Trubion Pharmaceuticals, Inc - FORM 10-Q

Attached files

file	filename
EX-10.4 - EXHIBIT 10.4 - Trubion Pharmaceuticals, Inc	v53941exv10w4.htm
EX-31.2 - EX-31.2 - Trubion Pharmaceuticals, Inc	v53941exv31w2.htm
EX-10.6 - EXHIBIT 10.6 - Trubion Pharmaceuticals, Inc	v53941exv10w6.htm
EX-31.1 - EX-31.1 - Trubion Pharmaceuticals, Inc	v53941exv31w1.htm
EX-10.1 - EXHIBIT 10.1 - Trubion Pharmaceuticals, Inc	v53941exv10w1.htm
EX-32.1 - EX-32.1 - Trubion Pharmaceuticals, Inc	v53941exv32w1.htm
EX-10.5 - EXHIBIT 10.5 - Trubion Pharmaceuticals, Inc	v53941exv10w5.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q


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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009


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

FOR THE TRANSITION PERIOD FROM TO

Commission File Number: 001-33054

TRUBION PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)


DELAWARE		52-2385898
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

2401 FOURTH AVENUE, SUITE 1050
SEATTLE, WASHINGTON		98121
(Address of registrant’s principal executive offices)		(Zip Code)

(206) 838-0500
(Telephone number, including area code)

N/A
(Former Name, Former Address and Former Fiscal Year, if Changed 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. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o 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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer þ

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company o

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

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of October 30, 2009 was 20,364,093.

TRUBION PHARMACEUTICALS, INC.

INDEX


		PAGE NO.
PART I. FINANCIAL INFORMATION			3
Item 1.	Financial Statements		3
	Balance Sheets as of September 30, 2009 and December 31, 2008		3
	Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008		4
	Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008		5
	Notes to Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		21
Item 4.	Controls and Procedures		21
PART II. OTHER INFORMATION			22
Item 1A.	Risk Factors		22
Item 6.	Exhibits		37
SIGNATURES			38
EXHIBIT INDEX
EXHIBIT 10.1
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 10.6
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TRUBION PHARMACEUTICALS, INC.

BALANCE SHEETS
(In thousands, except share and par value)


	September 30,
	2009			December 31, 2008
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	31,811		$	29,969
Investments		29,920			22,928
Receivable from collaborations		3,045			3,084
Prepaid expenses		1,037			2,112

Total current assets		65,813			58,093
Property and equipment, net		6,860			9,190
Other assets		3			7

Total assets	$	72,676		$	67,290

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,070		$	301
Accrued liabilities		4,964			4,981
Accrued compensation		1,820			1,169
Current portion of notes payable		1,267			1,302
Current portion of deferred rent		180			180
Current portion of deferred revenue		7,167			4,873

Total current liabilities		16,468			12,806
Non-current portion of notes payable		7,304			8,261
Non-current portion of deferred rent		—			135
Non-current portion of deferred revenue		29,887			14,620
Commitments and contingencies
Stockholders’ equity :
Preferred stock, $0.001 par value per share; shares authorized — 5,000,000; issued and outstanding — none		—			—
Common stock, $0.001 par value per share; shares authorized — 150,000,000; issued and outstanding — 20,360,631 at September 30, 2009 and 17,882,307 at December 31, 2008		20			18
Additional paid-in capital		135,389			123,846
Deferred stock-based compensation		—			(30	)
Accumulated other comprehensive income		5			103
Accumulated deficit		(116,397	)		(92,469	)

Total stockholders’ equity		19,017			31,468

Total liabilities and stockholders’ equity	$	72,676		$	67,290

See accompanying notes

TRUBION PHARMACEUTICALS, INC.

STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Revenue:
Collaboration revenue	$	4,452		$	3,766		$	12,783		$	12,197
Operating expenses:
Research and development		7,410			7,397			27,587			23,302
General and administrative		3,146			2,987			8,877			8,985

Total operating expenses		10,556			10,384			36,464			32,287

Loss from operations		(6,104	)		(6,618	)		(23,681	)		(20,090	)
Interest income		8			370			162			1,585
Interest expense		(131	)		(334	)		(409	)		(677	)

Net loss	$	(6,227	)	$	(6,582	)	$	(23,928	)	$	(19,182	)

Basic and diluted net loss per share	$	(0.33	)	$	(0.37	)	$	(1.31	)	$	(1.07	)

Shares used in computation of basic and diluted net loss per share		18,868			17,859			18,267			17,847

See accompanying notes

TRUBION PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)


	Nine Months Ended
	September 30,
	2009			2008
Operating activities:
Net loss	$	(23,928	)	$	(19,182	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		2,900			2,705
Net amortization of premium/(discount) on investments		74			62
Depreciation and amortization expense		2,390			2,469
Changes in operating assets and liabilities:
Receivable from collaborations		39			1,639
Prepaid expenses and other assets		1,079			264
Accounts payable		769			(423	)
Accrued liabilities and compensation		634			1,097
Deferred revenue		17,561			(4,142	)
Deferred rent		(135	)		(135	)

Net cash provided by (used in) operating activities		1,383			(15,646	)

Investing activities:
Purchases of property and equipment		(52	)		(1,106	)
Purchases of investments		(41,914	)		(57,036	)
Sale of investments		—			20,263
Maturities of investments		34,750			46,461

Net cash provided by (used in) investing activities		(7,216	)		8,582

Financing activities:
Proceeds from issuance of notes payable		—			10,000
Payments on notes payable		(1,000	)		(10,098	)
Proceeds from the private placement of common stock		8,593			—
Proceeds from exercise of stock options		82			84

Net cash provided by (used in) financing activities		7,675			(14	)

Net increase (decrease) in cash and cash equivalents		1,842			(7,078	)
Cash and cash equivalents at beginning of period		29,969			41,827

Cash and cash equivalents at end of period	$	31,811		$	34,749

Supplemental disclosure information:
Cash paid for interest	$	401		$	663

See accompanying notes

TRUBION PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation

The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements. The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required for complete financial statements. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our interim financial information.

The accompanying unaudited financial statements and notes to financial statements should be read in conjunction with the audited financial statements and related notes thereto, which are included in our annual report on Form 10-K for the year ended December 31, 2008, or the 2008 Form 10-K.

Use of Estimates

Our financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments in certain circumstances that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. In preparing these financial statements, our management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, stock-based compensation, fair values of assets, income taxes, clinical trial, manufacturing and legal accruals, and other contingencies. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from these estimates.

Recently Adopted Accounting Pronouncements

Effective January 1, 2009, we adopted a newly issued accounting standard for fair value measurements of all nonfinancial assets and nonfinancial liabilities not recognized or disclosed at fair value in the financial statements on a recurring basis. The adoption of the fair value guidance did not have a material impact on our financial position, results of operations or cash flows.

Effective January 1, 2009, we adopted a newly issued accounting standard for the accounting and disclosure of an entity’s collaborative arrangements. This newly issued standard requires us to disclose the nature and purpose of our collaborative arrangements in our annual financial statements, our rights and obligations under the collaborative arrangements, the stage of the underlying endeavors’ life cycle, our accounting policies for the arrangements and the income statement classification and amount of significant financial statement amounts related to the collaborative arrangements. The adoption of this guidance did not have any impact on our results of operations or financial position.

During the quarter ended June 30, 2009, we implemented newly issued accounting standards which provide guidance for determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying circumstances that indicate that a transaction is not orderly. Specifically, the new standards provide additional guidelines for making fair value measurements more consistent with the principles presented and provide authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed. This guidance is applicable to all assets and liabilities (i.e. financial and nonfinancial) and requires enhanced disclosures, including interim and annual disclosure of the input and valuation techniques (or changes in techniques) used to measure fair value and the defining of the major security types comprising debt and equity securities held based upon the nature and risk of the security. The adoption of the new standards did not impact our financial condition, results of operations or disclosures.

During the quarter ended June 30, 2009, we also implemented a newly issued accounting standard requiring disclosure about the fair value of financial instruments in interim as well as in annual financial statements. The adoption of the new standards did not impact our financial condition, results of operations or disclosures.

During the quarter ended June 30, 2009, we implemented a newly issued accounting standard which provided guidance for the recognition, measurement and presentation of other-than-temporary impairments. This newly issued standard amended the other-than-temporary impairment model for debt securities and requires additional disclosures regarding the calculation of credit losses and the factors considered in reaching a conclusion that an investment is not other-than-temporarily impaired. The adoption of the new standards did not impact our financial condition, results of operations or disclosures.

During the quarter ended June 30, 2009, we implemented a newly issued accounting standard which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The subsequent event guidance also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. The adoption of this guidance did not have an impact on our financial condition, results of operations or disclosures.

2. Fair Value Measurements

We currently measure and record cash equivalents and investment securities considered available-for-sale at fair value in the accompanying financial statements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value include:

			Level 1 — Observable inputs for identical assets or liabilities such as quoted prices in active markets.

			Level 2 — Inputs other than quoted prices in active markets that are either directly or indirectly observable.

			Level 3 — Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.

The following tables represent our fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2009 and December 31, 2008 (in thousands):


September 30, 2009	Level 1		Level 2		Level 3		Total
Money market funds	$	31,795	$	—	$	—	$	31,795
Government and agency debt securities		—		29,920		—		29,920

Total	$	31,795	$	29,920	$	—	$	61,715


December 31, 2008	Level 1		Level 2		Level 3		Total
Money market funds	$	27,444	$	—	$	—	$	27,444
Government and agency debt securities		—		12,424		—		12,424
Corporate debt securities		—		13,003		—		13,003

Total	$	27,444	$	25,427	$	—	$	52,871

Cash of $16,000 and $26,000 is not included in our fair value hierarchy disclosure as of September 30, 2009 and December 31, 2008, respectively.

Separate disclosure is required of assets and liabilities measured at fair value on a recurring basis, as documented above, from those measured at fair value on a nonrecurring basis. As of September 30, 2009 and December 31, 2008, no assets or liabilities were measured at fair value on a nonrecurring basis.

We invest in a variety of highly liquid investment-grade securities. The following is a summary of our available-for-sale securities at September 30, 2009 and December 31, 2008 (in thousands):


				Gross		Gross		Estimated
	Amortized			Unrealized		Unrealized		Fair Market
September 30, 2009	Cost			Gains		Losses		Value
Government and agency debt securities	$	29,915		$	5	$	—	$	29,920
Money market funds		31,795			—		—		31,795

Total		61,710			5		—		61,715
Less: cash equivalents		(31,795	)		—		—		(31,795	)

Amounts classified as investments	$	29,915		$	5	$	—	$	29,920


				Gross			Gross		Estimated
	Amortized			Unrealized			Unrealized		Fair Market
December 31, 2008	Cost			Gains			Losses		Value
Corporate debt securities	$	12,940		$	63		$	—	$	13,003
Government and agency debt securities		12,384			40			—		12,424
Money market funds		27,444			—			—		27,444

Total		52,768			103			—		52,871
Less: cash equivalents		(29,935	)		(8	)		—		(29,943	)

Amounts classified as investments	$	22,833		$	95		$	—	$	22,928

The estimated fair market value amounts have been determined using available market information. At September 30, 2009 and December 31, 2008, all marketable securities had remaining maturities of one year or less. Unrealized gains and losses on cash equivalents and available for sale securities are included in accumulated other comprehensive income (loss) in the accompanying balance sheets. As of September 30, 2009 and December 31, 2008, there were no unrealized losses on investments. Realized gains on cash equivalents and investments totaled $7,000 during the nine months ended September 30, 2008. There were no realized gains or losses on cash equivalents or available for sale securities during the nine months ended September 30, 2009.

3. Net Loss Per Share

Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding. Because we report a net loss for the six months ended September 30, 2009 and 2008, diluted net loss per share is the same as basic net loss per share. We have excluded all outstanding stock options from the calculation of diluted net loss per common share because all such securities are antidilutive to the computation of net loss per share. As of September 30, 2009 and 2008, potentially dilutive securities include stock options of 2,608,819 and 2,129,415, respectively.

4. Collaboration Agreements

Facet Biotech Corporation

In August 2009, we entered into a collaboration agreement with Facet Biotech Corporation, or Facet, for the joint worldwide development and commercialization of TRU-016, a product candidate in Phase 1 clinical development for chronic lymphocytic leukemia, or CLL. TRU-016 is a CD37-directed Small Modular Immunopharmaceutical, or SMIP protein therapeutic. The collaboration agreement includes TRU-016 in all indications and all other CD37-directed protein therapeutics. Under the terms of the collaboration agreement, the parties will not develop or commercialize protein therapeutics directed to CD37 outside of the collaboration agreement.

