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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2009

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)

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         x           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         o            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):

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

YES         o   NO          x

Number of shares outstanding of Dyax Corp.’s Common Stock, par value $0.01, as of October 26, 2009:  78,049,292

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DYAX CORP.

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PART I — FINANCIAL INFORMATION

Item 1 — FINANCIAL STATEMENTS

Dyax Corp. and Subsidiaries
Consolidated Balance Sheets (Unaudited)

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

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Dyax Corp. and Subsidiaries Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

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

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Dyax Corp. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited)

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

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DYAX CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Dyax Corp. (Dyax or the Company) is a biopharmaceutical company focused on the discovery, development and commercialization of novel biotherapeutics for unmet medical needs, with an emphasis on inflammatory and oncology indications.  Dyax uses its proprietary drug discovery technology, known as phage display, to identify antibody, small protein and peptide compounds for clinical development.  This technology has provided an internal pipeline of promising drug candidates and numerous licenses and collaborators that generate revenues through funded research, license fees, milestone payments and royalties.

The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, risks relating to preclinical and clinical trials and the regulatory approval process, dependence on collaborative arrangements, development by its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, and compliance with the United States Food and Drug Administration (FDA) and other governmental regulations and approval requirements.

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, 2008.  The accompanying December 31, 2008 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, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.  Material subsequent events up to the filing date of this Form 10-Q, November 2, 2009, have been considered for disclosure.

2. ACCOUNTING POLICIES

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 BV (formerly known as TargetQuest BV).  All inter-company accounts and transactions have been eliminated.

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, accounts receivable collectability, useful lives with respect to long

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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 and long-term investments and trade accounts receivable.  At September 30, 2009 and December 31, 2008, approximately 94% and 89% of the Company’s cash, cash equivalents, short-term investments were invested in money market funds backed by U.S. Treasury obligations, U.S. Treasury notes and bills, and obligations of U.S. 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.  Concentrations of credit risk with respect to trade receivable balances are usually limited on an ongoing basis, due to the diverse number of customers comprising the Company’s customer base.  As of September 30, 2009, three customers accounted for 52%, 19% and 14% of the accounts receivable balance.  Two separate customers accounted for approximately 48% and 35% of the Company’s accounts receivable balance as of December 31, 2008.

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 when purchased.  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, 2009, the Company’s investments consisted of U.S. Treasury notes and bills with an amortized cost and estimated fair value of $26.5 million and an unrealized gain of $19,000, which is recorded in other comprehensive income on the accompanying consolidated balance sheets.  As of December 31, 2008, the Company’s investments consisted of U.S. Treasury notes and bills with an amortized cost of $30.6 million, an estimated fair value of $30.8 million and an unrealized gain of $153,000, which is recorded in other comprehensive income on the accompanying consolidated balance sheets.

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 an impairment is indicated, the asset is written down to its estimated fair value on a discounted cash flow basis.

Revenue Recognition:     The Company enters into biopharmaceutical product development agreements with collaborative partners 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, milestone payments and royalties on any product sales derived from

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collaborations. Non-refundable signing and licensing fees are recognized as services are performed over the expected term of the collaboration. Funding for research and development, where the amounts received are non-refundable is recognized as revenue as the related expenses are incurred. Milestones that are based on designated achievement points and that are considered at risk and substantive at the inception of the collaboration are recognized as earned when the corresponding payment is considered reasonably assured. The Company evaluates whether milestones are at risk and substantive based on the contingent nature of the milestone, specifically reviewing factors such as the technological and commercial risk that must be overcome and the level of the investment required. Milestones that are not considered at risk and substantive are recognized, when achieved, in proportion to the percentage of the collaboration completed through the date of achievement in accordance with the Contingency Adjusted Performance Model (CAPM). The remainder is recognized as services are performed over the remaining term of the collaboration. Royalties are recognized when earned. 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.

The Company generally licenses its patent rights covering phage display as well as its proprietary phage display libraries 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 license 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 ratably over the term of the agreement. Perpetual patent licenses are recognized immediately if the Company has no future obligations, the payments are upfront and the license is non-exclusive. Standard terms of the proprietary phage display libraries 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 ratably over the term of the agreement. Upon the achievement of a milestone under a phage display license, a portion of the milestone payment equal to the percentage of the license period that has elapsed is recognized as revenue. The remainder is recognized over the remaining term of the license agreement in accordance with CAPM. Milestone payments under these license arrangements are recognized when the milestone is achieved if the Company has no future obligations under the license. Royalties are recognized when they are earned.

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

Guarantees:   The Company has determined that it is not a party to any agreements that fall within the scope of Guarantees of indebtedness in accordance with Accounting Standards Codification (ASC) 460, Guarantees.  The Company generally does not provide indemnification with respect to the license of its phage display technology. The Company does generally provide indemnifications for claims of third parties that arise out of activities that the Company performs under its collaboration, product development and cross-licensing activities. The maximum potential amount of future payments the Company could be required to make under the indemnification provisions in some instances may be unlimited. The Company has not incurred any costs to defend lawsuits or settle claims related to any indemnification obligations under its license agreements. As a result, the Company believes the estimated fair value of these obligations is minimal. The Company has no liabilities recorded for any of its indemnification obligations recorded as of September 30, 2009 and December 31, 2008.

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, DX-88 drug manufacturing costs, sponsored research, clinical trials insurance, other outside costs, depreciation and facility costs related to the development of drug candidates. These costs have been charged to research and development expense as incurred. Prepaid research and development on the consolidated balance sheets represents external drug manufacturing costs, and research and development service costs that have been paid for prior to the related product being received or the services being performed.

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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, 2009 and December 31, 2008, there were no unrecognized tax benefits.

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.  As of September 30, 2009, all currency translation adjustments are recorded to other income (expense) in the consolidated statement of operations.  Previously, currency translation adjustments were made directly to accumulated other comprehensive income (loss) in the consolidated balance sheets; the change is a result of the closure of the Liege, Belgium facility.  For the three and nine months ended September 30, 2009, the impact of the translation of foreign currencies were a $26,000 gain and a $154,000 loss, respectively, and for the three and nine months ended September 30, 2008, the translation of foreign currencies generated gains of $132,000 and $43,000, respectively.

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 employee stock purchase plan.  The Company’s share-based compensation expense is recorded in accordance with ASC 718.

Net Loss Per Share:    The Company is required to present two net loss per share (EPS) amounts, basic and diluted in accordance with ASC 260.  Basic net 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 or warrants are anti-dilutive for all periods presented and, therefore, are excluded from the calculation of diluted net loss per share. Stock options and warrants to purchase a total of 9,136,208 and 8,617,419 shares of common stock were outstanding at September 30, 2009 and 2008, 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 in annual financial statements of public enterprises and in interim financial reports issued to shareholders. It also established standards for related disclosures about products and services, geographic areas and major customers.  Prior to the 2008 closing of the research facility in Liege, Belgium, the Company operated as one business segment in two geographic areas.  Subsequent to the closing, the Company operates as one business segment with one geographic area.

Recent Accounting Pronouncements:

Effective July 1, 2009, the Financial Accounting Standards Board (FASB) issued the ASC as the as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with U.S. GAAP.  Therefore, beginning with this Form 10-Q, all references made to U.S. GAAP in the notes to our consolidated financial statements now use the new ASC numbering system. The ASC does not change or alter existing U.S. GAAP and, therefore, it does not have an impact on our financial position, results of operations or cash flows.

In June 2009, FASB issued an amendment to the accounting and disclosure requirements for transfers of financial assets. This amendment requires greater transparency and additional disclosures for

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transfers of financial assets and the entity’s continuing involvement with them and changes the requirements for derecognizing financial assets. In addition, this amendment eliminates the concept of a qualifying special-purpose entity (QSPE). This amendment is effective for financial statements issued for fiscal years beginning after November 15, 2009. The Company has not determined the effect that the adoption of this standard will have on its financial position or results of operations but any effect will generally be limited to future transactions. Historically, the Company has not had any material transfer of financial assets.

