Dyax (DYAX) 10-Q 2012 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2012
Or
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from            to              .

Commission File No. 000-24537

DYAX CORP.

(Exact Name of Registrant as Specified in its Charter)

Delaware	04-3053198
(State of Incorporation)	(I.R.S. Employer Identification Number)

55 Network Drive, Burlington, MA 01803

(Address of Principal Executive Offices)

(617) 225-2500

(Registrant’s Telephone Number, including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES         ý                            NO          o

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

YES         ý                            NO          o

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

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

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

YES         o                            NO          ý

Number of shares outstanding of Dyax Corp.’s Common Stock, par value $0.01, as of July 20, 2012: 99,035,178

DYAX CORP.

TABLE OF CONTENTS

PART I		FINANCIAL INFORMATION
Item 1	-	Financial Statements	Page
		Consolidated Balance Sheets (Unaudited) as of June 30, 2012 and December 31, 2011	3
		Consolidated Statements of Operations and Comprehensive Loss (Unaudited) for the three and six months ended June 30, 2012 and 2011	4
		Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2012 and 2011	5
		Notes to Consolidated Financial Statements (Unaudited)	6
Item 2	-	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3	-	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4	-	Controls and Procedures	37
PART II		OTHER INFORMATION	38
Item 1A	-	Risk Factors	38
Item 5		Other Information	56
Item 6	-	Exhibits	57
Signatures			58
Exhibit Index			59

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PART I – FINANCIAL INFORMATION

Item 1 – FINANCIAL STATEMENTS

Dyax Corp. and Subsidiaries

Consolidated Balance Sheets (Unaudited)

	June 30, 2012			December 31, 2011
	(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	29,531		$	31,468
Short-term investments		9,054			26,036
Accounts receivable, net of allowances for doubtful accounts of $45 and $115 at June 30, 2012 and December 31, 2011, respectively		5,975			6,092
Inventory		3,259			2,121
Current portion of restricted cash		—			1,266
Other current assets		2,269			4,968
Total current assets		50,088			71,951
Fixed assets, net		5,609			4,881
Restricted cash		1,100			1,100
Other assets		7,094			5,443
Total assets	$	63,891		$	83,375
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses	$	14,626		$	15,318
Current portion of deferred revenue		6,105			6,637
Current portion of long-term obligations		481			101
Other current liabilities		354			1,709
Total current liabilities		21,566			23,765
Deferred revenue		7,419			9,265
Notes payable		75,379			75,372
Long-term obligations		969			—
Deferred rent and other long-term liabilities		2,971			2,372
Total liabilities		108,304			110,774
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.01 par value; 1,000,000 shares authorized; 0 shares issued and outstanding		—			—
Common stock, $0.01 par value; 200,000,000 shares authorized; 98,913,675 and 98,798,065 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively		989			988
Additional paid-in capital		450,738			448,527
Accumulated deficit		(496,142	)		(476,921	)
Accumulated other comprehensive income		2			7
Total stockholders' deficit		(44,413	)		(27,399	)
Total liabilities and stockholders' deficit	$	63,891		$	83,375

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

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

	Three Months Ended  June 30,						Six Months Ended  June 30,
	2012			2011			2012			2011
	(In thousands, except share and per share data)
Revenues:
Product sales, net	$	9,164		$	5,184		$	17,174		$	9,291
Development and license fee revenues		4,866			16,691			8,345			20,798
Total revenues, net		14,030			21,875			25,519			30,089
Costs and expenses:
Cost of product sales		416			282			954			521
Research and development expenses		8,653			10,084			16,506			17,579
Selling, general and administrative expenses		10,350			9,081			20,755			18,330
Restructuring costs		—			—			1,440			—
Total costs and expenses		19,419			19,447			39,655			36,430
Income (loss) from operations		(5,389	)		2,428			(14,136	)		(6,341	)
Other income (expense):
Interest income		6			68			17			162
Interest and other expenses		(2,556	)		(2,572	)		(5,102	)		(5,162	)
Total other expense		(2,550	)		(2,504	)		(5,085	)		(5,000	)
Net loss		(7,939	)		(76	)		(19,221	)		(11,341	)
Other comprehensive income (loss):
Unrealized gain (loss) on investments		2			1			(5	)		9
Comprehensive loss	$	(7,937	)	$	(75	)	$	(19,226	)	$	(11,332	)
Basic and diluted net loss per share	$	(0.08	)	$	(0.00	)	$	(0.19	)	$	(0.11	)
Shares used in computing basic and diluted net loss per share		98,820,699			98,721,889			98,809,562			98,705,931

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

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

	Six Months Ended June 30,
	2012			2011
	(In thousands)
Cash flows from operating activities:
Net loss	$	(19,221	)	$	(11,341	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of purchased premium/discount		34			137
Depreciation and amortization of fixed assets and intangible assets		578			657
Non-cash interest expense		456			123
Compensation expenses associated with stock-based compensation plans		2,027			2,220
Provision for doubtful accounts		(35	)		—
Changes in operating assets and liabilities:
Accounts receivable		152			(5,358	)
Other current assets		2,699			172
Inventory		(2,901	)		(5,187	)
Other long-term assets		139			(332	)
Accounts payable and accrued expenses		89			1,153
Deferred revenue		(2,378	)		(3,595	)
Long-term deferred rent		599			(30	)
Net cash used in operating activities		(17,762	)		(21,381	)
Cash flows from investing activities:
Purchase of investments		(6,057	)		—
Proceeds from maturity of investments		23,000			11,000
Purchase of fixed assets		(3,816	)		(198	)
Restricted cash		1,266			922
Net cash provided by investing activities		14,393			11,724
Cash flows from financing activities:
Net proceeds from sale of common stock		—			323
Repayment of long-term obligations		(129	)		(1,520	)
Proceeds from long-term obligations		1,382			—
Proceeds from the issuance of common stock under employee stock purchase plan and exercise of stock options		179			159
Net cash provided by (used in) financing activities		1,432			(1,038	)
Net decrease in cash and cash equivalents		(1,937	)		(10,695	)
Cash and cash equivalents at beginning of the period		31,468			18,601
Cash and cash equivalents at end of the period	$	29,531		$	7,906
Supplemental disclosure of cash flow information:
Interest paid                                ��	$	6,331		$	5,883

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

5

DYAX CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS OVERVIEW

Dyax Corp. (Dyax or the Company) is a biopharmaceutical company with two business elements:

● Angioedema Franchise

The principal focus of the Company's efforts is to identify, develop and commercialize treatments for angioedemas that are identified as plasma kallikrein (bradykinin) mediated, including hereditary angioedema (HAE) and idiopathic angioedema.

The Company developed KALBITOR® (ecallantide) on its own and since February 2010 the Company has been selling it in the United States for the treatment of acute attacks of HAE.  Outside of the United States, the Company has established partnerships to obtain regulatory approval for and commercialize KALBITOR in certain markets and is evaluating opportunities in others.

The Company is expanding its franchise for the treatment of angioedemas in the following ways:

● Identifying diagnostic strategies to assist in the differentiation between histamine-mediated and plasma kallikrein (bradykinin) mediated angioedema, including development of a laboratory test.

● Continuing the development of DX-2930, a fully human monoclonal antibody inhibitor of plasma kallikrein, which could be a candidate to prophylactically treat plasma kallikrein (bradykinin) mediated angioedemas.

● Phage Display Licensing and Funded Research Program

The Company leverages its proprietary phage display technology through its Licensing and Funded Research Program, referred to as the LFRP.  This program has provided the Company a portfolio of product candidates being developed by its licensees, which currently includes 18 product candidates in various stages of clinical development, including four in Phase 3 trials.  The LFRP generated revenue of approximately $15 million in 2011, and to the extent that the Company’s licensees commercialize some of the Phase 3 product candidates, milestone and royalty revenues under the LFRP are expected to experience significant growth over the next several years.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and in accordance with instructions to the Quarterly Report on Form 10-Q.  It is management’s opinion that the accompanying unaudited interim consolidated financial statements reflect all adjustments (which are normal and recurring) necessary for a fair statement of the results for the interim periods.  The financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.  The accompanying December 31, 2011 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP.

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The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the dates of the financial statements and (iii) the reported amounts of revenue and expenses during the reporting periods.  Actual results could differ from those estimates.  The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

 Basis of Consolidation  

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

Use of Estimates

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

Concentration of Credit Risk 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, short-term investments and trade accounts receivable.  At June 30, 2012 and December 31, 2011, approximately 80% and 61% of the Company's cash, cash equivalents and short-term investments were invested in money market funds backed by U.S. Treasury obligations, U.S. Treasury notes and bills, and obligations of United States government agencies held by one financial institution.  The Company maintains balances in various operating accounts in excess of federally insured limits.

The Company provides most of its services and licenses its technology to pharmaceutical and biomedical companies worldwide, and makes all product sales to its distributors.  Concentrations of credit risk with respect to trade receivable balances are usually limited on an ongoing basis, due to the diverse number of licensees and collaborators comprising the Company's customer base.  As of June 30, 2012, two customers accounted for 41% and 40% of the accounts receivable balance.  These two customers also accounted for approximately 43% and 34% of the Company's accounts receivable balance as of December 31, 2011, all of which were collected in the first quarter of 2012.

Cash and Cash Equivalents

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

 Investments  

Short-term investments primarily consist of investments with original maturities greater than ninety days and remaining maturities less than one year at period end.  The Company has also classified its investments with maturities beyond one year as short-term, based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. The Company considers its investment portfolio of investments available-for-sale.  Accordingly, these investments are recorded at fair value, which is based on quoted market prices.  As of June 30, 2012, the Company's investments consisted of U.S. Treasury notes and bills with an amortized cost and estimated fair value of $30.9 million, and had an unrealized gain of $2,000.  As of December 31, 2011, the Company's investments consisted of United States Treasury notes and bills with an estimated fair value and amortized cost of $34.9 million, and had an unrealized gain of $7,000, which is recorded in other comprehensive income on the accompanying consolidated balance sheet.

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Inventories

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

Fixed Assets

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

The Company records all proceeds received from the lessor for tenant improvements under the terms of its operating lease as deferred rent.  These amounts are amortized on a straight-line basis over the term of the lease as an offset to rent expense.

Impairment of Long-Lived Assets

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

Revenue Recognition

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

Product Sales and Allowances

Product Sales.  Product sales are generated from the sale of KALBITOR to the Company’s wholesale and specialty distributors, and are recorded upon delivery when title and risk of loss have passed to the customer.  Product sales are recorded net of applicable reserves for trade prompt pay discounts, government rebates, patient assistance programs, product returns and other applicable allowances.

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

8

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

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

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

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

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

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

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

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

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

9

Development and License Fee Revenues

Collaboration Agreements.  The Company enters into collaboration agreements with other companies for the research and development of therapeutic, diagnostic and separations products. The terms of the agreements may include non-refundable signing and licensing fees, funding for research and development, payments related to manufacturing services, milestone payments and royalties on any product sales derived from collaborations.  These multiple element arrangements are analyzed to determine how the deliverables, which often include license and performance obligations such as research, steering committee and manufacturing services, are separated into units of accounting.

Before January 1, 2011, the Company evaluated license arrangements with multiple elements in accordance with ASC, 605-25 Revenue Recognition – Multiple-Element Arrangements.  In October 2009, the FASB issued ASU 2009-13 Revenue Arrangements with Multiple Deliverables, or ASU 2009-13, which amended the accounting standards for certain multiple element arrangements to:

● Provide updated guidance on whether multiple elements exist, how the elements in an arrangement should be separated and how the arrangement considerations should be allocated to the separate elements;

● Require an entity to allocate arrangement consideration to each element based on a selling price hierarchy, also called the relative selling price method, where the selling price for an element is based on vendor-specific objective evidence (VSOE), if available; vendor objective evidence (VOE), if available and VSOE is not available; or the best estimate of selling price (BESP), if neither VSOE or VOE is available;

● Eliminate the use of the residual method and require an entity to allocate arrangement consideration using the selling price hierarchy.

The Company evaluates all deliverables within an arrangement to determine whether or not they provide value to the licensee on a stand-alone basis.  Based on this evaluation, the deliverables are separated into units of accounting.  If VSOE or VOE is not available to determine the fair value of a deliverable, the Company determines the best estimate of selling price associated with the deliverable.  The arrangement consideration, including upfront license fees and funding for research and development, is allocated to the separate units based on relative fair value.

VSOE is based on the price charged when an element is sold separately and represents the actual price charged for that deliverable.  When VSOE cannot be established, the Company attempts to establish the selling price of the elements of a license arrangement based on VOE.  VOE is determined based on third party evidence for similar deliverables when sold separately.  In circumstances when the Company charges a licensee for pass-through costs paid to external vendors for development services, these costs represent VOE.

When the Company is unable to establish the selling price of an element using VSOE or VOE, management determines BESP for that element.  The objective of BESP is to determine the price at which the Company would transact a sale if the element within the license agreement was sold on a stand-alone basis.  The Company’s process for establishing BESP involves management’s judgment and considers multiple factors including discounted cash flows, estimated direct expenses and other costs and available data.

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Based on the value allocated to each unit of accounting within an arrangement, upfront fees and other guaranteed payments are allocated to each unit based on relative value.  The appropriate revenue recognition method is applied to each unit and revenue is accordingly recognized as each unit is delivered.

For agreements entered into prior to 2011, revenue related to upfront license fees was spread over the full period of performance under the agreement, unless the license was determined to provide value to the licensee on a stand-alone basis and the fair value of the undelivered performance obligations, typically including research or steering committee services was determinable.

Steering committee services that were not inconsequential or perfunctory and were determined to be performance obligations were combined with other research services or performance obligations required under an arrangement, if any, to determine the level of effort required in an arrangement and the period over which the Company expected to complete its aggregate performance obligations.

Whenever the Company determined that an arrangement should be accounted for as a single unit of accounting, it determined the period over which the performance obligations would be completed. Revenue is recognized using either an efforts-based or time-based (i.e. straight-line) proportional performance method. The Company recognizes revenue using an efforts-based proportional performance method when the level of effort required to complete its performance obligations under an arrangement can be reasonably estimated and such performance obligations are provided on a best-efforts basis. Direct labor hours or full-time equivalents are typically used as the measurement of performance.

If the Company cannot reasonably estimate the level of effort to complete its performance obligations under an arrangement, then revenue under the arrangement is recognized on a straight-line basis over the period the Company is expected to complete its performance obligations.

Many of the Company's collaboration agreements entitle it to additional payments upon the achievement of performance-based milestones. For all milestones achieved prior to 2011, substantive milestones were included in the Company's revenue model when achievement of the milestone was achieved. Milestones that were tied to regulatory approval were not considered probable of being achieved until such approval was received. All milestones achieved after January 1, 2011 which are determined to be substantive milestones are recognized as revenue in the period in which they are met in accordance with Accounting Standards Update (ASU) No. 2010-17, Revenue Recognition – Milestone Method.  Milestones tied to counter-party performance are not included in the Company’s revenue model until performance conditions are met.  Milestones determined to be non-substantive are allocated to each unit of accounting within an arrangement when met.  The allocation of the milestone to each unit is based on relative value and revenue related to each unit is recognized accordingly.

Royalty revenue is recognized upon the sale of the related products provided the Company has no remaining performance obligations under the arrangement.

Costs of revenues related to product development and license fees are classified as research and development in the consolidated statements of operations and comprehensive loss.