We received an up-front payment of $20 million in cash in September 2009 and may receive up to $176.5 million in additional contingent payments upon the achievement of specified development, regulatory and sales milestones. We and Facet will share equally the costs of all development, commercialization and promotional activities and all global operating profits. In connection with the collaboration agreement, we and Facet also entered into a stock purchase agreement, pursuant to which Facet purchased 2,243,649 shares of our common stock for an aggregate purchase price of $10 million, or $4.46 per share. The per share price of $4.46 represents a 35% equity premium over the sixty-day trading average of our common stock on NASDAQ for the trading period ending immediately prior to the execution of the stock purchase agreement. The $20 million up-front payment and $1.4 million of equity premium representing the difference between the purchase price and the closing price of our common stock on the date the stock was

purchased by Facet have been deferred and are being recognized ratably over the estimated term of our substantive contractual obligations under the collaboration. Our current obligations under the collaboration include the performance of non-clinical, clinical, manufacturing and regulatory activities. We currently estimate these obligations to extend through 2018. The estimated term of the research and development service period will be reviewed on a regular basis and adjusted as necessary.

With respect to control over decisions and responsibilities, the collaboration agreement provides for a joint steering committee, or JSC, consisting of representatives of Trubion and Facet, which makes decisions by consensus. If the JSC is unable to reach a consensus, then the matter will be referred to Trubion’s and Facet’s Chief Executive Officers for resolution. If the Chief Executive Officers are unable to resolve the matter, then it will be resolved by arbitration. Both Trubion and Facet, at their sole discretion, may discontinue participation on the JSC with 90 days written notice to the other party.

At predefined times, the parties have the right to opt-out of the collaboration entirely or on a product-by-product basis. Upon a change of control of a party, the other party will have the right to opt-out of the collaboration entirely and if the successor party is conducting a program that competes with the programs under the collaboration agreement, then the successor party must either (i) opt-out of the collaboration entirely or (ii) divest the competing program to a third party. If a party exercises its opt-out right with respect to a product, then the parties will no longer share development and commercialization costs for such product and such opting-out party will receive certain royalty payments upon the sale of such product, rather than half of the profits derived from such product. Even if Facet exercises its opt-out right, its obligation to make milestone payments to us continues. In addition, if the party that opts-out is the lead manufacturing party for the opt-out product, then that party must continue to supply the product to the continuing party for up to eighteen months following the opt-out.

Facet can terminate the collaboration agreement at any time, in which event all rights to TRU-016 and other CD37-directed protein therapeutics under the collaboration agreement would revert to us. If Facet terminates the collaboration agreement in the first 18 months, then Facet must pay us a $10 million termination fee.

If there is a material breach of the collaboration agreement, then the non-breaching party may either terminate the collaboration agreement or continue the collaboration agreement and force the breaching party to opt-out and accept royalties at a reduced rate.

Either party may assign its interest in the collaboration agreement to a third party, provided that the non-assigning party maintains a right of first negotiation over any proposed assignment. In addition, either we or Facet can freely assign the collaboration agreement without the consent of the other party in connection with certain specified change of control transactions, such as an acquisition.

We deferred the recognition of the up-front payment of $20 million and $1.4 million equity premium. These payments are being recognized as revenue over the period of our substantive contractual obligations, which we estimate to be approximately nine years, or through 2018. During the nine months ended September 30, 2009 we recognized as revenue $643,000 for research and development services pursuant to our Facet collaboration. The $643,000 recognized in the nine months ended September 30, 2009 is comprised of $191,000 for recognition of the $20 million up-front fee received from Facet and the $1.4 million equity premium, and $452,000 for collaborative research funding from the Facet collaboration

Pfizer Inc.

In December 2005, we entered into a collaboration agreement with Wyeth, now a wholly-owned subsidiary of Pfizer Inc., or Pfizer, for the development and worldwide commercialization of our lead product candidate, TRU-015, and other CD20-directed therapeutics. Pursuant to the agreement, we are also collaborating with Pfizer on the development and worldwide commercialization of certain other product candidates directed to a small number of targets other than CD20. During the period in which we will be providing research and development services for Pfizer, Pfizer has the right, subject to our reasonable consent, to replace a limited number of these targets. In addition, we have the option to co-promote with Pfizer, on customary terms to be agreed, CD20-directed therapies in the United States for niche indications. We retain the right to develop and commercialize, on our own or with others, product candidates directed to all targets not included within the agreement. Unless it is terminated earlier, the agreement will remain in effect on a product-by-product basis and on a country-by-country basis until the later of the date that any such product shall no longer be covered by a valid claim of a U.S. or foreign patent or application and, generally, ten years after the first commercial sale of any product licensed under the agreement. Pfizer may terminate the agreement without cause at any time upon 90 days’ prior written notice.

In connection with the agreement, Wyeth paid us a $40 million non-refundable, non-creditable, up-front fee in January 2006 and purchased directly from us in a private placement, concurrent with our initial public offering, 800,000 shares of our common stock at the initial public offering price of $13.00 per share, resulting in net proceeds to us of $10.4 million. Under the agreement, we provided research services for an initial three-year period ended December 22, 2008 with the option for Wyeth to extend the service period for two additional one-year periods. Wyeth’s financial obligations during the initial research service term included collaborative research funding commitments of $9.0 million in exchange for such committed research services. This $9.0 million was subject to an increase if the service period was extended beyond three years, as well as annual increases pursuant to percentage changes in the CPI. In June 2008, Wyeth exercised the first option under the terms of the agreement to extend the research period for an additional one-year period through December 22, 2009. In June 2009, Wyeth exercised the second option under the terms of the agreement to extend the research period for an additional one-year period through December 22, 2010. Due to the research period extensions, the collaboration research funding commitments to us initially from Wyeth and now from Pfizer, increased by approximately $3.3 million and $3.4 million in exchange for committed research services from us through December 22, 2009 and December 22, 2010, respectively.

Pfizer’s financial obligations include additional amounts for reimbursement of agreed-upon external research and development costs and patent costs. Pursuant to the agreement, Pfizer’s financial obligations also include payments to us of up to $250 million based on the achievement of specified regulatory and sales milestones for CD20-directed therapies and payments to us of up to $535 million based on the achievement of specified regulatory and sales milestones for therapies directed to the small number of targets other than CD20. In addition, we will receive royalty payments in the event of future licensed product sales. The $40 million up-front fee is being recognized ratably over the estimated term of our substantive contractual obligations under the agreement and the related research and development service period. Currently, our clinical development obligations under the agreement are limited to conducting ongoing re-treatment studies for TRU-015. The ongoing second Phase 2b study and future studies will be conducted by Pfizer. The estimated term of the research and development service period is reviewed and adjusted as additional information becomes available. During the third quarter of 2008, the estimated term of the research and development service period was adjusted from six years and three months to seven years, or through December 2012. The change in the estimated research and development service period was primarily due to an extension of our obligations to conduct clinical activities under our agreement with Pfizer. The change in estimate reduced the recognition of the up-front fee during 2008 by $487,000.

During the nine months ended September 30, 2009 and 2008, we recognized as revenue $12.1 million and $12.2 million, respectively, for research and development services pursuant to our Pfizer collaboration. The $12.1 million recognized in the nine months ended September 30, 2009 is comprised of $3.6 million for amortization of the $40 million up-front fee received from Wyeth and $8.5 million for collaborative research funding from the Pfizer collaboration. The $12.2 million recognized in the nine months ended September 30, 2008 is comprised of $4.1 million for amortization of the $40 million up-front fee received from Wyeth and $8.1 million for collaborative research funding from the Pfizer collaboration.

5. Restructuring

In an effort to reduce costs, we announced in February 2009 a workforce reduction of approximately 25%, which included the elimination of certain existing positions across our research and administrative functions. We incurred a $0.8 million restructuring charge in the first quarter of 2009 related to employee severance, benefits and outplacement services. Of the total restructuring charges, approximately $0.6 million and $0.2 million were recorded as research and development expense and general and administrative expense, respectively, in the first quarter of 2009. We paid cash of $0.8 million related to the restructuring charge during the nine months ended September 30, 2009. No restructuring obligations remain as of September 30, 2009.

6. Comprehensive Income (Loss)

Comprehensive loss is comprised of net loss and unrealized gains (losses) on marketable securities and derivatives. The components of comprehensive loss at September 30, 2009 and 2008 were as follows (in thousands):


	Three months ended						Nine months ended
	September 30,						September 30,
	2009			2008			2009			2008
Net loss	$	(6,227	)	$	(6,582	)	$	(23,928	)	$	(19,182	)
Net unrealized gains (losses) on securities available-for-sale		3			8			(98	)		(133	)
Net unrealized gains on cash flow hedges		—			156			—			129

Comprehensive loss	$	(6,224	)	$	(6,418	)	$	(24,026	)	$	(19,186	)

7. Commitments

We have entered into agreements with Lonza Biologics, or Lonza, and related entities for certain license rights related to Lonza’s manufacturing technology, and for research and development services. We have reserved future manufacturing capacity from Lonza under pre-specified terms and conditions. As of September 30, 2009, we had committed to purchase $2.1 million of manufacturing services from Lonza in 2010. If we terminate reserved future manufacturing capacity with Lonza without providing adequate notice to Lonza under the agreement, we may incur cancellation fees.

8. Subsequent Events

We have evaluated all subsequent events through November 5, 2009, which represents the filing date of this Form 10-Q with the Securities and Exchange Commission, to ensure that this Form 10-Q includes appropriate disclosure of events both recognized in the financial statements as of September 30, 2009, and events which occurred subsequent to September 30, 2009 but were not recognized in the financial statements. As of November 5, 2009, there were no subsequent events that required recognition or disclosure.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to them. In some cases you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” and “potential,” and similar expressions intended to identify forward-looking statements. Examples of these statements include, but are not limited to, statements regarding: the implications of interim or final results of our clinical trials, the progress of our research programs, including clinical testing and our collaborations with Pfizer and Facet, the extent to which our issued and pending patents may protect our products and technology, our ability to identify new product candidates, the potential of such product candidates to lead to the development of commercial products, our anticipated timing for initiation or completion of our clinical trials for any of our product candidates, our future operating expenses, our future losses, our future expenditures for research and development, and the sufficiency of our cash resources. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described in Part II, Item 1A of this quarterly report on Form 10-Q and our other filings with the Securities and Exchange Commission, or SEC. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this quarterly report on Form 10-Q. You should read this quarterly report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update these forward-looking statements, whether as a result of new information, future events, or otherwise.

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto included in Part I, Item 1 of this quarterly report on Form 10-Q.

Overview

We are a biopharmaceutical company creating a pipeline of novel protein therapeutic product candidates to treat autoimmune and inflammatory diseases and cancer. Our mission is to develop a variety of first-in-class and best-in-class product candidates customized in an effort to optimize safety, efficacy, and convenience that we believe may offer improved patient experiences. Our current product candidates are novel Small Modular Immunopharmaceutical, or SMIP, and multi-specific SCORPION therapeutics, members of a new generation of antibody alternatives. Our current clinical-stage therapeutics target specific antigens on B cells, CD20 and CD37, and are designed using our custom drug assembly technology. In order to fund ongoing development activities and commercialize our products, we will, in some cases, enter into collaboration agreements that would likely include licenses to our technology and arrangements to provide research and development services for others.

We were founded as a limited liability company in the state of Washington in March 1999. We converted into a corporation and redomiciled in the state of Delaware in October 2002. To date, we have funded our operations primarily through the sale of equity securities, strategic alliances, equipment financings and government grants.

Research and Development Programs and Recent Developments

Our lead product candidate, TRU-015, which we are developing with our partner Pfizer Inc., or Pfizer, has completed a Phase 2b clinical trial for the treatment of rheumatoid arthritis, or RA. A second Phase 2b clinical trial for RA is under way and enrollment was completed in September 2009. The randomized, parallel, double-blind, placebo-controlled, dose-regimen finding study is evaluating the safety and efficacy of two dosing regimens of TRU-015 administered to patients with active seropositive rheumatoid factor on a background of methotrexate. This study was designed in a way that we believe could be supportive of a registration package with the Food and Drug Administration, or FDA.

In October 2009, we announced positive data from the second course of re-treatment in the first Phase 2b clinical trial for RA demonstrating that administration of TRU-015 every 24 weeks produces well-tolerated results that are comparable with the more than four and a half years of re-treatment data compiled to date.

In collaboration with us, Pfizer is also developing SBI-087, our next generation CD20-directed product candidate. SBI-087 for RA builds on our and Pfizer’s clinical experience with TRU-015 and is based on our SMIP^tm technology. Pfizer has commenced a Phase 1 study of SBI-087 for RA, in which patient enrollment is complete and the study is ongoing. In addition, patient recruitment is underway in an additional Phase 1 study of SBI-087 for RA in Japan. Finally, Pfizer is conducting a Phase 1 clinical trial of SBI-087 in systemic lupus erythematosus, or SLE, in which patient dosing has commenced and recruitment is ongoing.

TRU-016, which we are developing with our partner Facet Biotech Corporation, or Facet, is a novel CD37-directed SMIP protein therapeutic. A TRU-016 Phase 1 clinical trial for patients with chronic lymphocytic leukemia, or CLL, is currently under way. TRU-016 uses a different mechanism of action than CD20-directed therapies. As a result, we believe its novel design may provide patients with improved therapeutic options and enhance efficacy when used alone or in combination with chemotherapy and/or CD20-directed therapeutics.