In October 2009, the FASB issued a new accounting standard which amends existing revenue recognition accounting pronouncements for Multiple-Deliverable Revenue Arrangements.  This new standard provides accounting principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management’s estimate of the selling price for an undelivered item in circumstances when there is no other means to determine the fair value of that undelivered item. Multiple-deliverable revenue arrangement guidance previously required that the fair value of the undelivered item be the price of the item either sold in a separate transaction between unrelated third parties or the price charged for each item when the item is sold separately by the vendor. This was difficult to determine when the product was not individually sold because of its unique features. Under the previous guidance, if the fair value of all of the elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company is currently evaluating the potential impact of this standard on its financial results.

3. FAIR VALUE MEASUREMENTS

Effective January 1, 2009, the Company adopted newly issued accounting standard for fair value measurements of all nonfinancial assets and liabilities not recognized or disclosed at fair value in the financial statements on a recurring basis.  The adoption of this accounting standard did not have an impact on the financial results of the Company.

During the quarter ended June 30, 2009, the Company also implemented a newly issued accounting standard requiring disclosure about the fair value of financial instruments in interim, as well as annual financial statements.  The adoption of this standard has resulted in the disclosure of the fair value attributable to the Company’s note payable within its interim report.  As the guidance addresses disclosure requirements, the adoption of this standard did not impact the Company’s financial results (see note 6).

The following tables present information about the Company’s financial assets that have been measured at fair value as of September 30, 2009 and December 31, 2008 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.

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As of September 30, 2009 and December 31, 2008, the Company’s short-term investments consisted of U.S. Treasury notes and bills which are categorized as Level 1 in accordance with ASC 820. 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.

4. STRATEGIC COLLABORATIONS

sanofi-aventis

In February 2008, the Company entered into an exclusive worldwide license with sanofi-aventis for the development and commercialization of the fully human monoclonal antibody DX-2240 as a therapeutic product, as well as a non-exclusive license to the Company’s proprietary antibody phage display technology. Under these licenses, the Company is eligible to receive clinical and sales milestones and royalties based on commercial sales of DX-2240 and other antibodies developed by sanofi-aventis. As an exclusive licensee, sanofi-aventis will be responsible for the ongoing development, commercialization and consolidation of sales of DX-2240. For certain other future antibody product candidates discovered by sanofi-aventis, the Company will retain co-development and profit sharing rights, while sanofi-aventis will maintain ultimate responsibility for development and commercialization, and will book sales worldwide.

As a result of these agreements, the Company received approximately $24.7 million of cash, net of taxes, in 2008 encompassing the upfront DX-2240 license fee, a license fee for Dyax’s proprietary antibody phage display technology, a transfer fee for DX-2240 inventory and know-how, and the transfer of additional specified deliverables.  In 2009, the Company received $190,000 for annual maintenance on the license of the Company’s proprietary antibody phage display technology.  The Company applied the provisions of multiple deliverable arrangements in accordance with ASC 605 and determined that these performance obligations represented a single unit of accounting. As the Company has established fair value in relation to the antibody phage display technology license, it is recognizing the revenue over the performance period. During the three and nine months ended September 30, 2009, the Company recognized revenue of $101,000 and $307,000, respectively, and during the three and nine months ended September 30, 2008, the Company recognized revenue of $104,000 and $426,000, respectively, related to the antibody phage display technology license.

Cubist Pharmaceuticals, Inc.

In April 2008, Dyax 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 DX-88 for the reduction of blood loss during surgery. Under this agreement, Cubist has assumed responsibility for all further development and costs associated with DX-88 in the licensed indications in the Cubist territory. The Company will be eligible to receive additional clinical, regulatory and sales-based milestone payments. The Company is also entitled to receive tiered, double-digit royalties based on sales of DX-88 by Cubist. The agreement also provides an option for the

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Company to retain certain U.S. co-promotion rights. The Company applied the provisions of multiple deliverable arrangements in accordance with ASC 605 to determine whether the performance obligations under this agreement, including development, participation in steering committees, and manufacturing services should be accounted for as a single unit or multiple units of accounting.  Revenue is being recognized under CAPM, including amounts billed to Cubist for clinical trial drug supply.

As a result of this agreement, the Company received a $17.5 million in license and milestone fees in 2008. 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, known as Kalahari 1. These amounts, and any future reimbursements and milestones, are being recorded as revenue over the remaining development period of DX-88 in the Cubist territory, which is currently estimated at five years. The Company will periodically reassess the length of the estimated development period based upon the completed effort.  As of September 30, 2009, the Company has $14.8 million of revenue deferred related to this agreement, which is recorded in deferred revenue on the accompanying consolidated balance sheets.  During the three and nine months ended September 30, 2009, the Company recognized revenue of $1.1 million and $3.2 million, respectively, and during the three and nine months ended September 30, 2008, the Company recognized revenue of $786,000 and $1.6 million, respectively, related to this agreement.

5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following (in thousands):

6. NOTE PAYABLE

In August 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 Licensing and Funded Research Program (LFRP). This loan is now known as the Tranche A loan.  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 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 (Paul Royalty) (see note 7).

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 Dyax 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 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

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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, 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.

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 a 50% premium over the 30-day average closing price.  The warrant has an eight-year term and is exercisable beginning on August 5, 2009.  The Company has estimated the relative fair value of the warrant to be $853,000, 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 a 25% premium over the 45-day average closing price.  The warrant expires in August 2016 and is exercisable beginning on March 27, 2010.  The Company has estimated the relative fair value of the warrant to be $477,000, 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 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.  During the three and nine months ended September 30, 2009, the Company recorded $61,000 and $165,000, respectively, of accretion associated with the debt discount and the warrants, $2.6 million and $7.1 million, respectively, in interest expense, and made payments to Cowen totaling $1.8 million and $9.6 million, respectively.  During the nine months ended September 30, 2009, $3.4 million was allocated to the reduction of the principal balance.  As of September 30, 2009, there was $834,000 of accrued interest payable in relation to this loan which is recorded on the Company’s consolidated balance sheet. The Loan principal balance at September 30, 2009, and December 31, 2008 was $59.7 million and $48.1 million, respectively.  The amount recorded on the Company’s consolidated balance sheets at September 30, 2009 and December 31, 2008, which is net of accrued interest payable and the unamortized portions of the discount and warrants, is $58.5 million and $46.9 million, respectively.  The estimated fair value of the note payable was $50.6 million at September 30, 2009.

7. LONG-TERM OBLIGATIONS

In August 2006, the Company entered into a Royalty Interest Assignment Agreement with Paul Royalty under which it received an upfront payment of $30 million.  In exchange for this payment, the Company assigned Paul Royalty a portion of milestones, royalties and other license fees to be received by it under the LFRP through 2017.  This agreement was extinguished in August 2008 using proceeds from the Cowen Healthcare note payable, at which time all Paul Royalty rights to LFRP receipts were terminated (see note 6).

Under the terms of the agreement, Paul Royalty was assigned a portion of the annual net LFRP receipts.  The portion assigned to Paul Royalty was tiered as follows:  70% of the first $15 million in annual receipts, 20% of the next $5 million, and 1% of any receipts above $20 million.  The agreement also provided for annual guaranteed minimum payments to Paul Royalty, which start at $1.75 million through 2007 and increased to $3.5 million in 2008.  Paul Royalty’s rights to receive a portion of LFRP receipts were to have continued for up to 12 years, depending upon the performance of the LFRP.

The upfront cash payment of $30.0 million, less the $500,000 in cost reimbursements paid to Paul Royalty was recorded as a debt instrument in long-term obligations on the Company’s consolidated balance

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sheet.  Based upon estimated future payments expected under this agreement, the Company determined the interest expense by using the effective interest method.  The best estimate of future payments was based upon returning to Paul Royalty an internal rate of return of 25% through net LFRP receipts.  Due to the application of the effective interest method and the total expected payments, the Company recorded interest expense of $4.1million for the nine months ended September 30, 2008.  During the nine months ended September 30, 2008, the Company made payments totaling $40.2 million related to this obligation to Paul Royalty, including its repayment in August 2008. The Company paid off this loan with a $35.1 million cash payment, of which $27.0 million was allocated to the principal amount and $8.1 million was recorded as loss on extinguishment of debt.  As of both September 30, 2009 and December 31, 2008, there was no outstanding debt balance under this agreement.

