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

Overview

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

We have never been profitable and, as of March 31, 2009, we had an accumulated deficit of $261.0 million. We had net losses of $65.1 million for the year ended December 31, 2008 and $9.5 million for the three months ended March 31, 2009.

In October and November 2008, following the announcement of Phase 2 clinical trial results for Synavive in subjects with knee osteoarthritis, we undertook two organizational restructurings that reduced our United States workforce by approximately 65%. The restructuring was to conserve capital and realign our business strategy to selectively advance product candidates into clinical trials, apply our cHTS drug discovery technology to identify new product candidates and biological mechanisms of action, continue our funded drug discovery programs and seek additional opportunities for funded discovery in other therapeutic areas, and seek to outlicense our clinical and preclinical product candidates. Our efforts to conserve capital continue after the strategic realignment, and we have substantially reduced our planned expenditures relating to Synavive and our other clinical product candidates.

Our most advanced product candidate, Synavive, is a novel dissociated glucocorticoid product candidate we have been developing to treat immuno-inflammatory disorders. During 2008 we studied Synavive in a multi-center Phase 2 clinical trial of 279 subjects with knee osteoarthritis, the COMET-1 study. The COMET-1 study was completed in September 2008, and the results of the study were disclosed in October 2008. Subjects who completed the 14-week duration of the COMET-1 study were eligible to participate in an extension study designed to investigate the long-term safety and durability of response for Synavive. The COMET-1 extension study of Synavive is to be completed during June 2009. Based in part on the results from a Phase 2a clinical trial of Synavive in subjects with rheumatoid arthritis, we advanced Synavive into a Phase 2b clinical trial in subjects with rheumatoid arthritis, the MARS-1 study, which started in 2007 and was targeted to enroll over 600 subjects on a worldwide basis. In July 2008, we discontinued enrollment in the MARS-1 study. This decision was based on a number of factors that compromised the timing of results and therefore the strategic value of the MARS-1 study compared to both its significant cost and the results expected in October 2008 from the COMET-1 study. Given poor financial market conditions and that the MARS-1 data would not be available in a timeframe consistent with the expected timing of the COMET-1 study results, the MARS-1 study was discontinued to preserve financial resources.

Our product candidate CRx-401 is a novel oral therapeutic that was evaluated in a 117 subject Phase 2a clinical trial for its anti-diabetic activity in subjects with Type 2 diabetes. The Phase 2a clinical trial of CRx-401 started in 2007 and was completed in March 2008. A pre-specified interim analysis of the data from the first 50 subjects enrolled in the CRx-401 Phase 2a study in November 2008 indicated that the trial is unlikely to detect a treatment advantage of CRx-401 over bezafibrate alone on the primary endpoint of change in levels of fasting plasma glucose. We plan to review the final data from this clinical trial to determine whether there is a treatment advantage of CRx-401 over bezafibrate alone on the primary endpoint of changes of fasting plasma glucose and other

secondary endpoints. Our product candidate CRx-191 is a topical synergistic combination drug candidate thought to have a novel

multi-target mechanism that inhibits TNF-† and interferon-gamma, key cell mediators of inflammation. CRx-191 contains the mid-potency glucocorticoid, mometasone, and a low dose of the tricyclic anti-depressant, nortriptyline, co-formulated as a topical cream for the treatment of psoriasis and other steroid-responsive dermatoses. We conducted a healthy volunteer safety study of CRx-191 during 2007 and conducted a Phase 2a clinical trial of CRx-191 in subjects with psoriasis during the first half of 2008. Our product candidate CRx-197 is a selective cytokine modulator containing low concentrations of the antihistamine loratadine, and the tricyclic anti-depressant nortriptyline, neither of which is approved for the treatment of topical dermatoses. This combination has been co-formulated as a topical cream for the treatment of atopic dermatitis and other inflammatory dermatoses. We completed a healthy volunteer safety study for CRx-197 in 2008 and a Phase 2a plaque psoriasis clinical trial that was initiated in 2008 and completed in the first quarter of 2009.

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

Critical Accounting Policies

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

The critical accounting policies we identified in our most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2008 related to restructuring, revenue recognition, stock-based compensation and accrued expenses. It is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies discussed below as well as those disclosed in our Annual Report on Form 10-K, as filed with the SEC on March 16, 2009.

