OVERVIEW

We are a biopharmaceutical company with two business elements:

The principal focus of our efforts is to identify, develop and commercialize treatments for angioedemas that are identified as plasma kallikrein-mediated, which we refer to as PKM angioedemas, including hereditary angioedema (HAE) and idiopathic angioedema.

We developed KALBITOR (ecallantide) on our own, and since February 2010, we have been selling it in the United States for the treatment of acute attacks of HAE. Outside of the United States, we have established partnerships to obtain regulatory approval for and to commercialize KALBITOR in certain markets and we are evaluating opportunities in others.

We are expanding our franchise for the treatment of PKM angioedemas in the following ways:

? Development of diagnostic strategies to assist in the differentiation between histamine-mediated and PKM angioedema.

? Continuing our development of DX-2930, a fully human monoclonal antibody inhibitor of plasma kallikrein, which could be a candidate to prophylactically treat PKM angioedemas.

We leverage our proprietary phage display technology through our Licensing and Funded Research Program, referred to as the LFRP. This program has provided us a portfolio of product candidates being developed by our licensees, which currently includes 13 product candidates in various stages of clinical development, including three in Phase 3 trials, for which we are eligible to receive future royalties and/or milestone payments. The LFRP generated approximately $12.5 million of revenue for us in 2012. To the extent that our licensees commercialize some of the Phase 3 product candidates, our revenues under the LFRP are expected to experience growth beginning in 2014.

PKM ANGIOEDEMA PORTFOLIO

We are focused on identifying and developing treatments for patients who experience PKM angioedema. Using our phage display technology, we developed ecallantide, a compound shown in vitro to be a high affinity, high specificity inhibitor of human plasma kallikrein. Plasma kallikrein, an enzyme found in blood, produces bradykinin, a protein that causes blood vessels to enlarge or dilate, which can cause swelling known as angioedema. Plasma kallikrein is believed to be a key component in the regulation of inflammation and contact activation pathways. Excess plasma kallikrein activity is thought to play a role in a number of inflammatory diseases, including PKM angioedemas such as HAE and idiopathic angioedema.

We have three key areas of activity in our PKM angioedema portfolio:

? HAE and KALBITOR. In February 2010, we began selling KALBITOR in the United States for treatment of acute attacks of HAE in patients 16 years of age and older. We are selling KALBITOR on our own in the United States. Working with international partners, we intend to seek approval for and commercialize KALBITOR for HAE and other angioedema indications in markets outside of the United States. We have entered into agreements for others to develop and commercialize subcutaneous ecallantide for the treatment of HAE and other angioedema indications throughout Europe, Japan, China and countries in Latin America and the Middle East.

? Identification of PKM angioedemas. In order to expand our PKM angioedema portfolio, we have launched a program to identify one or more diagnostic strategies that will assist in the differentiation of PKM angioedema from histamine-mediated angioedema, in order to direct appropriate treatment. We have developed laboratory tests for which the process of clinical validation has commenced. These tools are expected to be relevant to both normal C1esterase inhibitor (C1-INH) and C1-INH deficient patients and will enable the identification of PKM angioedema, including Type III HAE and angioedema of unknown origin, or idiopathic angioedema.

? DX-2930 - Antibody for PKM angioedemas. Based on our knowledge of angioedema and the kallikrein-kinin pathway, we are investigating the use of a fully human monoclonal antibody that is an inhibitor of plasma kallikrein and which could be a candidate to treat prophylactically PKM angioedemas. After completing a series of pharmacokinetic, tolerability and preclinical studies, we believe DX-2930 may be effective for prophylactically treating these indications. We expect to file an Investigational New Drug application (IND) for this antibody in mid-2013.

LICENSING AND FUNDED RESEARCH PROGRAM

We believe that our phage display libraries, which we have developed using our core technology and know-how, represent a leading technology in antibody discovery. We leverage our proprietary phage display technology and libraries through our LFRP licenses and collaborations. To date, we have recognized more than $185 million of revenue under the LFRP, primarily related to license fees and milestones, including approximately $12.5 million of revenue in 2012. The LFRP has the potential for substantially greater revenues, if and when product candidates that are discovered by our licensees receive marketing approval and are commercialized.