Library Licenses.  Standard terms of the proprietary phage display library agreements generally include non-refundable signing fees, license maintenance fees, development milestone payments, product license payments and royalties on product sales.  Signing fees and maintenance fees are generally recognized on a straight line basis over the term of the agreement as deliverables within these arrangements are determined to not provide the licensee with value on a stand-alone basis and therefore are accounted for as a single unit of accounting. As milestones are achieved under a phage display library license, a portion of the milestone payment, equal to the percentage of the performance period completed when the milestone is achieved, multiplied by the amount of the milestone payment, will be recognized. The remaining portion of the milestone will be recognized over the remaining performance period on a straight-line basis. Milestone payments under these license arrangements are recognized when the milestone is achieved if the Company has no future obligations under the license. Product license payments, which are optional to the licensee, are substantive and therefore are excluded from the initial allocation of the arrangement consideration.  These payments are recognized as revenue when the license is issued upon exercise of the licensee’s option, if the Company has no future obligations under the agreement. If there are future obligations under the agreement, product license payments are recognized as revenue only to the extent of the fair value of the license. Amounts paid in excess of fair value are recognized in a manner similar to milestone payments. Royalty revenue is recognized upon the sale of the related products provided the Company has no remaining performance obligations under the arrangement.

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

Patent Licenses.  The Company previously licensed its phage display patents on a non-exclusive basis to third parties for use in connection with the research and development of therapeutic, diagnostic, and other products.  The last of these patents will expire in November 2012.  Even after patent expiration, the Company generally remains eligible under these patent licenses to receive milestones and/or royalties for products discovered prior to patent expiration.  As a result, the Company does not expect the expiration of these patents to have a material impact on its LFRP business.

Standard terms of the patent rights agreements include non-refundable signing fees, non-refundable license maintenance fees, development milestone payments and royalties on product sales. Signing fees and maintenance fees are generally recognized on a straight line basis over the term of the agreement or through the date of patent expiry, if shorter, except that in the case of perpetual patent licenses for which fees were recognized immediately if it was determined that the Company had no future obligations under the agreement and the payments were made upfront.  Milestones are recognized as revenue in the period in which the milestone is achieved, and royalty revenue is recognized upon the sale of the related products, since the Company has no remaining performance obligations under the agreement.

Cost of Product Sales  

Cost of product sales includes costs to procure, manufacture and distribute KALBITOR and manufacturing royalties. Costs associated with the manufacture of KALBITOR prior to regulatory approval were expensed when incurred as a research and development cost and accordingly, KALBITOR units sold during the three and six months ended June 30, 2012 and 2011 do not include the full cost of drug manufacturing.

Research and Development  

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

Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes in accordance with ASC 740.  Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities using the enacted statutory tax rates.  At June 30, 2012 and December 31, 2011, there were no unrecognized tax benefits.

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

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Translation of Foreign Currencies

Assets and liabilities of the Company's foreign subsidiaries are translated at period end exchange rates. Amounts included in the statements of operations are translated at the average exchange rate for the period. All currency translation adjustments are recorded to other income (expense) in the consolidated statement of operations.  For the three and six months ending June 30, 2012 the Company recorded other expense of $27,000 and $13,000, respectively, for the translation of foreign currency.  For the three and six months ending June 30, 2011 the Company recorded other expenses of $12,000 and $47,000, respectively, for the translation of foreign currency.

Share-Based Compensation

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

Income or Loss Per Share

The Company presents two earnings or loss per share (EPS) amounts, basic and diluted in accordance with ASC 260.  Basic earnings or loss per share is computed using the weighted average number of shares of common stock outstanding. Diluted net loss per share does not differ from basic net loss per share since potential common shares from the exercise of stock options, warrants or rights under the Purchase Plan are anti-dilutive for the periods ended June 30, 2012 and 2011 and, therefore, are excluded from the calculation of diluted net loss per share.

Stock options and warrants to purchase a total of 11,814,354 and 11,656,386 shares of common stock were outstanding at June 30, 2012 and 2011, respectively.

Comprehensive Income (Loss)

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

Business Segments

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

Recent Accounting Pronouncements

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

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In December 2011, the FASB issued an amendment to the accounting guidance for disclosure of offsetting assets and liabilities and related arrangements. The amendment expands the disclosure requirements in that entities will be required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The amendment is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013, and shall be applied retrospectively.  The Company does not expect the adoption of this accounting pronouncement to have a material impact on its financial statements.

3. SIGNIFICANT TRANSACTIONS

In June 2010, the Company entered into a strategic collaboration agreement with Defiante Farmaceutica S.A., a subsidiary of the pharmaceutical company Sigma-Tau SpA (Sigma-Tau) to develop and commercialize subcutaneous ecallantide for the treatment of HAE and other therapeutic indications throughout Europe, North Africa, the Middle East and Russia.  In December 2010, the original agreement was amended to expand the partnership to commercialize KALBITOR for the treatment of HAE in Australia and New Zealand (the first amendment).  In May 2011, the Company further amended its agreement with Sigma-Tau to include development and commercialization rights in Latin America (excluding Mexico), the Caribbean and certain Asian territories (the second amendment).  Subsequent amendments to this agreement eliminated rights that Dyax had previously granted to Sigma-Tau for the Asian territories, the Middle East, North Africa, Latin America and the Caribbean.

Under the terms of the original agreement, Sigma-Tau made a $2.5 million upfront payment.  In addition, Sigma-Tau purchased 636,132 shares of the Company's common stock at a price of $3.93 per share, which represented a 50% premium over the 20-day average closing price through June 17, 2010, for an aggregate purchase price of $2.5 million. 

Under the terms of the first amendment, Sigma-Tau made an additional $500,000 upfront payment to the Company and also purchased 151,515 shares of the Company's common stock at a price of $3.30 per share, which represented a 50% premium over the 20-day average closing price through December 20, 2010, for an aggregate purchase price of $500,000.  Both payments were received in January 2011. 

Under the terms of a second amendment, Sigma-Tau made an additional upfront payment of $4.0 million in 2011 and was required to make an additional $3.0 million non-refundable payment to the Company by December 31, 2011.  Under a third amendment, upon elimination of Sigma-Tau’s rights to certain Asian territories, the $3.0 million payment obligation was eliminated, as were the future milestones and royalties related to these territories.

Under the terms of a fourth and fifth amendment, Sigma-Tau’s rights to the Middle East, Latin America and the Caribbean were eliminated.  The Company agreed to make contribution payments to Sigma-Tau ranging from 5%-12.5% of the amounts received by the Company as a result of any future product sales for certain countries in these territories.

The Company is eligible to receive up to $100 million in development and sales milestones related to ecallantide and royalties equal to 41% of net sales of product, as adjusted for product costs, in all licensed territories.  Sigma-Tau will pay costs associated with regulatory approval and commercialization in the licensed territories.  In addition, the Company and Sigma-Tau will share equally the costs for all development activities for optional future indications developed in partnership with Sigma-Tau in the territories covered under the initial Sigma-Tau agreement. The partnership agreement may be terminated by Sigma-Tau, at will, upon 6 months’ prior written notice.  Either party may terminate the partnership agreement in the event of an uncured material breach or declaration or filing of bankruptcy by the other party.

Prior to the second amendment in May 2011, revenue related to this multiple element arrangement was being recognized in accordance with ASC 605.  The Company evaluated the terms of the second amendment relative to the entire arrangement and determined the amendment to be a material modification to the existing agreement for financial reporting purposes.  As a result, the Company evaluated the entire arrangement under the guidance of ASU No. 2009-13 which was adopted in 2011.  

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Under the terms of the original agreement and first amendment, the Company analyzed this multiple element arrangement in accordance with ASC 605 and evaluated whether the performance obligations under this agreement, including the product license and development, steering committee, and manufacturing services should be accounted for as a single unit or multiple units of accounting.  The Company determined that there were two units of accounting.  The first unit of accounting included the product license, the committed future development services and the steering committee involvement. These deliverables were grouped into one unit of accounting due to the lack of objective and reliable evidence of fair value.  The second unit of accounting related to the manufacturing services, and was determined to meet all of the criteria to be a separate unit of accounting.  The Company had the ability to estimate the scope and timing of its involvement in the future development of the program as the Company's obligations under the development period are clearly defined.  Therefore, the Company recognized revenue related to the first unit of accounting utilizing a proportional performance model based on the actual effort performed in proportion to the total estimated level of effort.  Under this model, the Company estimated the level of effort to be expended over the term of the agreement and recognized revenue based on the lesser of the amount calculated based on proportional performance of total expected revenue or the amount of non-refundable payments earned.  As of the date of the second amendment, $4.8 million of revenue had been recognized for the first unit of accounting and $2.4 million of deferred revenue remained.  To date, no revenue has been recognized related to manufacturing services, as no such services have been provided.

As the second amendment represented a material modification to the existing agreement under applicable accounting rules, the Company re-evaluated the entire arrangement under ASU No. 2009-13, and determined all undelivered items under the agreement and divided them into separate units of accounting based on whether the deliverable provided stand-alone value to the licensee. These units of accounting consist of (i) the license to develop and commercialize ecallantide for the treatment of HAE and other therapeutic indications in the territories granted under the original agreement and first amendment, (ii) the license to develop and commercialize ecallantide for the treatment of HAE and other therapeutic indications in the territories granted under the second amendment, (iii) steering committee services and (iv) committed future development services.  The Company then determined the best estimate selling price (BESP) for the license and steering committee services and the fair value of committed future development services was determined using vendor objective evidence.  The Company’s process for determining BESP involves management’s judgment and includes factors such as discounted cash flows, estimated direct expenses and other costs and available data.

The upfront fee of $4.0 million, the non-refundable payment of $3.0 million due in December 2011 and $2.4 million of previously deferred revenue under the Sigma-Tau contracts were allocated to the units of accounting based upon relative fair value.

Revenue related to steering committee services of $190,000 was deferred and is being recognized under the proportional performance model, as meetings are held through the estimated development period for ecallantide in the Sigma-Tau territories.  Revenues associated with future committed development services will be recognized as incurred and billed to Sigma-Tau for reimbursement.  As future milestones are achieved and to the extent they involve substantial effort on the Company’s part, revenue will be recognized in the period in which the milestone is achieved.  The manufacturing services were determined to represent a contingent deliverable and, as such, have been excluded from the current revenue model.

The Company recognized revenue of approximately $20,000 and $87,000 related to the Sigma-Tau agreement, as amended, for the three and six months ended June 30, 2012, respectively, and $10.7 million and $11.9 million related to this agreement for the three and six months ended June 30, 2011, respectively.

As of June 30, 2012 and December 31, 2011, the Company has deferred $127,000 and $158,000, respectively, of revenue related to this arrangement, which is recorded in deferred revenue on the accompanying consolidated balance sheets at such dates.  The deferred revenue balance at June 30, 2012, relates to the joint steering committee obligation which is estimated to continue until 2014.

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In January 2012, the Company was notified that the collaboration agreement had been assigned by Defiante Farmaceutica S.A. to another subsidiary of Sigma-Tau, Sigma-Tau Rare Diseases S.A.

CMIC

In 2010, the Company entered into an agreement with CMIC Co., Ltd, (CMIC) to develop and commercialize subcutaneous ecallantide for the treatment of HAE and other angioedema indications in Japan.

Under the terms of the agreement, the Company received a $4.0 million upfront payment.  The Company is also eligible to receive up to $102 million in development and sales milestones for ecallantide in HAE and other angioedema indications and royalties of 20%-24% of net product sales. CMIC is solely responsible for all costs associated with development, regulatory activities, and commercialization of ecallantide for all angioedema indications in Japan. CMIC will purchase drug product from the Company on a cost-plus basis for clinical and commercial supply.

The Company analyzed this multiple element arrangement in accordance with ASC 605 and evaluated whether the performance obligations under this agreement, including the product license, development of ecallantide for the treatment of HAE and other angioedema indications in Japan, steering committee, and manufacturing services should be accounted for as a single unit or multiple units of accounting.  The Company determined that there were two units of accounting.  The first unit of accounting includes the product license, the committed future development services and the steering committee involvement.  The second unit of accounting relates to the manufacturing services.  At this time the scope and timing of the future development of ecallantide for the treatment of HAE and other indications in the CMIC territory are the joint responsibility of the Company and CMIC and therefore, the Company cannot reasonably estimate the level of effort required to fulfill its obligations under the first unit of accounting.  As a result, the Company is recognizing revenue under the first unit of accounting on a straight-line basis over the estimated development period of ecallantide for the treatment of HAE in the CMIC territory of approximately six years.

The Company recognized revenue of approximately $189,000 and $377,000 related to this agreement for the three and six months ended June 30, 2012, respectively and approximately $148,000 and $296,000 for the three and six months ended June 30, 2011, respectively.  As of June 30, 2012 and December 31, 2011, the Company has deferred approximately $2.9 million and $3.3 million, respectively, of revenue related to this arrangement, which is recorded in deferred revenue on the accompanying consolidated balance sheets.

4. FAIR VALUE MEASUREMENTS

The following tables present information about the Company's financial assets that have been measured at fair value as of June 30, 2012 and December 31, 2011 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize observable inputs other than Level 1 prices, such as quoted prices, for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability.

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Description    (in thousands)	June 30, 2012		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	21,877	$	21,877	$	—	$	—
Marketable debt securities		9,054		—		9,054		—
Total	$	30,931	$	21,877	$	9,054	$	—

Description   (in thousands)	December 31, 2011		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	8,825	$	8,825	$	—	$	—
Marketable debt securities		26,036		—		26,036		—
Total	$	34,861	$	8,825	$	26,036	$	—

The following tables summarize the Company’s marketable securities at June 30, 2012 and December 31, 2011, in thousands:

	June 30, 2012
Description	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
US Treasury Bills and Notes (due within 1 year)	$	6,038	$	—	$	—	$	6,038
US Treasury Bills and Notes (due after 1 year through 2 years)		3,014		2		—		3,016
Total	$	9,052	$	2	$	—	$	9,054

	December 31, 2011
Description	Amortized Cost		Gross  Unrealized Gains		Gross Unrealized Losses		Fair Value
US Treasury Bills and Notes (due within 1 year)	$	23,013	$	7	$	—	$	23,020
US Treasury Bills and Notes (due after 1 year through 2 years)		3,016		—		—		3,016
Total	$	26,029	$	7	$	—	$	26,036

As of June 30, 2012 and December 31, 2011, the Company's cash equivalents which are invested in money market funds are valued based on Level 1 inputs.  As of June 30, 2012 and December 31, 2011, the Company’s short-term investments consisted of U.S. Treasury notes and bills valued based on Level 2 inputs. These assets have been initially valued at the transaction price and subsequently valued utilizing a third party pricing service. We validate the prices provided by our third party pricing service by understanding the models used and obtaining market values from other pricing sources. The Company has classified its investments with maturities beyond one year as short-term, based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations.

The carrying amounts reflected in the consolidated balance sheets for cash, cash equivalents, other current assets, accounts payable and accrued expenses and other current liabilities approximate fair value due to their short-term maturities.

5. INVENTORY

In December 2009, the Company received marketing approval of KALBITOR from the FDA. Costs associated with the manufacture of KALBITOR prior to regulatory approval were expensed when incurred, and therefore were not capitalized as inventory.  As a result, the Company’s finished goods inventory does not include all costs of manufacturing drug substance currently being sold.  Subsequent to FDA approval, all costs associated with the manufacture of KALBITOR have been recorded as inventory.  Inventory on-hand that will be sold beyond the Company's normal operating cycle is classified as non-current and grouped with other assets on the Company's balance sheet. As of June 30, 2012, approximately $6.7 million of inventory is classified as non-current.  