The Company capitalized $257,000 of debt issuance costs related to this agreement which, prior to August 2008, were being amortized over the term of the related debt using the effective interest method.  In August 2008, the unamortized debt issuance costs were fully amortized.

8. STOCKHOLDER’S DEFICIT AND STOCK-BASED COMPENSATION

Common Stock

On October 5, 2009, the Company issued 5,500,000 shares of its common stock in an underwritten public offering.  The net proceeds to the Company were approximately $20.5 million, after deducting offering expenses.

In June 2009, the Company issued an aggregate of 8,539,605 shares of its common stock in an underwritten public offering at a price of $2.02 per share.  The aggregate net proceeds to the Company were approximately $16.1 million after deducting underwriting fees and offering expenses.

In 2008, the Company entered into a Common Stock Purchase Agreement with Azimuth Opportunity, Ltd. (Azimuth) which allows the Company to issue and sell up to an aggregate amount of $50 million in common stock with a minimum price of $2.00 per share, less the agreed upon discount which ranges from 4.05% to 6.25% based on the Company’s stock price.  In April 2009, pursuant to a single draw down notice, the Company issued 740,965 shares of its common stock to Azimuth and received net proceeds of approximately $1.6 million.  As of September 30, 2009, $48.4 million remains available under this agreement, if, at the Company’s sole discretion, it presents draw down notices.

Equity Incentive Plan

The Company’s 1995 Equity Incentive Plan (the Equity Plan), as amended to date, 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 them to assist the Company to achieve long-range performance goals and to enable them to participate in the long-term growth of the Company.

There are 18,350,000 shares of common stock available for issuance under the Equity Plan.   At September 30, 2009, a total of 6,141,853 shares were reserved and available for issuance under the Equity Plan.  The compensation expense in connection with the Equity Plan for the three and nine months ended September 30, 2009 was approximately $816,000 and $2.9 million, respectively, exclusive of stock compensation expense associated with the March 2009 restructuring.

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Employee Stock Purchase Plan

The Company’s 1998 Employee Stock Purchase Plan (the Purchase Plan), as amended in May 2002, allows employees to purchase shares of the Company’s common stock at a discount from fair market value.  Under the Purchase Plan, eligible employees may purchase shares during six-month offering periods commencing on January 1 and July 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 Purchase Plan for the three and nine months ended September 30, 2009 was approximately $42,000 and $114,000, respectively.  There were 49,977 and 49,970 shares purchased under the Purchase Plan during the three months ended September 30, 2009 and 2008, respectively, and 99,937and 99,941 shares purchased under the Purchase Plan during the nine months ended September 30, 2009 and 2008, respectively.

A maximum of 1,330,000 may be issued under the Purchase Plan.  At September 30, 2009, a total of 694,014 shares were reserved and available for issuance under the Purchase Plan.

Stock-Based Compensation Expense

The following table reflects stock compensation expense recorded during the three and nine months ended September 30, 2009 and 2008 (in thousands):

During the nine months ended September 30, 2009, amendments to the exercise and vesting schedules to certain options resulted in additional stock-based compensation expense of $1.3 million, inclusive of $237,000 stock-based compensation expense recorded in relation to the restructuring activities.

9. RESTRUCTURING AND IMPAIRMENT CHARGES

In March 2009, the Company eliminated positions from various departments to focus necessary resources on the commercialization of its lead product candidate, DX-88.  As a result of the restructuring, during the three months ended March 31, 2009, the Company recorded one-time charges of approximately $1.9 million, which includes severance related charges of approximately $1.6 million, outplacement costs of approximately $107,000, stock compensation expense of $237,000 for amendments to the exercise and vesting schedules to certain options and other exit costs of $26,000.  Substantially all amounts were paid during the quarter ended June 30, 2009.

As a result of the decrease in necessary facility space following the workforce reduction, the Company amended its facility lease during the

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third quarter of 2009 to reduce the leased space.  During the three months ended September 30, 2009, a one-time charge of approximately $1.4 million was recorded, of which approximately $955,000 was a result of the write-down of leasehold improvements.  During the third quarter of 2009, $375,000 of the restructuring charge was paid and an additional $375,000 is expected to be paid in the fourth quarter of 2009.

During the nine months ended September 30, 2008, a charge of approximately $4.6 million was recorded in connection with the closure of the Company’s Liege, Belgium research facility.  This amount included severance related charges of approximately $3.6 million, contract termination costs of approximately $688,000 and other exit costs of $362,000.  Of these restructuring charges, $3.6 million were paid during the nine months ended September 30, 2008, with the remainder paid in the fourth quarter of 2008.  In addition, during the nine months ended September 30, 2008, a charge of approximately $352,000 was recorded for the impairment of fixed assets in connection with the closure of the research facility.

In 1999, the Company received an €825,000 grant from the Walloon region of Belgium, which included specific criteria regarding employment and investment levels that need to be met.  The employment criteria were met in 2006.  Pursuant to the closure of the Liege, Belgium facility in 2008, the Company refunded approximately $162,000 of the grant and the residual balance of approximately $1.2 million is included in short-term liabilities on the consolidated balance sheet as of September 30, 2009.  The investment criteria were met in October 2009 and will result in the release of the liability to the statement of operations in the fourth quarter of 2009.

10. INCOME TAXES

The Company has recorded a deferred tax asset of approximately $1.9 million at December 31, 2008 reflecting the benefit of deductions from the exercise of stock options which has been fully reserved until it is more likely than not that the benefit will be realized.  The benefit from this $1.9 million deferred tax asset will be recorded as a credit to additional paid-in capital if and when realized through a reduction of cash taxes.

In accordance with 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 $142.6 million was established at December 31, 2008.

The tax years 1994 through 2007 remain open to examination by major taxing jurisdictions to which the Company is subject, which are primarily in the U.S., 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

The discussion in this item and elsewhere in this report contains forward-looking statements involving risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements.  These risks and uncertainties include those described in Part II, Item 1a — Risk Factors.

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of novel biotherapeutics for unmet medical needs, with an emphasis on inflammatory and oncology indications. We use our proprietary drug discovery technology, known as phage display, to

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identify antibody, small protein and peptide compounds for clinical development. This phage display technology fuels our internal pipeline of promising drug candidates, attracts numerous licensees and collaborators, and has the potential to generate important revenues in the future.

Our lead product candidate, DX-88, is a small recombinant protein that is a highly specific inhibitor of human plasma kallikrein. We and our collaborators are currently developing DX-88 in multiple indications.

The most advanced indication for DX-88 is in the treatment of hereditary angioedema (HAE), a potentially life-threatening inflammatory condition. If approved by the U.S. Food and Drug Administration, (FDA) in this indication, DX-88 will be branded as KALBITOR®.  It has orphan drug designation in the United States and European Union (EU) for the treatment of acute attacks of HAE. In this indication, we have completed three Phase 2 trials and two Phase 3 trials of DX-88 for subcutaneous administration. On September 23, 2008, we submitted a Biologics License Application (BLA) with the FDA for the use of DX-88 for the treatment of acute attacks of HAE, and the FDA designated this application for priority review. On February 4, 2009, the FDA’s Pulmonary-Allergy Advisory Committee voted in favor of approval of our BLA. On March 25, 2009, we received a complete response letter from the FDA outlining the requirements for approval of DX-88 for HAE.  Specifically, the FDA requested submission of a Risk Evaluation and Mitigation Strategy (REMS) and additional information with respect to the chemistry, manufacturing and controls (CMC) section of the BLA. The letter also included a requirement that we conduct certain post-marketing studies, but did not include requirements for any additional clinical trials for approval of DX-88.  We believe all issues raised in the complete response letter were fully addressed in our reply, which was submitted on June 1, 2009 and accepted for review by the FDA.  In connection with the acceptance, the FDA assigned our BLA a new Prescription Drug User Fee Act (PDUFA) action date of December 1, 2009.