Restructuring

In accordance with SFAS 146, the facilities related expenses and liabilities associated with our November 2008 restructuring include an estimate of the remaining rental obligation, net of estimated sublease income, for a facility we no longer occupy. This estimate and its assumptions, which include an estimate of a sublease rate per square foot as well as a period of time before we are able to enter into a sublease, will be reviewed on a regular basis until the outcome is finalized, and we will make whatever modifications to our estimates we believe necessary, based on our judgment, to reflect any changed circumstances. It is possible that such estimates could change in the future resulting in additional adjustments, and the effect of any such adjustments could be material.

Revenue Recognition

We have entered into collaborative research and development agreements with other pharmaceutical and biotechnology companies, government agencies and charitable foundations. These agreements are generally in the form of research and development and license agreements. The agreements are for early-stage compounds and are generally focused on specific disease areas. The agreements provide for nonrefundable up-front payments, milestone payments upon achieving significant milestone events and in some cases ongoing research funding. The agreements also contemplate royalty payments on sales if and when the product receives marketing approval by the FDA or other regulatory agency.

We recognize revenue in accordance with Emerging Issues Task Force, Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21") and Securities and Exchange Commission Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements" ("SAB 104"). Revenue arrangements with multiple deliverables are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered elements. The consideration received is allocated among separate elements based on their respective fair values. Revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred, the price is fixed or determinable and collection is reasonably assured. License fees or other amounts received in advance of performance obligations, or in cases where we have a continuing obligation to perform services, are deferred and recognized over the performance period. Revenues from milestone payments that are deemed to be substantive and represent the culmination of a separate earnings process are recorded when the milestone is achieved. Contract revenues are recorded as the services are performed. The periods over which revenue should be recognized are subject to estimates by management and may change over the course of the collaborative agreement. Such a change could have a material impact on the amount of revenue we record in future periods.

Revenue under government grants or cost reimbursement contracts is recognized as we perform the underlying research and development activities.

Stock-Based Compensation

We apply the provisions of SFAS 123R to share-based payments. We estimate the value of our stock options using the Black-Scholes model which requires us to make assumptions regarding stock price volatility and expected term. We analyze the volatilities and expected terms of a peer group of companies and utilize a stock price volatility in the Black-Scholes model that reflects the average volatility of this peer group and our own historical volatility. We have continued to increase the weight applied to our own historical volatility over time. We utilize the expected terms from this analysis of peer companies to support the expected term used in the Black-Scholes model.

Upon the adoption of SFAS 123R, we began to estimate the level of stock-based award forfeitures expected to occur and record compensation cost only for those awards that are ultimately expected to vest. We believe that using an average of our own historical data for percentage of option cancellations and actual employee turnover rates derived from periods of business activity most likely to be representative of future periods to be the most appropriate measure of forfeitures. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods. We have determined that the reduction in work force that occurred in the fourth quarter of 2008 is a one-time occurrence and, therefore, excluded these employees and their stock-based awards from the forfeiture rate calculation.

As of March 31, 2009, there was approximately $7.2 million of total stock-based compensation expense not yet recognized relating to non-vested awards granted under our stock option plans and restricted stock agreements as calculated under SFAS 123R. This expense is net of estimated forfeitures and is expected to be recognized over a weighted-average period of approximately 2.5 years. The amount of stock-based compensation expense to be recorded in any future period cannot be accurately predicted due to the uncertainty of future grant levels and actual forfeitures to be recorded. Additionally, changes to the assumptions used in the Black-Scholes model could cause a material change in the amount of stock-based compensation expense to be recorded in future reporting periods.

Accrued Expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate certain accrued expenses. This process involves identifying services that third parties have performed on our behalf and estimating the amount of service performed and the associated cost incurred for these services as of the balance sheet date in our consolidated financial statements. Examples of estimated accrued expenses for our business are contract service fees, such as amounts due to clinical research organizations who are supporting clinical trials for our product candidates Synavive, CRx-401, CRx-197 and CRx-191, preclinical and toxicology research services providers and formulation development providers, professional service fees, such as attorneys and accountants, and investigators in conjunction with our clinical trials. In connection with these service fees, our estimates are most affected by our understanding of the status and timing of services provided relative to the actual level of services incurred by the service providers. In the event that we do not identify certain costs that have been incurred or we under- or over-estimate the level of services or the costs of such services, our reported expenses for a reporting period could be understated or overstated.

