UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission file number: 000-50633

CYTOKINETICS, INCORPORATED

(Exact name of registrant as specified in its charter)

Delaware		94-3291317
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

280 East Grand Avenue
South San Francisco, California		94080
(Address of principal executive offices)		(Zip 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 þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).* Yes o No o

*

The registrant has not yet been phased into the interactive data requirements.

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

     Number of shares of common stock, $0.001 par value, outstanding as of October 29, 2010: 65,878,888.

 

 

CYTOKINETICS, INCORPORATED
TABLE OF CONTENTS FOR FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2010

		Page
PART I. FINANCIAL INFORMATION			3
Item 1. Financial Statements			3
Unaudited Condensed Balance Sheets as of September 30, 2010 and December 31, 2009			3
Unaudited Condensed Statements of Operations for the three and nine months ended September 30, 2010 and 2009, and the period from August 5, 1997 (date of inception) to September 30, 2010			4
Unaudited Condensed Statements of Cash Flows for the nine months ended September 30, 2010 and 2009, and the period from August 5, 1997 (date of inception) to September 30, 2010			5
Notes to Unaudited Condensed Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3. Quantitative and Qualitative Disclosures About Market Risk			26
Item 4. Controls and Procedures			26
PART II. OTHER INFORMATION			27
Item 1. Legal Proceedings			27
Item 1A. Risk Factors			27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 3. Defaults Upon Senior Securities			46
Item 4. Reserved			46
Item 5. Other Information			46
Item 6. Exhibits			46
SIGNATURES			47
EXHIBIT INDEX			48
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CYTOKINETICS, INCORPORATED
(A Development Stage Enterprise)

(In thousands, except share and per share data)

(Unaudited)

		September 30,				December 31,
		2010				2009
ASSETS
Current assets:
Cash and cash equivalents		$	30,439			$	25,561
Short-term investments			46,780				71,266
Investments in auction rate securities			—				15,542
Investment put option related to auction rate securities rights			—				2,358
Related party accounts receivable			262				180
Related party notes receivable			—				9
Prepaid and other current assets			1,777				2,005
Total current assets			79,258				116,921
Property and equipment, net			2,574				3,713
Restricted cash			788				1,674
Other assets			298				291
Total assets		$	82,918			$	122,599
LIABILITIES and STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,013			$	1,683
Accrued liabilities			4,446				5,935
Short-term portion of equipment financing lines			1,028				1,616
Deferred revenue			—				751
Loan with UBS			—				10,201
Total current liabilities			6,487				20,186
Long-term portion of equipment financing lines			309				985
Total liabilities			6,796				21,171
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value:
Authorized: 170,000,000 shares; Issued and outstanding: 64,572,009 shares at September 30, 2010 and 61,275,036 shares at December 31, 2009			65				61
Additional paid-in capital			425,087				412,729
Accumulated other comprehensive income			7				1
Deficit accumulated during the development stage			(349,037	)			(311,363	)
Total stockholders’ equity			76,122				101,428
Total liabilities and stockholders’ equity		$	82,918			$	122,599

The accompanying notes are an integral part of these financial statements.

CYTOKINETICS, INCORPORATED
(A Development Stage Enterprise)

(In thousands, except per share data)

(Unaudited)

																		Period from
																		August 5, 1997
		Three Months Ended								Nine Months Ended								(Date of Inception)
		September 30,				September 30,				September 30,				September 30,				to September 30,
		2010				2009				2010				2009				2010
Revenues:
Research and development revenues from related parties		$	306			$	5,506			$	1,390			$	6,148			$	48,999
Research and development, grant and other revenues			88				—				88				—				3,043
License revenues from related parties			—				—				—				74,367				112,935
Total revenues			394				5,506				1,478				80,515				164,977
Operating expenses:
Research and development			9,547				9,857				28,852				30,018				406,129
General and administrative			3,412				3,878				10,629				12,025				126,792
Restructuring charges (reversals)			—				(21	)			—				(23	)			2,450
Total operating expenses			12,959				13,714				39,481				42,020				535,371
Operating income (loss)			(12,565	)			(8,208	)			(38,003	)			38,495				(370,394	)
Interest and other, net			48				6				153				(1,422	)			21,331
Income (loss) before income taxes			(12,517	)			(8,202	)			(37,850	)			37,073				(349,063	)
Income tax benefit			(176	)			—				(176	)			—				(26	)
Net income (loss)		$	(12,341	)		$	(8,202	)		$	(37,674	)		$	37,073			$	(349,037	)
Net income (loss) per common share:
Basic		$	(0.19	)		$	(0.14	)		$	(0.59	)		$	0.66
Diluted		$	(0.19	)		$	(0.14	)		$	(0.59	)		$	0.65
Weighted-average number of shares used in computing net income (loss) per common share:
Basic			64,434				60,502				63,424				56,212
Diluted			64,434				60,502				63,424				56,697

The accompanying notes are an integral part of these financial statements.

CYTOKINETICS, INCORPORATED
(A Development Stage Enterprise)

(In thousands)

(Unaudited)

										Period from
										August 5, 1997
		Nine Months Ended								(Date of Inception)
		September 30,				September 30,				to September 30,
		2010				2009				2010
Cash flows from operating activities:
Net income (loss)		$	(37,674	)		$	37,073			$	(349,037	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment			1,437				1,527				26,903
(Gain) loss on disposal of equipment			(13	)			(48	)			298
Non-cash impairment charges			—				—				103
Non-cash restructuring expenses, net of reversals			—				22				498
Non-cash interest expense			—				—				504
Non-cash forgiveness of loan to officer			9				10				434
Stock-based compensation			3,165				3,734				28,424
Tax benefit from stock-based compensation			20				—				—
Non-cash warrant expense			—				1,585				1,626
Other non-cash expenses			—				—				141
Changes in operating assets and liabilities:
Related party accounts receivable			(82	)			(4,323	)			(613	)
Prepaid and other assets			221				(176	)			(2,103	)
Accounts payable			(585	)			97				1,137
Accrued liabilities			(1,486	)			(965	)			4,313
Related party payables and accrued liabilities			—				10				—
Deferred revenue			(751	)			(23,784	)			—
Net cash provided by (used in) operating activities			(35,739	)			14,762				(287,372	)
Cash flows from investing activities:
Purchases of investments			(81,790	)			(98,723	)			(883,360	)
Proceeds from sales and maturities of investments			106,282				34,054				816,645
Proceeds from sales of auction rate securities			17,900				1,875				20,025
Purchases of property and equipment			(406	)			(339	)			(30,506	)
Proceeds from sale of property and equipment			13				74				137
(Increase) decrease in restricted cash			886				1,076				(788	)
Issuance of related party notes receivable			—				—				(1,146	)
Proceeds from repayments of notes receivable			—				30				859
Net cash provided by (used in) investing activities			42,885				(61,953	)			(78,134	)
Cash flows from financing activities:
Proceeds from initial public offering, sale of common stock to related party, and public offerings, net of issuance costs			—				12,938				206,871
Proceeds from draw down of committed equity financing facilities, net of issuance costs			8,930				6,850				47,826
Proceeds from other issuances of common stock			287				406				7,281
Proceeds from issuance of preferred stock, net of issuance costs			—				—				133,172
Repurchase of common stock			—				—				(68	)
Proceeds from loan with UBS			—				12,441				12,441
Repayment of loan with UBS			(10,201	)			(1,971	)			(12,441	)
Proceeds from equipment financing lines			—				—				23,696
Repayment of equipment financing lines			(1,264	)			(1,577	)			(22,833	)
Tax benefit from stock-based compensation			(20	)			—				—
Net cash provided by (used in) financing activities			(2,268	)			29,087				395,945
Net increase (decrease) in cash and cash equivalents			4,878				(18,104	)			30,439
Cash and cash equivalents, beginning of period			25,561				41,819				—
Cash and cash equivalents, end of period		$	30,439			$	23,715			$	30,439

The accompanying notes are an integral part of these financial statements.

CYTOKINETICS, INCORPORATED
(A Development Stage Enterprise)

Note 1. Organization and Summary of Significant Accounting Policies

Overview

     Cytokinetics, Incorporated (the “Company”, “we” or “our”) was incorporated under the laws of the state of Delaware on August 5, 1997. The Company is a clinical-stage biopharmaceutical company focused on the discovery and development of novel small molecule therapeutics that modulate muscle function for the potential treatment of serious diseases and medical conditions. The Company is a development stage enterprise and has been primarily engaged in conducting research, developing drug candidates and technologies, and raising capital.

     The Company’s registration statement for its initial public offering (“IPO”) was declared effective by the Securities and Exchange Commission (“SEC”) on April 29, 2004. The Company’s common stock commenced trading on the NASDAQ National Market, now the NASDAQ Global Market, on April 29, 2004 under the trading symbol “CYTK”.

     The Company’s financial statements contemplate the conduct of the Company’s operations in the normal course of business. The Company has incurred an accumulated deficit since inception and there can be no assurance that the Company will attain profitability. The Company had a net loss of $37.7 million and net cash used in operations of $35.7 million for the nine months ended September 30, 2010, and an accumulated deficit of $349.0 million as of September 30, 2010. Cash, cash equivalents and short-term investments decreased to $77.2 million at September 30, 2010 from $114.7 million at December 31, 2009. The Company anticipates it will continue to have operating losses and net cash outflows in future periods. If sufficient additional capital is not available on terms acceptable to the Company, its liquidity will be impaired.

     The Company has funded its operations primarily through sales of common stock and convertible preferred stock, contract payments under its collaboration agreements, debt financing arrangements, government grants and interest income. Until it achieves profitable operations, the Company intends to continue to fund operations through payments from strategic relationships, additional sales of equity securities, government grants and debt financings. Based on the current status of its development plans, the Company believes that its existing cash, cash equivalents and short-term investments at September 30, 2010 will be sufficient to fund its cash requirements for at least the next 12 months. If, at any time, the Company’s prospects for financing its research and development programs decline, the Company may decide to reduce research and development expenses by delaying, discontinuing or reducing its funding of one or more of its research or development programs. Alternatively, the Company might raise funds through strategic relationships, public or private financings or other arrangements. Such funding, if needed, may not be available on favorable terms, or at all.

Basis of Presentation

     The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements include all adjustments (consisting only of normal recurring adjustments) that management believes are necessary for the fair statement of the balances and results for the periods presented. These interim financial statement results are not necessarily indicative of results to be expected for the full fiscal year or any future interim period.

     The balance sheet at December 31, 2009 has been derived from the audited financial statements at that date. The financial statements and related disclosures have been prepared with the presumption that users of the interim financial statements have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Form 10-K for the year ended December 31, 2009, as filed with the SEC on March 11, 2010.

     Certain reclassifications have been made to the Condensed Financial Statements for the nine months ended September 30, 2009 in order to conform to the current year presentation.

