EPIRUS Biopharmaceuticals, Inc. - FORM 10-Q

EPIRUS Biopharmaceuticals, Inc. - FORM 10-Q - November 3, 2009

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EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - EPIRUS Biopharmaceuticals, Inc.	dex312.htm
EX-32.1 - CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 906 - EPIRUS Biopharmaceuticals, Inc.	dex321.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - EPIRUS Biopharmaceuticals, Inc.	dex311.htm

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.

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number 000-51171

COMBINATORX, INCORPORATED

(Exact name of registrant as specified in its charter)


Delaware		04-3514457
(State or other jurisdiction of Incorporation or organization)		(IRS Employer Identification Number)

245 First Street Third Floor Cambridge, Massachusetts		02142
(Address of Principal Executive Offices)		(Zip Code)

(617) 301-7000

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changes since last report)

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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

Number of shares of the registrant’s Common Stock, $0.001 par value per share, outstanding as of November 2, 2009: 35,063,881 shares

COMBINATORX, INCORPORATED

QUARTERLY REPORT

ON FORM 10-Q

INDEX


PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 5.	Other Information	40
Item 6.	Exhibits	40
SIGNATURES		41

PART I

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of CombinatoRx, Incorporated (the “Company” or “CombinatoRx”) to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of financing needs, revenue, expenses, earnings or losses from operations, or other financial items; any statements regarding the proposed merger with Neuromed Pharmaceuticals Inc.; any statements regarding litigation involving CombinatoRx and the settlement thereof; any statements regarding plans for completion of restructuring and preservation of capital; any statements of the plans, strategies and objectives of management for future operations; any statements concerning product candidate research, development and commercialization plans and timelines; any statements regarding potential regulatory approval of or safety and efficacy of product candidates; any statements regarding plans for outlicensing of our clinical or preclinical product candidates and seeking collaborations; any statements regarding timing of initiating and completing clinical and preclinical trials and studies; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. In addition, forward-looking statements may contain the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” “project,” “will be,” “will continue,” “will result,” “seek,” “could,” “may,” “might,” or any variations of such words or other words with similar meanings.

The risks, uncertainties and assumptions referred to above include risks that are described in “Risk Factors” and elsewhere in this quarterly report and that are otherwise described from time to time in our annual report on Form 10-K and the other Securities and Exchange Commission reports filed after this report.

The forward-looking statements included in this quarterly report represent our estimates as of the date of this quarterly report. We specifically disclaim any obligation to update these forward-looking statements in the future. These forward-looking statements should not be relied upon as representing our estimates or views as of any date subsequent to the date of this quarterly report.

Item 1.

Financial Statements—Unaudited

The financial information set forth below should be read in conjunction with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Quarterly Report on Form 10-Q.

CombinatoRx, Incorporated

Condensed Consolidated Balance Sheets

(in thousands except per share data)

(Unaudited)


	September 30, 2009			December 31, 2008
Assets
Current assets:
Cash and cash equivalents	$	1,301		$	3,039
Restricted cash		1,550			1,250
Short-term investments		16,823			36,614
Accounts receivable		885			438
Prepaid expenses and other current assets		790			1,001
Current assets of discontinued operations		—			7,837

Total current assets		21,349			50,179
Property and equipment, net		7,740			12,400
Property and equipment of discontinued operations, net		—			995
Restricted cash and other assets		2,619			2,923

Total assets	$	31,708		$	66,497

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	861		$	2,842
Accrued expenses		3,116			4,067
Accrued restructuring		1,982			1,902
Deferred revenue		6,956			5,384
Current portion of lease incentive obligation		284			575
Current liabilities of discontinued operations		—			19,822

Total current liabilities		13,199			34,592
Deferred revenue, net of current portion		4,895			6,325
Deferred rent, net of current portion		783			1,680
Lease incentive obligation, net of current portion		1,797			4,074
Accrued restructuring, net of current portion		—			968
Liabilities of discontinued operations		—			66
Noncontrolling interest in discontinued operations		—			2,917
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $0.001 par value: 60,000 shares authorized; 35,064 and 35,090 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively		35			35
Additional paid-in capital		255,773			267,238
Accumulated other comprehensive income		6			73
Accumulated deficit		(244,780	)		(251,471	)

Stockholders’ equity		11,034			15,875

Total liabilities and stockholders’ equity	$	31,708		$	66,497

CombinatoRx, Incorporated

Condensed Consolidated Statements of Operations

(in thousands, except share and per share amounts)

(Unaudited)


	Three months ended September 30,						Nine months ended September 30,
	2009			2008 As adjusted			2009			2008 As adjusted
Revenue:
Collaborations	$	2,602		$	2,778		$	7,936		$	8,215
Government contracts and grants		140			207			757			631

Total revenue		2,742			2,985			8,693			8,846

Operating expenses:
Research and development		4,881			13,790			18,124			45,477
General and administrative		3,554			3,790			12,025			11,429
Restructuring		2,597			—			2,613			—

Total operating expenses		11,032			17,580			32,762			56,906

Operating loss		(8,290	)		(14,595	)		(24,069	)		(48,060	)
Interest income		54			413			242			2,064
Interest expense		(1	)		(160	)		(28	)		(528	)
Other (expense) income		(25	)		(14	)		(32	)		20

Loss from continuing operations before provision for income taxes		(8,262	)		(14,356	)		(23,887	)		(46,504	)

Provision for income taxes		—			—			—			(20	)

Loss from continuing operations		(8,262	)		(14,356	)		(23,887	)		(46,524	)

Discontinued operations:
Loss from discontinued operations		—			(1,207	)		(1,536	)		(3,375	)
Gain on disposal of discontinued operations		—			—			15,640			—

(Loss) gain on discontinued operations		—			(1,207	)		14,104			(3,375	)

Net loss	$	(8,262	)	$	(15,563	)	$	(9,783	)	$	(49,899	)

Net (loss) income per share — basic and diluted information:
From continuing operations	$	(0.24	)	$	(0.41	)	$	(0.68	)	$	(1.34	)
From discontinued operations		—			(0.04	)		0.40			(0.09	)

Net loss per share — basic and diluted	$	(0.24	)	$	(0.45	)	$	(0.28	)	$	(1.43	)

Weighted average number of common shares used in net income (loss) per share calculation — basic and diluted		35,038,881			34,926,731			35,026,216			34,802,763

CombinatoRx, Incorporated

Condensed Consolidated Statements of Cash Flow

(in thousands)

(Unaudited)


	Nine Months ended September 30,
	2009			2008
Operating activities
Net loss	$	(9,783	)	$	(49,899	)
Less: Loss from discontinued operations		(1,536	)		(3,375	)
Gain on disposal of discontinued operations		15,640			—

Loss from continuing operations		(23,887	)		(46,524	)
Adjustments to reconcile loss from continuing operations to net cash used in operating activities from continuing operations:
Depreciation and amortization		4,560			2,421
Non-cash restructuring benefit, net		(977	)		—
Non-cash interest expense		28			47
Non-cash rent expense		(418	)		(487	)
Stock-based compensation expense		3,077			4,748
Loss on sale of fixed assets		119			—
Decrease in deferred rent		(39	)		(56	)
Change in assets and liabilities:
(Increase) decrease in accounts receivable		(448	)		499
Decrease in prepaid expenses and other assets		215			845
(Decrease) increase in accounts payable		(1,982	)		565
Decrease in accrued restructuring		(888	)		—
(Decrease) increase in accrued expenses		(713	)		460
Increase (decrease) in deferred revenue		142			(3,909	)

Net cash used in operating activities from continuing operations		(21,211	)		(41,391	)
Net cash used in operating activities from discontinued operations		(1,088	)		(2,163	)

Net cash used in operating activities		(22,299	)		(43,554	)

Investing activities
Purchases of property and equipment		(559	)		(2,113	)
Proceeds from sale of fixed assets		309			—
Loss from sale of equity interest in subsidiary		(6,240	)		—
Purchases of short-term investments		(70,312	)		(224,292	)
Sales and maturities of short-term investments		90,036			268,213

Net cash provided by investing activities from continuing operations		13,234			41,808
Net cash used in investing activities from discontinued operations		(16	)		(128	)

Net cash provided by investing activities		13,218			41,680

Financing activities
Proceeds from exercise of stock options		2			273
Repurchases of common stock		—			(131	)
Repayment of notes payable		—			(2,001	)

Net cash provided by (used in) financing activities from continuing operations		2			(1,859	)
Net cash provided by financing activities from discontinued operations		—			4,700

Net cash provided by financing activities		2			2,841

Net (decrease) increase in cash and cash equivalents		(9,079	)		967
Cash and cash equivalents at beginning of the period(1)		10,380			11,585

Cash and cash equivalents at end of the period(1)	$	1,301		$	12,552

(1)	Cash and cash equivalents as of December 31, 2007, September 30, 2008 and December 31, 2008 includes cash and cash equivalents of the Company’s Singapore subsidiary of $8,558, $9,958 and $7,341, respectively.

CombinatoRx, Incorporated

Notes to Condensed Consolidated Financial Statements

(all dollar amounts are in thousands, except per share amounts)

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and as required by Regulation S-X, Rule 10-01. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been included. When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements. Actual results could differ from those estimates. As discussed in Note 3, the results of operations and the assets and the liabilities related to the divestiture of the Company’s Singapore subsidiary in June 2009 (the “Divestiture”) have been accounted for as discontinued operations. Accordingly, the results of operations from prior periods have been reclassified to discontinued operations as a result of the Divestiture. Additionally, operating results for the nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2009. For further information, refer to the financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission (“SEC”) on March 16, 2009.

In preparing the financial statements included in this Form 10-Q, the Company has evaluated subsequent events through November 3, 2009, the date of the filing of the Form 10-Q.

2. Recent Accounting Pronouncements

Effective January 1, 2009, the Company adopted new GAAP guidance related to business combinations. This new guidance requires an acquiring company to measure all assets acquired and liabilities assumed, including contingent consideration and all contractual contingencies, at fair value as of the acquisition date. In addition, an acquiring company is required to capitalize in-process research and development expense and either amortize it over the life of the relevant project, or write it off if the project is abandoned or impaired. The adoption of the new guidance did not have an immediate significant impact on the Company’s consolidated financial statements; however, it will impact the accounting for any future business combinations. On June 30, 2009, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Neuromed Pharmaceuticals Inc., a privately held biopharmaceutical company (“Neuromed”), Neuromed Pharmaceuticals Ltd., a wholly owned subsidiary of Neuromed (“Neuromed Canada”), PawSox, Inc., a wholly owned subsidiary of the Company (“PawSox”) and a representative of the stockholders of Neuromed and Neuromed Canada relating to a business combination the Company currently plans to close on November 17, 2009 (the “Merger”).

Effective January 1, 2009, the Company adopted new GAAP guidance related to noncontrolling interests in consolidated financial statements. This new guidance established accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. It also establishes disclosure requirements that identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The noncontrolling interest in the Company’s Singapore subsidiary represents preferred stock that was redeemable at the option of the holder and is classified in the “mezzanine” section between liabilities and stockholders’ equity on the balance sheet at December 31, 2008. Additionally, the Company did not attribute losses of the subsidiary to the noncontrolling interest since the preferred stock is equal to its liquidation preference. As such, the Company concluded that the adoption of this new guidance did not have a material impact on the consolidated financial statements and therefore no additional disclosures were required. The Company divested its ownership interest in the Singapore subsidiary in June 2009. See Note 3.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance concerning the organization of authoritative guidance under GAAP. This new guidance created the FASB Accounting Standards Codification (“Codification”). The Codification has become the single source of authoritative nongovernmental GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification is effective for interim and annual periods ending after September 15, 2009. On its effective date, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-SEC accounting literature not included in the Codification has become nonauthoritative. As the Codification is not intended to change or alter existing GAAP, it did not have any impact on the Company’s consolidated financial statements upon adoption.

During the three months ended September 30, 2009, the Company adopted new GAAP guidance related to recognition and presentation of other-than-temporary impairments. The Company adjusts the cost of available-for-sale debt securities for amortization of premiums and accretion of discounts to maturity. The Company includes such amortization and accretion in interest and investment income. Realized gains and losses and declines in value, if any, that the Company judges to be other-than-temporary on available-for-sale securities are reported in interest and investment income. To determine whether an other-than-temporary impairment exists, the Company considers whether it intends to sell the debt security and, if it does not intend to sell the debt security, the Company considers available evidence to assess whether it is more likely than not that it will be required to sell the security before the recovery of its amortized cost basis. During the three and nine months ended September 30, 2009 and 2008, the Company determined that no securities were other-than-temporarily impaired.

In October 2009, FASB issued Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements, or ASU 2009-13. ASU 2009-13 amends existing revenue recognition accounting pronouncements that are currently within the scope of the Codification Subtopic 605-25 (previously included within EITF 00-21, Revenue Arrangements with Multiple Deliverables. ASU 2009-13 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 when there is no other means to determine the fair value of that undelivered item. Existing guidance requires 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 fair value is difficult to determine when the product was not individually sold because of its unique features. Under current 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, although earlier adoption is permitted. The Company is currently evaluating the potential impact of this standard on its financial position and results of operations.

3. Discontinued Operations

On June 2, 2009, the Company divested its 51% equity ownership interest in CombinatoRx (Singapore) Pte. Ltd. (“CombinatoRx Singapore”), by selling its 2,602,041 ordinary shares of CombinatoRx Singapore to the other shareholder of CombinatoRx Singapore, BioMedical Sciences Investment Fund Pte. Ltd. (“BioMedical Sciences”), for nominal consideration. In connection with the Divestiture, the Company, CombinatoRx Singapore and BioMedical Sciences entered into a termination agreement pursuant to which the parties agreed to terminate all of the prior agreements among the Company, CombinatoRx Singapore and BioMedical Sciences relating to the joint funding and operations of CombinatoRx Singapore. As a result of the Divestiture and the termination of the prior agreements, CombinatoRx Singapore is no longer affiliated with the Company, and the issued and outstanding preferred shares and convertible promissory notes issued by CombinatoRx Singapore and held by BioMedical Sciences are no longer convertible into shares of the Company’s common stock. The Company also entered into a share purchase agreement with CombinatoRx Singapore and BioMedical Sciences and an intellectual property assignment agreement with CombinatoRx Singapore. Under the intellectual property assignment agreement, CombinatoRx Singapore has been assigned and retains all infectious disease intellectual property developed by CombinatoRx Singapore with the assistance of the Company since the formation of CombinatoRx Singapore. Under the share purchase agreement, the Company has agreed not to compete with CombinatoRx Singapore in the discovery and development of product candidates to treat certain infectious diseases in substantially all markets until June 2, 2010.

The following table presents the major classes of assets and liabilities that have been presented as assets of discontinued operations and liabilities of discontinued operations in the accompanying unaudited condensed consolidated balance sheets:


	December 31, 2008
Cash and cash equivalents	$	7,341
Accounts receivable		418
Prepaid expenses and other current assets		78
Property and equipment of discontinued operations, net		995

Total assets of discontinued operations	$	8,832

Accounts payable	$	116
Accrued expenses		417
Deferred revenue		165
Convertible notes payable of subsidiary		19,189
Deferred rent		1

Total liabilities of discontinued operations	$	19,888

The Company recorded a $15,640 gain on the divestiture of CombinatoRx Singapore in June 2009. The gain was calculated as the difference between (1) the consideration received and the carrying value of the noncontrolling equity interest and (2) the carrying value of the assets and liabilities of CombinatoRx Singapore.

4. Short-term Investments

The Company records its short-term investments at fair value. The fair value hierarchy for those instruments measured at fair value distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

•

Level 1 – Quoted market prices in active markets for identical assets or liabilities. Assets utilizing Level 1 inputs include money market funds, U.S. government securities and bank deposits;

•

Level 2 – Inputs other than Level 1 inputs that are either directly or indirectly observable, such as quoted market prices, interest rates and yield curves. Assets utilizing Level 2 inputs include U.S. agency securities, including direct issuance bonds and corporate bonds; and

•

Level 3 – Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect those that a market participant would use. The Company currently has no assets or liabilities valued with Level 3 inputs.

The following table summarizes the financial instruments measured at fair value on a recurring basis in the accompanying consolidated balance sheet as of September 30, 2009:


	Fair Value Measurement as of September 30, 2009
	Level 1		Level 2		Level 3		Total
Short-term investments	$	5,297	$	11,526	$	—	$	16,823

Total	$	5,297	$	11,526	$	—	$	16,823

The Company’s Level 2 securities are valued using third-party pricing sources. These sources generally use interest rates and yield curves observable at commonly quoted intervals of similar assets as observable inputs for pricing.

The Company classifies its short-term investments as available-for-sale as defined in the Codification. Unrealized gains and losses are included in other comprehensive income (loss).

Available-for-sale securities at September 30, 2009 and December 31, 2008 consist of the following:


	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
September 30, 2009—
Corporate debt securities	$	1,500	$	—	$	—	$	1,500
Government agency securities		10,020		6		—		10,026
U.S. treasuries		1,509		—		—		1,509
Treasury money market funds		3,788		—		—		3,788

	$	16,817	$	6	$	—	$	16,823

December 31, 2008—
Corporate debt securities	$	7,695	$	57	$	—	$	7,752
Government agency securities		9,261		16		—		9,277
U.S. treasuries		2,510		—		—		2,510
Treasury money market funds		17,075		—		—		17,075

	$	36,541	$	73	$	—	$	36,614

The amortized cost and estimated fair value of investments in debt securities, which excludes money market funds, at September 30, 2009 and December 31, 2008, by contractual maturity, were as follows:


	September 30, 2009				December 31, 2008
	Cost		Estimated Fair Value		Cost		Estimated Fair Value
Maturing in one year or less	$	13,029	$	13,035	$	19,466	$	19,539

The cost of securities sold is determined based on the specific identification method for purposes of recording realized gains and losses. Gross realized gains and losses on the sales of investments have not been material to the Company’s results of operations for all periods presented. As a matter of investment policy, the Company does not invest in auction rate securities.