In June 2009, we announced positive results following preliminary analysis from the Phase 1 clinical trial of TRU-016 for the treatment of CLL. The objectives of the Phase 1 TRU-016 CLL study were to define safety and tolerability, identify a maximum tolerated dose, evaluate pharmacology and pharmacodynamics, and assess preliminary clinical activity.

Collaborations

Facet Biotech Corporation

In August, 2009, we entered into a collaboration agreement with Facet for the joint worldwide development and commercialization of TRU-016, a product candidate in Phase 1 clinical development for chronic lymphocytic leukemia, or CLL. TRU-016 is a CD37-directed SMIP protein therapeutic. The collaboration agreement includes TRU-016 in all indications and all other CD37-directed protein therapeutics. Under the terms of the collaboration agreement, the parties will not develop or commercialize protein therapeutics directed to CD37 outside of the collaboration agreement.

equally the costs of all development, commercialization and promotional activities and all global operating profits. In connection with the collaboration agreement, we and Facet also entered into a stock purchase agreement, pursuant to which Facet purchased 2,243,649 shares of our common stock for an aggregate purchase price of $10 million, or $4.46 per share. The per share price of $4.46 represents a 35% equity premium over the sixty-day trading average of our common stock on NASDAQ for the trading period ending immediately prior to the execution of the stock purchase agreement.

At predefined times, the parties have the right to opt-out of the collaboration entirely or on a product-by-product basis. Upon a change of control of a party, the other party will have the right to opt-out of the collaboration entirely and if the successor party is conducting a program that competes with the programs under the collaboration agreement, then the successor party must either (i) opt-out of the collaboration entirely or (ii) divest the competing program to a third party. If a party exercises its opt-out right with respect to a product, then the parties will no longer share development and commercialization costs for such product and such opting-out party will receive certain royalty payments upon the sale of such product, rather than half of the profits derived from such product. Even if Facet exercises its opt-out right, its obligation to make milestone payments to us continues. In addition, if the party that opts-out is the lead manufacturing party for the opt-out product, then such party must continue to supply the product to the continuing party for up to eighteen months following the opt-out.

Pfizer Inc.

In December 2005 we entered into a collaboration agreement with Wyeth, now a wholly-owned subsidiary of Pfizer, for the development and worldwide commercialization of TRU-015 and other CD20-directed therapeutics. Pursuant to the agreement, we are also collaborating with Pfizer on the development and worldwide commercialization of certain other product candidates directed to a small number of targets other than CD20. During the period in which we will be providing research services for Pfizer, Pfizer has the right, subject to our reasonable consent, to replace a limited number of these targets. In addition, we have the option to co-promote with Pfizer, on customary terms to be agreed, CD20-directed therapies in the United States for niche indications. We retain the right to develop and commercialize, on our own or with others, product candidates directed to all targets not included within the agreement. Unless it is terminated earlier, our agreement with Pfizer will remain in effect on a product-by-product basis and on a country-by-country basis until the later of the date that any such product shall no longer be covered by a valid claim of a U.S. or foreign patent or application and, generally, ten years after the first commercial sale of any product licensed under the agreement. Pfizer may terminate the agreement without cause at any time upon 90 days’ prior written notice.

period through December 22, 2009. In June 2009, Wyeth exercised the second option under the terms of the agreement to extend the research period for an additional one-year period through December 22, 2010. Due to the research period extensions, the collaboration research funding commitments to us initially from Wyeth and now from Pfizer, increased by approximately $3.3 million and $3.4 million in exchange for committed research services from us through December 22, 2009 and December 22, 2010, respectively.

In October 2009, Pfizer completed its acquisition of Wyeth. Our collaboration agreement remains in effect with Pfizer and, as allowed under the collaboration agreement, we have requested further written assurances from Pfizer reaffirming Pfizer’s commitment to comply with the terms and conditions of the agreement. Pfizer has up to 90 days from the date of our request to reaffirm its commitment to comply with the terms and conditions of the collaboration agreement.

If Pfizer has ongoing development and/or commercialization activities that would violate the mutual exclusivity provisions of the collaboration agreement, we have the right to require Pfizer to engage in good faith discussions regarding the terms and conditions on which Pfizer would pay reasonable financial consideration to us with respect to those development and commercialization activities. If we and Pfizer do not agree to terms, we have the right to require Pfizer to enter into an agreement to divest such development and commercialization activities, or to divest the relevant collaboration agreement products to a third party. If Pfizer does not divest such development and commercialization activities or such collaboration agreement products, we have the right to terminate all licenses related to CD20 and/or the additional specified target, as applicable.

If during the 12 month period following Pfizer’s acquisition of Wyeth, Pfizer is required or voluntarily decides to divest itself of one or more of the products under the collaboration agreement, then subject to any governmental limitations, Pfizer must offer us an exclusive opportunity to negotiate the acquisition or license of all of Pfizer’s rights to that product on commercially reasonable terms. If we do not conclude an agreement with Pfizer covering the product, Pfizer can divest itself of the product but the terms of that divestiture cannot be more favorable than those that were last offered to us unless we are given the opportunity to accept those more favorable terms.

Upon a change of control of Trubion, the agreement would remain in effect, subject to the right of Pfizer to terminate specified provisions of the agreement.

Assuming TRU-015 and other product candidates under the collaboration with Pfizer continue to progress in development, expenses for future clinical trials may be higher than those incurred in prior clinical trials. These expenses will, however, likely be incurred by Pfizer and expenses incurred by us, if any, will be substantially offset by reimbursement revenue from Pfizer. In addition, Pfizer is responsible for a substantial portion of costs related to patent prosecution and patent litigation for products directed to targets selected by Pfizer pursuant to the collaboration agreement.

Outlook

The continued research and development of our product candidates will require significant additional expenditures, including preclinical studies, clinical trials, manufacturing costs, and the expenses of seeking regulatory approval. We rely on third parties to conduct a portion of our preclinical studies, all of our clinical trials and all of the manufacturing of current Good Manufacturing Process, or cGMP material. We expect expenditures associated with these activities to increase in future years as we continue developing our product candidates. Expenses associated with our product candidates included in the Pfizer collaboration are substantially offset by reimbursement revenue from Pfizer. Expenses associated with our product candidates included in the Facet collaboration are shared equally.

We have incurred significant losses since our inception. As of September 30, 2009, our accumulated deficit was $116.4 million and total stockholders’ equity was $19 million. During the nine months ended September 30, 2009 and 2008, we recognized net losses

of $23.9 million and $19.2 million, respectively. We expect our net losses to increase in the future as we continue our existing and anticipated preclinical studies, manufacturing, and clinical trials. Our revenues and research and development expenses under the Facet collaboration may fluctuate depending on which party in the collaboration is incurring the majority of the development costs in any particular quarterly period. However, we expect revenue to increase in the future as a result of the additional collaboration revenue from our Facet collaboration. This increase in revenue from the Facet collaboration will be partially offset by decreases in revenue from Pfizer due to the transfer to Pfizer of the responsibility for the majority of the clinical development efforts and related costs for product candidates covered by our collaboration agreement with Pfizer.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our unaudited financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as reported revenues and expenses during the reporting periods. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances. An accounting policy is considered to be critical if it is important to a company’s financial condition and results of operations, and if it requires the exercise of significant judgment and the use of estimates on the part of management in its application. We have discussed the selection and development of the critical accounting policies with the audit committee of our board of directors, and the audit committee has reviewed our related disclosures in this quarterly report on Form 10-Q. Although we believe our judgments and estimates are appropriate, actual results may differ from those estimates.

Our significant accounting policies are described in Note 1 to our audited financial statements for the year ended December 31, 2008 in the 2008 Form 10-K. Of our significant accounting policies, we believe that the following accounting policies relating to revenue recognition, preclinical study, clinical trial and manufacturing accruals, stock-based compensation and valuation of investments are the most critical to understanding and evaluating our reported financial results.

Revenue Recognition

We recognize revenue from our collaboration agreements with Pfizer and Facet, which consists of non-refundable, non-creditable up-front fees and license fees, collaborative research funding, regulatory and sales milestones future product royalties and future product sales. Revenue related to our collaboration agreements is recognized as follows:

Up-Front Fees and License Fee. Non-refundable, non-creditable up-front fees and license fees received in connection with collaborative research and development agreements are deferred and recognized on a straight-line basis over the estimated term of the research and development service period. The estimated term of the research and development service period is reviewed and adjusted based on the status of the project against the estimated timeline as additional information becomes available. We also consider the time frame of our substantive contractual obligations related to research and development agreements when estimating the term of the research and development period. For each collaboration agreement, we review our ongoing performance obligations on a regular basis and make adjustments to the estimated term as additional information becomes available. During the third quarter of 2008, the estimated term of the research and development service period related to the Pfizer agreement was adjusted from six years and three months to seven years, or through December 2012, due to an extension of the estimated service period of our obligations to conduct clinical activities under our agreement with Pfizer. The adjustment during the third quarter of 2008 was the second adjustment to the estimated research and development service period since the inception of the collaboration agreement with Pfizer. Adjustments to the research and development service period are made prospectively. We have made adjustments to the research and development service periods in the past we expect to revise our estimate of the development term in future periods due to the inherently uncertain nature of development terms. As a result, revenue may fluctuate materially in the future due to adjustments to the estimated term of the research and development service periods and our substantive contractual obligations under our collaborations.

Collaborative Research Funding. Certain internal and external research and development costs and patent costs are reimbursed in connection with our collaboration agreements. Reimbursed costs under the Pfizer collaboration are recognized as revenue in the same period the costs are incurred. With respect to the reimbursement of development costs under the Facet collaboration, each quarter, we and Facet reconcile what each party has incurred for development costs, and we record either a net receivable or a net payable in our financial statements. For each quarterly period, if we have a net receivable from Facet, we recognize revenues by such amount, and if we have a net payable to Facet, we recognize additional research and development expenses by such amount.

As a result, our revenues and research and development expenses may fluctuate depending on which party in the collaboration is incurring the majority of the development costs in any particular quarterly period. Reimbursed costs are subject to the estimation processes described in the preclinical study, clinical trial and manufacturing accruals processes described below and are subject to change in future periods when actual activity is known. To date we have not made any material adjustments to these estimates.

Milestones. Payments for milestones that are based on the achievement of substantive and at-risk performance criteria will be recognized in full at such time as the specified milestone has been achieved according to the terms of the agreement. When payments are not for substantive and at-risk milestones, revenue will be recognized immediately for the proportionate amount of the payment that correlates to services that have already been rendered, with the balance recognized on a straight-line basis over the remaining estimated term of the research and development service period. The basis of the research and development service period is reviewed and adjusted based on the status of the project against the estimated timeline as additional information becomes available.

Preclinical Study, Clinical Trial and Manufacturing Accruals

We estimate our preclinical study, clinical trial and manufacturing accrued expenses based on our estimates of the services received pursuant to contracts with multiple research organizations and contract manufacturers that conduct, manage, and provide materials for preclinical studies and clinical trials on our behalf. The financial terms of these agreements vary from contract to contract and may result in uneven payment flows. Research and development costs are expensed as the related goods are delivered or the related services are performed. Our preclinical study, clinical trial and manufacturing expenses include fees paid to the following:

	•		contract research organizations in connection with preclinical studies;

	•		clinical research organizations and other clinical sites in connection with clinical trials; and

	•		contract manufacturers in connection with the production of components and drug materials for preclinical studies and clinical trials.

We record accruals for these preclinical studies, clinical trial and manufacturing expenses based on the estimated amount of work completed. All such costs are included in research and development expenses based on these estimates. Costs of setting up a preclinical study or clinical trial are expensed as the related services are performed. Costs related to patient enrollment in clinical trials are accrued as patients are enrolled in the trial. We monitor patient enrollment levels and related activities to the extent possible through internal reviews, correspondence and discussions with research organizations. If we have incomplete or inaccurate information, we may, however, underestimate or overestimate activity levels associated with various preclinical studies and clinical trials at a given point in time. In the event we underestimate, we could record significant research and development expenses in future periods when the actual activity level becomes known. To the extent any of these expenses are reimbursable under our collaboration agreements with Pfizer or Facet, we could also record significant adjustments to revenue when the actual activity becomes known. To date, we have not made any material adjustments to our estimates of preclinical study, clinical trial and manufacturing expenses. We make good-faith estimates that we believe to be accurate, but the actual costs and timing of preclinical studies, clinical trials and manufacturing runs are highly uncertain, subject to risks, and may change depending on a number of factors, including our clinical development plan. If any of our product candidates enter Phase 3 clinical trials, the process of estimating clinical trial costs will become more difficult because the trials will involve larger numbers of patients and clinical sites.