Comprehensive Income (Loss)

     Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes certain changes in stockholders’ equity that are excluded from net income (loss). Comprehensive income (loss) and its components for the three and nine months ended September 30, 2010 and 2009 were as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2010				2009				2010				2009
Net income (loss)		$	(12,341	)		$	(8,202	)		$	(37,674	)		$	37,073
Change in unrealized gain on investments			4				27				6				6
Comprehensive income (loss)		$	(12,337	)		$	(8,175	)		$	(37,668	)		$	37,079

Restricted Cash

     In accordance with the terms of the Company’s line of credit agreements with General Electric Capital Corporation (“GE Capital”), the Company is obligated to maintain a certificate of deposit with the lender. In July 2010, GE Capital approved a reduction in the amount of the Company’s certificate of deposit. The balance of the certificate of deposit, which the Company classifies as restricted cash, was as follows (in thousands):

		September 30,				December 31,
		2010				2009
Certificate of deposit classified as restricted cash		$	788			$	1,674

Note 2. Net Income (Loss) Per Common Share

     Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of vested common shares outstanding during the period. Diluted net income (loss) per common share is computed by giving effect to all potentially dilutive common shares, including outstanding stock options, unvested restricted stock, warrants, and shares issuable under the Employee Stock Purchase Plan (“ESPP”) by applying the treasury stock method. The following is the calculation of basic and diluted net income (loss) per common share (in thousands, except per share data):

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2010				2009				2010				2009
Net income (loss)		$	(12,341	)		$	(8,202	)		$	(37,674	)		$	37,073
Weighted-average common shares outstanding			64,552				60,829				63,586				56,583
Unvested restricted stock			(118	)			(327	)			(162	)			(371	)
Weighted-average shares used in computing net income (loss) per common share — basic			64,434				60,502				63,424				56,212
Dilutive effect of stock options and unvested restricted stock			—				—				—				485
Weighted-average shares used in computing net income (loss) per common share — diluted			64,434				60,502				63,424				56,697
Net income (loss) per common share:
Basic		$	(0.19	)		$	(0.14	)		$	(0.59	)		$	0.66
Diluted		$	(0.19	)		$	(0.14	)		$	(0.59	)		$	0.65

     The following instruments were excluded from the computation of diluted net income (loss) per common share for the periods presented because their effect would have been antidilutive (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2010				2009				2010				2009
Options to purchase common stock			8,134				5,002				8,134				6,329
Warrants to purchase common stock			4,027				4,027				4,027				2,205
Shares issuable related to the ESPP			108				75				108				75
Total shares			12,269				9,104				12,269				8,609

Note 3. Supplemental Cash Flow Data

     Supplemental cash flow data was as follows (in thousands):

										Period from
										August 5, 1997
		Nine Months Ended								(date of inception)
		September 30,				September 30,				to September 30,
		2010				2009				2010
Significant non-cash investing and financing activities:
Deferred stock-based compensation		$	—			$	—			$	6,940
Purchases of property and equipment through accounts payable			18				62				18
Purchases of property and equipment through trade in value of disposed property and equipment			—				10				258
Penalty on restructuring of equipment financing lines			—				—				475
Conversion of convertible preferred stock to common stock			—				—				133,172
Warrants issued in registered direct equity financing			—				—				1,585

Note 4. Related Party Research and Development Arrangements

     Amgen Inc. (“Amgen”). Pursuant to its collaboration and option agreement with Amgen (the “Amgen Agreement”), the Company has recognized research and development revenue from Amgen for reimbursements of its costs of full-time employee equivalents (“FTEs”) supporting the research and development program for omecamtiv mecarbil and related compounds, and for reimbursements of other costs related to that program. In 2009, the Company also recorded revenue from Amgen for the transfer of the Company’s existing inventories of omecamtiv mecarbil and related reference materials to Amgen. These reimbursements were recorded as research and development revenues from related parties. In 2009, the Company recognized license revenue from related parties from Amgen for Amgen’s non-refundable option exercise fee received in June 2009 and the deferred license revenue related to the 2006 upfront non-exclusive license and technology access fee and stock purchase premium. Revenue from Amgen was as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2010				2009				2010				2009
FTE reimbursements		$	120			$	993			$	857			$	1,462
Reimbursements of other costs			186				494				533				641
Transfer of omecamtiv mecarbil materials			—				4,000				—				4,000
Total research and development revenues from Amgen			306				5,487				1,390				6,103
Nonrefundable option exercise fee			—				—				—				50,000
Deferred license revenue recognized			—				—				—				24,367
Total license revenue from Amgen			—				—				—				74,367
Total revenue from Amgen		$	306			$	5,487			$	1,390			$	80,470

     Deferred revenue and related party accounts receivable related to Amgen were as follows (in thousands):

		September 30,				December 31,
		2010				2009
Deferred revenue — Amgen		$	—			$	751
Related party accounts receivable — Amgen		$	258			$	175

     GlaxoSmithKline (“GSK”). Pursuant to its collaboration and license agreement with GSK, the Company recognized revenue for patent expense reimbursements from GSK, recorded as research and development revenues from related parties, as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2010				2009				2010				2009
Patent expense reimbursements		$	—			$	19			$	—			$	45

     There were no related party accounts receivable due from GSK at September 30, 2010 or December 31, 2009.

     In December 2009, the Company and GSK agreed to terminate the collaboration, effective February 28, 2010. As a result, all rights for GSK-923295 reverted to the Company at that time, subject to certain royalty obligations to GSK. GSK remains responsible for all activities and costs associated with completing and reporting on the ongoing Phase I clinical trial of GSK-923295.

Note 5. Other Research and Development Arrangements

     In July 2010, the National Institute of Neurological Disorders and Stroke (“NINDS”) awarded to the Company a $2.9 million grant to support research and development of CK-2017357 directed to the potential treatment for myasthenia gravis for a period of up to three years. In August 2010, the Company submitted, and the NINDS approved, a revision to the grant reducing the total grant amount to $2.8 million. Management has determined that the Company is the principal participant in the grant arrangement and, accordingly, the Company records amounts earned under the arrangement as revenue. The Company recognized revenue under this grant arrangement, which it recorded as research and development, grant and other revenues, as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2010				2009				2010				2009
Grant revenue from NINDS		$	88			$	—			$	88			$	—

Note 6. Cash Equivalents, Investments and Fair Value Measurements

Cash Equivalents and Available for Sale Investments

     The amortized cost and fair value of cash equivalents and available for sale investments at September 30, 2010 and December 31, 2009 were as follows (in thousands):

		September 30, 2010
		Amortized				Unrealized				Unrealized				Fair				Maturity
		Cost				Gains				Losses				Value				Dates
Cash equivalents — money market funds		$	20,305				—				—			$	20,305
Short-term investments — U.S. Treasury securities		$	46,773			$	7			$	—			$	46,780				10/2010-5/2011

		December 31, 2009
		Amortized				Unrealized				Unrealized				Fair				Maturity
		Cost				Gains				Losses				Value				Dates
Cash equivalents — money market funds		$	23,773				—				—			$	23,773
Short-term investments — U.S.Treasury securities		$	71,265			$	1			$	—			$	71,266				1/2010-6/2010

     The Company’s cash equivalents and short-term investments as of September 30, 2010 December 31, 2009 had no unrealized losses.

     Interest income was as follows (in thousands):

																		Period from
																		August 5, 1997
		Three Months Ended								Nine Months Ended								(date of inception)
		September 30,				September 30,				September 30,				September 30,				to September 30,
		2010				2009				2010				2009				2010
Interest income		$	54			$	113			$	280			$	464			$	28,355

Investments in Auction Rate Securities and Investment Put Option Related to Auction Rate Securities Rights

     On June 30, 2010, the Company exercised its Series C-2 Auction Rate Securities Rights issued to the Company by UBS AG (the “ARS Rights”), requiring that UBS AG purchase the Company’s remaining outstanding auction rate securities (“ARS”) at par value of $7.5 million. Accordingly, on the settlement date of July 1, 2010, UBS AG deposited the proceeds of $7.5 million into the Company’s money market account. The Company had recorded the ARS Rights as an investment put option, which was extinguished at the time that the ARS Rights were exercised.

     Changes in the fair value of the ARS and the investment put option related to the ARS Rights were recognized in current period earnings in Interest and other, net. The Company recognized unrealized gains in the third quarter of 2010 and 2009 of $0.8 million and

$0.4 million, respectively, to reflect the change in the fair value of the ARS. In the first nine months of 2010 and 2009, the Company recognized unrealized gains of $2.4 million and $1.0 million, respectively, to reflect the change in the fair value of the ARS.

     The Company recognized unrealized losses on the investment put option related to the ARS Rights of $0.8 million and $0.4 million in the third quarter of 2010 and 2009, respectively, and unrealized losses of $2.4 million and $1.0 million in the first nine months of 2010 and 2009, respectively.

Fair Value Measurements

     The Company adopted the fair value accounting guidance to value its financial assets and liabilities. Fair value is defined as the price that would be received for assets when sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that the Company believes market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable.

     The Company primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best information reasonably available. Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, and considers the security issuers’ and the third-party insurers’ credit risk in its assessment of fair value.

     The Company classifies the determined fair value based on the observability of those inputs. Fair value accounting guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three defined levels of the fair value hierarchy are as follows:

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

     Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or through corroboration with observable market data; and

     Level 3 — Unobservable inputs, for which there is little or no market data for the assets or liabilities, such as internally-developed valuation models.

     Financial assets measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009 are classified in the tables below in one of the three categories described above (in thousands):

		September 30, 2010
		Fair Value Measurements Using												Assets
		Level 1				Level 2				Level 3				At Fair Value
Money market funds		$	20,305			$	—			$	—			$	20,305
U.S. Treasury securities			46,780				—				—				46,780
Total		$	67,085			$	—			$	—			$	67,085
Amounts included in:
Cash and cash equivalents		$	20,305			$	—			$	—			$	20,305
Short-term investments			46,780				—				—				46,780
Total		$	67,085			$	—			$	—			$	67,085

		December 31, 2009
		Fair Value Measurements Using												Assets
		Level 1				Level 2				Level 3				At Fair Value
Money market funds		$	23,773			$	—			$	—			$	23,773
U.S. Treasury securities			71,266				—				—				71,266
Investments in ARS			—				—				15,542				15,542
Investment put option related to ARS Rights			—				—				2,358				2,358
Total		$	95,039			$	—			$	17,900			$	112,939
Amounts included in:
Cash and cash equivalents		$	23,773			$	—			$	—			$	23,773
Short-term investments			71,266				—				—				71,266
Investments in ARS			—				—				15,542				15,542
Investment put option related to ARS Rights			—				—				2,358				2,358
Total		$	95,039			$	—			$	17,900			$	112,939

     The valuation technique used to measure fair value for the Company’s Level 1 assets is a market approach, using prices and other relevant information generated by market transactions involving identical assets. The valuation technique used to measure fair value for Level 3 assets is an income approach, where, in most cases, the expected future cash flows are discounted back to present value for each asset, except with respect to the investment put option related to the ARS Rights, for which the valuation was based on the Black-Scholes option pricing model and approximated the difference in value between the par value and the fair value of the associated ARS.

     At December 31, 2009, the Company held approximately $15.5 million in fair value of ARS classified as short-term investments. The assets underlying the ARS were student loans substantially backed by the federal government. The fair value of these securities as of December 31, 2009 was estimated using a discounted cash flow (“DCF”) model. The Company classified its ARS in the Level 3 category, as some of the inputs used in the DCF model were unobservable. The assumptions used in preparing the DCF model included estimates of interest rates, timing and amount of cash flows, credit and liquidity premiums and expected holding periods of the ARS, based on data available as of December 31, 2009. The significant assumptions of the DCF model were discount margins that were based on industry recognized student loan sector indices, an additional liquidity discount and an estimated term to liquidity. Other items that this analysis considered were the collateralization underlying the security investments, the creditworthiness of the counterparty and the timing of expected future cash flows. The Company’s ARS were also compared, when possible, to other observable market data for securities with similar characteristics as the ARS.