5. Comprehensive Income (Loss)

The Company’s total comprehensive income (loss) consists of the following:


	Three months ended September 30,						Nine months ended September 30,
	2009			2008			2009			2008
Net loss	$	(8,262	)	$	(15,563	)	$	(9,783	)	$	(49,899	)
Other comprehensive income (loss):
Unrealized (loss) gain on investments		(6	)		4			(67	)		(196	)

Comprehensive loss	$	(8,268	)	$	(15,559	)	$	(9,850	)	$	(50,095	)

6. Net Loss Per Share

Basic and diluted net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted-average common shares outstanding during the period. The Company’s potentially dilutive shares, which include outstanding common stock options, unvested restricted stock, warrants and convertible notes, have not been included in the computation of diluted net loss per share for all periods, as the result would be anti-dilutive. Since the Company had a loss from continuing operations for all periods presented, the diluted share calculation is equal to the basic share calculation. The following common share equivalents, prior to the use of the treasury stock method, have been excluded from the computation of diluted weighted-average shares outstanding as of September 30, 2009 and 2008, as their effect is anti-dilutive.


	Nine Months Ended September 30,
	2009	2008
Options outstanding	4,760,369	6,493,066
Unvested restricted stock	25,000	110,000
Warrants outstanding	96,252	96,252
Convertible notes payable	—	2,159,349

7. Stock-Based Compensation

The Company recognized, for the three and nine months ended September 30, 2009 and 2008, stock-based compensation expense of approximately $618 and $3,077 and $1,521 and $4,748, respectively, in connection with its share-based payment awards, net of stock-based compensation expense associated with the divestiture of CombinatoRx Singapore. For the three and nine months ended September 30, 2009 and 2008, stock-based compensation expense associated with CombinatoRx Singapore was approximately $0 and $158 and $58 and $169, respectively.

Stock Plans

A summary of the status of the Company’s stock option plans at September 30, 2009 and changes during the nine months then ended is presented in the table and narrative below:


	Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2008	5,954,316		$	5.52
Granted	481,000			0.41
Exercised	(11,857	)		0.18
Cancelled	(1,663,090	)		5.67

Outstanding at September 30, 2009	4,760,369		$	4.88	5.16	$	654

Vested or expected to vest at September 30, 2009	4,566,549		$	4.94	5.01	$	592

Exercisable at September 30, 2009	3,636,562		$	5.17	4.14	$	337

The aggregate intrinsic value in the table above represents the value (the difference between the Company’s closing common stock price on the last trading day of the nine months ended September 30, 2009 and the exercise price of the options, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2009. As of September 30, 2009, there was $2,825 of total unrecognized stock-based compensation expense related to stock options granted under the plans. The expense is expected to be recognized over a weighted-average period of 2.3 years.

In March 2009, the Company modified certain outstanding employee stock options to extend the option exercise period upon termination from 90 days to two years. As a result of the modification, the Company recorded incremental stock-based compensation expense of $83 at the modification date, as no additional service from the stock option holders was required.

Share-based payments to employees are required to be measured at fair value. The Company uses the Black-Scholes pricing model in order to calculate the estimated fair value of its stock option grants. Since the Company completed its initial public offering in November 2005, it did not have sufficient history as a publicly traded company to evaluate its volatility factor and expected term. As such, the Company analyzes the volatilities and expected terms of several peer companies, in addition to its own historical activity, to support the assumptions used in its calculations. The Company has increased the weight of its own historical activity over time.

During the three and nine months ended September 30, 2009 and 2008, respectively, the assumptions used in the Black-Scholes pricing model for new grants were as follows. The Company did not issue any stock options during the three months ended September 30, 2009.


	Three Months Ended September 30,			Nine Months Ended September 30,
	2009	2008		2009		2008
Volatility factor	—	58.35	%	100.28	%	56.84	%
Risk-free interest rate	—	2.98	%	1.67	%	2.68	%
Dividend yield	—	—		—		—
Expected term (in years)	—	5.86		3.76		5.73

Restricted Stock

A summary of the status of non-vested restricted stock as of September 30, 2009 and changes during the nine months ended September 30, 2009 is as follows:


	Restricted Stock		Weighted- Average Grant Date Fair Value
Nonvested at December 31, 2008	103,438		$	7.71
Granted	—			—
Vested	(40,625	)		9.37
Canceled	(37,813	)		7.03

Nonvested at September 30, 2009	25,000		$	6.05

As of September 30, 2009, there was $128 of total unrecognized stock-based compensation expense related to non-vested restricted stock arrangements granted under the 2004 Equity Incentive Plan. The expense is expected to be recognized over a weighted-average period of 1.8 years. The stock-based compensation expense recognized on restricted stock awards was $133 during the nine months ended September 30, 2009, net of stock-based compensation expense associated with the divestiture of CombinatoRx Singapore. For the nine months ended September 30, 2009, stock-based compensation expense recognized on restricted stock awards associated with CombinatoRx Singapore was $33.

8. Restructuring

In the fourth quarter of 2008, the Company implemented a strategic realignment to focus the business on identifying novel product candidates based on unexpected biological synergies. The strategic realignment included two reductions in force eliminating, in total, approximately 77 employees, or approximately 65% of the Company’s workforce. The Company incurred total restructuring charges of $5,095, of which $4,637 was incurred in the fourth quarter of 2008. These restructuring charges included $3,257 of severance payments and related benefits, $1,704 of facility exit costs, of which $1,314 pertained to the impairment of leasehold improvements and other fixed assets and $390 pertained to the net lease obligation, and $134 of other associated costs. In the first quarter of 2009, the Company recorded the $458 balance of the restructuring charges, which represented severance payments and related benefits for employees who provided service beyond the minimum retention period, or 60 days. In the second quarter of 2009, the Company recorded a restructuring credit of $442 related to a change in estimate of facility exit costs that were originally recorded in the fourth quarter of 2008.

On July 1, 2009, in connection with the entry into the Merger Agreement on June 30, 2009 with Neuromed (as discussed in Note 10), the Company’s Board of Directors committed to a restructuring plan that resulted in a workforce reduction of 20 employees, or approximately 36% of the Company’s workforce. The restructuring is a result of a continued strategic realignment of the Company to focus its efforts on its funded drug discovery and on conserving capital in connection with the Merger.

As a result of the July 1, 2009 restructuring plan, the Company recorded a restructuring charge of $2,597 in the third quarter of 2009, consisting of termination benefits and facility exit costs. The restructuring charge included termination benefits of $4,400, which consisted of $2,574 of cash severance and related benefits and $1,826 of accelerated stock- based compensation. The Company began paying severance and related benefits in the third quarter of 2009 and will continue making payments into the first quarter of 2010.

As a result of the Company vacating certain lab premises in the third quarter of 2009, the Company recorded a restructuring credit of $1,803 in the third quarter of 2009 associated with facility exit costs. The credit to restructuring expense was comprised of lease termination payments of $1,000 under the Amendment to the Lease (as discussed in Note 9), which were offset by the reduction of deferred rent and lease incentive obligations totaling $2,803. In connection with the Company’s decision to vacate a portion of its laboratory and office premises in the second quarter of 2009, the Company recorded $1,151 and $1,383 within research and development and general and administrative expenses in the second quarter and third quarter of 2009, respectively, of accelerated amortization of leasehold improvements associated with these premises to reflect a remaining useful life commensurate with the estimated date that the Company would vacate the relevant premises.

The following table summarizes the activity and accrual balance as of September 30, 2009 related to the strategic realignment:


	Balance at December 31, 2008		Charges			Change in Estimate			Non-Cash Items			Payments			Balance at September 30, 2009
Termination benefits	$	1,503	$	4,858		$	—		$	(1,826	)	$	(4,053	)	$	482
Facilities		1,367		(1,803	)		(442	)		2,803			(425	)		1,500

Total	$	2,870	$	3,055		$	(442	)	$	977		$	(4,478	)	$	1,982

As discussed in Note 9, the Company expects to make payments on the facility component of accrued restructuring through July 1, 2010.

9. Leases

On August 3, 2009, the Company entered into a Second Amendment (the “Amendment”) to the Office and Laboratory Lease Agreement (the “Lease”) between the Company and MA-Riverview/245 First Street, L.L.C. (the “Landlord”), dated as of October 18, 2005, and amended on March 9, 2006 and June 5, 2006, relating to the Company’s principal office and laboratory facility in Cambridge, Massachusetts (the “Facility”). Prior to the Amendment of the Lease, which, as amended, expires in January 2017, the Company leased approximately 63,000 square feet of office and laboratory space at the Facility.

In accordance with the terms of the Amendment, the Company and the Landlord agreed that the Company’s occupancy of approximately 18,035 square feet of leased premises located on the sixteenth floor of the Facility (the “Office Premises”) would cease as of June 16, 2009, and that the Company would be liable for rent payments and occupancy costs on the Office Premises through September 30, 2009.

In addition, the Company and the Landlord agreed that the Company’s occupancy and liability for rent payments and occupancy costs of approximately 22,095 square feet of leased premises located on the fourth floor of the Facility (the “Lab Premises”) would cease as of September 15, 2009.

Under the Amendment, as consideration for the right to cease occupancy of the Office Premises, the Company will pay the Landlord $500 on or before October 1, 2009. The Company paid $500 on October 1, 2009. In addition, as consideration for the right to cease occupancy of the Lab Premises, the Company will pay the Landlord $500 on or before January 1, 2010 and $500 on or before July 1, 2010.

In connection with the Amendment, the Company’s Letter of Credit with Bank of America N.A. for the benefit of the Landlord will be reduced from $4,000 to $2,500, effective as of December 1, 2009; to $1,800 effective as of December 1, 2010; to $1,200 effective as of December 1, 2011; and to $800 effective as of December 1, 2012.

Under the terms of the Lease, as amended by the Amendment, the Company will continue to lease and occupy approximately 23,199 square feet of office and laboratory space at the Facility with a lease term until January 2017.

10. Merger Agreement

On June 30, 2009, the Company entered into the Merger Agreement with Neuromed, a privately-held biopharmaceutical company, pursuant to which PawSox will be merged with and into Neuromed. At the Company’s annual meeting of stockholders to be held on November 16, 2009, stockholders of the Company will be asked to approve, among other items, the issuance of shares of the Company’s common stock to the stockholders of Neuromed in the Merger, to approve authorizing the Company’s Board of Directors to effect a reverse stock split and to approve an amendment to the Company’s sixth amended and restated certificate of incorporation. At a special meeting of Neuromed stockholders to be held on November 16, 2009, stockholders of Neuromed will be asked to approve and adopt the Merger Agreement and to approve the Merger. The Merger is expected to close on November 17, 2009.

Under the terms of the Merger Agreement and a related escrow agreement (the “Escrow Agreement”) and subject to approval of the stockholders of the Company and Neuromed, and without giving effect to any reverse stock split, at closing the Company will issue approximately 14.9 million new shares of its common stock (the “Firm Shares”) to Neuromed stockholders and will place approximately 67.8 million new shares in escrow for the benefit of Neuromed stockholders (the “Escrow Shares”). Of the Escrow Shares subject to the Escrow Agreement, an aggregate of approximately 19.9 million shares (the “Holdback Shares”) will be placed into escrow and may or may not be released to Neuromed stockholders depending upon the timing of the FDA’s approval of Exalgo, a product candidate for the treatment of chronic pain which is the subject of a recently filed New Drug Application, and an aggregate of approximately 47.9 million shares (the “Milestone Shares”) will be placed into escrow and may or may not be released to Neuromed stockholders depending upon the timing of the FDA’s approval of Exalgo. Current Neuromed stockholders will have voting and other ownership rights with respect to the Holdback Shares but no voting rights with respect to the Milestone Shares. As a result, at closing current CombinatoRx stockholders effectively will retain approximately 50% of the outstanding voting shares of common stock of CombinatoRx immediately after the merger, current Neuromed stockholders effectively will own or control approximately 48.5% of the outstanding voting shares of common stock of CombinatoRx immediately after the merger (a portion of which will be subject to the terms of the Escrow Agreement), and certain Neuromed directors, officers and other employees effectively will hold approximately 1.5% of the outstanding shares of common stock of CombinatoRx immediately after the merger in the form of shares underlying restricted stock unit awards granted under the Neuromed special equity incentive plan. The release of the escrow shares, and any resulting adjustment of the relative ownership percentage of the then outstanding shares of common stock of the combined company, will be based upon the timing of the FDA’s approval of Exalgo and, subject to the terms and conditions of the Escrow Agreement:

•

If FDA approval of Exalgo is received on or before December 31, 2009, all of the Escrow Shares will be released to the former Neuromed stockholders, resulting in the pre-merger CombinatoRx stockholders owning approximately 30% of the then outstanding shares of common stock of the combined company.

•

If FDA approval of Exalgo is received on or after January 1, 2010 and on or before September 30, 2010, a portion of the Escrow Shares will be released to the former Neuromed stockholders and a portion will be cancelled, resulting in the pre-merger CombinatoRx stockholders owning approximately 40% of the then outstanding shares of common stock of the combined company.

•

If FDA approval of Exalgo is received on or after October 1, 2010 and on or before December 31, 2010, a portion of the Escrow Shares will be released to the former Neuromed stockholders and a portion will be cancelled, resulting in the pre-merger CombinatoRx stockholders owning approximately 60% of the then outstanding shares of common stock of the combined company.

•

If FDA approval of Exalgo is not received on or before December 31, 2010, all of the remaining Escrow Shares will be cancelled, resulting in the pre-merger CombinatoRx stockholders owning approximately 70% of the then outstanding shares of common stock of the combined company.

As used above, the term “then outstanding shares of common stock of the combined company” reflects the impact of the release and/or cancellation of escrow shares in accordance with the terms of the escrow agreement, assumes the issuance of the shares underlying the restricted stock unit awards to be granted by CombinatoRx after the merger pursuant to the rights granted by Neuromed under the Neuromed special equity incentive plan, and assumes no additional changes in the combined company’s capitalization after the effective time of the merger.

If the Merger Agreement is approved by the Company’s and Neuromed’s stockholders, the Merger Agreement will be accounted for under the acquisition method of accounting in accordance with FASB ASC Topic 805, Business Combinations.

11. Research and Development Agreements

On July 22, 2009, the Company and Fovea Pharmaceuticals SA (“Fovea”) amended and restated their Amended and Restated Research and License Agreement, dated as of June 12, 2007 (the “Amended and Restated Agreement”). Under the Amended and Restated Agreement, in exchange for Fovea’s development investment, the Company has granted Fovea an exclusive worldwide license to certain drug combinations to treat allergic and inflammatory diseases of the front of the eye. Fovea has advanced one such combination, Prednisporin (FOV-1101), through a Phase 2a proof-of-concept clinical trial for allergic conjunctivitis. For these licensed combinations, the Company has received payments totaling $1,000, and is eligible to receive up to an additional $24,500 in development and regulatory milestone payments for each combination successfully developed by Fovea, an additional $15,000 milestone payment for the approval of a combination in a specified additional indication and in the event these license combinations are licensed by Fovea to a third party, commercialization milestones of up to an additional $25,000. The Company is also eligible to receive royalties for each product commercialized by Fovea in connection with the agreement.

On August 11, 2009, the Company entered into a collaboration agreement (the “Collaboration Agreement”) with PGxHealth, LLC (“PGx”), a subsidiary of Clinical Data, Inc., relating to the potential development of ATL313, an adenosine A2A receptor agonist compound owned by PGx, as a combination therapy in the cancer field. Under the terms of the Collaboration Agreement, the Company will fund and advance the preclinical and clinical development of ATL313 as a combination therapy in the cancer field. PGx has an exclusive option to enter into a co-development relationship with the Company relating to ATL313 in the cancer field. PGx may exercise the co-development option by paying the Company 50% of the costs incurred by the Company to develop ATL313, and PGx would then equally share the costs of further development of ATL313 in cancer. If PGx does not exercise its co-development option, the Company may maintain its exclusive license to ATL313 in the cancer field by paying PGx a license fee of $5,000. In addition, the Company would be obligated to pay PGx up to $252,500 upon the achievement of various clinical and regulatory milestones and upon the achievement of various aggregate net sales milestones for products containing ATL313 in the cancer field. If PGx does not exercise its co-development option, the Company will pay PGx tiered royalty rates based on annual net sales of products containing ATL313.

12. Subsequent Events

Offer to Exchange Stock Options

On October 13, 2009, the Company commenced a tender offer (the “Option Exchange”) to allow eligible participants to exchange, before November 17, 2009, some or all of their eligible stock options for new options with an exercise price per share equal to the closing price of the Company’s common stock as reported by NASDAQ on the grant date. Eligible options are stock option grants made under the Company’s 2000 Stock Option Plan, as amended, and under the Amended and Restated 2004 Equity Incentive Plan with exercise prices per share greater than or equal to $1.31. However, any options that have exercise prices less than the closing price of the Company’s common stock as reported on NASDAQ on the Option Exchange expiration date will not be options eligible for exchange. The closing of the Option Exchange is expressly conditioned on the approval of the exchange by the Company’s stockholders at the stockholders’ meeting scheduled for November 16, 2009 and the closing of the planned Merger with Neuromed currently expected to close on November 17, 2009. The Company currently does not expect that the Option Exchange will have a material effect on its financial statements.

Form S-4 Registration Statement and Prospectus

On October 22, 2009, the Company’s Registration Statement on Form S-4, as amended, filed with the SEC to register shares issuable to Neuromed stockholders in exchange for shares of Neuromed upon the completion of the Merger pursuant to the terms of the Merger Agreement was declared effective. Also on October 22, 2009, the Company filed a final joint proxy statement/prospectus in connection with the Merger pursuant to Rule 424(b)(3) of the Securities Act.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial statements and their notes appearing elsewhere in this quarterly report. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed below and elsewhere in this quarterly report or in our annual report on form 10-K.