Stock-Based Compensation

We account for stock-based compensation for employees and directors be based on estimated fair values. Employee stock-based compensation expense recognized in the years ended December 31, 2008, 2007 and 2006 was calculated based on awards ultimately expected to vest, and has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The forfeiture estimate is based on historical employee turnover rates and could differ from actual forfeitures. Compensation costs for employee stock options granted prior to January 1, 2006 were accounted for using the option’s intrinsic value or the difference, if any, between the fair market value of our common stock and the exercise price of the option.

The fair value of each employee option grant in the nine months ended September 30, 2009 and 2008, respectively, was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:


	Nine months ended
	September 30,
	2009			2008
Risk-free interest rate		2.13%-2.72	%		2.80%-3.40	%
Weighted-average expected life (in years)		5.93			6.04
Expected dividend yield		0	%		0	%
Expected volatility rate		88%-105	%		70%-74	%
Weighted-average estimated fair value of employee options	$	1.72		$	5.29

For stock options granted to non-employees, the fair value of the stock options is estimated using the Black-Scholes valuation model. The Black-Scholes model utilizes the estimated fair value of common stock and requires that, at the date of grant, we make assumptions with respect to the expected life of the option, the volatility of the fair value of the underlying common stock, risk free interest rates and expected dividend yields of our common stock. We have assumed that non-employee stock options have an expected life of one to ten years and assumed common stock volatility between 65% and 100%.

Stock-based compensation expense is recognized over the period of expected service by the non-employee. As the service is performed, we are required to update our valuation assumptions, remeasure unvested options and record the stock-based compensation using the valuation as of the vesting date. These adjustments may result in higher or lower stock-based compensation expense in the statement of operations than originally estimated. Changes in the market price of our stock could materially change the value of an option and the resulting stock-based compensation expense. We expect stock-based compensation expense associated with non-employee options to fluctuate in the future based on the volatility of our future stock price.

Valuation of Investments

We classify our investment portfolio as available-for-sale. The cost of securities sold is based on the specific identification method. We carry our investments in debt securities at fair value, estimated as the amount at which an asset or liability could be bought or sold in a current transaction between willing parties. In accordance with our investment policy, we diversify our credit risk and invest in debt securities with high credit quality. The majority of our investments held as of September 30, 2009 are in active markets and our estimate of fair value is based upon quoted market prices. The remainder of our investments held as of September 30, 2009 are valued using observable inputs. To date, the carrying values of our investments have not been written down due to declines in value because such declines are judged to be temporary. Declines in the fair value of our investments judged to be other than temporary could adversely affect our future operating results. We continue to monitor our credit risks and evaluate the potential need for impairment charges related to credit risks in future periods.

Results of Operations for the Three Months and Nine Months Ended September 30, 2009 and 2008

Revenue

Revenue increased to $4.5 million in the three months ended September 30, 2009 from $3.8 million in the three month ended September 30, 2008. Revenue increased to $12.8 million in the nine months ended September 30, 2009 from $12.2 million in the nine months ended September 30, 2008. The three- and nine-month increases were primarily due to revenue recognized from our Facet collaboration of $643,000. The $643,000 is comprised of $191,000 for recognition of the $20 million up-front fee and $1.4 million equity premium, and $452,000 for collaborative research funding. Revenue in the nine months ended September 30, 2009 and 2008 also included $3.6 million and $4.1 million, respectively, for recognition of the $40 million upfront fee received from Wyeth and $8.5 million and $8.1 million of collaborative research funding from the Pfizer collaboration. The Wyeth and Facet upfront fees are being deferred and recognized on a straight-line basis over the estimated term of the research and development service periods. The Pfizer estimated service period is seven years, or through December 2012 and the Facet estimated service period is approximately nine years or through 2018. Reimbursement revenue is expected to fluctuate in the future due to the timing of reimbursed development and legal costs, and the recognition of the associated collaborative research revenue under our collaboration agreements. Also, revenues from the Facet collaboration may fluctuate depending on which party in the collaboration is incurring the majority of the development costs in any particular quarterly period.

Research and Development Expenses

Research and development expenses remained stable at $7.4 million in each of the three months ended September 30, 2009 and 2008. Research and development expenses increased to $27.6 million in the nine months ended September 30, 2009 from $23.3 million in the nine months ended September 30, 2008. The increase was primarily due to higher outside manufacturing and clinical development costs related to our TRU-016 product candidate, partially offset by decreased lab expense and personnel costs. In connection with the restructuring in February 2009, we incurred a $0.8 million charge in the first quarter of 2009 related to employee severance, benefits and outplacement services, $0.6 million of which was classified as research and development expense. We expect research and development expenses to increase in the future due to additional clinical trials, preclinical research and manufacturing expenses associated with TRU-016 development. These costs may fluctuate depending on which party in the Facet collaboration is incurring the majority of the development costs in any particular period. Our actual research and development expenses could differ materially from those anticipated.

At any time, we have many ongoing research projects. Our internal resources, employees, and infrastructure are not directly tied to any individual research project and are typically deployed across multiple projects. Through our clinical development programs, we are developing each of our product candidates in parallel for multiple disease indications, and through our basic research activities, we are seeking to design potential drug candidates for multiple new disease indications. Due to the number of ongoing projects and our ability to utilize resources across several projects, we do not record or maintain information regarding the costs incurred for our research and development programs on a program-specific basis. In addition, we believe that allocating costs on the basis of time incurred by our employees does not accurately reflect the actual costs of a project.

Our research and development activities can be divided into research and preclinical programs and clinical development programs. The costs associated with research and preclinical programs and clinical development programs approximate the following (in thousands):


	Three months ended				Nine months ended
	September 30,				September 30,
	2009		2008		2009		2008
Research and preclinical programs	$	4,037	$	4,916	$	13,960	$	15,408
Clinical development programs		3,373		2,481		13,627		7,894

Total research and development	$	7,410	$	7,397	$	27,587	$	23,302

Research and preclinical program costs consist of costs associated with our product development efforts, conducting preclinical studies, personnel costs, animal studies, lab supplies, and indirect costs such as rent, utilities and depreciation. Research and preclinical program costs decreased in the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 primarily due to lower personnel-related and lab costs as a result of the restructuring in February 2009. Clinical development costs consist of clinical manufacturing costs, clinical trial site and investigator fees, personnel costs and indirect costs such as rent, utilities, and depreciation. Clinical development program costs increased in the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 primarily due to higher outside manufacturing and clinical development costs for TRU-016.

The majority of our research and development programs are at an early stage and may not result in any approved products. Product candidates that may appear promising at early stages of development may not reach the market for a variety of reasons. Product candidates may be found to be ineffective or to cause harmful side effects during clinical trials, may take longer to pass through clinical trials than had been anticipated, may fail to receive necessary regulatory approvals, and may prove impracticable to manufacture in commercial quantities at reasonable cost and with acceptable quality. As part of our business strategy, we may enter into collaborative arrangements with third parties to complete the development and commercialization of our product candidates and it is uncertain which of our product candidates may be subject to future collaborative arrangements. The participation of a collaborative partner may accelerate the time to completion and reduce the cost to us of a product candidate or it may delay the time to completion and increase the cost to us due to the alteration of our existing strategy.

As a result of the uncertainties discussed above, the uncertainty associated with clinical trial enrollments, and the risks inherent in the development process, we are unable to determine the duration and completion costs of the current or future clinical stages of our product candidates or when, or to what extent, we will generate revenue from the commercialization and sale of any of our product candidates. Development timelines, probability of success, and development costs vary widely. Under our collaboration with Pfizer,

we are responsible for completing the remaining retreatment portion of the Phase 2a and initial 2b clinical trials of TRU-015 for RA. In addition, we are responsible for conducting clinical studies for TRU-015 niche indications. Under our collaboration with Facet, we are obligated to perform non-clinical, clinical, manufacturing and regulatory activities. While we are currently focused on developing TRU-015, SBI-087 and other product candidates with Pfizer, our TRU-016 product candidate with Facet and other product candidates that are outside our collaborations, we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each product candidate, as well as an ongoing assessment as to the product candidate’s commercial potential. We anticipate developing additional product candidates, which will also increase our research and development expenses in future periods. We do not expect any of our current product candidates to be commercially available in major markets before 2012, if at all.

General and Administrative Expenses

General and administrative expenses increased slightly to $3.1 million in the three months ended September 30, 2009 from $3 million in the three months ended September 30, 2008. General and administrative expenses decreased to $8.9 million in the nine months ended September 30, 2009 from $9.0 million in the nine months ended September 30, 2008. The decrease in the nine-month period was primarily due to lower personnel-related costs as a result of the restructuring in February 2009. In connection with the restructuring in February 2009, we incurred a $0.8 million charge in the first quarter of 2009 related to employee severance, benefits and outplacement services, $0.2 million of which was classified as general and administrative expense. We expect our general and administrative expenses to remain relatively stable in the future. Our actual general and administrative expenses could differ materially from those anticipated.

Net Interest Income (Expense)

Net interest income (expense) decreased to ($123,000) in the three months ended September 30, 2009 from $36,000 in the three months ended September 30, 2008. Net interest income (expense) decreased to ($247,000) in the nine months ended September 30, 2009 from $908,000 in the nine months ended September 30, 2008. The decrease was primarily the result of a decline in interest rates and a decrease in our average cash and investment balance in the first nine months of 2009 compared to the same period in 2008. We expect net interest income (expense) to increase slightly in the future as a result of cash received from the Facet collaboration.

Liquidity and Capital Resources

As of September 30, 2009, we had $61.7 million in cash, cash equivalents and short-term investments. We have received the majority of our funding from the issuance of common stock, proceeds from our collaboration agreements, asset-based lease financings and interest earned on investments. Our cash and investment balances are held in a variety of interest bearing instruments, including obligations of United States government agencies, high credit rating corporate borrowers, and money market accounts. We do not hold auction rate securities within our investment portfolio, nor do we hold any corporate securities. Cash in excess of immediate requirements is invested with regard to liquidity and capital preservation.

Operating Activities. Net cash provided by operating activities was $1.4 million in the nine months ended September 30, 2009 compared to net cash used in operating activities of $15.6 million in the nine months ended September 30, 2008. Net cash provided by operating activities in the nine months ended September 30, 2009 was due to the $20 million up-front fee received from Facet in September 2009, partially offset by operating costs. We expect net cash used in operations to increase in the future due to the expansion of our clinical activities.

Investing Activities. Net cash used in investing activities was $7.2 million in the nine months ended September 30, 2009 compared to net cash provided by investing activities in the nine months ended September 30, 2008 of $8.6 million. Investing activities consist primarily of purchases and maturities of marketable securities and capital purchases. Purchases of property and equipment were $52,000 and $1.1 million in the nine months ended September 30, 2009 and 2008, respectively. We expect to continue to make investments in property and equipment in the future; however, we expect to do so to a lesser extent than in 2008.

Financing Activities. Net cash provided by financing activities was $7.7 million in the nine months ended September 30, 2009 compared to net cash used in financing activities of $14,000 in the nine months ended September 30, 2008. In the nine months ended September 30, 2009 financing activities consisted primarily of a private placement of common stock to Facet of $8.6 million and payments on an equipment financing arrangement of $1.0 million. In the nine months ended September 31, 2008, financing activities

consisted primarily of $10 million in proceeds under a new debt facility, offset by $10.1 million in payments against pre-existing equipment financing arrangements.

We entered into a loan and security agreement with Silicon Valley Bank, or SVB, effective July 25, 2008, which provided for a $10.0 million debt facility secured by a security interest in our assets, other than intellectual property. The full $10.0 million available under the SVB facility was drawn at closing and is payable in fixed equal payments of principal plus accrued interest at a fixed rate of 5.75% based on an 84-month amortization schedule with all principal and interest due July 25, 2013. As of September 30, 2009, $8.6 million is outstanding under SVB loan and security agreement.

The loan and security agreement with SVB contains representations and warranties and affirmative and negative covenants that are customary for credit facilities of this type. We were in compliance with all covenants under the loan and security agreement as of September 30, 2009. The loan and security agreement could restrict our ability to, among other things, sell certain assets, engage in a merger or change in control transaction, incur debt, pay cash dividends, and make investments. The loan and security agreement also contains events of default that are customary for credit facilities of this type, including payment defaults, covenant defaults, insolvency type defaults, and events of default relating to liens, judgments, material misrepresentations, and the occurrence of certain material adverse events. In addition, the loan and security agreement with SVB contains a material adverse change clause which may accelerate the maturity of the loan upon the occurrence of certain events. We have no indication that we are in default of the material adverse change clause and no scheduled loan payments have accelerated as a result of this provision.

Based on our current operating plans, we believe that our existing capital resources plus proceeds from the collaboration and stock purchase agreements with Facet, together with interest thereon, will be sufficient to meet our financial obligations for at least the next 24 months. The key assumption underlying this estimate is that expenditures related to continued preclinical, manufacturing, and clinical development of our product candidates during this period will be within budgeted levels.