     As of September 30, 2010, the Company had no remaining financial assets measured at fair value on a recurring basis using significant Level 3 inputs. The following table provides a rollforward of all assets measured at fair value using significant Level 3 inputs for the three and nine months ended September 30, 2010 (in thousands):

						Investment Put Option
		ARS				Related to ARS Rights
Balance as of December 31, 2009		$	15,542			$	2,358
Unrealized gain on ARS, included in Interest and other, net			19				—
Unrealized loss on the investment put option related to ARS Rights, included in Interest and other, net			—				(19	)
Sale of ARS			(250	)			—
Balance as of March 31, 2010			15,311				2,339
Unrealized gain on ARS, included in Interest and other, net			1,562				—
Unrealized loss on the investment put option related to ARS Rights, included in Interest and other, net			—				(1,562	)
Sale of ARS			(10,175	)			—
Balance as of June 30, 2010			6,698				777
Unrealized gain on ARS, included in Interest and other, net			777				—
Unrealized loss on the investment put option related to ARS Rights, included in Interest and other, net			—				(777	)
Sale of ARS			(7,475	)			—
Balance as of September 30, 2010		$	—			$	—

     The Company’s equipment financing line debt is not recorded at fair value, but the Company is required to disclose the fair value. The Company determined the fair value of the equipment financing line debt using a DCF model. The major inputs to the model are expected cash flows, which equal the contractual payments, and borrowing rates available to the Company for similar debt as of the applicable balance sheet dates. The fair value and the carrying value of the equipment financing line debt were as follows (in thousands):

		September 30,				December 31,
		2010				2009
Carrying value — equipment financing line		$	1,337			$	2,601
Fair value — equipment financing line		$	1,272			$	2,425

Note 7. Loan with UBS

     In connection with the settlement with UBS AG relating to the Company’s ARS, in October 2008, the Company entered into a loan agreement with UBS Bank USA and UBS Financial Services Inc. On January 5, 2009, the Company borrowed approximately $12.4 million under the loan agreement, with its ARS held in accounts with UBS Financial Services Inc. as collateral. The Company repaid the remaining balance of the loan in full during the second quarter of 2010.

     During the nine months ended September 30, 2010, the Company paid $56,000 of interest expense associated with the loan, received $140,000 in interest income from the ARS, and applied the net interest received and the proceeds of $10.1 million from the sales of the ARS to repay the loan in full. During the three months ended September 30, 2009, the Company paid $41,000 of interest expense associated with the loan, received $33,000 in interest income from the ARS, and applied the net interest received and the proceeds of $1.8 million from the sales of the ARS, to make payments on the loan. During the nine months ended September 30, 2009, the Company paid $122,000 of interest expense associated with the loan, received $218,000 in interest income from the ARS, and applied the net interest received and the proceeds of $1.9 million from the sales of the ARS to make payments on the loan.

Note 8. Stockholders’ Equity

Common Stock

     During the nine months ended September 30, 2010, under the October 2007 committed equity financing facility (the “2007 CEFF”) with Kingsbridge Capital Limited (“Kingsbridge”), the Company sold 3,085,317 shares of its common stock to Kingsbridge and received gross proceeds of $8.9 million, which represents a price per share equal to 90% of the volume-weighted average price of the Company’s stock on each trading day during the eight-day pricing period prior to the sale. As of September 30, 2010, 3,097,366 shares remained available to the Company for sale under the 2007 CEFF.

Stock Option Plans

     Stock option activity for the nine months ended September 30, 2010 under the 2004 Equity Incentive Plan, as amended, and the 1997 Stock Option/Stock Issuance Plan was as follows:

		Shares
		Available for								Weighted
		Grant of								Average Exercise
		Options				Stock Options				Price per Share of
		or Awards				Outstanding				Stock Options
Balance at December 31, 2009			4,098,228				6,984,463			$	4.58
Increase in authorized shares			2,300,000				—				—
Options granted			(1,836,437	)			1,836,437			$	3.05
Options exercised			—				(157,620	)		$	1.05
Options cancelled			528,899				(528,899	)		$	3.61
Restricted stock awards forfeited			17,925				—				—
Balance at September 30, 2010			5,108,615				8,134,381			$	4.37

     Restricted stock award activity for the nine months ended September 30, 2010 was as follows:

						Weighted Average
						Award Date Fair
		Number of Shares				Value per Share
Unvested restricted stock awards outstanding at December 31, 2009			191,630			$	2.37
Awards released			(173,705	)		$	2.37
Awards forfeited			(17,925	)		$	2.37
Unvested restricted stock awards outstanding at September 30, 2010			—				—

Note 9. Interest and Other, Net

     Components of Interest and other, net were as follows (in thousands):

																		Period from
																		August 5, 1997
		Three Months Ended								Nine Months Ended								(date of inception)
		September 30,				September 30,				September 30,				September 30,				to September 30,
		2010				2009				2010				2009				2010
Unrealized gain on ARS (Note 6)		$	777			$	352			$	2,358			$	1,020			$	—
Unrealized loss on investment put option related to ARS Rights (Note 6)			(777	)			(352	)			(2,358	)			(1,020	)			—
Warrant expense			—				—				—				(1,585	)			(1,585	)
Interest income and other income			61				112				296				480				28,830
Interest expense and other expense			(13	)			(106	)			(143	)			(317	)			(5,914	)
Interest and other, net		$	48			$	6			$	153			$	(1,422	)		$	21,331

     Investments that the Company designates as trading securities are reported at fair value, with gains or losses resulting from changes in fair value recognized in earnings and included in Interest and other, net. The Company classified its investments in ARS as trading securities in short-term assets as of December 31, 2009 and through June 30, 2010. The Company sold its remaining outstanding ARS on June 30, 2010, and the transaction settled on July 1, 2010.

     The Company elected to measure the investment put option related to the ARS Rights at fair value to mitigate volatility in reported earnings due to its linkage to the ARS. The Company recorded $2.4 million as the fair value of the investment put option related to the ARS Rights as of December 31, 2009, classified as a short-term asset on the balance sheet with a corresponding credit to Interest and other, net. Changes in the fair value of the ARS are also recognized in current period earnings in Interest and other, net. The investment put option related to the ARS rights was extinguished on July 1, 2010, the settlement date of the sale of the remaining ARS.

     Warrant expense for the nine months ended September 30, 2009 and the period from inception to September 30, 2010, related to the change in the fair value of the warrant liability that was recorded in connection with the Company’s registered direct equity offering in May 2009.

     Interest income and other income primarily consists of interest income generated from the Company’s cash, cash equivalents and investments. Interest expense and other expense primarily consists of interest expense on borrowings under the Company’s equipment financing lines and, through June 30, 2010, on its loan agreement with UBS Bank USA and UBS Financial Services Inc.

Note 10. Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

     The Company has adopted new accounting guidance for improving disclosures about fair value measurements. The new guidance adds a requirement to disclose transfers in and out of Level 3 and fair value measurements, and clarifies existing guidance about the level of disaggregation of fair value measurements and disclosures regarding inputs and valuation techniques. The Company’s adoption of the new guidance did not have a material impact on its financial position or results of operations.

Accounting Pronouncements Not Yet Adopted

     In October 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance for recognizing revenue for multiple-deliverable revenue arrangements. The new guidance amends the existing guidance for separately accounting for individual deliverables in a revenue arrangement with multiple deliverables, and removes the criterion that an entity must use objective and reliable evidence of fair value to separately account for the deliverables. The new guidance also establishes a hierarchy for determining the value of each deliverable and establishes the relative selling price method for allocating consideration when vendor specific objective evidence or third party evidence of value does not exist. The Company must adopt the new guidance prospectively for new revenue arrangements entered into or materially modified beginning in the first quarter of 2011. Earlier adoption is permitted. The Company is currently evaluating the impact that the new guidance will have on its financial statements and the timing of its adoption.

     In January 2010, the FASB issued new accounting guidance for improving disclosures about fair value measurements, which requires a gross presentation of Level 3 fair value rollforwards. The guidance is effective for the Company beginning in the first quarter of 2011. The Company does not expect that its adoption of the new fair value guidance will have a material impact on its financial position or results of operations.

     In April 2010, the FASB issued new accounting guidance on the milestone method of revenue recognition. The new guidance codifies the milestone method as an acceptable revenue recognition model when a milestone is deemed to be substantive. The guidance is effective for the Company beginning in the first quarter of 2011, and is to be applied prospectively for milestones achieved after the effective date, although early adoption is permitted. Retrospective adoption of the guidance for all prior periods is also allowed. The Company is currently evaluating the timing of its adoption of the new revenue recognition guidance, but does not expect that its adoption of the guidance will have a material impact on its financial position or results of operations.

Note 11. Subsequent Events

     In October 2010, the Company sold 1,306,879 shares of its common stock to Kingsbridge under the 2007 CEFF for proceeds of $3.0 million. The gross proceeds represent a price per share equal to 90% of the volume-weighted average price of the Company’s stock on each trading day during the eight-day pricing period prior to the sale date. As of November 4, 2010, up to 1,790,487 shares of the Company’s common stock remain available for sale under the 2007 CEFF.

     In October 2010, the 2007 CEFF was amended to extend the expiration date of the agreement to the first to occur of March 31, 2011 or the purchase by Kingsbridge of the maximum number of shares under the CEFF. All other terms of the 2007 CEFF remain unchanged. Kingsbridge is not obligated to purchase any further shares under the 2007 CEFF unless certain conditions are met, including a minimum volume-weighted average price of $2.00 for the Company’s common stock.

     The Company was recently notified by the Internal Revenue Service that it will receive total cash grants of $0.7 million based on its applications for certain investments in qualified therapeutic discovery projects under Section 48D of the Internal Revenue Code. These grants relate to certain research and development costs incurred in 2009 in connection with the Company’s cardiac, skeletal and smooth muscle contractility programs. The Company expects to receive the grant funds in 2010.

     On November 1, 2010, the Company issued 62,276 shares of common stock pursuant to the ESPP at an average price of $1.68 per share.

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

     This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included elsewhere in this report. Operating results are not necessarily indicative of results that may occur in future periods.

     This report contains forward-looking statements that are based upon current expectations within the meaning of the Private Securities Litigation Reform Act of 1995. We intend that such statements be protected by the safe harbor created thereby. Forward-looking statements involve risks and uncertainties and our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Examples of such forward-looking statements include, but are not limited to, statements about or relating to:

	•		guidance concerning revenues, research and development expenses and general and administrative expenses for 2010;
	•		the sufficiency of existing resources to fund our operations for at least the next 12 months;
	•		our capital requirements and needs for additional financing;
	•		the initiation, design, progress, timing and scope of clinical trials and development activities for our drug candidates and potential drug candidates conducted by ourselves or our partners, such as Amgen, Inc. (“Amgen”), including the anticipated timing for initiation of clinical trials and anticipated dates of data becoming available or being announced from clinical trials;
	•		the results from the clinical trials and non-clinical studies of our drug candidates and other compounds, and the significance and utility of such results;
	•		our and our partners’, such as Amgen’s, plans or ability to conduct the continued research and development of our drug candidates and other compounds;

	•		our expected roles in research, development or commercialization under our strategic alliances, such as with Amgen;
	•		the properties and potential benefits of, and the potential market opportunities for, our drug candidates and other compounds, including the potential indications for which they may developed;
	•		the sufficiency of the clinical trials conducted with our drug candidates to demonstrate that they are safe and efficacious;
	•		our receipt of milestone payments, royalties, reimbursements and other funds from current or future partners under strategic alliances, such as with Amgen;
	•		our plans to seek strategic alternatives for our oncology program with third parties;
	•		our ability to continue to identify additional potential drug candidates that may be suitable for clinical development;
	•		our plans or ability to commercialize drugs with or without a partner, including our intention to develop sales and marketing capabilities;
	•		the focus, scope and size of our research and development activities and programs;
	•		the utility of our focus on the cytoskeleton and our ability to leverage our experience in muscle contractility to other muscle functions;
	•		the issuance of shares of our common stock under our committed equity financing facility entered into with Kingsbridge Capital Limited (“Kingsbridge”) in 2007;
	•		our ability to protect our intellectual property and to avoid infringing the intellectual property rights of others;
	•		expected future sources of revenue and capital;
	•		losses, costs, expenses and expenditures;
	•		future payments under loan and lease obligations and equipment financing lines;
	•		potential competitors and competitive products;
	•		increasing the number of our employees, retaining key personnel and recruiting additional key personnel;
	•		expected future amortization of employee stock-based compensation; and
	•		the potential impact of recent accounting pronouncements on our financial position or results of operations.