Overview

We are a biopharmaceutical company in the field of synergistic combination pharmaceuticals. Going beyond traditional combinations, we use our drug discovery technology to create product candidates with novel multi-target mechanisms of action striking at the biological complexities of human disease. We have been advancing a portfolio of four product candidates, Synavive^TM (CRx-102), CRx-401, CRx-191 and CRx-197, into or through clinical research and development, and we have a number of product candidates that have either completed Phase 2a clinical trials, such as CRx-170 or Prednisporin^TM, or are in preclinical development, such as our B-cell malignancies program. This portfolio is almost entirely internally generated from our proprietary combination high throughput screening, or cHTS™ technology, which provides a renewable and previously untapped source of novel drug candidates that are both synergistic and selective toward the diseases they are being developed to treat. Our portfolio of clinical product candidates targets multiple diseases including immuno-inflammatory diseases, metabolic disease, chronic pain, ophthalmic conditions and topical dermatoses. We also have a pipeline of preclinical product candidates in development for oncology, immuno-inflammatory diseases, neurodegenerative diseases, ophthalmic conditions and inherited diseases. Portions of this preclinical portfolio have been generated through collaboration agreements with pharmaceutical companies, foundations and government grants and may include product candidates to be discovered under our oncology research collaboration with Novartis.

We have never been profitable from operations and, as of September 30, 2009, we had an accumulated deficit of $244.8 million. We had net losses of $65.1 million for the year ended December 31, 2008 and $9.8 million for the nine months ended September 30, 2009. The nine-month period ended September 30, 2009 includes a gain on divestiture of CombinatoRx Singapore of $15.6 million.

On June 30, 2009, we entered into an agreement and plan of merger, or Merger Agreement, with Neuromed Pharmaceuticals, Inc., or Neuromed, a privately-held biopharmaceutical company, pursuant to which our wholly-owned subsidiary, PawSox, Inc., will be merged with and into Neuromed. At our annual meeting of stockholders scheduled for November 16, 2009, our stockholders will be asked to approve, among other items, the issuance of shares of our common stock to the stockholders of Neuromed in the merger, to approve authorizing our Board of Directors to effect a reverse stock split and to approve an amendment to our sixth amended and restated certificate of incorporation. At a special meeting of Neuromed stockholders to be held on November 16, 2009, stockholders of Neuromed will be asked to approve and adopt the Merger Agreement and to approve the merger. The merger is expected to close on November 17, 2009. Under the terms of the Merger Agreement and a related escrow agreement, and without giving effect to a reverse stock split, and subject to approval of the stockholders of CombinatoRx and Neuromed, at closing we will issue approximately 14.9 million new shares of our common stock, or firm shares, to Neuromed stockholders and will place approximately 67.8 million new shares in escrow for the benefit of Neuromed stockholders, or escrow shares. Of the escrow shares subject to the escrow agreement, an aggregate of approximately 19.9 million shares, or holdback shares, will be placed into escrow and may or may not be released to Neuromed stockholders depending upon the timing of the FDA’s approval of Exalgo^TM, a product candidate for the treatment of chronic pain which is the subject of a recently filed new drug application, and an aggregate of approximately 47.9 million shares, or milestone shares will be placed into escrow and may or may not be released to Neuromed stockholders depending upon the timing of the FDA’s approval of Exalgo. Current Neuromed stockholders will have voting and other ownership rights with respect to the holdback shares but no voting rights with respect to the milestone shares. As a result, at closing current CombinatoRx stockholders effectively will retain approximately 50% of the outstanding voting shares of common stock of CombinatoRx immediately after the merger, current Neuromed stockholders effectively will own or control approximately 48.5% of the outstanding voting shares of common stock of CombinatoRx immediately after the merger (a portion of which will be subject to the terms of the escrow agreement), and certain Neuromed directors, officers and other employees effectively will hold approximately 1.5% of the outstanding shares of common stock of CombinatoRx immediately after the merger in the form of shares underlying restricted stock unit awards granted under the Neuromed special equity incentive plan. The release of the escrow shares, and any resulting adjustment of the relative ownership percentage of the then outstanding shares of common stock of the combined company, will be based upon the timing of the FDA’s approval of Exalgo and, subject to the terms and conditions of the escrow agreement:

•

If FDA approval of Exalgo is received on or before December 31, 2009, all of the escrow shares will be released to the former Neuromed stockholders, resulting in the pre-merger CombinatoRx stockholders owning approximately 30% of the then outstanding shares of common stock of the combined company.

•

If FDA approval of Exalgo is received on or after January 1, 2010 and on or before September 30, 2010, a portion of the escrow shares will be released to the former Neuromed stockholders and a portion will be cancelled, resulting in the pre-merger CombinatoRx stockholders owning approximately 40% of the then outstanding shares of common stock of the combined company.

•

If FDA approval of Exalgo is received on or after October 1, 2010 and on or before December 31, 2010, a portion of the escrow shares will be released to the former Neuromed stockholders and a portion will be cancelled, resulting in the pre-merger CombinatoRx stockholders owning approximately 60% of the then outstanding shares of common stock of the combined company.

•

If FDA approval of Exalgo is not received on or before December 31, 2010, all of the remaining escrow shares will be cancelled, resulting in the pre-merger CombinatoRx stockholders owning approximately 70% of the then outstanding shares of common stock of the combined company.

In October and November 2008, following the announcement of Phase 2 clinical trial results for Synavive in subjects with knee osteoarthritis, we undertook two organizational restructurings that reduced our United States workforce by approximately 65%. The restructuring was to conserve capital and realign our business strategy to selectively advance product candidates into clinical trials, apply our cHTS drug discovery technology to identify new product candidates and biological mechanisms of action, continue our funded drug discovery programs and seek additional opportunities for funded discovery in other therapeutic areas, and seek to outlicense our clinical and preclinical product candidates. Our efforts to conserve capital are ongoing, and we have substantially reduced our planned expenditures relating to Synavive and our other clinical product candidates. In July 2009, in connection with our entry into the Merger Agreement with Neuromed, we further reduced our workforce by approximately 36%. The 2009 restructuring was a result of a continuing strategic realignment to focus our efforts on continuing our funded drug discovery and conserving capital in connection with the potential merger transaction with Neuromed currently expected to close on November 17, 2009.

Our most advanced product candidate, Synavive, is a novel dissociated glucocorticoid product candidate we have been developing to treat immuno-inflammatory disorders. During 2008 we studied Synavive in a multi-center Phase 2 clinical trial of 279 subjects with knee osteoarthritis, the COMET-1 study. The COMET-1 study was completed in September 2008, and the results of the study were disclosed in October 2008. Subjects who completed the 14-week duration of the COMET-1 study were eligible to participate in an extension study designed to investigate the long-term safety and durability of response for Synavive. The COMET-1 extension study of Synavive was completed in June 2009. Based in part on the results from a Phase 2a clinical trial of Synavive in subjects with rheumatoid arthritis, we advanced Synavive into a Phase 2b clinical trial in subjects with rheumatoid arthritis, the MARS-1 study, which started in 2007 and was targeted to enroll over 600 subjects on a worldwide basis. In July 2008, we discontinued enrollment in the MARS-1 study.

In addition to Synavive, we have been advancing three other product candidates, CRx-401, CRx-191 and CRx-197 through clinical research and development. CRx-401 is a synergistic combination drug candidate containing sustained-release bezafibrate, an anti-dyslipidemia agent approved outside the United States, and a low dose of diflunisal, a widely available analgesic. CRx-401 is thought to have a novel mechanism of action that reduces hyperglycemia and improves HDL and triglyceride levels without promoting weight gain. CRx-401 was evaluated in a 117 subject Phase 2a clinical trial for its anti-diabetic activity in subjects with Type 2 diabetes as an add-on to metformin therapy. The Phase 2a clinical trial of CRx-401 started in 2007 and was completed in March 2009. In May 2009, we reported results from this Phase 2a clinical trial of CRx-401 demonstrating that CRx-401 performed statistically significantly better than bezafibrate on the primary efficacy endpoint of change in fasting plasma glucose. Our product candidate, CRx-191, is a topical synergistic combination drug candidate thought to have a novel multi-target mechanism that inhibits TNF-a and interferon-gamma, key cell mediators of inflammation. CRx-191 contains the mid-potency glucocorticoid, mometasone, and a low dose of the tricyclic anti-depressant, nortriptyline, co-formulated as a topical cream for the treatment of psoriasis and other glucocorticoid-responsive dermatoses. We conducted a healthy volunteer safety study of CRx-191 during 2007 and conducted a Phase 2a clinical trial of CRx-191 in subjects with psoriasis during the first half of 2008. Our product candidate, CRx-197, is a selective cytokine modulator containing low concentrations of the antihistamine, loratadine, and the tricyclic anti-depressant, nortriptyline, neither of which is approved for the treatment of topical dermatoses. This combination has been co-formulated as a topical cream for the treatment of atopic dermatitis and other inflammatory dermatoses. We conducted a healthy volunteer safety study for CRx-197 in 2008 and conducted a Phase 2a clinical trial of CRx-197 in subjects with plaque psoriasis at the beginning of 2009. An additional clinical product candidate in our portfolio, CRx-170, has completed a Phase 2a clinical trial and may be advanced into further clinical trials. CRx-170 is an oral synergistic combination drug candidate containing low doses of the glucocorticoid, prednisolone, and the tricyclic anti-depressant, nortriptyline, that we have been evaluating for the potential treatment of chronic pain conditions.

Our management currently uses consolidated financial information in determining how to allocate resources and assess performance. We have determined that we conduct operations in one business segment. The majority of our revenues since inception have been generated in the United States, and all of our long-lived assets are located in the United States.

Critical Accounting Policies

We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as “critical” because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable—could have been used, which would have resulted in different financial results.

The critical accounting policies we identified in our most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2008 related to restructuring, revenue recognition, stock-based compensation and accrued expenses. There have not been any significant changes to our critical accounting policies in 2009. It is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies disclosed in our Annual Report on Form 10-K, as filed with the SEC on March 16, 2009.

Results of Operations

Discontinued Operations

On June 2, 2009, we divested our 51% equity ownership interest in CombinatoRx Singapore, by selling our 2,602,041 ordinary shares of CombinatoRx Singapore to the other shareholder of CombinatoRx Singapore, BioMedical Sciences, for nominal consideration. CombinatoRx Singapore was formed on August 16, 2005 for the purpose of discovering and developing product candidates to treat infectious diseases.

In connection with the divestiture, we entered into a termination agreement with CombinatoRx Singapore and BioMedical, pursuant to which the parties agreed to terminate all of the prior agreements among us, CombinatoRx Singapore and BioMedical Sciences relating to the joint funding and operations of CombinatoRx Singapore. As a result of the divestiture and the termination of the prior agreements, CombinatoRx Singapore is no longer affiliated with us, and the issued and outstanding preferred shares and convertible promissory notes issued by CombinatoRx Singapore and held by BioMedical Sciences and are no longer convertible into shares of our common stock.

We also entered into a share purchase agreement with CombinatoRx Singapore and BioMedical Sciences and an intellectual property assignment agreement and transition services agreement with CombinatoRx Singapore. Under the intellectual property assignment agreement, CombinatoRx Singapore has been assigned and retains all infectious disease intellectual property developed by CombinatoRx Singapore with our assistance since the formation of CombinatoRx Singapore. Under the share purchase agreement, we have agreed not to compete with CombinatoRx Singapore in the discovery and development of product candidates to treat certain infectious diseases in substantially all markets until June 2, 2010. Under the transition services agreement, we provided certain transition services to CombinatoRx Singapore relating to intellectual property, legal, accounting and information technology matters, all of which were completed prior to September 30, 2009.

In the second quarter of 2009 we recorded a gain on the divestiture of $15.6 million. The financial results of CombinatoRx Singapore have been reclassified as discontinued operations for all periods presented.

Comparison of the Three Months ended September 30, 2009 and September 30, 2008

Revenue. For the three months ended September 30, 2009, we recorded $2.7 million of revenue from our research and development collaborations with Novartis Institutes of BioMedical Research, Inc., or Novartis, Angiotech Pharmaceuticals, Inc., or Angiotech, Cystic Fibrosis Foundation Therapeutics, Inc., or CFFT, Charley’s Fund, the Nash Avery Foundation and GMT Charitable Research, LLC, or the DMD Foundations, and from grants from the National Institutes of Allergy and Infectious Diseases, or NIAID, the United States Army Medical Research Institute for Infectious Diseases, or USAMRIID. For the three months ended September 30, 2008, we recorded $3.0 million of revenue from our research and development collaborations with Angiotech, CFFT, CHDI, Inc., or CHDI, and the DMD Foundations, and from grants from the NIAID and the USAMRIID. The decrease in revenue is primarily due to the completion of our collaboration agreement with CHDI in the fourth quarter of 2008.

Research and Development. Research and development expense for the three months ended September 30, 2009 was $4.9 million compared to $13.8 million for the three months ended September 30, 2008. The $8.9 million decrease was primarily due to a decrease of $4.1 million in preclinical and external clinical expenses, a $3.5 million decrease in compensation and benefits expense associated with reduced headcount attributable to the fourth quarter 2008 and the third quarter 2009 restructurings, a $1.1 million decrease in lab supplies, facilities, depreciation and other overhead costs also associated with the restructurings, as well as a $0.2 million decrease in non-cash stock-based compensation expense.

The table below summarizes our allocation of research and development expenses to our clinical programs Synavive, CRx-401, CRx-197 and CRx-191 for the three months ended September 30, 2009 and 2008. Our internal project costing methodology does not allocate all of the personnel and other indirect costs from all of our research and development departments to specific clinical and preclinical programs, and such unallocated costs are further summarized in the table below. Unallocated clinical program costs consist primarily of the personnel and other expenses for our clinical operations, medical affairs, biostatistics, data systems, medical writing

and clinical program leadership departments, all of which supported the development of our clinical product candidates Synavive, CRx-401, CRx-197 and CRx-191. Preclinical program costs consist of the personnel and other expenses allocated to our internally funded preclinical programs, as well as the direct costs allocated to all of our research collaborations. Unallocated clinical and preclinical program costs consist primarily of the personnel and other expenses for our formulations, pharmacology, regulatory, quality, new products and discovery departments, all of which supported the development of both our clinical product candidates Synavive, CRx-401, CRx-197 and CRx-191, as well as our preclinical product candidates. Infrastructure and support costs consist of facility costs, depreciation and amortization and costs for research and development support personnel such as our informatics and facilities departments.


	Three Months Ended September 30, *(in thousands)*
	2009			2008
Synavive	$	614		$	4,536
CRx-401		87			1,142
CRx-197		(126	)		597
CRx-191		(39	)		230
Unallocated clinical program costs		24			514

Total clinical program costs		560			7,019
Preclinical program costs		1,154			2,691
Unallocated clinical and preclinical program costs		392			1,431
Infrastructure and support costs		2,420			2,038
Non-cash employee and non-employee stock-based compensation expense		355			611

Total research and development expenses	$	4,881		$	13,790

Following our restructurings, we expect our research and development costs to continue to decrease as we have completed clinical trials of our product candidates and we now focus on drug discovery, research and preclinical development. Further, we expect decreased research and development expenses as a result of the completion of research activities under our agreements with CFFT and CHDI. We may select product candidates and research projects for further development on an ongoing basis in response to their preclinical and clinical success and commercial potential. Due to the fact that our most advanced product candidates are in the early stages of development, we cannot estimate anticipated completion dates and when we might receive material net cash inflows from future collaboration agreements with sponsored research funding, up-front payments, milestones or royalties.

General and Administrative. General and administrative expense for the three months ended September 30, 2009 was $3.6 million compared to $3.8 million for the three months ended September 30, 2008. The $0.2 million decrease was primarily due to a decrease in overall general and administrative expenses related to our fourth quarter 2008 and third quarter 2009 restructuring, offset by an increase in professional fees and consulting expenses associated with our proposed merger with Neuromed.

Restructuring. Restructuring costs of $2.6 million in the third quarter of 2009 resulted from the continued implementation of our plan to focus our efforts on our funded drug discovery and conserving capital in connection with the planned merger with Neuromed currently expected to close on November 17, 2009. The charge consisted of $2.6 million for severance and related benefits for approximately 20 employees, $1.8 million of accelerated stock-based compensation and $1.0 million of lease termination costs, partially offset by $2.8 million of non-cash credits related to the write-off of deferred rent and lease incentive obligations associated with a facility that was exited.

Interest Income. Interest income for the three months ended September 30, 2009 was $0.1 million compared to $0.4 million for the three months ended September 30, 2008. The $0.3 million decrease was primarily due to decreases in our average cash and short-term investments balances and significantly lower average interest rates for the securities held in our investment portfolio.

Interest Expense. Interest expense for the three months ended September 30, 2009 was less than $0.1 million compared to $0.2 million for the three months ended September 30, 2008. This decrease was due to the repayment of our equipment lines of credit with General Electric Capital Corporation and its affiliates, or GECC, in December 2008.

Comparison of the Nine Months ended September 30, 2009 and September 30, 2008

Revenue. For the nine months ended September 30, 2009, we recorded $8.7 million of revenue from our research and development collaborations with Novartis, Fovea Pharmaceuticals SA, or Fovea,, Angiotech, CFFT, CHDI, Inc. and the DMD Foundations, and from grants from the NIAID and USAMRIID. For the nine months ended September 30, 2008, we recorded $8.8 million of revenue from our research and development collaborations with Angiotech, CFFT, CHDI and the DMD Foundations, and from grants from the NIAID and USAMRIID.

Research and Development. Research and development expense for the nine months ended September 30, 2009 was $18.1 million compared to $45.5 million for the nine months ended September 30, 2008. The $27.4 million decrease was primarily due to a decrease of $12.8 million in preclinical and external clinical expenses, a $9.7 million decrease in compensation and benefits expense associated with reduced headcount attributable to the fourth quarter 2008 and the third quarter 2009 restructurings, a $4.3 million decrease in consulting, lab supplies, facilities, depreciation and other overhead costs also associated with the restructurings, as well as a $0.6 million decrease in non-cash stock-based compensation expense.

The table below summarizes our allocation of research and development expenses to our clinical programs Synavive, CRx-401, CRx-197 and CRx-191 for the nine months ended September 30, 2009 and 2008. Our internal project costing methodology does not allocate all of the personnel and other indirect costs from all of our research and development departments to specific clinical and preclinical programs, and such unallocated costs are further summarized in the table below. Unallocated clinical program costs consist primarily of the personnel and other expenses for our clinical operations, medical affairs, biostatistics, data systems, medical writing and clinical program leadership departments, all of which supported the development of our clinical product candidates Synavive, CRx-401, CRx-197 and CRx-191. Preclinical program costs consist of the personnel and other expenses allocated to our internally funded preclinical programs, as well as the direct costs allocated to all of our research collaborations. Unallocated clinical and preclinical program costs consist primarily of the personnel and other expenses for our formulations, pharmacology, regulatory, quality, new products and discovery departments, all of which supported the development of both our clinical product candidates Synavive, CRx-401, CRx-197 and CRx-191, as well as our preclinical product candidates. Infrastructure and support costs consist of facility costs, depreciation and amortization and costs for research and development support personnel such as our informatics and facilities departments.