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Inventory consists of the following (in thousands):

	June 30, 2012		December 31, 2011
Raw Materials	$	888	$	1,429
Work in Progress		8,816		5,474
Finished Goods		246		119
Total	$	9,950	$	7,022

The Company has revised the classification for $4.9 million of inventory from current assets to non-current other assets for the year ended December 31, 2011, to correct the classification of inventory based on the projected sale of inventory beyond the Company's normal operating cycle. The Company concluded this error was not material to the prior period financial statements.

6. FIXED ASSETS

Fixed assets consist of the following:

	June 30, 2012			December 31, 2011
	(In thousands)
Laboratory equipment	$	9,148		$	9,103
Furniture and office equipment		1,588			1,095
Software and computers		4,692			4,445
Leasehold improvements		4,502			6,845
Construction in process		—			3,960
Total		19,930			25,448
Less: accumulated depreciation and amortization		(14,321	)		(20,567	)
	$	5,609		$	4,881

Depreciation expense for the three and six months ended June 31, 2012 was approximately $265,000 and $578,000, respectively, and $319,000 and $657,000 for the three and six months ended June 30, 2011, respectively.

7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

	June 30, 2012		December 31, 2011
Accounts payable	$	2,057	$	2,927
Accrued employee compensation and related taxes.	3,253		4,529
Accrued expenses	2,775		1,591
Accrued license fees	500		—
Accrued legal	634		214
Accrued drug substance manufacturing	2,618		—
Accrued leasehold improvements	—		2,472
Accrued restructuring	235		—
Accrued sales allowances	857		525
Other accrued liabilities	1,697		3,060
Total	$	14,626	$	15,318

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8. NOTES PAYABLE

HealthCare Royalty Partners

Original Financing

In 2008, the Company entered into an agreement with an affiliate of HealthCare Royalty Partners, formerly Cowen Healthcare Partners (HC Royalty) for a $50.0 million loan secured by the Company's LFRP (Tranche A loan).  In March 2009, the Company amended and restated the loan agreement with HC Royalty to include a Tranche B loan of $15.0 million.

The Tranche A and Tranche B loans (collectively, the Original Loan) mature in August 2016.  The Tranche A portion bears interest at an annual rate of 16%, payable quarterly, and the Tranche B portion bears interest at an annual rate of 21.5%, payable quarterly. The Original Loan may be prepaid without penalty, in whole or in part, beginning in August 2012.

In connection with the Original Loan, the Company entered into a security agreement granting HC Royalty a security interest in the intellectual property related to the LFRP, and the revenues generated by the Company through the license of the intellectual property related to the LFRP. The security agreement does not apply to the Company's internal drug development or to any of the Company's co-development programs.

Under the terms of the Original Loan agreement, the Company is required to repay the Original Loan based on the annual net LFRP receipts.  Until June 30, 2013, required payments are tiered as follows: 75% of the first $10.0 million in specified annual LFRP receipts, 50% of the next $5.0 million and 25% of annual included LFRP receipts over $15.0 million.  After June 30, 2013, and until the maturity date or the complete amortization of the Original Loan, HC Royalty will receive 90% of all included LFRP receipts.  If the HC Royalty portion of LFRP receipts for any quarter exceeds the interest for that quarter, then the principal balance will be reduced.  Any unpaid principal will be due upon the maturity of the Original Loan.  If the HC Royalty portion of LFRP revenues for any quarterly period is insufficient to cover the cash interest due for that period, the deficiency may be added to the outstanding principal or paid in cash by the Company. After five years from the date of funding of each tranche of the Original Loan, the Company must repay to HC Royalty all additional accumulated principal above the original $50.0 million and $15.0 million loan amounts of Tranche A and Tranche B, respectively.

In addition, under the terms of the agreement, the Company is permitted to sell or otherwise transfer collateral generating cash proceeds of up to $25.0 million. Twenty percent of these cash proceeds will be applied to principal and accrued interest on the Original Loan plus any applicable prepayment premium and an additional 5.0% of such proceeds will be paid to HC Royalty as a cash premium.  In 2010, the Company sold its rights to royalties and other payments related to the commercialization of a product developed by one of the Company’s licensees under the LFRP.  Under the terms of the sale, the Company has received $11.8 million, including milestone fees based on product sales

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

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The cash proceeds from the Original Loan were recorded as a note payable on the Company's consolidated balance sheet.  The note payable balance was reduced by $1.3 million for the fair value of the Tranche A and Tranche B warrants, and by $580,000 for payment of HC Royalty’s legal fees in conjunction with the Loan.  Prior to the December 2011 additional financing, each of these amounts was being accreted over the life of the note through August 2016.  Subsequent to the additional financing, the unamortized portion of these amounts is being accreted over the life of the modified note through August 2018.

2011 Additional Financing and Original Loan Modification

In December 2011, the Company entered into an agreement with a second affiliate of HC Royalty and received an additional loan of $20 million and a commitment to refinance the Original Loan at a reduced interest rate in August 2012

The additional loan is unsecured and accrues interest at an annual rate of 13% through August 2012, at which time the agreement provides that the additional loan and its accrued interest will be combined with a second loan, subject to customary closing conditions.  The second loan will be used to refinance 102% of the outstanding principal of the Original Loan.  Together, the collective loan will be secured exclusively by the Company’s LFRP and will bear interest at a rate of 12%.  It will mature in August 2018, and can be repaid without penalty beginning in August 2015.  Should the second loan not be funded in August 2012, the additional $20 million loan will continue to bear interest at a rate of 13% and will mature on June 30, 2013.

Upon execution of the additional financing, the terms of the Original Loan were determined to be modified under ASC 470.  Accordingly, during the three and six months ending June 30 2012, interest expense on the modified loan is being recorded in the Company’s financial statements at an effective interest rate of 12.8%.

The note payable balance related to the additional financing was reduced by $193,000 to reflect payment of legal fees in conjunction with the loan; these fees are being accreted over the life of the modified note, through August 2018.

The Original Loan and the 2011 Additional Financing (collectively, the Loan) principal balance due to HC Royalty at June 30, 2012 and December 31, 2011 was $77.9 million and $76.7 million, respectively.  For financial reporting purposes, the Loan is adjusted for discounts associated with the debt issuance, including warrants and fees.

Activity under the Loan is presented for financial reporting purposes for the six months ended June 30, 2012 and for the year ended December 31, 2011, as follows (in thousands):

	June 30, 2012			December 31, 2011
Beginning balance	$	75,372		$	56,406
Accretion of discount		99			246
Loan activity:
Net proceeds from additional loan		—			20,000
Discount on additional loan		(43	)		(150	)
Interest Expense		4,962			9,932
Payments applied to principal		(96	)		(1,129	)
Payments applied to interest		(4,561	)		(8,224	)
Accrued interest payable		(354	)		(1,709	)
Ending balance	$	75,379		$	75,372

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The estimated fair value of the note payable was $83.2 million at June 30, 2012 which was calculated based on level 3 inputs due to the limited availability of comparable data points.  The note payable was valued using expected cash flows discounted at our estimate of the currently available market interest rate.

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

Equipment Loan

In June 2012, the Company entered into an equipment lease line of credit for up to $3 million with Silicon Valley Bank.  When drawn, the note bears interest at a 6% annual rate.  The Company drew down $1.4 million from this line, which will be financed over a 3-year term.  

9. FACILITY LEASE

In July 2011, the Company entered into a lease agreement for new premises located in Burlington, Massachusetts and in January 2012, the Company relocated its operations to the new facility.  The new premises, consisting of approximately 45,000 rentable square feet of office and laboratory facilities, serves as the Company’s principal offices and corporate headquarters.  The term of the Burlington lease is ten years, and the Company has rights to extend the term for an additional five years at fair market value subject to specified terms and conditions. The aggregate minimum lease commitment over the ten year term of the new lease is approximately $15.0 million.  The Company has provided the landlord a Letter of Credit of $1.1 million to secure its obligations under the lease.  Under the terms of the Burlington lease agreement, the landlord has provided the Company with a tenant improvement allowance of $2.6 million which was used towards the cost of leasehold improvements.  Through June 30, 2012, the Company capitalized approximately $4.5 million in leasehold improvements associated with the Burlington facility.  Costs reimbursed under the tenant improvement allowance have been recorded as deferred rent and are being amortized as a reduction to rent expense over the lease term.

10. RESTRUCTURING CHARGES

In February 2012, the Company realigned its business structure and implemented a number of strategic and operational initiatives designed to provide a framework for the future growth of the business.  As part of these initiatives, the Company terminated certain early stage, preclinical research and development programs and a workforce reduction was implemented.  As a result of the restructuring, during the six months ended June 30, 2012, the Company recorded one-time charges of approximately $1.4 million, which included severance and benefits related charges of approximately $1.2 million, outplacement costs of approximately $120,000, stock compensation expense of $56,000 for amendments to the exercise schedules to certain options and other exit costs of $90,000.  All restructuring costs are expected to be paid by December 31, 2012, including $235,000 which is accrued and unpaid as of June 30, 2012.  No additional charges are expected in future periods related to this restructuring.  

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

Equity Incentive Plan

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

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At the Annual Meeting of Stockholders held in May 2012 (the Annual Meeting), the Company’s shareholders approved a stock option exchange program for employees, executive officers and non-employee directors.  Under this option exchange program, outstanding options to purchase an aggregate of 4,192,310 shares of the Company’s common stock were exchanged for new options to purchase an aggregate of 2,473,596 shares of the Company’s common stock at an exercise price equal to $2.06 per share, which was the closing price of the Company’s common stock on the grant date of June 20, 2012.  All new options issued in the option exchange program are subject to a new, extended vesting schedule, the terms of which differ depending on the holder’s status as an executive, director or non-executive employee.  The new options have a term equal to the greater of (i) the term of the original options for which they were exchanged, or (ii) five years from date of grant.  The new options had a fair value approximately equal to the fair value of the surrendered options, based on a Black-Scholes option pricing model applied immediately prior to commencement of the exchange program.  Therefore, nominal expense was recorded during the three and six months ended June 30, 2012 related to the modification of the exchanged options.

Also at the Annual Meeting, the Company’s shareholders approved an amendment to the Equity Plan to increase the number of shares of common stock available for issuance under the plan by 5,000,000 shares less the net number of shares, if any, returned to the Equity Plan for issuance following the option exchange program.  Accordingly, 3,281,286 additional shares of common stock, constituting the approved 5,000,000 share increase net of the 1,718,714 shares that were returned to the Equity Plan as a result of the option exchange program, became available for issuance under the plan.

At June 30, 2012, a total of 5,899,314 shares were available for future grants under the Equity Plan.

Employee Stock Purchase Plan

The Company's Purchase Plan allows employees to purchase shares of the Company's common stock at a discount from fair market value.  Under this Plan, eligible employees may purchase shares during six-month offering periods commencing on June 1 and December 1 of each year at a price per share of 85% of the lower of the fair market value price per share on the first or last day of each six-month offering period.  Participating employees may elect to have up to 10% of their base pay withheld and applied toward the purchase of such shares, subject to the limitation of 875 shares per participant per quarter.  The rights of participating employees under the Purchase Plan terminate upon voluntary withdrawal from the Purchase Plan at any time or upon termination of employment.  The compensation expense in connection with the Plan was approximately $8,000 and $17,000 for the three and six months ended June 30, 2012, respectively, and $12,000 and $24,000, respectively, for the three and six months ended June 30, 2011.  There were 48,748 and 87,188 shares purchased under the Plan during the six months ended June 30, 2012 and 2011, respectively.  At June 30, 2012, a total of 408,165 shares were reserved and available for issuance under this Plan.

Stock-Based Compensation Expense

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

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The following table reflects stock compensation expense recorded, net of amounts capitalized into inventory, during the three and six months ended June 30, 2012 and 2011 (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Compensation expense related to:
Equity Incentive Plan	$	1,169	$	1,204		2,011	$	2,196
Employee Stock Purchase Plan		8		12		17		24
	$	1,177	$	1,216		2,028	$	2,220
Stock-based compensation expense charged to:
Research and development	$	194	$	313	$	378	$	624
Selling, general and administrative	$	983	$	903	$	1,595	$	1,596
Restructuring charges	$	—	$	—	$	55	$	—

Stock-based compensation expense of $1,000 and $6,000 was capitalized into inventory for the three and six months ended June 30, 2012, respectively, and $6,000 and $15,000 for the three and six months ended June 30, 2011, respectively.  Capitalized stock-based compensation is recognized into cost of product sales when the related product is sold.

Stock-based compensation expense for the three and six months ending June 30, 2012 included $308,000 and $382,000, respectively, related to the modification of certain stock options.

12. INCOME TAXES

Deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using future expected enacted rates. A valuation allowance is recorded against deferred tax assets for which the Company determines that it does not meet the criteria under ASC 740.

As required by ASC 740, the Company's management has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, and has determined that it does not meet the criteria for recognizing its deferred tax assets under the criteria of ASC 740.  Therefore, a valuation allowance of approximately $199.2 million was established at December 31, 2011.

The Company accounts for uncertain tax positions using a "more-likely-than-not" threshold for recognizing and resolving uncertain tax positions. The Company evaluates uncertain tax positions on a quarterly basis and adjusts the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. As of June 30, 2012, the Company had no unrecognized tax benefits.

The Company has recorded a deferred tax asset of approximately $1.8 million at December 31, 2011 reflecting the benefit of deductions from the exercise of stock options which has been fully reserved until it is more likely than not that the benefit will be realized.  The benefit from this deferred tax asset will be recorded as a credit to additional paid-in capital, if and when realized, through a reduction of cash taxes.

The tax years 1997 through 2011 remain open to examination by major taxing jurisdictions to which the Company is subject, which are primarily in the United States, as carryforward attributes generated in years past may still be adjusted upon examination by the Internal Revenue Service or state tax authorities if they have or will be used in a future period.  The Company is currently not under examination in any jurisdictions for any tax years.

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Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Note Regarding Forward-Looking Statements

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

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

● our commercialization of KALBITOR, including revenues and costs, and the potential benefits of new sales initiatives;

● the potential for market approval for KALBITOR in markets outside the United States;

● plans and anticipated timing for pursuing additional indications and uses for ecallantide and other product candidates to address plasma kallikrein (bradykinin) mediated angioedemas;

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

● estimates of potential markets for our products and product candidates;

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

● the impact of the expiration of certain of our phage display patents under the LFRP; and

● expected future revenues and operating results, including our financial guidance for 2012 and 2013.

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

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BUSINESS OVERVIEW

We are a biopharmaceutical company with two business elements:

● Angioedema Franchise

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

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

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

● Identifying diagnostic strategies to assist in the differentiation between histamine-mediated and plasma kallikrein (bradykinin) mediated angioedema, including development of a laboratory test.

● Continuing our development of DX-2930, a fully human monoclonal antibody inhibitor of plasma kallikrein, which could be a candidate to prophylactically treat plasma kallikrein (bradykinin) mediated angioedemas.

● Phage Display Licensing and Funded Research Program

We leverage our proprietary phage display technology through our Licensing and Funded Research Program, referred to as the LFRP.  This program has provided us a portfolio of product candidates being developed by our licensees, which currently includes 18 product candidates in various stages of clinical development, including four in Phase 3 trials.  The LFRP generated revenue of approximately $15 million in 2011 and to the extent that our licensees commercialize some of the Phase 3 product candidates, revenues under the LFRP are expected to experience significant growth over the next several years.