Our forecast of the period of time that our financial resources will be adequate to support operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed in Part II, Item 1A entitled “Risk Factors.” In light of the numerous risks and uncertainties associated with the development and commercialization of our product candidates and the extent to which we enter into collaborations with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with product development. Our future funding requirements will depend on many factors, including:

	•		the determination by any of our current collaboration partners, or any of their successors-in-interest to cease developing any product candidate that is the subject of that collaboration;

	•		the terms and timing of any additional collaborative or licensing agreements that we may establish;

	•		the ability to raise capital through strategic partnerships or in the debt/equity markets;

	•		milestone payments projected to be received under the Pfizer and Facet collaboration agreements;

	•		the scope, rate of progress, results and costs of our preclinical testing, clinical trials, and other research and development activities;

	•		the number of programs we pursue;

	•		the cost of establishing clinical and commercial supplies of our product candidates;

	•		the cost of preparing, filing, prosecuting, defending, and enforcing any patent claims and other intellectual property rights;

	•		the cost, timing, and outcomes of regulatory approvals; and

	•		the extent to which we acquire or invest in businesses, products, or technologies.

We will need to raise additional funds to support our operations, and such funding may not be available to us on acceptable terms, if at all. The capital markets have been experiencing extreme volatility and disruption for more than 12 months. The scope and extent of this disruption in the capital markets could make it difficult or impossible to raise additional capital in public or private capital markets until conditions stabilize. If we are unable to raise additional funds when needed, we may not be able to continue development of our product candidates or we could be required to delay, scale back, or eliminate some or all of our development programs and other operations. We may seek to raise additional funds through public or private financing, strategic partnerships, or other arrangements. Any additional equity financing may be dilutive to stockholders and debt financing, if available, may involve restrictive covenants. If we raise funds through collaborative or licensing arrangements we may be required to relinquish, on terms that are not favorable to us, rights to some of our technologies or product candidates that we would otherwise seek to develop or commercialize ourselves. Our failure to raise capital when needed may harm our business and operating results.

As of September 30, 2009, the incremental costs of contractual commitments related to reservation fees for future manufacturing capacity at Lonza were $2.1 million, all of which are due within the next 12 months.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is primarily confined to our investment securities. The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of investments in a variety of securities of high credit quality. The securities in our investment portfolio are not leveraged, are classified as available for sale and, due to their very short-term nature, are subject to minimal interest rate risk. We currently do not hedge interest rate exposure on our investment securities. We actively monitor changes in interest rates.

We are exposed to potential loss due to changes in interest rates. Our principal interest rate exposure is to changes in U.S. interest rates related to our investment securities. To estimate the potential loss due to changes in interest rates, we performed a sensitivity analysis using the instantaneous adverse change in interest rates of 100 basis points across the yield curve. On this basis, we estimate the potential loss in fair value that would result from a hypothetical 1% (100 basis points) increase in interest rates to be $139,000 as of September 30, 2009.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer have reviewed our disclosure controls and procedures prior to the filing of this quarterly report on Form 10-Q. Based on that review, they have concluded that, as of the end of the period covered by this quarterly report, these disclosure controls and procedures were, in design and operation, effective to assure that the required information has been properly recorded, processed, summarized, and reported to those responsible in order that it may be included in this quarterly report.

(b) Changes in internal control over financial reporting. There have not been any changes in our internal control over financial reporting during the quarter ended September 30, 2009 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1A. Risk Factors

You should carefully consider the risks described below together with all of the other information included in this quarterly report on Form 10-Q and in our 2008 Form 10-K. The risks and uncertainties described below are not the only ones we face. If any of the following risks actually occurs, our business, financial condition, or operating results could be harmed. In such case, the trading price of our common stock could decline, and investors in our common stock could lose all or part of their investment.

Risks Related to Our Business

Our success depends on the success of our clinical product candidates, TRU-015, TRU-016, and SBI-087, and we cannot be certain that they will be safe or effective, complete clinical trials, receive regulatory approval or be successfully commercialized.

Although our lead product candidate, TRU-015, has completed a Phase 2b clinical trial for the treatment of RA, additional clinical trials would be required before we are able to submit a Biologic License Application, or BLA, to the FDA for approval. In addition, our Facet collaboration clinical candidate, TRU-016, and our Pfizer collaboration clinical candidate, SBI-087, commenced initial clinical testing in 2008 and even if, based on the results of the initial clinical trials for TRU-016 and SBI-087, we and Facet, in the case of TRU-016, or Pfizer, in the case of SBI-087, determine to proceed with further clinical testing, a number of additional clinical trials will be required before a BLA can be submitted to the FDA for product approval.

The regulatory approval process can take many years and require the expenditure of substantial resources. We are a party to a collaboration agreement with Pfizer pursuant to which Pfizer is responsible for regulatory approval, and any subsequent commercialization of TRU-015 and SBI-087. Ultimate decision-making authority as to most matters within the collaboration, including development plans and timeline, is vested with Pfizer. In addition to the risks and uncertainties inherent in the regulatory approval process for TRU-015 and SBI-087, Pfizer may not advance the development and commercialization of TRU-015 and SBI-087, or either of these product candidates as quickly as we would like, if at all. For example, prior to its acquisition by Pfizer, Wyeth had determined not to pursue TRU-015 for any oncology indications and discontinued the TRU-015 Phase 1/2 clinical trial for the treatment of non-Hodgkins’ lymphoma, or NHL, that it had initiated in December 2007. In addition, we are a party to a collaboration agreement with Facet pursuant to which we and Facet must jointly agree to all development and commercialization plans and timelines. In addition, to the risks and uncertainties inherent in the regulatory approval process for TRU-016, Facet and we, acting jointly, may not advance the development and commercialization of TRU-016 as quickly as we would, acting alone.

Clinical trials involving the number of sites and patients required for FDA approval of TRU-015 for RA, SBI-087 for RA or SLE or TRU-016 for CLL may not be successfully completed. If these clinical trials are not completed or their results do not meet safety and efficacy thresholds required by the FDA, these product candidates will likely not receive regulatory approval. Even if any of these product candidates receive regulatory approval, the approved product candidate may never be successfully commercialized. If our product candidates do not receive regulatory approval or are not successfully commercialized, we may not be able to generate revenue, or become profitable, which would negatively affect our ability to continue operations.

If we fail to obtain the capital necessary to fund our operations, we may be unable to develop our product candidates and we could be forced to share our rights to these product candidates with third parties on terms that may not be favorable to us.

We need large amounts of capital to support our research and development efforts. We may seek to raise funds through additional strategic partnerships, by selling additional equity or debt securities, or both, or incur other indebtedness. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, if at all, we will be prevented from pursuing research and development efforts and may elect to enter into collaborations that could require us to share rights to our product candidates to a greater extent than we currently intend, which could harm our business prospects and financial condition. The sale of additional equity or debt securities, if convertible, could result in the issuance of additional shares of our capital stock and could result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights, and other operating restrictions that could adversely impact our ability to conduct our business. The capital markets have been experiencing extreme losses and disruption for more than 12 months. The scope and extent of this disruption in the capital markets could make it difficult or impossible to raise additional capital in public or private capital markets until conditions

stabilize. Market volatility notwithstanding, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all.

We have incurred operating losses in each year since our inception and expect to continue to incur substantial and increasing losses for the foreseeable future.

We have been engaged in designing and developing compounds and product candidates since 1999 and have not generated any product revenue to date. Our net losses were $23.9 million and $19.2 million in the nine months ended September 30, 2009 and 2008, respectively. As of September 30, 2009, we had an accumulated deficit of $116.4 million. We expect our research and development expenses to increase in the future due to increased manufacturing and clinical development costs primarily related to our Facet collaboration clinical candidate, TRU-016, as well as the advancement of our preclinical programs, and product candidate manufacturing costs. As a result, we expect to continue to incur substantial and increasing losses for the foreseeable future. We are uncertain when or if we will be able to achieve or sustain profitability. Failure to become and remain profitable would adversely affect the price of our common stock and our ability to raise capital and continue operations. Continued operating losses and depletion of our cash balance may also result in non-compliance with our existing debt covenants and may require us to dedicate a substantial portion of our cash to repay our debt. As of September 30, 2009, our outstanding indebtedness under agreements with financial debt covenants that could be affected by continued operating losses or our cash position totaled $8.6 million. In addition, our net operating loss carryforwards and credits were substantially exhausted as a result of the payments we received from Wyeth in January 2006 pursuant to our Pfizer collaboration agreement, and any remaining net operating loss carryforwards and credits may be subject to an annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986, as amended, and similar state law provisions, which would have an adverse effect on our ability to reduce future tax expenses.

We depend on our collaborative relationship with Pfizer to develop, manufacture, and commercialize TRU-015, SBI-087, and other selected product candidates.

In October 2009, Pfizer completed its acquisition of Wyeth and Pfizer is now our collaboration partner for TRU-015 and SBI-087. We have no prior relationship with Pfizer and, as a result, we cannot predict how or whether Pfizer will proceed with the collaboration or the development of any of the collaboration product candidates. In addition to our collaboration agreement with Pfizer for the development and worldwide commercialization of TRU-015, SBI-087 and other therapeutics directed to CD20, we are also collaborating with Pfizer on the development and worldwide commercialization of certain other product candidates directed to a small number of targets other than CD20 that have been established pursuant to the agreement. Our ability to receive any significant revenue from our product candidates covered by the collaboration agreement depends on the efforts of Pfizer and on our ability to collaborate effectively. Any future payments, including royalties to us, will depend on the extent to which we and Pfizer advance product candidates through development and commercialization. Pfizer may terminate the collaboration relationship, in whole or in part, without cause, by giving 90 days’ written notice to us. Pfizer also has the right to terminate the agreement, on a target-by-target basis, upon 60 days’ written notice, if any safety or regulatory issue arises that would have a material adverse effect on Pfizer’s ability to develop, manufacture, or commercialize one or more product candidates.

Although Pfizer is responsible for developing, manufacturing, and commercializing product candidates directed to collaboration targets, including CD20, and for the costs associated with such activities, we were obligated to complete the Phase 2b clinical trial, and are obligated to conduct re-treatment studies in RA, and may be obligated to conduct niche indication registration studies for CD20-directed therapies.

With respect to control over decisions and responsibilities, the collaboration agreement provides for a research committee and a CD20-directed therapy development committee consisting of representatives of Pfizer and us. Ultimate decision-making authority as to most matters within the collaboration, including development plans and timelines, however, is vested in Pfizer. Pfizer has the right to develop multiple product candidates against the targets licensed to it under our collaboration. Pfizer has begun clinical development of SBI-087, another CD20-directed therapy, for RA and is currently enrolling patients in a phase 1 trial for the evaluation of SBI-087 for SLE. If Pfizer later determines not to continue developing two CD20-directed therapies, Pfizer could decide to discontinue efforts to further develop TRU-015. SBI-087 is at an earlier stage in clinical development than TRU-015 and a decision by Pfizer to develop SBI-087 instead of TRU-015 would likely delay the potential commercialization of any product under our collaboration with Pfizer, which could adversely affect our business and cause the price of our common stock to decline.

We cannot assure you that Pfizer will fulfill its obligations under the agreement, or will develop and commercialize our product candidates as quickly as we would like, if at all. If Pfizer terminates the agreement or fails to fulfill its obligations under the agreement, we would need to obtain the capital necessary to fund the development and commercialization of our product candidates or enter into alternative arrangements with a third party. We could also become involved in disputes with Pfizer, which could lead to delays in or termination of our development and commercialization programs and time-consuming and expensive litigation or arbitration. If Pfizer terminates or breaches its agreement with us, or otherwise fails to complete its obligations in a timely manner, our collaboration product development programs would be substantially delayed and the chances of successfully developing or commercializing our collaboration product candidates would be materially and adversely affected.

We depend on our collaborative relationship with Facet to develop, manufacture, and commercialize TRU-016 and other CD37-directed protein therapeutics.

In August 2009, we entered into a collaboration agreement with Facet for the joint worldwide development and commercialization of TRU-016, our product candidate in Phase 1 clinical development for chronic lymphocytic leukemia, or CLL, and other CD37-directed protein therapeutics. Under the terms of the collaboration agreement, neither we nor Facet have the right to develop or commercialize protein therapeutics directed to CD37 outside of the collaboration.

Our ability to receive funding for TRU-016 depends on our ability to collaborate effectively with Facet. Any future payments, including milestones payable to us, will depend on the extent to which we and Facet advance TRU-016 through development and commercialization. Facet may terminate the collaboration agreement without cause, and would not be obligated to pay us a termination fee if such a termination was more than 18 months after the beginning of the collaboration. Facet also has the right upon 90 days’ written notice to terminate the agreement for our uncured material breach.

With respect to control over decisions and responsibilities, the collaboration agreement provides for a joint steering committee, or JSC, that must make decisions by consensus. The failure of the JSC to reach consensus on material aspects of the development or commercialization of TRU-016 will lead to dispute resolution by our and Facet’s chief executive officers, and potentially arbitration, any of which may delay the development of TRU-016, which may harm our business.