	Nine Months Ended September 30, *(in thousands)*
	2009		2008
Synavive	$	3,101	$	17,994
CRx-401		1,129		2,765
CRx-197		3		1,790
CRx-191		13		913
Unallocated clinical program costs		259		1,619

Total clinical program costs		4,505		25,081
Preclinical program costs		4,279		7,744
Unallocated clinical and preclinical program costs		1,443		4,503
Infrastructure and support costs		6,691		6,282
Non-cash employee and non-employee stock-based compensation expense		1,206		1,867

Total research and development expenses	$	18,124	$	45,477

General and Administrative. General and administrative expense for the nine months ended September 30, 2009 was $12.0 million compared to $11.4 million for the nine months ended September 30, 2008. The $0.6 million increase was primarily due to the $2.4 million increase in professional and consulting fees associated with our ongoing strategic realignment and the merger agreement with Neuromed offset by a $1.0 million decrease in non-cash stock-based compensation and a $0.8 million decrease in compensation and benefits expense.

Restructuring. Restructuring costs of $2.6 million for the nine months ended September 30, 2009 primarily resulted from a third quarter 2009 charge related to the continued implementation of our plan to focus our efforts on our funded drug discovery and conserving capital in connection with the planned merger with Neuromed currently expected to close on November 17, 2009. The charge consisted of $2.6 million for severance and related benefits for approximately 20 employees, $1.8 million of accelerated stock-based compensation and $1.0 million of lease termination costs, partially offset by $2.8 million of non-cash credits related to the write-off of deferred rent and lease incentive obligations associated with a facility that was exited.

Interest Income. Interest income for the nine months ended September 30, 2009 was $0.2 million compared to $2.1 million for the nine months ended September 30, 2008. The $1.9 million decrease was primarily due to decreases in our average cash and short-term investments balances and significantly lower average interest rates for the securities held in our investment portfolio.

Interest Expense. Interest expense for the nine months ended September 30, 2009 was less than $0.1 million compared to $0.5 million for the nine months ended September 30, 2008. This decrease was due to the repayment of our equipment lines of credit with GECC in December 2008.

Liquidity and Capital Resources

Since our inception in March 2000 until our initial public offering on November 9, 2005, we have funded our operations principally through the private placement of equity securities, which provided net proceeds of approximately $104.9 million. Our initial public offering provided net proceeds of $43.8 million, a private placement of our common stock in March 2006 provided net proceeds of $45.4 million and a public offering of our common stock in October 2007 provided net proceeds of $33.0 million. We have also generated funds from debt financing and payments from our collaboration partners. As of September 30, 2009, we had cash, cash equivalents and short-term investments of approximately $22.2 million, which includes $4.1 million of restricted cash. Our funds are primarily invested in short-term, investment-grade securities, commercial paper, government agency securities and U.S. Treasury money market funds, and as such, we do not believe there is significant risk in our investment portfolio as of September 30, 2009.

For the nine months ended September 30, 2009, we received $9.2 million in payments from our collaborations and research and development agreements with Novartis, Fovea, CFFT, CHDI, Inc. and the DMD Foundations, and grants from the NIAID and USAMRIID. We expect that our sources of funding in the future will also include, subject to our satisfying conditions, additional research funding, license fees, potential milestone payments and royalties relating to our collaboration and research and development agreements with Novartis, Angiotech, the DMD Foundations and government grants from the NIAID and USAMRIID and any other collaborative agreements into which we might enter.

Based on our current operating plans, we expect our resources to be sufficient to fund our planned operations into 2012. However, we may require significant additional funds earlier than we currently expect if our research and development expenses exceed our current expectations or our collaboration funding is less than our current expectations. We may seek additional funding through collaboration agreements and public or private financings of debt or equity capital. Additional funding may not be available to us on acceptable terms or at all. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail one or more of our research or development programs or our operations. We also could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our technologies or product candidates which we would otherwise pursue on our own.

Our operating activities from continuing operations used cash of $21.2 million for the nine months ended September 30, 2009 and used cash of $41.4 million for the nine months ended September 30, 2008. The decrease in the net use of cash in operating activities was primarily attributed to our $22.6 million decrease in loss from continuing operations, offset by working capital adjustments in accounts payable, accrued expenses and accrued restructuring.

Our investing activities from continuing operations provided cash of $13.2 million for the nine months ended September 30, 2009 and provided cash of $41.8 million for the nine months ended September 30, 2008. The cash provided by investing activities for the nine months ended September 30, 2009 was primarily due to net sales and maturities of short-term investments and proceeds from the sale of fixed assets, partially offset by purchases of property and equipment and the loss from the sale of our equity interest in CombinatoRx Singapore.

Our financing activities from continuing operations were not a significant source of cash for the nine months ended September 30, 2009 and we used cash of $1.9 million for the nine months ended September 30, 2008. The use of cash in the nine months ended September 30, 2008 was primarily due to the repayment of our notes payable to GECC, which were repaid in full in December 2008.

As of March 31, 2009, CombinatoRx Singapore had $19.4 million in convertible notes payable, representing $17.5 million in principal amount of convertible promissory notes issued by CombinatoRx Singapore to BioMedical Sciences on August 30, 2005, June 8, 2006, May 30, 2007 and August 5, 2008 and accrued interest of $1.9 million. The notes bore interest at an annual rate of 5% and were due and payable on December 31, 2009, unless we elected to prepay the notes before that date through CombinatoRx Singapore. On June 2, 2009, we divested our 51% equity ownership interest in CombinatoRx Singapore by selling our 2,602,041 ordinary shares of CombinatoRx Singapore to the other shareholder of CombinatoRx Singapore, BioMedical Sciences, for nominal consideration. In connection with the divestiture, CombinatoRx, CombinatoRx Singapore and BioMedical Sciences entered into a termination agreement pursuant to which the parties agreed to terminate all of the prior agreements among CombinatoRx, CombinatoRx Singapore and BioMedical Sciences relating to the joint funding and operations of CombinatoRx Singapore. As a result of the divestiture and the termination of the prior agreements, CombinatoRx Singapore is no longer affiliated with us, and the issued and outstanding preferred shares and convertible promissory notes issued by CombinatoRx Singapore and held by BioMedical Sciences are no longer convertible into shares of our common stock. CombinatoRx also entered into a share purchase agreement with CombinatoRx Singapore and BioMedical Sciences and an intellectual property assignment agreement with CombinatoRx Singapore. Under the intellectual property assignment agreement, CombinatoRx Singapore has been assigned and retains all infectious disease intellectual property developed by CombinatoRx Singapore with the assistance of CombinatoRx since the formation of CombinatoRx Singapore. Under the share purchase agreement, we have agreed not to compete with CombinatoRx Singapore in the discovery and development of product candidates to treat certain infectious diseases in substantially all markets until June 2, 2010.

On August 3, 2009, we entered into a second amendment to our office and laboratory lease for approximately 63,000 square feet of office and laboratory space at our Cambridge, Massachusetts facility. The lease term extends through January 2017. Under the terms of the second amendment, our occupancy of approximately 18,035 square feet of leased office premises located on the sixteenth floor of the facility will cease as of June 16, 2009, and we are liable for rent payments and occupancy costs on the office premises through September 30, 2009. Under the terms of the second amendment, our occupancy and liability for rent payments and occupancy costs of approximately 22,095 square feet of leased lab premises located on the fourth floor of the facility ceased as of September 15, 2009. As consideration for the right to cease occupancy of the office premises and the lab premises, we agreed to pay our landlord $0.5 million on or before October 1, 2009, $0.5 million on or before January 1, 2010 and $0.5 million on or before July 1, 2010. Under the terms of the lease, as amended, we will continue to lease and occupy approximately 23,199 square feet of office and laboratory space with a lease term until January 2017. As a result of the lease amendment, excluding anticipated reductions in management fees payable by us to our landlord, we have reduced our aggregate obligations under our operating lease for our Cambridge facility by approximately $11.4 million.

In June 2009, Neuromed sold the commercial rights to Exalgo to Mallinckrodt Inc., a subsidiary of Covidien plc. If our proposed merger with Neuromed is consummated and Exalgo is approved by the FDA, we will receive from Mallinckrodt Inc. a milestone payment of $30 million which could potentially increase to $40 million. After FDA approval, we will also receive tiered royalties on Mallinckrodt Inc.’s sales of Exalgo ranging from a mid to high-single digit percentage of net sales. As previously disclosed, the FDA has set November 22, 2009 as Exalgo’s Prescription Drug User Fee Act review date, or its PDUFA date.

Contractual Obligations

The following table summarizes our contractual obligations at September 30, 2009, and the effects such obligations are expected to have on our liquidity and cash flows in future periods.


Contractual Obligations *(in thousands)*	Total		2009		2010 through 2011		2012 through 2013		After 2013
Operating lease obligations:
Cambridge facility(1)	$	10,246	$	779	$	3,227	$	2,449	$	3,791

Total contractual obligations	$	10,246	$	779	$	3,227	$	2,449	$	3,791

(1)

Our payment and rent obligations under the lease, as amended, are reflected as operating lease obligations in the table above. The amounts in the table above do not include management fees payable to our landlord for our leased space, which are meant to cover our allocable share of property taxes, utilities and other common area costs. Our payment obligations under the amended lease are supported by standby letters of credit totaling $4.0 million. Effective December 1, 2009 the standby letters of credit will be reduced to $2.5 million.

In connection with our agreement with the DMD Foundations, in the event that we either enter into a license agreement with a third party granting the rights to make, use or sell a product developed under the agreement to treat Duchenne muscular dystrophy, or DMD, or we or any of our affiliates or licensees first sells a product developed under the agreement to treat DMD, we will pay the DMD Foundations a payment equal to 100% of the research funding provided to us under the agreement. In addition, on the first anniversary of the first commercial sale of a product developed under the agreement, we will pay the DMD Foundations an additional payment equal to 100% of the research funding provided to us under the agreement. Finally, if a product developed under the agreement to treat DMD achieves cumulative net sales of at least $100.0 million, within 90 days of such occurrence, we will pay the DMD Foundations an additional payment equal to 200% of the research funding provided to us under the agreement. As of September 30, 2009, based on the $3.0 million of research funding that we have received as of that date, the maximum contingent obligation that we may have to pay under this agreement is $12.0 million, but will be expected to increase as we receive approximately $0.5 million of additional research funding as contemplated under the agreement. Because of the uncertainty over when, if ever, such payments must be made upon outlicensing or product sales, the amount and timing of such payment obligations are highly uncertain and are not included in the above table.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements or any relationships with unconsolidated entities of financial partnerships, such as entities often referred to as structured finance or special purpose entities.

New Accounting Standards

Refer to Note 2, Recent Accounting Pronouncements, in “Notes to Condensed Consolidated Financial Statements,” for a discussion of new accounting standards

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

We are exposed to market risk related to changes in interest rates. As of September 30, 2009, we had unrestricted cash, cash equivalents and marketable securities of $18.1 million consisting of cash and highly liquid and short-term investments. Our cash is deposited in and invested through highly rated financial institutions in North America. Our marketable securities are subject to interest rate risk and will fall in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 5% from levels at September 30, 2009, we estimate that the fair value of our investments would decline by an immaterial amount; and therefore, our exposure to interest rate changes is immaterial.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a–15(b) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective at the reasonable assurance level in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control

As required by Rule 13a-15(d) of the 1934 Act, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of the internal control over financial reporting to determine whether any changes

occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded no such changes during the fiscal quarter covered by this Quarterly Report on Form 10-Q materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

Item 1.

Legal Proceedings

On April 30, 2009, CombinatoRx filed a lawsuit against Aptuit, Inc., or Aptuit, in the Supreme Court for the State of New York, New York County, Commercial Division claiming fraudulent inducement, breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment in connection with Aptuit’s manufacturing and distribution of CombinatoRx’s product candidate Synavive (CRx-102) for a worldwide Phase 2b clinical trial targeting hundreds of subjects with rheumatoid arthritis, the MARS-1 study. CombinatoRx alleges that Aptuit caused harm by willfully ignoring significant deficiencies in its manufacturing process (practices that did not comply with Good Manufacturing Practices and the clinical trial directive promulgated by the European Union, or EU), and ignoring warnings about those deficiencies, and failing to correct those deficiencies after the United Kingdom’s Medicines and Healthcare Regulatory Authority identified them during planned inspections. In addition, CombinatoRx alleges that Aptuit caused harm by failing to disclose information about those deficiencies to CombinatoRx, while inducing it to expand Aptuit’s scope of work under the operative contracts by which Aptuit agreed to manufacture and distribute Synavive for the MARS-1 study. CombinatoRx is seeking compensatory damages in an amount to be determined at trial. The outcome of this matter and whether we would be able to recover the damages sought, if any, cannot be determined with any certainty at this time.

On October 2, 2009, a lawsuit was filed in the Superior Court for Suffolk County, Massachusetts against CombinatoRx, each of the members of CombinatoRx’s board of directors and Neuromed. The action is brought by Philip Lorenzi, a purported stockholder of CombinatoRx, on his own behalf, and seeks also to certify, and bring the action on behalf of, a class of CombinatoRx stockholders. The complaint alleges the members of the board breached fiduciary duties owed to CombinatoRx stockholders by, among other things, agreeing to an all-stock transaction at an unfair price, agreeing to a merger agreement which contained preclusive deal protection devices, and failing to disclose material information related to the proposed merger between CombinatoRx and Neuromed, and that CombinatoRx and Neuromed aided and abetted the purported breaches of fiduciary duties. While CombinatoRx and the other defendants believe the allegations in the complaint are entirely without merit and they have valid defenses to all claims, in an effort to minimize the cost and expense of any litigation, on October 8, 2009, the defendants entered into a memorandum of understanding, or MOU, with the plaintiffs to settle this lawsuit. Subject to the negotiation and execution of a stipulation of settlement with respect to this litigation and the approval of this settlement by the court, the MOU resolves the allegations by the plaintiffs against the defendants and provides a release and settlement by the purported class of CombinatoRx’s stockholders of all claims and causes of actions of any kind whatsoever, whether under state or federal law, against the defendants and their affiliates and agents in connection with the merger, the merger agreement, any of the transactions contemplated by the merger agreement or that arise out of allegations, facts, events or claims that were in the complaint or that could have been brought in the complaint. In exchange for this release and settlement, pursuant to the terms of the MOU, the parties agreed, after arm’s length discussions between and among the parties, that CombinatoRx would provide additional supplemental disclosures in the Company’s registration statement on Form S-4, as amended, filed in connection with the planned Neuromed merger, and in the joint proxy statement/prospectus related to the planned Neuromed merger, or the Prospectus.

Item 1A.

Risk Factors

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

Investment in our common stock involves a high degree of risk and uncertainty. You should carefully consider each of the risks and uncertainties described below before you decide to invest in our common stock. If any of the following risks and uncertainties actually occurs, our business, financial condition, and results of operations could be severely harmed. This could cause the trading price of our common stock to decline, and you could lose all or part of your investment.

Risks Related to the Proposed Merger

Completion of the proposed merger with Neuromed is subject to various closing conditions, involves significant costs and will require considerable attention from our management. Failure to complete the merger could adversely affect our stock price and our future business and operations.

The completion of the proposed merger with Neuromed is subject to the satisfaction of various closing conditions, including the approval by both our and Neuromed’s stockholders, and we cannot assure you that such conditions will be satisfied and that the merger will be successfully completed. In the event that the merger is not consummated we will have spent considerable time and resources, and incurred substantial costs, including costs related to the merger, such as legal, accounting and advisory fees, many of which must be paid even if the merger is not completed, or the payment of a termination fee to Neuromed under certain circumstances. If the merger is not consummated, our reputation in our industry and in the investment community could be damaged and, as a result, the market price of our common stock could decline.

We may fail to realize the anticipated benefits of the merger with Neuromed.

The success of the merger with Neuromed will depend on, among other things, our ability to realize anticipated cost savings and to combine the businesses of CombinatoRx and Neuromed in a manner that does not materially disrupt existing relationships or otherwise result in decreased productivity and that allows us to capitalize on the drug development capabilities of the combined company. If we are not able to achieve these objectives, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected.

CombinatoRx and Neuromed have operated and, until the completion of the merger expected to close on November 17, 2009, will continue to operate independently. It is possible that the integration process could result in the loss of key employees, the disruption of CombinatoRx’s or Neuromed’s ongoing businesses or inconsistencies in standards, controls, procedures or policies that could adversely affect our ability to maintain relationships with third parties and employees or to achieve the anticipated benefits of the merger. Issues that must be addressed in integrating the operations of CombinatoRx and Neuromed in order to realize the anticipated benefits of the merger include, among other things, identifying and eliminating redundant operations and assets across a geographically dispersed organization and integrating the research and development operations and systems of CombinatoRx and Neuromed. Integration efforts between the two companies will also divert management’s attention and resources. An inability to realize the full extent of, or any of, the anticipated benefits of the merger, as well as any delays encountered in the integration process, could have an adverse effect on our business and results of operations, which may affect the value of the shares of CombinatoRx common stock after the completion of the merger.

In addition, the actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized. Actual cost synergies, if achieved at all, may be lower than we expect and may take longer to achieve than we anticipate. If we are not able to adequately address these challenges, CombinatoRx and Neuromed may be unable to successfully integrate their operations, or to realize the anticipated benefits of the integration of the two companies.

Pursuant to the terms of the merger agreement and escrow agreement with Neuromed, a substantial number of shares may be released from escrow after the consummation of the merger, which will result in significant dilution to the current holders of outstanding CombinatoRx common stock.