If the BLA is approved, we intend to independently market and sell KALBITOR for HAE in North America. We are currently negotiating with potential partners to commercialize KALBITOR for HAE and other angioedema indications in markets outside of North America.

Outside of HAE, DX-88 is also being developed in additional indications. These include use of DX-88 for the reduction of blood loss during surgery in collaboration with Cubist Pharmaceuticals (Cubist), and for the treatment of retinal diseases in collaboration with Fovea Pharmaceuticals (Fovea), which has entered into an agreement to be acquired by sanofi-aventis.  In addition, we are also exploring use of DX-88 for the treatment of ACE inhibitor-induced angioedema, a life threatening inflammatory response brought on by adverse reactions to ACE inhibitors; and acquired angioedema, a condition associated with B-cell lymphoma and autoimmune disorders.

In addition to DX-88, we continue to use our proprietary phage display to identify new drug candidates such as DX-2240 and DX-2400, two fully human monoclonal antibodies with therapeutic potential in oncology indications. In February 2008, we entered into an exclusive license agreement with sanofi-aventis under which they will be responsible for the continued development of DX-2240. DX-2400 is currently in preclinical development within our development pipeline.

Although we use our phage display technology primarily to advance our own internal development activities, we also leverage it through licenses and collaborations designed to generate revenues and provide us access to co-develop and/or co-promote drug candidates identified by other biopharmaceutical and pharmaceutical companies. Through our Licensing and Funded Research Program (LFRP), we have more than 70 licenses and collaborations, which have thus far resulted in 16 product candidates that licensed third parties have advanced into clinical trials and one product that has received market approval from the FDA. A portion of the current and future revenues generated through the LFRP are pledged to secure payment of loans we received from Cowen Healthcare in August 2008 and March 2009, which loans had an aggregate outstanding balance of $59.7 million as of September 30, 2009.

We have incurred net losses since our inception, including net losses of $12.2 million and $51.5 million for the three and nine months ended September 30, 2009, respectively.  We expect to continue to

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incur significant additional net losses over at least the next several years. We do not expect to generate profits until the therapeutic products from our development portfolio reach the market after being subjected to the uncertainties of the regulatory approval process.  Our revenues and operating results have fluctuated on a quarter to quarter basis and we expect these fluctuations to continue in the future.

Our Business Strategy

Our strategic goal is to develop new biotherapeutics for unmet medical needs, with an emphasis on inflammatory and oncology indications. We intend to accomplish this goal through the following activities:

·                  DX-88 Franchise.  We will continue to focus our internal efforts on obtaining market approval for DX-88 for the treatment of acute attacks of HAE and other angioedemas. We intend to commercialize DX-88 for HAE as KALBITOR on our own in North America and to establish partnerships in other major markets. We plan to expand the label beyond HAE, in two additional angioedemas (acquired and ACE inhibitor-induced). In addition to our internal efforts, ongoing development of DX-88 for the reduction of blood loss during on-pump cardiothoracic surgery and other surgical indications is being pursued through our collaboration agreement with Cubist. Fovea, which has entered into an agreement to be acquired by sanofi-aventis, is developing an ophthalmic formulation for DX-88 starting with retinal vein occlusion-induced macular edema. We will continue to explore the therapeutic potential of DX-88 in other indications.

·                  Emerging Pipeline and Phage Display Technology.  We will continue to use our proprietary phage display technology to identify new drug candidates and advance others within our preclinical pipeline. 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, as we have with our DX-2240 antibody, in order to balance the risks associated with drug discovery and maximize return for our stockholders.

·                  Licensing and Funded Research Program.  We will also continue to leverage our phage display technology through our LFRP in order to generate ongoing future revenues and to gain rights to co-develop and/or co-promote drug candidates identified by certain of our collaborators. There are currently 16 product candidates that licensed third parties in the LFRP have advanced into clinical trials and one product that has received market approval from the FDA.

DX-88 Development Programs

DX-88 for HAE.    We are developing DX-88 as a treatment of acute attacks of HAE.  We have completed three Phase 2 trials and two Phase 3 trials of DX-88 for subcutaneous administration.  An ongoing, open-label continuation study is also being conducted to augment our clinical data with respect to DX-88.

Our study results in patients exposed to DX-88 suggest that it can provide repeated therapeutic benefit to HAE patients for all types of HAE attacks, including potentially fatal laryngeal attacks. Furthermore, with repeated dosing there is no apparent decrease in DX-88’s therapeutic effects on HAE attacks in these patients. To date, DX-88 is generally well tolerated, with the most serious risks being hypersensitivity reactions, including anaphylaxis, which are resolved with treatment. Other adverse events include headache, nausea and fatigue.

Based on the positive efficacy and satisfactory safety profile results from our EDEMA4 and EDEMA3 trials, we submitted our BLA to the FDA on September 23, 2008. The FDA accepted our BLA

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for filing and designated the application for priority review. The FDA’s Pulmonary-Allergy Drugs Advisory Committee reviewed our submission for the subcutaneous formulation of DX-88 for HAE on February 4, 2009, and the Committee voted in favor of approval of DX-88 for HAE by a margin of six votes in favor to five votes against, with two voters abstaining. In addition to the overall vote in favor of approval, the Committee provided recommendations aimed at a better understanding of DX-88’s safety characteristics in the subset of patients that experience hypersensitivity reactions.  Earlier in 2009, a pre-approval inspection of the manufacturing site, processes and supporting quality systems was successfully completed at our third-party contract manufacturer, Avecia Biologics, Ltd.  On March 25, 2009, we received a complete response letter from the FDA outlining the requirements for approval of DX-88 for HAE.  Specifically, the FDA requested submission of a REMS, and additional information with respect to the CMC section of the BLA. The letter also included a requirement that we conduct certain post-marketing studies, but did not include requirements for any additional clinical trials for approval of DX-88.  We believe all issues raised in the complete response letter were fully addressed in our reply, which was submitted on June 1, 2009 and accepted for review by the FDA.  In connection with the acceptance, the FDA assigned our BLA a new PDUFA action date of December 1, 2009.

Given our familiarity with the HAE market and its relatively small number of treating allergists, we intend to independently commercialize DX-88 for HAE in North America. For markets outside of North America, we will seek to establish arrangements where DX-88 is sold by pharmaceutical companies that are already well established in these regions.

During the three months ended September 30, 2009 (the 2009 Quarter), HAE program expenses totaled $5.3 million compared with $9.0 million in the three months ended September 30, 2008 (the 2008 Quarter).  The decrease in spending in the 2009 Quarter as compared to the 2008 Quarter is attributable primarily to cost savings as a result of the workforce reduction in March 2009 and a decrease of $1.6 million in clinical trial costs for the completion of the EDEMA 4 trial and other external research and development costs related to the BLA submission in 2008.  These decreases were partially offset by increased sales and marketing expenses for the HAE program in preparation of the commercialization of our lead product candidate, DX-88.  During the nine months ended September 30, 2009 (the 2009 Period), HAE program expenses totaled $26.4 million compared with $26.1 million in the nine months ended September 30, 2008 (the 2008 Period).  Although the change in the 2009 Period as compared to the 2008 Period was not substantial, there were significant fluctuations in categories of expenditures from period to period, including a decrease in internal costs as a result of the workforce reduction in March 2009 and a decrease of $3.6 million in clinical trial costs for the completion of the EDEMA 4 trial.  In addition, other external research and development costs decreased in the 2009 Period due to the activities related to the initial BLA filing in late 2008.  These decreases were partially offset by an increase of $7.5 million associated with the manufacture of DX-88 drug material, as well as, an increase in infrastructure costs to support plans for commercialization of DX-88 for HAE of approximately $1.0 million.