Under certain circumstances, the parties have the right to opt-out of the collaboration or may be deemed to have opted-out of the collaboration. If Facet opts-out of the collaboration with respect to a product, then we would become responsible for all development and commercialization costs for that product and be obligated to pay Facet certain royalty payments upon the sale of that product. If we opt-out of the collaboration and are the lead TRU-016 manufacturing party at that time, we would be obligated to continue to supply TRU-016 to Facet for up to 18 months.

If Facet opts-out of or terminates the agreement or fails to fulfill its obligations under the agreement, we would need to obtain the capital necessary to fully fund the development and commercialization of TRU-016 or enter into alternative arrangements with a third party. We could also become involved in disputes with Facet, which could lead to delays in or termination of our development and commercialization programs and time-consuming and expensive litigation or arbitration. If Facet terminates or breaches its agreement with us, or otherwise fails to complete its obligations in a timely manner, our collaboration product development programs would be substantially delayed and the chances of successfully developing or commercializing our collaboration product candidates would be materially and adversely affected.

Facet is the subject of a hostile takeover bid by Biogen Idec Inc., which may have negative impacts on our collaboration.

On September 21, 2009, Biogen Idec Inc., or Biogen Idec, launched a hostile tender offer for the purchase of all of Facet’s outstanding shares of common stock that is currently set to expire on December 16, 2009, unless further extended by Biogen Idec. Facet’s board of directors has recommended that its stockholders reject the offer to purchase and not tender their shares to Biogen Idec, although the ultimate outcome of the tender offer is highly speculative and impossible to predict.

The tender offer is likely to distract Facet’s management from the operation of its core business, including focus on our collaboration, until and for some time after its resolution. Furthermore, Facet’s and our research and development personnel are actively engaged in establishing the parameters and timeline upon which the TRU-016 development and commercialization program will be based and it is critical that they are able to communicate efficiently. Continued uncertainty regarding the tender offer might distract these personnel or otherwise impede their ability to collaborate effectively. The failure of Facet’s management or research

personnel to focus adequately on our collaboration could negatively impact our ability to develop in a timely manner, if at all, the product candidates that are the subject of this collaboration.

If Biogen Idec completes its proposed acquisition of Facet, whether through the tender offer or otherwise, we cannot be certain whether and to what extent it would proceed with the collaboration or the related development and commercialization programs. Biogen Idec has stated publicly that it does not consider our collaboration with Facet to be a positive development for Facet or its stockholders. If Facet, or any successor-in-interest, was to opt-out of or terminate or fail to fulfill its obligations under the agreement or if we were forced to opt-out of the agreement as a result of a change in control of Facet, we could become involved in costly and protracted disputes or litigation and our ability to successfully develop and commercialize any TRU-016 product candidates would be materially and adversely affected.

We currently rely on third-party manufacturers to supply our product candidates and will rely on third-party manufacturers to manufacture our product candidates in commercial quantities, which could delay or prevent the clinical development and future commercialization of our product candidates.

We currently depend on Pfizer for the supply of TRU-015 and SBI-087. We also currently depend on contract manufacturers for certain biopharmaceutical development and manufacturing services for TRU-016, our Facet collaboration clinical candidate. Any disruption in production, inability of these third-party manufacturers to produce adequate quantities to meet our needs, or other impediments with respect to development or manufacturing could adversely affect our ability to successfully complete clinical trials, delay submissions of our regulatory applications, or adversely affect our ability to commercialize our product candidates in a timely manner, if at all.

Our product candidates have not yet been manufactured for commercial use. If any of our product candidates becomes a product approved for commercial sale, in order to supply our or our collaborators’ commercial requirements for such an approved product, the third-party manufacturer may need to increase its manufacturing capacity, which may require the manufacturer to fund capital improvements to support the scale-up of manufacturing and related activities. The third-party manufacturer may not be able to successfully increase its manufacturing capacity for such an approved product in a timely or economic manner, if at all. If any manufacturer is unable to provide commercial quantities of such an approved product, we will have to successfully transfer manufacturing technology to a new manufacturer. Engaging a new manufacturer for such an approved product could require us to conduct comparative studies or utilize other means to determine bioequivalence of the new and prior manufacturers’ products, which could delay or prevent our ability to commercialize such an approved product. If any of these manufacturers is unable or unwilling to increase its manufacturing capacity or if we are unable to establish alternative arrangements on a timely basis or on acceptable terms, the development and commercialization of such an approved product may be delayed or there may be a shortage in supply. Any inability to manufacture our products in sufficient quantities when needed would seriously harm our business.

Any manufacturer of our product candidates and approved products, if any, must comply with cGMP requirements enforced by the FDA through its facilities inspection program. These requirements include quality control, quality assurance, and the maintenance of records and documentation. Manufacturers of our product candidates and approved products, if any, may be unable to comply with these cGMP requirements and with other FDA, state, and foreign regulatory requirements. We have little control over our manufacturers’ compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any quantities supplied is compromised due to our manufacturers’ failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our products, which would seriously harm our business.

Our success depends on the proper management of our current and future business operations, and the expenses associated with them.

Our business strategy requires us to manage our operations to provide for the continued development and potential commercialization of our product candidates and to manage our expenses generated by these activities. In an effort to reduce costs, we announced in February 2009 a workforce reduction of approximately 25%, which included the elimination of certain existing positions across our research and administrative functions. As a result of this reduction in force, we recorded a restructuring charge of $0.8 million in the first quarter of 2009. We continue to believe that strict cost containment in the near term is essential if our current funds are to be sufficient to allow us to continue our currently planned operations.

If we are unable to effectively manage our current operations, we may not be able to implement our business strategy and our financial condition and results of operations may be adversely affected. If we are unable to effectively manage our expenses, we may find it necessary to reduce our expenses through another reduction in our workforce, which could adversely affect our operations.

We rely on highly skilled personnel, and if we are unable to retain or motivate key personnel or hire qualified personnel, we may not be able to maintain our operations.

Our performance largely depends on the talents and efforts of highly skilled individuals. In February 2009, as part of our efforts to reduce our operating expenses through prioritization of our development portfolio and streamlining our infrastructure, we announced a reduction of approximately 25% of our workforce, across our research and administrative functions. This reduction in workforce may impair our ability to recruit and retain qualified employees and to effectively complete administrative and developmental functions. As a result, our ability to respond to unexpected challenges may be impaired and we may be unable to take advantage of new opportunities. If we need to rehire terminated individuals or hire individuals with similar skills, we may be unable to do so. Our future success depends on our continuing ability to develop, motivate, and retain qualified management, clinical, and scientific personnel for all areas of our organization. If we do not succeed in retaining and motivating our remaining personnel, our existing operations may suffer and we may be unable to effectively engage in planned operations.

We cannot assure you any of our product candidates will be safe or effective, or receive regulatory approval.

The clinical trials and the manufacturing of our product candidates are, and marketing of our products will be, subject to extensive and rigorous review and regulation by numerous government authorities in the United States and in other countries where we intend to test and market our product candidates. Before obtaining regulatory approvals for the commercial sale of any product candidate, we must demonstrate through preclinical testing and clinical trials that the product candidate is safe and effective for use in each target indication. This process can take many years and require the expenditure of substantial resources, and may include post-marketing studies and surveillance. To date, we have not successfully demonstrated in clinical trials safety or efficacy sufficient for regulatory approval. Although our lead product candidate, TRU-015, has completed a Phase 2b clinical trial for the treatment of RA, additional clinical trials would be required before we are able to submit a BLA to the FDA for approval. In addition, our Facet collaboration clinical candidate TRU-016 and our Pfizer collaboration clinical candidate SBI-087 commenced initial clinical testing in 2008 and as a result we only have limited clinical trial results regarding the safety or efficacy of either of these product candidates. Even if, based on the results of the initial clinical trials for TRU-016 and SBI-087, we and Facet, in the case of TRU-016, or Pfizer, in the case of SBI-087, determine to proceed with further clinical testing, a number of additional clinical trials will be required before a BLA can be submitted to the FDA for product approval. The results from preclinical testing and clinical trials that we have completed may not be predictive of results in future preclinical tests and clinical trials, and we cannot assure you we will demonstrate sufficient safety and efficacy to seek or obtain the requisite regulatory approvals. A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. All of our other product candidates remain in the discovery and pre-clinical testing stages. We may also encounter delays or rejections due to additional government regulation from future legislation, administrative action, or changes in FDA policy. We cannot assure you that regulatory approval will be obtained for any of our product candidates, and even if the FDA approves a product, the approval will be limited to those indications covered in the approval. If our current product candidates are not shown to be safe and effective in clinical trials, the resulting delays in developing other product candidates and conducting related preclinical testing and clinical trials, as well as the potential need for additional financing, would have a material adverse effect on our business, financial condition, and operating results. If we are unable to discover or successfully develop drugs that are effective and safe in humans and receive regulatory approval, we will not have a viable business. We do not expect any of our current product candidates to be commercially available in major markets before 2012, if at all.

Any failure or delay in commencing or completing clinical trials for product candidates could severely harm our business.

Each of our product candidates must undergo extensive preclinical studies and clinical trials as a condition to regulatory approval. Preclinical studies and clinical trials are expensive and take many years to complete. To date we have not initiated any Phase 3 clinical trials of any product candidate. The commencement and completion of clinical trials for our product candidates may be delayed by many factors, including:

•

having the capital resources available to fund additional clinical trials;

	•		our or our collaborators’ ability to obtain regulatory approval to commence a clinical trial;

	•		our or our collaborators’ ability to manufacture or obtain from third parties materials sufficient for use in preclinical studies and clinical trials;

	•		delays in patient enrollment and variability in the number and types of patients available for clinical trials;

	•		poor effectiveness of product candidates during clinical trials;

	•		unforeseen safety issues or side effects;

	•		governmental or regulatory delays related to clinical trials, including trial design, results, and materials supply;

	•		changes in regulatory requirements, policy, and guidelines; and

	•		varying interpretation of data by us, any or all of our collaborators, the FDA, and similar foreign regulatory agencies.

It is possible that none of our product candidates will complete the required clinical trials in any of the markets in which we or our collaborators intend to commercialize those product candidates. Accordingly, we or our collaborators may not seek or receive the regulatory approvals necessary to market our product candidates. Any failure or delay in commencing or completing clinical trials or obtaining regulatory approvals for product candidates would prevent or delay their commercialization and severely harm our business and financial condition.

We rely on third parties to conduct our clinical trials. If these third parties do not perform as contractually required or otherwise expected, we may not be able to obtain regulatory approval for or commercialize our product candidates.

We do not currently have the ability to conduct clinical trials and we must rely on third parties, such as contract research organizations, medical institutions, clinical investigators, and contract laboratories, to conduct our clinical trials. We have, in the ordinary course of business, entered into agreements with these third parties. Nonetheless, we are responsible for confirming that each of our clinical trials is conducted in accordance with its general investigational plan and protocol. Moreover, the FDA requires us to comply with regulations and standards, commonly referred to as good clinical practices, for conducting, recording, and reporting the results of clinical trials to ensure that data and reported results are credible and accurate and that the trial participants are adequately protected. Our reliance on third parties does not relieve us of these responsibilities and requirements. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our clinical trials may be extended, delayed, suspended, or terminated, and we may not be able to obtain regulatory approval for our product candidates.

If we enter into additional strategic partnerships, such as our relationships with Pfizer and Facet, we may be required to relinquish important rights to and control over the development of our product candidates or otherwise be subject to terms unfavorable to us.

If we enter into any strategic partnerships, we will be subject to a number of risks, including:

	•		we may not be able to control the amount and timing of resources that our strategic partners devote to the development or commercialization of product candidates;

	•		strategic partners may delay clinical trials, design clinical trials in a manner with which we do not agree, provide insufficient funding, terminate a clinical trial or abandon a product candidate, repeat or conduct new clinical trials, or require a new version of a product candidate for clinical testing;

	•		strategic partners may not pursue further development and commercialization of products resulting from the strategic partnering arrangement or may elect to discontinue research and development programs;

	•		strategic partners may not commit adequate resources to the marketing and distribution of any future products, limiting our potential revenues from these products;

	•		disputes may arise between us and our strategic partners that result in the delay or termination of the research, development, or commercialization of our product candidates or that result in costly litigation or arbitration that diverts management’s attention and consumes resources;

	•		strategic partners may experience financial difficulties;

	•		strategic partners may not properly maintain or defend our intellectual property rights or may use our proprietary information in a manner that could jeopardize or invalidate our proprietary information or expose us to potential litigation;

	•		business combinations or significant changes in a strategic partner’s business strategy may also adversely affect a strategic partner’s willingness or ability to complete its obligations under any arrangement;

	•		strategic partners could independently move forward with a competing product candidate developed either independently or in collaboration with others, including our competitors; and

	•		strategic partners could terminate the arrangement or allow it to expire, which would delay the development and may increase the cost of developing our product candidates.

The occurrence of any of these risks could negatively impact the development of our product candidates which would have an adverse effect on our business prospects.