As of September 30, 2009, approximately 35.1 million shares of CombinatoRx common stock were outstanding. Upon the consummation of the merger and without giving effect to any reverse stock split, CombinatoRx expects to issue approximately 14.9 million shares of its common stock as initial merger consideration to former Neuromed stockholders as well as approximately 67.8 million shares of its common stock that will be placed into escrow and subject to the terms of an escrow agreement. CombinatoRx’s stockholders are expected effectively to retain approximately 50% of the outstanding voting shares of common stock of CombinatoRx immediately after the merger. As set forth below, based on the timing of the FDA’s approval of Exalgo, which is a drug product candidate for which the commercial rights were recently sold by Neuromed, the 50% ownership of the combined company by CombinatoRx’s stockholders will be adjusted by releasing shares held in escrow to former Neuromed stockholders or cancelling shares held in escrow.

Subject to the terms and conditions of the escrow agreement:

•

If FDA approval of Exalgo is not received on or before December 31, 2010, all of remaining escrow shares will be cancelled, resulting in the pre-merger CombinatoRx stockholders owning approximately 70% of the then outstanding shares of common stock of the combined company.

As each of the milestone dates described above are reached without receipt of FDA approval of Exalgo, the parties have agreed that the requisite number of the escrow shares will be returned to the combined company, cancelled and cease to be outstanding such that the number of escrow shares is reduced to the number of escrow shares that would be released to former Neuromed stockholders

if FDA approval of Exalgo is received on or before the next milestone date. If FDA approval of Exalgo is not received on or before December 31, 2010, all of the remaining escrow shares will be returned to the combined company, cancelled and cease to be outstanding. As a result, the total number of outstanding shares of common stock of the combined company may fluctuate significantly based on the timing of FDA approval of Exalgo, if any. These fluctuations as well as the uncertainty relating to the escrow arrangement and relative ownership of the combined company may have an adverse impact on the market price of CombinatoRx common stock.

Future sales of common stock by existing CombinatoRx and Neuromed stockholders may cause the price of CombinatoRx common stock to fall.

Certain of CombinatoRx’s existing stockholders and certain Neuromed stockholders receiving shares of CombinatoRx common stock in the merger will have beneficial ownership of significant blocks of outstanding CombinatoRx common stock after the consummation of the merger. If these or other stockholders sell substantial amounts of CombinatoRx common stock in the public market, particularly if these sales are in a rapid or disorderly manner, or investors perceive that these sales could occur, the market price of CombinatoRx common stock could decrease significantly. In connection with the execution of the merger agreement, CombinatoRx entered into a registration rights agreement with certain investment funds affiliated with MPM Capital LLC, James Richardson & Sons, Limited and Working Opportunity Fund (EVCC) Ltd., existing stockholders of Neuromed who collectively own or control approximately 52% of Neuromed’s voting securities as of September 30, 2009, and with certain funds affiliated with BVF Inc., stockholders of CombinatoRx who own or control approximately 30.4% of outstanding CombinatoRx common stock as of September 30, 2009. If requested properly under the terms of the registration rights agreement, these stockholders have the right to require us to register all or some of such shares for sale under the Securities Act and in certain circumstances also have the right to include those shares in a registration we initiate. If we are required to include the shares of CombinatoRx common stock of these stockholders pursuant to these registration rights in a registration we initiate, sales made by such stockholders may adversely affect the price of CombinatoRx common stock and our ability to raise needed capital. In addition, if these stockholders exercise their demand registration rights and cause a large number of shares to be registered and sold in the public market or demand that we register their shares on a shelf registration statement, such sales or shelf registration may have an adverse effect on the market price of CombinatoRx common stock. These sales might also make it more difficult for us to sell equity securities at an appropriate time and price.

Ownership of CombinatoRx common stock may be highly concentrated after consummation of the merger.

After consummation of the merger, certain stockholders will have beneficial ownership of significant blocks of outstanding CombinatoRx common stock. Investment funds affiliated with BVF Inc., CombinatoRx’s largest stockholder before the merger, effectively will own or control approximately 15.2% of the outstanding voting shares of common stock of CombinatoRx immediately after the merger and will remain the largest percentage holder of the outstanding shares of common stock of the combined company. Investment funds affiliated with MPM Capital LLC, Working Opportunity Fund (EVCC) Ltd., Neuro Discovery Limited Partnership and James Richardson & Sons, Limited, Neuromed’s largest stockholders before the merger, effectively will own or control approximately 13.9%, 7.0%, 4.3% and 6.1%, respectively, of the outstanding voting shares of common stock of CombinatoRx immediately after the merger, based upon an assumed volume-weighted average of the per share daily closing prices of CombinatoRx common stock as reported on The NASDAQ Global Market of $1.50 for the five (5) consecutive trading days ending on the second trading day prior to the effective time of the merger and an estimated November 17, 2009 closing date for the merger. In addition, two of CombinatoRx’s directors after the merger, Todd Foley and Hartley T. Richardson, are affiliated with MPM Capital LLC and James Richardson & Sons, Limited, respectively. These and other large stockholders, acting individually or as a group, will have substantial influence over the outcome of a corporate action requiring stockholder approval, including the election of directors, any approval of a merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction, even if the outcome sought by such stockholders is not in the interest of our other stockholders. These stockholders, acting as a group, may also delay or prevent a change in control, even if such change in control would benefit our other stockholders. In addition, the significant concentration of stock ownership may adversely affect the value of CombinatoRx common stock due to a resulting lack of liquidity of CombinatoRx common stock or a perception among investors that conflicts of interest may exist or arise.

We expect to incur significant costs in connection with the merger and in integrating the companies into a single business.

To date, CombinatoRx has incurred aggregate transaction costs of approximately $2.5 million in connection with the merger. Based on information available at this time, CombinatoRx anticipates incurring additional transaction costs of up to approximately $2.0 million in connection with the merger. To date, Neuromed has incurred aggregate transaction costs of approximately $1.6 million in connection with the merger. Based on information available at this time, Neuromed anticipates incurring additional transaction costs of up to approximately $1.4 million in connection with the merger. In addition, we expect to incur significant costs integrating the companies’ operations, product candidates and personnel, which cannot be estimated accurately at this time. These costs may include costs for severance, legal fees and reorganization of facilities and personnel. If the total costs of the merger exceed estimates, or benefits of the merger do not exceed the total costs of the merger, our financial results could be adversely affected.

Risks Related to Our Discovery, Development and Commercialization of Combination Drugs

Our approach to the discovery and development of combination drugs is unproven and may never lead to commercially viable products.

Our approach to drug discovery and development is complex and unproven and has not been successfully used or, to our knowledge, attempted by any company. Previously unrecognized or unexpected defects or limitations to our drug discovery technology or drug development strategy may emerge, which we may also be unable to overcome or mitigate. None of the product candidates identified or developed to date, through the application of our business model and drug discovery technology, has been approved by any regulatory agency for commercial sale or been commercialized.

While we have often advanced and continue to advance our product candidates into Phase 2a proof-of-concept and Phase 2 clinical trials on the basis of their approved drug components, these product candidates have and could fail in these or future clinical trials or have indeterminate results. For example, as we announced in October 2008, Synavive, our most advanced product candidate, did not meet the primary endpoint in a Phase 2 clinical trial in patients with knee osteoarthritis. In addition, in some cases we have been required to conduct additional preclinical and Phase 1 clinical studies for our product candidates prior to Phase 2a proof-of-concept clinical trials, and we may be required to conduct these studies in connection with the formulations of our product candidates we have developed or plan to develop. If the additional preclinical or Phase 1 clinical studies required for a product candidate or its new formulation are extensive, it could delay or prevent further development of the product candidate. Regulatory approval for a combination drug generally requires clinical trials to compare the activity of each component drug with the combination. As a result, it may be more difficult and costly to obtain regulatory approval of a combination drug than of a new drug containing only a single active pharmaceutical ingredient. In some instances, we may choose to advance product candidates where one or more of the compounds of the combination are not approved drugs, which may lead to longer clinical development timelines for these types of product candidates.

Our business model is dependent on the ability of our proprietary high throughput discovery technology to identify additional promising product candidates. High throughput screening involves testing large numbers of compounds in cell-based assays using automated systems that measure the biological activity of the compounds and provide detailed data regarding the results. Because our high throughput discovery technology is unproven in identifying drugs that can be approved, we cannot be certain that we will be able to discover additional drug combinations that show promising effects in our cell-based disease models and preclinical studies, which we can advance into clinical trials. As a result, we may not be able to identify additional product candidates. Many other companies with substantially greater resources than ours use high throughput screening for drug discovery. These or other companies may have developed or could in the future develop combination screening technology equal or superior to our technology.

For these and other reasons, our approach to drug discovery and development may not be successful and our business model may not generate viable products or revenue. Even if our approach is theoretically viable, we may not complete the significant research and development or obtain the financial resources and personnel required to further develop and apply our discovery technology, advance promising product candidates to and through clinical trials, and obtain required regulatory approvals.

Our results to date provide only a limited basis for predicting whether any of our product candidates will be safe or effective, or receive regulatory approval.

All of our product candidates are in an early stage of development and their risk of failure is high. The data supporting our drug discovery and development programs is derived from either laboratory and preclinical studies and limited early stage clinical trials that were not all designed to be statistically significant or proof-of-concept or Phase 2 clinical trials, some of which are exploratory in nature. We cannot predict when or if any one of our product candidates will prove effective or safe in humans or will receive regulatory approval. If we are unable to discover or successfully develop drugs that are effective and safe in humans, we will not have a viable business.

The approved drugs included in our product candidates may have adverse or unacceptable side effects and we may not be able to achieve an acceptable level of side effect risks, compared to the potential therapeutic benefits, for our product candidates.

The approved drugs included in our combination product candidates have known adverse side effects. These side effects may be acceptable when an ingredient is used in its approved dosage to achieve a therapeutic benefit for its currently approved indications, but the side effect risk compared to the therapeutic benefit may not be acceptable when used for the intended indications for the product candidate. These side effects may also make it difficult for us to obtain regulatory or other approval to initiate clinical trials of our product candidates. In addition, the therapeutic effect of an approved drug in its currently approved indications may be inappropriate or undesirable in the intended indication for our product candidate. Also, the adverse side effects of an approved drug may be enhanced when it is combined with the other approved drug in the product candidate or other drugs patients are taking, or the combined drugs in a product candidate may produce additional side effects. Adverse side effects of the approved drugs could, in any of these situations, prevent successful development and commercialization of some or all of our product candidates, because the risks associated with the approved drug component may outweigh the therapeutic benefit of the combination.

The development of a product candidate could be adversely affected by safety or efficacy issues that subsequently arise or become the focus of increased attention or publicity regarding use of either of the approved drugs which comprise the product candidate or similar drugs. We could be forced to abandon a product candidate or an approved product due to adverse side effects from long-term or other use of one of the active pharmaceutical ingredients in the product candidate or product, even if such long-term or other use is not contemplated for such product candidate or product.

Several of our product candidates seek to increase the therapeutic effect of a reduced-dose oral glucocorticoid or mid-potency topical glucocorticoid by the combination of such glucocorticoid with a second pharmaceutical ingredient that serves as an enhancer agent. The adverse side effects of the steroids and the antidepressant or other enhancer agent included in these drug candidates are significant and generally increase as their dosage and/or duration of therapy increases. As a result, the success of these product candidates depends upon the ability of an acceptable dose of the candidate’s enhancer agent to selectively amplify the therapeutic effect of a reduced-dose glucocorticoid or mid-potency glucocorticoid, without causing unacceptable expected or unexpected adverse side effects. To achieve sufficient efficacy in humans, we may need to include higher doses of the glucocorticoid, or of the enhancer agent, than we expected to include based on our screening procedures, preclinical trials and limited clinical trials. As a result, our product candidates could have greater adverse side effects than anticipated and could fail to achieve risk-to-benefit profiles that would justify their continued development.

Certain antidepressants, including the antidepressants in our product candidates, CRx-170, CRx-191 and CRx-197, carry a black box warning and expanded warning statements that alert health care providers to an increased risk of suicidality in children and adolescents being treated with these drugs. Several scientific publications also suggest the possibility of an increased risk for suicidal behavior in adults, in addition to children and adolescents, who are being treated with antidepressant medications. Additional product labeling or even suspension of the use of some or all of the anti-depressants included in our product candidates would delay or prevent the continuation of our clinical trials, development and eventual commercialization of these product candidates. The occurrence of the adverse side effects described in the black box warning during the development of the CRx-197 product candidate could lead to product liability claims.

Diflunisal, a component of our CRx-401 product candidate, is a member of the NSAID (non steroidal anti-inflammatory drug) class, which carries an FDA-required black box warning alerting physicians to the potential for increased thrombotic cardiovascular events (including heart attacks and stroke) which may increase with duration of use, an increased risk of serious gastrointestinal adverse events including bleeding, ulceration, and perforation of the stomach or intestines, which could be fatal and the fact that diflunisal is contraindicated for the treatment of peri-operative pain in the setting of coronary artery bypass graft (CABG) surgery. The occurrence of the adverse side effects described in the diflunisal black-box warning during the development of our CRx-401 product candidate could make it inadvisable to continue development of CRx-401 or lead to difficulty in obtaining regulatory approval or other approval for clinical trials, the termination of our clinical trials or could result in product liability claims.

Significant adverse side effects of the component drugs included in our clinical stage product candidates include: in the case of our product candidate Synavive, headache, nausea, dizziness, diarrhea, muscle and bone loss, diabetes, dyslipidemia, osteoporosis, fractures, weakness, adrenal suppression, infections, abdominal distress, peptic ulceration, arrhythmias, cataracts, glaucoma and myopathy; in the case of our product candidates CRx-191 and CRx-197 burning, skin atrophy, stinging, adrenal suppression, suicidality, headache, drowsiness, fatigue, nervousness, constipation, nausea, blurred vision, abdominal distress, tachycardia, and arrhythmias; in the case of our product candidate CRx-401 heart attack, stroke, hypertension, bleeding, ulceration, and perforation of the stomach or intestines, diarrhea, constipation, flatulence, liver effects, renal impairment, drowsiness, insomnia, dizziness, headache, fatigue, nausea, muscular pain, weakness or cramps and alopecia; and in the case of our product candidate, CRx-170, drowsiness, muscle and bone loss, fractures, adrenal suppression, cataracts, glaucoma, nausea, birth defects, infections, constipation and abdominal distress. These side effects are not the only side effects of the components of our clinical stage product candidates, but are provided based on their severity and expected frequency of occurrence. The occurrence of these or other significant adverse side effects such as electrocardiogram changes, hepatic or renal dysfunction, infections, weight gain, immunosuppression, tachycardia and agranulocytosis could make it inadvisable to continue development of a product candidate or lead to difficulty in obtaining regulatory or other approval for clinical trials of our product candidates, the termination of our clinical trials or could result in product liability claims.

The active pharmaceutical ingredients in our product candidates may produce adverse side effects when delivered in combination.

While an active pharmaceutical ingredient in one of our product candidates may be safe, or have an acceptable risk-to-benefit profile when administered as a single agent for its approved indications, the same active pharmaceutical ingredient when delivered in combination with the other active pharmaceutical ingredient in the product candidate or other drugs being taken by patients we are seeking to treat may cause serious unexpected or unacceptable adverse side effects. Our discovery technology is not designed to and does not detect adverse side effects that may result from the combination of the two drugs, and these side effects may not be detected in any preclinical toxicology studies we conduct. Side effects resulting from the delivery in combination of our product candidates or the interaction with other drugs could be discovered in the course of performing clinical trials of our product candidates. In addition,

the active pharmaceutical ingredients in a product candidate may not be approved for treatment of the product candidate’s targeted disease and may result in additional adverse side effects not typically associated with products for treatment of such a disease. The FDA or other regulators could require preclinical and Phase 1 studies testing for combination side effects before we advance product candidates to further clinical trials.

Our product candidates are generally combinations of approved drugs that are commercially available and marketed by other companies. As a result, our products may be subject to substitution and competition.

We anticipate that the approved drugs that are combined to produce our product candidates are likely to be commercially available at prices lower than the prices at which we would seek to market our product candidates. Even with new formulations, we cannot be sure that physicians will view our products as sufficiently superior to a treatment regimen of the individual active pharmaceutical ingredients as to justify the significantly higher cost we expect to seek for our combination products, and they may prescribe the individual drugs already approved and marketed by other companies instead of our combination products. Even if we are issued patents covering the composition of matter, method of use or formulations of our combination products, those patents may be ineffective as a practical matter to protect against physicians prescribing the individual drugs marketed by other companies instead of our combination products. To the extent that the price of our products is significantly higher than the prices of the individual components as marketed by other companies, physicians may have a greater incentive to write prescriptions for the individual components instead of for our combination products, and this may limit how we price our products. Similar concerns could also limit the reimbursement amounts private health insurers or government agencies in the United States are prepared to pay for our products, which could also limit market and patient acceptance of our products, and could negatively impact our revenues and net income, if any. Physicians might also prescribe the individual components of a product candidate prior to its approval, which could adversely affect our development of the product candidate due to our lack of control over the administration to patients of the combination of active pharmaceutical ingredients in our product candidate, the occurrence of adverse effects, and other reasons. Such pre-approval use could also adversely affect our ability to market and commercialize any such product candidate which we successfully develop.

In many countries where we plan to market our products, including Europe, Japan and Canada, the pricing of prescription drugs is controlled by the government or regulatory agencies. Regulatory agencies in these countries could determine that the pricing for our products should be based on prices for their active pharmaceutical ingredients when sold separately, rather than allowing us to market our products at a premium as new drugs.

We must create commercially viable pharmaceutical formulations for our product candidates.

