, or 46 percent of sales, for the comparable three-month period of 2008. Cost of sales of marketed products declined despite rising sales, dropping to 31 percent of sales in the first six months of 2009 from 44 percent in the first six months of 2008. The improvements in gross margin period-over-period, reflect in large part efficiencies derived across all products from the recent consolidation of our manufacturing facilities (see Restructuring). There was also a favorable effect on gross margins attributable to product mix. In addition, during the second quarter of 2009, we wrote off certain Adagen inventory due to the identification of some out-of-specification batches, and provided replacement product to customers. These events amounted to approximately $0.5 million and contributed to somewhat lower margins in the second quarter of 2009 than in the first quarter of 2009. The second-quarter 2008 amounts included $1.9 million immediate amortization of a $5.0 million licensing intangible milestone payment that was triggered during that quarter.

Research and development

Research and development spending on marketed products, primarily Oncaspar and Adagen, increased $6.0 million in the second quarter of 2009 to $9.4 million compared to the second quarter of 2008 of $3.4 million. On a year-to-date basis, research and development rose to $15.1 million in 2009 from $7.2 million the previous year. We continue to increase efforts to improve the manufacturing processes and pharmaceutical properties of both Oncaspar and Adagen. As previously reported, we are taking over responsibility for the production of L-asparaginase by the beginning of 2010. We will continue to invest in programs to enhance and secure the supply of Oncaspar and Adagen.

Selling and marketing expenses

Selling and marketing expenses consist primarily of sales and marketing personnel, other commercial expense and marketing programs to support our sales force as well as medical education. Selling and marketing expenses for the three months ended June 30, 2009 were $6.4 million, down 10 percent from $7.0 million in the second quarter of 2008 as a result of more focused deployment of resources resulting, in part, from the first-quarter 2009 restructuring discussed below. Year-to-date, selling and marketing expenses decreased 11 percent to $12.9 million in 2009 from $14.5 million in 2008.

As part of our continued efforts to streamline operations, during the first quarter of 2009, we undertook a reduction in workforce that affected most areas of the Company (refer also to Corporate and Other Expense below). Costs of severance and related benefits for employees in the Products segment affected by the 2009 workforce reduction amounted to $0.3 million during the first quarter of 2009. This is expected to be the entire charge related to this program in the Products segment and the amounts will be fully paid out by the end of 2009.

During 2007 and 2008, manufacturing operations were consolidated in the Company's Indianapolis, Indiana location and its South Plainfield, New Jersey location was decommissioned. Restructuring costs associated with the manufacturing consolidation program were fully accrued as of December 31, 2008. As of June 30, 2009, the balance of the accrued expenses for unpaid employee separation and related benefits related to this program was $0.2 million. The liability as of December 31, 2008 was $1.2 million. The reduction in the accrual was attributable to payments made; there were no adjustments made during the first six months of 2009.

The Company incurred the following costs in the Products Segment in connection with its restructuring programs during the three months and six months ended June 30, 2009 and June 30, 2008 (in thousands):

                                              Three Months Ended June 30,           Six Months Ended June 30,
                                                  2009               2008           2009                2008
Employee termination costs - 2009 program   $           -     $            -   $        283       $            -
Employee termination costs - manufacturing
         consolidation                                  -                496              -                1,524
Write-down of manufacturing assets                      -                393              -                  619
                                            $           -     $          889   $        283       $        2,143

--------------------------------------------------------------------------------
Royalties Segment

(millions of dollars)
                           Three Months Ended June 30,           Six Months Ended June 30,
                                        %                                   %
                          2009       Change          2008      2009      Change          2008
Royalty revenue       $     13.9       (7)         $ 15.0   $   27.5       (8)         $ 29.7

Royalty revenue declined 7 percent due primarily to PEG-INTRON royalties which declined 4 percent during the three months ended June 30, 2009 compared to the prior-year second quarter. As reported by Schering-Plough Corporation, this was attributable to the unfavorable impact of foreign exchange coupled with lower sales of PEG-INTRON in the U.S. Further contributing to the decline, royalties from Pegasys in the second quarter of 2009 decreased significantly on a comparison basis from the corresponding quarter of 2008. Timing of shipments of Pegasys in the second quarter of 2008 resulted in higher revenues that period. For the six months ended June 30, 2009, the year-over-year decline in royalty revenues was 8 percent. Reductions in royalty revenues on PEG-INTRON and Pegasys were the principal influences here as well.