If our technology or our product candidates conflict with the rights of others we may not be able to manufacture or market our product candidates, which could have a material adverse effect on us and on our collaboration agreement with Pfizer.

Our commercial success will depend in part on not infringing the patents or violating the proprietary rights of third parties. Issued patents held by others may limit our ability to develop commercial products. All issued U.S. patents are entitled to a presumption of validity under U.S. law. If we need licenses to such patents to permit us to manufacture, develop, or market our product candidates we may be required to pay significant fees or royalties, and we cannot be certain that we would be able to obtain such licenses. Competitors or third parties may obtain patents that may cover subject matter we use in developing the technology required to bring our products to market, producing our products, or treating patients with our products. We know that others have filed patent applications in various jurisdictions that relate to several areas in which we are developing products. Some of these patent applications have already resulted in patents and some are still pending. We may be required to alter our processes or product candidates, pay licensing fees, or cease activities. For example, certain parts of our SMIP™ product technology, including the current expression system responsible for the production of the recombinant proteins used in our product candidates and certain nucleic acids, originated from third-party sources. These third-party sources include academic, government, and other research laboratories, as well as the public domain. If use of technology incorporated into or used to produce our product candidates is challenged, or if our processes or product candidates conflict with patent rights of others, third parties could bring legal actions against us in Europe, the United States, and elsewhere claiming damages and seeking to enjoin manufacturing and marketing of the affected products. Additionally, it is not possible to predict with certainty what patent claims may issue from pending applications. In the United States, for example, patent prosecution can proceed in secret prior to issuance of a patent. As a result, third parties may be able to obtain patents with claims relating to our product candidates which they could attempt to assert against us. Further, as we develop our products, third parties may assert that we infringe the patents currently held or licensed by them and we cannot predict the outcome of any such action.

We are aware of previously filed U.S. provisional patent applications owned by Genentech and Biogen Idec, which patent applications are related to a revoked European patent that was generally directed to the use of an anti-CD20 antibody for the treatment of RA. A U.S. patent or patent application claiming the benefit of priority to the provisional patent applications, if it exists, has not yet published. In the event any such U.S. patent issues, and if our activities are determined to be covered by such a patent, we cannot assure you Genentech would be willing to grant us or Pfizer a license on terms we or they would consider commercially reasonable, if at all, which could prevent us from manufacturing and marketing TRU-015 or SBI-087 for the treatment of RA in the United States, and have a material adverse effect on our business, financial condition, operating results, and our collaboration with Pfizer. With regard to the related European patent, we announced on September 11, 2008 that the Opposition Division, or OD, of the European Patent Office, or EPO, had revoked the European patent in its entirety. On February 19, 2009, Genentech and Biogen Idec appealed

the decision to the Board of Appeals of the EPO. If Genentech and Biogen Idec succeed in their appeal of the OD’s decision the opposition proceeding will be reopened before the OD. If upon these further proceedings the European patent is held to be valid, either as amended prior to the OD hearing or with a more limited scope, and if our activities are determined to be covered by that patent, we cannot assure you that Genentech would be willing to grant us or Pfizer a license on terms we or they would consider commercially reasonable, if at all. As a consequence, we and Pfizer could be prevented from manufacturing and marketing TRU-015 or SBI-087 for the treatment of RA in the designated and extended states of the European Patent Convention where the patent is validated, which could have a material adverse effect on our business, financial condition, and operating results. The revoked Genentech European patent claimed the benefit of priority to two U.S. provisional patent applications and a U.S. patent or patent application claiming priority to the provisional patent applications that have not been published. In the event any such U.S. patent issues, and if our activities are determined to be covered by such a patent, we cannot assure you Genentech would be willing to grant us or Pfizer a license on terms we or they would consider commercially reasonable, if at all, which could prevent us from manufacturing and marketing TRU-015 or SBI-087 for the treatment of RA in the United States, and have a material adverse effect on our business, financial condition and operating results, and our collaboration with Pfizer.

If we are unable to obtain, maintain, and enforce our proprietary rights, we may not be able to compete effectively or operate profitably.

Our success depends in part on obtaining, maintaining, and enforcing our patents and other proprietary rights, and will depend in large part on our ability to:

	•		obtain and maintain patent and other proprietary protection for our technology, processes, and product candidates;

	•		enforce patents once issued and defend those patents if their enforceability is challenged;

	•		preserve trade secrets; and

	•		operate without infringing the patents and proprietary rights of third parties.

The degree of future protection for our proprietary rights is uncertain. For example:

	•		we might not have been the first to make the inventions claimed in our patents, if issued, or disclosed in our pending patent applications;

	•		we might not have been the first to file patent applications for these inventions;

	•		others may independently develop similar or alternative technologies or duplicate any of our technologies;

	•		it is possible that none of our pending patent applications will result in issued patents or, if issued, these patents may not be sufficient to protect our technology or provide us with a basis for commercially viable products, and may not provide us with any competitive advantages;

	•		if our pending applications issue as patents, they may be challenged by third parties as not infringed, invalid, or unenforceable under U.S. or foreign laws;

	•		if issued, the patents under which we hold rights may not be valid or enforceable; or

	•		we may develop additional proprietary technologies that are not patentable and that may not be adequately protected through trade secrets, if, for example, a competitor were to independently develop duplicative, similar, or alternative technologies.

The patent position of biotechnology and pharmaceutical firms is highly uncertain and involves many complex legal and technical issues. There is no clear policy involving the breadth of claims allowed in patents or the degree of protection afforded under patents. Although we believe our potential rights under patent applications provide a competitive advantage, we cannot assure you that patent applications owned by or licensed to us will result in patents being issued or that, if issued, the patents will give us an advantage over competitors with similar technology, nor can we assure you that we can obtain, maintain, and enforce all ownership and other proprietary rights necessary to develop and commercialize our product candidates.

Even if any or all of our patent applications issue as patents, others may challenge the validity, inventorship, ownership, enforceability, or scope of our patents or other technology used in or otherwise necessary for the development and commercialization of our product candidates. Further, we cannot assure you that any such challenge would not be successful. Moreover, the cost of litigation to uphold the validity of patents to prevent infringement or to otherwise protect our proprietary rights can be substantial. If the outcome of litigation is adverse to us, third parties may be able to use the challenged technologies without payment to us. We cannot assure you that our patents, if issued, will not be infringed or successfully avoided through design innovation. Intellectual property lawsuits are expensive and would consume time and other resources, even if the outcome were successful. In addition, there is a risk that a court would decide that our patents, if issued, are not valid and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of a patent were upheld, a court would refuse to stop the other party from using the inventions, including on the ground that its activities do not infringe that patent. If any of these events were to occur, our business, financial condition, and operating results would be materially adversely affected.

We also will rely on current and future trademarks to establish and maintain recognized brands. If we fail to acquire and protect such trademarks, our ability to market and sell our products, and therefore our business, financial condition and operating results, would be materially adversely affected. For example, in November 2005, Merck KGaA filed a proceeding with the Office for Harmonisation in the Internal Market opposing our European registration of the trademark TRUBION and seeking to place certain restrictions on the identification of goods, services, and channels of trade description in our European trademark registration. Merck claims rights resulting from its prior trademark registration of TRIBION HARMONIS. Our appeal to the opposition was dismissed by the Board of Appeals. We have filed an action with the Court of First Instance of the European Communities to annul the Board decision. We intend to continue challenging the opposition vigorously; however, if we are unable to effectively defend against the opposition, we may be prohibited from using the TRUBION trademark in certain European Union jurisdictions, which could have an adverse effect on our ability to promote the Trubion brand in those jurisdictions.

In addition to the intellectual property and other rights described above, we also rely on unpatented technology, trade secrets, and confidential information, particularly when we do not believe that patent or trademark protection is appropriate or available. Trade secrets are difficult to protect and we cannot assure you that others will not independently develop substantially equivalent information and techniques or otherwise gain access to or disclose our unpatented technology, trade secrets, and confidential information. In addition, we cannot assure you that the steps we take with employees, consultants, and advisors will provide effective protection of our confidential information or, in the event of unauthorized use of our intellectual property or the intellectual property of third parties, provide adequate or effective remedies or protection.

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.

There has been significant litigation in the biotechnology industry over patents and other proprietary rights, and if we become involved in any litigation it could consume a substantial portion of our resources, regardless of the outcome of the litigation. Some of our competitors may be better able to sustain the costs of complex patent litigation because they have substantially greater resources. If these legal actions are successful, in addition to any potential liability for damages, we could be required to obtain a license, grant cross-licenses, and pay substantial royalties in order to continue to manufacture or market the affected products. We cannot assure you we would prevail in any legal action or that any license required under a third-party patent would be made available on acceptable terms, if at all. In addition, uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to continue our operations. Ultimately we could be prevented from commercializing a product or be forced to cease some aspect of our business operations as a result of claims of patent infringement or violation of other intellectual property rights, which could have a material adverse effect on our business, financial condition, and operating results. Should third parties file patent applications, or be issued patents claiming technology also claimed by us in pending applications, we may be required to participate in interference proceedings in the United States Patent and Trademark Office to determine priority of invention, which could result in substantial costs to us and an adverse decision as to the priority of our inventions. An unfavorable outcome in an interference proceeding could require us to cease using the technology or to license rights from prevailing third parties. We cannot assure you that any prevailing party would offer us a license or that we could acquire any license made available to us on commercially acceptable terms.

We face substantial competition, which may result in others discovering, developing, or commercializing products before, or more successfully than, we do.

Our future success depends on our ability to demonstrate and maintain a competitive advantage with respect to the design, development, and commercialization of our product candidates. We expect any product candidate that we commercialize with our collaborative partners, or on our own, will compete with other products.

Product Candidates for Autoimmune and Inflammatory Diseases. If approved for the treatment of RA, we anticipate that our product candidates would compete with other marketed protein therapeutics for the treatment of RA, including: Rituxan® (Genentech, Roche and Biogen Idec), Enbrel® (Amgen and Pfizer), Remicade® (JNJ and Schering-Plough), Humira® (Abbott), Orencia^®(BMS), Cimzia® (UCB) and Simponi® (JNJ and Schering-Plough). If approved for the treatment of SLE, our product candidates may compete with other therapies.

Product Candidates for B-cell Malignancies. If approved for the treatment of CLL, NHL, or other B-cell malignancies, we anticipate that our product candidates would compete with other B-cell depleting therapies. While we are not aware of any CD37-directed therapeutics in development or on the market, other biologic therapies are marketed for the treatment of NHL or CLL or both, such as Rituxan/Mabthera® (Genentech, Roche and Biogen Idec), Zevalin® (Spectrum Pharmaceuticals, Inc. and Bayer Schering AG), Bexxar^®(GSK), Treanda® (Cephalon), Campath® (Genzyme and Bayer Schering AG) and Arzerra® (GSK and Genmab).

Many of our potential competitors have substantially greater financial, technical, manufacturing, marketing and personnel resources than we have. In addition, many of these competitors have significantly greater commercial infrastructures than we have. Our ability to compete successfully will depend largely on our ability to:

	•		design and develop products that are superior to other products in the market;

	•		attract and retain qualified scientific, medical, product development, commercial, and sales and marketing personnel;

	•		obtain patent and/or other proprietary protection for our processes, product candidates, and technologies;

	•		operate without infringing the patents and proprietary rights of third parties;

	•		obtain required regulatory approvals; and

	•		successfully collaborate with others in the design, development, and commercialization of new products.

Established competitors may invest heavily to quickly discover and develop novel compounds that could make our product candidates obsolete. In addition, any new product that competes with a generic market-leading product must demonstrate compelling advantages in efficacy, convenience, tolerability, and safety in order to overcome severe price competition and to be commercially successful. If we are not able to compete effectively against our current and future competitors, our business will not grow, and our financial condition and operating results will suffer.

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

We have limited technical, managerial, and financial resources to determine which of our product candidates should proceed to initial clinical trials, later-stage clinical development, and potential commercialization and, further, we may make incorrect determinations. Our decisions to allocate our research and development, 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.

Even if our product candidates receive regulatory approval, they could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our products.

Any product candidate for which we receive regulatory approval, together with the manufacturing processes, post-approval clinical data, and advertising and promotional activities for such product, will be subject to continued review and regulation by the FDA and other regulatory agencies. Even if regulatory approval of a product candidate is granted, the approval may be subject to limitations on

the indicated uses for which the product candidate may be marketed or on the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product candidate. Later discovery of previously unknown problems with our products or their manufacture, or failure to comply with regulatory requirements, may result in, among other things:

	•		restrictions on the products or manufacturing processes;

	•		withdrawal of the products from the market;

	•		voluntary or mandatory recalls;

	•		fines;

	•		suspension of regulatory approvals;

	•		product seizures; or

	•		injunctions or the imposition of civil or criminal penalties.

If we are slow or otherwise unable to adapt to changes in existing regulatory requirements, we may lose marketing approval for any products that may be approved in the future.