Such forward-looking statements involve risks and uncertainties, including, but not limited to, those risks and uncertainties relating to:

	•		Amgen’s decisions with respect to the timing, design and conduct of development activities for omecamtiv mecarbil, including decisions to postpone or discontinue research or development activities relating to omecamtiv mecarbil;
	•		our ability to obtain additional financing;
	•		our receipt of funds under our current or future strategic alliances;
	•		difficulties or delays in the development, testing, production or commercialization of our drug candidates;
	•		difficulties or delays in or slower than anticipated patient enrollment in our or our partners’ clinical trials;

	•		unexpected adverse side effects or inadequate therapeutic efficacy of our drug candidates that could slow or prevent product approval (including the risk that current and past results of preclinical studies or clinical trials may not be indicative of future clinical trials results);
	•		results from non-clinical studies that may adversely impact the timing or the further development of our drug candidates and potential drug candidates;
	•		the possibility that the U.S. Food and Drug Administration (“FDA”) or foreign regulatory agencies may delay or limit our or our partners’ ability to conduct clinical trials or may delay or withhold approvals for the manufacture and sale of our products;
	•		activities and decisions of, and market conditions affecting, current and future strategic partners;
	•		our ability to enter into partnership agreements for any of our programs on acceptable terms and conditions or in accordance with our planned timelines;
	•		the conditions in our 2007 committed equity financing facility with Kingsbridge that must be fulfilled before we can require Kingsbridge to purchase our common stock, including the minimum volume-weighted average share price;
	•		our ability to maintain the effectiveness of our registration statement permitting resale of securities to be issued to Kingsbridge by us in connection with our 2007 committed equity financing facility;
	•		the availability of funds under our grant from the National Institute of Neurological Disorders and Stroke in future periods;
	•		changing standards of care and the introduction of products by competitors or alternative therapies for the treatment of indications we target that may make our drug candidates commercially unviable;
	•		the uncertainty of protection for our intellectual property, whether in the form of patents, trade secrets or otherwise; and
	•		potential infringement or misuse by us of the intellectual property rights of third parties.

       In addition such statements are subject to the risks and uncertainties discussed in the “Risk Factors” section and elsewhere in this document. Operating results reported are not necessarily indicative of results that may occur in future periods.

       When used in this report, unless otherwise indicated, “Cytokinetics,” “the Company,” “we,” “our” and “us” refers to Cytokinetics, Incorporated.

       CYTOKINETICS, and our logo used alone and with the mark CYTOKINETICS, are registered service marks and trademarks of Cytokinetics. Other service marks, trademarks and trade names referred to in this report are the property of their respective owners.

Overview

       We are a clinical-stage biopharmaceutical company focused on the discovery and development of novel small molecule therapeutics that modulate muscle function for the potential treatment of serious diseases and medical conditions. Our research and development activities relating to the biology of muscle function have evolved from our knowledge and expertise regarding the cytoskeleton, a complex biological infrastructure that plays a fundamental role within every human cell. Our current research and development programs relating to the biology of muscle function are directed to small molecule modulators of the contractility of cardiac, skeletal and smooth muscle. We intend to leverage our experience in muscle contractility in order to expand our current pipeline into new therapeutic areas, and expect to continue to be able to identify additional potential drug candidates that may be suitable for clinical development. To date, five drug candidates arising from our research activities have been progressed into clinical development.

       Our drug candidates currently in clinical development include omecamtiv mecarbil for the potential treatment of heart failure and CK-2017357 for the potential treatment of diseases or medical conditions associated with skeletal muscle weakness or wasting. We are conducting non-clinical development of a back-up compound to CK-2017357. We are also conducting non-clinical development of compounds that inhibit smooth muscle contractility. These compounds may be useful as potential treatments for diseases and

conditions such as systemic hypertension or bronchoconstriction. We are evaluating strategic alternatives for the further clinical development of the three drug candidates from our discontinued oncology program: ispinesib, SB-743921 and GSK-923295.

Muscle Contractility Programs

Cardiac Muscle Contractility

     Our lead drug candidate from this program is omecamtiv mecarbil, a novel cardiac muscle myosin activator. In December 2006, we entered into a collaboration and option agreement with Amgen to discover, develop and commercialize novel small molecule therapeutics that activate cardiac muscle contractility for potential applications in the treatment of heart failure, including omecamtiv mecarbil. The agreement provided Amgen with a non-exclusive license and access to certain technology. The agreement also granted Amgen an option to obtain an exclusive license worldwide, except Japan, to develop and commercialize omecamtiv mecarbil and other drug candidates arising from the collaboration. In May 2009, Amgen exercised this option and subsequently paid us an exercise fee of $50.0 million. As a result, Amgen is now responsible for the development and commercialization of omecamtiv mecarbil and related compounds, at its expense worldwide, except Japan, subject to our development and commercialization participation rights. Under the agreement, Amgen will reimburse us for agreed research and development activities we perform. The agreement provides for potential pre-commercialization and commercialization milestone payments of up to $600.0 million in the aggregate on omecamtiv mecarbil and other potential products arising from research under the collaboration, and royalties that escalate based on increasing levels of annual net sales of products commercialized under the agreement. The agreement also provides for us to receive increased royalties by co-funding Phase III development costs of drug candidates under the collaboration. If we elect to co-fund such costs, we would be entitled to co-promote omecamtiv mecarbil in North America and participate in agreed commercialization activities in institutional care settings, at Amgen’s expense.

     We have conducted a clinical trials program for omecamtiv mecarbil comprised of multiple Phase I and Phase IIa clinical trials designed to evaluate the safety, tolerability, pharmacodynamics and pharmacokinetic profiles of both intravenous and oral formulations in a diversity of patients, including patients with stable heart failure and patients with ischemic cardiomyopathy. In these trials, omecamtiv mecarbil exhibited generally linear, dose-proportional pharmacokinetics across the dose ranges studied. The adverse effects observed in humans at doses that exceeded the maximum-tolerated dose appeared similar to the adverse findings which occurred in preclinical safety studies at similar plasma concentrations. These effects are believed to be related to the mechanism of action of this drug candidate which, at doses that exceeded the maximum-tolerated dose, resulted in an excessive prolongation of the systolic ejection time. However, these effects resolved promptly with discontinuation of the infusions of omecamtiv mecarbil.

     In September 2010, Cytokinetics and Amgen announced plans to initiate a Phase IIb clinical trial of an intravenous formulation of omecamtiv mecarbil in hospitalized patients with acutely decompensated heart failure prior to initiating further clinical trials of oral formulations of omecamtiv mecarbil. We anticipate that, in the first half of 2011, Amgen will initiate a randomized, double-blind, placebo-controlled Phase IIb clinical trial of an intravenous formulation of omecamtiv mecarbil in hospitalized acute heart failure patients with left ventricular systolic dysfunction. We anticipate that, in 2011, Amgen will initiate an open-label, multiple-dose Phase IIa clinical trial designed to investigate the pharmacokinetics of two formulations of omecamtiv mecarbil administered orally to patients with stable heart failure. We anticipate that, following discussions with regulatory authorities, Amgen will initiate a Phase Ib multi-center, open-label, single-dose, safety and pharmacokinetic clinical study of a modified-release oral formulation of omecamtiv mecarbil in patients with renal dysfunction.

     In September 2010, additional Phase I clinical trial data relating to omecamtiv mecarbil were presented as a poster at the 2010 Heart Failure Society of America Annual Meeting.

     The clinical trials program for omecamtiv mecarbil may proceed for several years, and we will not be in a position to generate any revenues or material net cash flows from sales of this drug candidate until the program is successfully completed, regulatory approval is achieved, and the drug is commercialized. Omecamtiv mecarbil is at too early a stage of development for us to predict if or when this may occur. We funded all research and development costs associated with this program prior to Amgen’s option exercise in May 2009. We recorded research and development expenses for activities relating to our cardiac muscle contractility program of approximately $1.5 million and $9.1 million in the nine months ended September 30, 2010 and 2009, respectively. We recognized research and development revenue from Amgen of $1.4 million in the nine months ended September 30, 2010, consisting of reimbursements of full-time employee equivalent (“FTE”) and other expense reimbursements. We recognized research and development revenue from Amgen of $6.1 million in the nine months ended September 30, 2009, consisting of $4.0 million for the transfer of our existing inventories of omecamtiv mecarbil and related reference materials to Amgen and $2.1 million for reimbursements of FTE and other costs reimbursements.

     We anticipate that our expenditures relating to the research and development of compounds in our cardiac muscle contractility program will increase if we participate in the future advancement of omecamtiv mecarbil through clinical development. Our expenditures will also increase if Amgen terminates development of omecamtiv mecarbil or related compounds and we elect to develop them independently, or if we elect to co-fund later-stage development of omecamtiv mecarbil or other compounds in our cardiac muscle contractility program under our collaboration and option agreement with Amgen.

Skeletal Muscle Contractility

     CK-2017357 is the lead drug candidate from this program. CK-2017357 and its back-up development compound are structurally distinct and selective small molecule activators of the fast skeletal sarcomere. These compounds act on fast skeletal muscle troponin. Activation of troponin increases its sensitivity to calcium, leading to an increase in skeletal muscle contractility. This mechanism of action has demonstrated encouraging pharmacological activity in preclinical models. We are evaluating the potential indications for which CK-2017357 may be useful. In March 2010, CK-2017357 received an orphan drug designation from the FDA for the treatment of amyotrophic lateral sclerosis, also known as ALS or Lou Gehrig’s disease.

     During the second quarter of 2010, we initiated two “evidence of effect” clinical trials of CK-2017357. Our evidence of effect clinical trials are intended to translate the mechanism of action of CK-2017357 as demonstrated pharmacodynamically in healthy volunteers to patients with impaired muscle function and potentially to establish statistically significant and clinically relevant evidence of pharmacodynamic effects. These trials may then form the basis for larger clinical trials designed to demonstrate proof of concept in which improvements may be seen in the consequences of disease over time.