Costs and expenses

Royalty revenues do not require any material specific maintenance 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

(millions of dollars)

                               Three Months Ended June 30,           Six Months Ended June 30,
                                          %                                     %
                             2009      Change            2008      2009      Change          2008
Revenues                  $    3.4      (49)           $  6.8   $    8.7      (35)         $ 13.4
Cost of sales                  2.5      (35)              3.9        5.6      (34)            8.4
General and
administrative                 0.1        -               0.1        0.2        -             0.2
Segment profit            $    0.8      (70)           $  2.8   $    2.9      (38)         $  4.8

Contract manufacturing revenue for the three months ended June 30, 2009 was $3.4 million, essentially half of the $6.8 million generated in the comparable three-month period of 2008. For the six-months ended June 30, 2009, contract manufacturing revenues were down 35 percent to $8.7 million. The primary cause of the decline was a delay in the shipment of certain completed orders for the injectable vitamin, MVI, in the second quarter of 2009. Shipment of these orders was delayed pending additional testing and acceptance by the customer. The decrease in year-to-date contract manufacturing revenue also was partly attributable to revenue recognized in the first quarter of 2008 for non-routine services for design work for existing customers. Our contract for manufacture of MVI, an injectable multivitamin, is scheduled to terminate effective April 30, 2010 which could cause a reduction in our production of MVI over the latter half of 2009. Our agreements with Cephalon France SAS regarding the manufacture of MYOCET and Abelcet expire in January 2010 and November 2011, respectively.

Cost of sales

Cost of sales for contract manufacturing for the three months ended June 30, 2009 was $2.5 million or 73 percent of sales compared to $3.9 million or 57 percent of sales for the comparable three-month period of 2008. Unfavorable variances related to lower production volumes adversely affected second-quarter 2009 margins. For the six months ended June 30, 2009, cost of sales as a percent of sales was approximately 64 percent, not materially different than the 63

Non-U.S Revenue

During the three months ended June 30, 2009, we had export sales and royalties on export sales of $17.7 million, of which $10.8 million were in Europe. This compares to $20.5 million of export sales in the comparable three-month period of 2008, of which $14.4 million were in Europe.

We had export sales and royalties on export sales of $35.6 million and $40.7 million, of which $21.4 million and $27.7 million were in Europe, for the six months ended June 30, 2009 and 2008, respectively.

Corporate and Other Expense

(millions of dollars)

                                      Three Months Ended June 30,              Six Months Ended June 30,
                                                     %                                       %
                                    2009           Change        2008        2009         Change        2008
 Research and development        $    11.8            11       $ 10.6     $   22.9           16       $ 19.6
 General and administrative           10.0            (9 )       11.0         19.4            2         19.1
 Restructuring                           -             -            -          0.7         n.m.            -
 Other (income) expense:
     Investment income, net           (1.1 )           3         (1.1 )       (2.1 )        (36 )       (3.3 )
     Interest expense                  2.7           (14 )        3.2          6.0           (8 )        6.6
     Other, net                       (0.1 )        n.m.            -         (4.9 )       n.m.         (0.3 )
                                       1.5           (24 )        2.1         (1.0 )       n.m.          3.0
 Corporate and other expenses    $    23.3            (1 )     $ 23.7     $   42.0            1       $ 41.7

n.m. - not meaningful

Research and development. For the three months ended June 30, 2009, research and development expenses increased 11 percent to $11.8 million as compared to $10.6 million for the three months ended June 30, 2008. Based on findings from our Phase I studies, we initiated a Phase II study for our PEG-SN38 in metastatic colorectal cancer patients. This study opened for enrollment in June. We also continue to increase dosage in our Phase I studies for the HIF-1 alpha antagonist and Survivin antagonist. The second quarter of 2008 spending included $2.0 million in milestone payments related to the LNA platform. For the six-month period ended June 30, 2009, research and development expenses increased 16 percent to $22.9 million. We continue to advance our research and development programs in areas such as PEG-SN38, the HIF-1 alpha antagonist and other LNA- and PEGylation- based programs. We anticipate increased levels of research and development expenses for the full year 2009 when compared to 2008.

General and administrative. General and administrative expense decreased to $10.0 million for the three months ended June 30, 2009 from $11.0 million in the three months ended June 30, 2008. We are experiencing some efficiencies from our recent restructuring initiatives. During the three-month periods ended June 30, 2009 and June 30, 2008, we incurred significant legal and other costs that are not expected to recur in future periods, including costs associated with a proposed shareholder consent solicitation and related litigation in 2009 and expenses related to the previously considered spin-off of our biotechnology assets in 2008. For the six months ended June 30, 2009, general and administrative spending was up 2 percent over the prior-year comparative period, rising to $19.4 million. Reflected in the current-year spending is the cost of certain organizational and administrative enhancements, including the establishment of a business development function and the post-implementation costs of a newly developed enterprise resource planning (ERP) computer software system. In addition, beginning in the fourth quarter of 2008, costs associated with the site at South Plainfield, New Jersey have begun to be recognized in general and administrative expense (previously included in cost of sales) since production activities at that location have ceased completely. Such costs include security, utilities, insurance and monthly rental related to the South Plainfield facility.

