a50045679.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 2011
 
Or
 
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from            to              .
 
 
Commission File No. 000-24537
 
DYAX CORP.
(Exact Name of Registrant as Specified in its Charter)
 
DELAWARE
 
04-3053198
(State of Incorporation)
 
(I.R.S. Employer Identification Number)
 
300 TECHNOLOGY SQUARE, CAMBRIDGE, MA 02139
(Address of Principal Executive Offices)
 
(617) 225-2500
(Registrant’s Telephone Number, including Area Code)
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
YES         ý                            NO          o

Indicate by check mark whether the registrant has submitted electronically and posted on it corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).

YES         ý                            NO          o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of "accelerated filer", "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer      o              Accelerated filer      ý           Non-accelerated filer      o        Smaller reporting company      o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES         o                            NO          ý

Number of shares outstanding of Dyax Corp.’s Common Stock, par value $0.01, as of October 26, 2011: 98,748,086
 
 
 

 
 
DYAX CORP.
 
TABLE OF CONTENTS

 
     
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Item 5
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Other Information of the Form 10-Q  55
       
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2

 

PART I – FINANCIAL INFORMATION

Item 1 – FINANCIAL STATEMENTS

Dyax Corp. and Subsidiaries
Consolidated Balance Sheets (Unaudited)

   
September 30,
2011
 
December 31,
2010
   
(In thousands, except share data)
ASSETS
 
Current assets:
           
Cash and cash equivalents
  $ 15,281     $ 18,601  
Short-term investments
    33,093       58,783  
Accounts receivable, net of allowances for doubtful accounts of $75 and $45 at September 30, 2011 and December 31, 2010, respectively
    6,790       5,315  
Inventory
    6,859       1,696  
Current portion of restricted cash
    1,266       922  
Other current assets
    2,977       3,248  
   Total current assets
    66,266       88,565  
Fixed assets, net
    1,957       2,178  
Restricted cash
    1,100       1,266  
Other assets
    669       422  
Total assets
  $ 69,992     $ 92,431  
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
Current liabilities:
               
Accounts payable and accrued expenses
  $ 10,417     $ 10,672  
Current portion of deferred revenue
    7,016       8,738  
Current portion of long-term obligations
    199       586  
   Other current liabilities
    1,428       700  
Total current liabilities
    19,060       20,696  
Deferred revenue
    10,310       12,598  
Note payable
    55,461       56,406  
Long-term obligations
          68  
Deferred rent and other long-term liabilities
          30  
Total liabilities
    84,831       89,798  
Commitments and contingencies (Notes 7, 8 and 10)
               
Stockholders' equity (deficit):
               
Preferred stock, $0.01 par value; 1,000,000 shares authorized; 0 shares issued and outstanding
           
Common stock, $0.01 par value; 200,000,000 shares authorized; 98,748,086 and 98,508,487 shares issued and outstanding at
September 30, 2011 and December 31, 2010, respectively
    987       985  
Additional paid-in capital
    447,534       443,926  
Accumulated deficit
    (463,386 )     (442,322 )
Accumulated other comprehensive income
    26       44  
Total stockholders' equity (deficit)
    (14,839 )     2,633  
Total liabilities and stockholders' equity (deficit)
  $ 69,992     $ 92,431  

The accompanying notes are an integral part of the unaudited consolidated financial statements.
 
 
3

 

Dyax Corp. and Subsidiaries Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)
 
    Three Months Ended  
 Nine Months Ended
    September 30,   September 30,
    2011   2010   2011   2010
   
(In thousands, except share and per share data)
Revenues:                                 
Product sales, net
  $ 6,597     $ 2,622     $ 15,888     $ 5,796  
Development and license fee revenues
    3,535       4,329       24,333       36,345  
Total revenues, net
    10,132       6,951       40,221       42,141  
Costs and expenses:                                 
Cost of product sales
    260       119       781       247  
Research and development expenses
    8,659       7,940       26,238       23,743  
Selling, general and administrative expenses
    8,790       7,668       27,120       24,619  
Total costs and expenses
    17,709       15,727       54,139       48,609  
Loss from operations
    (7,577 )     (8,776 )     (13,918 )     (6,468 )
Other income (expense):                                 
Interest and other income
    382       123       544       198  
Interest and other expenses
    (2,528 )     (2,601 )     (7,690 )     (9,291 )
Total other expense
    (2,146 )     (2,478 )     (7,146 )     (9,093 )
Net loss
    (9,723 )     (11,254 )     (21,064 )     (15,561 )
                                 
Other comprehensive income (loss):
                               
Unrealized gain (loss) on investments
    (27 )     (1 )       (18     33  
Comprehensive loss
  $ (9,750 )   $ (11,255 )   $ (21,082 )   $ (15,528 )
                                 
Basic and diluted net loss per share
  $ (0.10 )   $ (0.11 )   $ (0.21 )   $ (0.17 )
Shares used in computing basic and diluted net loss per share
    98,748,086       98,401,835       98,720,137       91,502,187  
 
The accompanying notes are an integral part of the unaudited consolidated financial statements.
 
 
4

 
 
Dyax Corp. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited)
 
   
Nine Months Ended September 30,
   
2011
 
2010
   
(In thousands)
Cash flows from operating activities:
           
Net loss
  $ (21,064 )   $ (15,561 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Amortization of purchased premium/discount
    190       26  
Depreciation and amortization of fixed assets and intangible assets
    973       1,134  
Non-cash interest expense
    1,612       1,145  
Compensation expenses associated with stock-based compensation plans
    3,110       2,935  
Loss on disposal of fixed assets
    --       51  
Provision for doubtful accounts
    10       15  
Changes in operating assets and liabilities:
               
Accounts receivable
    (1,485 )     937  
Prepaid research and development and other current assets
    271       (622 )
Inventory
    (5,075 )     (752 )
Other long-term assets
    (247 )     168  
Accounts payable and accrued expenses
    (1,540 )     (4,113 )
Deferred revenue
    (4,010 )     (9,442 )
Long-term deferred rent
    (30 )     (194 )
Other long-term liabilities
    --       11  
Net cash used in operating activities
    (27,285 )     (24,262 )
Cash flows from investing activities:
               
Purchase of investments
    (3,021 )     (53,667 )
Proceeds from maturity of investments
    28,502       21,999  
Purchase of fixed assets
    (236 )     (176 )
Proceeds from sale of fixed assets
    --       29  
Restricted cash
    (178 )     700  
Net cash provided by (used in) investing activities
    25,067       (31,115 )
Cash flows from financing activities:                
Net proceeds from common stock offerings
    323       61,133  
Repayment of long-term obligations
    (1,584 )     (2,613 )
Proceeds from the issuance of common stock under employee stock purchase plan and exercise of stock options
    159       263  
Net cash provided by (used in) financing activities
    (1,102 )     58,783  
Net increase (decrease) in cash and cash equivalents
    (3,320 )     3,406  
Cash and cash equivalents at beginning of the period
    18,601       29,386  
Cash and cash equivalents at end of the period
  $ 15,281     $ 32,792  
Supplemental disclosure of cash flow information:
               
Interest paid
  $ 6,923     $ 9,416  

The accompanying notes are an integral part of the unaudited consolidated financial statements.
 
 
5

 

DYAX CORP.
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
1. BUSINESS OVERVIEW
 
Dyax Corp. (Dyax or the Company) is a biopharmaceutical company focused on the discovery, development and commercialization of novel biotherapeutics for unmet medical needs. The Company currently has three major business components:
 
  
Dyax commercializes KALBITOR® (ecallantide) for treatment of acute attacks of hereditary angioedema (HAE) in the United States and is also developing KALBITOR for use in other indications.  Outside of the United States, Dyax has established partnerships to obtain regulatory approval for and commercialize KALBITOR in other major markets and is evaluating opportunities in additional territories.

  
Dyax leverages its proprietary phage display technology through its Licensing and Funded Research Program, or LFRP.  This program has resulted in a portfolio of product candidates being developed by its licensees, which currently includes 17 product candidates in clinical development.  The LFRP generated $26 million in revenue in 2010, and to the extent that one or more of these product candidates are commercialized according to published timelines, milestone and royalty revenues under the LFRP are expected to experience significant growth over the next several years.

  
Dyax uses its phage display technology to identify new drug candidates for its own preclinical pipeline.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and in accordance with instructions to the Quarterly Report on Form 10-Q.  It is management’s opinion that the accompanying unaudited interim consolidated financial statements reflect all adjustments (which are normal and recurring) necessary for a fair statement of the results for the interim periods.  The financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.  The accompanying December 31, 2010 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the dates of the financial statements and (iii) the reported amounts of revenue and expenses during the reporting periods.  Actual results could differ from those estimates.  The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.  

 Basis of Consolidation  

The accompanying consolidated financial statements include the accounts of the Company and the Company's European subsidiaries Dyax S.A. and Dyax B.V.  All inter-company accounts and transactions have been eliminated.

 
6

 
 
Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the amounts of assets and liabilities reported and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods.  The significant estimates and assumptions in these financial statements include revenue recognition, product sales allowances, useful lives with respect to long lived assets, valuation of stock options, accrued expenses and tax valuation reserves.  Actual results could differ from those estimates.

Concentration of Credit Risk 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, short-term investments and trade accounts receivable.  At September 30, 2011 and December 31, 2010, approximately 91% and 98%, respectively, of the Company's cash, cash equivalents and short-term investments were invested in money market funds backed by U.S. Treasury obligations, U.S. Treasury notes and bills, and obligations of United States government agencies held by one financial institution.  The Company maintains balances in various operating accounts in excess of federally insured limits.

The Company provides most of its services and licenses its technology to pharmaceutical and biomedical companies worldwide, and makes all product sales to its distributors.  Concentrations of credit risk with respect to trade receivable balances are usually limited on an ongoing basis, due to the diverse number of licensees and collaborators comprising the Company's customer base.  As of September 30, 2011, two customers accounted for 46% and 35% of the accounts receivable balance.  Three customers accounted for approximately 35%, 28% and 24%, of the Company's accounts receivable balance as of December 31, 2010, all of which were collected in the first quarter of 2011.

Cash and Cash Equivalents

All highly liquid investments purchased with an original maturity of ninety days or less are considered to be cash equivalents.  Cash and cash equivalents consist principally of cash and U.S. Treasury funds.

 Investments  

Short-term investments primarily consist of investments with original maturities greater than ninety days and remaining maturities less than one year at quarter end.  The Company has also classified its investments with maturities beyond one year as short-term, based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. The Company considers its investment portfolio of investments available-for-sale.  Accordingly, these investments are recorded at fair value, which is based on quoted market prices.  As of September 30, 2011, the Company's investments consisted of U.S. Treasury notes and bills with an amortized cost and estimated fair value of $33.1 million, and an unrealized gain of $26,000, which is recorded in other comprehensive income on the accompanying consolidated balance sheet.  As of December 31, 2010, the Company's investments consisted of United States Treasury notes and bills with an amortized cost of $58.7 million, an estimated fair value of $58.8 million, and had an unrealized gain of $44,000, which is recorded in other comprehensive income on the accompanying consolidated balance sheet.

Inventories

Inventories are stated at the lower of cost or market with cost determined under the first-in, first-out, or FIFO, basis. The Company evaluates inventory levels and would write-down inventory that is expected to expire prior to being sold, inventory that has a cost basis in excess of its expected net realizable value, inventory in excess of expected sales requirements, or inventory that fails to meet commercial sale specifications, through a charge to cost of product sales. Included in the cost of inventory are employee stock-based compensation costs capitalized under Accounting Standards Codification (ASC) 718.

 
7

 
 
Fixed Assets

Property and equipment are recorded at cost and depreciated over the estimated useful lives of the related assets using the straight-line method. Laboratory and production equipment, furniture and office equipment are depreciated over a three to seven year period. Leasehold improvements are stated at cost and are amortized over the lesser of the non-cancelable term of the related lease or their estimated useful lives. Leased equipment is amortized over the lesser of the life of the lease or their estimated useful lives. Maintenance and repairs are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost of these assets and related accumulated depreciation and amortization are eliminated from the balance sheet and any resulting gains or losses are included in operations in the period of disposal.
 
Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flow to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value on a discounted cash flow basis.

Revenue Recognition

The Company’s principal sources of revenue are product sales of KALBITOR, license fees, funding for research and development, and milestones and royalties derived from collaboration and license agreements.  In all instances, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, collectability of the resulting receivable is reasonably assured and the Company has no further performance obligations.

Product Sales and Allowances

Product Sales.  Product sales are generated from the sale of KALBITOR to the Company’s wholesale and specialty distributors, and are recorded upon delivery, net of applicable reserves for trade prompt pay discounts, government rebates, a patient assistance program, product returns and other applicable allowances.

Product Sales Allowances.  The Company establishes reserves for trade prompt pay discounts, government rebates, a patient assistance program, product returns and other applicable allowances.  Reserves established for these discounts and allowances are classified as a reduction of accounts receivable (if the amount is payable to the customer) or a liability (if the amount is payable to a party other than the customer).

Allowances against receivable balances primarily relate to prompt payment discounts and are recorded at the time of sale, resulting in a reduction in product sales revenue.  Accruals related to government rebates, the patient financial assistance program, product returns and other applicable allowances are recognized at the time of sale, resulting in a reduction in product sales revenue and the recording of an increase in accrued expenses.

The Company maintains service contracts with its distributors for patient service initiatives. Accounting standards related to consideration given by a vendor to a customer, including a reseller of a vendor’s product, specify that each consideration given by a vendor to a customer is presumed to be a reduction of the selling price.  Consideration should be characterized as a cost if the company receives, or will receive, an identifiable benefit in exchange for the consideration, and fair value of the benefit can be reasonably estimated.  The Company has established that the services are at fair value and represent a separate and identifiable benefit related to these services and, accordingly, has classified them as selling, general and administrative expense.
 
 
8

 

Prompt Payment Discounts.  The Company offers a prompt payment discount to its distributors.  Since the Company expects that its distributors will take advantage of this discount, the Company accrues 100% of the prompt payment discount that is based on the gross amount of each invoice, at the time of sale.  The accrual is adjusted quarterly to reflect actual earned discounts.

Government Rebates and Chargebacks.  The Company estimates reductions to product sales for Medicaid and Veterans' Administration (VA) programs and the Medicare Part D Coverage Gap Program, as well as with respect to certain other qualifying federal and state government programs.  The Company estimates the amount of these reductions based on KALBITOR patient data and actual sales data.  These allowances are adjusted each period based on actual experience.

Medicaid rebate reserves relate to the Company’s estimated obligations to states under the established reimbursement arrangements of each applicable state.  Rebate accruals are recorded during the same period in which the related product sales are recognized.  Actual rebate amounts are determined at the time of claim by the state, and the Company will generally make cash payments for such amounts after receiving billings from the state.

VA rebates or chargeback reserves represent the Company’s estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at a price lower than the list price charged to the Company’s distributor.  The distributor will charge the Company for the difference between what the distributor pays for the product and the ultimate selling price to the qualified healthcare provider.  Rebate accruals are established during the same period in which the related product sales are recognized. Actual chargeback amounts for Public Health Service are determined at the time of resale to the qualified healthcare provider from the distributor, and the Company will generally issue credits for such amounts after receiving notification from the distributor.

The Company offers a financial assistance program, which involves the use of a patient voucher, for qualified KALBITOR patients in order to aid a patient’s access to KALBITOR.  The Company estimates its liability from this voucher program based on actual redemption rates.

Although allowances and accruals are recorded at the time of product sale, certain rebates are typically paid out, on average, up to six months or longer after the sale.  Reserve estimates are evaluated quarterly and if necessary, adjusted to reflect actual results.  Any such adjustments will be reflected in the Company’s operating results in the period of the adjustment.

Product Returns.  Allowances for product returns are recorded during the period in which the related product sales are recognized, resulting in a reduction to product revenue.  The Company does not provide its distributors with a general right of product return. It permits returns if the product is damaged or defective when received by customers or if the product has expired.  The Company estimates product returns based upon historical trends in the pharmaceutical industry and trends for similar products sold by others.
 
 
9

 

During the three and nine months ended September 30, 2011 and 2010, provisions for product sales allowances reduced gross product sales as follows (in thousands):
 
   
Three months ended September 30,
 
Nine months ended September 30,
   
2011
 
2010
 
2011
 
2010
                         
Total gross product sales
  $ 6,931     $ 2,767     $ 16,634     $ 6,114  
                                 
Prompt pay and other discounts
  $ (193 )   $ (56 )   $ (447 )   $ (146 )
Government rebates and chargebacks
    (130 )     (88 )     (274 )     (161 )
Returns
    (11 )     (1 )     (25 )     (11 )
Product sales allowances
  $ (334 )   $ (145 )   $ (746 )   $ (318 )
Total product sales, net
  $ 6,597     $ 2,622     $ 15,888     $ 5,796  
                                 
Total product sales allowances as a percent of gross product sales
    4.8 %     5.2 %     4.5 %     5.2 %
 
Development and License Fee Revenues
 
In January 2011, the Company adopted a new U.S. GAAP accounting standard which amends existing revenue recognition accounting guidance to provide accounting principles and application guidance on whether multiple deliverables exist, whether and how the deliverables should be separated, and the consideration allocated.  The new guidance amends the requirement to establish objective evidence of fair value of undelivered products and services and provides for separate revenue recognition based upon management’s best estimate of selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item.  The adoption of this standardwill be applied to all new or materially amended agreements which include multiple deliverables in 2011.  In 2011, the Company applied the amended revenue guidance to several revenue arrangements entered into during the period, including one amendment which was determined to be a material modification to an existing agreement (see Note 3, Significant Transactions – Sigma-Tau).  
 