DX-88 for the Treatment of Other Angioedemas.    Another form of angioedema is induced by the use of so-called ACE inhibitors. With an estimated 30 to 40 million prescriptions written annually worldwide, ACE inhibitors are widely prescribed to reduce Angiotensin Converting Enzyme (ACE) and generally reduce high blood pressure and vascular constriction. Approximately 17% of all angioedemas admitted to medical centers for treatment are identified as ACE inhibitor-induced angioedema. Research suggests the use of ACE inhibitors increases the relative activity 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, DX-88 has the potential to be effective for treating this condition. We are working with investigators affiliated with the University of Cincinnati as they prepare to initiate an investigator sponsored study for drug-induced angioedema.

Acquired angioedema is a condition associated with B-cell lymphoma and autoimmune disorders. Dr. Marco Cicardi, of the University of Milan, plans to sponsor a compassionate use program for DX-88 in acquired angioedema.

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Both of these studies are expected to be initiated by the end of 2009.

DX-88 for On-Pump CTS.    Industry publications report that there are an estimated one million procedures performed worldwide each year involving on-pump cardiothoracic surgery, or CTS. On-pump CTS procedures, which are performed for patients who have narrowings or blockages of the coronary arteries, often involve use of a heart-lung machine commonly referred to as the “pump”. In these procedures, the heart is stopped with medications, and the pump does the work of the heart and lungs during surgery. This allows the surgeon to position the heart as needed, to accurately identify the arteries and to perform the bypass while the heart is stationary.

The use of the pump during CTS procedures elicits an adverse systemic inflammatory response. Many patients undergoing on-pump CTS procedures experience significant intraoperative blood loss that requires transfusion. Plasma kallikrein has been implicated in the body’s response to on-pump heart surgery as a major contributor to the significant blood loss seen in on-pump CTS patients and to the pathologic inflammation that plays a role in the complications of on-pump CTS procedures.

In April 2008, Dyax entered into an exclusive license and collaboration agreement with Cubist for the development and commercialization in North America and Europe of the intravenous formulation of DX-88 for the reduction of blood loss during surgery. Under this agreement, Cubist assumed responsibility for all further development and costs associated with DX-88 in the licensed indications in the Cubist territory.

Cubist has initiated two Phase 2 trials.  The first, known as CONSERVTM 1, is a dose ranging study evaluating 5, 25 and 75 milligram doses of DX-88 versus placebo in patients undergoing primary coronary artery bypass graft (CABG) surgery who are at a low risk of bleeding complications.  The second trial, known as CONSERVTM 2, compares a single 75 milligram dose of DX-88 to tranexamic acid in patients at a higher risk of bleeding.  Combined, these trials are expected to enroll approximately 650 patients.  Cubist expects to have data unblinded from these trials in early 2010 and currently anticipates an end of Phase 2 meeting with the FDA in mid-2010.

During the three and nine months ended September 30, 2008, research and development expenses for the CTS program totaled $760,000 and $2.4 million, respectively. There have been no costs incurred by us in 2009 and we do not expect to incur future expenditures for this program.

DX-88 for Ophthalmic Indications.    We have entered into a license agreement with Fovea, which has entered into an agreement to be acquired by sanofi-aventis, for the ocular formulation of DX-88 for the treatment of retinal diseases in the EU. Under this agreement, Fovea will fully fund development for the first indication, retinal vein occlusion-induced macular edema, for which a Phase 1 trial was initiated in the third quarter of 2009.   Dyax retains all rights to commercialize DX-88 in this indication outside of the EU.

Goals for DX-88 Development Programs.    Our goal for the ongoing development of DX-88 is to ensure that we and our various collaborators move rapidly to develop DX-88 in multiple indications and obtain marketing approval from the FDA and international regulatory agencies in such indications. Cash inflows from these programs, other than upfront and milestone payments from our collaborations will not commence until after marketing approvals are obtained, and then only if the product candidate finds acceptance in the marketplace as a treatment for its disease indication. Because of the many risks and uncertainties related to the completion of clinical trials, receipt of marketing approvals and acceptance in the marketplace, we cannot predict when cash inflows from these programs will commence, if ever.

Other Discovery and Development Programs

In addition to our drug candidates in clinical trials, our phage display technology and expertise has allowed us to develop a pipeline of drug candidates. Of our existing pipeline candidates, the most advanced

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are DX-2240 and DX-2400, two fully human monoclonal antibodies with therapeutic potential in oncology indications.

Our DX-2240 antibody has a novel mechanism of action that targets the Tie-1 receptor on tumor blood vessels. In preclinical animal models, DX-2240 has demonstrated activity against a broad range of solid tumor types. Data also indicates increased activity when combined with antiangiogenic therapies such as Avastin® and Nexavar®. In February 2008, we entered into agreements with sanofi-aventis, under which we granted sanofi-aventis exclusive worldwide rights to develop and commercialize DX-2240 as a therapeutic product, as well as a non-exclusive license to our proprietary antibody phage display technology.

Our DX-2400 antibody is a specific inhibitor of Matrix Metalloproteinase-14 (MMP-14), a protease expressed on tumor cells and tumor blood vessels. To date, small molecule approaches have failed to produce compounds that distinguish between closely related MMPs. In contrast, our technology has allowed us to identify a highly selective inhibitor of MMP-14 that does not inhibit other proteases that we have tested. In animal models, DX-2400 has been shown to significantly inhibit tumor progression and metastasis in a dose-dependent manner in breast, prostate and melanoma tumors. Herceptin®, a leading breast cancer treatment, is effective in only the subtype of breast tumors which are Her2+. Current data suggests that DX-2400 may be effective against both Her2+ and Her2- breast tumors, potentially offering promise for treatment of a wider range of breast cancer patients. DX-2400 is currently in preclinical development within our development pipeline.

Given the uncertainties of the research and development process, it is not possible to predict with confidence if we will be able to enter into additional partnerships or otherwise internally develop any of these other preclinical drug candidates into marketable pharmaceutical products. We monitor the results of our discovery research and our nonclinical and clinical trials and frequently evaluate our preclinical pipeline in light of new data and scientific, business and commercial insights with the objective of balancing risk and potential. This process can result in relatively abrupt changes in focus and priority as new information becomes available and we gain additional insights into ongoing programs and potential new programs.

Results of Operations

Three Months Ended September 30, 2009 and 2008

Revenue.   Substantially all our revenue has come 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.  Revenue was $4.5 million in the 2009 Quarter and $5.5 million in the 2008 Quarter.   The decrease resulted primarily from lower funded research revenue.

Research and Development.   Our research and development expenses for the 2009 and 2008 Quarters were $7.1 million and $16.5 million, respectively.  Our research and development expenses arise primarily from compensation and other related costs for our personnel dedicated to research and development activities, fees paid and costs reimbursed to outside parties to conduct research and clinical trials and the cost of manufacturing drug material prior to FDA approval. The 2009 decrease in research and development expenses was primarily related to cost savings of approximately $4.0 million as a result of the workforce reduction in March 2009.  In addition, external research and development costs decreased by approximately $5.0 million, including a decrease of $2.0 million in clinical trial costs, as we completed our EDEMA4 clinical trial in 2008.

General and Administrative.  Our general and administrative expenses consist primarily of the costs of our management and administrative staff, as well as expenses related to business development, protecting our intellectual property, administrative occupancy, professional fees, market research,

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promotion activities and the reporting requirements of a public company. General and administrative expenses for the 2009 and 2008 Quarters were $5.9 million and $4.9 million, respectively.  Costs increased during the 2009 Quarter due to the expanded infrastructure to support plans for commercialization of DX-88 for HAE.

Restructuring and Impairment.  As a result of the decrease in necessary facility space following the workforce reduction in March 2009, we amended our facility lease during the 2009 Quarter, to reduce our leased space.  In the 2009 Quarter, a one-time charge of approximately $1.4 million was recorded of which, approximately $955,000 was recorded as a result of the write-down of leasehold improvements.

In the 2008 Quarter, we incurred restructuring fees of $876,000 related to the closing of our Liege, Belgium research facility.  There was no impairment of fixed assets in the 2008 Quarter.

Loss on Extinguishment of Debt.  In the 2008 Quarter, we incurred a one-time loss on extinguishment of debt of $8.3 million related to the repayment in full of our debt with Paul Royalty.