LFRP Product Development

Currently, 18 product candidates generated by our licensees or collaborators under the LFRP portfolio are in clinical development and one product has received market approval from the FDA. We will receive future milestones and/or royalties from our licensees and collaborators for 13 of the 18 product candidates that are currently in clinical development, including three in Phase 3 and four in Phase 2 trials, to the extent these product candidates advance in development and are ultimately commercialized. Furthermore, our licensees and collaborators have 13 additional product candidates in various stages of preclinical development. Our licensees and collaborators are responsible for all costs associated with development of these product candidates. To the extent that our licensees commercialize some of the Phase 3 product candidates, our revenues under the LFRP are expected to experience growth beginning in 2014.

Under loan arrangements with affiliates of HC Royalty, we have obtained debt funding which has a principal balance of $81.2 million as of December 31, 2012, secured exclusively by the LFRP, which is described more fully in Note 8 to Notes to Consolidated Financial Statements filed under Item 8 of this Form 10-K.

RESULTS OF OPERATIONS

Revenues. Total revenues for 2012 were $54.7 million, compared with $48.7 million in 2011 and $51.4 million in 2010.

Product Sales. We began commercializing KALBITOR in the United States in 2010 for treatment of acute attacks of HAE in patients 16 years of age and older. We sell KALBITOR to our distributors, and we recognize revenue when title and risk of loss have passed to the distributor, typically upon delivery. Due to the specialty nature of KALBITOR, the limited number of patients, limited return rights and contractual limits on inventory levels, we anticipate that distributors will carry inventory that is in line with ordinary business needs. Although fluctuations can occur due to the acute nature of HAE attacks, generally distributors do not hold inventory of more than 60 days of anticipated demand.

We record product sales net of allowances and accruals related to trade prompt pay discounts, government rebates, a patient financial assistance program, product returns and other applicable allowances. In 2012, product sales of KALBITOR increased to $39.8 million, net of product discounts and allowances of $3.5 million, compared to product sales of $22.9 million, net of product discounts and allowances of $1.1 million during 2011 and product sales of $8.8 million, net of product discounts and allowances of $458,000 during 2010. The 2012 and 2011 increases in product sales were primarily due to a significant increase in the volume of KALBITOR units sold, as well as a price increase in each of those years.

Provisions for product sales allowances reduced gross product sales as follows (in thousands):

                                                       2012         2011        2010

    Total gross product sales                        $ 43,251     $ 23,999     $ 9,293

    Prompt pay and other discounts                   $ (1,722 )   $   (831 )   $  (205 )
    Government rebates and chargebacks                 (1,243 )       (249 )      (239 )
    Returns                                              (503 )        (35 )       (14 )
    Product sales allowances                         $ (3,468 )   $ (1,115 )   $  (458 )
    Total product sales, net                         $ 39,783     $ 22,884     $ 8,835

    Total product sales allowances as a percent of
     gross product sales                                  8.0 %        4.6 %       4.9 %

Development and License Fees. We also derive revenues from licensing, funded research and development fees, including milestone payments from our licensees and collaborators, in amounts that fluctuate from year-to-year due to the timing of the licensing and clinical activities of our collaborators and licensees. This revenue was $14.9 million in 2012, $25.9 million in 2011 and $42.6 million in 2010.

Development and license fee revenue in 2011 included $10.5 million recognized under our agreement, as amended, with Sigma-Tau, compared with $204,000 and $2.2 million recognized in 2012 and 2010, respectively (see Note 3, Significant Transactions - Sigma-Tau).

Development and license fee revenue in 2010 included the recognition of $11.3 million from the sale of rights to royalties and other payments related to Xyntha, a product developed by one of our licensees under the LFRP, and $13.8 million of previously deferred revenue associated with the Cubist license that was fully recognized during 2010 based upon Cubist's termination of its ecallantide development program.

Cost of Product Sales. We incurred $2.2 million of costs associated with product sales during 2012, $1.2 million during 2011 and $505,000 during 2010. This primarily includes the cost of testing, filling, packaging and distributing the KALBITOR product, as well as a royalty due on net sales of KALBITOR. Costs associated with the manufacture of KALBITOR prior to FDA approval were previously expensed when incurred and, accordingly, were not included in the cost of product sales during 2010, 2011 and 2012. The supply of KALBITOR produced prior to FDA approval met commercial needs through the third quarter of 2012. When this supply was depleted during the fourth quarter of 2012, our cost of product sales increased, reflecting more of the cost of manufacturing KALBITOR product. During 2013, we expect the cost of product sales to reflect the full cost of KALBITOR manufacturing.