     In April 2010, we initiated dosing in a Phase IIa evidence of effect clinical trial of CK-2017357 in patients with ALS. This clinical trial is a double-blind, randomized, placebo-controlled, three-period crossover, pharmacokinetic and pharmacodynamic study of CK-2017357 in male and female patients with ALS. In each dosing period, patients will receive a single oral dose of placebo or 250 mg or 500 mg of CK-2017357. Over the course of the three dosing periods, each patient will receive, in random order, each one of these three single doses. A wash-out period of at least 6 days (to a maximum of 10 days) will be employed between the individual doses for each patient. The primary objective of this trial is to evaluate the pharmacodynamic effects of single doses of CK-2017357 on measures of skeletal muscle function or fatigability in patients with ALS. Multiple pharmacodynamic assessments will be made without specifying a single primary pharmacodynamic endpoint. These assessments will include various measures of maximum voluntary muscle strength, development of fatigue at maximum and sub-maximum voluntary muscle contraction, and pulmonary function, measured at baseline, and at 3, 6 and 24 hours post-dosing after each of the two single doses of CK-2017357 and placebo. The secondary objectives of this clinical trial are to evaluate the relationship between the plasma concentration of CK-2017357 and its pharmacodynamic effects, to evaluate the safety and tolerability of the two single doses of CK-2017357 administered orally to patients with ALS, and to evaluate the effects of CK-2017357 on patient- and investigator-determined global functional assessments. In September, we conducted a second interim review of data from this clinical trial. The data suggested potential pharmacodynamic activity across multiple assessments of patient function and skeletal muscle performance. In addition, this review indicated that single CK-2017357 doses of 250 mg and 500 mg continued to be well-tolerated. Two serious adverse events were reported, one of pancreatic cancer and another of pulmonary embolism, that were judged by the respective investigators not to be related to treatment with CK-2017357. Enrollment of patients in this trial was recently completed.

     In June 2010, we initiated dosing in a Phase IIa evidence of effect clinical trial of CK-2017357 in patients with symptoms of claudication associated with peripheral artery disease. This clinical trial is a double-blind, randomized, placebo-controlled, three-period crossover, pharmacokinetic and pharmacodynamic study of CK-2017357 in patients with peripheral artery disease and claudication. At least 36 and up to 72 patients may be enrolled in this trial. In each dosing period, patients receive, in random order, a single oral dose of placebo or 375 mg or 750 mg of CK-2017357. A wash-out period of at least 6 days (to a maximum of 10 days) is employed between the individual doses for each patient. The primary objective of this clinical trial is to evaluate the pharmacodynamic effects of single doses of CK-2017357 on several measures of skeletal muscle function and fatigability in patients with peripheral artery disease and claudication without specifying a single primary pharmacodynamic endpoint. The assessments include the number of contractions, time, and work to onset of claudication, and to intolerable claudication pain or to maximum calf muscle fatigue during bilateral heel raises. A six-minute walk test is also performed during each dosing period. The secondary objectives of this trial are to evaluate and characterize the relationship, if any, between the doses and plasma concentrations of CK-2017357 and its pharmacodynamic effects and to evaluate the safety and tolerability of CK-2017357 administered as single oral doses to patients with peripheral artery disease and claudication. In October 2010, we conducted an interim review of data from this trial that suggested potential pharmacodynamic activity of CK-2017357 to increase skeletal muscle performance in these patients. In addition, this review suggested that single oral doses of CK-2017357 were generally well-tolerated by most patients in this trial. However,

serious adverse events were reported by two patients: dizziness and mental confusion in one and dizziness and dyskinesia (or abnormal movements) in the other. Both patients required inpatient observation until their symptoms resolved. These events were not life-threatening and appeared to resolve spontaneously and completely without any additional treatment. Following these observations, the protocol has been amended to lower the 750 mg dose to 500 mg.

     In the third quarter of 2010, we were awarded a grant in the amount of $2.8 million by the National Institute of Neurological Disorders and Stroke, which is intended to support research and development of CK-2017357 for the potential treatment of myasthenia gravis for three years. The grant was awarded under the American Recovery and Reinvestment Act of 2009. In the third quarter of 2010, we recognized revenue of $0.1 million under this grant arrangement, which we recorded as research and development, grant and other revenues.

     In July 2010, a poster relating to a Phase I clinical trial of CK-2017357 was presented at the XII International Congress on Neuromuscular Diseases.

     Two abstracts relating to CK-2017357 were presented at the 2010 Annual Aging Muscle Symposium held September 30 — October 1, 2010.

     We also anticipate continuing non-clinical development studies of the back-up potential drug candidate in our skeletal muscle contractility program throughout 2010.

     CK-2017357 is at too early a stage of development for us to predict if or when we will be in a position to generate any revenues or material net cash flows from its commercialization. We currently fund all research and development costs associated with this program. We recorded research and development expenses for activities relating to our skeletal muscle contractility program of approximately $22.3 million and $10.6 million in the nine months ended September 30, 2010 and 2009, respectively. We anticipate that our expenditures relating to the research and development of compounds in our skeletal muscle contractility program will increase significantly if and as we advance CK-2017357, its back-up compound or other compounds from this program into and through development.

Smooth Muscle Contractility

     Our smooth muscle contractility program is focused on the discovery and development of small molecule smooth muscle myosin inhibitors which may be useful as potential treatments for diseases and conditions associated with excessive smooth muscle contraction, and leverages our expertise in muscle function and its application to drug discovery. Our inhaled smooth muscle myosin inhibitors have demonstrated pharmacological activity in preclinical models of bronchoconstriction and may have application for indications such as asthma or chronic obstructive pulmonary disease. Our smooth muscle myosin inhibitors, administered orally or intravenously, have demonstrated pharmacological activity in preclinical models of vascular constriction. Smooth muscle myosin inhibitors administered orally may have application in systemic hypertension. We anticipate continuing non-clinical development studies of our smooth muscle myosin inhibitors throughout 2010.

     Our smooth muscle myosin inhibitors are at too early a stage of development for us to predict if or when we will be in a position to generate any revenues or material net cash flows from their commercialization. We currently fund all research and development costs associated with this program. We recorded research and development expenses for activities relating to our smooth muscle contractility program of approximately $1.5 million and $4.3 million in the nine months ended September 30, 2010 and 2009, respectively. We anticipate that our expenditures relating to the research and development of compounds in our smooth muscle contractility program will increase significantly if and as we advance compounds from this program into and through development.

Oncology Program: Mitotic Kinesin Inhibitors

     We currently have three drug candidates for the potential treatment of cancer: ispinesib, SB-743921 and GSK-923295. All of these arose from our earlier research activities directed to the role of the cytoskeleton in cell division and were progressed under our strategic alliance with GlaxoSmithKline (“GSK”). Under this strategic alliance, we focused primarily on two mitotic kinesins: kinesin spindle protein (“KSP”) and centromere-associated protein E (“CENP-E”). Inhibition of KSP or CENP-E interrupts cancer cell division, causing cell death. Ispinesib and SB-743921 are structurally distinct small molecules that specifically inhibit KSP. GSK-923295 specifically inhibits CENP-E.

     In November 2006, we amended our strategic alliance with GSK and assumed responsibility, at our expense, for the continued research, development and commercialization of inhibitors of KSP, including ispinesib and SB-743921, and other mitotic kinesins,

other than CENP-E. GSK retained an option to resume responsibility for the development and commercialization of either or both of ispinesib and SB-743921. This option expired at the end of 2008. As a result, we have retained all rights to develop and commercialize ispinesib and SB-743921, subject to certain royalty obligations to GSK. In December 2009, we agreed with GSK to terminate this strategic alliance, effective February 28, 2010. Accordingly, we have retained all rights to develop and commercialize GSK-923295, subject to certain royalty obligations to GSK. We are evaluating strategic alternatives for the future development and commercialization of ispinesib, SB-743921 and GSK-923295 with third parties.

Ispinesib

     We have completed patient treatment in the Phase I portion of our Phase I/II clinical trial evaluating ispinesib as monotherapy administered as a first-line treatment in chemotherapy-naïve patients with locally advanced or metastatic breast cancer and have closed this trial. As a result of the expiration of GSK’s option relating to ispinesib, we have retained all development and commercialization rights to ispinesib, subject to certain royalty obligations to GSK. We are evaluating strategic alternatives for the future development and commercialization of ispinesib with third parties.

SB-743921

     We have completed patient treatment in the Phase I portion of our Phase I/II clinical trial of SB-743921 in patients with Hodgkin or non-Hodgkin lymphoma and have closed this trial. As a result of the expiration of GSK’s option relating to SB-743921, we have retained all development and commercialization rights to SB-743921, subject to certain royalty obligations to GSK. We are evaluating strategic alternatives for the future development and commercialization of SB-743921 with third parties.

GSK-923295

     GSK has closed enrollment and continues patient treatment in its Phase I clinical trial of GSK-923295. GSK has agreed to complete this clinical trial at its cost. Following the agreed termination of our strategic alliance with GSK in February 2010, we have retained all development and commercialization rights to GSK-923295, subject to certain royalty obligations to GSK. We are evaluating strategic alternatives for the future development and commercialization of GSK-923295 with third parties.

     Each of ispinesib, SB-743921 and GSK-923295 is at too early a stage of development for us to predict if or when we will be in a position to generate any revenues or material net cash flows from its commercialization. We currently are responsible for all research and development costs associated with ispinesib and SB-743921. Following GSK’s completion of its Phase I clinical trial of GSK-923295, we will be responsible for any further research and development costs associated with GSK-923295. We recorded research and development expenses for activities relating to our mitotic kinesins inhibitors program of approximately $0.9 million and $3.2 million in the nine months ended September 30, 2010 and 2009, respectively. We received and recognized as revenue reimbursements from GSK patent expenses related to our mitotic kinesin inhibitors program of zero and $45,000 for the nine months ended September 30, 2010 and 2009, respectively. We have completed the Phase I portion of each of the Phase I/II clinical trials for ispinesib and SB-743921. GSK is completing the current Phase I clinical trial of GSK-923295. We do not currently intend to conduct any further development of these drug candidates ourselves. We are evaluating strategic alternatives to continue the development of ispinesib, SB-743921 and GSK-923295 with third parties. We may not be able to enter into an agreement regarding such an alternative on acceptable terms, if at all.

Development Risks

     The successful development of any of our drug candidates is highly uncertain. We cannot estimate with certainty or know the exact nature, timing and costs of the activities necessary to complete the development of any of our drug candidates or the date of completion of these development activities due to numerous risks and uncertainties, including, but not limited to:

	•		decisions made by Amgen with respect to the development of omecamtiv mecarbil;
	•		the uncertainty of the timing of the initiation and completion of patient enrollment and treatment in our clinical trials;
	•		the possibility of delays in the collection of clinical trial data and the uncertainty of the timing of the analyses of our clinical trial data after these trials have been initiated and completed;

	•		our potential inability to obtain additional funding and resources for our development activities on acceptable terms, if at all, including, but not limited to, our potential inability to obtain or retain partners to assist in the design, management, conduct and funding of clinical trials;
	•		delays or additional costs in manufacturing of our drug candidates for clinical trial use, including developing appropriate formulations of our drug candidates;
	•		the uncertainty of clinical trial results, including variability in patient response;
	•		the uncertainty of obtaining FDA or other foreign regulatory agency approval required for the clinical investigation of our drug candidates;
	•		the uncertainty related to the development of commercial scale manufacturing processes and qualification of a commercial scale manufacturing facility; and
	•		possible delays in the characterization, formulation and manufacture of potential drug candidates.

     If we fail to complete the development of any of our drug candidates in a timely manner, it could have a material adverse effect on our operations, financial position and liquidity. In addition, any failure by us or our partners to obtain, or any delay in obtaining, regulatory approvals for our drug candidates could have a material adverse effect on our results of operations. A further discussion of the risks and uncertainties associated with completing our programs on schedule, or at all, and certain consequences of failing to do so are discussed further in the risk factors entitled “We have never generated, and may never generate, revenues from commercial sales of our drugs and we may not have drugs to market for at least several years, if ever,” “Clinical trials may fail to demonstrate the desired safety and efficacy of our drug candidates, which could prevent or significantly delay completion of clinical development and regulatory approval” and “Clinical trials are expensive, time-consuming and subject to delay,” and other risk factors.