Nine Months Ended September 30, 2009 and 2008

Revenue.   Substantially all our revenue has come from licensing, funded research and development fees, including milestone payments from our licensees and collaborators. This revenue fluctuates from period-to-period due to the timing of the clinical activities of our collaborators and licensees.  Revenue increased to $15.3 million in the 2009 Period from $12.0 million in the 2008 Period. This increase primarily relates to higher revenue from library license activity of approximately $2.5 million and additional revenue recognized under our April 2008 agreement with Cubist.

Research and Development.   Our research and development expenses for the 2009 and 2008 Periods were $37.8 million and $51.6 million, respectively.  Our research and development expenses are primarily from compensation and other related costs for our personnel dedicated to research and development activities, fees paid and costs reimbursed to outside parties to conduct research and clinical trials and the cost of manufacturing drug material prior to FDA approval. The 2009 decrease in research and development expenses was primarily related to cost savings of approximately $8.7 million as a result of the workforce reduction in March 2009, and approximately $2.2 million from the closure of our Liege, Belgium research facility in the second quarter of 2008.  In addition, clinical trial costs decreased by approximately $6.6 million during the 2009 Period, as we completed our EDEMA4 clinical trial in 2008.  License expense and other external research and development costs also decreased during the 2009 Period as well.  These decreases were offset by an increase in costs of $7.5 million associated with the manufacture of drug substance.

General and Administrative.  Our general and administrative expenses consist primarily of the costs of our management and administrative staff, as well as expenses related to business development, protecting our intellectual property, administrative occupancy, professional fees, market research, promotion activities and the reporting requirements of a public company. General and administrative expenses were $18.9 million for the 2009 Period compared to $15.6 million for the 2008 Period.  The higher general and administrative costs in 2009 were primarily due to an increase in infrastructure to support plans for commercialization of DX-88 for HAE and a $1.1 million charge for share-based compensation expense for amendments to the exercise and vesting schedules of certain options, as required under ASC 718.

Restructuring and Impairment.  In March 2009, we implemented a workforce reduction to focus necessary resources on the commercialization of DX-88 and to support our long-term financial success.  As a result, during the first quarter of 2009, we recorded one-time restructuring charges related to the workforce reduction of approximately $1.9 million.  We expect the reduction in personnel costs, along with other external costs, will result in approximately $18.0 million in annual savings.

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As a result of the decrease in necessary facility space following the workforce reduction in March 2009, we amended our facility lease during the 2009 Quarter to reduce our leased space.  In the 2009 Quarter, a one-time charge of approximately $1.4 million was recorded of which, approximately $955,000 was recorded as a result of the write-down of leasehold improvements.

In the 2008 Period, we incurred restructuring fees of $4.6 million, and recorded an impairment charge related to fixed assets of $352,000 in conjunction with the closing of our Liege, Belgium research facility.

Loss on Extinguishment of Debt.  In the 2008 Period, we incurred a one-time loss on extinguishment of debt of $8.3 million related to the repayment in full of our debt with Paul Royalty.

Liquidity and Capital Resources

The following table summarizes our cash flow activity for the nine months ended September 30, 2009 and 2008 (in thousands):

We require cash to fund our operating expenses, to make capital expenditures, acquisitions and investments, and to service debt. Through September 30, 2009, we have funded our operations principally through the sale of equity securities, which have provided aggregate net cash proceeds since inception of approximately $314 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 development and license fees.  Our excess funds are currently invested in short-term investments primarily consisting of U.S. Treasury notes and bills and money market funds backed by U.S. Treasury obligations.

Operating Activities

The principal use of cash in our operations was to fund our net loss, which was $51.5 million during the nine months ended September 30, 2009. Of this net loss, certain costs were non-cash charges, such as depreciation and amortization costs of $2.3 million, interest expense of $1.3 million, impairment of fixed assets totaling $1.0 million, and stock-based compensation expense of $4.4 million.  In addition to non-cash charges, we also had a net change in other operating assets and liabilities of $2.3 million, including a decrease in accounts payable and accrued expenses of $4.8 million, offset by a decrease in accounts receivable of $3.6 million.

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For 2008, our net loss was $72.9 million, of which certain costs were non-cash charges such as depreciation and amortization of $2.5 million, interest expense of $5.3 million, and stock-based compensation expense of $3.3 million and certain revenues for which we received payments totaling $41.0 million, which were deferred for financial reporting purposes.

While the net loss in 2009 decreased by approximately $21.4 million from 2008, net cash used in operating activities increased by $37.1 million, primarily due to approximately $41 million in cash receipts recorded as deferred revenue in the 2008 Period.  These receipts were primarily related to the signing of license agreements with Cubist and sanofi-aventis, which did not recur in the 2009 Period.

Investing Activities

Our investing activities for the 2009 Period consisted of investment maturities totaling of approximately $30.5 million, offset by purchases of additional securities of $26.5 million and the purchase of approximately $450,000 of fixed assets.

Our investing activities for the 2008 Period are primarily due to a $1.6 million decrease in restricted cash from a contractual reduction of our letter of credit that serves as our security deposit for the lease of our facility and the timing of the maturity of our investments.  This was offset by $1.4 million purchase of fixed assets.

Financing Activities

Our financing activities for the 2009 Period consisted of net proceeds of $17.9 million from the sale of 9,280,570 shares of our common stock and net proceeds of $14.8 million from the Tranche B loan with Cowen Healthcare, which was an amendment to our existing loan agreement with Cowen Healthcare.  This Tranche B loan is secured by our LFRP on the same terms as the initial Tranche A loan, which was executed in August 2008.  These proceeds were partially offset by repayments of long-term obligations, totaling $4.6 million, primarily principal payments to Cowen Healthcare.

Subsequent to September 30, 2009, we received approximately $20.5 million in net proceeds from the sale of 5,500,000 shares of common stock.

Our financing activities for the 2008 Period primarily consisted of net proceeds of $49.6 million from Tranche A of our note payable to Cowen Healthcare, a $10.0 million sale of common stock, proceeds from long-term obligations of $1.1 million and proceeds from the issuance of common stock under our employee stock purchase plan and the exercise of stock options.  We repaid in full the Paul Royalty loan of $35.1 million and repaid other long-term obligations of $7.9 million during this period.

We have financed fixed asset purchases through capital leases and debt. Capital lease obligations are collateralized by the assets under lease.

In October 2008, we entered into an equity line of credit arrangement with Azimuth Opportunity Ltd. (Azimuth).  We entered into a Common Stock Purchase Agreement with Azimuth (the Purchase Agreement), which provides that Azimuth is committed to purchase up to $50.0 million of our common stock, or the number of shares which is one share less than twenty percent of the issued and outstanding shares of our common stock as of October 30, 2008, which is subject to automatic reduction in certain circumstances, over the approximately 18-month term of the Purchase Agreement. As of September 30, 2009, $48.4 million remains available under this agreement.  From time to time during the term of the Purchase Agreement, and at our sole discretion, we may present Azimuth with draw down notices to purchase our common stock over 10 consecutive trading days or such other period mutually agreed upon by us and Azimuth. Each draw down is subject to limitations based on the price of our common stock and a limit of 2.5% of our market capitalization at the time of such draw down, provided, however, Azimuth will not be required to purchase more than approximately $7.7 million of our common stock in any single draw

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down excluding shares under any call option, as described below. We are able to present Azimuth with up to 24 draw down notices during the term of the Purchase Agreement, with a minimum of five trading days required between each draw down period. Unless otherwise agreed by us and Azimuth, only one draw down is allowed in each draw down pricing period, with a minimum price of $2.00 per share, less agreed upon discount.

We have managed our cash burn by completing partnerships, collaborations, strategic transactions, equity offerings and by reducing internal and external costs.  We expect that existing cash, cash equivalents, and short-term investments, together with anticipated cash flow from existing product development, collaborations and license agreements will be sufficient to support our current operations through 2010.  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 existing equity line of credit agreement with Azimuth, 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, 2008, 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. During the nine months ended September 30, 2009, we amended the note payable with Cowen Healthcare and were issued an additional $15 million of debt under the Tranche B loan (see Item I, Notes to the Consolidated Financial Statements, Note 6, Note Payable).  There were no other material changes in our commitments and contingencies during the nine months ended September 30, 2009.