Research and Development. Our research and development expenses are summarized as follows:

                                               Years Ended December 31,
                                            2012         2011         2010
                                                    (In thousands)
KALBITOR development costs                $ 16,371     $ 21,474     $ 17,157
Other research and development expenses     12,070       10,753       11,975
LFRP pass-through fees                       1,587        2,449        2,390
Total                                     $ 30,028     $ 34,676     $ 31,522

Our research and development expenses arise primarily from compensation and other related costs for our personnel dedicated to research, development, medical and pharmacovigilence activities, costs of post-approval studies and commitments and KALBITOR life cycle management, as well as fees paid and costs reimbursed to outside parties to conduct research and clinical trials.

KALBITOR development costs decreased in 2012 compared to 2011 primarily due to the discontinuation during June 2012 of the clinical study of the use of ecallantide for the treatment of ACE inhibitor-induced angioedema. This Phase 2 clinical study was initiated during 2011 and the increase in 2011 costs over 2010 was primarily due to this study. In addition, costs associated with obtaining regulatory approval for the treatment of HAE in territories outside the United States were $32,000, $2.0 million and $1.2 million during 2012, 2011 and 2010, respectively. These amounts were reimbursed by Sigma Tau and such payments are recorded as development and license fee revenue in our results of operations.

The 2012 increase in other research and development costs from 2011 was due primarily to the pre-clinical, scale-up activities for DX-2930, a fully human monoclonal antibody inhibitor of plasma kallikrein, which could be a candidate to treat prophylactically PKM angioedemas. The 2011 decrease in other research and development costs from 2010 was due to a shift in internal efforts from early stage development programs to KALBITOR development.

Research and development expenses may increase in future years, due to costs associated with our clinical study developing DX-2930 as a therapeutic candidate. Until the clinical studies are further advanced, we are not able to predict the future clinical costs that may be incurred for the development of this candidate.

Selling, General and Administrative. Our selling, general and administrative expenses consist primarily of the sales and marketing costs of commercializing KALBITOR, costs of our management and administrative staff, as well as expenses related to business development, protecting our intellectual property, administrative occupancy, professional fees and the reporting requirements of a public company. Selling, general and administrative expenses were $39.9 million in 2012 compared to $37.7 million in 2011 and $33.6 million in 2010.

The 2012 and 2011 increases in costs are primarily due to the expansion of infrastructure to support KALBITOR commercial efforts, primarily sales and marketing programs, and additional legal expenses to protect our intellectual property.

We do not anticipate a significant change in the trend for selling, general and administrative expenses in 2013.

Restructuring. In February 2012, we implemented a realignment of our business which included a workforce reduction. As a result, we recorded restructuring charges of approximately $1.4 million.

Interest Expense. Interest expense, which is primarily derived from our loan arrangement with HC Royalty, was $10.5 million, $10.3 million and $11.9 million in 2012, 2011 and 2010, respectively. Based on the modification of the HC Royalty loan in December 2011, under which we received additional proceeds of $20 million, we recorded interest expense in 2012 using the effective interest rate method for the different tranches of the loans. The effective interest rate is now approximately 13%. In 2011 and 2010, we recorded interest expense at the stated interest rate for each tranche, which in total was approximately 17.4%. The higher 2010 expense was also due to additional interest expense under the HC Royalty loan of approximately $1.4 million for payments in connection with the sale of our rights to royalties and other payments related to the Xyntha product.

Interest and Other Income. Interest income was $28,000, $184,000 and $209,000 in 2012, 2011 and 2010, respectively. The 2012 decrease in interest income was primarily due to lower cash and investment balances during the year.

In 2010, income of $1.5 million was recognized from several grants received under the Qualifying Therapeutic Discovery Project program. Under this program, the Internal Revenue Service, in conjunction with the Department of Health and Human Services, approved our applications for projects that showed significant potential to produce new and cost-saving therapies, support jobs and increase U.S. competitiveness. All proceeds from this grant were classified as Other Income in the Statement of Operations.

Net Loss. For the year ended December 31, 2012, the net loss was $29.3 million or $0.30 per share, as compared to $34.6 million or $0.35 per share in 2011, and $24.5 million or $0.26 per share in 2010.