Results of Operations

Revenues

     We recorded total revenues of $0.4 million and $5.5 million for the third quarter of 2010 and 2009, respectively, and $1.5 million and $80.5 million for the first nine months of 2010 and 2009, respectively. The decrease in the first nine months of 2010 compared to the first nine months of 2009 was primarily due to the recognition in 2009 of license revenue related to our strategic alliance with Amgen.

     Research and development revenues from related parties refer to research and development revenues from our strategic alliance with Amgen and, through 2009, our strategic alliance with GSK. Research and development revenues from Amgen were $0.3 million and $5.5 million in the third quarter of 2010 and 2009, respectively. Research and development revenues from Amgen for the third quarter of 2010 consisted of $0.1 million for reimbursements of FTE expenses and $0.2 million for reimbursements of other research and development expenses. Research and development revenues from Amgen of $5.5 million for the third quarter of 2009 consisted of reimbursements of $4.0 million for clinical trial material, $1.0 million for FTE costs and $0.5 million for other out of pocket expenses. For the first nine months of 2010, research and development revenues from Amgen consisted of reimbursements of $0.9 million for FTE expenses and $0.5 million for other research and development expenses. For the first nine months of 2009, research and development revenues from Amgen consisted of reimbursements of $4.0 million for clinical trial material, $1.5 million for reimbursements for FTE costs and $0.6 million for other out of pocket expenses. The FTE reimbursements from Amgen are at negotiated rates that approximate our costs, and which we believe approximate fair value.

     In July 2010, the National Institute of Neurological Disorders and Strokes awarded us a grant to support research and development of CK-2017357 directed to the potential treatment for myasthenia gravis for a period of up to three years. In the third quarter of 2010, we recognized grant revenue of $0.1 million under this grant arrangement.

     License revenues from related parties refer to license revenues from our strategic alliance with Amgen. There were no license revenues in the third quarter of 2010 or 2009. License revenues for the first nine months of 2010 and 2009 were zero and $74.4 million, respectively. License revenues for the first nine months of 2009 consisted of the May 2009 $50.0 million option exercise fee received from Amgen and the recognition of deferred license revenues of $24.4 million related to the 2006 upfront non-exclusive license and technology access fee and stock purchase premium from Amgen.

     The deferred revenue balance related to Amgen was zero at September 30, 2010 and $0.8 million at December 31, 2009. The December 31, 2009 deferred revenue balance consisted of Amgen’s prepayment of FTE reimbursements.

Research and Development Expenses

     Research and development expenses were $9.5 million and $9.9 million in the third quarter of 2010 and 2009, respectively. The decrease in research and development expenses in the third quarter of 2010 compared to the same period in 2009 was primarily due to decreases of $0.4 million in laboratory expenses and $0.4 million in personnel expenses, partially offset by an increase of $0.5 million in clinical and preclinical outsourcing costs related to our muscle contractility clinical trial programs.

     Research and development expenses were $28.9 million and $30.0 million in the first nine months of 2010 and 2009, respectively. The $1.1 million decrease in research and development expense in first nine months of 2010, compared to the same period in 2009, was primarily due to a decrease of $1.8 million in personnel expenses, partially offset by an increase of $0.7 million for clinical and preclinical outsourcing costs related to our muscle contractility clinical trial program. The decrease of $1.8 million in personnel expenses in the first nine months of 2010 was primarily due to lower employee bonus expense of $1.2 million, largely attributable to the 2009 employee special bonus, which was recorded in 2009.

     From a program perspective, the $0.4 million decrease in spending in the third quarter of 2010 compared to the third quarter of 2009 was due to decreases of $1.6 million for our cardiac muscle contractility program, $0.9 million for our smooth muscle contractility program and $0.8 million for our mitotic kinesin inhibitors program, partially offset by increased spending of $2.9 million for our skeletal muscle contractility program. For the first nine months of 2010 compared to the first nine months of 2009, the $1.1 million decrease in spending was primarily due to decreases of $7.6 million for our cardiac muscle contractility program, $2.8 million for our smooth muscle contractility program and $2.3 million for our mitotic kinesin inhibitors program, partially offset by an increase of $11.7 million for our skeletal muscle contractility program.

     Research and development expenses incurred related to the following programs (in millions):

																		Period from
																		August 5, 1997
		Three Months Ended								Nine Months Ended								(date of inception)
		September 30,				September 30,				September 30,				September 30,				to September 30,
		2010				2009				2010				2009				2010
Cardiac muscle contractility		$	0.2			$	1.8			$	1.5			$	9.1			$	136.2
Skeletal muscle contractility			7.8				4.9				22.3				10.6				58.3
Smooth muscle contractility			0.3				1.2				1.5				4.3				27.8
Mitotic kinesin inhibitors			0.1				0.9				0.9				3.2				71.7
Proprietary technologies			—				0.4				—				0.9				53.7
All other research programs			1.1				0.7				2.7				1.9				58.4
Total research and development expenses		$	9.5			$	9.9			$	28.9			$	30.0			$	406.1

     We recognized research and development expense reimbursements from Amgen of $0.3 million and $5.5 million in the third quarter of 2010 and 2009, respectively, and $1.4 million and $6.1 million for the first nine months of 2010 and 2009, respectively. These reimbursements were recorded as research and development revenues from related parties.

     Clinical development timelines, likelihood of success and total completion costs vary significantly for each drug candidate and are difficult to estimate. We anticipate that we will determine on an on-going basis which research and development programs to pursue and how much funding to direct to each program, taking into account the scientific and clinical success of each drug candidate. The lengthy process of seeking regulatory approvals and subsequent compliance with applicable regulations requires the expenditure of substantial resources. Any failure by us to obtain and maintain, or any delay in obtaining, regulatory approvals could cause our research and development expenditures to increase and, in turn, could have a material adverse effect on our results of operations.

     We expect our full year 2010 research and development expenditures to remain at approximately the same level as 2009. As part of our strategic alliance with Amgen, we expect to continue to participate in the development of our drug candidate omecamtiv mecarbil for the potential treatment of heart failure. We expect to continue development of our drug candidate CK-2017357 for the potential treatment of diseases and medical conditions associated with skeletal muscle weakness or wasting. We expect to continue development of our smooth muscle myosin inhibitor compounds, which may be useful for the potential treatment of systemic hypertension and diseases and medical conditions associated with bronchoconstriction. We anticipate that research and development

expenses for 2010 will be in the range of $39.0 million to $42.0 million. Non-cash expenses such as stock-based compensation and depreciation of approximately $3.6 million are included in our estimate of 2010 research and development expenses.

General and Administrative Expenses

     General and administrative expenses were $3.4 million and $3.9 million in the third quarter of 2010 and 2009, respectively. The decrease in the third quarter of 2010, compared to the same period in 2009, was primarily due to a decreases of $0.2 million in personnel expenses and $0.2 million in outside services. General and administrative expenses were $10.6 million and $12.0 million in the first nine months of 2010 and 2009, respectively. The decrease in the first nine months of 2010, compared to the same period in 2009, was primarily due to a decrease of $1.0 million in employee bonus expense attributable to the 2009 employee special bonus, which was recorded in 2009.

     We expect that general and administrative expenses for the full year 2010 will be at approximately the same level as 2009. For the year ending December 31, 2010, we anticipate general and administrative expenses will be in the range of $14.0 million to $15.0 million. Non-cash expenses such as stock-based compensation and depreciation of approximately $2.5 million are included in our estimate of 2010 general and administrative expenses.

Interest and Other, Net

     Components of Interest and other, net were as follows (in millions):

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2010				2009				2010				2009
Unrealized gain on auction rate securities (“ARS”)		$	0.8			$	0.4			$	2.4			$	1.0
Unrealized loss on investment put option related to ARS rights			(0.8	)			(0.4	)			(2.4	)			(1.0	)
Warrant expense			—				—				—				(1.6	)
Interest income and other income			0.1				0.1				0.3				0.5
Interest expense and other expense			(0.1	)			(0.1	)			(0.1	)			(0.3	)
Interest and other, net		$	—			$	—			$	0.2			$	(1.4	)

     Warrant expense of $1.6 million for the first nine months of 2009 related to the change in the fair value of the warrant liability recorded in connection with our registered direct equity offering in May 2009.

     Interest income and other income decreased in the first nine months of 2010, compared to the first nine months of 2009, due to lower average effective interest rates, partially offset by higher average invested balances.

     Interest expense and other expense primarily consisted of interest expense on our equipment financing debt and, through the second quarter of 2010, our loan with UBS Bank USA.

Critical Accounting Policies

     The accounting policies that we consider to be our most critical (i.e., those that are most important to the portrayal of our financial condition and results of operations and that require our most difficult, subjective or complex judgments), the effects of those accounting policies applied and the judgments made in their application are summarized in “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Recent Accounting Pronouncements

     See Note 10, “Recent Accounting Pronouncements” in the Notes to Unaudited Condensed Financial Statements for a discussion of recently adopted accounting pronouncements and accounting pronouncements not yet adopted, and their expected impact on our financial position and results of operations.

Liquidity and Capital Resources

     From August 5, 1997, our date of inception, through September 30, 2010, we funded our operations through the sale of equity securities, equipment financings, non-equity payments from collaborators, government grants and interest income.

     Our cash, cash equivalents and investments, excluding restricted cash, totaled $77.2 million at September 30, 2010, down from $114.7 million at December 31, 2009. The decrease of $37.5 million was primarily due to the use of cash to fund operations.

     Net cash used in operating activities was $35.7 million in the first nine months of 2010 and primarily resulted from the net loss of $37.7 million. Net cash provided by operating activities in the first nine months of 2009 was $14.8 million and primarily resulted from net income of $37.1 million, partially offset by a $23.8 million decrease in deferred revenue. Net income in 2009 primarily resulted from the recognition of $74.4 million of license revenue from Amgen, partially offset by cash operating expenses. Deferred revenue decreased during the first nine months of 2009 because we recognized as revenue the remaining balance of the Amgen deferred license revenue when the non-exclusive license period ended in May 2009.

     Net cash provided by investing activities was $42.9 million in the first nine months of 2010 and primarily consisted of proceeds from the maturity of investments, net of cash used to purchase investments, of $24.5 million and proceeds of $17.9 million from the sale of ARS. Net cash used in investing activities in the first nine months of 2009 was $62.0 million and primarily represented cash used to purchase investments, net of proceeds from the maturity of investments, of $64.7 million, partially offset by proceeds from the sale of ARS of $1.9 million.

     Net cash used in financing activities was $2.3 million in the first nine months of 2010 and primarily consisted of repayments of $10.2 million on our loan with UBS Bank USA granted to us in connection with the Series C-2 Auction Rate Securities Rights issued to us by UBS AG (the “ARS Rights”), partially offset by proceeds of $8.9 million from the sale of 3,085,317 shares of our common stock to Kingsbridge under our 2007 committed equity financing facility. Net cash provided by financing activities in the first nine months of 2009 was $29.1 million and primarily consisted of net proceeds of $12.9 million from our May 2009 registered direct equity offering, proceeds of $12.4 million from our loan with UBS Bank USA, and drawdowns of $6.8 million, net of issuance costs, under our 2007 committed equity financing facility with Kingsbridge.