Collaboration Agreements.  The Company enters into collaboration agreements with other companies for the research and development of therapeutic, diagnostic and separations products. The terms of the agreements may include non-refundable signing and licensing fees, funding for research and development, payments related to manufacturing services, milestone payments and royalties on any product sales derived from collaborations.  These multiple element arrangements are analyzed to determine how the deliverables, which often include license and performance obligations such as research, steering committee and manufacturing services, are separated into units of accounting.
 
Before January 1, 2011, we evaluated license arrangements with multiple elements in accordance with Accounting Standards Codification, or ASC, 605-25 Revenue Recognition – Multiple-Element Arrangements.  In October 2009, the Financial Accounting Standards Board, or FASB, issued ASU 2009-13 Revenue Arrangements with Multiple Deliverables, or ASU 2009-13, which amended the accounting standards for certain multiple element arrangements to:
 
  
Provide updated guidance on whether multiple elements exist, how the elements in an arrangement should be separated and how the arrangement considerations should be allocated to the separate elements;
 
 
10

 
 
  
Require an entity to allocate arrangement consideration to each element based on a selling price hierarchy, also called the relative selling price method, where the selling price for an element is based on vendor-specific objective evidence (VSOE), if available; vendor objective evidence (VOE), if available and VSOE is not available; or the best estimate of selling price (BESP), if neither VSOE or VOE is available;
 
  
Eliminate the use of the residual method and require an entity to allocate arrangement consideration using the selling price hierarchy.
 
The Company evaluates all deliverables within an arrangement to determine whether or not they provide value to the licensee on a stand-alone basis.  Based on this evaluation, the deliverables are separated into units of accounting.  If VSOE or VOE is not available to determine the fair value of a deliverable, the Company determines the best estimate of selling price associated with the deliverable.  The arrangement consideration, including upfront license fees and funding for research and development is allocated to the separate units based on relative fair value.
 
VSOE is based on the price charged when an element is sold separately and represents the actual price charged for that deliverable.  For more advanced stage development licensing agreements, these arrangements are unique in nature and therefore the Company generally cannot establish VSOE for the elements within the arrangement.  For earlier stage funded research agreements, the Company can establish the fair value of the elements based on VSOE.  This type of agreement is less unique from licensee to licensee and the Company has more history of entering funded research agreements.
 
When VSOE cannot be established, we attempt to establish the selling price of the elements of a license arrangement based on VOE.  VOE is determined based on third party evidence for similar deliverables when sold separately.  In circumstances when the Company charges a licensee for pass-through costs paid to external vendors for development services, these costs represent VOE.
 
When we are unable to establish the selling price of an element using VSOE or VOE, management determines BESP for that element.  The objective of BESP is to determine the price at which we would transact a sale if the element within the license agreement was sold on a stand-alone basis.  Our process for establishing BESP involves management’s judgment and considers multiple factors including discounted cash flows, estimated direct expenses and other costs and available data.
 
Based on the value allocated to each unit of accounting within an arrangement, upfront fees and other guaranteed payments are allocated to each unit based on relative value.  The appropriate revenue recognition method is applied to each unit and revenue is accordingly recognized as each unit is delivered.
 
For agreements entered into prior to 2011, revenue related to upfront license fees was spread over the full period of performance under the agreement, unless the license was determined to provide value to the licensee on a stand-alone basis and the fair value of the undelivered performance obligations, typically including research or steering committee services was determinable.
 
Steering committee services that were not inconsequential or perfunctory and were determined to be performance obligations were combined with other research services or performance obligations required under an arrangement, if any, to determine the level of effort required in an arrangement and the period over which the Company expected to complete its aggregate performance obligations.
 
Whenever the Company determined that an arrangement should be accounted for as a single unit of accounting, it determined the period over which the performance obligations would be performed for revenue recognized. Revenue is recognized using either a proportional performance or straight-line method. The Company recognizes revenue using the proportional performance method when the level of effort required to complete its performance obligations under an arrangement can be reasonably estimated and such performance obligations are provided on a best-efforts basis. Direct labor hours or full-time equivalents are typically used as the measurement of performance.
 
 
11

 
 
If the Company cannot reasonably estimate the level of effort to complete its performance obligations under an arrangement, then revenue under the arrangement is recognized on a straight-line basis over the period the Company is expected to complete its performance obligations.
 
Many of the Company's collaboration agreements entitle it to additional payments upon the achievement of performance-based milestones. If the achievement of a milestone is considered probable at the inception of the collaboration, the related milestone payment is included with other collaboration consideration, such as up-front fees and research funding, in the Company's revenue model. Milestones that involve substantial effort on the Company's part and the achievement of which are not considered probable at the inception of the collaboration are considered "substantive milestones." All milestones achieved after January 1, 2011 which are determined to be substantive milestones are recognized as revenue in the period in which they are met in accordance with Accounting Standards Update (ASU) No. 2010-17, Revenue Recognition – Milestone Method.  For all milestones achieved prior to 2011, substantive milestones were included in the Company's revenue model when achievement of the milestone was considered probable. Milestones that are tied to regulatory approval are not considered probable of being achieved until such approval is received. Milestones tied to counter-party performance are not included in the Company's revenue model until the performance conditions are met.
 
Royalty revenue is recognized upon the sale of the related products provided the Company has no remaining performance obligations under the arrangement.
 
Costs of revenues related to product development and license fees are classified as research and development in the consolidated statements of operations and comprehensive loss.
 
Patent Licenses.  The Company generally licenses its patent rights covering phage display on a non-exclusive basis to third parties for use in connection with the research and development of therapeutic, diagnostic, and other products.
 
Standard terms of the patent rights agreements generally include non-refundable signing fees, non-refundable license maintenance fees, development milestone payments and royalties on product sales. Signing fees and maintenance fees are generally recognized on a straight line basis over the term of the agreement. Perpetual patent licenses are recognized immediately if the Company has no future obligations and the payments are upfront.
 
Library Licenses.  Standard terms of the proprietary phage display library agreements generally include non-refundable signing fees, license maintenance fees, development milestone payments, product license payments and royalties on product sales.  Signing fees and maintenance fees are generally recognized on a straight line basis over the term of the agreement as deliverables within these arrangements are determined to not provide the licensee with value on a stand-alone basis and therefore are accounted for as a single unit of accounting. As milestones are achieved under a phage display library license, a portion of the milestone payment, equal to the percentage of the performance period completed when the milestone is achieved, multiplied by the amount of the milestone payment, will be recognized. The remaining portion of the milestone will be recognized over the remaining performance period on a straight-line basis. Milestone payments under these license arrangements are recognized when the milestone is achieved if the Company has no future obligations under the license. Product license payments, which are optional to the licensee, are substantive and therefore are excluded from the initial allocation of the arrangement consideration.  These payments are recognized as revenue when the license is issued upon exercise of the licensee’s option, if the Company has no future obligations under the agreement. If there are future obligations under the agreement, product license payments are recognized as revenue only to the extent of the fair value of the license. Amounts paid in excess of fair value are recognized in a manner similar to milestone payments. Royalty revenue is recognized upon the sale of the related products provided the Company has no remaining performance obligations under the arrangement.
 
 
12

 
 
Payments received that have not met the appropriate criteria for revenue recognition are recorded as deferred revenue.
 
Cost of Product Sales  

Cost of product sales includes costs to procure, manufacture and distribute KALBITOR and manufacturing royalties. Costs associated with the manufacture of KALBITOR prior to regulatory approval were expensed when incurred as a research and development cost and accordingly, KALBITOR units sold during the three and nine months ended September 30, 2011 and 2010 do not reflect the full cost of drug manufacturing.

Research and Development  

Research and development costs include all direct costs, including salaries and benefits for research and development personnel, outside consultants, costs of clinical trials, sponsored research, clinical trials insurance, other outside costs, depreciation and facility costs related to the development of drug candidates.

Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes in accordance with ASC 740.  Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities using the current statutory tax rates.  At September 30, 2011 and December 31, 2010, there were no unrecognized tax benefits.

The Company accounts for uncertain tax positions using a "more-likely-than-not" threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. The Company evaluates uncertain tax positions on a quarterly basis and adjusts the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions.
 
Translation of Foreign Currencies

Assets and liabilities of the Company's foreign subsidiaries are translated at period end exchange rates. Amounts included in the statements of operations are translated at the average exchange rate for the period. All currency translation adjustments are recorded to other income (expense) in the consolidated statement of operations.  For the three and nine months ending September 30, 2011 the Company recorded other expense of $32,000 and other income of $15,000, respectively, for the translation of foreign currency.  For the three and nine months ending September 30, 2010, the Company recorded other income of $61,000 and other expenses of $33,000, respectively, for the translation of foreign currency.

Share-Based Compensation

The Company’s share-based compensation program consists of share-based awards granted to employees in the form of stock options, as well as its 1998 Employee Stock Purchase Plan, as amended (the Purchase Plan).  The Company’s share-based compensation expense is recorded in accordance with ASC 718.

 
13

 
 
Income or Loss Per Share

The Company presents two earnings or loss per share (EPS) amounts, basic and diluted in accordance with ASC 260.  Basic earnings or loss per share is computed using the weighted average number of shares of common stock outstanding. Diluted net loss per share does not differ from basic net loss per share since potential common shares from the exercise of stock options, warrants or rights under the Purchase Plan are anti-dilutive for the period ended September 30, 2011 and, therefore, are excluded from the calculation of diluted net loss per share.

Stock options and warrants to purchase a total of 11,682,969 and 9,932,997 shares of common stock were outstanding at September 30, 2011 and 2010, respectively.

Comprehensive Income (Loss)

The Company accounts for comprehensive income (loss) under ASC 220, Comprehensive Income, which established standards for reporting and displaying comprehensive income (loss) and its components in a full set of general purpose financial statements. The statement required that all components of comprehensive income (loss) be reported in a financial statement that is displayed with the same prominence as other financial statements.

Business Segments
 
The Company discloses business segments under ASC 280, Segment Reporting.   The statement established standards for reporting information about operating segments and disclosures about products and services, geographic areas and major customers.  The Company operates as one business segment within predominantly one geographic area.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies, which are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04). This newly issued accounting standard clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This ASU is effective on a prospective basis for annual and interim reporting periods beginning on or after December 15, 2011, which for Dyax will be January 1, 2012. The Company does not expect that adoption of this standard will have a material impact on its financial position or results of operations.

In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05, “Comprehensive Income (Topic 220)” (ASU 2011-05). This newly issued accounting standard (1) eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity; (2) requires the consecutive presentation of the statement of net income and other comprehensive income; and (3) requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income nor do the amendments affect how earnings per share is calculated or presented. This ASU is required to be applied retrospectively and is effective for fiscal years and interim periods within those years beginning after December 15, 2011, which for Dyax will be January 1, 2012. As this accounting standard only requires enhanced disclosure, the adoption of this standard will not impact the Company’s financial position or results of operations.

 
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3. SIGNIFICANT TRANSACTIONS

Sigma-Tau
 
In June 2010, the Company entered into a strategic partnership agreement with Defiante Farmaceutica S.A., a subsidiary of the pharmaceutical company Sigma-Tau SpA (Sigma-Tau) to develop and commercialize subcutaneous ecallantide for the treatment of HAE and other therapeutic indications throughout Europe, North Africa, the Middle East and Russia.  In December 2010, the original agreement was amended to expand the partnership to commercialize KALBITOR for the treatment of HAE in Australia and New Zealand (the first amendment).  In May 2011, the Company further amended its agreement with Sigma-Tau to include development and commercialization rights in Latin America (excluding Mexico), the Caribbean, Taiwan, Singapore and South Korea (the second amendment).
 
Under the terms of the original agreement, Sigma-Tau made a $2.5 million upfront payment.  In addition, Sigma-Tau purchased 636,132 shares of the Company's common stock at a price of $3.93 per share, which represented a 50% premium over the 20-day average closing price through June 17, 2010, for an aggregate purchase price of $2.5 million. 
 
Under the terms of the first amendment, Sigma-Tau made an additional $500,000 upfront payment to the Company and also purchased 151,515 shares of the Company's common stock at a price of $3.30 per share, which represented a 50% premium over the 20-day average closing price through December 20, 2010, for an aggregate purchase price of $500,000.  Both payments were received in January 2011. 
 
Under the terms of the second amendment, Sigma-Tau is required to make additional $7.0 million in non-refundable payments to the Company during 2011, of which $4.0 million was received in July 2011.
 
The Company is also eligible to receive over $115 million in development and sales milestones related to ecallantide and royalties equal to 41% of net sales of product, as adjusted for product costs.  Sigma-Tau will pay costs associated with regulatory approval and commercialization in the licensed territories.  In addition, the Company and Sigma-Tau will share equally the costs for all development activities for optional future indications developed in partnership with Sigma-Tau in the territories covered under the initial Sigma-Tau agreement. The partnership agreement may be terminated by Sigma-Tau, at will, upon 6 months’ prior written notice.  Either party may terminate the partnership agreement in the event of an uncured material breach or declaration or filing of bankruptcy by the other party.
 
Prior to the second amendment in May 2011, revenue related to this multiple element arrangement was being recognized in accordance with ASC 605.  The Company evaluated the terms of the second amendment relative to the entire arrangement and determined the amendment to be a material modification to the existing agreement for financial reporting purposes.  As a result, the Company evaluated the entire arrangement under the guidance of ASU No. 2009-13 which was adopted in 2011.  
 
Under the terms of the original agreement and first amendment, the Company analyzed this multiple element arrangement in accordance with ASC 605 and evaluated whether the performance obligations under this agreement, including the product license and development, steering committee, and manufacturing services should be accounted for as a single unit or multiple units of accounting.  The Company determined that there were two units of accounting.   The first unit of accounting included the product license, the committed future development services and the steering committee involvement. These deliverables were grouped into one unit of accounting due to the lack of objective and reliable evidence of fair value.  The second unit of accounting related to the manufacturing services, and was determined to meet all of the criteria to be a separate unit of accounting.  The Company had the ability to estimate the scope and timing of its involvement in the future development of the program as the Company's obligations under the development period are clearly defined.  Therefore, the Company recognized revenue related to the first unit of accounting utilizing a proportional performance model based on the actual effort performed in proportion to the total estimated level of effort.   Under this model, the Company estimated the level of effort to be expended over the term of the agreement and recognized revenue based on the lesser of the amount calculated based on proportional performance of total expected revenue or the amount of non-refundable payments earned.  As of the date of the second amendment, $4.8 million of revenue was recognized for the first unit of accounting.  To date, no revenue has been recognized related to manufacturing services as none have been provided.
 
 
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As the second amendment represented a material modification to the existing agreement, the Company re-evaluated the entire arrangement under ASU No. 2009-13, and determined all undelivered items under the agreement and divided them into separate units of accounting based on whether the deliverable provided stand-alone value to the licensee. These units of accounting consist of (i) the license to develop and commercialize ecallantide for the treatment of HAE and other therapeutic indications in the territories granted under the second amendment, (ii) steering committee services and (iii) committed future development services.  The Company then determined the best estimate selling price (BESP) for the license and steering committee services and the fair value of committed future development services was determined using vendor objective evidence.   The Company’s process for determining BESP involves management’s judgment and includes factors such as discounted cash flows, estimated direct expenses and other costs and available data.
 
Based on the change in revenue guidance applied to this arrangement, previously deferred revenue of $3.4 million was recognized during the second quarter of 2011.  This amount represents the existing deferred revenue balance and guaranteed payments less the total of BESP for the undelivered units of accounting.
 
As the license granted under the second amendment was delivered during the quarter, revenue related to this unit of $5.8 million was also recognized in the second quarter of 2011.   Revenue related to steering committee services of $190,000 was deferred and is being recognized under the proportional performance model as meetings are held through the estimated development period of ecallantide in the Sigma-Tau Territories.  Revenues associated with future committed development services will be recognized as incurred and billed to Sigma-Tau for reimbursement.  As future milestones are achieved and to the extent they involve substantial effort on the Company’s part, revenue will be recognized in the period in which the milestone is achieved.  The manufacturing services were determined to represent a contingent deliverable and, as such, have been excluded from the current revenue model.
 
The Company recognized revenue of approximately $280,000 and $12.2 million related to this agreement for the three and nine months ended September 30, 2011, respectively.  Revenue for the three and nine months ending September 30, 2011 would have been $1.2 million and $7.4 million, respectively, if revenue had been recognized under the previous revenue recognition model, prior to adoption of ASU 2009-13.
 
As of September 30, 2011 and December 31, 2010, the Company has deferred $174,000 and $3.1 million, respectively, of revenue related to this arrangement, which is recorded in deferred revenue on the accompanying consolidated balance sheets at such dates.  The deferred revenue balance at September 30, 2011, relates to the joint steering committee obligation which is estimated to continue until the middle of 2014.  As of September 30, 2011 and December 30, 2010, the Company had receivable balances due from Sigma-Tau of $3.1 million and $1.4 million, respectively.   
 
 
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CMIC
 
In September 2010, the Company entered into an agreement with CMIC Co., Ltd, (CMIC) to develop and commercialize subcutaneous ecallantide for the treatment of HAE and other angioedema indications in Japan.
 
Under the terms of the agreement, the Company received a $4.0 million upfront payment.  The Company is also eligible to receive up to $102 million in development and sales milestones for ecallantide in HAE and other angioedema indications and royalties of 20%-24% of net product sales. CMIC is solely responsible for all costs associated with development, regulatory activities, and commercialization of ecallantide for all angioedema indications in Japan. CMIC will purchase drug product from the Company on a cost-plus basis for clinical and commercial supply.