ANGIOEDEMA FRANCHISE

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

We have three key areas of activity in our angioedema franchise:

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

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● Identification of plasma kallikrein (bradykinin) mediated angioedemas.  As part of extending the angioedema franchise, we have launched a program to identify one or more diagnostic strategies that will assist in the differentiation of plasma kallikrein (bradykinin) mediated angioedema from histamine-mediated angioedema, in order to direct appropriate treatment.  These tools are expected to be relevant to both normal C1esterase inhibitor (C1-INH) and C1-INH deficient patients and will enable the identification of plasma kallikrein (bradykinin) mediated angioedema, including Type III HAE and angioedema of unknown origin, or idiopathic angioedema.  A laboratory based test is expected to begin clinical validation in 2013.

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

In addition, through June 2012, we were conducting a Phase 2 clinical study exploring the use of ecallantide for the treatment of ACE inhibitor-induced angioedema (ACEI-AE), a life threatening inflammatory response brought on by adverse reactions to angiotensin-converting enzyme (ACE) inhibitors.  Based on the results of an interim analysis of data from the study, we decided to discontinue this trial.  An independent investigator-sponsored trial exploring the use of ecallantide for the treatment of ACEI-AE is being conducted at the University of Cincinnati, College of Medicine.

HAE AND KALBITOR

HAE is a rare, genetic disorder characterized by severe, debilitating and often painful swelling, which can occur in the abdomen, face, hands, feet and airway.  HAE is caused by a deficiency of C1-INH activity, a naturally occurring molecule that inhibits plasma kallikrein, a key mediator of inflammation, and other serine proteases in the blood.  It is estimated that HAE affects between 1 in 10,000 to 1 in 50,000 people around the world.  Based upon HAE patient association registries, we estimate there is an immediately addressable target population of approximately 6,500 patients in the United States.

Ecallantide was approved by the FDA under the brand name KALBITOR for treatment of HAE in patients 16 years of age and older regardless of anatomic location. KALBITOR, a potent, selective and reversible plasma kallikrein inhibitor that we discovered and developed, was the first subcutaneous HAE treatment approved in the United States.

As part of the product approval of KALBITOR, we have established a Risk Evaluation and Mitigation Strategy (REMS) program to communicate the risk of anaphylaxis and the importance of distinguishing between hypersensitivity reaction and HAE attack symptoms. To communicate these risks, the REMS required a communication plan through February 2012, which consisted of a "Dear Healthcare Professional" letter that was provided to doctors identified as likely to prescribe KALBITOR and treat HAE patients.

In February 2010, we also initiated a 4-year, Phase 4 observational study which is being conducted with up to 200 HAE patients to evaluate immunogenicity and hypersensitivity with exposure to KALBITOR for treatment of acute attacks of HAE. The study is designed to identify predictive risk factors and develop effective screening tools to mitigate the risk of hypersensitivity and anaphylaxis.

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United States Sales and Marketing

We have a commercial organization to support sales of KALBITOR in the United States, including a field-based team of approximately 30 professionals, consisting of sales representatives and corporate account directors.  At this time, our commercial organization is sized to effectively market KALBITOR in the United States, where patients are treated primarily by a limited number of specialty physicians, consisting mainly of allergists and immunologists.

KALBITOR Access®

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

Distribution

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

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

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

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

These agreements have a term through November 2012, which will renew for an additional two years unless amended or terminated by the parties.  Each agreement contains customary termination provisions and may be terminated by us for any reason upon six months prior written notice.

In August 2011, we expanded our distribution network to provide home infusion of KALBITOR through a specialty pharmacy arrangement with Walgreens Infusion Services, Inc. (Walgreens).  Under this agreement, Walgreens provides eligible HAE patients with on-demand nursing services for the home administration of KALBITOR by a healthcare professional, as well as treatment at Walgreens’ infusion centers.  This agreement has a term through August 2012, which will renew for an additional year unless amended or terminated by the parties.

Single-Injection Ecallantide Formulation

We are currently in the process of developing a more convenient formulation of ecallantide, which is intended to allow for a single-injection of KALBITOR, instead of the current three-injection formulation.  During the fourth quarter of 2011, we completed a bioequivalence clinical study which successfully demonstrated bioequivalence between the current formulation and the new single-injection formulation.  Upon demonstration of appropriate stability of the new formulation, we expect to file a supplemental Biologics License Application (BLA) with the FDA in the first half of 2013.

Manufacturing

We have established a commercial supply chain, consisting of third parties to manufacture, test and transport KALBITOR.  All third party manufacturers involved in the KALBITOR manufacturing process are required to comply with current good manufacturing practices, or cGMPs.

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To date, ecallantide drug substance used in the production of KALBITOR has been manufactured in the United Kingdom by Fujifilm Diosynth Biotechnologies (UK) Ltd. (Fujifilm).  Effective as of June 29, 2012, we entered into an agreement with Fujifilm for the manufacture and supply of KALBITOR, under which Fujifilm has committed to be available to manufacture bulk drug substance through 2020. Our current inventories are sufficient to supply all ongoing studies relating to ecallantide and to meet anticipated KALBITOR market demand into 2016.

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

Ecallantide outside of the United States

In markets outside of the United States, we intend to work with international partners to seek approval and commercialize ecallantide for HAE and other angioedema indications.  We have entered into license or collaboration agreements with several such companies, which have regulatory capabilities, distribution systems and sales capabilities in their designated territories.

Sigma-Tau – We have a collaboration agreement with Sigma-Tau Rare Diseases S.A. (as successor-in-interest to Defiante Farmaceutica S.A.), a subsidiary of Sigma-Tau SpA (Sigma-Tau) to develop and commercialize subcutaneous ecallantide for the treatment of HAE and other therapeutic indications throughout Europe, Russia, Australia and New Zealand.  Under the terms of the agreement, as amended, Sigma-Tau made an aggregate of $7.0 million in upfront payments to us and also purchased 787,647 shares of our common stock for an aggregate purchase price of $3.0 million.  We are also eligible to receive up to $100 million in development and sales milestones related to ecallantide and royalties equal to 41% of net sales of product, as adjusted for product costs.  Under the terms of the amendments to our agreement with Sigma-Tau that eliminated its rights to the Middle East, Latin America and the Caribbean, we agreed to make contribution payments to Sigma-Tau ranging from 5%-12.5% of the amounts received by us as a result of any product sales in certain countries in these territories.

Sigma-Tau will pay the costs associated with regulatory approval and commercialization in the licensed territories.  In addition, we and Sigma-Tau will share equally the costs for all development activities for future indications developed in partnership with Sigma-Tau.

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

CMIC has a clinical development plan that was established in consultation with the Japanese regulatory authorities.  CMIC has completed a twelve patient pharmacokinetic study and, to fulfill submission requirements, the company is required to complete an open-label study of ten patients that is scheduled to begin in the second half of 2012.  Assuming successful completion of the open-label study, CMIC plans to commercialize subcutaneous ecallantide for the treatment of HAE in Japan as early as 2014.

Taiba – In May 2012, we granted exclusive distribution rights to taiba ME (Taiba) under which they will obtain registration and reimbursement approval and commercialize ecallantide for HAE in certain countries in the Middle East.  Under the terms of the agreement, we will provide Taiba with drug supply at a price equal to 60% of net sales within the licensed territory.

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Neopharm - In Israel, we have an agreement with Neopharm Scientific Ltd., (Neopharm) to obtain regulatory approval and commercialize ecallantide for HAE and other angioedema indications. Under the terms of the agreement, we will provide Neopharm drug supply at a price equal to 50% of net sales.  In June 2011, Neopharm received a commercial registration license from the Israeli Ministry of Health.  Consideration for reimbursement approval is expected in late 2012.

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

ACEI-AE AND ECALLANTIDE                                                                

Through June 2012, we were conducting a Phase 2 clinical study exploring the use of ecallantide for the treatment of ACEI-AE, a life threatening inflammatory response brought on by adverse reactions to angiotensin-converting enzyme (ACE) inhibitors.  This double-blind, placebo-controlled, randomized, dose-ranging study was designed to evaluate the efficacy and safety of ecallantide (10, 30, or 60 mg subcutaneous doses) compared to placebo, with a goal of enrolling 176 patients.  The primary endpoint was the proportion of patients meeting a set of criteria indicating eligibility for discharge from the emergency department within 6 hours following study drug administration.  Based on the results of an interim analysis of data from the study, we decided to discontinue this study.

Safety was not a factor in our decision to stop the clinical study.  Separately from this interim analysis of the efficacy data, an independent Data Safety Monitoring Board (DSMB) met on May 15, 2012, and reviewed blinded safety data for the first 25% of patients enrolled in the trial.  The DSMB did not identify any safety concerns and did not recommend any changes to the conduct of the study.

Data from the first 72 patients treated in the trial suggests a trend favoring a treatment with ecallantide over placebo; however, this trend is not statistically significant.  Because the observed response rate to placebo was substantially higher than originally anticipated, we determined that the study was inadequately powered to detect a statistically significant difference between ecallantide and placebo.  In addition, based upon the primary endpoint data, the enrolled population did not appear to reproduce the high morbidity described in previous medical literature.

We are currently assessing options regarding future investigational efforts in the acute treatment of ACE inhibitor-induced angioedema.

An additional double-blind, placebo-controlled, randomized clinical study using ecallantide in 50 patients for the treatment of ACEI-AE is being conducted by Drs. Jonathan Bernstein and Joseph Moellman, at the University of Cincinnati, College of Medicine.  Data from this investigator sponsored study is expected in 2012.

IDENTIFICATION OF PLASMA KALLIKREIN (BRADYKININ) MEDIATED ANGIOEDEMAS

We have launched a program to identify one or more diagnostic strategies that will assist in the differentiation of plasma kallikrein (bradykinin) mediated angioedema from histamine-mediated angioedema, in order to direct appropriate treatment.  These tools are expected to be relevant to both normal C1-INH and C1-INH deficient patients and will enable the identification of plasma kallikrein (bradykinin) mediated angioedema, including Type III HAE and angioedema of unknown origin, or idiopathic angioedema.  A laboratory based test is expected to begin clinical validation in 2013.

PLASMA KALLIKREIN ANTIBODY – DX-2930

We are currently in preclinical development of DX-2930, a potent and specific fully human monoclonal antibody that is an inhibitor of plasma kallikrein and which would be a candidate to prophylactically treat plasma kallikrein (bradykinin) mediated angioedema.  DX-2930 provides the potential for a subcutaneous formulation, with a half-life which could enable less frequent dosing than currently available therapies and an advantageous immunogenicity profile.  We have completed a series of preliminary preclinical pharmacokinetic and tolerability studies and found DX-2930 to have relevant activity in animal models.  We expect to file an IND for this antibody in mid-2013.

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LICENSING AND FUNDED RESEARCH PROGRAM

LFRP Product Development

We believe that our phage display libraries, which we have developed using our core technology and know-how, represent a leading technology in antibody discovery.  We leverage our proprietary phage display technology and libraries through our LFRP licenses and collaborations.  To date, we have received more than $165 million under the LFRP, primarily related to license fees and milestones, including approximately $15 million of revenue in 2011.  The LFRP has the potential for substantially greater revenues, if and when product candidates that are discovered by our licensees receive marketing approval and are commercialized.

To date, we have entered into over 100 LFRP license agreements.  Currently, 18 product candidates generated by our licensees or collaborators under the LFRP portfolio are in clinical development, four of which are in Phase 3 trials, five are in Phase 2 and nine are in Phase 1.  In addition, one product has received market approval from the FDA.  Furthermore, we estimate that our licensees and collaborators have over 70 additional product candidates in various stages of research and preclinical development.  Our licensees and collaborators are responsible for all costs associated with development of these product candidates.  Generally, we receive milestones and/or royalties from our licensees and collaborators to the extent these product candidates advance in development and are ultimately commercialized.  If commercialized, we expect to receive royalties from commercial sales beginning in 2014.

Under loan arrangements with affiliates of HealthCare Royalty Partners, formerly Cowen Healthcare Partners (HC Royalty), we have obtained debt funding which has a principal balance of $77.9M as of June 30, 2012, secured exclusively by the LFRP.

The chart below provides a summary of the clinical stage product candidates under the LFRP and is based on information publicly disclosed by licensees.  Certain of these product candidates are in multiple clinical trials for various indications.

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Currently, the types of licenses and collaborations that we enter into under the LFRP have one of three distinct structures:

● Library Licenses.    Under our library license program, we grant our licensees rights to use our phage display libraries in connection with their internal therapeutic development programs.  These libraries are protected by a patent portfolio in which the last patent is scheduled to expire in 2024.  We also provide these licensees with related materials and training so that they may rapidly identify compounds that bind with high affinity to therapeutic targets.  The period during which our licensees may use our libraries is typically limited to a 4 to 5 year term.  Library license agreements contain up-front license fees, annual maintenance fees, milestone payments based on successful product development, and royalties based on any future product sales.  We have approximately 20 library licensees, including Amgen, Aveo, Bayer Schering, Biogen Idec, Boehringer Ingelheim, CSL Behring, ImClone Systems (a wholly-owned subsidiary of Eli Lilly), Kadmon, Merck Serono, Novo Nordisk, sanofi-aventis and Emergent BioSolutions (formerly known as Emergent Trubion).

● Funded Research. Under our funded research program, we have performed funded research for various collaborators using our phage display libraries to identify, characterize and optimize antibodies that bind to disease targets provided by the collaborators.  Funded research agreements provide for fees, technical and development milestones, and royalties based on any future product sales.  Our funded research collaborators with products currently in development include Baxter Healthcare, Biogen Idec, Merck Serono, Merrimack, and Emergent BioSolutions (formerly known as Trubion).

● Patent Licenses. Under our patent license program, we previously granted other biopharmaceutical and pharmaceutical companies non-exclusive licenses to use certain of our phage display patents to discover and develop biologic compounds for use in specified fields.  The last of these patents will expire in November 2012.  We do not anticipate entering into future agreements for this patent portfolio after expiry.  We do not expect the expiration of these patents to have a material impact on our LFRP business.

We expect to continue to enter into library licenses and collaborations to maximize the strategic value of our LFRP.

Results of Operations

Three Months Ended June 30, 2012 and 2011

Revenues.  Total revenues for the three months ended June 30, 2012 (the 2012 Quarter) were $14.0 million, compared with $21.9 million for the three months ended June 30, 2011 (the 2011 Quarter).

Our financial guidance for total revenue in 2012 is $50 to $54 million, including KALBITOR sales of $36 to $40 million.

Product Sales.  We began commercializing KALBITOR in the United States in 2010 for treatment of acute attacks of HAE in patients 16 years of age and older.  We sell KALBITOR to our distributors, and we recognize revenue when title and risk of loss have passed to the distributor, typically upon delivery.  Due to the specialty nature of KALBITOR, the limited number of patients, limited return rights and contractual limits on inventory levels, we anticipate that distributors will carry limited inventory.

We record product sales allowances and accruals related to trade prompt pay discounts, government rebates, patient financial assistance programs, product returns and other applicable allowances.  For the 2012 Quarter, product sales of KALBITOR increased to $9.2 million, net of product discounts and allowances of $767,000 compared with product sales of $5.2 million, net of product discounts and allowances of $227,000 during the 2011 Quarter.  The 2012 increase in net sales was primarily due to additional KALBITOR units sold in the 2012 Quarter, as well as an increase in the selling price of KALBITOR in 2012.