     In October 2010, we sold 1,306,879 shares of our common stock to Kingsbridge under the 2007 committed equity financing facility and received proceeds of $3.0 million. The gross proceeds represent a price per share equal to 90% of the volume-weighted average price of our stock on each trading day during the eight-day pricing period prior to the sale date. In October 2010, the 2007 committed equity financing facility was amended to extend the expiration date of the agreement to the first to occur of March 31, 2011 or the purchase by Kingsbridge of the maximum number of shares under the committed equity financing facility. All other terms of the 2007 committed equity financing facility remain unchanged. Kingsbridge is not obligated to purchase any further shares under the 2007 committed equity financing facility unless certain conditions are met, including a minimum volume-weighted average price of $2.00 for our common stock. As of November 4, 2010, up to 1,790,487 shares our common stock remain available for sale under the 2007 committed equity financing facility.

     We are eligible to request up to $2.7 million in future grant payments from the National Institute of Neurological Disorders and Stroke, provided we incur eligible research and development costs for CK-2017357 directed to the potential treatment for myasthenia gravis for three years.

     On November 1, 2010, we were notified by the Internal Revenue Service that we will receive total cash grants of $0.7 million based on our applications for certain investments in qualified therapeutic discovery projects under Section 48D of the Internal Revenue Code. These grants relate to certain research and development costs incurred in 2009 in connection with our cardiac, skeletal and smooth muscle contractility programs. We expect to receive the grant funds in 2010.

     Auction Rate Securities, Investment Put Option and Loan with UBS. On June 30, 2010, we exercised our ARS Rights, requiring that UBS AG purchase our remaining outstanding ARS at par value of $7.5 million. Accordingly, on the settlement date of July 1, 2010, UBS AG deposited the proceeds of $7.5 million into our money market account. The investment put option related to the ARS Rights was extinguished at that time.

     In connection with the October 2008 settlement with UBS AG relating to the ARS, we entered into a loan agreement with UBS Bank USA and UBS Financial Services Inc. On January 5, 2009, we borrowed approximately $12.4 million under the loan agreement,

with our ARS held in accounts with UBS Financial Services Inc. as collateral. During the second quarter of 2010, we repaid the remaining balance of the loan in full.

     Shelf Registration Statement. In November 2008, we filed a shelf registration statement with the SEC, which was declared effective in November 2008. The shelf registration statement allows us to issue shares of our common stock from time to time for an aggregate initial offering price of up to $100 million. As of November 4, 2010, $76.2 million remains available to us under this shelf registration statement, assuming all outstanding warrants are exercised in cash. The specific terms of offerings, if any, under the shelf registration statement would be established at the time of such offerings.

     As of September 30, 2010, future minimum payments under our loan and lease obligations were as follows (in thousands):

		Within				Two to				Four to				After
		One Year				Three Years				Five Years				Five Years				Total
Operating leases (1)		$	2,818			$	3,545			$	329			$	—			$	6,692
Equipment financing line			1,028				309				—				—				1,337
Total		$	3,846			$	3,854			$	329			$	—			$	8,029

     In future periods, we expect to incur substantial costs as we continue to expand our research programs and related research and development activities. We plan to continue to support the clinical development of our cardiac muscle myosin activator omecamtiv mecarbil for the potential treatment of heart failure as part of our strategic alliance with Amgen. We plan to continue clinical development of our fast skeletal sarcomere activator CK-2017357 for the potential treatment of diseases and conditions related to skeletal muscle weakness or wasting and non-clinical development of our back-up potential drug candidate from our skeletal sarcomere activator program. We plan to progress one or more of our smooth muscle myosin inhibitor compounds through non-clinical and clinical development. We expect to incur development expenses for the close-out of our clinical trials for ispinesib and SB-743921. We expect to incur significant research and development expenses as we advance the research and development of our other compounds from our muscle contractility programs through research to candidate selection.

     Our future capital uses and requirements depend on numerous factors. These factors include, but are not limited to, the following:

	•		the initiation, progress, timing, scope and completion of preclinical research, non-clinical development and clinical trials for our drug candidates and potential drug candidates;
	•		the time and costs involved in obtaining regulatory approvals;
	•		delays that may be caused by requirements of regulatory agencies;
	•		Amgen’s decisions with regard to funding of development and commercialization of omecamtiv mecarbil or other compounds for the potential treatment of heart failure under our collaboration;
	•		our level of funding for the development of current or future drug candidates;
	•		the number of drug candidates we pursue;
	•		the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims;
	•		our ability to establish and maintain selected strategic alliances required for the development of drug candidates and commercialization of our potential drugs;
	•		our plans or ability to expand our drug development capabilities, including our capabilities to conduct clinical trials for our drug candidates;
	•		our plans or ability to establish sales, marketing or manufacturing capabilities and to achieve market acceptance for potential drugs;

	•		the expansion and advancement of our research programs;
	•		the hiring of additional employees and consultants;
	•		the expansion of our facilities;
	•		the acquisition of technologies, products and other business opportunities that require financial commitments; and
	•		our revenues, if any, from successful development of our drug candidates and commercialization of potential drugs.

     We believe that our existing cash and cash equivalents, short-term investments and interest earned on investments will be sufficient to meet our projected operating requirements for at least the next 12 months.

     If, at any time, our prospects for internally financing our research and development programs decline, we may decide to reduce research and development expenses by delaying, discontinuing or reducing our funding of development of one or more of our drug candidates or potential drug candidates or of other research and development programs. Alternatively, we might raise funds through strategic relationships, public or private financings or other arrangements. There can be no assurance that funding, if needed, will be available on attractive terms, or at all, or in accordance with our planned timelines. Furthermore, financing obtained through future strategic relationships may require us to forego certain commercialization and other rights to our drug candidates. Similarly, any additional equity financing may be dilutive to stockholders and debt financing, if available, may involve restrictive covenants. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategy.

Off-balance Sheet Arrangements

     As of September 30, 2010, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. Therefore, we are not materially exposed to financing, liquidity, market or credit risk that could arise if we had engaged in these relationships. We do not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our exposure to market risk has changed since our disclosures in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2009. We sold our remaining ARS on June 30, 2010, and the transaction settled on July 1, 2010. We repaid the remaining outstanding balance of our loan with UBS in June 2010. There have been no other material changes to our market risk exposure subsequent to the disclosures in the Form 10-K for the year ended December 31, 2009.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

     Our management evaluated, with the participation and under the supervision of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded, subject to the limitations described below, that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.

(b) Changes in internal control over financial reporting

     There was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

(c) Limitations on the Effectiveness of Controls

     A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     None.

ITEM 1A. RISK FACTORS

     In evaluating our business, you should carefully consider the following risks in addition to the other information in this report. Any of the following risks could materially and adversely affect our business, results of operations, financial condition or your investment in our securities, and many are beyond our control. It is not possible to predict or identify all such factors and, therefore, you should not consider any of these risk factors to be a complete statement of all the potential risks or uncertainties that we face.

Risks Related To Our Business

We have a history of significant losses and may not achieve or sustain profitability and, as a result, you may lose all or part of your investment.

     We have generally incurred operating losses in each year since our inception in 1997, due to costs incurred in connection with our research and development activities and general and administrative costs associated with our operations. Our drug candidates are in the early stages of clinical testing, and we and our partners must conduct significant additional clinical trials before we and our partners can seek the regulatory approvals necessary to begin commercial sales of our drugs. We expect to incur increasing losses for at least several more years, as we continue our research activities and conduct development of, and seek regulatory approvals for, our drug candidates, and commercialize any approved drugs. If our drug candidates fail or do not gain regulatory approval, or if our drugs do not achieve market acceptance, we will not be profitable. If we fail to become and remain profitable, or if we are unable to fund our continuing losses, you could lose all or part of your investment.

We will need substantial additional capital in the future to sufficiently fund our operations.

     We have consumed substantial amounts of capital to date, and our operating expenditures will increase over the next several years if we expand our research and development activities. We have funded all of our operations and capital expenditures with proceeds from private and public sales of our equity securities, strategic alliances with Amgen, GSK and others, equipment financings, interest on investments and government grants. We believe that our existing cash and cash equivalents, short-term investments and interest earned on investments should be sufficient to meet our projected operating requirements for at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development of our drug candidates and other research and development activities, including risks and uncertainties that could impact the rate of progress of our development activities, we are unable to estimate with certainty the amounts of capital outlays and operating expenditures associated with these activities.

     For the foreseeable future, our operations will require significant additional funding, in large part due to our research and development expenses and the absence of any revenues from product sales. Until we can generate a sufficient amount of product revenue, we expect to raise future capital through strategic alliance and licensing arrangements, public or private equity offerings and debt financings. We do not currently have any commitments for future funding other than reimbursements, milestone and royalty payments that we may receive under our collaboration and option agreement with Amgen. We may not receive any further funds under that agreement. Our ability to raise funds may be adversely impacted by current economic conditions, including the effects of the recent disruptions to

the credit and financial markets in the United States and worldwide. In particular, the pool of third-party capital that in the past has been available to development-stage companies such as ours has decreased significantly in recent years, and such decreased availability may continue for a prolonged period. As a result of these and other factors, we do not know whether additional financing will be available when needed, or that, if available, such financing would be on terms favorable to our stockholders or us.

     To the extent that we raise additional funds through strategic alliances or licensing and other arrangements with third parties, we will likely have to relinquish valuable rights to our technologies, research programs or drug candidates, or grant licenses on terms that may not be favorable to us. To the extent that we raise additional funds by issuing equity securities, our stockholders will experience additional dilution. To the extent that we raise additional funds through debt financing, the financing may involve covenants that restrict our business activities. In addition, funding from any of these sources, if needed, may not be available to us on favorable terms, or at all, or in accordance with our planned timelines.

     If we can not raise the funds we need to operate our business, we will need to discontinue certain research and development activities and our stock price likely would be negatively affected.

We depend on Amgen for the conduct, completion and funding of the clinical development and commercialization of omecamtiv mecarbil (formerly known as CK-1827452).

     In May 2009, Amgen exercised its option to acquire an exclusive license to our drug candidate omecamtiv mecarbil worldwide, except for Japan. As a result, Amgen now is responsible for the clinical development and obtaining and maintaining regulatory approval of omecamtiv mecarbil for the potential treatment of heart failure worldwide, except Japan.

     We do not control the clinical development activities being conducted or that may be conducted in the future by Amgen, including, but not limited to, the timing of initiation, termination or completion of clinical trials, the analysis of data arising out of those clinical trials or the timing of release of data concerning those clinical trials, which may impact our ability to report on Amgen’s results. Amgen may conduct these activities more slowly or in a different manner than we would if we controlled the clinical development of omecamtiv mecarbil. For example, Amgen recently informed us that it now plans to initiate a Phase IIb clinical trial of an intravenous formulation of omecamtiv mecarbil in hospitalized patients with acutely decompensated heart failure prior to initiating further clinical trials of oral formulations of omecamtiv mecarbil, including a planned Phase IIa clinical trial with oral formulations of omecamtiv mecarbil in patients with heart failure. Amgen is responsible for filing future applications with the FDA or other regulatory authorities for approval of omecamtiv mecarbil and will be the owner of any marketing approvals issued by the FDA or other regulatory authorities for omecamtiv mecarbil. If the FDA or other regulatory authorities approve omecamtiv mecarbil, Amgen will also be responsible for the marketing and sale of the resulting drug, subject to our right to co-promote omecamtiv mecarbil in North America if we exercise our option to co-fund Phase III development costs of omecamtiv mecarbil under the collaboration. However, we cannot control whether Amgen will devote sufficient attention and resources to the clinical development of omecamtiv mecarbil or will proceed in an expeditious manner, even if we do exercise our option to co-fund the development of omecamtiv mecarbil. Even if the FDA or other regulatory agencies approve omecamtiv mecarbil, Amgen may elect not to proceed with the commercialization of the resulting drug in one or more countries.