The Company analyzed this multiple element arrangement in accordance with ASC 605 and evaluated whether the performance obligations under this agreement, including the product license, development of ecallantide for the treatment of HAE and other angioedema indications in Japan, steering committee, and manufacturing services should be accounted for as a single unit or multiple units of accounting.  The Company determined that there were two units of accounting.  The first unit of accounting includes the product license, the committed future development services and the steering committee involvement.  The second unit of accounting relates to the manufacturing services.  At this time the scope and timing of the future development of ecallantide for the treatment of HAE and other indications in the CMIC territory are the joint responsibility of the Company and CMIC and therefore, the Company cannot reasonably estimate the level of effort required to fulfill its obligations under the first unit of accounting.  As a result, the Company is recognizing revenue under the first unit of accounting on a straight-lined basis over the estimated development period of ecallantide for the treatment of HAE and other indications in the CMIC territory of approximately seven years.
 
The Company recognized revenue of approximately $148,000 and $444,000 related to this agreement for the three and nine months ended September 30, 2011, respectively.  As of September 30, 2011 and December 31, 2010, the Company has deferred approximately $3.4 million and $3.9 million, respectively, of revenue related to this arrangement, which is recorded in deferred revenue on the accompanying consolidated balance sheets.
    
Sale of Xyntha Royalty Rights

In April 2010, the Company sold its rights to royalties and other payments related to the commercialization of the product Xyntha®, which was developed by one of the Company's licensees under the Company's phage display LFRP.  Under the terms of this sale, the Company received an upfront cash payment of $9.8 million and earned an additional $1.5 million milestone payment based on 2010 product sales.  The Company is also eligible to receive an additional $500,000 milestone payment based on 2011 product sales.  A portion of the cash payments received were required to be applied to the Company's loan with Cowen Healthcare (see Note 7 – Note Payable), totaling a $2.2 million principal reduction and interest expense of $1.4 million.  The Company has determined that it has no substantive future obligations under the arrangement.

Cubist Pharmaceuticals Inc.

In 2008, the Company entered into an exclusive license and collaboration agreement with Cubist Pharmaceuticals, Inc. (Cubist), for the development and commercialization in North America and Europe of the intravenous formulation of ecallantide for the reduction of blood loss during surgery. Under this agreement, Cubist assumed responsibility for all further development and costs associated with ecallantide in the licensed indications in the Cubist territory. The Company received $17.5 million in license and milestone fees in 2008 as a result of the Cubist agreement. Additionally, the Company received $3.6 million for drug product supply and reimbursement of costs incurred in 2008 related to the conduct of the Phase 2 clinical trial.

 
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On March 31, 2010, Cubist announced its intention to terminate this agreement with the Company.  Based upon Cubist's decision, $13.8 million of deferred revenue was recognized as revenue during the three months ended March 31, 2010, as the development period had ended.

4. FAIR VALUE MEASUREMENTS

The following tables present information about the Company's financial assets that have been measured at fair value as of September 30, 2011 and December 31, 2010 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize observable inputs other than Level 1 prices, such as quoted prices, for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability.
 
Description    (in thousands)
 
September 30,
2011
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
                       
Cash equivalents
  $ 10,807     $ 10,807     $     $  
Marketable debt securities
    33,093       33,093              
Total
  $ 43,900     $ 43,900     $     $  

Description   (in thousands)
 
December 31,
2010
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
                       
Cash equivalents
  $ 16,931     $ 16,931     $     $  
Marketable debt securities
    58,783       58,783              
Total
  $ 75,714     $ 75,714     $     $  

As of September 30, 2011 and December 31, 2010, the Company's investments consisted of U.S. Treasury notes and bills which are categorized as Level 1. The fair values of cash equivalents and marketable debt securities are determined through market, observable and corroborated sources. The carrying amounts reflected in the consolidated balance sheets for cash, cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses and other current liabilities approximate fair value due to their short-term maturities.
 
5. INVENTORY
 
In December 2009, the Company received marketing approval of KALBITOR from the FDA. Costs associated with the manufacture of KALBITOR prior to regulatory approval were expensed when incurred, and therefore were not capitalized as inventory.  As a result, the Company’s finished goods inventory does not include all costs of manufacturing drug substance currently being sold.  Subsequent to FDA approval, all costs associated with the manufacture of KALBITOR have been recorded as inventory, which consists of the following (in thousands):
 
   
September 30,
2011
 
December 31,
2010
Raw Materials                                         
  $ 1,364     $ 766  
Work in Progress                                         
    5,286       723  
Finished Goods
    209       207  
 Total
  $ 6,859     $ 1,696  

 
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6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
Accounts payable and accrued expenses consist of the following (in thousands):
 
   
September 30,
2011
 
December 31,
2010
Accounts payable                                         
  $ 2,889     $ 1,398  
Accrued employee compensation and related taxes
    3,499       4,847  
Accrued external research and development and contract manufacturing
    1,374       1,180  
Accrued legal                                         
    476       500  
Other accrued liabilities                                         
    2,179       2,747  
 Total
  $ 10,417     $ 10,672  
 
7. NOTE PAYABLE
 
In 2008, the Company entered into an agreement with Cowen Healthcare Royalty Partners, LP (Cowen Healthcare) for a $50.0 million loan secured by the Company's phage display LFRP (Tranche A loan). The Company used $35.1 million from the proceeds of the Tranche A loan to pay off its remaining obligation under a then existing agreement with Paul Royalty Fund Holdings II, LP.  In March 2009, the Company amended and restated the loan agreement with Cowen Healthcare to include a Tranche B loan of $15.0 million.

The Tranche A and Tranche B loans (collectively, the Loan) mature in August 2016.  The Tranche A portion bears interest at an annual rate of 16%, payable quarterly, and the Tranche B portion bears interest at an annual rate of 21.5%, payable quarterly. The Loan may be prepaid without penalty, in whole or in part, beginning in August 2012.  In connection with the Loan, the Company has entered into a security agreement granting Cowen Healthcare a security interest in the intellectual property related to the LFRP, and the revenues generated by the Company through the license of the intellectual property related to the LFRP. The security agreement does not apply to the Company's internal drug development or to any of the Company's co-development programs.

Under the terms of the loan agreement, the Company is required to repay the Loan based on the annual net LFRP receipts.  Until June 30, 2013, required payments are tiered as follows: 75% of the first $10.0 million in specified annual LFRP receipts, 50% of the next $5.0 million and 25% of annual included LFRP receipts over $15.0 million.  After June 30, 2013, and until the maturity date or the complete amortization of the Loan, Cowen Healthcare will receive 90% of all included LFRP receipts.  If the Cowen Healthcare 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 Loan.  If the Cowen Healthcare 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 by the Company. After five years from the date of funding of each tranche of the loan, the Company must repay to Cowen Healthcare all additional accumulated principal above the original $50.0 million and $15.0 million loan amounts of Tranche A and Tranche B, respectively.
 
 
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In addition, under the terms of the loan agreement, the Company is permitted to sell or otherwise transfer collateral generating cash proceeds of up to $25.0 million. Twenty percent of these cash proceeds will be applied to principal and accrued interest on the Loan plus any applicable prepayment premium and an additional 5.0% of such proceeds will be paid to Cowen Healthcare as a cash premium.  In 2010, the Company sold its rights to royalties and other payments related to the commercialization of a product developed by one of the Company’s licensees under the LFRP.  Under the terms of the sale, the Company has received $11.3 million and is eligible to receive an additional $500,000 based on 2011 product sales (see Note 3, Significant Transactions - Sale of Xyntha Royalty Rights).

In connection with the Tranche A loan, the Company issued to Cowen Healthcare a warrant to purchase 250,000 shares of the Company's common stock at an exercise price of $5.50 per share.  The warrant expires in August 2016 and became exercisable on August 5, 2009.  The Company estimated the relative fair value of the warrant to be $853,000 on the date of issuance, using the Black-Scholes valuation model, assuming a volatility factor of 83.64%, risk-free interest rate of 4.07%, an eight-year expected term and an expected dividend yield of zero.  In conjunction with the Tranche B loan, the Company issued to Cowen Healthcare a warrant to purchase 250,000 shares of the Company’s common stock at an exercise price of $2.87 per share.  The warrant expires in August 2016 and became exercisable on March 27, 2010.  The Company estimated the relative fair value of the warrant to be $477,000 on the date of issuance, using the Black-Scholes valuation model, assuming a volatility factor of 85.98%, risk-free interest rate of 2.77%, a seven-year, four-month expected term and an expected dividend yield of zero.  The relative fair values of the warrants as of the date of issuance are recorded in additional paid-in capital on the Company's consolidated balance sheets.

The cash proceeds from the Loan were recorded as a note payable on the Company's consolidated balance sheet.  The note payable balance was reduced by $1.3 million for the fair value of the Tranche A and Tranche B warrants, and by $580,000 for payment of Cowen Healthcare’s legal fees in conjunction with the Loan.  Each of these amounts is being accreted over the life of the note.

The following table reflects the activity on the Loan for financial reporting purposes for the nine months ended September 30, 2011 and the year ended December 31, 2010 (in thousands):

   
2011
 
2010
Balance, January 1
  $ 56,406     $ 58,096  
Accretion on warrants and discount
    184       246  
Loan activity:
               
     Interest expense
    7,470       11,420  
     Payments applied to principal
    (1,129 )     (1,935 )
     Payments applied to interest
    (6,042 )     (10,721 )
     Accrued interest payable
    (1,428 )     (700 )
Ending balance
  $ 55,461     $ 56,406  

The Loan principal balance at September 30, 2011, and December 31, 2010 was $56.7 million and $57.8 million, respectively.  The estimated fair value of the note payable was $52.2 million at September 30, 2011.

In August 2011, Cowen Healthcare assigned their rights and interests under the loan agreement to an affiliate, Vanderbilt Royalty Sub L.P.  Cowen Healthcare continues to act as the agent under the loan agreement and will continue to manage all obligations with respect to the Loan.

 
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8. FACILITY LEASE

In July 2011, the Company entered into a lease agreement for new premises located in Burlington, Massachusetts.  The premises, consisting of approximately 44,500 rentable square feet of office and laboratory facilities, will be used as the Company’s principal offices and corporate headquarters.  The Company intends to relocate all of its operations presently conducted in Cambridge, Massachusetts to the new facility in January 2012.  The term of the new lease is ten years, and the Company has rights to extend the term for an additional five years at fair market value subject to specified terms and conditions. The aggregate minimum lease commitment over the ten year term of the new lease is approximately $15.0 million.  During July, 2011, the Company provided the landlord a letter of credit of $1.1 million to secure its obligations under the lease.  The landlord has provided the Company with a tenant improvement allowance of up to $1.9 million an additional tenant improvement loan option of up to $668,000.
In connection with this relocation, the Company has exercised its right to terminate the lease agreement for the Company’s current headquarters in Cambridge, Massachusetts to coincide approximately with the commencement of the new lease.

9. STOCKHOLDER’S EQUITY (DEFICIT) AND STOCK-BASED COMPENSATION

Common Stock

In January 2011, the Company issued 151,515 shares of its common stock for an aggregate purchase price of $500,000 in connection with an amendment to a strategic partnership (see Note 3, Significant Transactions - Sigma Tau).

In May 2011, the Company’s stockholders approved an amendment to Dyax’s Restated Certificate of Incorporation to increase the number of authorized shares of common stock to 200,000,000 shares.

Equity Incentive Plan

The Company's 1995 Equity Incentive Plan (the Equity Plan), as amended, is an equity plan under which equity awards, including awards of restricted stock and incentive and nonqualified stock options to purchase shares of common stock may be granted to employees, consultants and directors of the Company by action of the Compensation Committee of the Board of Directors. Options are generally granted at the current fair market value on the date of grant, generally vest ratably over a 48-month period, and expire within ten years from date of grant. The Equity Plan is intended to attract and retain employees and to provide an incentive for employees, consultants and directors to assist the Company to achieve long-range performance goals and to enable them to participate in the long-term growth of the Company.  At September 30, 2011, a total of 3,389,540 shares were available for future grants under the Equity Plan.

Employee Stock Purchase Plan

The Company's Purchase Plan allows employees to purchase shares of the Company's common stock at a discount from fair market value.  Under this Plan, eligible employees may purchase shares during six-month offering periods commencing on June 1 and December 1 of each year at a price per share of 85% of the lower of the fair market value price per share on the first or last day of each six-month offering period.  Participating employees may elect to have up to 10% of their base pay withheld and applied toward the purchase of such shares, subject to the limitation of 875 shares per participant per quarter.  The rights of participating employees under the Purchase Plan terminate upon voluntary withdrawal from the Purchase Plan at any time or upon termination of employment.  The compensation expense in connection with the Plan for the three and nine months ended September 30, 2011 was approximately $8,000 and $32,000, respectively, and $16,000 and $47,000, respectively, for the three and nine months ended September 30, 2010.  There were 87,188 and 99,934 shares purchased under the Plan during the nine months ended September 30, 2011 and 2010, respectively. At September 30, 2011, a total of 506,892 shares were reserved and available for issuance under this Plan.

 
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Stock-Based Compensation Expense

The Company measures compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest.  The fair value of stock options is determined using the Black-Scholes valuation model. Such value is recognized as expense over the service period, net of estimated forfeitures and adjusted for actual forfeitures. The estimation of stock options that will ultimately vest requires significant judgment. The Company considers many factors when estimating expected forfeitures, including historical experience. Actual results and future changes in estimates may differ substantially from the Company's current estimates.

The following table reflects stock compensation expense recorded, net of amounts capitalized into inventory, during the three and nine months ended September 30, 2011 and 2010 (in thousands):
 
   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
   
2011
 
2010
 
2011
 
2010
Compensation expense related to:
                       
Equity Incentive Plan
  $ 883     $ 955     $ 3,078     $ 2,888  
Employee Stock Purchase Plan
    8       16       32       47  
    $ 891     $ 971     $ 3,110     $ 2,935  
                                 
Stock-based compensation expense charged to:
                               
Research and development expenses
  $ 273     $ 348     $ 896     $ 1,066  
                                 
Selling, general and administrative expenses
  $ 618     $ 623     $ 2,214     $ 1,869  

Stock-based compensation of $18,000 and $25,000 was capitalized into inventory for the nine months ended September 30, 2011 and 2010, respectively.  Capitalized stock-based compensation is recognized into cost of product sales when the related product is sold.

10. INCOME TAXES

Deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using future expected enacted rates. A valuation allowance is recorded against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized.  At December 31, 2010, we had $1.8 million of net operating losses, which were attributable to deductions from the exercise of equity awards. The benefit from these deductions will be recorded as a credit to additional paid-in capital if and when realized through a reduction of taxes paid in cash.

As required by ASC 740, the Company's management has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, and has determined that it is not "more likely than not" that the Company will recognize the benefits of the deferred tax assets.  Accordingly, a valuation allowance of approximately $187.7 million was in place at December 31, 2010.

The Company accounts for uncertain tax positions using a "more-likely-than-not" threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. The Company evaluates uncertain tax positions on a quarterly basis and adjusts the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. As of September 30, 2011, the Company had no unrecognized tax benefits.
 
 
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The tax years 1996 through 2010 remain open to examination by major taxing jurisdictions to which the Company is subject, which are primarily in the United States, as carryforward attributes generated in years past may still be adjusted upon examination by the Internal Revenue Service or state tax authorities if they have or will be used in a future period.  The Company is currently not under examination in any jurisdictions for any tax years.
 
Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by our management and may include, but are not limited to, statements about:

  
the potential benefits and commercial potential of KALBITOR (ecallantide) for its approved indication and any additional indications;

  
our commercialization of KALBITOR, including revenues and cost of product sales;

  
the potential for market approval for KALBITOR in the EU, Japan and other markets outside the United States;

  
plans and anticipated timing for pursuing additional indications and uses for ecallantide;

  
plans to enter into additional collaborative and licensing arrangements for ecallantide and for other compounds in development;

  
estimates of potential markets for our products and product candidates;

  
the sufficiency of our cash, cash equivalents and short-term investments; and

  
expected future revenues and operating results, including our financial guidance for 2011 and later periods.

Statements that are not historical facts are based on our current expectations, beliefs, assumptions, estimates, forecasts and projections for our business and the industry and markets in which we compete. We often use the words or phrases of expectation or uncertainty like "guidance," "believe," "anticipate," "plan," "expect," "intend," "project," "future," "may," "will," "could," "would" and similar words to help identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include, but are not limited to, those discussed later in this report under the section entitled "Risk Factors". Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether because of new information, future events or otherwise. However, readers should carefully review the risk factors set forth in other reports or documents we file from time to time with the Securities and Exchange Commission.
 
 
 
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BUSINESS OVERVIEW

We are a biopharmaceutical company focused on the discovery, development and commercialization of novel biotherapeutics for unmet medical needs.  We currently have three major business components:
 

  
KALBITOR and the Ecallantide Franchise
We commercialize KALBITOR (ecallantide) on our own in the United States for treatment of acute attacks of HAE and are also developing KALBITOR for use in other indications.  Outside of the United States, we have established partnerships to obtain regulatory approval for and commercialize KALBITOR in other major markets and are evaluating opportunities in additional territories.

  
Phage Display Licensing and Funded Research Program
We leverage our proprietary phage display technology through our Licensing and Funded Research Program, or LFRP.  This program has resulted in a portfolio of product candidates being developed by our licensees, which currently includes 17 product candidates in clinical development.  The LFRP generated $26 million in revenue in 2010, and to the extent that one or more of these product candidates are commercialized according to published timelines, milestone and royalty revenues under the LFRP are expected to experience significant growth over the next several years.

  
Dyax Pipeline
We use our phage display technology to identify new drug candidates for our preclinical pipeline.