Results of Operations

Comparison of the Three Months ended March 31, 2009 and March 31, 2008

Revenue. For the three months ended March 31, 2009, we recorded $3.0 million of revenue from our research and development collaborations with Angiotech Pharmaceuticals, Inc., or Angiotech, Cystic Fibrosis Foundation Therapeutics, Inc., or CFFT, CHDI, Inc., Charley's Fund, the Nash Avery Foundation and GMT Charitable Research, LLC, or the DMD Foundations, the Liverpool School of Tropical Medicine, or LSTM, and from grants from the National Institutes of Allergy and Infectious Diseases, or NIAID, the United States Army Medical Research Institute for Infectious Diseases, or USAMRIID, and the Singapore Economic Development Board, or EDB. For the three months ended March 31, 2008, we recorded $3.4 million of revenue from our research and development collaborations with Angiotech, CFFT, CHDI, Inc., the DMD Foundations, LSTM, and SAIC - National Institute of Neurological Disorders and Stroke, or SAIC (NINDS), and from grants from the National Institutes of Allergy and Infectious Diseases, or NIAID and the Singapore Economic Development Board, or EDB. The decrease in revenue is primarily due to a decrease in the revenue recognized under our research and license agreement with CHDI, which completed research activities in December 2008.

Research and Development. Research and development expense for the three months ended March 31, 2009 was $8.3 million compared to $17.0 million for the three months ended March 31, 2008. The $8.7 million decrease was primarily due to a decrease of $2.9 million in cash and non-cash compensation expense, a $3.3 million decrease in preclinical and external clinical expenses as well as a $2.5 million decrease in lab supplies, facilities, depreciation and other overhead costs related to our fourth quarter 2008 restructuring.

The table below summarizes our allocation of research and development expenses to our clinical programs Synavive, CRx-401, CRx-197 and CRx-191 for the three months ended March 31, 2009 and 2008. Our internal project costing methodology does not allocate all of the personnel and other indirect costs from all of our research and development departments to specific clinical and

preclinical programs, and such unallocated costs are further summarized in the table below. Unallocated clinical program costs consist primarily of the personnel and other expenses for our clinical operations, medical affairs, biostatistics, data systems, medical writing and clinical program leadership departments, all of which supported the development of our clinical product candidates Synavive, CRx-401, CRx-197 and CRx-191. Preclinical program costs consist of the personnel and other expenses allocated to our internally funded preclinical programs, as well as the direct costs allocated to all of our research collaborations, including the personnel costs of our alliance management department. Unallocated clinical and preclinical program costs consist primarily of the personnel and other expenses for our formulations, pharmacology, regulatory, quality, new products and discovery departments, all of which supported the development of both our clinical product candidates Synavive, CRx-401, CRx-197 and CRx-191, as well as our preclinical product candidates. Infrastructure and support costs consist of facility costs, depreciation and amortization and costs for research and development support personnel such as our informatics and facilities departments.

                                                                         Three Months Ended
                                                                             March 31,
                                                                           (in thousands)
                                                                          2009         2008
Synavive                                                               $    1,689    $  6,082
CRx-401                                                                       681       1,031
CRx-197                                                                       267         607
CRx-191                                                                        47         462
Unallocated clinical program costs                                            180         712

Total clinical program costs                                                2,864       8,894

Preclinical program costs                                                   2,044       3,389
Unallocated clinical and preclinical program costs                            874       1,438
Infrastructure and support costs                                            1,902       2,578
Non-cash employee and non-employee stock-based compensation expense           603         687

Total research and development expenses                                $    8,287    $ 16,986

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

General and Administrative. General and administrative expense for the three months ended March 31, 2009 was $3.6 million compared to $3.9 million for the three months ended March 31, 2008. The $0.3 million decrease was primarily due to reduced non-cash compensation expense, primarily due to the reduction in our stock price which reduced the Black-Scholes value of stock options granted in the second half of 2008 and the first quarter of 2009.

Restructuring. For the three months ended March 31, 2009, we recorded a restructuring charge of $0.4 million primarily related to termination benefits for employees that provided service beyond the minimum retention period of sixty days after notification in November 2008.