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During the three months ended June 30, 2012 and 2011, provisions for product sales allowances reduced gross product sales as follows (in thousands):

	2012			2011
Total gross product sales	$	9,931		$	5,411
Prompt pay and other discounts	$	(355	)	$	(149	)
Government rebates and chargebacks		(301	)		(58	)
Returns		(111	)		(20	)
Product sales allowances	$	(767	)	$	(227	)
Total product sales, net	$	9,164		$	5,184
Total product sales allowances as a percent of gross product sales		7.7	%		4.2	%

Development and License Fees.  We derive revenues from licensing, funded research and development fees, including milestone payments from our licensees and collaborators, in amounts that fluctuate from period to period due to the timing of the clinical activities of our collaborators and licensees.  This revenue was $4.9 million in the 2012 Quarter and $16.7 million in the 2011 Quarter, which included $10.7 million recognized in connection with our amended agreement with Sigma-Tau.

Cost of Product Sales.We incurred $416,000 of costs associated with product sales during the 2012 Quarter and $282,000 of costs associated with product sales during the 2011 Quarter.  These costs primarily include the cost of testing, filling, packaging and distributing the product, as well as a royalty due on net sales of KALBITOR.  Costs associated with the manufacture of KALBITOR prior to FDA approval were previously expensed when incurred, and accordingly are not included in the cost of product sales during these periods.  The supply of KALBITOR produced prior to FDA approval is expected to meet anticipated commercial needs through 2012.  When this supply has been fully depleted, we expect our cost of product sales will increase, reflecting the full manufacturing cost of KALBITOR.

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

		Three Months  Ended June 30,
		2012	2011
		(In thousands)
KALBITOR development costs	$	5,526	$	5,817
Other research and development expenses		2,506		2,961
LFRP pass-through fees		621		1,306
Research and development expenses	$	8,653	$	10,084

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

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Total research and development costs decreased in the 2012 Quarter primarily due to the lower internal costs associated with the 2012 restructuring.  Included in the 2012 KALBITOR development costs were $2.2 million of expenses of associated with our Phase 2 clinical study, using ecallantide for the treatment of ACEI-AE.  This amount includes the cost of concluding the Phase 2 clinical study, which was discontinued in June 2012, and terminating any contractual obligations.  It is not expected that there will be significant ongoing costs associated with the discontinued clinical study.

Selling, General and Administrative.  Our selling, general and administrative expenses consist primarily of the sales and marketing costs of commercializing KALBITOR, costs of our management and administrative staff, as well as expenses related to business development, protecting our intellectual property, administrative occupancy, professional fees and the reporting requirements of a public company.  Selling, general and administrative expenses for the 2012 and 2011 Quarters were $10.4 million and $9.1 million, respectively.  Costs increased during the 2012 Quarter primarily due to continued expansion of infrastructure and initiatives to support further commercialization of the KALBITOR product.

Interest Expense.  Interest expense was $2.5 million in the 2012 Quarter compared to $2.6 million in the 2011 Quarters. Based on the modification of the HC Royalty loan in December 2011, we record interest expense in 2012 using the effective interest rate method for the different tranches of the HC Royalty loan.  This effective interest rate is approximately 12.8%.  In 2011, we recorded interest expense at the stated interest rate for each tranche, which in total was approximately 17.4%.

Six Months Ended June 30, 2012 and 2011

Revenues.  Total revenues for the six months ended June 30, 2012 (the 2012 Period) were $25.5 million, compared with $30.1 million for the six months ended June 30, 2011 (the 2011 Period).

Our financial guidance for total revenue in 2012 is $50 to $54 million, including KALBITOR sales of $36 to $40 million.

Product Sales.  We began commercializing KALBITOR in the United States in 2010 for treatment of acute attacks of HAE in patients 16 years of age and older.  We sell KALBITOR to our distributors, and we recognize revenue when title and risk of loss have passed to the distributor, typically upon delivery.  Due to the specialty nature of KALBITOR, the limited number of patients, limited return rights and contractual limits on inventory levels, we anticipate that distributors will carry limited inventory.

We record product sales allowances and accruals related to trade prompt pay discounts, government rebates, a patient financial assistance program, product returns and other applicable allowances.  For the 2012 Period, product sales of KALBITOR increased to $17.2 million, net of product discounts and allowances of $1.4 million compared with product sales of $9.3 million, net of product discounts and allowances of $413,000 during the 2011 Period.  The 2012 increase in net sales was primarily due to additional KALBITOR units sold in the 2012 Period, as well as an increase in the selling price of KALBITOR in 2012.

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During the six months ended June 30, 2012 and 2011, provisions for product sales allowances reduced gross product sales as follows (in thousands):

	2012			2011
Total gross product sales	$	18,540		$	9,704
Prompt pay and other discounts	$	(643	)	$	(255	)
Government rebates and chargebacks		(536	)		(144	)
Returns		(187	)		(14	)
Product sales allowances	$	(1,366	)	$	(413	)
Total product sales, net	$	17,174		$	9,291
Total product sales allowances as a percent of gross product sales		7.4	%		4.3	%

Development and License Fees.  We derive revenues from licensing, funded research and development fees, including milestone payments from our licensees and collaborators, in amounts that fluctuate from period to period due to the timing of the clinical activities of our collaborators and licensees.  This revenue was $8.3 million in the 2012 Period and $20.8 million in the 2011 Period, which included $11.9 million recognized in connection with our amended agreement with Sigma-Tau.

Cost of Product Sales.We incurred $1.0 million of costs associated with product sales during the 2012 Period and $521,000 of costs associated with product sales during the 2011 Period.  These costs primarily include the cost of testing, filling, packaging and distributing the product, as well as a royalty due on net sales of KALBITOR.  Costs associated with the manufacture of KALBITOR prior to FDA approval were previously expensed when incurred, and accordingly are not included in the cost of product sales during these periods.  The supply of KALBITOR produced prior to FDA approval is expected to meet anticipated commercial needs through 2012.  When this supply has been fully depleted, we expect our cost of product sales will increase, reflecting the full manufacturing cost of KALBITOR.

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

		Six Months  Ended June 30,
		2012	2011
		(In thousands)
KALBITOR development costs	$	10,569	$	10,420
Other research and development expenses		4,862		5,709
LFRP pass-through fees		1,075		1,450
Research and development expenses	$	16,506	$	17,579

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

Total research and development costs decreased in 2012 primarily due to the lower internal costs associated with the 2012 restructuring. KALBITOR development costs in the 2012 Period include costs of $3.0 million associated with our Phase 2 clinical study that was initiated during 2011, using ecallantide for the treatment of ACEI-AE.  This amount includes the cost of concluding the Phase 2 clinical study, which was discontinued in June 2012, and terminating any contractual obligations.  It is not expected that there will be significant ongoing costs associated with the discontinued clinical study.

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Costs associated with obtaining regulatory approval for the treatment of HAE in territories outside the United States were $56,000 and $1.4 million during 2012 and 2011, respectively.  These amounts were reimbursed by Sigma Tau and such payments are recorded as development and license fee revenue in our results of operations.

Selling, General and Administrative.  Our selling, general and administrative expenses consist primarily of the sales and marketing costs of commercializing KALBITOR, costs of our management and administrative staff, as well as expenses related to business development, protecting our intellectual property, administrative occupancy, professional fees and the reporting requirements of a public company.  Selling, general and administrative expenses for the 2012 and 2011 Periods were $20.8 million and $18.3 million, respectively.  Costs increased during the 2012 Period primarily due to continued expansion of infrastructure and initiatives to support further commercialization of the KALBITOR product.

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

Interest Expense.  Interest expense was $5.1 million in the 2012 Period compared to $5.2 million in 2011. Based on the modification of the HC Royalty loan in December 2011, we record interest expense in 2012 using the effective interest rate method for the different tranches of the HC Royalty.  This effective interest rate is approximately 12.8%.  In 2011, we recorded interest expense at the stated interest rate for each tranche, which in total was approximately 17.4%.

Liquidity and Capital Resources

	June 30, 2012		December 31, 2011
	(in thousands)
Cash and cash equivalents	$	29,531	$	31,468
Short-term investments		9,054		26,036
Total cash, cash equivalents and investments	$	38,585	$	57,504

The following table summarizes our cash flow activity for the six months ended June 30, 2012 and 2011 (in thousands):

	2012			2011
Net cash used in operating activities	$	(17,762	)	$	(21,381	)
Net cash provided by investing activities		14,393			11,724
Net cash provided by (used in) financing activities		1,432			(1,038	)
Net decrease in cash and cash equivalents	$	(1,937	)	$	(10,695	)

We require cash to fund our operating activities, make capital expenditures, acquisitions and investments, and service debt.  Through June 30, 2012, we have funded our operations through the sale of equity securities, which have provided aggregate net cash proceeds since inception of approximately $397 million, and from borrowed funds under our loan agreement with HC Royalty, which are secured by certain assets associated with our LFRP.  In addition, we generate funds from product sales and development and license fees.  Our excess funds are currently invested in short-term investments primarily consisting of United States Treasury notes and bills and money market funds backed by the United States Treasury.

Our financial guidance is that we expect to be at cash-flow breakeven during 2013.

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Operating Activities

The principal use of cash in our operations during the 2012 Period was to fund our net loss, which was $19.2 million.  Of this net loss, certain costs were non-cash charges, such as non-cash interest expense of $456,000, depreciation and amortization costs of $612,000 and stock-based compensation expense of $2.0 million.  In addition to non-cash charges, we also had net cash out-flow due to changes in other operating assets and liabilities, including an increase in inventory of $2.9 million, a decrease in other assets of $2.7 million and a decrease in deferred revenue of $2.4 million associated with revenue recognized for library licenses that was previously deferred.

The principal use of cash in our operations during the 2011 Period was to fund our net loss, which was $11.3 million.  Of this net loss, certain costs were non-cash charges, such as non-cash interest expense of $123,000, depreciation and amortization costs of $794,000 and stock-based compensation expense of $2.2 million.  In addition to non-cash charges, we also had net cash out flow due to changes in other operating assets and liabilities, including an increase in inventory of $5.2 million, an increase in accounts receivable of $5.4 million, a decrease in deferred revenue of $3.6 million for previously deferred revenue recognized from our agreement with Sigma-Tau, and an increase in accounts payable and accrued expenses of $1.2 million.   

Investing Activities

Our investing activities for the 2012 Period primarily consisted of investments which matured of $23.0 million, as well as a decrease of $1.3 million in restricted cash resulting from the release of the letter of credit that had been issued as a security deposit under the lease of our previous headquarters in Cambridge, Massachusetts.  These are offset by the purchase of $3.8 million of fixed assets primarily made up of leasehold improvements for the new Burlington facility, of which $2.6 million was covered by a tenant improvement allowance and $1.4 million was financed through an equipment loan arrangement.

Our investing activities for the 2011 Period primarily consisted of investments which matured of $11.0 million, as well as a decrease of $922,000 in restricted cash primarily from the contractual reduction of the letter of credit that served as our security deposit for the lease of our former facility in Cambridge, Massachusetts.

Financing Activities

Our financing activities for the 2012 Quarter consisted of a drawdown of $1.4 million under an equipment loan arrangement, as well as the repayment of long-term debt totaling $129,000, including $96,000 to HC Royalty.

Our financing activities for the 2011 Period consisted of net proceeds of $323,000 from the sale of 151,515 shares of our common stock, as well as repayments of long-term debt totaling $1.5 million including $1.1 million to HC Royalty.

We expect to continue to manage our cash requirements by completing additional partnerships, collaborations, and financial and strategic transactions.  We expect that existing cash, cash equivalents, and short-term investments together with anticipated cash flow from existing development, collaborations and license agreements and product sales of KALBITOR will be sufficient to support our current operations through 2013.  We will need additional funds if our cash requirements exceed our current expectations or if we generate less revenue than we expect during this period.

We may seek additional funding through our collaborative arrangements and public or private financings.  We may not be able to obtain financing on acceptable terms or at all, and we may not be able to enter into additional collaborative arrangements. Arrangements with collaborators or others may require us to relinquish rights to certain of our technologies, product candidates or products. The terms of any financing may adversely affect the holdings or the rights of our stockholders. If we need additional funds and are unable to obtain funding on a timely basis, we would curtail significantly our research, development or commercialization programs in an effort to provide sufficient funds to continue our operations, which could adversely affect our business prospects.

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OFF BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements with the exception of operating leases.

COMMITMENTS AND CONTINGENCIES

In our Annual Report on Form 10-K for the year ended December 31, 2011, Part II, Item 7, Management’s Discussion and Analysis of Financial Conditions and Results of Operations, under the heading "Contractual Obligations, " we described our commitments and contingencies. There were no material changes in our commitments and contingencies during the six months ended June 30, 2012.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

In our Annual Report on Form 10-K for the year ended December 31, 2011, our critical accounting policies and estimates were identified as those relating to revenue recognition, allowance for doubtful accounts, share-based compensation and valuation of long-lived and intangible assets.  There have been no material changes to our critical accounting policies from the information provided in our 2011 Annual Report on Form 10-K.

Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk consists primarily of our cash and cash equivalents and short-term investments. We place our investments in high-quality financial instruments, primarily U.S. Treasury notes and bills, which we believe are subject to limited credit risk. We currently do not hedge interest rate exposure. As of June 30, 2012, we had cash, cash equivalents and investments of approximately $38.6 million. Our investments will decline by an immaterial amount if market interest rates increase, and therefore, our exposure to interest rate changes is immaterial. Declines of interest rates over time will, however, reduce our interest income from our investments.

As of June 30, 2012, we had $80.0 million outstanding under short-term and long-term obligations, including our note payable. Interest rates on all of these obligations are fixed and therefore are not subject to interest rate fluctuations.

Most of our transactions are conducted in U.S. dollars. We have collaboration and technology license agreements with parties located outside of the United States. Transactions under certain of the agreements between us and parties located outside of the United States are conducted in local foreign currencies. If exchange rates undergo a change of up to 10%, we do not believe that it would have a material impact on our results of operations or cash flows.

Item 4 - CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

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

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Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control that occurred during our fiscal quarter ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1A. – RISK FACTORS

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

Risks Related To Our Business

We have a history of net losses, expect to incur significant additional net losses and may never achieve or sustain profitability.

We have incurred net losses on an annual basis since our inception.  As of June 30, 2012 we had an accumulated deficit of approximately $496.1 million.  We expect to incur additional net losses in 2012 as our research, development, preclinical testing, clinical trial and commercial activities continue.

We have generated limited revenue from product sales to date, and it is possible that we will never have significantly more product sales revenue.  Currently, we generate a significant amount of our revenue from collaborators through license and milestone fees, research and development funding, and maintenance fees that we receive in connection with the licensing of our phage display technology.  To become profitable, we, alone or with our collaborators, must either generate higher product sales from the commercialization of KALBITOR, increase licensing receipts under our LFRP or reduce costs.  It is possible that we will never have sufficient product sales revenue or receive sufficient royalties on our licensed product candidates or licensed technology in order to achieve or sustain future profitability.

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

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

● the amount of future sales of KALBITOR and related costs to manufacture and sell the product;

● the cost and timing of our research and development, manufacturing and commercialization activities;

● the establishment of new collaboration and licensing arrangements;

● the timing and results of clinical trials, including a failure to receive the required regulatory approvals to commercialize ecallantide in additional indications and other product candidates;

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● the timing, receipt and amount of payments, if any, from current and prospective collaborators and licensees, including the completion of certain milestones; and

● revenue recognition and other generally accepted accounting policies.

Our revenues and costs in any period are not reliable indicators of our future operating results.  If the revenues we recognize are less than the revenues we expect for a given fiscal period, then we may be unable to reduce our expenses quickly enough to compensate for the shortfall.  In addition, our fluctuating operating results may fail to meet the expectations of securities analysts or investors which may cause the price of our common stock to decline.