KALBITOR AND THE ECALLANTIDE FRANCHISE

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, 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 HAE.
 
HAE is a rare, genetic disorder characterized by severe, debilitating and often painful swelling, which can occur in the abdomen, face, hands, feet and airway. HAE is caused by a deficiency of C1-INH activity, a naturally occurring molecule that inhibits plasma kallikrein, a key mediator of inflammation, and other serine proteases in the blood. It is estimated that HAE affects between 1 in 10,000 to 1 in 50,000 people around the world. HAE patient association registries estimate there is an immediately addressable target population of approximately 6,000 patients in the United States.
 
In February 2010, we began commercializing KALBITOR in the United States for treatment of acute attacks of HAE in patients 16 years of age and older.  We are commercializing KALBITOR on our own in the United States.  Working through corporate 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 to develop and commercialize subcutaneous ecallantide for the treatment of HAE and other therapeutic indications throughout Europe, Japan, Australia, New Zealand and other countries in Asia, North Africa, the Middle East, Latin America and the Caribbean.

We are also exploring the use of ecallantide for the treatment of drug-induced angioedema, a life threatening inflammatory response brought on by adverse reactions to angiotensin-converting enzyme (ACE) inhibitors. We filed an Investigational New Drug application (IND) for this indication with the United States Food and Drug Administration (FDA) and in August 2011, we commenced patient treatments in this dose-ranging Phase 2 clinical study.  In addition, we have licensed ecallantide for development through a collaboration with Fovea Pharmaceuticals SA, a subsidiary of sanofi-aventis, for treatment of retinal diseases.
 
 
 
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KALBITOR
 
In December 2009, ecallantide was approved by the FDA under the brand name KALBITOR for treatment of HAE in patients 16 years of age and older regardless of anatomic location. KALBITOR, a potent, selective and reversible plasma kallikrein inhibitor discovered and developed by us, is the first subcutaneous HAE treatment approved in the United States.
 
As part of product approval, we have established a Risk Evaluation and Mitigation Strategy (REMS) program to communicate the risk of anaphylaxis and the importance of distinguishing between hypersensitivity reaction and HAE attack symptoms. To communicate these risks, the REMS requires a communication plan which consists of a "Dear Healthcare Professional" letter to be provided to doctors identified as likely to prescribe KALBITOR and treat HAE patients.
 
In February 2010, we also initiated a 4-year Phase 4 observational study which will be conducted with 200 HAE patients to evaluate immunogenicity and hypersensitivity with exposure to KALBITOR for treatment of acute attacks of HAE. The study is designed to identify predictive risk factors and develop effective screening tools to mitigate the risk of hypersensitivity and anaphylaxis.
 
United States Sales and Marketing

We have established a commercial organization to support sales of KALBITOR in the United States. We believe that a field-based team of approximately 25 professionals, consisting of sales representatives and corporate account directors, is appropriate to effectively market KALBITOR in the United States at this time, where patients are treated primarily by a limited number of specialty physicians, consisting mainly of allergists and immunologists.

KALBITOR Access®

In furtherance of our efforts to facilitate access to KALBITOR in the United States, we have created the KALBITOR Access program, designed as a one-stop point of contact for information about KALBITOR, which offers treatment support service for patients with HAE and their healthcare providers. KALBITOR case managers provide comprehensive product and disease information, treatment site coordination, financial assistance for qualified patients and reimbursement facilitation services.

Distribution

KALBITOR is distributed through exclusive wholesale and co-exclusive specialty pharmacy arrangements.

We have agreements with two wholly-owned subsidiaries of AmerisourceBergen Specialty Group, Inc. (ABSG) for the distribution of KALBITOR:

  
US Bioservices Corporation (US Bio), serves as a specialty pharmacy for KALBITOR and also administers KALBITOR Access, which provides comprehensive call center services for patients and healthcare providers seeking information and access to KALBITOR; and

  
ASD Specialty Healthcare Inc. (ASD), serves as a wholesale distributor for KALBITOR to treating hospitals in the United States.

These agreements have a term through November 2012 and each contains customary termination provisions and may be terminated by us for any reason upon six months prior written notice.
 
 
 
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In August 2011, we expanded our distribution network to provide home infusion of KALBITOR through a specialty pharmacy arrangement with Walgreens Infusion Services, Inc. (Walgreens).   Under this renewable one-year agreement, Walgreens will provide eligible HAE patients with on-demand nursing services for the home administration of KALBITOR by a healthcare professional, as well as treatment at Walgreens’ infusion centers.
 
Ecallantide for Treatment of Other Angioedemas
 
In addition to its approved commercial use, we are also developing ecallantide in other angioedema indications.  One form of angioedema is induced by the use of so-called ACE inhibitors.  With an estimated 51 million prescriptions written annually worldwide, ACE inhibitors are widely prescribed to reduce ACE and generally reduce high blood pressure and vascular constriction.  It is estimated that up to 2% of patients treated with ACE inhibitors suffer from angioedema attacks, which represents approximately 30% of all angioedemas treated in emergency rooms.  Research suggests the use of ACE inhibitors increases levels of bradykinin, a protein that causes blood vessels to enlarge, or dilate, which can also cause the swelling known as angioedema. As a specific inhibitor of plasma kallikrein, an enzyme needed to produce bradykinin, ecallantide has the potential to be effective for treating this condition.  We filed an IND for a placebo-controlled, dose–ranging Phase 2 clinical study for this indication and, in August 2011, we commenced patient treatments in this clinical study.  Data from this trial is expected in the second half of 2012.
 
Ecallantide for Ophthalmic Indications

We entered into a license agreement in 2009 with Fovea Pharmaceuticals SA, a subsidiary of sanofi-aventis, for the development of ecallantide in the EU for treatment of retinal diseases. Under this agreement, Fovea will fully fund development for the first indication, retinal vein occlusion-induced macular edema.  In September 2011, Fovea voluntarily suspended their ongoing Phase 1 clinical study for this indication, due to adverse changes observed in the eyes of certain monkeys exposed to ecallantide.  Fovea is performing additional non-clinical investigations.  Review of the full data set is expected to be completed at the end of 2011, at which time Fovea will make a decision as to next steps for this trial.
 
Under the license agreement, we are entitled to receive tiered royalties, ranging from the high teens to mid-twenties, based on sales of ecallantide by Fovea in the EU.  If we elect to commercialize ecallantide in this indication outside of the EU, Fovea will be entitled to receive royalties from us, ranging from the low to mid-teens, based on our sales of ecallantide outside the EU. The term of the agreement continues until the expiration of the licensed patents or, if later, the eleventh anniversary of the first commercial sale of ecallantide in an ophthalmic indication. The agreement may be terminated by Fovea on prior notice to us and by either party for cause.
 
Higher Strength Ecallantide Formulation
 
We are currently in the process of developing a one milliliter higher strength formulation of ecallantide, which may provide an even more convenient administration to patients.  This program is designed to allow for a single-shot dose of KALBITOR to be used in a commercial setting, which would be a product improvement over the current three-shot formulation.  Under our development timeline, we expect to commence a bioequivalence study in the fourth quarter of 2011.

Manufacturing

In connection with the commercial launch of KALBITOR in the United States, we have established a commercial supply chain, consisting of single-source third party suppliers to manufacture, test and distribute this product. All third party manufacturers involved in the KALBITOR manufacturing process are required to comply with current good manufacturing practices, or cGMPs.
 
 
 
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To date, ecallantide drug substance used in the production of KALBITOR has been manufactured in the United Kingdom by Fujifilm Diosynth Biotechnologies (UK) Ltd., formerly known as MSD Biologics Limited, (Fujifilm).  Our inventories are sufficient to supply all ongoing studies relating to ecallantide and KALBITOR and to meet anticipated market demand into 2014. Under existing arrangements with Fujifilm, they have agreed to conduct additional manufacturing campaigns, as necessary, to supplement existing inventory.

The shelf-life of our frozen ecallantide drug substance is four years.  Ecallantide drug substance is filled, labeled and packaged into the final form of KALBITOR drug product by Hollister-Steir at its facilities in Spokane, Washington under a commercial supply agreement. This process, known in the industry as the "fill and finish" process, is not unique to KALBITOR and alternative manufacturers are readily available in the event that we elect, or are required, to relocate the "fill and finish" process.  KALBITOR in its "filled and finished" form has additional refrigerated shelf-life of three years.

Ecallantide Outside of the United States

In markets outside of the United States, we intend to seek approval and commercialize ecallantide for HAE and other angioedema indications in conjunction with multiple partners by entering into license or collaboration agreements with companies that have established distribution systems and direct sales forces in such territories.

In June 2010, we entered into a strategic partnership agreement with Sigma-Tau to develop and commercialize subcutaneous ecallantide for the treatment of HAE and other therapeutic indications throughout Europe, North Africa, the Middle East and Russia.  Under the terms of the agreement, Sigma-Tau made a $2.5 million upfront payment to us and also purchased 636,132 shares of our common stock at a price of $3.93 per share, which represented a 50% premium over the 20-day average closing price through June 17, 2010, for an aggregate purchase price of $2.5 million.  We will also be eligible to receive over $100 million in development and sales milestones related to ecallantide and royalties equal to 41% of net sales of product.  Sigma-Tau will pay the costs associated with regulatory approval and commercialization in the licensed territories.  In addition, we and Sigma-Tau will share equally the costs for all development activities for future indications developed in partnership with Sigma-Tau.

The Marketing Authorization Application (MAA) was submitted in May 2010 to the European Medicines Agency (EMA) for ecallantide for the treatment of HAE in the European Union (EU).    In June 2011 we received the Day 180 consolidated list of questions from the EMA and in October 2011, we and Sigma-Tau took part in an Oral Explanation to the Committee for Medicinal Products for Human Use (CHMP), to discuss our submission. We anticipate a CHMP opinion by end of November 2011.  If approved, KALBITOR will receive marketing authorization in 27 EU member states.

In December 2010, we amended our agreement with Sigma-Tau to expand our collaboration to commercialize KALBITOR for the treatment of HAE in Australia and New Zealand.  Under the terms of the amendment, in January 2011, Sigma-Tau made a $500,000 upfront payment to us and also purchased 151,515 shares of our common stock at a price of $3.30 per share, which represented a 50% premium over the 20-day average closing price through December 20, 2010, for an aggregate purchase price of $500,000.  We will also be eligible to receive up to $2 million in regulatory and commercialization milestones and royalties equal to 41% of net sales of product, as adjusted for product costs.

In May 2011, we further amended our agreement with Sigma-Tau to expand our collaboration to commercialize KALBITOR for the treatment of HAE in Southeast Asia and Latin America (excluding Mexico), and the Caribbean.  Under the terms of the second amendment, Sigma-Tau will pay us an additional $7.0 million in upfront fees during 2011, of which $4.0 million was received in July 2011.  In addition, we are eligible to receive up to $10.0 million in regulatory, approval and reimbursement milestones and royalties equal to 41% of net sales of product, as adjusted for product costs, in the additional territories.
 
 
 
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Sigma-Tau will pay the costs associated with regulatory approval and commercialization in all licensed territories.

In September 2010, we entered in an agreement with CMIC Co., Ltd (CMIC) to develop and commercialize subcutaneous ecallantide for the treatment of HAE and other angioedema indications in Japan. Under the terms of the agreement, we received a $4.0 million upfront payment.  We will also be eligible to receive up to $102 million in development and sales milestones for ecallantide in HAE and other angioedema indications and royalties of 20%-24% of net product sales. CMIC is solely responsible for all costs associated with development, regulatory activities, and commercialization of ecallantide for all angioedema indications in Japan. CMIC will purchase drug product from us on a cost-plus basis for clinical and commercial supply.

CMIC has a clinical development plan that was established in consultation with the Japanese regulatory authorities under which they will commence clinical studies in Japan during 2012.  Under CMIC’s development timeline, approval to commercialize subcutaneous ecallantide for the treatment of HAE in Japan would be received in 2014.

We have also entered into an agreement with Neopharm Scientific Ltd., (Neopharm) to obtain regulatory approval and commercialize ecallantide for HAE and other angioedema indications in Israel. Under the terms of the agreement, we will provide Neopharm drug supply at a price equal to 50% of net sales.  In June 2011, Neopharm received a commercial registration license from the Israeli Ministry of Health.  Reimbursement approval is currently pending.

Other than the specific licenses granted to Sigma-Tau, CMIC and Neopharm, as described above, we retain the rights to ecallantide in all other territories.

LICENSING AND FUNDED RESEARCH PROGRAM
 
LFRP Product Development
 
We believe that our phage display libraries, which have been developed using our core technology and know-how, represent the "gold standard" for therapeutic discovery.  We leverage our proprietary phage display technology and libraries through our LFRP licenses and collaborations.  This program currently generates significant revenues and has the potential for substantially greater revenues if and when product candidates that are discovered by our licensees receive marketing approval and are commercialized.   We have approximately 75 ongoing LFRP license agreements.  Currently, 17 product candidates generated by our licensees or collaborators under the LFRP portfolio are in clinical development, four of which are in Phase 3, four are in Phase 2 and nine are in Phase 1 trials.  In addition, one product has received market approval from the FDA.  Furthermore, we estimate that our licensees and collaborators have over 70 additional product candidates in various stages of research and preclinical development.  Our licensees and collaborators are responsible for all costs associated with development of these product candidates.  We will receive milestones and/or royalties from our licensees and collaborators to the extent these product candidates advance in development and are ultimately commercialized.

The chart below provides a summary of the clinical stage product candidates under the LFRP.
 
GRAPHIC
 
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Generally, under the terms of our LFRP licenses, we are entitled to receive royalties on commercial sales of products for at least ten years after initial commercialization. To the extent that the product candidates in the chart above receive marketing approval and are commercialized according to published timelines, we expect to receive royalties from commercial sales beginning in 2014.  Furthermore, based upon our own analysis as to the probability of receiving marketing approval and the large markets being addressed, our long term plan includes estimates of annual revenues under the LFRP of more than $70 million by 2016. In addition, several of our LFRP collaborations provide us access to co-develop and/or co-promote drug candidates identified by other biopharmaceutical and pharmaceutical companies.
 
To date, we have received more than $150 million under the LFRP, primarily related to license fees and milestones.  In 2010, we recognized approximately $26 million of LFRP revenues, including an $11.3 million buy-out of one royalty obligation for Xyntha®.  We expect revenues under the LFRP to grow over time as more products advance through clinical development.
 
In addition, under a loan arrangement with Cowen Healthcare, we obtained $65 million in debt funding, secured exclusively by the LFRP.  This debt, which has a principal balance of $56.7 million as of September 30, 2011, is being repaid from a portion of LFRP receipts, is required to be repaid in full by 2016, and may be prepaid without penalty in August 2012.
 
Currently, the types of licenses and collaborations that we enter into have one of three distinct structures:

  
Library Licenses. Under our library license program, we grant our licensees rights to use our phage display libraries in connection with their internal therapeutic development programs.  We also provide these licensees with related materials and training so that they may rapidly identify compounds that bind with high affinity to therapeutic targets.  The period during which our licensees may use our libraries is typically limited to a 4 to 5 year term.  Library license agreements contain significant up-front license fees, annual maintenance fees, milestone payments based on successful product development, and royalties based on any future product sales.  We have approximately 20 library licensees including Amgen, Aveo, Bayer Schering, Biogen Idec, Boehringer Ingelheim, CSL, ImClone Systems (a wholly-owned subsidiary of Eli Lilly), Merck Serono, Novo Nordisk, sanofi-aventis and Trubion (now known as Emergent BioSolutions).

  
Funded Research. Under our funded research program, we perform funded research for various collaborators using our phage display technology to identify, characterize and optimize antibodies that bind to disease targets provided by the collaborators.  Our funded research collaborators with products currently in development include Baxter Healthcare, Biogen Idec, Merck Serono, Merrimack, and Trubion (now known as Emergent BioSolutions).
 
 
 
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Patent Licenses. Under our patent license program, we grant other biopharmaceutical and pharmaceutical companies non-exclusive licenses to use our core phage display patents (known as the Ladner patents) to discover and develop biologic compounds for use in specified fields.  We generally grant licenses on a non-exclusive basis so that we may retain broad rights to practice our phage display technology in multiple fields.  Our license agreements generally provide for up-front license fees, annual maintenance fees, milestone payments based on successful product development, and royalties based on any future product sales for a period of ten years after commercialization of any resulting product.  In addition, under the terms of our license agreements, most licensees have agreed not to sue us for using phage display improvement patents which they developed and some have granted us specific access to certain phage-display technologies which they have developed or which they control.  We believe that these provisions allow us to practice enhancements to phage display developed by our licensees.  We currently have approximately 45 patent licensees worldwide.  Once the Ladner patents expire in 2012, we will no longer be entering into additional patent license agreements.

We expect to continue to enter into licenses and collaborations that are designed to maximize the strategic value of our proprietary phage display technology.
 
DYAX PIPELINE

We are also developing a pipeline of drug candidates using our phage display technology. We use phage display to identify antibody, small protein and peptide compounds with therapeutic potential for development in our own internal programs.  These preclinical drug candidates may be developed independently or through strategic partnerships with other biotechnology and pharmaceutical companies.  Although we will continue to seek to retain ownership and control of our internally discovered drug candidates by taking them further into preclinical and clinical development, we will also partner certain candidates in order to balance the risks associated with drug discovery and maximize return for our stockholders.

We currently have several preclinical candidates in our internal pipeline generated from phage display technology.  Our goal is to file a new IND application every 24 months.  Candidates are targeted which have defined regulatory pathways and address meaningful market opportunities.

