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

Overview

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

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

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

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

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

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

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

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

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

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

Critical Accounting Policies

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

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

Results of Operations

Discontinued Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Restructuring. Restructuring costs of $2.6 million for the nine months ended . . .