CRITICAL ACCOUNTING ESTIMATES

In our Annual Report on Form 10-K for the year ended December 31, 2008, our critical accounting policies and estimates were identified as those relating to revenue recognition, allowance for doubtful accounts, share-based compensation and valuation of long-lived and intangible assets.  There have been no material changes to our critical accounting policies from the information provided in our 2008 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, 2009, we had cash, cash equivalents and short-term investments of approximately $41.1 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.

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As of September 30, 2009, we had $62.3 million 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 U.S. Transactions under certain of the agreements between us and parties located outside of the U.S. 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.

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) 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, 2009 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

Forward-looking statements

This Quarterly Report on Form 10-Q contains forward-looking statements, including statements about our reply to the FDA’s complete response regarding the BLA for DX-88, our future cash resources, our growth and future operating results, discovery and development of products, strategic alliances and intellectual property. Any statement that is not a statement of historical fact should be considered a forward-looking statement. We often use the words or phrases of expectation or uncertainty like “believe,” “anticipate,” “plan,” “expect,” “intend,” “project,” “future,” “may,” “will,” “could,” “would” and similar words to help identify forward-looking statements.

Statements that are not historical facts are based on our current expectations and beliefs including our assumptions, estimates, forecasts and projections for our business and the industry and markets in which we compete. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. We cannot assure investors that our expectations and beliefs will prove to have been correct. Important factors could cause our actual results to differ materially from those indicated or implied by forward-looking statements. Factors that could cause or contribute to such differences include the factors discussed below. We caution you not to place undue reliance on these forward looking statements, which speak only as of the date on which they are made. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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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 since our inception in 1989, including net losses of $51.5 million and $72.9 million for the nine months ended September 30, 2009 and 2008, respectively, and net losses of $66.5 million, $56.3 million and $50.3 million for the years ended December 31, 2008, 2007 and 2006, respectively. As of September 30, 2009, we had an accumulated deficit of approximately $406.9 million. We expect to incur substantial additional net losses over the next several years as our research, development, preclinical testing, clinical trial and commercial activities increase, particularly with respect to our current lead product candidate, DX-88.

We have not generated any revenue from product sales to date, and it is possible that we will never have significant, if any, product sales revenue. Currently, we generate 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, either alone or with our collaborators, must successfully develop, manufacture and market our current product candidates, including DX-88, and other products and continue to leverage our phage display technology to generate research funding and licensing revenue. It is possible that we will never have significant product sales revenue or receive significant royalties on our licensed product candidates or licensed technology in order to achieve or sustain future profitability.

We will need substantial additional capital in the future and may be unable to raise the capital that we will need to sustain our operations.

We require significant capital to fund our operations and develop and commercialize our product candidates. Our future capital requirements will depend on many factors, including:

·                  the timing and cost to develop, obtain regulatory approvals for and commercialize our product candidates, including the cost of developing sales and marketing capabilities prior to receipt of any regulatory approval of our product candidates;

·                  future levels of commercial product sales, if any;

·                  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 materials used in our product candidates;

·                  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.

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We expect that existing cash, cash equivalents, and short-term investments together with anticipated cash flow from existing product development, collaborations and license fees will be sufficient to support our current operations through 2010. 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 our existing equity line of credit, 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 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.

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 U.S., 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 U.S. 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 U.S. 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 U.S. 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.

The complete response letter that we received from the FDA in March 2009 pertaining to our BLA for DX-88, required a REMS and additional information with respect to the CMC section of the BLA.  While we have developed a REMS program for DX-88, and included it in our response to the FDA’s complete response letter, along with our responses to their other information requests, we cannot predict what risk management activities the FDA may require of us or whether the FDA will accept our REMS program.

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

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unable to market and sell our product candidates, our business and results of operations would be materially and adversely affected.

The FDA is requiring us to implement a Risk Evaluation and Mitigation Strategy for DX-88 and to perform additional post-marketing studies.  Additionally, the FDA or similar agencies in other jurisdictions may require us to restrict the distribution or use of DX-88 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 is requiring that we implement a REMS for DX-88 and conduct post-marketing studies to assess a risk of hypersensitivity reactions, including anaphylaxis. The REMS will include a medication guide, a patient package insert and a communication plan to healthcare providers.

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 our existing 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 DX-88, if we or others identify side effects after DX-88 is on the market, even if the FDA initially approves the BLA.

Even if we obtain regulatory approval, our biopharmaceutical products will continue to be subject to governmental review. If we, or our suppliers, fail to comply with FDA or other government regulations, our business, financial condition, and results of operations would be adversely affected.

Even if regulatory approval is obtained, our biopharmaceutical products will continue to be subject to extensive and rigorous regulation by the FDA and comparable foreign authorities. These regulations govern, among other things, the manufacturing, labeling, storage, advertising, promotion, distribution, and sales of our products.

Previously unidentified adverse events or an increased frequency of adverse events that may occur post-approval could result in a requirement for labeling modifications of approved products, which could adversely affect future marketing. Approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. Later discovery of previously unknown problems with a product, manufacturer or facility may result in the FDA and/or other regulatory agencies requiring further clinical research or restrictions on the product or the manufacturer, including withdrawal of the drug product from the market.

In addition, the facilities used by our contract manufacturers to manufacture our product candidates must be approved by the FDA. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the FDA’s strict regulatory requirements, they will not be able to secure required FDA approval for the manufacturing facilities. Our contract manufacturers will be subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies for compliance with cGMP and similar regulatory requirements. Failure by any of our contract manufacturers to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure to grant approval to market our product candidates, delays, suspensions or withdrawals of approvals, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect our business.

The restriction, suspension, or revocation of regulatory approvals or any other failure to comply with regulatory requirements could have a material adverse effect on our business, financial condition, and results of operations.

If we are unable to develop effective independent sales and marketing capabilities or establish third-party relationships for the commercialization of our drug candidates, we will not be able to successfully commercialize DX-88, even if we are able to obtain regulatory approval.

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We currently have limited experience as a company in sales and marketing or with respect to pricing and obtaining adequate third-party reimbursement for drug use.  We will need to either develop marketing capabilities and an independent sales force or enter into arrangements with third parties to sell and market DX-88, if it is approved for sale by regulatory authorities.

In order to market DX-88 for acute attacks of HAE in the U.S. if it is approved, we intend to build a marketing organization and a specialized sales force, which will require substantial efforts and significant management and financial resources.  While we intend to stage our commitments to the extent possible in consideration of the development and regulatory timelines, in order to support an effective launch of DX-88, we will need to make significant financial commitments to our marketing organization prior to receiving regulatory approval.  We will need to devote significant effort, in particular, to recruiting individuals with experience in sales and marketing of pharmaceutical products.  Competition for personnel with these skills is high.  As a result, we may not be able to successfully develop our own marketing capabilities or independent sales force for DX-88 in the U.S. in order to support an effective launch of DX-88 if it is approved for sale.  We may also be unable to enter into third party arrangements for the marketing and sale of DX-88.

As a result, we may experience delays in the commercialization of DX-88 and we may be unable to compete effectively which would adversely impact our business, operating results and financial condition.

Our biopharmaceutical product candidates must undergo rigorous clinical trials which could substantially delay or prevent their development or marketing.

Before we can commercialize any biopharmaceutical product, 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

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·                  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. Our IND Applications for our recombinant protein DX-88, for example, were placed on clinical hold by the FDA in May 2004, following the FDA’s evaluation of certain animal test data submitted by us. Although that study was allowed to continue, we were required by the FDA to conduct additional testing at additional expense. There is no guarantee that we will be able to resolve similar issues in the future, 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. For example, in 2008, the contract research organization collecting and assembling the data from our EDEMA4 trial announced that it was terminating that line of business, which forced us to find a new contractor and delay the filing of our BLA for HAE by almost two months. We may also experience unexpected cost increases that are beyond our control.