Results of Operations
 
Three Months Ended September 30, 2011 and 2010

Revenues.   Total revenues for the three months ended September 30, 2011 (the 2011 Quarter) were $10.1 million, compared with $7.0 million for the three months ended September 30, 2010 (the 2010 Quarter).

Our financial guidance for total revenue in 2011 is $50 - 52 million, including KALBITOR sales of $20 - $24 million. In addition, our long term plan is to achieve potential revenue growth in 2016 of $110 - $125 million for KALBITOR sales and LFRP revenue of $70 - $85 million.

Product Sales.  We began selling KALBITOR in the United States for treatment of acute attacks of HAE in patients 16 years of age and older in February 2010.  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 limited inventory.

We record product sales allowances and accruals related to trade prompt pay discounts, government rebates, a patient financial assistance program, product returns and other applicable allowances.  For the 2011 Quarter, product sales of KALBITOR were $6.6 million, net of product discounts and allowances of $334,000 compared with product sales of $2.6 million, net of product discounts and allowances of $144,000 during the 2010 Quarter.
 
 
 
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Development and License Fees.  We derive revenues from licensing, funded research and development fees, including milestone payments from our licensees and collaborators. This revenue fluctuates from quarter-to-quarter due to the timing of the clinical activities of our collaborators and licensees.  This revenue was $3.5 million in the 2011 Quarter and $4.3 million in the 2010 Quarter.

Cost of Product Sales. We incurred $260,000 of costs associated with product sales during the 2011 Quarter and $119,000 of costs associated with product sales during the 2010 Quarter.  These costs primarily include the cost of testing, filling, packaging and distributing the 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 therefore are not included in the cost of product sales during these periods.  The supply of KALBITOR produced prior to FDA approval is expected to meet anticipated commercial needs through early 2012.  When this supply has been fully depleted, we expect our costs of product sales will increase, reflecting the full manufacturing cost of KALBITOR.

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

   
Three Months 
Ended September 30,
   
2011
 
2010
   
(In thousands)
KALBITOR development costs
  $ 5,272     $ 4,145  
Other research and development expenses
    2,556       3,397  
LFRP pass-through license fees     831        398   
Research and development expenses
  $ 8,659     $ 7,940  

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.  Costs associated with obtaining regulatory approval for the treatment of HAE in Europe, which are being reimbursed by Sigma-Tau, were $430,000 and $252,000 during the 2011 Quarter and 2010 Quarter, respectively.

Research and development expenses may increase in future periods, primarily due to clinical trial costs associated with our exploration of using ecallantide for the treatment of ACE-inhibitor-induced angioedema, including the Phase 2 clinical study that was initiated during 201l.  Until the Phase 2 clinical study is completed, we are not able to predict the future clinical costs that may be incurred for this indication.

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 for the 2011 and 2010 Quarters were $8.8 million and $7.7 million, respectively.  Costs increased during the 2011 Quarter primarily due to the expansion of infrastructure to support KALBITOR commercial efforts.

Interest Expense.  Interest expense was $2.5 million in the 2011 Quarter compared to $2.6 million in 2010.  Interest expense under the Cowen Healthcare loan decreased due to principal payments made in the second quarter of 2011.

Nine Months Ended September 30, 2011 and 2010
 
 
 
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Revenues.   Total revenues for the nine months ended September 30, 2011 (the 2011 Period) were $40.2 million, compared with $42.1 million for the nine months ended September 30, 2010 (the 2010 Period).

Product Sales.  We began selling KALBITOR in the United States for treatment of acute attacks of HAE in patients 16 years of age and older in February 2010.  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 our distributors will carry limited inventory.
 
We record product sales allowances and accruals related to trade prompt pay discounts, government rebates, a patient financial assistance program, product returns and other applicable allowances.  For the 2011 Period, product sales of KALBITOR were $15.9 million, net of product discounts and allowances of $746,000 compared with product sales of $5.8 million, net of product discounts and allowances of $317,000 during the 2010 Period.

Development and License Fees.  We derive revenues from licensing, funded research and development fees, including milestone payments from our licensees and collaborators. This revenue fluctuates from quarter-to-quarter due to the timing of the clinical activities of our collaborators and licensees.  Development and license fee revenue was $24.3 million in the 2011 Period and $36.3 million in the 2010 Period. This 2011 change was due to $9.8 million in revenue recognized in the 2010 Period under the sale of rights to royalties and other payments related to the product Xyntha, which was developed by one of our licensees under the LFRP, and $13.8 million of previously deferred revenue associated with the Cubist license, which was fully recognized during the 2010 Period based upon Cubist’s announcement to end its DX-88 development program.  The absence of these revenues in the 2011 Period was partially offset by $12.2 million recognized in the 2011 Period in connection with our amended agreement with Sigma-Tau.   
 
Cost of Product Sales. We incurred $781,000 of costs associated with product sales during the 2011 Period and $247,000 of costs associated with product sales during the 2010 Period.  These costs primarily include the cost of testing, filling, packaging and distributing the 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 therefore are not included in the cost of product sales during these periods.  The supply of KALBITOR produced prior to FDA approval is expected to meet anticipated commercial needs through early 2012.  When this supply has been fully depleted, we expect our costs of product sales will increase, reflecting the full manufacturing cost of KALBITOR.

Research and Development.  Our research and development expenses are summarized as follows:
 
   
Nine Months
Ended September 30,
   
2011
 
2010
   
(In thousands)
KALBITOR development costs
  $ 15,692     $ 12,736  
Other research and development expenses
    8,266       9,073  
LFRP pass-through license fees      2,280        1,934  
Research and development expenses
  $ 26,238     $ 23,743  
 
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.  In addition, costs associated with obtaining regulatory approval for the treatment of HAE in Europe, which are being reimbursed by Sigma-Tau, were $1.8 million and $420,000 during the 2011 Period and 2010 Period, respectively.

Research and development expenses may increase in future periods, primarily due to clinical trial costs associated with our exploration of using ecallantide for the treatment of ACE-inhibitor-induced angioedema, including the Phase 2 clinical study that was initiated during 2011.  Until the Phase 2 clinical study is completed, we are not able to predict the future clinical costs that may be incurred for this indication.
 
 
 
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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 for the 2011 and 2010 Periods were $27.1 million and $24.6 million, respectively.  Costs increased during the 2011 Period primarily due to the expansion of infrastructure to support KALBITOR commercial efforts.

Interest Expense.  Interest expense was $7.7 million in the 2011 Period compared to $9.2 million in 2010.  This decrease is primarily due to additional interest expense in the 2010 Period of approximately $1.3 million for payments due under the Cowen Healthcare loan in connection with the sale of our rights to royalties and other payments related to the Xyntha product.

Liquidity and Capital Resources

   
September 30, 2011
   
December 31, 2010
 
   
(in thousands)
 
Cash and cash equivalents
  $ 15,281     $ 18,601  
Short-term investments
    33,093       58,783  
Total cash, cash equivalents and investments
  $ 48,374     $ 77,384  


The following table summarizes our cash flow activity for the nine months ended September 30, 2011 and 2010 (in thousands):

   
Nine Months Ended September 30,
 
   
2011
   
2010
 
Net cash used in operating activities
  $ (27,285 )   $ (24,262 )
Net cash provided by (used in) investing activities
    25,067       (31,115 )
Net cash provided by (used in) financing activities
    (1,102 )     58,783  
Net increase (decrease) in cash and cash equivalents
    (3,320 )   $ 3,406  

 
We require cash to fund our operating activities, manufacture inventory, make capital expenditures, acquisitions and investments, and service debt.  Through September 30, 2011, we have funded our operations principally through the sale of equity securities, which have provided aggregate net cash proceeds since inception of approximately $397 million.  We have also borrowed funds under our loan agreement with Cowen Healthcare, 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.
 
 
Our long term plan is to achieve cash-flow breakeven during 2013. 
 
 
 
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Operating Activities
 
The principal use of cash in our operations was to fund our net loss, which was $21.1 million during the 2011 Period.  Of this net loss, certain costs were non-cash charges, such as non-cash interest expense of $1.6 million, depreciation and amortization costs of $1.2 million and stock-based compensation expense of $3.1 million.  In addition to non-cash charges, we also had net cash out flow due to changes in other operating assets and liabilities, including an increase in inventory of $5.1 million, an increase in accounts receivable of $1.5 million and a decrease in deferred revenue of $4.0 million.  
 
The principal use of cash in our operations was to fund our net loss, which was $15.6 million during the 2010 period.  Of this net loss, certain costs were non-cash charges, such as depreciation and amortization costs of $1.2 million and stock-based compensation expense of $2.9 million.  In addition to non-cash charges, we also had a net change in other operating assets and liabilities of $14.0 million, including a decrease in accounts payable and accrued expenses of $4.1 million, a decrease in accounts receivable of $937,000, and a decrease in deferred revenue of $9.4 million.  The change in deferred revenue is primarily due to the recognition of $13.8 million of revenue associated with Cubist’s announced termination of its ecallantide development program.
 
Investing Activities
 
Our investing activities for the 2011 Period primarily consisted of investment maturities of $28.5 million, partially offset by $3.0 million in investment purchases.  Additionally, we had an increase of $178,000 in restricted cash primarily due to a new $1.1 million letter of credit under our new lease in Burlington, Massachusetts, partially offset by the contractual reduction of the letter of credit that serves as our security deposit for the lease of our facility in Cambridge, Massachusetts.
 
In July, 2011, we entered into a lease agreement for new premises located in Burlington, Massachusetts.  The premises, consisting of approximately 44,500 rentable square feet of office and laboratory facilities, will be used as our principal offices and corporate headquarters.  We intend to relocate all of our operations presently conducted in Cambridge, Massachusetts to the new facility in January 2012.  The term of the new lease is ten years, and we have rights to extend the term for an additional five years at fair market value subject to specified terms and conditions. The aggregate minimum lease commitment over the ten year term of the new lease is approximately $15.0 million.  We have provided the landlord a letter of credit of $1.1 million to secure our obligations under the lease.  The landlord has provided us with a tenant improvement allowance of approximately $1.9 million and an additional tenant improvement loan option of up to $668,000. Net of the tenant improvement allowance and loan, we expect to incur approximately $1.3 million of tenant improvements for the new premises through the first quarter of 2012.
 
In connection with this relocation, we have exercised our right to terminate the lease agreement for our current headquarters in Cambridge, Massachusetts to coincide approximately with the commencement of the new lease.
 
Our investing activities for the 2010 Period primarily consisted of the purchase of investments totaling of approximately $53.7 million, offset by investment maturities of $22.0 million, 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 the 2011 Period consisted of net proceeds of $323,000 from the sale of 151,515 shares of our common stock, as well as repayments of long-term debt totaling $1.6 million including $1.1 million to Cowen Healthcare.
 
Our financing activities for the 2010 Period consisted of net proceeds of $61.1 million from the sale of 20,186,132 shares of our common stock, as well as repayments of long-term debt totaling $2.6 million, including $1.9 million to Cowen Healthcare.
 
 
 
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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 through 2012.  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.
 
OFF BALANCE SHEET ARRANGEMENTS
 
We have no off-balance sheet arrangements with the exception of operating leases.
 
COMMITMENTS AND CONTINGENCIES

In our Annual Report on Form 10-K for the year ended December 31, 2010, Part II, Item 7, Management’s Discussion and Analysis of Financial Conditions and Results of Operations, under the heading "Contractual Obligations, " we described our commitments and contingencies. There were no material changes in our commitments and contingencies during the nine months ended September 30, 2011.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
 
In our Annual Report on Form 10-K for the year ended December 31, 2010, our critical accounting policies and estimates were identified as those relating to revenue recognition, allowance for doubtful accounts, share-based compensation,  valuation of long-lived assets and deferred tax assets.  With the exception of revenue recognition polices for multiple deliverable arrangements which were revised in 2011 to comply with amended accounting guidance, there have been no material changes to our critical accounting policies from the information provided in our 2010 Annual Report on Form 10-K.

Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Our exposure to market risk consists primarily of our cash and cash equivalents and short-term investments. We place our investments in high-quality financial instruments, primarily U.S. Treasury notes and bills, which we believe are subject to limited credit risk. We currently do not hedge interest rate exposure. As of September 30, 2011, we had cash, cash equivalents and investments of approximately $48.4 million. Our investments will decline by an immaterial amount if market interest rates increase, and therefore, our exposure to interest rate changes is immaterial. Declines of interest rates over time will, however, reduce our interest income from our investments.
 
As of September 30, 2011, we had $56.8 million of principal outstanding under short-term and long-term obligations, including our note payable. Interest rates on all of these obligations are fixed and therefore are not subject to interest rate fluctuations.
 
Most of our transactions are conducted in U.S. dollars. We have collaboration and technology license agreements with parties located outside of the United States. Transactions under certain of the agreements between us and parties located outside of the United States are conducted in local foreign currencies. If exchange rates undergo a change of up to 10%, we do not believe that it would have a material impact on our results of operations or cash flows.
 
 
 
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Item 4 - CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and Rule 15(d)-15(e) promulgated under the Securities Exchange Act of 1934). Based on this evaluation, our principal executive officer and principal financial officer concluded that these disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control that occurred during our fiscal quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1A. – RISK FACTORS
 
You should carefully consider the following risk factors before you decide to invest in our Company and our business because these risk factors may have a significant impact on our business, operating results, financial condition, and cash flows. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially and adversely affected.

Risks Related To Our Business

We have a history of net losses, expect to incur significant additional net losses and may never achieve or sustain profitability.
 
We have incurred net losses on an annual basis since our inception.  As of September 30, 2011 we had an accumulated deficit of approximately $463.4 million.  We expect to incur additional net losses in 2011 and 2012 as our research, development, preclinical testing, clinical trial and commercial activities continue.
 
We have generated minimal revenue from product sales to date, and it is possible that we will never have significant product sales revenue.  Currently, we generate a significant amount of our revenue from collaborators through license and milestone fees, research and development funding, and maintenance fees that we receive in connection with the licensing of our phage display technology.  To become profitable, we, alone or with our collaborators, must either generate higher product sales from the commercialization of KALBITOR or increase licensing receipts under our LFRP.  It is possible that we will never have sufficient product sales revenue or receive sufficient royalties on our licensed product candidates or licensed technology in order to achieve or sustain future profitability.
 
 
 
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We will need additional capital in the future and may be unable to generate the capital that we will need to sustain our operations.
 
We require significant capital to fund our operations to commercialize KALBITOR and to develop and commercialize other product candidates.  Our future capital requirements will depend on many factors, including:
 
 
future sales levels of KALBITOR and other commercial products and the profitability of such sales, if any;
 
 
the timing and cost to develop, obtain regulatory approvals for and commercialize our pipeline products;
 
 
maintaining or expanding our existing collaborative and license arrangements and entering into additional arrangements on terms that are favorable to us;
 
 
the amount and timing of milestone and royalty payments from our collaborators and licensees related to their progress in developing and commercializing products;
 
 
our decision to manufacture, or have third parties manufacture, the materials used in KALBITOR and other pipeline products;
 
 
competing technological and market developments;
 
 
the progress of our drug discovery and development programs;
 
 
the costs of prosecuting, maintaining, defending and enforcing our patents and other intellectual property rights;
 
 
the amount and timing of additional capital equipment purchases; and
 
 
the overall condition of the financial markets.
 
We expect that existing cash, cash equivalents, and investments together with anticipated cash flow from product sales and existing product development, collaborations and license fees will be sufficient to support our current operations through 2012. We will need additional funds if our cash requirements exceed our current expectations or if we generate less revenue than we expect.

We may seek additional funding through collaborative arrangements, and public or private financings, or other means.  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 and if we are unable to obtain funding on a timely basis, we may be required to curtail significantly our research, development or commercialization programs which could adversely affect our business prospects.

Our revenues and operating results have fluctuated significantly in the past, and we expect this to continue in the future.

Our revenues and operating results have fluctuated significantly on a quarterly and year to year basis.  We expect these fluctuations to continue in the future.  Fluctuations in revenues and operating results will depend on:

 
the amount of future sales of KALBITOR and related costs to commercialize the product;
 
 
the cost and timing of our increased research and development, manufacturing and commercialization activities;
 
 
 
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the establishment of new collaboration and licensing arrangements;
 
 
the timing and results of clinical trials, including a failure to receive the required regulatory approvals to commercialize our product candidates;
 
 
the timing, receipt and amount of payments, if any, from current and prospective collaborators, including the completion of certain milestones; and
 
 
revenue recognition and other accepted accounting policies.
 
Our revenues and costs in any period are not reliable indicators of our future operating results.  If the revenues we recognize are less than the revenues we expect for a given fiscal period, then we may be unable to reduce our expenses quickly enough to compensate for the shortfall.  In addition, our fluctuating operating results may fail to meet the expectations of securities analysts or investors which may cause the price of our common stock to decline.

We depend heavily on the success of our lead product, KALBITOR, which was approved in the United States for treatment of acute attacks of HAE in patients 16 years and older.

Our ability to generate product sales will depend on commercial success of KALBITOR in the United States and whether physicians, patients and healthcare payers view KALBITOR as therapeutically effective relative to cost.  We initiated the commercial launch of KALBITOR in the United States in February 2010.

The commercial success of KALBITOR and our ability to generate and increase product sales will depend on several factors, including the following:
 
 
the number of patients with HAE who are diagnosed with the disease and identified to us;
 
 
the number of patients with HAE who may be treated with KALBITOR;
 
 
acceptance of KALBITOR in the medical community;
 
 
the frequency of HAE patients' use of KALBITOR to treat their acute attacks of HAE;
 
 
HAE patients' ability to obtain and maintain sufficient coverage or reimbursement by third-party payers for the use of KALBITOR;
 
 
our ability to effectively market and distribute KALBITOR in the United States;
 
 
competition from other products that treat HAE;
 
 
the maintenance of marketing approval in the United States and the receipt and maintenance of marketing approval from foreign regulatory authorities; and
 
 
our maintenance of commercial manufacturing capabilities through third-party manufacturers.
 