Failure to obtain regulatory approval in foreign jurisdictions would prevent us from marketing our products internationally.

We intend to have our product candidates marketed outside the United States. In order to market our products in the European Union and many other non-U.S. jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. To date, we have not filed for marketing approval of any of our product candidates and may not receive the approvals necessary to commercialize our product candidates in any market. The approval procedure varies among countries and can involve additional testing and data review. The time required to obtain foreign regulatory approval 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, or may include different or additional risks. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory agencies in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory agencies in other foreign countries or by the FDA. A failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in other jurisdictions, including approval by the FDA. The failure to obtain regulatory approval in foreign jurisdictions could seriously harm our business.

Our product candidates may never achieve market acceptance even if we obtain regulatory approvals.

Even if we obtain regulatory approvals for the commercial sale of our product candidates, the commercial success of these product candidates will depend on, among other things, their acceptance by physicians, patients, third-party payors, and other members of the medical community as a therapeutic and cost-effective alternative to competing products and treatments. If our product candidates fail to gain market acceptance, we may be unable to earn sufficient revenue to continue our business. Market acceptance of, and demand for, any product that we may develop and commercialize will depend on many factors, including:

	•		our ability to provide acceptable evidence of safety and efficacy;

	•		the prevalence and severity of adverse side effects;

	•		availability, relative cost, and relative efficacy of alternative and competing treatments;

	•		the effectiveness of our marketing and distribution strategy;

	•		publicity concerning our products or competing products and treatments; and

	•		our ability to obtain sufficient third-party insurance coverage or reimbursement.

If our product candidates do not become widely accepted by physicians, patients, third-party payors, and other members of the medical community, our business, financial condition, and operating results would be materially adversely affected.

If we are unable to establish a sales and marketing infrastructure or enter into collaborations with partners to perform these functions, we will not be able to commercialize our product candidates.

We currently do not have any internal sales, marketing, or distribution capabilities. In order to commercialize any of our product candidates that are approved for commercial sale, we must either acquire or internally develop a sales, marketing, and distribution infrastructure or enter into collaborations with partners able to perform these services for us. In December 2005, we entered into a collaboration agreement with Wyeth, now Pfizer to develop and commercialize therapeutics directed to the CD20 protein and other targets. If we do not enter into collaborations with respect to product candidates not covered by the Pfizer collaboration, or if any of our product candidates are the subject of collaborations with partners that are not able to commercialize such product candidates, we will need to acquire or internally develop a sales, marketing, and distribution infrastructure. Factors that may inhibit our efforts to commercialize our product candidates without partners that are able to commercialize the product candidates include:

	•		our inability to recruit and retain adequate numbers of effective sales and marketing personnel;

	•		the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe our products;

	•		the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and

	•		unforeseen costs and expenses associated with creating a sales and marketing organization.

If we are not able to partner with a third party able to commercialize our product candidates, or are not successful in recruiting sales and marketing personnel or in building a sales, marketing, and distribution infrastructure, we will have difficulty commercializing our product candidates, which would adversely affect our business and financial condition.

If any products we develop become subject to unfavorable pricing regulations, third-party reimbursement practices, or healthcare reform initiatives, our business could be harmed.

Our ability to commercialize any product candidate profitably will depend in part on the extent to which reimbursement for such product candidate and related treatments will be available from government health administration authorities, private health insurers, or private payors, and other organizations in the United States and internationally. Even if we succeed in bringing one or more product candidates to market, these products may not be considered cost-effective, and the amount reimbursed for any product may be insufficient to allow us to sell it profitably. Because our product candidates are in the early stages of development, we are unable at this time to determine their cost-effectiveness and the level or method of reimbursement. There may be significant delays in obtaining coverage for newly approved products, and coverage may be more limited than the purposes for which the product candidate is approved by the FDA or foreign regulatory agencies. Moreover, eligibility for coverage does not mean that any product will be reimbursed in all cases or at a rate that covers our costs, including research, development, manufacture, sale, and distribution. Increasingly, the third-party payors who reimburse patients, such as government and private payors, are requiring that companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. If the reimbursement we are able to obtain for any product we develop is inadequate in light of our development and other costs, our business could be harmed.

We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability for a product candidate and may have to limit its commercialization.

The use of our product candidates in clinical trials and the sale of any products for which we obtain marketing approval expose us to the risk of product liability claims. Product liability claims might be brought against us by consumers, health-care providers, pharmaceutical companies, or others selling our products. If we cannot successfully defend ourselves against these claims, we will incur substantial liabilities. Regardless of merit or eventual outcome, product liability claims may result in:

•

decreased demand for our product candidates;

	•		impairment of our business reputation;

	•		withdrawal of clinical trial participants;

	•		costs of related litigation;

	•		substantial monetary awards to patients or other claimants;

	•		loss of revenues; and

	•		the inability to commercialize our product candidates.

Although we currently have product liability insurance coverage for our clinical trials for expenses or losses, our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any or all expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. On occasion, large judgments have been awarded in class action lawsuits based on products that had unanticipated side effects. A successful product liability claim or series of claims brought against us could cause our stock price to fall and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

We could be required to pay significant cancellation fees for reserved manufacturing capacity under our manufacturing agreement with Lonza.

We are party to a manufacturing services agreement effective as of November 21, 2005, with Lonza under which Lonza provides development and manufacturing services, with respect to TRU-016, including manufacture of product candidates for use in clinical trials and, upon regulatory approval, for commercial use. Under this agreement, we reserve future manufacturing runs under pre-specified terms and conditions. We may desire to cancel a reserved manufacturing run for a number of business reasons, such as a regulatory action or a preclinical, clinical, or commercial development that might change our clinical trial schedule. If for any reason we terminate any of these reserved runs without providing at least 360 days’ advance notice to Lonza and if Lonza is unable to mitigate its losses after using reasonable efforts to do so, we will incur cancellation fees of 85% of the cost to us of the run. In addition, if we terminate any of the reserved runs without providing at least 180 days’ advance notice to Lonza, and if Lonza is unable to mitigate its losses after using reasonable efforts to do so, we will incur cancellation fees of 100% of the cost to us of the run. For example, we currently have a manufacturing run scheduled to occur in less than 360 days and if we cancel that run and if Lonza is unable to find a replacement customer despite its reasonable efforts to mitigate its losses, we will owe Lonza a cancellation fee of $1.8 million, which could harm our financial condition.

If we use biological and hazardous materials in a manner that causes contamination or injury or violates laws, we may be liable for damages.

Our research and development activities involve the use of potentially harmful biological materials, as well as hazardous materials, chemicals, and various radioactive compounds. We cannot completely eliminate the risk of accidental contamination or injury from the use, storage, handling, or disposal of these materials. In the event of contamination or injury, we could be held liable for damages that result, and any liability could exceed our resources. We do not maintain liability insurance coverage for our handling of biological or hazardous materials. We, the third parties that conduct clinical trials on our behalf, and the third parties that manufacture our product candidates are subject to federal, state, and local laws and regulations governing the use, storage, handling, and disposal of these materials and waste products. The cost of compliance with these laws and regulations could be significant. The failure to comply with any of these laws and regulations could result in significant fines and work stoppages and may harm our business.

Risks Related to Our Common Stock

The trading price of our common stock may be subject to significant fluctuations and volatility, and our stockholders may be unable to resell their shares at a profit.

The trading prices of many smaller publicly traded companies are highly volatile, particularly companies such as ours that have limited operating histories. Accordingly, the trading price of our common stock has been subject to significant fluctuations and may continue to fluctuate or decline. Since our initial public offering, which was completed in October 2006, the price of our common stock has ranged from an intra-day low of $1.00 to an intra-day high of $22.50. Factors that could cause fluctuations in the trading price of our common stock include the following:

	•		low trading volumes;

	•		our ability to develop and market new and enhanced product candidates on a timely basis;

	•		announcements by us or our collaborators or competitors of new commercial products, clinical progress or the lack thereof, changes in or terminations of relationships, significant contracts, commercial relationships, or capital commitments;

	•		commencement of, or our involvement in, litigation;

	•		changes in earnings estimates or recommendations by securities analysts;

	•		changes in governmental regulations or in the status of our regulatory approvals;

	•		any major change in our board or management;

	•		quarterly variations in our operating results or those of our collaborators or competitors;

	•		general economic conditions and slow or negative growth of our markets; and

	•		political instability, natural disasters, war, and/or events of terrorism.

In addition, the U.S. stock market has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of trading companies. Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

If securities analysts do not publish research or reports about our business, or if they downgrade our stock, the price of our stock could decline.

The trading market for our common stock will rely in part on the availability of research and reports that third-party industry or financial analysts publish about us. There are many large, publicly traded companies active in the biopharmaceutical industry, which may mean it will be less likely that we receive widespread analyst coverage. Furthermore, if one or more of the analysts who do cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of us, we could lose visibility in the market, which in turn could cause our stock price to decline.

The concentration of our capital stock ownership with insiders will likely limit your ability to influence corporate matters.

As of September 30, 2009, our executive officers, directors, current five percent or greater stockholders, and affiliated entities together beneficially owned approximately 82% of our outstanding common stock. As a result, these stockholders, acting together, have control over most matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of us that other stockholders may view as beneficial.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our certificate of incorporation and bylaws may delay or prevent an acquisition of us or a change in our management. These provisions include a classified board of directors, a prohibition on actions by written consent of our stockholders and the ability of our board of directors to issue preferred stock without stockholder approval. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. Although we believe these provisions collectively provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

We are exposed to potential risks from legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act.

The Sarbanes-Oxley Act requires that we maintain effective internal controls over financial reporting and disclosure controls and procedures. Among other things, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on, and our independent registered public accounting firm to attest to, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Compliance with Section 404 requires substantial accounting expense and significant management efforts. Our testing, or the subsequent review by our independent registered public accounting firm, may reveal deficiencies in our internal controls that would require us to remediate in a timely manner so as to be able to comply with the requirements of Section 404 each year. If we are not able to comply with the requirements of Section 404 in a timely manner each year, we could be subject to sanctions or investigations by the SEC, NASDAQ or other regulatory authorities that would require additional financial and management resources and could adversely affect the market price of our common stock.

ITEM 6. EXHIBITS


Exhibit
Number		Description
3.1		Amended and Restated Certificate of Incorporation (Exhibit 3.1)(A)
3.2		Amended and Restated Bylaws (Exhibit 3.1)(B)
4.1		Form of common stock certificate (Exhibit 4.1)(C)
4.2		Amended and Restated Investor Rights Agreement, dated July 13, 2004 (Exhibit 4.2)(A)
4.3		Amendment No. 1 to Amended and Restated Investor Rights Agreement, dated December 19, 2005 (Exhibit 4.3)(A)
10.1*†		Collaboration and License Agreement, dated August 27, 2009, by and between Facet Biotech Corporation and Trubion Pharmaceuticals, Inc.
10.2†		Manufacturing Services Agreement, dated November 21, 2005, by and between Lonza Biologics and Trubion Pharmaceuticals, Inc. (Exhibit 10.37) (D)
10.3		Novation Agreement, effective as of January 1, 2007, among Trubion Pharmaceuticals, Inc., Lonza Biologics, Inc. and Lonza Sales AG (Exhibit 10.3) (E)
10.4*†		Amendment, dated December 5, 2008, to the Manufacturing Services Agreement, dated November 21, 2005, by and between Trubion Pharmaceuticals, Inc. and Lonza Sales AG
10.5*†		Quality Agreement for TRU-016, dated December 5, 2008, by and between Trubion Pharmaceuticals, Inc. and Lonza Sales AG
10.6*†		Second Amendment, dated April 3, 2009, to the Manufacturing Services Agreement, dated November 21, 2005, by and between Trubion Pharmaceuticals, Inc.and Lonza Sales AG
31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C § 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


(A)		Incorporated by reference to the designated exhibit to the registrant’s Registration Statement on Form S-1 filed with the SEC on June 2, 2006 (File No. 333-134709).

(B)		Incorporated by reference to the designated exhibit to the registrant’s Current Report on Form 8-K filed with the SEC on November 26, 2008 (File No. 001-33054).

(C)		Incorporated by reference to the designated exhibit to the registrant’s Registration Statement on Form S-1 filed with the SEC on October 2, 2006 (File No. 333-134709).

(D)		Incorporated by reference to the designated exhibit to the Registrant’s Registration Statement on Form S-1 filed with the SEC on August 18, 2006.

(E)		Incorporated by reference to the designated exhibit to the Registrant’s quarterly report of Form 10-Q filed with the SEC on August 7, 2008.

*		Filed herewith.

†		Portions of the agreement are subject to confidential treatment.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 5, 2009


	TRUBION PHARMACEUTICALS, INC.
	By:	/s/ Michelle G. Burris
		Michelle G. Burris
		Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer)

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Trubion Pharmaceuticals, Inc Reports

Trubion Pharmaceuticals, Inc - FORM 10-Q - November 5, 2009

Attached files

Trubion Pharmaceuticals, Inc Reports