Interest Income. Interest income for the three months ended March 31, 2009 was $0.1 million compared to $1.2 million for the three months ended March 31, 2008. The $1.1 million decrease was primarily due to decreases in our average cash and short-term investments balances and lower average interest rates for the securities held in our investment portfolio.

Interest Expense. Interest expense for the three months ended March 31, 2009 was $0.2 million compared to $0.4 million for the three months ended March 31, 2008. The $0.2 million decrease was due to the repayment of our equipment lines of credit with General Electric Capital Corporation and its affiliates, or GECC, in December 2008.

Liquidity and Capital Resources

Since our inception in March 2000 until our initial public offering on November 9, 2005, we have funded our operations principally through the private placement of equity securities, which provided net proceeds of approximately $104.9 million. Our initial public offering provided net proceeds of $43.8 million, a private placement of our common stock in March 2006 provided net proceeds of $45.4 million and a public offering of our common stock in October 2007 provided net proceeds of $33.0 million. We

have also generated funds from debt financing and payments from our collaboration partners. As of March 31, 2009, we had cash, cash equivalents and short-term investments of approximately $39.2 million, which includes $4.1 million of restricted cash. Our funds are primarily invested in short-term, investment-grade securities, commercial paper, government agency securities and U.S. Treasury money market funds, and as such, we do not believe there is significant risk in our investment portfolio as of March 31, 2009.

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

Our operating activities used cash of $11.7 million for the three months ended March 31, 2009 and used cash of $12.2 million for the three months ended March 31, 2008. The decrease in the net use of cash in operating activities is primarily attributed to our $7.2 million decrease in net loss, offset by working capital adjustments in accounts payable, accrued expenses and accrued restructuring as a result of our fourth quarter 2008 restructuring.

Our investing activities provided cash of $9.3 million for the three months ended March 31, 2009 and provided cash of $11.2 million for the three months ended March 31, 2008. The cash provided by investing activities for the three months ended March 31, 2009 was primarily due to sales and maturities of short-term investments, partially offset by purchases of property and equipment.

Our financing activities were not a significant source of cash for the three months ended March 31, 2009 and used cash of $0.9 million for the three months ended March 31, 2008. The use of cash in the three months ended March 31, 2008 is primarily due to the repayment of our notes payable to GECC, which were repaid in full in December 2008.

As of March 31, 2009, our subsidiary CombinatoRx Singapore had $19.4 million in convertible notes payable, representing $17.5 million in principal amount of convertible promissory notes issued by CombinatoRx Singapore to BioMedical Sciences on August 30, 2005, June 8, 2006, May 30, 2007 and August 5, 2008 and accrued interest of $1.9 million. The notes bear interest at an annual rate of 5% and are due and payable on December 31, 2009, unless we elect to prepay the notes before that date through CombinatoRx Singapore. The notes are secured by a security interest in the non-intellectual property assets of the subsidiary and by a negative pledge by the subsidiary with respect to its intellectual property rights. We have not provided a guaranty of the convertible promissory notes issued by CombinatoRx Singapore, and there is no payment recourse to us. We have pledged our shares in CombinatoRx Singapore as additional collateral for the subsidiary's obligations under the notes. The notes are convertible into our common stock at the option of BioMedical Sciences only upon maturity, acceleration or default of any proposed prepayment. We are currently in discussions with BioMedical Sciences regarding a potential divestiture of our ownership interest in CombinatoRx Singapore.

For the three months ended March 31, 2009, we received $2.0 million in payments from our collaborations and research and development agreements with CFFT, CHDI, Inc., the DMD Foundations and LSTM, and grants from the NIAID, USAMRIID and the EDB. We expect that our sources of funding in the future will also include, subject to our satisfying conditions, additional research funding, license fees, potential milestone payments and royalties relating to our collaboration and research and development agreements with Novartis, Angiotech, CFFT, the DMD Foundations and government grants from the NIAID and USAMRIID and any other collaborative agreements into which we might enter.

Contractual Obligations

There have been no additional material contractual obligations incurred by us that materially changes the disclosure of our contractual obligations in our Form 10-K for the year ended December 31, 2008.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements or relationships with . . .