If we are unable to develop substantial sales of KALBITOR in the United States and commercialize ecallantide in additional countries or if we are significantly delayed or limited in doing so, our business prospects would be adversely affected.
 
 
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Because the target patient population of KALBITOR for treatment of HAE is small and has not been definitively determined, we must be able to successfully identify HAE patients and achieve a significant market share in order to achieve or maintain profitability.
 
The prevalence of HAE patients which has been estimated at approximately 1 in 10,000 to 1 in 50,000 people around the world, has not been definitively determined.  There can be no guarantee that any of our programs will be effective at identifying HAE patients and the number of HAE patients in the United States may turn out to be lower than expected or may not otherwise utilize treatment with KALBITOR for all or any of their acute HAE attacks, all of which would adversely affect our results of operations and business prospects.
 
If HAE patients are unable to obtain and maintain reimbursement for KALBITOR from government health administration authorities, private health insurers and other organizations, KALBITOR may be too costly for regular use and our ability to generate product sales would be harmed.
 
We may not be able to sell KALBITOR on a profitable basis or our profitability may be reduced if we are required to sell our product at lower than anticipated prices or if reimbursement is unavailable or limited in scope or amount.  KALBITOR is significantly more expensive than traditional drug treatments and most patients require some form of third party insurance coverage in order to afford its cost.  Our future revenues and profitability will be adversely affected if HAE patients cannot depend on governmental, private and other third-party payers, such as Medicare and Medicaid in the United States or country specific governmental organizations, to defray the cost of KALBITOR.  If these entities refuse to provide coverage and reimbursement with respect to KALBITOR or determine to provide a lower level of coverage and reimbursement than anticipated, KALBITOR may be too costly for general use, and physicians may not prescribe it.
 
In addition to potential restrictions on insurance coverage, the amount of reimbursement for KALBITOR may also reduce our ability to profitably commercialize KALBITOR.  In the United States and elsewhere, there have been, and we expect there will continue to be, actions and proposals to control and reduce healthcare costs.  Government and other third-party payers are challenging the prices charged for healthcare products and increasingly limiting and attempting to limit both coverage and level of reimbursement for prescription drugs.
 
It is possible that we will never have significant KALBITOR sales revenue in order to achieve or sustain future profitability.
 
We may not be able to gain or maintain market acceptance among the medical community or patients for KALBITOR which would prevent us from achieving or maintaining profitability in the future.
 
We cannot be certain that KALBITOR will gain or maintain market acceptance among physicians, patients, healthcare payers, and others.  Although we have received regulatory approval for KALBITOR in the United States, such approval does not guarantee future revenue.  We cannot predict whether physicians, other healthcare providers, government agencies or private insurers will determine that KALBITOR is safe and therapeutically effective relative to cost.  Medical doctors' willingness to prescribe, and patients' willingness to accept, KALBITOR depends on many factors, including prevalence and severity of adverse side effects in both clinical trials and commercial use, effectiveness of our marketing strategy and the pricing of KALBITOR, publicity concerning our products or competing products, HAE patient's ability to obtain and maintain third-party coverage or reimbursement, and availability of alternative treatments.  In addition, the number of acute attacks that are treated with KALBITOR will vary from patient to patient depending upon a variety of factors.  If KALBITOR fails to achieve market acceptance, we may not be able to market and sell it successfully, which would limit our ability to generate revenue and adversely affect our results of operations and business prospects.
 
Competition and technological change may make our potential products and technologies less attractive or obsolete.

We compete in industries characterized by intense competition and rapid technological change.  New developments occur and are expected to continue to occur at a rapid pace.  Discoveries or commercial developments by our competitors may render some or all of our technologies, products or potential products obsolete or non-competitive.
 
 
 
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Our principal focus is on the development of human therapeutic products.  We plan to conduct research and development programs to develop and test product candidates and demonstrate to appropriate regulatory agencies that these products are safe and effective for therapeutic use in particular indications.  Therefore our principal competition going forward, as further described below, will be companies who either are already marketing products in those indications or are developing new products for those indications.  Many of our competitors have greater financial resources and experience than we do.

For KALBITOR as a treatment for HAE, our principal competitors include:

 
CSL Behring— CSL Behring markets a plasma-derived C1-esterase inhibitor, known as Berinert®, which is administered intravenously. Berinert is approved in the US for the treatment of acute abdominal or facial attacks of HAE in adult and adolescent patients, and has orphan drug designation from the FDA. Berinert is also sold in Europe, Japan and several rest-of-world markets for the treatment of acute HAE attacks.  Additionally, CSL Behring completed a clinical trial evaluating subcutaneous administration of Berinert.
 
 
ViroPharma Inc.— ViroPharma markets a plasma-derived C1-esterase inhibitor, known as Cinryze®, which is administered intravenously. Cinryze is approved in the US for routine prophylaxis against angioedema attacks in adolescent and adult patients with HAE, and has orphan drug designation from the FDA. The FDA has also approved patient labeling for Cinryze to include self-administration for routine prophylaxis once a patient is properly trained by his or her healthcare provider. ViroPharma has also received approval in the EU. The therapeutic indication in Europe is for treatment and pre-procedure prevention of angioedema attacks in adults and adolescents with HAE, and routine prevention of angioedema attacks in adults and adolescents with severe and recurrent attacks of HAE, who are intolerant to or insufficiently protected by oral prevention treatments or patients who are inadequately managed with repeated acute treatment. The approval also includes a self administration option for appropriately trained patients. ViroPharma has also completed a Phase 2 trial evaluating subcutaneous administration of Cinryze and in September 2011, announced the initiation of another Phase 2 trial using a new subcutaneous formulation that uses a proprietary drug delivery platform from Halozyme.
 
 
Jerini AG/Shire plc— Jerini/Shire markets its bradykinin receptor antagonist, known as Firazyr® (icatibant), which is administered subcutaneously. Firazyr is approved in the US, Europe, and certain other countries. Firazyr is approved in these markets for the treatment of acute HAE attacks in adult patients.  The approval also includes a self-administration option. Firazyr has orphan drug designations from the FDA and in Europe.
 
 
Pharming Group NV— Pharming markets Ruconest™ which is approved in the EU for the treatment of acute HAE attacks in adult patients.  Ruconest is a recombinant C1-esterase inhibitor, which is delivered intravenously.. In the US, Pharming's recombinant C1-esterase inhibitor is known as Rhucin®. In December 2010, Pharming and US partner Santarus announced the submission of a Biologics License Application (BLA) for Rhucin. In February 2011, the companies announced the receipt of a "refusal to file" letter in which the FDA indicated that the BLA was not sufficiently complete to enable a critical medical review. Also in February, the companies announced the initiation of a new Phase 3 trial.  Pharming's recombinant C1-esterase inhibitor has Fast Track status from the FDA and orphan drug designations from the FDA and in Europe. 
 
Other competitors for the treatment of HAE are companies that market corticosteroid drugs, including the manufacturers of danazol, as well as companies developing plasma kallikrein inhibitors, including BioCryst.
 
Additionally, a significant number of companies compete with us in the antibody technology space by offering licenses and/or research services to pharmaceutical and biotechnology companies. Specifically, our phage display technology is one of several in vitro display technologies available to generate libraries of compounds that can be leveraged to discover new antibody products. Other companies that compete with us in the display technology space include BioInvent, Micromet, Xoma, Adimab and several others. Additional platforms pharmaceutical and biotechnology companies use to identify antibodies that bind to a desired target are in vivo technology platforms which use direct immunization of mice or other species to generate fully human antibodies. Competitors in this space include GenMab, arGEN-X and several others. There are also a number of new technologies directed to the generation of candidates with novel scaffolds that may possess similar properties to monoclonal antibodies.
 
 
 
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In addition to the technologies described above, many pharmaceutical companies have either acquired antibody discovery technologies or developed humanized murine antibodies derived from hybridomas. Pharmaceutical companies also develop orally available small molecule compounds directed to the targets for which we and others are seeking to develop antibody, peptide and/or protein products.

In addition, we may experience competition from companies that have acquired or may acquire technology from universities and other research institutions.

If we fail to comply with continuing regulations, we could lose our approvals to market KALBITOR, and our business would be adversely affected.
 
We cannot guarantee that we will be able to maintain our regulatory approval for KALBITOR in the United States. We and our future partners, contract manufacturers and suppliers are subject to rigorous and extensive regulation by the FDA, other federal and state agencies, and governmental authorities in other countries.  These regulations continue to apply after product approval, and cover, among other things, testing, manufacturing, quality control, labeling, advertising, promotion, adverse event reporting requirements, and export of biologics.
 
As a condition of approval for marketing KALBITOR in the United States and other jurisdictions, the FDA or governmental authorities in those jurisdictions may require us to conduct additional clinical trials.  For example, in connection with the approval of KALBITOR in the United States, we have agreed to conduct a Phase 4 clinical study to evaluate immunogenicity and hypersensitivity with exposure to KALBITOR for treatment of acute attacks of HAE.  The FDA can propose to withdraw approval if new clinical data or information shows that KALBITOR is not safe for use or determines that such study is inadequate.  We are required to report any serious and unexpected adverse experiences and certain quality problems with KALBITOR to the FDA and other health agencies.  We, the FDA or another health agency may have to notify healthcare providers of any such developments.  The discovery of any previously unknown problems with KALBITOR or its manufacturer may result in restrictions on KALBITOR and the manufacturer or manufacturing facility, including withdrawal of KALBITOR from the market.  Certain changes to an approved product, including the way it is manufactured or promoted, often require prior regulatory approval before the product as modified may be marketed.
 
Our third-party manufacturing facilities were subjected to inspection prior to grant of marketing approval and are subject to continued review and periodic inspections by the regulatory authorities.  Any third party we would use to manufacture KALBITOR for sale must also be licensed by applicable regulatory authorities.  Although we have established a corporate compliance program, we cannot guarantee that we are and will continue to be in compliance with all applicable laws and regulations. Failure to comply with the laws, including statutes and regulations, administered by the FDA or other agencies could result in:
 
 
administrative and judicial sanctions, including warning letters;
 
 
fines and other civil penalties;
 
 
 
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withdrawal of a previously granted approval;
 
 
interruption of production;
 
 
operating restrictions;
 
 
product recall or seizure; injunctions; and
 
 
criminal prosecution.
 
The discovery of previously unknown problems with a product, including KALBITOR, or the facility used to produce the product could result in a regulatory authority imposing restrictions on us, or could cause us to voluntarily adopt such restrictions, including withdrawal of KALBITOR from the market.
 
If we do not maintain our regulatory approval for KALBITOR in the United States, our results of operations and business prospects will be materially harmed.
 
If the use of KALBITOR harms people, or is perceived to harm patients even when such harm is unrelated to KALBITOR, our regulatory approvals could be revoked or otherwise negatively affected and we could be subject to costly and damaging product liability claims.
 
The testing, manufacturing, marketing and sale of drugs for use in humans exposes us to product liability risks.  Side effects and other problems from using KALBITOR could: 
 
 
lessen the frequency with which physicians decide to prescribe KALBITOR;
 
 
encourage physicians to stop prescribing KALBITOR to their patients who previously had been prescribed KALBITOR;
 
 
cause serious adverse events and give rise to product liability claims against us; and
 
 
result in our need to withdraw or recall KALBITOR from the marketplace.
 
Some of these risks are unknown at this time.
 
We have tested KALBITOR in only a small number of patients.  As more patients begin to use KALBITOR, new risks and side effects may be discovered, and risks previously viewed as inconsequential could be determined to be significant.  Previously unknown risks and adverse effects of KALBITOR may also be discovered in connection with unapproved, or off-label, uses of KALBITOR.  We do not promote, or in any way support or encourage the promotion of KALBITOR for off-label uses in violation of relevant law, but physicians are permitted to use products for off-label uses.  In addition, we expect to study ecallantide in diseases other than HAE in controlled clinical settings, and expect independent investigators to do so as well.  In the event of any new risks or adverse effects discovered as new patients are treated for HAE, regulatory authorities may revoke their approvals and we may be required to conduct additional clinical trials, make changes in labeling of KALBITOR, reformulate KALBITOR or make changes and obtain new approvals for our and our suppliers' manufacturing facilities.  We may also experience a significant drop in the potential sales of KALBITOR, experience harm to our reputation and the reputation of KALBITOR in the marketplace or become subject to government investigations or lawsuits, including class actions.  Any of these results could decrease or prevent any sales of KALBITOR or substantially increase the costs and expenses of commercializing and marketing KALBITOR.
 
We may be sued by people who use KALBITOR, whether as a prescribed therapy, during a clinical trial, during an investigator initiated study, or otherwise.  Any informed consents or waivers obtained from people who enroll in our trials or use KALBITOR may not protect us from liability or litigation.  Our product liability insurance may not cover all potential types of liabilities or may not cover certain liabilities completely.  Moreover, we may not be able to maintain our insurance on acceptable terms.  In addition, negative publicity relating to the use of KALBITOR or a product candidate, or to a product liability claim, may make it more difficult, or impossible, for us to market and sell KALBITOR.  As a result of these factors, a product liability claim, even if successfully defended, could have a material adverse effect on our business, financial condition or results of operations.
 
 
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During the course of treatment, patients may suffer adverse events, including death, for reasons that may or may not be related to KALBITOR.  Such events could subject us to costly litigation, require us to pay substantial amounts of money to injured patients, delay, negatively impact or end our opportunity to receive or maintain regulatory approval to market KALBITOR, or require us to suspend or abandon our commercialization efforts.  Even in a circumstance in which we do not believe that an adverse event is related to KALBITOR, the investigation into the circumstance may be time consuming or may be inconclusive.  These investigations may interrupt our sales efforts, delay our regulatory approval process in other countries, or impact and limit the type of regulatory approvals KALBITOR receives or maintains.
 
Although we obtained regulatory approval of KALBITOR for treatment of acute attacks of HAE in patients 16 years and older in the United States, we may be unable to obtain regulatory approval for ecallantide in any other territory.
 
Governments in countries outside the United States also regulate drugs distributed in such countries and facilities in such countries where such drugs are manufactured, and obtaining their approvals can also be lengthy, expensive and highly uncertain.  The approval process varies from country to country and the requirements governing the conduct of clinical trials, product manufacturing, product licensing, pricing and reimbursement vary greatly from country to country.  In certain jurisdictions, we are required to finalize operational, reimbursement, price approval and funding processes prior to marketing our products.  We may not receive regulatory approval for ecallantide in countries other than the United States on a timely basis, if ever.  Even if approval is granted in any such country, the approval may require limitations on the indicated uses for which the drug may be marketed.  Failure to obtain regulatory approval for ecallantide in territories outside the United States could have a material adverse affect on our business prospects.
 
If we are unable to establish and maintain effective sales, marketing and distribution capabilities, or to enter into agreements with third parties to do so, we will be unable to successfully commercialize KALBITOR.

We are marketing and selling KALBITOR ourselves in the United States, and have only limited experience with marketing, sales or distribution of drug products. If we are unable to adequately establish the capabilities to sell, market and distribute KALBITOR, either ourselves or by entering into agreements with others, or to maintain such capabilities, we will not be able to successfully sell KALBITOR.  In that event, we will not be able to generate significant product sales.  We cannot guarantee that we will be able to establish and maintain our own capabilities or enter into and maintain any marketing or distribution agreements with third-party providers on acceptable terms, if at all.
 
In the United States, we sell KALBITOR to ABSG which provides a distribution network for KALBITOR, including a call center to support its commercialization, and to Walgreens which provides nursing services for home administration of KALBITOR.  Neither ABSG nor Walgreens set or determine demand for KALBITOR.  We expect our distribution arrangements to continue for the foreseeable future.  Our ability to successfully commercialize KALBITOR will depend, in part, on the extent to which we are able to provide adequate distribution of KALBITOR to patients through our distributors.  It is possible that our distributors could change their policies or fees, or both, at some time in the future.  This could result in their refusal to distribute smaller volume products such as KALBITOR, or cause higher product distribution costs, lower margins or the need to find alternative methods of distributing KALBITOR.  Although we have contractual remedies to mitigate these risks for the three-year term of the contract with ABSG and we also believe we can find alternative distributors on relatively short notice, our product sales during that period of time may suffer and we may incur additional costs to replace a distributor.  A significant reduction in product sales to our distributors, any cancellation of orders they have made with us or any failure to pay for the products we have shipped to them could materially and adversely affect our results of operations and financial condition.
 
 
 
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We have hired sales and marketing professionals for the commercialization of KALBITOR throughout the United States.  Even with these sales and marketing personnel, we may not have the necessary size and experience of the sales and marketing force and the appropriate distribution capabilities necessary to successfully market and sell KALBITOR.  Establishing and maintaining sales, marketing and distribution capabilities are expensive and time-consuming.  Our expenses associated with building up and maintaining the sales force and distribution capabilities may be disproportional compared to the revenues we may be able to generate on sales of KALBITOR.  We cannot guarantee that we will be successful in commercializing KALBITOR and a failure to do so would adversely affect our business prospects.

If we market KALBITOR in a manner that violates health care fraud and abuse laws, we may be subject to civil or criminal penalties.

In addition to FDA and related regulatory requirements, we are subject to health care "fraud and abuse" laws, such as the federal False Claims Act, the anti-kickback provisions of the federal Social Security Act, and other state and federal laws and regulations.  Federal and state anti-kickback laws prohibit, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any health care item or service reimbursable under Medicare, Medicaid, or other federally or state financed health care programs.  This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, patients, purchasers and formulary managers on the other.  Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing, or recommending may be subject to scrutiny if they do not qualify for an exemption or safe harbor.
 
Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid.  Pharmaceutical companies have been prosecuted under these laws for a variety of alleged promotional and marketing activities, such as allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product; reporting to pricing services inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging in promotion for uses that the FDA has not approved, or "off-label" uses, that caused claims to be submitted to Medicaid for non-covered off-label uses; and submitting inflated best price information to the Medicaid Rebate Program.

Although physicians are permitted to, based on their medical judgment, prescribe products for indications other than those cleared or approved by the FDA, manufacturers are prohibited from promoting their products for such off-label uses.  We market KALBITOR for acute attacks of HAE in patients 16 years and older and provide promotional materials and training programs to physicians regarding the use of KALBITOR for this indication.  Although we believe our marketing, promotional materials and training programs for physicians do not constitute off-label promotion of KALBITOR, the FDA may disagree.  If the FDA determines that our promotional materials, training or other activities constitute off-label promotion of KALBITOR, it could request that we modify our training or promotional materials or other activities or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and criminal penalties.  It is also possible that other federal, state or foreign enforcement authorities might take action if they believe that the alleged improper promotion led to the submission and payment of claims for an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement.  Even if it is later determined we are not in violation of these laws, we may be faced with negative publicity, incur significant expenses defending our position and have to divert significant management resources from other matters.
 
 
 
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The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payer.  Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer's products from reimbursement under government programs, criminal fines, and imprisonment.  Even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, which would also harm our financial condition.  Because of the breadth of these laws and the narrowness of the safe harbors and because government scrutiny in this area is high, it is possible that some of our business activities could come under that scrutiny.

In recent years, several states and localities, including California, the District of Columbia, Maine, Massachusetts, Minnesota, Nevada, New Mexico, Vermont, and West Virginia, have enacted legislation requiring pharmaceutical companies to establish marketing compliance programs, and file periodic reports with the state or make periodic public disclosures on sales, marketing, pricing, clinical trials, and other activities.  Similar legislation is being considered in other states.  Many of these requirements are new and uncertain, and the penalties for failure to comply with these requirements are unclear.  Nonetheless, although we have established compliance policies that comport with the Code of Interactions with Healthcare Providers adopted by Pharmaceutical Research Manufacturers of America (PhRMA Code) and the Office of Inspector General's (OIG) Compliance Program Guidance for Pharmaceutical Manufacturers,  if we are found not to be in full compliance with these laws, we could face enforcement action and fines and other penalties, and could receive adverse publicity.

The FDA or similar agencies in other jurisdictions may require us to restrict the distribution or use of KALBITOR or other future products or take other potentially limiting or costly actions if we or others identify side effects after the product is on the market.

The FDA required that we implement a REMS for KALBITOR and conduct post-marketing studies to assess a risk of hypersensitivity reactions, including anaphylaxis.  The REMS consists of a communication plan to healthcare providers.  The FDA and other regulatory agencies could impose new requirements or change existing regulations or promulgate new ones at any time that may affect our ability to obtain or maintain approval of KALBITOR or future products or require significant additional costs to obtain or maintain such approvals.  For example, the FDA or similar agencies in other jurisdictions may require us to restrict the distribution or use of KALBITOR if we or others identify side effects after KALBITOR is on the market.  Changes in KALBITOR's approval or restrictions on its use could make it difficult to achieve market acceptance, and we may not be able to market and sell KALBITOR or continue to sell it, successfully, or at all, which would limit our ability to generate product sales and adversely affect our results of operations and business prospects.

We rely on third-party manufacturers to produce our preclinical and clinical drug supplies and we intend to rely on third parties to produce commercial supplies of KALBITOR and any future approved product candidates.  Any failure by a third-party manufacturer to produce supplies for us may delay or impair our ability to develop, obtain regulatory approval for or commercialize our product candidates.

We have relied upon a small number of third-party manufacturers for the manufacture of our product candidates for preclinical and clinical testing purposes and intend to continue to do so in the future.  As a result, we depend on collaborators, partners, licensees and other third parties to manufacture clinical and commercial scale quantities of our biopharmaceutical candidates in a timely and effective manner and in accordance with government regulations.  If these third party arrangements are not successful, it will adversely affect our ability to develop, obtain regulatory approval for or commercialize our product candidates.

We have identified only a few facilities that are capable of producing material for preclinical and clinical studies and we cannot assure you that they will be able to supply sufficient clinical materials during the clinical development of our biopharmaceutical candidates.  Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates ourselves, including reliance on the third party for regulatory compliance and quality assurance, the possibility of breach of the manufacturing agreement by the third party because of factors beyond our control (including a failure to synthesize and manufacture our product candidates in accordance with our product specifications) and the possibility of termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or damaging to us.  In addition, the FDA and other regulatory authorities require that our product candidates be manufactured according to cGMP and similar foreign standards.  Any failure by our third-party manufacturers to comply with cGMP or failure to scale up manufacturing processes, including any failure to deliver sufficient quantities of product candidates in a timely manner, could lead to a delay in, or failure to obtain, regulatory approval of any of our product candidates.
 
 
 
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In addition, as our drug development pipeline increases and matures, we will have a greater need for clinical trial and commercial manufacturing capacity.  We do not own or operate manufacturing facilities for the production of clinical or commercial quantities of our product candidates and we currently have no plans to build our own clinical or commercial scale manufacturing capabilities.  To meet our projected needs for commercial manufacturing, third parties with whom we currently work will need to increase their scale of production or we will need to secure alternate suppliers.

We are dependent on a single contract manufacturer to produce drug substance for ecallantide, which may adversely affect our ability to commercialize KALBITOR and other potential ecallantide products.
 
We currently rely on Fujifilm to produce the bulk drug substance used in the manufacture of KALBITOR and other potential ecallantide products.  Our business, therefore, faces risks of difficulties with, and interruptions in, performance by Fujifilm, the occurrence of which could adversely impact the availability and/or sales of KALBITOR and other potential ecallantide products in the future.  The failure of Fujifilm to supply manufactured product on a timely basis or at all, or to manufacture our drug substance in compliance with our specifications or applicable quality requirements or in volumes sufficient to meet demand could adversely affect our ability to sell KALBITOR and other potential ecallantide products, could harm our relationships with our collaborators or customers and could negatively affect our revenues and operating results.  If the operations of Fujifilm are disrupted, we may be forced to secure alternative sources of supply, which may be unavailable on commercially acceptable terms, cause delays in our ability to deliver products to our customers, increase our costs and negatively affect our operating results.

In addition, failure to comply with applicable good manufacturing practices and other governmental regulations and standards could be the basis for action by the FDA or corresponding foreign agency to withdraw approval for KALBITOR or any other product previously granted to us and for other regulatory action, including recall or seizure, fines, imposition of operating restrictions, total or partial suspension of production or injunctions.

We do not currently have a long-term commercial supply agreement with Fujifilm for the production of ecallantide drug substance.  We are working to establish a long-term supply contract with Fujifilm.  However, we cannot guarantee that we will be able to enter into long-term supply contracts on commercially reasonable terms, or at all.  We believe that our supply of the ecallantide drug substance used to manufacture KALBITOR will be sufficient to supply all ongoing studies relating to ecallantide and KALBITOR and to meet anticipated market demand into 2014. These estimates are subject to changes in market conditions and other factors beyond our control.  If we are unable to execute a long-term supply agreement or otherwise secure a dependable source for drug substance before our inventory of ecallantide drug substance is exhausted, it could adversely affect our ability to further develop and commercialize KALBITOR and other potential ecallantide products, generate revenue from product sales, increase our costs and negatively affect our operating results.
 
 
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Any new biopharmaceutical product candidates we develop must undergo rigorous clinical trials which could substantially delay or prevent their development or marketing.
 
In addition to KALBITOR, we are developing ecallantide in further indications and other potential biopharmaceutical products.  Before we can commercialize any biopharmaceutical product candidate, we must engage in a rigorous clinical trial and regulatory approval process mandated by the FDA and analogous foreign regulatory agencies.  This process is lengthy and expensive, and approval is never certain.  Positive results from preclinical studies and early clinical trials do not ensure positive results in late stage clinical trials designed to permit application for regulatory approval.  We cannot accurately predict when planned clinical trials will begin or be completed.  Many factors affect patient enrollment, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, alternative therapies, competing clinical trials and new drugs approved for the conditions that we are investigating.  As a result of all of these factors, our future trials may take longer to enroll patients than we anticipate.  Such delays may increase our costs and slow down our product development and the regulatory approval process.  Our product development costs will also increase if we need to perform more or larger clinical trials than planned.  The occurrence of any of these events will delay our ability to commercialize products, generate revenue from product sales and impair our ability to become profitable, which may cause us to have insufficient capital resources to support our operations.

Products that we or our collaborators develop could take a significantly longer time to gain regulatory approval than we expect or may never gain approval.  If we or our collaborators do not receive these necessary approvals, we will not be able to generate substantial product or royalty revenues and may not become profitable.  We and our collaborators may encounter significant delays or excessive costs in our efforts to secure regulatory approvals.  Factors that raise uncertainty in obtaining these regulatory approvals include the following:

 
we must demonstrate through clinical trials that the proposed product is safe and effective for its intended use;
 
 
we have limited experience in conducting the clinical trials necessary to obtain regulatory approval; and
 
 
data obtained from preclinical and clinical activities are subject to varying interpretations, which could delay, limit or prevent regulatory approvals.
 
Regulatory authorities may delay, suspend or terminate clinical trials at any time if they believe that the patients participating in trials are being exposed to unacceptable health risks or if they find deficiencies in the clinical trial procedures.  There is no guarantee that we will be able to resolve such issues, either quickly, or at all.  In addition, our or our collaborators' failure to comply with applicable regulatory requirements may result in criminal prosecution, civil penalties and other actions that could impair our ability to conduct our business.

We lack experience in and/or capacity for conducting clinical trials and handling regulatory processes.  This lack of experience and/or capacity may adversely affect our ability to commercialize any biopharmaceuticals that we may develop.

We have hired experienced clinical development and regulatory staff to develop and supervise our clinical trials and regulatory processes.  However, we will remain dependent upon third party contract research organizations to carry out some of our clinical and preclinical research studies for the foreseeable future.  As a result, we have had and will continue to have less control over the conduct of the clinical trials, the timing and completion of the trials, the required reporting of adverse events and the management of data developed through the trials than would be the case if we were relying entirely upon our own staff.  Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities.  Outside parties may have staffing difficulties, may undergo changes in priorities or may become financially distressed, adversely affecting their willingness or ability to conduct our trials.  We may also experience unexpected cost increases that are beyond our control.

 
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Problems with the timeliness or quality of the work of a contract research organization may lead us to seek to terminate the relationship and use an alternative service provider.  However, changing our service provider may be costly and may delay our trials, and contractual restrictions may make such a change difficult or impossible.  Additionally, it may be impossible to find a replacement organization that can conduct our trials in an acceptable manner and at an acceptable cost.

Government regulation of drug development is costly, time consuming and fraught with uncertainty, and our products in development cannot be sold if we do not gain regulatory approval.

We and our licensees and partners conduct research, preclinical testing and clinical trials for our product candidates.  These activities are subject to extensive regulation by numerous state and federal governmental authorities in the United States, such as the FDA, as well as foreign countries, such as the EMEA in European countries, Canada and Australia.  Currently, we are required in the United States and in foreign countries to obtain approval from those countries' regulatory authorities before we can manufacture (or have our third-party manufacturers produce), market and sell our products in those countries.  The FDA and other United States and foreign regulatory agencies have substantial authority to fail to approve commencement of, suspend or terminate clinical trials, require additional testing and delay or withhold registration and marketing approval of our product candidates.

Obtaining regulatory approval has been and continues to be increasingly difficult and costly and takes many years, and if obtained is costly to maintain.  With the occurrence of a number of high profile safety events with certain pharmaceutical products, regulatory authorities, and in particular the FDA, members of Congress, the United States Government Accountability Office (GAO), Congressional committees, private health/science foundations and organizations, medical professionals, including physicians and investigators, and the general public are increasingly concerned about potential or perceived safety issues associated with pharmaceutical and biological products, whether under study for initial approval or already marketed.

This increasing concern has produced greater scrutiny, which may lead to fewer treatments being approved by the FDA or other regulatory bodies, as well as restrictive labeling of a product or a class of products for safety reasons, potentially including a boxed warning or additional limitations on the use of products, pharmacovigilance programs for approved products or requirement of risk management activities related to the promotion and sale of a product.

If regulatory authorities determine that we or our licensees or partners conducting research and development activities on our behalf have not complied with regulations in the research and development of a product candidate, new indication for an existing product or information to support a current indication, then they may not approve the product candidate or new indication or maintain approval of the current indication in its current form or at all, and we will not be able to market and sell it.  If we were unable to market and sell our product candidates, our business and results of operations would be materially and adversely affected.

Product liability and other claims arising in connection with the testing our product candidates in human clinical trials may reduce demand for our products or result in substantial damages.

We face an inherent risk of product liability exposure related to KALBITOR and the testing of our product candidates in human clinical trials.

An individual may bring a product liability claim against us if KALBITOR or one of our product candidates causes, or merely appears to have caused, an injury.  Moreover, in some of our clinical trials, we test our product candidates in indications where the onset of certain symptoms or "attacks" could be fatal.  Although the protocols for these trials include emergency treatments in the event a patient appears to be suffering a potentially fatal incident, patient deaths may nonetheless occur.  As a result, we may face additional liability if we are found or alleged to be responsible for any such deaths.
 
 
 
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These types of product liability claims may result in:
 
 
decreased demand for KALBITOR and other product candidates;
 
 
injury to our reputation;
 
 
withdrawal of clinical trial volunteers;
 
 
related litigation costs; and
 
 
substantial monetary awards to plaintiffs.
 
Although we currently maintain product liability insurance, we may not have sufficient insurance coverage, and we may not be able to obtain sufficient coverage at a reasonable cost.  Our inability to obtain product liability insurance at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of any products that we or our collaborators develop, including KALBITOR.  If we are successfully sued for any injury caused by our products or processes, then our liability could exceed our product liability insurance coverage and our total assets.

If we fail to establish and maintain strategic license, research and collaborative relationships, or if our collaborators are not able to successfully develop and commercialize product candidates, our ability to generate revenues could be adversely affected.

Our business strategy includes leveraging certain product candidates, as well as our proprietary phage display technology, through collaborations and licenses that are structured to generate revenues through license fees, technical and clinical milestone payments, and royalties.  We have entered into, and anticipate continuing to enter into, collaborative and other similar types of arrangements with third parties to develop, manufacture and market drug candidates and drug products.
 
In addition, for us to continue to receive any significant payments from our LFRP related licenses and collaborations and generate sufficient revenues to meet the required payments under our agreement with Cowen Healthcare, the relevant product candidates must advance through clinical trials, establish safety and efficacy, and achieve regulatory approvals, obtain market acceptance and generate revenues.

Reliance on license and collaboration agreements involves a number of risks as our licensees and collaborators:

 
are not obligated to develop or market product candidates discovered using our phage display technology;

 
may not perform their obligations as expected, or may pursue alternative technologies or develop competing products;

 
control many of the decisions with respect to research, clinical trials and commercialization of product candidates we discover or develop with them or have licensed to them;

 
may terminate their collaborative arrangements with us under specified circumstances, including, for example, a change of control, with short notice; and

 
may disagree with us as to whether a milestone or royalty payment is due or as to the amount that is due under the terms of our collaborative arrangements.

We cannot assure you that we will be able to maintain our current licensing and collaborative efforts, nor can we assure the success of any current or future licensing and collaborative relationships.  An inability to establish new relationships on terms favorable to us, work successfully with current licensees and collaborators, or failure of any significant portion of our LFRP related licensing and collaborative efforts would result in a material adverse impact on our business, operating results and financial condition.
 
 
 
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Our success depends significantly upon our ability to obtain and maintain intellectual property protection for our products and technologies and upon third parties not having or obtaining patents that would prevent us from commercializing any of our products.
 
We face risks and uncertainties related to our intellectual property rights.  For example:
 
 
we may be unable to obtain or maintain patent or other intellectual property protection for any products or processes that we may develop or have developed;
 
 
third parties may obtain patents covering the manufacture, use or sale of these products or processes, which may prevent us from commercializing any of our products under development globally or in certain regions; or
 
 
our patents or any future patents that we may obtain may not prevent other companies from competing with us by designing their products or conducting their activities so as to avoid the coverage of our patents.
 
Patent rights relating to our phage display technology are central to our LFRP.  As part of our LFRP, we generally seek to negotiate license agreements with parties practicing technology covered by our patents.  In countries where we do not have and/or have not applied for phage display patent rights, we will be unable to prevent others from using phage display or developing or selling products or technologies derived using phage display.  In addition, in jurisdictions where we have phage display patent rights, we may be unable to prevent others from selling or importing products or technologies derived elsewhere using phage display.  Any inability to protect and enforce such phage display patent rights, whether by any inability to license or any invalidity of our patents or otherwise, could negatively affect future licensing opportunities and revenues from existing agreements under the LFRP.
 
In all of our activities, we also rely substantially upon proprietary materials, information, trade secrets and know-how to conduct our research and development activities and to attract and retain collaborators, licensees and customers.  Although we take steps to protect our proprietary rights and information, including the use of confidentiality and other agreements with our employees and consultants and in our academic and commercial relationships, these steps may be inadequate, these agreements may be violated, or there may be no adequate remedy available for a violation.  Also, our trade secrets or similar technology may otherwise become known to, or be independently developed or duplicated by, our competitors.
 