The success of our product candidates will depend on our ability to develop a formulation of the product candidate that is superior to a treatment regimen of the two approved drugs included in the product candidate taken separately. In some instances, to be commercially successful, this formulation must have a different method of administration than the approved drugs. We have developed or are developing proprietary formulations for our most advanced product candidates. Developing such proprietary formulations is costly and difficult, and we have limited experience in developing formulations ourselves. We are relying on and expect to rely on third-party suppliers to develop the pharmaceutical formulations, delivery methods or packaging for our product candidates and they may not be successful in doing so or may experience delays in doing so that could delay our clinical trials, and ultimately our ability to obtain approval of our product candidates. Defects in the formulation, delivery method or packaging of any of our product candidates could delay our ability to conduct clinical trials or require us to repeat clinical trials using a revised formulation, delivery method or packaging. If we are unsuccessful in creating commercially viable formulations, delivery methods or packaging, we may never generate product revenue or be profitable. We are also undertaking some efforts to utilize medicinal chemistry to potentially develop new product candidates or to potentially create next-generation versions of our existing product candidates. We have only limited experience with medicinal chemistry and research and development regarding new chemical entities. We may be completely unsuccessful in finding new product candidates or in discovering potential next-generation product candidates. In addition, development and regulatory approval timelines for these product candidates will be longer in duration that the timelines for our combination product candidates.

We may not be able to initiate and complete clinical trials for our product candidates.

Conducting clinical studies for any of our drug candidates requires finding appropriate clinical sites and clinical investigators, securing approvals for such studies from the independent review board at each such site and local regulatory authorities and enrolling sufficient numbers of patients. We may not be able to arrange for appropriate clinical trials for our product candidates, secure the necessary approvals or enroll the necessary number of participants. In 2008 we terminated enrollment in a Phase 2b clinical study of Synavive in rheumatoid arthritis due to delays in the enrollment associated with competing therapies otherwise available to the relevant patient population, enrollment criteria that required the discontinuance of glucocorticoid use by subjects and issues with third-party contract research organizations and third-party suppliers of clinical trial material. In addition, we cannot guarantee that outside clinical investigators conducting our clinical trials will conduct them in compliance with applicable United States or foreign regulations. Clinical sites may fail the FDA’s or other regulatory agencies’ inspections or reviews, and our trials could be halted for these or other reasons. We are conducting and may conduct additional proof-of-concept clinical trials as well as Phase 2b clinical trials

for some of our product candidates. These clinical trials may be in indications where we do not have prior experience or may be of a size and scope greater than what we have undertaken before, and this lack of experience or size may lead to delays in enrollment and other aspects of the trials. We have contracted with third-party clinical research organizations to conduct some of our Phase 2b and other Phase 2 proof-of-concept clinical trials for our product candidates and may continue to do so. These organizations may not completely perform their contractual obligations regarding the trial, or may not diligently or completely perform their tasks with respect to clinical trials under their supervision. As a result of these risks, our clinical trials may be extended, delayed or terminated, which could delay the receipt of clinical results for our product candidates, which could delay, impede or stop the development, regulatory approval or successful commercialization of our product candidates.

We may be unable to find safe and effective doses and dose ratios for our product candidates without extensive clinical trials and substantial additional costs, if at all.

We must select the doses, including the amount, frequency and duration, of each of the two active pharmaceutical ingredients included in our product candidates, and the relative amounts, or dose ratios, of these doses. Our clinical trials in humans may show that the doses or dose ratios we select based on our high throughput screening, animal testing or early clinical trials do not achieve the desired therapeutic effect in humans, or achieve this effect only in a small part of the population. Even if the doses or dose ratios we select show efficacy in humans, the resulting doses or dose ratios of our active pharmaceutical ingredients may not have acceptable safety profiles for our targeted indications. Furthermore, even if we believe that our preclinical and clinical studies adequately demonstrate that the doses or dose ratios we select for our product candidates are safe and effective in humans, the FDA or other regulatory agencies in foreign jurisdictions may conclude that our clinical trials do not support our conclusion. We may be required to conduct additional long-term clinical studies and provide more evidence substantiating the safety and effectiveness of the doses or dose ratios we select in a significant patient population. If we need to adjust the doses or dose ratios, we may need to conduct new clinical trials. We may also be required to make different doses or dose ratios available for different types of patients. All of this may result in significant delays and additional costs or prevent commercialization of our product candidates.

We may fail to select or capitalize on the most scientifically, clinically or commercially promising or profitable product candidates.

We may make incorrect determinations as to which of our product candidates should proceed to initial clinical trials, later stage clinical development and potential commercialization. Our decisions to allocate our research, management and financial resources toward particular product candidates or therapeutic areas may not lead to the development of viable commercial products and may divert resources from better opportunities. Similarly, our decisions to delay or terminate drug development programs may also be incorrect and could cause us to miss valuable opportunities.

A material component of our business strategy is to establish and maintain collaborative relationships to fund research and possible development and commercialization of combination product candidates, by us or by collaborators. If we or any collaborator terminates or fails to perform any obligations under our collaboration agreements, the development and commercialization of product candidates under these agreements could be delayed or terminated.

A material component of our business strategy is to establish and maintain collaborative arrangements with pharmaceutical, biotechnology and medical device companies, research institutions and foundations, and to seek grants from agencies of the United States government, to fund research and possible development and commercialization of combination drug products for the treatment of diseases. We also intend to seek to establish collaborative relationships to obtain domestic or international sales, marketing and distribution capabilities if any of our combination product candidates receive regulatory approval.

The process of establishing collaborative relationships is difficult, time-consuming and involves significant uncertainty. Moreover, even if we do establish collaborative relationships, it may be difficult for us to maintain or perform under such collaboration arrangements, as our funding resources may be limited or our collaborators may seek to renegotiate or terminate their relationships with us due to unsatisfactory research or clinical results, a change in business strategy, a change of control or other reasons. If we or any collaborator fails to fulfill any responsibilities in a timely manner, or at all, our research, clinical development or commercialization efforts related to that collaboration could be delayed or terminated. Additionally it may become necessary for us to assume responsibility for activities that would otherwise have been the responsibility of our collaborator. Further, if we are unable to establish and maintain collaborative relationships on acceptable terms, we may have to delay or discontinue further development of one or more of our product candidates, undertake development and commercialization activities at our own expense or find alternative sources of funding.

Our collaborations are generally new, and we have only a short history of working together with our collaborators and cannot predict the success of any of our collaborations. Our collaborations typically involve a complex allocation of responsibilities, costs and benefits and provide for milestone payments to us upon the achievement of specified clinical and regulatory milestones. Our collaborations also may provide us with royalty-based revenue if product candidates are successfully commercialized. Under the Novartis, Angiotech, Fovea and other collaborations, we will rely on our collaborators to provide resources to develop new product

candidates and to potentially achieve these milestones and commercialize any new products. We may not be able to achieve any of the milestones provided in our Novartis, Angiotech or other collaboration agreements or derive any license or royalty revenue with respect to these collaborations.

We have no sales or distribution capabilities and may not obtain the collaboration, development, commercialization, manufacturing or other third-party relationships that we will require to develop, commercialize and manufacture some or all of our product candidates.

We have no sales or distribution capabilities and lack the resources, capabilities, and experience necessary to clinically develop, formulate, test, market and sell pharmaceuticals. As a result, to succeed in our business plan, we will be dependent on the efforts of third parties. We depend on collaborators, licensees, clinical research organizations and other third parties to formulate product candidates and to conduct clinical trials for some or all of our product candidates. We also rely on obtaining sufficient quantities of the approved drugs in our product candidates from sources acceptable to the FDA and other regulators for early stage clinical trials.

We expect to be able to develop and commercialize many of our product candidates only with the participation of pharmaceutical or biotechnology company collaborators or by out-licensing rights to the product candidates. Pharmaceutical and biotechnology companies and others may be reluctant to collaborate with us or to license rights to our product candidates due to the unproven nature of our drug discovery and development approach, the fact that the active pharmaceutical ingredients in our product candidates are approved drugs marketed by other companies, the risk that healthcare providers may substitute the component active pharmaceutical ingredients for our proposed combination products, concerns regarding the pricing of and reimbursement for our product candidates if they are successfully developed, or other factors.

We cannot guarantee that we will be able to successfully negotiate agreements for relationships with collaborators, partners, licensees, clinical investigators, manufacturers and other third parties on favorable terms, if at all. If we are unable to obtain these agreements, we may not be able to clinically develop, formulate, manufacture, test, obtain regulatory approvals for or commercialize our product candidates.

We expect to expend substantial funds and management time and effort to enter into relationships with these third parties and, if we successfully enter into such relationships, to manage these relationships. However, we cannot control the amount or timing of resources our contract partners will devote to our research and development programs, product candidates or potential product candidates, and we cannot guarantee that these parties will succeed in a timely fashion, if at all.

Due to the recent volatility in the financial markets and tightening of the credit markets, there may be a disruption or delay in the performance or satisfaction of commitments to us by our third party providers which could have a material adverse effect on our business.

Because we have limited manufacturing experience, we depend on third-party manufacturers to manufacture product candidates for us. Failure of these manufacturers to perform could lead to delays in the clinical trials of our product candidates or costs and delays associated with contracting with new manufacturers.

We do not have any manufacturing experience, nor do we have any manufacturing facilities. We have relied and plan to rely upon third-party manufacturers to manufacture all clinical trial supplies of our product candidates. We depend on these third-party manufacturers to perform their obligations in a timely manner and in accordance with applicable governmental regulations. In most cases, we only have a single contract manufacturer making one of our product candidates, in which case there is a concentration of risk of non-performance with that single manufacturer that would be costly to mitigate or could lead to the delay, suspension or termination of one of our clinical trials if the manufacturer is unable to perform. For example, Aptuit, the third party manufacturer we engaged to manufacture and distribute our product candidate Synavive for the MARS-1 study, became aware of deficiencies in its good manufacturing practices as assessed by the United Kingdom’s Medicines and Healthcare Regulatory Authority at the facility where the Synavive clinical trial material was made, resulting in Aptuit suspending the release into the EU of all clinical trial material made at the facility, including Synavive. This materially impacted our efforts to enroll and carry on the MARS-1 study in the EU.

Our third-party manufacturers may encounter difficulties with meeting our requirements, including problems involving:

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inconsistent production yields;

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poor quality control and assurance or inadequate process controls; and

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lack of compliance with regulations set forth by the FDA or other foreign regulatory agencies.

These contract manufacturers may not be able to manufacture our product candidates at a cost or in quantities necessary to make them commercially viable. We also have no control over whether third-party manufacturers breach their agreements with us or whether they may terminate or decline to renew agreements with us. Changes in the manufacturing process or procedure, including a change in the location where the drug is manufactured or a change of a third-party manufacturer, require prior FDA review and approval in accordance with the FDA’s current Good Manufacturing Practices, or cGMPs or comparable foreign requirements. This review may be costly and time-consuming and could delay or prevent the use of the product candidate in clinical trials or the launch of

a product. The FDA or similar foreign regulatory agencies at any time may also implement new standards, or change their interpretation and enforcement of existing standards for manufacture, packaging or testing of products. If we or our contract manufacturers are unable to comply, we or they may be subject to regulatory action, civil actions or penalties.

If we are unable to enter into agreements with additional manufacturers on commercially reasonable terms, or if there is poor manufacturing performance on the part of our third-party manufacturers, we may not be able to complete development of, or market, our product candidates.

We may not be able to gain market acceptance of our product candidates, which would prevent us from becoming profitable.

We cannot be certain that any of our product candidates, if approved, will gain market acceptance among physicians, patients, healthcare payors, pharmaceutical companies or others. Demonstrating the safety and efficacy of our product candidates and obtaining regulatory approvals will not guarantee future revenue. Sales of medical products largely depend on the reimbursement of patients’ medical expenses by government healthcare programs and private health insurers. Governments and private insurers closely examine medical products to determine whether they should be covered by reimbursement and if so, the level of reimbursement that will apply. We cannot be certain that third-party payors will sufficiently reimburse sales of our products, or enable us to sell our products at profitable prices. Sales of medical products also depend on physicians’ willingness to prescribe the treatment, which is likely to be based on a determination by these physicians that the products are safe, therapeutically effective and cost-effective. We cannot predict whether physicians, other healthcare providers, government agencies or private insurers will determine that our products are safe, therapeutically effective and cost effective relative to competing treatments, including a treatment regimen of the individual approved drugs included in our combination products.

We may need to further modify the size of our organization and reduce expenses, and we may experience difficulties in managing restructurings.

In July 2009, in connection with our entry into an agreement and plan of merger in June 2009, with Neuromed, we undertook an organizational restructuring that reduced our workforce by approximately 36%. The restructuring is a result of a continuing strategic realignment to focus our efforts on continuing our funded drug discovery and conserving capital in connection with the potential merger transaction with Neuromed.

In October 2008, we undertook an organizational restructuring that reduced our United States workforce by approximately 45%. In November 2008 we undertook an additional organizational restructuring that, when combined with our prior restructuring plans, resulted in a total workforce reduction of approximately 65%. The restructuring was a result of continuing a strategic realignment to focus our efforts on continuing our funded drug discovery, outlicensing our existing product candidates, and conserving capital.

Effecting any restructuring places significant strains on management, our employees and our operational, financial and other resources. Furthermore, restructurings take time to fully implement and involve certain additional costs, including severance payments to terminated employees, and we may also incur liabilities from early termination or assignment of contracts, potential litigation or other effects from such restructuring. Such effects from our restructuring program could have a material adverse affect on our ability to execute on our business plan. There can be no assurance that we will be successful in containing these costs or risks from our restructuring programs.

Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit, maintain and integrate additional employees. Any future restructuring activities may involve significant changes to our drug development and business strategies and other operational capabilities as we may need to take additional measures such as curtailing discretionary spending or capital expenditures, as well as other steps to reduce expenses. Our future financial performance and our ability to develop our product candidates or our technology platform and to perform our obligations to collaboration partners effectively will depend, in part, on our ability to effectively manage any future growth or restructuring, as the case may be.

Disputes under key agreements could delay or prevent development or commercialization of our product candidates.

Any agreements we have or may enter into with third parties, such as collaboration, license, formulation supplier, manufacturing, testing, clinical research organization or clinical trial agreements, may give rise to disputes regarding the rights and obligations of the parties. Disagreements could develop over rights to ownership or use of intellectual property, the scope and direction of research and development, the approach for regulatory approvals or commercialization strategy. We intend to conduct research programs in a range of therapeutic areas, but our pursuit of these opportunities could result in conflicts with the other parties to these agreements who may be developing or selling pharmaceuticals or conducting other activities in these same therapeutic areas. Any disputes or commercial conflicts could lead to the termination of our agreements, delay progress of our product development programs, compromise our ability to renew agreements or obtain future agreements, lead to the loss of intellectual property rights or result in costly litigation.

We may be required to spend substantial time and money litigating or defending claims as a result of litigation.

We may initiate litigation in order to enforce or protect our contractual or other rights, or we may be sued by third parties. If we defend against suits brought by third parties, or if we sue third parties to protect our rights, we may be required to pay substantial litigation costs, and our management’s attention may be diverted from operating our business. We recently filed a lawsuit against Aptuit claiming fraudulent inducement, breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment in connection with Aptuit’s manufacturing and distribution of our Synavive product candidate for a worldwide Phase 2b clinical trial targeting hundreds of subjects with rheumatoid arthritis. We cannot predict whether we will prevail in this lawsuit and, regardless of the eventual outcome, we are likely to incur substantial legal fees and expenses.

Risks Related to Our Financial Results and Need for Additional Financing

We have a history of operating losses, expect to incur significant and increasing operating losses and may never be profitable. Our stock is a highly speculative investment.

We commenced operations in March 2000 and have a limited operating history for you to evaluate our business. We have no approved products and have generated no product revenue. We have incurred operating losses since our inception in 2000. As of September 30, 2009, we had an accumulated deficit of $244.8 million. We have spent, and expect to continue to spend, significant resources to fund research and development of our product candidates and to enhance our drug discovery technology. We expect to incur substantial operating losses over the next several years due to our ongoing research, development, preclinical testing, and potential clinical trial activities. As a result, our accumulated deficit will continue to increase.

Our product candidates are in the early stages of development and may never result in any revenue. We will not be able to generate product revenue unless and until one of our product candidates successfully completes clinical trials and receives regulatory approval. As our most advanced product candidates are in or recently emerged from Phase 2 clinical development, we do not expect to receive revenue from any product candidate for the next five years, if ever. We may seek to obtain revenue from collaboration or licensing agreements with third parties. Our current collaboration and license agreements may not provide us with material, sustainable ongoing future revenue, and we may not be able to enter into additional collaboration agreements. Even if we eventually generate product revenues, we may never be profitable, and if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

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

We will need substantial additional funds to support our planned operations. Based on our current operating plans, we expect our resources to be sufficient to fund our planned operations into 2012. We may, however, need to raise additional funds before that time if our research and development expenses exceed our current expectations or our collaboration funding is less than our current assumptions or expectations. This could occur for many reasons, including:

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some or all of our product candidates fail in clinical or preclinical studies or prove to be less commercially promising than we expect and we are forced to seek additional product candidates;

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our product candidates require more extensive clinical or preclinical testing or our clinical trials take longer to complete than we currently expect;

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we advance more of our product candidates than expected into costly later stage clinical trials;

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we advance more preclinical product candidates than expected into early stage clinical trials;

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our revenue generating collaboration agreements are terminated;

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we determine or are required to conduct more high throughput screening than expected against current or additional disease targets to develop additional product candidates;

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we are required, or consider it advisable, to acquire or license rights from one or more third parties; or

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we determine to acquire or license rights to additional product candidates or new technologies.

While we expect to seek additional funding through public or private financings, we may not be able to obtain financing on acceptable terms, or at all. In addition, the terms of our financings may be dilutive to, or otherwise adversely affect, holders of our common stock. We may also seek additional funds through arrangements with collaborators or others. These arrangements would generally require us to relinquish rights to some of our technologies, product candidates or products, and we may not be able to enter into such agreements, on acceptable terms, if at all. The arrangements also may include issuances of equity, which may also be dilutive to, or otherwise adversely affect, holders of our common stock. Financial markets in the United States and the rest of the world have been experiencing significant volatility in security prices, substantially diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. There can be no assurance that we will be able to access equity

or credit markets in order to finance our operations in the United States or expand development programs for any of our product candidates, or that there will not be a further deterioration in financial markets and confidence in economies. We may also have to scale back or further restructure our operations. If we are unable to obtain additional funding on a timely basis, we may be required to curtail or terminate some or all of our research or development programs, including some or all of our product candidates.

Risks Related to Regulatory Approvals

The regulatory approval process is costly and lengthy and we may not be able to successfully obtain all required regulatory approvals.