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

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

● future sales levels of KALBITOR and any other commercial products and the profitability of such sales, if any;

● the timing and cost to develop, obtain regulatory approvals for and commercialize other product candidates and additional indications for ecallantide;

● maintaining or expanding our existing collaborative and license arrangements and entering into additional arrangements on terms that are favorable to us;

● the amount and timing of milestone and royalty payments from our collaborators and licensees related to their progress in developing and commercializing products;

● our decision to manufacture, or have third parties manufacture, the materials used in KALBITOR and any other product candidates;

● competing technological and market developments;

● the progress of our development programs;

● the costs of prosecuting, maintaining, defending and enforcing our patents and other intellectual property rights;

● the amount and timing of additional capital equipment purchases; and

● the overall condition of the financial markets.

We expect that existing cash, cash equivalents and investments together with anticipated cash flow from product sales and existing product development, collaborations and license fees will be sufficient to support our current operations through 2013.  We will need additional funds if our cash requirements exceed our current expectations or if we generate less revenue than we expect.

We may seek additional funding through collaborative arrangements, and public or private financings, or other means.  We may not be able to obtain financing on acceptable terms or at all, and we may not be able to enter into additional collaborative arrangements.  Arrangements with collaborators or others may require us to relinquish rights to certain of our technologies, product candidates or products.  The terms of any financing may adversely affect the holdings or the rights of our stockholders and if we are unable to obtain funding on a timely basis, we may be required to curtail significantly our research, development or commercialization programs which could adversely affect our business prospects.

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

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

The commercial success of KALBITOR and our ability to generate and increase product sales will depend on multiple factors, including the following:

● the number of patients with HAE who are diagnosed with the disease and identified to us;

● the number of patients with HAE who may be treated with KALBITOR;

● acceptance of KALBITOR in the medical community;

● the frequency of HAE patients' use of KALBITOR to treat their acute attacks of HAE;

● HAE patients' ability to obtain and maintain sufficient coverage or reimbursement by third-party payers for the use of KALBITOR;

● our ability to effectively market and distribute KALBITOR in the United States;

● competition from other products that treat HAE;

● the maintenance of marketing approval in the United States and the receipt and maintenance of marketing approval from foreign regulatory authorities;

● our maintenance of commercial manufacturing capabilities through third-party manufacturers; and

● our ability to maintain sufficient inventories to supply KALBITOR for patient use.

If we are unable to develop substantial sales of KALBITOR in the United States and commercialize ecallantide in additional countries or if we are significantly delayed or limited in doing so, our business prospects would be adversely affected.

Because the target patient population of KALBITOR for treatment of HAE is small and has not been definitively determined, we must be able to successfully identify HAE patients and achieve a significant market share in order to achieve or maintain profitability.

The prevalence of HAE patients, which has been estimated at approximately 1 in 10,000 to 1 in 50,000 people around the world, has not been definitively determined.  There can be no guarantee that any of our programs will be effective at identifying HAE patients, and the number of HAE patients in the United States may turn out to be lower than expected or they may not utilize treatment with KALBITOR for all or any of their acute HAE attacks, all or any of which would adversely affect our results of operations and business prospects.

If HAE patients are unable to obtain and maintain reimbursement for KALBITOR from government health administration authorities, private health insurers and other organizations, KALBITOR may be too costly for regular use and our ability to generate product sales would be harmed.

We may not be able to sell KALBITOR on a profitable basis or our profitability may be reduced if we are required to sell our product at lower than anticipated prices or if reimbursement is unavailable or limited in scope or amount.  KALBITOR is more expensive than traditional drug treatments and most patients require some form of third party insurance coverage and/or patient assistance provided by us in order to afford its cost.  Our future revenues and profitability will be adversely affected if HAE patients cannot depend on governmental, private and other third-party payers, such as Medicare and Medicaid in the United States or country specific governmental organizations, to defray the cost of KALBITOR.  If these entities refuse to provide coverage and reimbursement with respect to KALBITOR or determine to provide a lower level of coverage and reimbursement than anticipated, KALBITOR may be too costly for general use, and physicians may not prescribe it.

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In addition to potential restrictions on insurance coverage, the amount of reimbursement for KALBITOR may also reduce our ability to profitably commercialize KALBITOR.  In the United States and elsewhere, there have been, and we expect there will continue to be, actions and proposals to control and reduce healthcare costs.  Government and other third-party payers are challenging the prices charged for healthcare products and increasingly limiting and attempting to limit both coverage and level of reimbursement for prescription drugs.

It is possible that we will never have significant KALBITOR sales revenue in order to achieve or sustain future profitability.

We may not be able to gain or maintain market acceptance among the medical community or patients for KALBITOR, which would prevent us from achieving or maintaining profitability in the future.

We cannot be certain that KALBITOR will gain or maintain market acceptance among physicians, patients, healthcare payers, and others.  Although we have received regulatory approval for KALBITOR in the United States, such approval does not guarantee future revenue.  We cannot predict whether physicians, other healthcare providers, government agencies or private insurers will determine that KALBITOR is safe and therapeutically effective relative to cost.  Medical doctors' willingness to prescribe, and patients' willingness to accept, KALBITOR depends on many factors, including prevalence and severity of adverse side effects in both clinical trials and commercial use, effectiveness of our marketing strategy and the pricing of KALBITOR, publicity concerning our products or competing products, HAE patient's ability to obtain and maintain third-party coverage or reimbursement, and availability of alternative treatments.  In addition, the number of acute attacks that are treated with KALBITOR will vary from patient to patient depending upon a variety of factors.

If KALBITOR fails to achieve market acceptance, we may not be able to market and sell it successfully, which would limit our ability to generate revenue and adversely affect our results of operations and business prospects.

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

We compete in industries characterized by intense competition and rapid technological change.  New developments occur and are expected to continue to occur at a rapid pace.  Discoveries or commercial developments by our competitors may render some or all of our technologies, products or potential products obsolete or non-competitive.

Our principal focus is on the development of human therapeutic products.  We plan to conduct research and development programs to develop and test product candidates and demonstrate to appropriate regulatory agencies that these products are safe and effective for therapeutic use in particular indications.  Therefore our principal competition going forward, as further described below, will be companies who either are already marketing products in those indications or are developing new products for those indications.  Many of our competitors have greater financial resources and experience than we do.

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

● Manufacturers of corticosteroids, including danazol, which we estimate are still used to prophylactically treat a significant number of identified HAE patients.

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● ViroPharma Inc. — ViroPharma markets a plasma-derived C1-esterase inhibitor, known as Cinryze®, which is administered intravenously. Cinryze is approved in the US for routine prophylaxis against angioedema attacks in adolescent and adult patients with HAE, and has orphan drug designation from the FDA. The FDA has also approved patient labeling for Cinryze to include self-administration for routine prophylaxis once a patient is properly trained by his or her healthcare provider. ViroPharma has also received approval in the EU where the product is approved for the treatment and pre-procedure prevention of angioedema attacks in adults and adolescents with HAE, and routine prevention of angioedema attacks in adults and adolescents with severe and recurrent attacks of HAE, who are intolerant to or insufficiently protected by oral prevention treatments or patients who are inadequately managed with repeated acute treatment. The EU approval includes a self-administration option for appropriately trained patients. ViroPharma has also completed two Phase 2 trials evaluating subcutaneous administration of Cinryze.  One of these trials evaluated a formulation that uses a proprietary drug delivery platform from Halozyme.

● Shire plc— Shire markets its bradykinin receptor antagonist, known as Firazyr® (icatibant), which is administered subcutaneously. Firazyr is approved in the US, Europe, and certain other countries. Firazyr is approved in these markets for the treatment of acute HAE attacks in adult patients.  The US and EU labels allow for patients to self-administer Firazyr following training by their healthcare provider.  Firazyr has orphan drug designations from the FDA and in Europe.

● CSL Behring— CSL Behring markets a plasma-derived C1-esterase inhibitor, known as Berinert®, which is administered intravenously. Berinert is approved in the US for the treatment of acute abdominal, facial or laryngeal attacks of HAE in adults and adolescents, and has orphan drug designation from the FDA. The FDA has also approved patient labeling for Berinert to include self-administration after proper training by a healthcare professional.  Berinert is also approved in the EU, Japan and several rest-of-world markets for the treatment of acute attacks of HAE.  CSL Behring announced in May 2012 that they had commenced an international Phase I/II study of a volume-reduced subcutaneous formulation of C1-INH which will evaluate the pharmacokinetics, pharmacodynamics and safety of various doses of C1-INH.

● Pharming Group NV— Pharming markets a recombinant C1-esterase inhibitor, known as Ruconest™, which is administered intravenously.  Ruconset is approved in the EU for the treatment of acute HAE attacks in adult patients.  In the US, Pharming's recombinant C1-esterase inhibitor is known as Rhucin®. In July 2012, Pharming and US partner Santarus announced they had reached full recruitment in their Phase 3 trial for Ruconest. Pharming's recombinant C1-esterase inhibitor has Fast Track status from the FDA and orphan drug designations from the FDA and in Europe. 

Other competitors for the treatment of HAE are companies that are developing small molecule plasma kallikrein inhibitors, including BioCryst.

Additionally, a significant number of companies compete with us in the antibody technology space by offering licenses and/or research services to pharmaceutical and biotechnology companies. Specifically, our phage display technology is one of several in vitro display technologies available to generate libraries of compounds that can be leveraged to discover new antibody products. Other companies that compete with us in the display technology space include BioInvent, XOMA, Adimab and several others. Additional platforms pharmaceutical and biotechnology companies use to identify antibodies that bind to a desired target are in vivo technology platforms which use direct immunization of mice or other species to generate fully human antibodies. Competitors in this space include GenMab, arGEN-X and several others. There are also a number of new technologies directed to the generation of candidates with novel scaffolds that may possess similar properties to monoclonal antibodies.

In addition to the technologies described above, many pharmaceutical companies have either acquired antibody discovery technologies or developed humanized murine antibodies derived from hybridomas.  Pharmaceutical companies also develop orally available small molecule compounds directed to the targets for which we and others are seeking to develop antibody, peptide and/or protein products.

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We may also experience competition from companies that have acquired or may acquire other technologies from universities and other research institutions.

If we fail to comply with continuing regulations, we could lose our approvals to market KALBITOR, and our business would be adversely affected.

We cannot guarantee that we will be able to maintain our regulatory approval for KALBITOR in the United States. We and our future partners, contract manufacturers and suppliers are subject to rigorous and extensive regulation by the FDA, other federal and state agencies, and governmental authorities in other countries.  These regulations continue to apply after product approval, and cover, among other things, testing, manufacturing, quality control, labeling, advertising, promotion, adverse event reporting requirements, and export of biologics.

As a condition of approval for marketing KALBITOR in the United States and other jurisdictions, the FDA or governmental authorities in those jurisdictions may require us to conduct additional clinical trials.  For example, in connection with the approval of KALBITOR in the United States, we have agreed to conduct a Phase 4 clinical study to evaluate immunogenicity and hypersensitivity with exposure to KALBITOR for treatment of acute attacks of HAE.  The FDA can propose to withdraw approval if new clinical data or information shows that KALBITOR is not safe for use or determines that such study is inadequate.  We are required to report any serious and unexpected adverse experiences and certain quality problems with KALBITOR to the FDA and other health agencies.  We, the FDA or another health agency may have to notify healthcare providers of any such developments.  The discovery of any previously unknown problems with KALBITOR or its manufacturer may result in restrictions on KALBITOR and the manufacturer or manufacturing facility, including withdrawal of KALBITOR from the market.  Certain changes to an approved product, including the way it is manufactured or promoted, often require prior regulatory approval before the product as modified may be marketed.

Our third-party manufacturing facilities were subjected to inspection prior to grant of marketing approval and are subject to continued review and periodic inspections by the regulatory authorities.  Any third party we would use to manufacture KALBITOR for sale must also be licensed by applicable regulatory authorities.  Although we have established a corporate compliance program, we cannot guarantee that we or our third party vendors are and will continue to be in compliance with all applicable laws and regulations. Failure to comply with the laws, including statutes and regulations, administered by the FDA or other agencies could result in:

● administrative and judicial sanctions, including warning letters;

● fines and other civil penalties;

● withdrawal of a previously granted approval;

● interruption of production;

● operating restrictions;

● product recall or seizure; injunctions; and

● criminal prosecution.

The discovery of previously unknown problems with a product, including KALBITOR, or the facility used to produce the product could result in a regulatory authority imposing restrictions on us, or could cause us to voluntarily adopt such restrictions, including withdrawal of KALBITOR from the market.

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If we do not maintain our regulatory approval for KALBITOR in the United States, our results of operations and business prospects will be materially harmed.

If the use of KALBITOR harms people, or is perceived to harm patients even when such harm is unrelated to KALBITOR, our regulatory approvals could be revoked or otherwise negatively affected and we could be subject to costly and damaging product liability claims.

The testing, manufacturing, marketing and sale of drugs for use in humans exposes us to product liability risks.  Side effects and other problems from using KALBITOR could: 

● lessen the frequency with which physicians decide to prescribe KALBITOR;

● encourage physicians to stop prescribing KALBITOR to their patients who previously had been prescribed KALBITOR;

● cause serious adverse events and give rise to product liability claims against us; and

● result in our need to withdraw or recall KALBITOR from the marketplace.

Some of these risks are unknown at this time.

We have tested KALBITOR in only a limited number of patients.  As more patients begin to use KALBITOR, new risks and side effects may be discovered, and risks previously viewed as inconsequential could be determined to be significant.  Previously unknown risks and adverse effects of KALBITOR may also be discovered in connection with unapproved and unsolicited, or off-label, uses of KALBITOR.  We do not promote, or in any way support or encourage the promotion of KALBITOR for off-label uses in violation of relevant law, but current regulations allow physicians to use products for off-label uses.  In addition, we expect to study ecallantide in diseases other than HAE in controlled clinical settings, and expect independent investigators to do so as well.  In the event of any new risks or adverse effects discovered as new patients are treated for HAE, regulatory authorities may modify or revoke their approvals and we may be required to conduct additional clinical trials, make changes in labeling of KALBITOR, reformulate KALBITOR or make changes and obtain new approvals for our and our suppliers' manufacturing facilities.  We may also experience a significant drop in the potential sales of KALBITOR, experience harm to our reputation and the reputation of KALBITOR in the marketplace or become subject to government investigations or lawsuits, including class actions.  Any of these results could decrease or prevent any sales of KALBITOR or substantially increase the costs and expenses of commercializing and marketing KALBITOR.

We may be sued by people who use KALBITOR, whether as a prescribed therapy, during a clinical trial, during an investigator initiated study, or otherwise.  Any informed consents or waivers obtained from people who enroll in our trials or use KALBITOR may not protect us from liability or litigation.  Our product liability insurance may not cover all potential types of liabilities or may not cover certain liabilities completely.  Moreover, we may not be able to maintain our insurance on acceptable terms.  In addition, negative publicity relating to the use of KALBITOR or a product candidate, or to a product liability claim, may make it more difficult, or impossible, for us to market and sell KALBITOR.  As a result of these factors, a product liability claim, even if successfully defended, could have a material adverse effect on our business, financial condition or results of operations.