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.

Because we currently lack the resources, capability and experience necessary to manufacture biopharmaceuticals, we will depend on third parties to perform this function, which may adversely affect our ability to commercialize any biopharmaceuticals we may develop.

We do not currently operate manufacturing facilities for the clinical or commercial production of biopharmaceuticals and do not plan to have that capacity for the foreseeable future. We also lack the resources, capability and experience necessary to manufacture biopharmaceuticals. 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 market 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. There is no assurance that contractors will have the capacity to manufacture or test our products at the required scale and within the required time

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frame or that the supply of clinical materials can be maintained during the clinical development of our biopharmaceutical candidates.

We are dependent on a single contract manufacturer to produce drug substance for DX-88 for HAE, if it is approved for sale. This manufacturer will be subject to ongoing periodic inspection by the FDA and corresponding foreign agencies to ensure strict compliance with current good manufacturing practices and other governmental regulations and standards. We have limited control over our contract manufacturer and its ability to maintain adequate quality control, quality assurance and qualified personnel. Failure by our contract manufacturer to comply with or to adequately maintain any of these standards could adversely affect our ability to further develop, obtain regulatory approval for or market DX-88 and would adversely impact our business.

If we are unable to find distributors for our DX-88 product candidate outside the U.S., we may be unable to generate significant revenues from, or recoup our investments in, DX-88.

We are familiar with the HAE patient community and its relatively small number of treating allergists, and we believe the optimal commercialization strategy for the HAE indication is to build an internal sales team to promote DX-88 in the U.S. and to establish regional collaborations for distribution in other major market countries. If we are not able to find a suitable distributor or distributors, or if we are unable to negotiate acceptable terms for distribution, we may not be able to fully develop and commercialize DX-88, which would adversely affect our business prospects and the value of our common stock.

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 $59.7 million at September 30, 2009. 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 may not 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.

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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 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.

Product liability and other claims against us may reduce demand for our product candidates or result in substantial damages.

We face an inherent risk of product liability exposure related to testing our product candidates in human clinical trials and will face even greater risks if we sell our product candidates commercially.

An individual may bring a product liability claim against us if 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

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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.

These types of product liability claims may result in:

·                  decreased demand for our 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. 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.

We and our collaborators may not be able to gain market acceptance of our biopharmaceutical product candidates, which could adversely affect our revenues.

We cannot be certain that any of our biopharmaceutical product candidates, even if successfully approved by the regulatory authorities, will gain market acceptance among physicians, patients, healthcare payers, or others. We may not achieve market acceptance even if clinical trials demonstrate safety and efficacy of our biopharmaceutical candidates and the necessary regulatory and reimbursement approvals are obtained. The degree of market acceptance of our biopharmaceutical candidates will depend on a number of factors, including:

·                  their clinical efficacy and safety;

·                  their cost-effectiveness;

·                  their potential advantage over alternative treatment methods;

·                  their marketing and distribution support;

·                  reimbursement policies of government and third-party payors; and

·                  market penetration and pricing strategies of competing and future products.

If our products do not achieve significant market acceptance, our potential future revenues could be adversely affected which would have a material adverse effect on our business, financial condition, and results of operations.

Competition and technological change may make our potential products and technologies less attractive or obsolete.

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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.

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 DX-88 as a treatment for HAE, our principal competitors include:

·                  ViroPharma Inc.—In October 2008, ViroPharma received FDA approval for its plasma-derived C1-esterase inhibitor, known as Cinryze™, which is administered intravenously. Cinryze was approved for routine prophylaxis against angioedema attacks in adolescent and adult patients with HAE, and has orphan drug designation from the FDA. Cinryze was launched in December 2008. ViroPharma also submitted a supplemental Biologics License Application to the FDA for the use of Cinryze as a treatment for acute attacks of HAE, and on June 3, 2009, the FDA issued a complete response letter requesting that ViroPharma conduct an additional clinical study.

·                  CSL Behring— In October 2009, CSL Behring received FDA approval for its plasma-derived C1-esterase inhibitor, known as Berinert®, which is administered intravenously. Berinert was approved 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 marketed in several European countries.

·                  Jerini AG/Shire plc—Jerini AG has filed for market approval from the FDA and EMEA for its bradykinin receptor antagonist, known as Firazyr®, which is delivered by subcutaneous injection. In July 2008, the European Commission approved an MAA for Firazyr. In April 2008, the FDA issued a Not Approvable letter for Firazyr.  Firazyr has orphan drug designations from both the FDA and EMEA. Jerini/Shire initiated a new Phase 3 U.S. trial in June 2009.

·                  Pharming Group NV— Pharming filed for market approval from the EMEA for its recombinant C1-esterase inhibitor, known as Rhucin®, which is delivered intravenously. Rhucin has Fast Track status from the FDA and orphan drug designations from both the FDA and EMEA. In December 2007 and March 2008, Pharming received negative opinions from the EMEA. In September 2009, Pharming filed a new MAA with the EMEA. Pharming has also reported that it will request a pre-BLA meeting with the FDA by the end of the year.

Other competitors include companies that market or are developing corticosteroid drugs or other anti-inflammatory compounds.

The principal competitors for DX-88 as a treatment for reducing blood loss in cardiothoracic surgery procedures, are manufacturers of aminocaproic acid, a drug used in this indication. A number of other organizations, including Novo Nordisk A/S, Pfizer Inc., Vanderbilt University and The Medicines Company, are developing other products for this indication.

For our potential oncology product candidates, our potential competitors include numerous pharmaceutical and biotechnology companies, many of which have greater financial resources and experience than we do.

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In addition, most large pharmaceutical companies seek to develop orally available small molecule compounds against many of the targets for which we and others are seeking to develop antibody, peptide and/or small protein products.

Our phage display technology is one of several technologies available to generate libraries of compounds that can be leveraged to discover new antibody, peptide and/or small protein products. The primary competing technology platforms that pharmaceutical, diagnostics and biotechnology companies use to identify antibodies that bind to a desired target are transgenic mouse technology and the humanization of murine antibodies derived from hybridomas. Medarex, Inc., Genmab A/S, and PDL Biopharma are leaders in these technologies. Further, other companies such as BioInvent International AB and XOMA Ltd. have access to phage display technology and compete with us by offering licenses and research services to pharmaceutical and biotechnology companies.

In addition, we may experience competition from companies that have acquired or may acquire technology from universities and other research institutions. As these companies develop their technologies, they may develop proprietary positions that may prevent us from successfully commercializing our products.

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.

The Company’s 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.

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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 Inverness Medical Innovations), Cambridge Antibody Technology Limited (now known as MedImmune Limited and owned by AstraZeneca), 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.

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 U.S. 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 U.S., 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 have one divisional patent application of the 597 Patent pending in the European Patent Office. We cannot be assured that we will prevail in the prosecution of this patent application. We will not be able to prevent other parties from using our phage display technology in Europe if the European Patent Office does not grant us another phage display patent.

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,

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Genentech, XOMA and Cambridge Antibody Technology Limited (now known as MedImmune 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 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.

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.

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 quarter to quarter basis. We expect these fluctuations to continue in the future. Fluctuations in revenues and operating results will depend on:

·                  the cost and timing of our increased research and development, manufacturing and commercialization expenditures;

·                  the establishment of new collaborative 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 receive 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

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operating results may fail to meet the expectations of securities analysts or investors which may cause the price of our common stock to decline.

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.

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 U.S. dollar. We do, however, rely on an international contract manufacturer for the production of our drug substance for DX-88. 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 U.S. 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:

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·                  the diversion of management’s attention from core business concerns;

·                  the failure to effectively exploit acquired technologies 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.

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 September 30, 2009, 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 U.S. 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.

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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 and our shareholder rights plan 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. Our shareholder rights plan could result in the significant dilution of the proportionate ownership of any person that engages in an unsolicited attempt to take over our company and, accordingly, could discourage potential acquirers.

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.

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Item 6 — EXHIBITS

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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.

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DYAX CORP.

EXHIBIT INDEX

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