The preclinical development, clinical trials, manufacturing, marketing, testing and labeling of pharmaceuticals and medical devices are all subject to extensive regulation by numerous governmental authorities and agencies in the United States and other countries. We or our collaborators must obtain regulatory approval for product candidates before marketing or selling any of them. The approval process is typically lengthy and expensive, and approval is never certain. It is not possible to predict how long the approval processes of the FDA or any other applicable federal or foreign regulatory authority or agency for any of our products will take or whether any such approvals ultimately will be granted. The FDA and foreign regulatory agencies have substantial discretion in the drug and medical device approval process, and positive results in preclinical testing or early phases of clinical studies offer no assurance of success in later phases of the approval process. Generally, preclinical and clinical testing of products and medical devices can take many years and require the expenditure of substantial resources, and the data obtained from these tests and trials can be susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Any delay in obtaining, or failure to obtain, approvals could prevent or adversely affect the marketing of our products or our collaborator’s products and our ability to generate product revenue. The risks associated with the approval process include delays or rejections in the regulatory approval process based on the failure of clinical or other data to meet expectations, or the failure of the product or medical device to meet a regulatory agency’s requirements for safety, efficacy and quality. In addition, regulatory approval, if obtained, may significantly limit the indicated uses for which a product may be marketed.

We or our collaborators may delay, suspend or terminate clinical trials to obtain marketing authorization of any of our product candidates or their associated medical devices or products at any time for reasons including:

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ongoing discussions with the FDA or comparable foreign authorities regarding the scope or design of our clinical trials;

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delays or the inability to obtain required approvals from institutional review boards or other governing entities at clinical sites selected for participation in our clinical trials;

•

delays in enrolling patients and volunteers into clinical trials;

•

lower than anticipated retention rates of patients and volunteers in clinical trials;

•

the need to repeat clinical trials as a result of inconclusive or negative results or poorly executed testing;

•

lack of effectiveness of a product candidate in other clinical trials;

•

lack of sufficient funds for further clinical development;

•

insufficient supply or deficient quality of product candidate materials or other materials necessary to conduct our clinical trials;

•

unfavorable regulatory inspection of a manufacturing, testing, labeling or packaging facility for drug substance or drug product;

•

unfavorable regulatory inspection and review of a clinical or preclinical trial site or records of any clinical or preclinical investigation;

•

serious and unexpected drug-related side effects or serious adverse safety events experienced by participants in our clinical trials or by patients following commercialization; or

•

the placement of a clinical hold on a product candidate in an ongoing clinical trial.

Positive or timely results from preclinical studies and early clinical trials do not ensure positive or timely results in late stage clinical trials or product approval by the FDA or any other regulatory authority. Product candidates that show positive preclinical or early clinical results often fail in later stage clinical trials. Data obtained from preclinical and clinical activities is susceptible to varying interpretations, which could delay, limit, or prevent regulatory approvals.

We have limited experience in conducting the clinical trials required to obtain regulatory approval. We may not be able to conduct clinical trials at preferred sites, enlist clinical investigators, enroll sufficient numbers of patients, or begin or successfully complete clinical trials in a timely fashion, if at all. Any failure to perform may delay or terminate the trials. Our current clinical trials may be insufficient to demonstrate that our potential products are active, safe, or effective and as a result we may decide to abandon further development of such product candidates. Additional clinical trials may be required if clinical trial results are negative or

inconclusive, which will require us to incur additional costs and significant delays. If we do not receive the necessary regulatory approvals, we will not be able to generate product revenues and will not become profitable. We may encounter significant delays in the regulatory process that could result in excessive costs that may prevent us from continuing to develop our product candidates. In addition, the failure to comply with applicable regulatory requirements may result in criminal prosecution, civil penalties, product recalls, withdrawal of product approval, mandatory restrictions or other actions that could impair our ability to conduct our business.

The FDA and other regulatory agencies may require additional preclinical and Phase 1 clinical data for our combination products.

Our proposed products are composed of drugs previously approved as single agents, and as a result, there is significant pre-existing information on the safety of those drugs as single agents for their approved indications in the form of animal studies, Phase 1 pharmacokinetic and other clinical studies and actual clinical experience. Nonetheless, new safety issues may arise when the previously approved drugs are used in combination in our products or when the proposed combination products are used in different treatment regimens for disease indications different than the disease indications for which the components are used as single agents. For example, the combination might be proposed for long-term use for a chronic condition, while the single agents are currently approved for short-term use in acute conditions. In addition, if a component has not been approved in all jurisdictions in which approval of the combination is sought, the regulatory agencies having authority over the combination in the jurisdictions that had not approved each component as a single agent may require us to submit data that would not otherwise be required. If any of these issues arises, we may be required to conduct additional nonclinical and Phase 1 clinical trials for our product candidates. If the additional nonclinical or Phase 1 clinical trials required for a product candidate or its formulation are extensive, it could delay or prevent further development of the product candidate.

The FDA and other regulatory agencies may require more extensive or expensive trials for our combination product candidates than may be required for single agent pharmaceuticals.

To obtain regulatory approval for our combination product candidates, we are typically required to show that each active pharmaceutical ingredient in the product candidate makes a contribution to the combined product candidate’s claimed effects and that the dosage of each component, including amount, frequency and duration, is such that the combination is safe and effective for a significant patient population requiring such concurrent therapy. As a result, we are typically required to conduct clinical trials comparing each component drug with the combination. This could require us to conduct more extensive and more expensive clinical trials than would be the case for many single agent pharmaceuticals. The need to conduct such trials could make it more difficult and costly to obtain regulatory approval of a combination drug than of a new drug containing only a single active pharmaceutical ingredient.

Even if we receive regulatory approvals for marketing our product candidates, if we fail to comply with continuing regulatory requirements, we could lose our regulatory approvals, and our business would be adversely affected.

The FDA and other regulatory authorities continue to review therapeutic products and medical devices even after they receive initial approval. If we receive approval to commercialize any product candidates, the manufacturing, testing, marketing, sale and distribution of these drugs and medical devices will be subject to continuing regulation, including compliance with quality systems regulations, good manufacturing practices, adverse event reporting requirements and prohibitions on promoting a product for unapproved uses. Furthermore, heightened Congressional scrutiny on the adequacy of the FDA’s drug approval process and the agency’s efforts to assure the safety of marketed drugs has resulted in the enactment of legislation, the FDA Amendments Act of 2007, addressing, among other things, drug safety issues. This law provides the FDA with expanded authority over drug products after approval, including the authority to require post-approval studies and clinical trials, labeling changes based on new safety information, and compliance with risk evaluation and mitigation strategies, or REMS, approved by the FDA. The FDA’s exercise of this authority could result in delays or increased costs during the period of product candidate development, clinical trials and regulatory review and approval, increased costs to assure compliance with new post-approval regulatory requirements, and potential restrictions on the sale of approved products, which could lead to lower product revenues to us or our collaborators. Enforcement actions resulting from failure to comply with government requirements could result in fines, suspension of approvals, withdrawal of approvals, recalls of products, product seizures, operating restrictions, and civil or criminal penalties. These enforcement actions could affect the manufacturing, testing, marketing, sale and distribution of our products.

Healthcare reform measures could adversely affect our business.

The efforts of governmental and third-party payors to contain or reduce the costs of healthcare may adversely affect the business and financial condition of pharmaceutical, biotechnology and medical device companies. In the United States and in foreign jurisdictions there have been, and we expect that there will continue to be, a number of legislative and regulatory proposals aimed at changing the healthcare system. For example, in some countries other than the United States, pricing of prescription drugs and medical devices is subject to government control, and we expect proposals to implement similar controls in the United States to continue. The pendency or approval of such proposals could result in a decrease in our common stock price or limit our ability to raise capital or to enter into collaborations or license rights to our products.

Federal law may increase the pressure to reduce prices of pharmaceutical products paid for by Medicare, which could adversely affect our revenues, if any.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or MMA, expanded Medicare coverage for drug purchases by the elderly and disabled beginning in 2006. Under the MMA, private insurance plans subsidized by the government offer prescription drug coverage to Medicare beneficiaries who elect to enroll in their plans. Although almost all prescription drugs are potentially available to plan enrollees, the plans are allowed to use formularies, preferred drug lists and similar mechanisms to favor selected drugs and limit access to other drugs except in certain circumstances. The price of a drug as negotiated between the manufacturer and a plan is a factor that the plan can consider in determining its availability to enrollees.

As a result, we expect that there will be increased pressure to reduce prices for drugs to obtain favorable status for them under the plans offering prescription drug coverage to Medicare beneficiaries. This pressure could decrease the coverage and price that we receive for our products in the future and could seriously harm our business. It is possible that our products, if successfully developed, could be particularly subject to price reduction initiatives because they are based on combinations of lower priced existing drugs.

In addition, some members of Congress advocate that the federal government should negotiate directly with manufacturers for lower prices for drugs in the Medicare program, rather than rely on private plans. If the law were changed to allow or require such direct negotiation, there could be additional reductions in the coverage of and prices that we receive for our products.

Federal laws or regulations on drug importation could make lower cost versions of our future products available, which could adversely affect our revenues, if any.

The prices of some drugs are lower in other countries than in the United States because of government regulation and market conditions. Under current law, importation of drugs into the United States is generally not permitted unless the drugs are approved in the United States and the entity that holds that approval consents to the importation. Various proposals have been advanced to permit the importation of drugs from other countries to provide lower cost alternatives to the products available in the United States. In addition, the MMA requires the Secretary of Health and Human Services to promulgate regulations for drug reimportation from Canada into the United States under some circumstances, including when the drugs are sold at a lower price than in the United States.

If the laws or regulations are changed to permit the importation of drugs into the United States in circumstances not now permitted, such a change could have an adverse effect on our business by making available lower priced alternatives to our future products.

Failure to obtain regulatory and pricing approvals in foreign jurisdictions could delay or prevent commercialization of our products abroad.

If we succeed in developing any products, we intend to market them in the European Union and other foreign jurisdictions. In order to do so, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval abroad may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval and additional risks because there may be additional variations between how our combinations of approved drugs and single agent drugs are treated in foreign jurisdictions. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. We and our collaborators may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market outside the United States. The failure to obtain these approvals could materially adversely affect our business, financial condition and results of operations. Even if we are successful at obtaining these approvals, regulatory agencies in foreign countries where pricing of prescription drugs or medical devices is controlled by the government, could determine that pricing for our products should be based on prices for the existing drugs that comprise the active pharmaceutical ingredients in our combination products instead of allowing us to price our products at a premium as novel medicines.

Risks Related to Our Intellectual Property

Our success depends upon our ability to obtain and maintain intellectual property protection for our products and technologies.

Our success will depend on our ability to obtain and maintain adequate protection of our intellectual property, including our proprietary drug discovery technology and any products or product candidates we plan to develop. We intend to apply for patents with claims covering our technologies, processes, products and product candidates when and where we deem it appropriate to do so and plan to take other steps to protect our intellectual property. We have applied for patent protection covering our clinical and preclinical product candidates in the United States, and some, but not all, foreign countries. In countries where we have not and do not seek patent protection, third parties may be able to manufacture and sell our products without our permission, and we may not be able to stop them from doing so.

Similar to other biotechnology companies, our patent position is generally uncertain and involves complex legal and factual questions. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and other biotechnology companies have encountered significant problems in protecting and defending their proprietary rights in foreign jurisdictions. Whether filed in the United States or abroad, our patent applications may be challenged or may fail to result in issued patents. In addition, our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing or commercializing competing products. Furthermore, others may independently develop or commercialize similar or alternative technologies or drugs, or design around our patents. Our patents may be challenged, invalidated or fail to provide us with any competitive advantages.

The United States Patent and Trademark Office and similar agencies in foreign jurisdictions may not agree with our view that our combination product candidates are patentable or novel and non-obvious, and on this basis may deny us patent protection. Even if we receive patent protection, others, including those who own patent or trade secret rights associated with the approved drugs that are active pharmaceutical ingredients of our product candidates, may attempt to invalidate our patent or trade secret rights. Even if our patent or trade secret rights are not directly challenged, disputes among third parties could lead to the weakening or invalidation of our intellectual property rights.

If we do not obtain or we are unable to maintain adequate patent or trade secret protection for our products in the United States, competitors could duplicate them without repeating the extensive testing that we will be required to undertake to obtain approval of the products by the FDA and other regulatory authorities. Regardless of any patent protection, under the current statutory framework the FDA is prohibited by law from approving any generic version of any of our combination products for three years after it has approved our product. Upon the expiration of that period, or if that time period is altered, the FDA could approve a generic version of our product unless we have patent protection sufficient to enforce our rights. Without sufficient patent protection, the applicant for a generic version of our product would be required only to conduct a relatively inexpensive study to show that its product is bioequivalent to our product and would not have to repeat the studies that we conducted to demonstrate that the product is safe and effective. In the absence of adequate patent protection in other countries, competitors may similarly be able to obtain regulatory approval of products that duplicate our products.

We may not be able to develop or commercialize our product candidates due to intellectual property rights held by third parties.

If a third party holds a patent to a composition or method of use of an approved drug that is a component of one or more of our product candidates or a formulation technology related to our planned formulation of a product candidate, we may not be able to develop or commercialize such product candidates without first obtaining a license to such patent, or waiting for the patent to expire. In particular, for our product candidate, CRx-170, some of the various formulations and methods of use of one drug in the combination are covered by third-party patents which could pose an impediment to our ability to develop and commercialize these products. We believe that other formulations and methods of use of these drugs, which are not covered by any third-party patents, are available. However, we cannot be sure that the unpatented formulations or methods of use of these drugs will be the optimal formulation, or that a feasible formulation for these product candidates will be available. Additionally, there are three United States patents that may cover therapeutic uses of CRx-401, our Type 2 diabetes product candidate. We may not be able to develop or commercialize our CRx-401 product candidate without first obtaining a license to these patents, or waiting for them to expire. Our business will be harmed if we are unable to use the optimal formulation or methods of use of the component drugs that comprise our product candidates. This may occur because the formulations or methods of use are covered by one or more third-party patents, and a license to such patents is unavailable or is available on terms that are unacceptable to us.

We may be unable to in-license intellectual property rights or technology necessary to develop and commercialize our products.

Depending on its ultimate formulation and method of use, before we can develop, make, use, or sell a particular product candidate, we may need to obtain a license from one or more third parties who have patent or other intellectual property rights covering components of our product candidate or its method of use. There can be no assurance that such licenses will be available on commercially reasonable terms, or at all. Because our product candidates are based on combinations of existing drugs, there may be a significant number of patents covering both the active pharmaceutical ingredients in our product candidates and their method of use. If a third party does not offer us a necessary license or offers a license only on terms that are unattractive or unacceptable to us, we might be unable to develop and commercialize one or more of our product candidates.

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

In our activities, we 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. 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. However, these steps may be inadequate, agreements may be violated, or there may be no adequate remedy available for a violation of an agreement. Our proprietary information may be inadvertently disclosed or we may lose the protection of our trade secrets. Our competitors may independently develop substantially equivalent proprietary information or may otherwise gain access to our trade secrets, which could adversely affect our ability to compete in the market.

Litigation or third-party claims of intellectual property infringement could require substantial time and money to resolve. Unfavorable outcomes in these proceedings could limit our intellectual property rights and our activities.

We may need to resort to litigation to enforce or defend our intellectual property rights, including any patents issued to us. If a competitor or collaborator files a patent application claiming technology also invented by us, in order to protect our rights, we may have to participate in an expensive and time consuming interference proceeding before the United States Patent and Trademark Office. We cannot guarantee that our product candidates will be free of claims by third parties alleging that we have infringed their intellectual property rights. Third parties may assert that we are employing their proprietary technologies without authorization and they may resort to litigation to attempt to enforce their rights. Third parties may have or obtain patents in the future and claim that the use of our technology or any of our product candidates infringes their patents. We may not be able to develop or commercialize combination product candidates because of patent protection others have. Our business will be harmed if we cannot obtain a necessary or desirable license, can obtain such a license only on terms we consider to be unattractive or unacceptable, or if we are unable to redesign our product candidates or processes to avoid actual or potential patent or other intellectual property infringement.

Our efforts to obtain, protect and defend our patent and other intellectual property rights, whether we are successful or not, can be expensive and may require us to incur substantial costs, including the diversion of management and technical personnel. An unfavorable ruling in patent or intellectual property litigation could subject us to significant liabilities to third parties, require us to cease developing, 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. In addition, defending patent or other intellectual property litigation, whether we are successful or not, can be very expensive and may require us to incur substantial costs, including the diversion of management and technical personnel. During the course of any patent litigation, there may be public announcements of the results of hearings, motions, and other interim proceedings or developments in the litigation. If securities analysts or investors regard these announcements as negative, the market price of our common stock may decline. General proclamations or statements by key public figures may also have a negative impact on the perceived value of our intellectual property.

There can be no assurance that we would prevail in any intellectual property infringement action, will be able to obtain a license to any third-party intellectual property on commercially reasonable terms, successfully develop non-infringing alternatives on a timely basis, or license non-infringing alternatives, if any exist, on commercially reasonable terms. Any significant intellectual property impediment to our ability to develop and commercialize our products could seriously harm our business and prospects.

Risks Related to Our Industry

Our competitors and potential competitors may develop products and technologies that make ours less attractive or obsolete.

Many companies, universities, and research organizations developing competing product candidates have greater resources and significantly greater experience in research and development, manufacturing, marketing, sales, distribution, financial and technical regulatory matters than we have. In addition, many competitors have greater name recognition and more extensive collaborative relationships. Our competitors could commence and complete clinical testing of their product candidates, obtain regulatory approvals, and begin commercial-scale manufacturing of their products faster than we are able to for our products. They could develop drug discovery technology or products that would render our drug discovery technology and product candidates, and those of our collaborators, obsolete and noncompetitive. They may also employ high throughput screening technologies to the discovery of combination drugs, which may render our technologies or our approach to drug discovery and development obsolete or noncompetitive. Our drug discovery technology will compete against well-established techniques to discover new drugs. If we are unable to compete effectively against these existing techniques and the companies that support them, then we may not be able to commercialize our product candidates or achieve a competitive position in the market. This would adversely affect our ability to generate revenues.