During the course of treatment, patients may suffer adverse events, including death, for reasons that may or may not be related to KALBITOR.  Such events could subject us to costly litigation, require us to pay substantial amounts of money to injured patients, delay, negatively impact or end our opportunity to receive or maintain regulatory approval to market KALBITOR, or require us to suspend or abandon our commercialization efforts.  Even in a circumstance in which we do not believe that an adverse event is related to KALBITOR, the investigation into the circumstance may be time consuming or may be inconclusive.  These investigations may interrupt our sales efforts, delay our regulatory approval process in other countries, or impact and limit the type of regulatory approvals KALBITOR receives or maintains.

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Although we obtained regulatory approval of KALBITOR for treatment of acute attacks of HAE in patients 16 years and older in the United States, we may be unable to obtain regulatory approval for ecallantide in any other territory.

Governments in countries outside the United States also regulate drugs distributed in such countries and facilities in such countries where such drugs are manufactured, and obtaining their approvals can also be lengthy, expensive and highly uncertain.  The approval process varies from country to country and the requirements governing the conduct of clinical trials, product manufacturing, product licensing, pricing and reimbursement vary greatly from country to country.  In certain jurisdictions, we are required to finalize operational, reimbursement, price approval and funding processes prior to marketing our products.  We may not receive regulatory approval for ecallantide in countries other than the United States on a timely basis, if ever.  Even if approval is granted in any such country, the approval may require limitations on the indicated uses for which the drug may be marketed.  Failure to obtain regulatory approval for ecallantide in territories outside the United States could have a material adverse effect on our business prospects.

If we are unable to establish and maintain effective sales, marketing and distribution capabilities, or to enter into agreements with third parties to do so, we will be unable to successfully commercialize KALBITOR.

We are marketing and selling KALBITOR ourselves in the United States and have only limited experience with marketing, sales or distribution of drug products. If we are unable to adequately establish the capabilities to sell, market and distribute KALBITOR, either ourselves or by entering into agreements with others, or to maintain such capabilities, we will not be able to successfully sell KALBITOR.  In that event, we will not be able to generate significant product sales.  We cannot guarantee that we will be able to establish and maintain our own capabilities or enter into and maintain any marketing or distribution agreements with third-party providers on acceptable terms, if at all.

In the United States, we sell KALBITOR to ABSG which provides a distribution network for KALBITOR, including a call center to support its commercialization, and to Walgreens which provides nursing services for home administration of KALBITOR.  Neither ABSG nor Walgreens set or determine demand for KALBITOR.  We expect our distribution arrangements to continue for the foreseeable future through an extension or replacement of our current agreements.  Our ability to successfully commercialize KALBITOR will depend, in part, on the extent to which we are able to provide adequate distribution of KALBITOR to patients through our distributors.  It is possible that our distributors could change their policies or fees, or both, at some time in the future.  This could result in their refusal to distribute smaller volume products such as KALBITOR, or cause higher product distribution costs, lower margins or the need to find alternative methods of distributing KALBITOR.  Although we have contractual remedies to mitigate these risks for the three-year term of the contract with ABSG and we also believe we can find alternative distributors on relatively short notice, our product sales during that period of time may suffer and we may incur additional costs to replace a distributor.  A significant reduction in product sales to our distributors, any cancellation of orders they have made with us or any failure to pay for the products we have shipped to them could materially and adversely affect our results of operations and financial condition.

We have hired sales and marketing professionals for the commercialization of KALBITOR throughout the United States.  Even with these sales and marketing personnel, we may not have the necessary size and experience of the sales and marketing force and the appropriate distribution capabilities necessary to successfully market and sell KALBITOR.  Establishing and maintaining sales, marketing and distribution capabilities are expensive and time-consuming.  Our expenses associated with building up and maintaining the sales force and distribution capabilities may be disproportional compared to the revenues we may be able to generate on sales of KALBITOR.  We cannot guarantee that we will be successful in commercializing KALBITOR and a failure to do so would adversely affect our business prospects.

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

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In addition to FDA and related regulatory requirements, we are subject to health care "fraud and abuse" laws, such as the federal False Claims Act, the anti-kickback provisions of the federal Social Security Act, and other state and federal laws and regulations.  Federal and state anti-kickback laws prohibit, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any health care item or service reimbursable under Medicare, Medicaid, or other federally or state financed health care programs.  This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, patients, purchasers and formulary managers on the other.  Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing, or recommending may be subject to scrutiny if they do not qualify for an exemption or safe harbor.

Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid.  Pharmaceutical companies have been prosecuted under these laws for a variety of alleged promotional and marketing activities, such as allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product; reporting to pricing services inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging in promotion for uses that the FDA has not approved, or "off-label" uses, that caused claims to be submitted to Medicaid for non-covered off-label uses; and submitting inflated best price information to the Medicaid Rebate Program.

Although physicians are permitted to, based on their medical judgment, prescribe products for indications other than those cleared or approved by the FDA, manufacturers are prohibited from promoting their products for such off-label uses.  We market KALBITOR for acute attacks of HAE in patients 16 years and older and provide promotional materials to physicians regarding the use of KALBITOR for this indication.  Although we believe our marketing, promotional materials do not constitute off-label promotion of KALBITOR, the FDA may disagree.  If the FDA determines that our promotional materials, training or other activities constitute off-label promotion of KALBITOR, it could request that we modify our training or promotional materials or other activities or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and criminal penalties.  It is also possible that other federal, state or foreign enforcement authorities might take action if they believe that the alleged improper promotion led to the submission and payment of claims for an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement.  Even if it is later determined we are not in violation of these laws, we may be faced with negative publicity, incur significant expenses defending our position and have to divert significant management resources from other matters.

The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payer.  Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer's products from reimbursement under government programs, criminal fines, and imprisonment.  Even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, which would also harm our financial condition.  Because of the breadth of these laws and the narrowness of the safe harbors and because government scrutiny in this area is high, it is possible that some of our business activities could come under that scrutiny.

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

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

The FDA has required that we implement a REMS for KALBITOR and conduct post-marketing studies to assess a risk of hypersensitivity reactions, including anaphylaxis.  The REMS consisted of a communication plan to healthcare providers which was completed in February 2012.  The FDA and other regulatory agencies could impose new requirements or change existing regulations or promulgate new ones at any time that may affect our ability to obtain or maintain approval of KALBITOR or future products or require significant additional costs to obtain or maintain such approvals.  For example, the FDA or similar agencies in other jurisdictions may require us to restrict the distribution or use of KALBITOR if we or others identify side effects after KALBITOR is on the market.  Changes in KALBITOR's approval or restrictions on its use could make it difficult to achieve market acceptance, and we may not be able to market and sell KALBITOR or continue to sell it, successfully, or at all, which would limit our ability to generate product sales and adversely affect our results of operations and business prospects.

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

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

We have identified only a few vendors with facilities that are capable of producing material for preclinical, clinical studies and for commercial purposes and we cannot assure you that they will be able to supply sufficient clinical materials during the clinical development or commercialization of our biopharmaceutical candidates.  Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates ourselves, including reliance on the third party for regulatory compliance and quality assurance, the possibility of breach of the manufacturing agreement by the third party because of factors beyond our control (including a failure to synthesize and manufacture our product candidates in accordance with our product specifications) and the possibility of termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or damaging to us.  In addition, the FDA and other regulatory authorities require that our product candidates be manufactured according to cGMP and similar foreign standards.  Any failure by our third-party manufacturers to comply with cGMP or failure to scale up manufacturing processes, including any failure to deliver sufficient quantities of product candidates in a timely manner, could lead to a delay in, or failure to obtain, regulatory approval of any of our product candidates.

In addition, as our drug development pipeline increases and matures, we will have a greater need for clinical trial and commercial manufacturing capacity.  We do not own or operate manufacturing facilities for the production of clinical or commercial quantities of our product candidates and we currently have no plans to build our own clinical or commercial scale manufacturing capabilities.  To meet our projected needs for commercial manufacturing, third parties with whom we currently work will need to increase their scale of production or we will need to secure alternate suppliers.

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We are dependent on a single contract manufacturer to produce drug substance for ecallantide, which may adversely affect our ability to commercialize KALBITOR and other potential ecallantide products.

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

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

We currently have a long-term commercial supply agreement with Fujifilm, under which FujiFilm has committed to be available to manufacture ecallantide drug substance through 2020.  In addition, we believe that our existing supply of ecallantide drug substance will be sufficient to supply all ongoing studies relating to ecallantide and KALBITOR and to meet anticipated market demand into 2016.  These estimates are subject to changes in market conditions and other factors beyond our control.  If Fujifilm is unable to dependably meet our demands for ecallantide drug substance, it could adversely affect our ability to further develop and commercialize KALBITOR and other potential ecallantide products, generate revenue from product sales, increase our costs and negatively affect our operating results.

Any new biopharmaceutical product candidates we develop must undergo rigorous clinical trials which could substantially delay or prevent their development or marketing.

In addition to KALBITOR, we are evaluating ecallantide in further indications and are developing DX-2930, another potential biopharmaceutical product.  Before we can commercialize any biopharmaceutical product candidate, we must engage in a rigorous clinical trial and regulatory approval process mandated by the FDA and analogous foreign regulatory agencies.  This process is lengthy and expensive, and approval is never certain.  Positive results from preclinical studies and early clinical trials do not ensure positive results in late stage clinical trials designed to permit application for regulatory approval.  We cannot accurately predict when planned clinical trials will begin or be completed.  Many factors affect patient enrollment, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, alternative therapies, competing clinical trials and new drugs approved for the conditions that we are investigating.  As a result of all of these factors, our future trials may take longer to enroll patients than we anticipate.  Such delays may increase our costs and slow down our product development and the regulatory approval process.  Our product development costs will also increase if we need to perform more or larger clinical trials than planned.  The occurrence of any of these events will delay our ability to commercialize products, generate revenue from product sales and impair our ability to become profitable, which may cause us to have insufficient capital resources to support our operations.

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

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● we or our collaborators must demonstrate through clinical trials that the proposed product is safe and effective for its intended use;

● we have limited experience in conducting the clinical trials necessary to obtain regulatory approval; and

● data obtained from preclinical and clinical activities are subject to varying interpretations, which could delay, limit or prevent regulatory approvals.

Regulatory authorities may delay, suspend or terminate clinical trials at any time if they believe that the patients participating in trials are being exposed to unacceptable health risks or if they find deficiencies in the clinical trial procedures.  There is no guarantee that we will be able to resolve such issues, either quickly, or at all.  In addition, our or our collaborators' failure to comply with applicable regulatory requirements may result in criminal prosecution, civil penalties and other actions that could impair our ability to conduct our business.

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

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

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

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

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

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

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

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

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

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

An individual may bring a product liability claim against us if KALBITOR or one of our product candidates causes, or merely appears to have caused, an injury.  Moreover, in some of our clinical trials, we test our product candidates in indications where the onset of certain symptoms or "attacks" could be fatal.  Although the protocols for these trials include emergency treatments in the event a patient appears to be suffering a potentially fatal incident, patient deaths may nonetheless occur.  As a result, we may face additional liability if we are found or alleged to be responsible for any such deaths.

These types of product liability claims may result in:

● decreased demand for KALBITOR or any other product candidates;

● injury to our reputation;

● withdrawal of clinical trial volunteers;

● related litigation costs; and

● substantial monetary awards to plaintiffs.

Although we currently maintain product liability insurance, we may not have sufficient insurance coverage, and we may not be able to obtain sufficient coverage at a reasonable cost.  Our inability to obtain product liability insurance at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of any products that we or our collaborators develop, including KALBITOR.  If we are successfully sued for any injury caused by our products or processes, then our liability could exceed our product liability insurance coverage and our total assets.

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

Our business strategy includes leveraging certain product candidates, as well as our proprietary phage display technology, through collaborations and licenses that are structured to generate revenues through license fees, technical and clinical milestone payments, and royalties.  We have entered into, and anticipate continuing to enter into, collaborative and other similar types of arrangements with third parties to develop, manufacture and market drug candidates and drug products.

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In addition, for us to continue to receive any significant payments from our LFRP related licenses and collaborations and generate sufficient revenues to meet the required payments under our agreement with HC Royalty, the relevant product candidates must advance through clinical trials, establish safety and efficacy, and achieve regulatory approvals, obtain market acceptance and generate revenues.

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

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

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

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

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

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

We cannot be assured we will be able to maintain our current licensing and collaborative efforts, nor can we assure the success of any current or future licensing and collaborative relationships.  An inability to establish new relationships on terms favorable to us, work successfully with current licensees and collaborators, or failure of any significant portion of our LFRP related licensing and collaborative efforts would result in a material adverse impact on our business, operating results and financial condition.

Our success depends significantly upon our ability to obtain and maintain intellectual property protection for our products and technologies and upon third parties not having or obtaining patents that would prevent us from commercializing any of our products.

We face risks and uncertainties related to our intellectual property rights.  For example:

● we may be unable to obtain or maintain patent or other intellectual property protection for any products or processes that we may develop or have developed;

● third parties may obtain patents covering the manufacture, use or sale of these products or processes, which may prevent us from commercializing any of our products under development globally or in certain regions; or

● our patents or any future patents that we may obtain may not prevent other companies from competing with us by designing their products or conducting their activities so as to avoid the coverage of our patents.

Patent rights relating to our phage display technology are central to our LFRP.  In countries where we do not have and/or have not applied for phage display patent rights, we will be unable to prevent others from using phage display or developing or selling products or technologies derived using phage display.  In addition, in jurisdictions where we have phage display patent rights, we may be unable to prevent others from selling or importing products or technologies derived elsewhere using phage display.  Any inability to protect and enforce such phage display patent rights, whether by any inability to license or any invalidity of our patents or otherwise, could negatively affect future licensing opportunities and revenues from existing agreements under the LFRP.

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In all of our activities, we also rely substantially upon proprietary materials, information, trade secrets and know-how to conduct our research and development activities and to attract and retain collaborators, licensees and customers.  Although we take steps to protect our proprietary rights and information, including the use of confidentiality and other agreements with our employees and consultants and in our academic and commercial relationships, these steps may be inadequate, these agreements may be violated, or there may be no adequate remedy available for a violation.  Also, our trade secrets or similar technology may otherwise become known to, or be independently developed or duplicated by, our competitors.

Before we and our collaborators can market some of our processes or products, we and our collaborators may need to obtain licenses from other parties who have patent or other intellectual property rights covering those processes or products.  Third parties have patent rights related to phage display, particularly in the area of antibodies.  While we have gained access to key patents in the antibody area through the cross licenses with Affimed Therapeutics AG, Affitech AS, Biosite Incorporated (now owned by Alere Inc.), Cambridge Antibody Technology Limited or CAT (now known as MedImmune Limited and owned by AstraZeneca), Domantis Limited (a wholly-owned subsidiary of GlaxoSmithKline), Genentech, Inc. and XOMA Ireland Limited, other third party patent owners may contend that we need a license or other rights under their patents in order for us to commercialize a process or product.  In addition, we may choose to license patent rights from other third parties.  In order for us to commercialize a process or product, we may need to license the patent or other rights of other parties.  If a third party does not offer us a needed license or offers us a license only on terms that are unacceptable, we may be unable to commercialize one or more of our products.  If a third party does not offer a needed license to our collaborators and as a result our collaborators stop work under their agreement with us, we might lose future milestone payments and royalties, which would adversely affect us.  If we decide not to seek a license, or if licenses are not available on reasonable terms, we may become subject to infringement claims or other legal proceedings, which could result in substantial legal expenses.  If we are unsuccessful in these actions, adverse decisions may prevent us from commercializing the affected process or products and could require us to pay substantial monetary damages.