LIQUIDITY AND CAPITAL RESOURCES

                                                   December 31,
                                                 2012         2011
                                                  (In thousands)
Cash and cash equivalents                      $ 20,018     $ 31,468
Short-term investments                            9,028       26,036
Total cash, cash equivalents and investments   $ 29,046     $ 57,504

The following table summarizes our cash flow activity:

                                                             Years Ended December 31,
                                                         2012          2011          2010
                                                                  (In thousands)
Net cash used in operating activities                  $ (28,482 )   $ (36,452 )   $ (34,131 )
Net cash provided by (used in) investing activities       14,343        30,609       (35,409 )
Net cash provided by financing activities                  2,689        18,710        58,755
Net (decrease) increase in cash and cash equivalents   $ (11,450 )   $  12,867     $ (10,785 )

We require cash to fund our operating activities, make capital expenditures, acquisitions and investments, and service debt. Through December 31, 2012, we have funded our operations through the sale of equity securities, which have provided aggregate net cash proceeds since inception of approximately $399 million, and from borrowed funds under our loan agreement with HC Royalty, which are secured by certain assets associated with our LFRP. In addition, we generate funds from product sales and development and license fees. Our excess funds are currently invested in short-term investments primarily consisting of United States Treasury notes and bills and money market funds backed by the United States Treasury.

Operating Activities.

In 2012, the principal use of cash in our operations was to fund our $29.3 million net loss. Of this net loss, certain costs were non-cash charges, such as depreciation and amortization costs of $1.1 million and stock-based compensation expense of $3.6 million. In addition to non-cash charges, we also had cash outflows due to changes in other operating assets and liabilities, including an increase in inventory of $2.9 million, an increase in prepaid and other assets of $2.8 million and a decrease in deferred revenue of $4.1 million, primarily associated with revenue recognized for LFRP licenses that was previously deferred.

In 2011, the principal use of cash in our operations was to fund our $34.6 million net loss. Of this net loss, certain costs were non-cash charges, such as depreciation and amortization costs of $1.6 million and stock-based compensation expense of $4.0 million. In addition to non-cash charges, we also had cash outflows due to changes in other operating assets and liabilities, including an increase in inventory of $5.2 million, an increase in accounts payable and accrued expenses of $1.6 million and a decrease in deferred revenue of $5.4 million, due primarily to the recognition of previously deferred revenue related to our collaborations to commercialize ecallantide outside of the United States.

In 2010, the principal use of cash in our operations was to fund our $24.5 million net loss. Of this net loss, certain costs were non-cash charges, such as depreciation and amortization costs of $1.6 million and stock-based compensation expense of $4.1 million. In addition to non-cash charges, we also had a net change in other operating assets and liabilities of $16.3 million, including a decrease in accounts payable and accrued expenses of $2.5 million, an increase in accounts receivable of $2.6 million, and a decrease in deferred revenue of $8.8 million. The change in deferred revenue is primarily due to the recognition of $13.8 million of revenue associated with the 2010 termination of the license and collaboration agreement with Cubist, offset by additional deferred revenue of $7.0 million from new collaborations to commercialize ecallantide outside the United States.

Investing Activities.

Our investing activities for 2012 primarily consisted of $23.0 million of investments which matured, offset by the purchase of $6.1 million of investments, as well as a decrease of $1.3 million in restricted cash resulting from the release of the letter of credit that had been issued as a security deposit under the lease of our previous facility in Cambridge, Massachusetts. These are offset by the purchase of $4.1 million of fixed assets primarily made up of leasehold improvements for the new Burlington facility, of which $2.6 million was covered by a tenant improvement allowance and $1.4 million was financed through an equipment loan arrangement.

Our investing activities for 2011 consisted of approximately $35.5 million of investment maturities, offset by the purchase of $3.0 million of investments. In addition, during 2011, we expended approximately $1.7 million in leasehold improvements related to the build-out of the new Burlington facility, of which $925,000 was reimbursed by the Landlord in 2011. The residual balance was reimbursed by the Landlord during 2012, as referenced above. In conjunction with the Burlington lease agreement, we have provided the landlord a letter of credit of $1.1 million to secure our obligations under the lease.

Our investing activities for 2010 consisted of the purchase of approximately $82.8 million of investments, offset by $47.0 million of investment maturities, as well as a decrease of $700,000 in restricted cash from the contractual reduction of the letter of credit that serves as our security deposit for the lease of our facility in Cambridge, Massachusetts.

Financing Activities.