We may have significant product liability exposure which may harm our business and our reputation.

We face exposure to product liability and other claims if our product candidates, products or processes are alleged to have caused harm. These risks are inherent in the testing, manufacturing, and marketing of human therapeutic products and medical devices. We maintain product liability insurance covering our clinical trials of our product candidates. We may not have sufficient

insurance coverage, and we may not be able to obtain sufficient coverage at a reasonable cost, if at all. 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 or product candidates that we develop. If we are sued for any injury caused by our products, product candidates or processes, our liability could exceed our product liability insurance coverage and our total assets. Claims against us, regardless of their merit or potential outcome, may also divert significant management time and resources, generate negative publicity or hurt our ability to obtain physician endorsement of our products or expand our business.

We use and generate materials that may expose us to expensive and time-consuming legal claims.

Our development programs involve the use of hazardous materials, chemicals, and biological materials. We are subject to foreign, federal, state and local laws and regulations governing the use, manufacture, storage, and disposal of materials and waste products. We believe that our safety procedures for handling these materials comply with the standards prescribed by laws and regulations. However, we may incur significant costs to comply with current or future environmental laws and regulations. In addition, we cannot completely eliminate the risk of contamination or injury from hazardous materials. In the event of an accident, an injured party may seek to hold us liable for any damages that result. Any liability could exceed the limits or fall outside the coverage of our insurance, and we may not be able to maintain insurance on acceptable terms, if at all.

Risks Related to an Investment in Our Common Stock

Our common stock has a volatile public trading price.

The market price for our common stock has been volatile, and market prices for securities of companies comparable to us have been highly volatile. For example, the market price for our common stock declined sharply following our announcement of the results of our Phase 2 clinical trial for Synavive in subjects with knee osteoarthritis. In addition, the stock market as a whole and biotechnology and other life science stocks in particular have experienced significant recent price declines and volatility. Like our common stock, these stocks have experienced significant price and volume fluctuations for reasons unrelated to the operating performance of the individual companies. Factors giving rise to this volatility may include:

•

disclosure of actual or potential clinical results with respect to product candidates we are developing;

•

regulatory developments in both the United States and abroad;

•

developments concerning proprietary rights, including patents and litigation matters;

•

public concern about the safety or efficacy of our product candidates or technology, their components, or related technology or new technologies generally;

•

public announcements by our competitors or others; and

•

general market conditions and comments by securities analysts and investors.

Failure to comply with The Global Market continued listing requirements may result in our common stock being delisted from The Nasdaq Global Market.

Due to our stock price over the last several months, we may not continue to qualify for continued listing on the Nasdaq Global Market. To maintain listing, we are required, among other things, to maintain a minimum closing bid price of $1.00 per share. Nasdaq suspended enforcement of its rules requiring a minimum $1.00 closing bid price and a minimum market value of publicly held shares until July 31, 2009, and the rules were reinstated on August 3, 2009. Now that the enforcement of their requirements has resumed, if our closing bid stock price is below $1.00 per share for 30 consecutive business days, we will receive a deficiency notice from Nasdaq advising us that we have a certain period of time, typically 180 days, to regain compliance by maintaining a minimum closing bid price of at least $1.00 for at least ten consecutive business days, but Nasdaq could require a longer period.

The delisting of our common stock would significantly affect the ability of investors to trade our common stock and negatively impact the liquidity and price of our stock. In addition, the delisting of our common stock could materially adversely impact our ability to raise capital on acceptable terms or at all. Delisting from the Nasdaq Global Market could also have other negative results, including the potential loss of confidence by our current or future third-party providers and collaboration partners, the loss of institutional investor interest, and fewer outlicensing and partnering opportunities.

Ownership of our common stock by our largest shareholder may cause a decline in our common stock should they decide to sell all or a portion of its shares.

Based on public filings, as of September 30, 2009, entities affiliated with BVF, Inc. hold 30.4% of our outstanding common stock. If entities affiliated with BVF, Inc. decide to sell all or a portion of their shares in a rapid or disorderly manner, our common stock price could be negatively impacted.

Fluctuations in our operating losses could adversely affect the price of our common stock.

Our operating losses may fluctuate significantly on a quarterly basis. Some of the factors that may cause our operating losses to fluctuate on a period-to-period basis include the status of our preclinical and clinical development programs, level of expenses incurred in connection with our preclinical and clinical development programs, implementation or termination of collaboration, licensing, manufacturing or other material agreements with third parties, non-recurring revenue or expenses under any such agreement, and compliance with regulatory requirements. Period-to-period comparisons of our historical and future financial results may not be meaningful, and investors should not rely on them as an indication of future performance. Our fluctuating losses may fail to meet the expectations of securities analysts or investors. Our failure to meet these expectations may cause the price of our common stock to decline.

Our product development strategy may cause volatility in our stock price, and we may incur significant costs from class action litigation.

Our strategy of initiating proof-of-concept clinical trials for multiple product candidates and making development decisions based on the results of these trials may result in a greater number of public announcements regarding the progress of our development efforts than would be true for a company developing fewer products or advancing products less quickly into proof-of-concept clinical trials. These announcements, including announcements regarding decisions to terminate further development of one or more product candidates, may cause significant volatility in our stock price.

Recently, when the market price of a stock has been volatile, as our stock price may be, holders of that stock have occasionally brought securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit of this type against us, even if the lawsuit is without merit, we could incur substantial costs defending the lawsuit. A stockholder lawsuit could also divert the time and attention of our management.

Anti-takeover provisions in our charter documents and provisions of Delaware law may make an acquisition more difficult and could result in the entrenchment of management.

We are incorporated in Delaware. Anti-takeover provisions of Delaware law and our charter documents may make a change in control or efforts to remove management more difficult. Also, under Delaware law, our board of directors may adopt additional anti-takeover measures. The existence of the following provisions of Delaware law and our charter or by-laws could limit the price that investors might be willing to pay in the future for shares of our common stock.

Our charter authorizes our board of directors to issue up to 5,000,000 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 and vote the stock they acquire to remove management or directors.

Our charter also provides staggered terms for the members of our board of directors. Under Section 141 of the Delaware General Corporation Law and our charter, our directors may be removed by stockholders only for cause and only by vote of the holders of 75% of voting shares then outstanding. These provisions 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. These provisions could also delay the removal of management by the board of directors with or without cause. In addition our bylaws limit the ability our stockholders to call special meetings of stockholders.

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 uses its authority to accelerate vesting of options, this action could make an acquisition more costly, and it could prevent an acquisition from going forward.

Under Section 203 of the Delaware General Corporation Law, a corporation may not engage 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 in advance. In October 2008, entities affiliated with BVF, Inc. acquired more than 15% of our common stock without the prior approval of our board of directors. As a result, the provisions of Section 203 of the Delaware General Corporation Law will apply to certain transactions with these shareholders.

Change-of-control provisions in our collaboration agreements may make an acquisition of us more difficult or costly.

Under our research and license agreement with Angiotech, we have agreed that upon a change of control of us, as defined in the research and license agreement, the agreement would remain in effect, although Angiotech would have the right to terminate the agreement in the nine months after a change of control if we were acquired by an entity operating primarily in Angiotech’s field.

Under our research collaboration and license agreement with Novartis, we have agreed that upon a change of control or liquidation of us, as defined in the agreement, Novartis may terminate the agreement after a change of control or liquidation of us after providing us with sixty days notice, and in the event of such termination, we will be required to pay Novartis $3.0 million if such termination is effective prior to November 1, 2009; $2.0 million if such termination is effective between November 1, 2009 and May 1, 2010; and $1.0 million if such termination is effective between May 1, 2010 and November 1, 2010.

These provisions may make a change of control of us more difficult or costly, but we believe that the proposed business combination with Neuromed will not result in the termination of these agreements.

Item 5.

Other Information

Annual Meeting of Stockholders

As detailed in our Prospectus filed with the SEC pursuant to Rule 424(b)(3) of the Securities Act on October 22, 2009, our 2009 annual meeting of stockholders will be held on November 16, 2009, beginning at 9:00 a.m., local time, at the offices of Goodwin Procter LLP, 53 State Street, Boston, Massachusetts.

Item 6.

Exhibits.

(a) Exhibits.

The Exhibits listed in the Exhibit Index immediately preceding the Exhibits are filed as a part of this Quarterly Report on Form 10-Q.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.


COMBINATORX, INCORPORATED

By:		/s/ JUSTIN A. RENZ
		Justin A. Renz
		Senior Vice President and Chief Financial Officer

Date: November 3, 2009

EXHIBIT INDEX


Exhibit No	Description	Incorporated by Reference to:
Exhibit No	Description	Form or Schedule	Exhibit No.	Filing Date with SEC	SEC File Number

2.1	Agreement and Plan of Merger, dated as of June 30, 2009, by and among CombinatoRx, Incorporated, PawSox, Inc., Neuromed Pharmaceuticals Inc., Neuromed Pharmaceuticals Ltd. and the Stockholder Representative named therein	424B3	Appendix A	10/22/2009	333-161146

3.1	Sixth Amended and Restated Certificate of Incorporation.	S-1/A	3.2	11/4/2005	333-121173

3.2	Amended and Restated By-Laws.	8-K	3.1	6/4/2007	000-51171

4.1	Specimen Common Stock Certificate.	S-1/A	4.1	1/19/2005	333-121173

4.2	Warrant issued to General Electric Capital Corporation on September 15, 2004 to purchase up to 8,892 shares of the Registrant’s Common Stock.	S-1	10.7	12/10/2004	333-121173

4.3	Warrant issued to General Electric Capital Corporation on June 28, 2005 to purchase 471 shares of the Registrant’s Common Stock.	10-K	4.5	3/20/2006	000-51171

4.4	Warrant issued to Silicon Valley Bank on April 25, 2001 to purchase up to 10,019 of the Registrant’s Common Stock.	S-1	10.9	12/10/2004	333-121173

4.5	Registration Rights Agreement dated as of April 25, 2001 by and between Silicon Valley Bank and the Registrant.	S-1	10.10	12/10/2004	333-121173

4.6	Form of Warrant to purchase shares of the Registrant’s Stock, together with a schedule of warrant holders.	S-1	10.11	12/10/2004	333-121173

4.7	Form of Warrant issued to BioMedical Sciences Investment Fund Pte Ltd on August 19, 2005 to purchase up to 25,000 shares of the Registrant’s Common Stock.	S-1/A	10.45	8/19/2005	333-121173

4.8	Second Amended and Restated Investors’ Rights Agreement, dated as of February 18, 2004, by and between the Registrant and the investors named therein, as amended.	S-1	10.17	12/10/2004	333-121173

4.9	Amendment to the Second Amended and Restated Investors’ Rights Agreement by and between the Registrant and the investors named therein, dated as of December 8, 2004.	S-1	10.18	12/10/2004	333-121173

4.10	Omnibus Amendment Agreement to Second Amended and Restated Investors’ Right Agreement and by and between the Registrant and the investors named therein and the Registration Rights Agreement by and between Silicon Valley Bank and the Registrant	8-K	10.1	12/6/2006	000-51171

#10.1	2000 Stock Option Plan, as amended.	S-1	10.1	12/10/2004	333-121173

#10.2	Amended and Restated 2004 Incentive Plan.	8-K	10.1	6/5/2006	000-51171

#10.3	Form Incentive Stock Option Agreement under the 2004 Incentive Plan.	10-K	10.3	3/20/2006	000-51171


Exhibit No	Description	Incorporated by Reference to:
Exhibit No	Description	Form or Schedule	Exhibit No.	Filing Date with SEC	SEC File Number

#10.4	Form Non-Qualified Option Agreement under the 2004 Incentive Plan.	10-K	10.4	3/20/2006	000-51171

#10.5	Nonqualified Deferred Compensation Plan, effective December 1, 2007.	S-8	4.1	11/30/2007	333-147745

#10.6	Employment, Confidentiality and Non-Competition Agreement with Robert Forrester, dated as of February 23, 2004.	S-1	10.23	12/10/2004	333-121173

#10.7	Amendment to Employment, Confidentiality and Non-Competition Agreement with Robert Forrester, dated December 15, 2008.	10-K	10.10	03/16/2009	000-51171

#10.8	Letter Agreement Re: Retention Bonus with Robert Forrester, dated December 15, 2008.	10-K	10.11	03/16/2009	000-51171

#10.9	Employment Letter Agreement with Jason F. Cole, dated as of January 23, 2006.	10-K	10.15	03/20/2006	000-51171

#10.10	Amendment to Employment Agreement with Jason Cole, dated December 15, 2008.	10-K	10.13	03/16/2009	000-51171

#10.11	Letter Agreement Re: Retention Bonus with Jason Cole, dated December 16, 2008.	10-K	10.14	03/16/2009	000-51171

#10.12	Employment Letter Agreement with Justin A. Renz, dated as of August 31, 2006.	S-4	10.14	08/07/2009	333-161146

#10.13	Letter Agreement Re: Retention Bonus with Justin A. Renz, dated December 12, 2008.	S-4	10.15	08/07/2009	333-161146

#10.14	Letter Agreement Re: Severance Arrangements with Justin A. Renz, dated December 12, 2008.	S-4	10.16	08/07/2009	333-161146

#10.15	Amended and Restated Restricted Stock Award Agreement, dated January 17, 2007, by and between Robert Forrester and the Registrant.	8-K	10.2	01/22/2007	000-51171

#10.16	Amended and Restated Restricted Stock Award Agreement, dated September 5, 2008, by and between Jason Cole and the Registrant.	10-Q	10.25	11/10/2008	000-51171

10.17	Form of Indemnification Agreement for directors.	S-4/A	10.19	09/16/2009	333-161146

10.19	Research Project Cooperative Agreement, dated April 10, 2005, between the National Institutes of Health and the Registrant.	S-1/A	10.37	08/19/2005	333-121173

†10.20	Research and License Agreement, dated as of October 3, 2005, between Angiotech Pharmaceuticals, Inc. and the Registrant.	S-1/A	10.46	08/19/2005	333-121173

10.21	Second Amended and Restated Research and License Agreement, dated July 22, 2009, between Fovea Pharmaceuticals SA and the Registrant.	8-K	10.1	07/23/2009	000-51171

10.22	Office and Laboratory Lease Agreement, as of October 18, 2005, by and between MA-Riverview, 245 First Street, L.L.C. and the Registrant.	S-1/A	10.48	10/24/2005	333-121173


Exhibit No	Description	Incorporated by Reference to:
Exhibit No	Description	Form or Schedule	Exhibit No.	Filing Date with SEC	SEC File Number

10.23	First Amendment to Office and Laboratory Lease Agreement, as of March 9, 2006, by and between MA-Riverview, 245 First Street, L.L.C. and the Registrant.	10-K	10.44	03/20/2006	000-51171

10.24	Second Amendment to Office and Laboratory Lease Agreement, dated August 3, 2009, by and between MA-Riverview, 245 First Street, L.L.C. and the Registrant.	8-K	10.1	08/04/2009	000-51171

10.25	Sponsored Research Collaboration Agreement, dated November 7, 2007, between Dart Therapeutics, LLC and the Registrant.	8-K	10.1	11/08/2007	000-51171

10.26	First Amendment to Sponsored Research Collaboration Agreement, dated as of October 20, 2008, between the Registrant, DART Therapeutics, LLC and GMT Charitable Research, LLC.	8-K	10.1	10/22/2008	000-51171

10.27	Termination Agreement, dated as of June 2, 2009, by and among CombinatoRx (Singapore) Pte Ltd, BioMedical Sciences Investment Fund Pte Ltd and the Registrant.	8-K	10.1	06/02/2009	000-51171

10.28	Share Purchase Agreement, dated as of June 2, 2009, by and among CombinatoRx (Singapore) Pte Ltd, BioMedical Sciences Investment Fund Pte Ltd and the Registrant.	8-K	10.2	06/02/2009	000-51171

10.29	Intellectual Property Assignment Agreement, dated as of June 2, 2009, by and between CombinatoRx (Singapore) Pte Ltd and the Registrant.	8-K	10.3	06/02/2009	000-51171

10.30	Transition Services Agreement, dated as of June 2, 2009, by and between CombinatoRx (Singapore) Pte Ltd and the Registrant.	8-K	10.4	06/02/2009	000-51171

†10.31	Research Collaboration and License Agreement, dated as of May 1, 2009, by and between the Registrant and Novartis Institutes for BioMedical Research, Inc.	10-Q	10.43	05/11/2009	000-51171

10.32	Software License Agreement, dated as of May 1, 2009, by and between the Registrant and Novartis Institutes for BioMedical Research, Inc.	10-Q	10.44	05/11/2009	000-51171

10.33	Collaboration Agreement, dated August 11, 2009, by and between PGxHealth, LLC and CombinatoRx, Incorporated.	8-K	10.1	08/13/2009	000-51171

#10.33	Neuromed Pharmaceuticals Inc. Special Equity Incentive Plan	S-4/A	10.51	09/16/2009	333-161146

#10.34	CombinatoRx Form of Restricted Stock Unit Agreement for awards granted under the Neuromed Pharmaceuticals Inc. Special Equity Incentive Plan (Directors)	S-4/A	10.52	09/16/2009	333-161146

#10.35	CombinatoRx Form of Restricted Stock Unit Agreement for awards granted under the Neuromed Pharmaceuticals Inc. Special Equity Incentive Plan (Executives)	S-4/A	10.53	09/16/2009	333-161146

21.1	List of subsidiaries.	S-4	21.1	08/07/2009	333-161146

*31.1.	Certification of Chief Executive Officer pursuant to Exchange Act rules 13a-14 or 15d-14.

*31.2	Certification of Chief Financial Officer pursuant to Exchange Act rules 13a-14 or 15d-14.


Exhibit No	Description	Incorporated by Reference to:
Exhibit No	Description	Form or Schedule	Exhibit No.	Filing Date with SEC	SEC File Number

*32.1.	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Exchange Act rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350.

*	Filed herewith.

†	Confidential treatment requested as to certain portions, which portions are omitted and filed separately with the Securities and Exchange Commission.

#	Management contract or compensatory plan or arrangement filed as an Exhibit to this report pursuant to Items 15(a) and 15(c) of Form 10-Q.

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