Other (income) expense. Other (income) expense for the three months ended June 30, 2009 was net expense of $1.5 million, as compared to net expense of $2.1 million for the three months ended June 30, 2008. On a year-to-date basis, 2009 resulted in net income of $1.0 million, compared to $3.0 million of net expense in 2008. Other (income) expense includes: net investment income, interest expense and other income or expense.

Net investment income was essentially unchanged for the quarter ended June 30, 2009 at $1.1 million. On a year-to-date basis, net investment income declined 36 percent to $2.1 million. The second quarter of 2008 amounts were adversely affected by the impairment write-down of an auction rate security of $645 thousand reducing the amount of investment income reported for the three months ended June 30, 2008. Without this charge in the prior year, investment income would have shown greater rates of decline period-over-period which were attributable to general market conditions and lower investment returns.

Interest expense, which includes amortization of deferred debt issue costs, was $2.7 million and $6.0 million for the three-month and six-month periods ended June 30, 2009 and $3.2 million and $6.6 million for the three-month and six-month periods ended June 30, 2008, respectively. The reduction in interest expense resulted from the declining balance of 4% Convertible Senior Notes due in 2013 and elimination of the 4.5% Convertible Subordinated Notes that came due in July 2008.

During the first quarter of 2009, we repurchased $20.4 million principal amount of our 4% notes at a discount to par yielding a gain of $4.8 million (reflected in Other, net) exclusive of the write-off of related deferred debt offering costs of $0.3 million (reflected in interest expense).

Income taxes

During the three months and six months ended June 30, 2009, we recorded net tax expense of approximately $74,000 and $92,000, respectively, which represents Canadian tax liabilities and an adjustment to taxes payable. During the three months and six months ended June 30, 2008, we recorded net tax expense of $85,000 and $295,000, respectively, representing Canadian taxes payable and an adjustment to taxes payable. No federal income tax provision was recorded for the three months and six months ended June 30, 2009 as the estimated annual effective tax rate is zero.

Total cash reserves, which include cash, cash equivalents, short-term investments and marketable securities, were $187.8 million as of June 30, 2009, as compared to $206.9 million as of December 31, 2008. The decrease is primarily due to the repurchase of $20.4 million principal amount of our 4% notes payable at $15.6 million and payment of a $5.0 million milestone obligation in January 2009 (see below). We invest our excess cash primarily in investment-grade corporate debt securities.

Operating activities constituted a use of cash of $0.6 million during the six months ended June 30, 2009 as compared to a $9.2 million source of cash in the prior year six-month period. Net income for the six months ended June 30, 2009, adjusted for non-operating and noncash items such as depreciation, amortization and asset write-downs yielded approximately $10.0 million compared to approximately $14.0 million generated in the six months ended June 30, 2008. In addition, changes in balance sheet operating assets and liabilities utilized approximately $5.8 million more cash in the first six months of 2009 than was the case in the first six months of 2008. Inventory and accounts receivable balances were higher at June 30, 2009 than at December 31, 2008. Finished goods inventory balances at June 30, 2009 are somewhat elevated due to delayed shipment of certain orders of MVI. Accounts receivable balances generally returned to more normal levels at June 30, 2009 after having been reduced significantly at December 31, 2008 due in large part to timing of Oncaspar shipments. The increase in the accounts receivable balance at June 30, 2009 is also attributable to one customer claiming prior period chargebacks through offsets against current remittances to us. An initial assessment of the customer's claim indicates that we will recover the amounts deducted to date. However, it is possible a portion of the disputed amount will result in an expense to us. We cannot estimate what the outcome of this claim will be.

Cash was used in investing activities in the first six months of 2009 in the amount of approximately $17.0 million due primarily to net investments in marketable securities, and a payment of $5.0 million to Sanofi-Aventis in January 2009. The $5.0 million was a milestone payment accrued for in 2008

Repurchase of $20.4 million principal amount of the 4% notes payable for a cash outlay of $15.6 million constituted the primary financing cash outflows during the first six months of 2009. During the first six months of 2008, redemption of $59.9 million principal amount of our 4.5% notes payable required a cash outlay of $59.5 million, again representing the majority of financing activities.

As of June 30, 2009, we had outstanding $250.0 million of convertible senior notes payable that bear interest at an annual rate of 4%. Interest is payable on June 1 and December 1 for the 4% notes. Accrued interest on the notes was $0.8 million and $0.9 million, respectively as of June 30, 2009 and December 31, 2008.

Included in our short-term investments at June 30, 2009 are investments in . . .