We seek affirmative rights of license or ownership under existing patent rights relating to phage display technology of others.  For example, through our patent licensing program, we have secured a limited freedom to practice some of these patent rights pursuant to our standard license agreement, which contains a covenant by the licensee that it will not sue us under certain of the licensee's phage display improvement patents.  We cannot guarantee, however, that we will be successful in enforcing any agreements from our licensees, including agreements not to sue under their phage display improvement patents, or in acquiring similar agreements in the future, or that we will be able to obtain commercially satisfactory licenses to the technology and patents of others.  If we cannot obtain and maintain these licenses and enforce these agreements, this could have a material adverse impact on our business.

Proceedings to obtain, enforce or defend patents and to defend against charges of infringement are time consuming and expensive activities.  Unfavorable outcomes in these proceedings could limit our patent rights and our activities, which could materially affect our business.

Obtaining, protecting and defending against patent and proprietary rights can be expensive.  For example, if a competitor files a patent application claiming technology also invented by us, we may have to participate in an expensive and time-consuming interference proceeding before the United States Patent and Trademark Office to address who was first to invent the subject matter of the claim and whether that subject matter was patentable.  Moreover, an unfavorable outcome in an interference proceeding could require us to cease using the technology or to attempt to license rights to it from the prevailing party.  Our business would be harmed if a prevailing third party does not offer us a license on terms that are acceptable to us.

In patent offices outside the United States, we may be forced to respond to third party challenges to our patents.  For example, our first phage display patent in Europe, European Patent No. 436,597, known as the 597 Patent, was ultimately revoked in 2002 in proceedings in the European Patent Office.  We are not able to prevent other parties from using certain aspects of our phage display technology in Europe.

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The issues relating to the validity, enforceability and possible infringement of our patents present complex factual and legal issues that we periodically reevaluate.  Third parties have patent rights related to phage display, particularly in the area of antibodies.  While we have gained access to key patents in the antibody area through our cross-licensing agreements with Affimed, Affitech, Biosite, Domantis, Genentech, XOMA and CAT, other third party patent owners may contend that we need a license or other rights under their patents in order for us to commercialize a process or product.  In addition, we may choose to license patent rights from third parties.  While we believe that we will be able to obtain any needed licenses, we cannot assure you that these licenses, or licenses to other patent rights that we identify as necessary in the future, will be available on reasonable terms, if at all.  If we decide not to seek a license, or if licenses are not available on reasonable terms, we may become subject to infringement claims or other legal proceedings, which could result in substantial legal expenses.  If we are unsuccessful in these actions, adverse decisions may prevent us from commercializing the affected process or products.  Moreover, if we are unable to maintain the covenants with regard to phage display improvements that we obtain from our licensees through our patent licensing program and the licenses that we have obtained to third party phage display patent rights, it could have a material adverse effect on our business.

We would expect to incur substantial costs in connection with any litigation or patent proceeding.  In addition, our management's efforts would be diverted, regardless of the results of the litigation or proceeding.  An unfavorable result could subject us to significant liabilities to third parties, require us to cease manufacturing or selling the affected products or using the affected processes, require us to license the disputed rights from third parties or result in awards of substantial damages against us.  Our business will be harmed if we cannot obtain a license, can obtain a license only on terms we consider to be unacceptable or if we are unable to redesign our products or processes to avoid infringement.

In all of our activities, we substantially rely on proprietary materials and information, trade secrets and know-how to conduct research and development activities and to attract and retain collaborative partners, licensees and customers.  Although we take steps to protect these materials and information, including the use of confidentiality and other agreements with our employees and consultants in both academic commercial relationships, we cannot assure you that these steps will be adequate, that these agreements will not be violated, or that there will be an available or sufficient remedy for any such violation, or that others will not also develop the same or similar proprietary information.

Failure to meet our HealthCare Royalty Partners (HC Royalty) debt service obligations could adversely affect our financial condition and our loan agreement obligations could impair our operating flexibility.

We have loans with affiliates of HC Royalty which have an aggregate principal balance of $77.9 million at June 30, 2012.  The loans bear interest at rates ranging from 13% to 21.5% per annum payable quarterly, and unless refinanced in August 2012 under a commitment from HC Royalty, will have maturities commencing in June 2013.  In connection with the initial loan, we have entered into a security agreement granting HC Royalty a security interest in substantially all of the assets related to our LFRP.  We are required to repay the loans based on a percentage of LFRP related revenues, including royalties, milestones, and license fees received by us under the LFRP.  If the LFRP revenues for any quarterly period are insufficient to cover the cash interest due for that period, the deficiency may be added to the outstanding loan principal or paid in cash by us.  In the event of certain changes of control or mergers or sales of all or substantially all of our assets, any or all of the loan may become due and payable at HC Royalty’s option, including a prepayment premium obligation which will expire in 2015.  We must comply with certain loan covenants which if not observed could make all loan principal, interest and all other amounts payable under the loan immediately due and payable.

Our obligations under the HC Royalty agreement require that we dedicate a substantial portion of cash flow from our LFRP receipts to service the loan, which will reduce the amount of cash flow available for other purposes.  If the LFRP fails to generate sufficient receipts to fund quarterly principal and interest payments to HC Royalty, we will be required to fund such obligations from cash on hand or from other sources, further decreasing the funds available to operate our business.  In the event that amounts due under the loan are accelerated, payment would significantly reduce our cash, cash equivalents and short-term investments and we may not have sufficient funds to pay the debt if any of it is accelerated.

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As a result of the security interest granted to HC Royalty, we are restricted in our ability to sell our rights to part or all of those assets, or take certain other actions, without first obtaining permission from HC Royalty.  This requirement could delay, hinder or condition our ability to enter into corporate partnerships or strategic alliances with respect to these assets.

The obligations and restrictions under the HC Royalty agreement may limit our operating flexibility, make it difficult to pursue our business strategy and make us more vulnerable to economic downturns and adverse developments in our business.

If we lose or are unable to hire and retain qualified personnel, then we may not be able to develop our products or processes.

We are highly dependent on qualified scientific and management personnel, and we face intense competition from other companies and research and academic institutions for qualified personnel.  If we lose an executive officer, a manager of one of our principal business units or research programs, or a significant number of any of our staff or are unable to hire and retain qualified personnel, then our ability to develop and commercialize our products and processes may be delayed which would have an adverse effect on our business, financial condition, and results of operations.

We use and generate hazardous materials in our business, and any claims relating to the improper handling, storage, release or disposal of these materials could be time-consuming and expensive.

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

Our business is subject to risks associated with international contractors and exchange rate risk.

None of our business is conducted in currencies other than the United States dollar.  We do, however, rely on an international contract manufacturer for the production of our drug substance for ecallantide.  We recognize foreign currency gains or losses arising from our transactions in the period in which we incur those gains or losses.  As a result, currency fluctuations among the United States dollar and the currencies in which we do business have caused foreign currency transaction gains and losses in the past and will likely do so in the future.  Because of the variability of currency exposures and the potential volatility of currency exchange rates, we may suffer significant foreign currency transaction losses in the future due to the effect of exchange rate fluctuations.

Compliance with changing regulations relating to corporate governance and public disclosure may result in additional expenses.

Keeping abreast of, and in compliance with, changing laws, regulations, and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations, and NASDAQ Global Market rules, have required an increased amount of management attention and external resources.  We intend to invest all reasonably necessary resources to comply with evolving corporate governance and public disclosure standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

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We may not succeed in acquiring technology and integrating complementary businesses.

We may acquire additional technology and complementary businesses in the future.  Acquisitions involve many risks, any one of which could materially harm our business, including:

● the diversion of management's attention from core business concerns;

● the failure to exploit acquired technologies effectively or integrate successfully the acquired businesses;

● the loss of key employees from either our current business or any acquired businesses; and

● the assumption of significant liabilities of acquired businesses.

We may be unable to make any future acquisitions in an effective manner.  In addition, the ownership represented by the shares of our common stock held by our existing stockholders will be diluted if we issue equity securities in connection with any acquisition.  If we make any significant acquisitions using cash consideration, we may be required to use a substantial portion of our available cash.  If we issue debt securities to finance acquisitions, then the debt holders would have rights senior to the holders of shares of our common stock to make claims on our assets and the terms of any debt could restrict our operations, including our ability to pay dividends on our shares of common stock.  Acquisition financing may not be available on acceptable terms, or at all.  In addition, we may be required to amortize significant amounts of intangible assets in connection with future acquisitions.  We might also have to recognize significant amounts of goodwill that will have to be tested periodically for impairment.  These amounts could be significant, which could harm our operating results.

Risks Related To Our Common Stock

Our common stock may continue to have a volatile public trading price and low trading volume.

The market price of our common stock has been highly volatile.  Since our initial public offering in August 2000 through April 20, 2012, the price of our common stock on the NASDAQ Global Market has ranged between $54.12 and $1.05.  The market has experienced significant price and volume fluctuations for many reasons, some of which may be unrelated to our operating performance.

Many factors may have an effect on the market price of our common stock, including:

● public announcements by us, our competitors or others;

● developments concerning proprietary rights, including patents and litigation matters;

● publicity regarding actual or potential clinical results or developments with respect to products or compounds we or our collaborators are developing;

● regulatory decisions in both the United States and abroad;

● public concern about the safety or efficacy of new technologies;

● issuance of new debt or equity securities;

● general market conditions and comments by securities analysts; and

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● quarterly fluctuations in our revenues and financial results.

While we cannot predict the effect that these factors may have on the price of our common stock, these factors, either individually or in the aggregate, could result in significant variations in price during any given period of time.

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

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

Our charter authorizes our board of directors to issue up to 1,000,000 shares of preferred stock and to determine the terms of those shares of stock without any further action by our stockholders.  If the board of directors exercises this power to issue preferred stock, it could be more difficult for a third party to acquire a majority of our outstanding voting stock.  Our charter also provides staggered terms for the members of our board of directors.  This may prevent stockholders from replacing the entire board in a single proxy contest, making it more difficult for a third party to acquire control of us without the consent of our board of directors.  Our equity incentive plans generally permit our board of directors to provide for acceleration of vesting of options granted under these plans in the event of certain transactions that result in a change of control.  If our board of directors used its authority to accelerate vesting of options, then this action could make an acquisition more costly, and it could prevent an acquisition from going forward.

Section 203 of the Delaware General Corporation Law prohibits a person from engaging in a business combination with any holder of 15% or more of its capital stock until the holder has held the stock for three years unless, among other possibilities, the board of directors approves the transaction.  This provision could have the effect of delaying or preventing a change of control of Dyax, whether or not it is desired by or beneficial to our stockholders.

The provisions described above, as well as other provisions in our charter and bylaws and under the Delaware General Corporation Law, may make it more difficult for a third party to acquire our company, even if the acquisition attempt was at a premium over the market value of our common stock at that time. 

Item 5. OTHER INFORMATION

The Company and Fujifilm entered into an agreement, effective as of June 29, 2012, for the commercial manufacture and supply of bulk drug substance for KALBITOR® (ecallantide).  Pursuant to the agreement, Fujifilm has committed to be available to the Company to manufacture bulk drug substance through 2020.  The agreement is non-exclusive and the Company has no financial obligations under the agreement other than for any binding orders it may place from time to time for drug substance.

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Item 6 – EXHIBITS

DYAX CORP.

EXHIBIT INDEX

EXHIBIT NO.	DESCRIPTION
3.1	Amended and Restated Certificate of Incorporation of the Company. Filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q (File No. 000-24537) for the quarter ended September 30, 2008 and incorporated herein by reference.
3.2	Certificate of Amendment of the Company’s Amended and Restated Certificate of Incorporation.  Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 000-24537) filed on May 13, 2011 and incorporated herein by reference.
3.3	Amended and Restated By-laws of the Company. Filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q (File No. 000-24537) for the quarter ended September 30, 2008 and incorporated herein by reference.
10.1†	Fourth Amendment to Joint Development and License Agreement by and between the Company and Sigma-Tau Rare Diseases S.A., as successor-in-interest to Defiante Farmaceutica S.A. dated as of May 29, 2012.  Filed herewith.
10.2†	Fifth Amendment to Joint Development and License Agreement by and between the Company and Sigma-Tau Rare Diseases S.A., as successor-in-interest to Defiante Farmaceutica S.A. dated as of June 21, 2012.  Filed herewith.
10.3†	Agreement by and between the Company and Fujifilm Diosynth Biotechnologies UK Limited, dated as of June 29, 2012.  Filed herewith.
10.4	Amended and Restated 1995 Equity Incentive Plan of the Company. Filed as Exhibit 99.1 to the Company’s Registration Statement on Form S-8 (File No. 000-24537) filed on June 28, 2012 and incorporated herein by reference.
31.1	Certification of Chief Executive Officer Pursuant to §240.13a-14 or §240.15d-14 of the Securities Exchange Act of 1934, as amended. Filed herewith.
31.2	Certification of Chief Financial Officer Pursuant to §240.13a-14 or §240.15d-14 of the Securities Exchange Act of 1934, as amended. Filed herewith.
32	Certification pursuant to 18 U.S.C. Section 1350.  Filed herewith.
101*	The following materials from Dyax Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011, (ii) Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and 2011, (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011, and (iv) Notes to Consolidated Financial Statements. [confirm now subject to detailed tagging]
*	Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
†	This Exhibit has been filed separately with the Commission pursuant to an application for confidential treatment.  The confidential portions of this Exhibit have been omitted and are marked by an asterisk.

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DYAX CORP.

SIGNATURE

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

	DYAX CORP.
Date: August 2, 2012
	/s/George Migausky
	George Migausky Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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DYAX CORP.

EXHIBIT INDEX

EXHIBIT NO.	DESCRIPTION
3.1	Amended and Restated Certificate of Incorporation of the Company. Filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q (File No. 000-24537) for the quarter ended September 30, 2008 and incorporated herein by reference.
3.2	Certificate of Amendment of the Company’s Amended and Restated Certificate of Incorporation.  Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 000-24537) filed on May 13, 2011 and incorporated herein by reference.
3.3	Amended and Restated By-laws of the Company. Filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q (File No. 000-24537) for the quarter ended September 30, 2008 and incorporated herein by reference.
10.1†	Fourth Amendment to Joint Development and License Agreement by and between the Company and Sigma-Tau Rare Diseases S.A., as successor-in-interest to Defiante Farmaceutica S.A. dated as of May 29, 2012.  Filed herewith.
10.2†	Fifth Amendment to Joint Development and License Agreement by and between the Company and Sigma-Tau Rare Diseases S.A., as successor-in-interest to Defiante Farmaceutica S.A. dated as of June 21, 2012.  Filed herewith.
10.3†	Agreement by and between the Company and Fujifilm Diosynth Biotechnologies UK Limited, dated as of June 29, 2012.  Filed herewith.
10.4	Amended and Restated 1995 Equity Incentive Plan of the Company. Filed as Exhibit 99.1 to the Company’s Registration Statement on Form S-8 (File No. 000-24537) filed on June 28, 2012 and incorporated herein by reference.
31.1	Certification of Chief Executive Officer Pursuant to §240.13a-14 or §240.15d-14 of the Securities Exchange Act of 1934, as amended. Filed herewith.
31.2	Certification of Chief Financial Officer Pursuant to §240.13a-14 or §240.15d-14 of the Securities Exchange Act of 1934, as amended. Filed herewith.
32	Certification pursuant to 18 U.S.C. Section 1350.  Filed herewith.
101*	The following materials from Dyax Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011, (ii) Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and 2011, (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011, and (iv) Notes to Consolidated Financial Statements.
*	Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
†	This Exhibit has been filed separately with the Commission pursuant to an application for confidential treatment.  The confidential portions of this Exhibit have been omitted and are marked by an asterisk.

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