Our financing activities for 2012 consisted $1.4 million from the issuance of common stock under the Employee Stock Purchase Plan and the Employee Stock Option Plan, a drawdown of $1.4 million under an equipment loan arrangement, as well as the repayment of long-term debt totaling $135,000, primarily to HC Royalty. See below for more details on our loan with HC Royalty.

Our financing activities for 2011 consisted of net proceeds of $19.9 million of new debt from an affiliate of HC Royalty, as well as principal repayments of long-term debt totaling $1.7 million, consisting of capital lease payments and $1.1 million to HC Royalty.

Our financing activities for 2010 consisted of net proceeds of $61.1 million from the sale of 20,186,132 shares of our common stock, as well as principal repayments of long-term debt totaling $2.8 million, consisting of capital lease payments and $1.9 million to HC Royalty.

We expect to continue to manage our cash requirements by completing additional partnerships, collaborations, and financial and strategic transactions. We expect that existing cash, cash equivalents, and short-term investments together with anticipated cash flow from existing development, collaborations and license agreements and product sales of KALBITOR will be sufficient to support our current operations into 2014. We will need additional funds if our cash requirements exceed our current expectations or if we generate less revenue than we expect during this period. We may seek additional funding through our collaborative arrangements and public or private financings. We may not be able to obtain financing on acceptable terms or at all, and we may not be able to enter into additional collaborative arrangements. Arrangements with collaborators or others may require us to relinquish rights to certain of our technologies, product candidates or products. The terms of any financing may adversely affect the holdings or the rights of our stockholders. If we need additional funds and are unable to obtain funding on a timely basis, we would curtail significantly our research, development or commercialization programs in an effort to provide sufficient funds to continue our operations, which could adversely affect our business prospects.

HealthCare Royalty Partners

In August 2012, we completed an agreement that we entered into with an affiliate of HC Royalty in December 2011 to refinance our existing loans with HC Royalty. At December 31, 2012, the aggregate principal amount of the new loan was $81.2 million, consisting of a $21.9 million Tranche A Loan and a $59.3 million Tranche B Loan. The loans bear interest at a rate of 12% per annum, payable quarterly. The loans will mature in August 2018, and can be repaid without penalty beginning in August 2015.

In connection with the loans, we entered into a security agreement granting HC Royalty a security interest in the intellectual property related to the LFRP, and the revenues generated through our licenses of the intellectual property related to the LFRP. The security agreement does not apply to our internal drug development or to any of our co-development programs for HAE.

Under the terms of the loan agreement, we are required to repay the loans based on the annual net LFRP receipts. Until September 30, 2016, required payments are equal to the sum of 75% of the first $15.0 million in specified annual LFRP receipts and 25% of specified annual LFRP receipts over $15.0 million. After September 30, 2016, and until the maturity date or the complete repayment of the loans, HC Royalty will receive 90% of all specified LFRP receipts. If the HC Royalty portion of LFRP receipts for any quarter exceeds the interest for that quarter, then the principal balance will be reduced. Any unpaid principal will be due upon the maturity of the loans. If the HC Royalty portion of LFRP revenues for any quarterly period is insufficient to cover the cash interest due for that period, the deficiency may be added to the outstanding principal or paid in cash. In December 2016 and August 2017, five years from the issuance dates of the Tranche A and Tranche B Loans, we must repay all additional accumulated principal above the original loan amounts of $21.7 million and $58.8 million, respectively.

Tranche A Loan

In December 2011, we entered into an agreement with an affiliate of HC Royalty and received a loan of $20 million (Tranche A Loan) and a commitment to refinance the amounts outstanding under our March 2009 amended and restated loan agreement (the March 2009 loan agreement) at a reduced interest rate in August 2012. The Tranche A Loan was unsecured and accrued interest at an annual rate of 13% through August 2012, at which time the Tranche A Loan and its accrued interest was combined with 102% of the unpaid principal and accrued interest outstanding under the March 2009 loan agreement upon the closing of the Tranche B Loan.

Upon execution of the Tranche A Loan, the terms of the Original Loans (defined below) were determined to be modified under ASC 470. Accordingly, during the year ended December 31, 2012, interest expense on the Loan is being recorded in the Company's financial statements at an effective interest rate of 13%.

Upon modification of the debt arrangement, the note payable balance related to the Tranche A Loan was reduced by $193,000 to reflect payment of legal fees in . . .