Before we and our collaborators can market some of our processes or products, we and our collaborators may need to obtain licenses from other parties who have patent or other intellectual property rights covering those processes or products.  Third parties have patent rights related to phage display, particularly in the area of antibodies.  While we have gained access to key patents in the antibody area through the cross licenses with Affimed Therapeutics AG, Affitech AS, Biosite Incorporated (now owned by Alere Inc.), CAT, Domantis Limited (a wholly-owned subsidiary of GlaxoSmithKline), Genentech, Inc. and XOMA Ireland Limited, other third party patent owners may contend that we need a license or other rights under their patents in order for us to commercialize a process or product.  In addition, we may choose to license patent rights from other third parties.  In order for us to commercialize a process or product, we may need to license the patent or other rights of other parties.  If a third party does not offer us a needed license or offers us a license only on terms that are unacceptable, we may be unable to commercialize one or more of our products.  If a third party does not offer a needed license to our collaborators and as a result our collaborators stop work under their agreement with us, we might lose future milestone payments and royalties, which would adversely affect us.  If we decide not to seek a license, or if licenses are not available on reasonable terms, we may become subject to infringement claims or other legal proceedings, which could result in substantial legal expenses.  If we are unsuccessful in these actions, adverse decisions may prevent us from commercializing the affected process or products and could require us to pay substantial monetary damages.
 
 
 
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We seek affirmative rights of license or ownership under existing patent rights relating to phage display technology of others.  For example, through our patent licensing program, we have secured a limited freedom to practice some of these patent rights pursuant to our standard license agreement, which contains a covenant by the licensee that it will not sue us under certain of the licensee's phage display improvement patents.  We cannot guarantee, however, that we will be successful in enforcing any agreements from our licensees, including agreements not to sue under their phage display improvement patents, or in acquiring similar agreements in the future, or that we will be able to obtain commercially satisfactory licenses to the technology and patents of others.  If we cannot obtain and maintain these licenses and enforce these agreements, this could have a material adverse impact on our business.
 
Proceedings to obtain, enforce or defend patents and to defend against charges of infringement are time consuming and expensive activities.  Unfavorable outcomes in these proceedings could limit our patent rights and our activities, which could materially affect our business.
 
Obtaining, protecting and defending against patent and proprietary rights can be expensive.  For example, if a competitor files a patent application claiming technology also invented by us, we may have to participate in an expensive and time-consuming interference proceeding before the United States Patent and Trademark Office to address who was first to invent the subject matter of the claim and whether that subject matter was patentable.  Moreover, an unfavorable outcome in an interference proceeding could require us to cease using the technology or to attempt to license rights to it from the prevailing party.  Our business would be harmed if a prevailing third party does not offer us a license on terms that are acceptable to us.
 
In patent offices outside the United States, we may be forced to respond to third party challenges to our patents.  For example, our first phage display patent in Europe, European Patent No. 436,597, known as the 597 Patent, was ultimately revoked in 2002 in proceedings in the European Patent Office.  We are not able to prevent other parties from using certain aspects of our phage display technology in Europe.
 
The issues relating to the validity, enforceability and possible infringement of our patents present complex factual and legal issues that we periodically reevaluate.  Third parties have patent rights related to phage display, particularly in the area of antibodies.  While we have gained access to key patents in the antibody area through our cross-licensing agreements with Affimed, Affitech, Biosite, Domantis, Genentech, XOMA and CAT, other third party patent owners may contend that we need a license or other rights under their patents in order for us to commercialize a process or product.  In addition, we may choose to license patent rights from third parties.  While we believe that we will be able to obtain any needed licenses, we cannot assure you that these licenses, or licenses to other patent rights that we identify as necessary in the future, will be available on reasonable terms, if at all.  If we decide not to seek a license, or if licenses are not available on reasonable terms, we may become subject to infringement claims or other legal proceedings, which could result in substantial legal expenses.  If we are unsuccessful in these actions, adverse decisions may prevent us from commercializing the affected process or products.  Moreover, if we are unable to maintain the covenants with regard to phage display improvements that we obtain from our licensees through our patent licensing program and the licenses that we have obtained to third party phage display patent rights, it could have a material adverse effect on our business.
 
We would expect to incur substantial costs in connection with any litigation or patent proceeding.  In addition, our management's efforts would be diverted, regardless of the results of the litigation or proceeding.  An unfavorable result could subject us to significant liabilities to third parties, require us to cease manufacturing or selling the affected products or using the affected processes, require us to license the disputed rights from third parties or result in awards of substantial damages against us.  Our business will be harmed if we cannot obtain a license, can obtain a license only on terms we consider to be unacceptable or if we are unable to redesign our products or processes to avoid infringement.
 
 
 
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In all of our activities, we substantially rely on proprietary materials and information, trade secrets and know-how to conduct research and development activities and to attract and retain collaborative partners, licensees and customers.  Although we take steps to protect these materials and information, including the use of confidentiality and other agreements with our employees and consultants in both academic commercial relationships, we cannot assure you that these steps will be adequate, that these agreements will not be violated, or that there will be an available or sufficient remedy for any such violation, or that others will not also develop the same or similar proprietary information.
 
Failure to meet our Cowen Healthcare debt service obligations could adversely affect our financial condition and our loan agreement obligations could impair our operating flexibility.
 
We have a loan with Cowen Healthcare which has an aggregate principal balance of $56.7 million at September 30, 2011.  The loan bears interest at a rate of 16% per annum for Tranche A and 21.5% per annum for Tranche B payable quarterly, all of which matures in August 2016.  In connection with the loan, we have entered into a security agreement granting Cowen Healthcare a security interest in substantially all of the assets related to our LFRP.  We are required to repay the loan based on a percentage of LFRP related revenues, including royalties, milestones, and license fees received by us under the LFRP.  If the LFRP revenues for any quarterly period are insufficient to cover the cash interest due for that period, the deficiency may be added to the outstanding loan principal or paid in cash by us.  We may prepay the loan in whole or in part at any time after August 2012.  In the event of certain changes of control or mergers or sales of all or substantially all of our assets, any or all of the loan may become due and payable at Cowen Healthcare's option, including a prepayment premium prior to August 2012.  We must comply with certain loan covenants which if not observed could make all loan principal, interest and all other amounts payable under the loan immediately due and payable.
 
Our obligations under the Cowen Healthcare agreement require that we dedicate a substantial portion of cash flow from our LFRP receipts to service the loan, which will reduce the amount of cash flow available for other purposes.  If the LFRP fails to generate sufficient receipts to fund quarterly principal and interest payments to Cowen, we will be required to fund such obligations from cash on hand or from other sources, further decreasing the funds available to operate our business.  In the event that amounts due under the loan are accelerated, payment would significantly reduce our cash, cash equivalents and short-term investments and we may not have sufficient funds to pay the debt if any of it is accelerated.
 
As a result of the security interest granted to Cowen Healthcare, we are restricted in our ability to sell our rights to part or all of those assets, or take certain other actions, without first obtaining permission from Cowen.  This requirement could delay, hinder or condition our ability to enter into corporate partnerships or strategic alliances with respect to these assets.
 
The obligations and restrictions under the Cowen Healthcare agreement may limit our operating flexibility, make it difficult to pursue our business strategy and make us more vulnerable to economic downturns and adverse developments in our business.
 
If we lose or are unable to hire and retain qualified personnel, then we may not be able to develop our products or processes.
 
We are highly dependent on qualified scientific and management personnel, and we face intense competition from other companies and research and academic institutions for qualified personnel.  If we lose an executive officer, a manager of one of our principal business units or research programs, or a significant number of any of our staff or are unable to hire and retain qualified personnel, then our ability to develop and commercialize our products and processes may be delayed which would have an adverse effect on our business, financial condition, and results of operations.
 
We use and generate hazardous materials in our business, and any claims relating to the improper handling, storage, release or disposal of these materials could be time-consuming and expensive.
 
 
 
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Our phage display research and development involves the controlled storage, use and disposal of chemicals and solvents, as well as biological and radioactive materials.  We are subject to foreign, federal, state and local laws and regulations governing the use, manufacture and storage and the handling and disposal of materials and waste products.  Although we believe that our safety procedures for handling and disposing of these hazardous materials comply with the standards prescribed by laws and regulations, we cannot completely eliminate the risk of contamination or injury from hazardous materials.  If an accident occurs, an injured party could seek to hold us liable for any damages that result and any liability could exceed the limits or fall outside the coverage of our insurance.  We may not be able to maintain insurance on acceptable terms, or at all.  We may incur significant costs to comply with current or future environmental laws and regulations.
 
Our business is subject to risks associated with international contractors and exchange rate risk.
 
Since the closing of our European subsidiary operations in 2008, none of our business is conducted in currencies other than our reporting currency, the United States dollar.  We do, however, rely on an international contract manufacturer for the production of our drug substance for ecallantide.  We recognize foreign currency gains or losses arising from our transactions in the period in which we incur those gains or losses.  As a result, currency fluctuations among the United States dollar and the currencies in which we do business have caused foreign currency transaction gains and losses in the past and will likely do so in the future.  Because of the variability of currency exposures and the potential volatility of currency exchange rates, we may suffer significant foreign currency transaction losses in the future due to the effect of exchange rate fluctuations.
 
Compliance with changing regulations relating to corporate governance and public disclosure may result in additional expenses.
 
Keeping abreast of, and in compliance with, changing laws, regulations, and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations, and NASDAQ Global Market rules, have required an increased amount of management attention and external resources.  We intend to invest all reasonably necessary resources to comply with evolving corporate governance and public disclosure standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.
 
We may not succeed in acquiring technology and integrating complementary businesses.
 
We may acquire additional technology and complementary businesses in the future.  Acquisitions involve many risks, any one of which could materially harm our business, including:
 
 
the diversion of management's attention from core business concerns;
 
 
the failure to exploit acquired technologies effectively or integrate successfully the acquired businesses;
 
 
the loss of key employees from either our current business or any acquired businesses; and
 
 
the assumption of significant liabilities of acquired businesses.
 
We may be unable to make any future acquisitions in an effective manner.  In addition, the ownership represented by the shares of our common stock held by our existing stockholders will be diluted if we issue equity securities in connection with any acquisition.  If we make any significant acquisitions using cash consideration, we may be required to use a substantial portion of our available cash.  If we issue debt securities to finance acquisitions, then the debt holders would have rights senior to the holders of shares of our common stock to make claims on our assets and the terms of any debt could restrict our operations, including our ability to pay dividends on our shares of common stock.  Acquisition financing may not be available on acceptable terms, or at all.  In addition, we may be required to amortize significant amounts of intangible assets in connection with future acquisitions.  We might also have to recognize significant amounts of goodwill that will have to be tested periodically for impairment.  These amounts could be significant, which could harm our operating results.
 
 
 
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Risks Related To Our Common Stock
 
Our common stock may continue to have a volatile public trading price and low trading volume.
 
The market price of our common stock has been highly volatile.  Since our initial public offering in August 2000 through October 26, 2011, the price of our common stock on the NASDAQ Global Market has ranged between $54.12 and $1.05.   The market has experienced significant price and volume fluctuations for many reasons, some of which may be unrelated to our operating performance.
 
Many factors may have an effect on the market price of our common stock, including:
 
 
public announcements by us, our competitors or others;
 
 
developments concerning proprietary rights, including patents and litigation matters;
 
 
publicity regarding actual or potential clinical results or developments with respect to products or compounds we or our collaborators are developing;
 
 
regulatory decisions in both the United States and abroad;
 
 
public concern about the safety or efficacy of new technologies;
 
 
issuance of new debt or equity securities;
 
 
general market conditions and comments by securities analysts; and
 
 
quarterly fluctuations in our revenues and financial results.
 
While we cannot predict the effect that these factors may have on the price of our common stock, these factors, either individually or in the aggregate, could result in significant variations in price during any given period of time.

Anti-takeover provisions in our governing documents and under Delaware law may make an acquisition of us more difficult.

We are incorporated in Delaware.  We are subject to various legal and contractual provisions that may make a change in control of us more difficult.  Our board of directors has the flexibility to adopt additional anti-takeover measures.

Our charter authorizes our board of directors to issue up to 1,000,000 shares of preferred stock and to determine the terms of those shares of stock without any further action by our stockholders.  If the board of directors exercises this power to issue preferred stock, it could be more difficult for a third party to acquire a majority of our outstanding voting stock.  Our charter also provides staggered terms for the members of our board of directors.  This may prevent stockholders from replacing the entire board in a single proxy contest, making it more difficult for a third party to acquire control of us without the consent of our board of directors.  Our equity incentive plans generally permit our board of directors to provide for acceleration of vesting of options granted under these plans in the event of certain transactions that result in a change of control.  If our board of directors used its authority to accelerate vesting of options, then this action could make an acquisition more costly, and it could prevent an acquisition from going forward.
 
 
 
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Section 203 of the Delaware General Corporation Law prohibits a person from engaging in a business combination with any holder of 15% or more of its capital stock until the holder has held the stock for three years unless, among other possibilities, the board of directors approves the transaction.  This provision could have the effect of delaying or preventing a change of control of Dyax, whether or not it is desired by or beneficial to our stockholders.
 
The provisions described above, as well as other provisions in our charter and bylaws and under the Delaware General Corporation Law, may make it more difficult for a third party to acquire our company, even if the acquisition attempt was at a premium over the market value of our common stock at that time. 
 
Item 5 – OTHER INFORMATION OF THE FORM 10-Q:
 
On July 28, 2011 Dyax notified its landlord, ARE-Tech Square, LLC, that its lease dated as of June 13, 2001 for the property located at 300 Technology Square, Cambridge, Massachusetts would terminate on January 28, 2012 instead of at its stated term on February 29, 2012.
 
 
 
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Item 6 – EXHIBITS
 
EXHIBIT
NO.
 
DESCRIPTION
     
3.1
 
Amended and Restated Certificate of Incorporation of the Company. Filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q (File No. 000-24537) for the quarter ended September 30, 2008 and incorporated herein by reference.
     
3.2
 
Certificate of Amendment of the Company’s Amended and Restated Certificate of Incorporation.   Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 000-24537) filed on May 13, 2011 and incorporated herein by reference.
     
3.3
 
Amended and Restated By-laws of the Company. Filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q (File No. 000-24537) for the quarter ended September 30, 2008 and incorporated herein by reference.
     
10.1
 
Third Amendment dated as of July 8, 2011 to Distribution Agreement by and between the Company and US Bioservices Corporation.  Filed herewith.
     
10.2
 
First Amendment dated as of August 25, 2011 to Distribution Agreement by and between the Company and ASD Specialty Healthcare Inc. Filed herewith.
     
10.3
 
Lease, dated as of July 14, 2011, by and between the Company and Netview 5 and 6 LLC.  Filed herewith.
 
31.1
 
Certification of Chief Executive Officer Pursuant to §240.13a-14 or §240.15d-14 of the Securities Exchange Act of 1934, as amended. Filed herewith.
     
31.2
 
Certification of Chief Financial Officer Pursuant to §240.13a-14 or §240.15d-14 of the Securities Exchange Act of 1934, as amended. Filed herewith.
     
32
 
Certification pursuant to 18 U.S.C. Section 1350.  Filed herewith.
 
101**
 
The following materials from Dyax Corp.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010, (ii) Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2011 and 2010, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010, and (iv) Notes to Consolidated Financial Statements, tagged as blocks of text.
 
This Exhibit has been filed separately with the Comission pursuant to an application for confidential treatment. The confidential portions of this Exhibit have been omitted and are marked by an asterisk.
   
**
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
 
 
 
56

 
 
DYAX CORP.
 
SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
DYAX CORP.
   
Date: November 3, 2011
 
 
/s/George Migausky
 
 
George Migausky
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
 
 
 
57

 
 
DYAX CORP.
 
EXHIBIT INDEX

 
EXHIBIT NO.
 
DESCRIPTION
     
3.1
 
Amended and Restated Certificate of Incorporation of the Company. Filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q (File No. 000-24537) for the quarter ended September 30, 2008 and incorporated herein by reference.
     
3.2
 
Certificate of Amendment of the Company’s Amended and Restated Certificate of Incorporation.   Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 000-24537) filed on May 13, 2011 and incorporated herein by reference.
     
3.3
 
Amended and Restated By-laws of the Company. Filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q (File No. 000-24537) for the quarter ended September 30, 2008 and incorporated herein by reference.
     
10.1
 
Third Amendment dated as of July 8, 2011 to Distribution Agreement by and between the Company and US Bioservices Corporation.  Filed herewith.
     
10.2
 
First Amendment dated as of August 25, 2011 to Distribution Agreement by and between the Company and ASD Specialty Healthcare Inc. Filed herewith.
     
10.3
 
Lease, dated as of July 14, 2011, by and between the Company and Netview 5 and 6 LLC.  Filed herewith.
 
31.1
 
Certification of Chief Executive Officer Pursuant to §240.13a-14 or §240.15d-14 of the Securities Exchange Act of 1934, as amended. Filed herewith.
     
31.2
 
Certification of Chief Financial Officer Pursuant to §240.13a-14 or §240.15d-14 of the Securities Exchange Act of 1934, as amended. Filed herewith.
     
32
 
Certification pursuant to 18 U.S.C. Section 1350.  Filed herewith.
 
101**
 
The following materials from Dyax Corp.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010, (ii) Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2011 and 2010, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010, and (iv) Notes to Consolidated Financial Statements, tagged as blocks of text.
 
This Exhibit has been filed separately with the Comission pursuant to an application for confidential treatment. The confidential portions of this Exhibit have been omitted and are marked by an asterisk.
   
**
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
 
 
58