     Amgen generally has discretion to elect whether to pursue or abandon the development of omecamtiv mecarbil and may terminate our strategic alliance for any reason upon six months prior notice. If the initial results of one or more clinical trials with omecamtiv mecarbil do not meet Amgen’s expectations, Amgen may elect to terminate further development of omecamtiv mecarbil or certain of the potential clinical trials for omecamtiv mecarbil, even if the actual number of patients treated at that time is relatively small. If Amgen abandons omecamtiv mecarbil, it would result in a delay in or could prevent us from commercializing omecamtiv mecarbil, and would delay and could prevent us from obtaining revenues for this drug candidate. Disputes may arise between us and Amgen, which may delay or cause the termination of any omecamtiv mecarbil clinical trials, result in significant litigation or cause Amgen to act in a manner that is not in our best interest. If development of omecamtiv mecarbil does not progress for these or any other reasons, we would not receive further milestone payments or royalties on product sales from Amgen with respect to omecamtiv mecarbil. If Amgen abandons development of omecamtiv mecarbil prior to regulatory approval or if it elects not to proceed with commercialization of the resulting drug following regulatory approval, we would have to seek a new partner for clinical development or commercialization, curtail or abandon that clinical development or commercialization, or undertake and fund the clinical development of omecamtiv mecarbil or commercialization of the resulting drug ourselves. If we seek a new partner but are unable to do so on acceptable terms, or at all, or do not have sufficient funds to conduct the development or commercialization of omecamtiv mecarbil ourselves, we would have to curtail or abandon that development or commercialization, which could harm our business.

We have never generated, and may never generate, revenues from commercial sales of our drugs and we will not have drugs to market for at least several years, if ever.

     We currently have no drugs for sale and we cannot guarantee that we will ever develop or obtain approval to market any drugs. To receive marketing approval for any drug candidate, we must demonstrate that the drug candidate satisfies rigorous standards of safety and efficacy to the FDA in the United States and other regulatory authorities abroad. We and our partners will need to conduct significant additional research and preclinical and clinical testing before we or our partners can file applications with the FDA or other regulatory authorities for approval of any of our drug candidates. In addition, to compete effectively, our drugs must be easy to use, cost-effective and economical to manufacture on a commercial scale, compared to other therapies available for the treatment of the same conditions. We may not achieve any of these objectives. Currently, our only drug candidates that have progressed into clinical development are: omecamtiv mecarbil, our drug candidate for the potential treatment of heart failure; CK-2017357, our drug candidate for the potential treatment of diseases associated with aging, muscle wasting and neuromuscular dysfunction; and ispinesib, SB-743921 and GSK-923295, our drug candidates for the potential treatment of cancer. We cannot be certain that the clinical development of these or any future drug candidates will be successful, that they will receive the regulatory approvals required to commercialize them, or that any of our other research programs will yield a drug candidate suitable for clinical testing or commercialization. Our commercial revenues, if any, will be derived from sales of drugs that we do not expect to be commercially marketed for at least several years, if at all. The development of any one or all of these drug candidates may be discontinued at any stage of our clinical trials programs and we may not generate revenue from any of these drug candidates.

Clinical trials may fail to demonstrate the desired safety and efficacy of our drug candidates, which could prevent or significantly delay completion of clinical development and regulatory approval.

     Prior to receiving approval to commercialize any of our drug candidates, we or our partners must adequately demonstrate to the FDA and foreign regulatory authorities that the drug candidate is sufficiently safe and effective with substantial evidence from well-controlled clinical trials. In clinical trials we or our partners will need to demonstrate efficacy for the treatment of specific indications and monitor safety throughout the clinical development process and following approval. None of our drug candidates have yet been demonstrated to be safe and effective in clinical trials and they may never be. In addition, for each of our current preclinical compounds, we or our partners must adequately demonstrate satisfactory chemistry, formulation, stability and toxicity in order to submit an investigational new drug application (IND) to the FDA, or an equivalent application in foreign jurisdictions, that would allow us to advance that compound into clinical trials. Furthermore, we or our partners may need to submit separate INDs (or foreign equivalent) to different divisions within the FDA (or foreign regulatory authorities) in order to pursue clinical trials in different therapeutic areas. Each new IND (or foreign equivalent) must be reviewed by the new division before the clinical trial under its jurisdiction can proceed, entailing all the risks of delay inherent to regulatory review. If our or our partners current or future preclinical studies or clinical trials are unsuccessful, our business will be significantly harmed and our stock price could be negatively affected.

     All of our drug candidates are prone to the risks of failure inherent in drug development. Preclinical studies may not yield results that would adequately support the filing of an IND (or a foreign equivalent) with respect to our potential drug candidates. Even if the results of preclinical studies for a drug candidate are sufficient to support such a filing, the results of preclinical studies do not necessarily predict the results of clinical trials. As an example, because the physiology of animal species used in preclinical studies may vary substantially from other animal species and from humans, it may be difficult to assess with certainty whether a finding from a study in a particular animal species will result in similar findings in other animal species or in humans. For any of our drug candidates, the results from Phase I clinical trials in healthy volunteers and clinical results from Phase I and II trials in patients are not necessarily indicative of the results of larger Phase III clinical trials that are necessary to establish whether the drug candidate is safe and effective for the applicable indication. Likewise, interim results from a clinical trial may not be indicative of the final results from that trial.

     In addition, while the clinical trials of our drug candidates are designed based on the available relevant information, in view of the uncertainties inherent in drug development, such clinical trials may not be designed with focus on indications, patient populations, dosing regimens, safety or efficacy parameters or other variables that will provide the necessary safety or efficacy data to support regulatory approval to commercialize the resulting drugs. For example, in a number of two-stage Phase II clinical trials designed to evaluate the safety and efficacy of ispinesib as monotherapy in the first- or second-line treatment of patients with different forms of cancer, ispinesib did not satisfy the criteria for advancement to Stage 2. In addition, individual patient responses to the dose administered of a drug may vary in a manner that is difficult to predict. Also, the methods we select to assess particular safety or efficacy parameters may not yield the same statistical precision in estimating our drug candidates’ effects as may other alternative methodologies. Even if we believe the data collected from clinical trials of our drug candidates are promising, these data may not be sufficient to support approval by the FDA or foreign regulatory authorities. Preclinical and clinical data can be interpreted in different

ways. Accordingly, the FDA or foreign regulatory authorities could interpret these data in different ways than we or our partners do, which could delay, limit or prevent regulatory approval.

     Administering any of our drug candidates or potential drug candidates may produce undesirable side effects, also known as adverse effects. Toxicities and adverse effects observed in preclinical studies for some compounds in a particular research and development program may also occur in preclinical studies or clinical trials of other compounds from the same program. Potential toxicity issues may arise from the effects of the active pharmaceutical ingredient itself or from impurities or degradants that are present in the active pharmaceutical ingredient or could form over time in the formulated drug candidate or the active pharmaceutical ingredient. These toxicities or adverse effects could delay or prevent the filing of an IND (or a foreign equivalent) with respect to our drug candidates or potential drug candidates or cause us or our partners to modify, suspend or terminate clinical trials with respect to any drug candidate at any time during the development program. The FDA, other regulatory authorities, our partners or we may modify, suspend or terminate clinical trials with our drug candidates at any time. If these or other adverse effects are severe or frequent enough to outweigh the potential efficacy of a drug candidate, the FDA or other regulatory authorities could deny approval of that drug candidate for any or all targeted indications. Even if one or more of our drug candidates were approved for sale as drugs, the occurrence of even a limited number of toxicities or adverse effects when used in large populations may cause the FDA to impose restrictions on, or stop, the further marketing of those drugs. Indications of potential adverse effects or toxicities which do not seem significant during the course of clinical trials may later turn out to actually constitute serious adverse effects or toxicities when a drug is used in large populations or for extended periods of time.

     We have observed certain adverse effects in the clinical trials conducted with our drug candidates. For example, in clinical trials of omecamtiv mecarbil, doses that exceeded the maximum-tolerated dose were associated with complaints of chest discomfort, palpitations, dizziness and feeling hot, increases in heart rate, declines in blood pressure, electrocardiographic changes consistent with acute myocardial ischemia and transient rises in the MB fraction of creatine kinase and cardiac troponins I and T, which are indicative of myocardial infarction. In Phase IIa clinical trials of CK-2017357, adverse events of dizziness, headache, fatigue, somnolence (sleepiness), euphoric mood, nausea, and asthenia (weakness) appeared to increase in frequency with increasing doses of CK-2017357. In clinical trials of ispinesib, the most commonly observed dose-limiting toxicity was neutropenia, a decrease in the number of a certain type of white blood cell that results in an increase in susceptibility to infection.

     In addition, clinical trials of omecamtiv mecarbil and CK-2017357 enroll patients who typically suffer from serious diseases which put them at increased risk of death. These patients may die while receiving our drug candidates. In such circumstances, it may not be possible to exclude with certainty a causal relationship to our drug candidate, even though the responsible clinical investigator may view such an event as not study drug-related. For example, in a Phase IIa clinical trial designed to evaluate and compare the oral pharmacokinetics of both modified and immediate release formulations of omecamtiv mecarbil in patients with stable heart failure, a patient died suddenly after receiving the immediate release formulation of omecamtiv mecarbil, without having reported any preceding adverse events. The clinical investigator assessed the patient’s death as not related to omecamtiv mecarbil. However, the event was reported to the appropriate regulatory authorities as possibly related to omecamtiv mecarbil because the immediate cause of the patient’s death could not be determined, and therefore, a relationship to omecamtiv mecarbil could not be excluded definitively.

     Any failure or significant delay in completing preclinical studies or clinical trials for our drug candidates, or in receiving and maintaining regulatory approval for the sale of any resulting drugs, may significantly harm our business and negatively affect our stock price.

Clinical trials are expensive, time-consuming and subject to delay.

     Clinical trials are subject to rigorous regulatory requirements and are very expensive, difficult and time-consuming to design and implement. The length of time and number of trial sites and patients required for clinical trials vary substantially based on the type, complexity, novelty, intended use of the drug candidate and safety concerns. We estimate that the clinical trials of our current drug candidates will each continue for several more years. However, the clinical trials for all or any of these drug candidates may take significantly longer to complete. The commencement and completion of our clinical trials could be delayed or prevented by many factors, including, but not limited to:

•

delays in obtaining, or inability to obtain, regulatory or other approvals to commence and conduct clinical trials in the manner we or our partners deem necessary for the appropriate and timely development of our drug candidates and commercialization of any resulting drugs;

	•		delays in identifying and reaching agreement, or inability to identify and reach agreement, on acceptable terms, with prospective clinical trial sites and other entities involved in the conduct of our clinical trials;
	•		delays or additional costs in developing, or inability to develop, appropriate formulations of our drug candidates for clinical trial use, including an appropriate modified release oral formulation for omecamtiv mecarbil;
	•		slower than expected rates of patient recruitment and enrollment, including as a result of competition for patients with other clinical trials; limited numbers of patients that meet the enrollment criteria; patients’, investigators’ or trial sites’ reluctance to agree to the requirements of a protocol; or the introduction of alternative therapies or drugs by others;
	•		for those drug candidates that are the subject of a strategic alliance, delays in reaching agreement with our partner as to appropriate development strategies;
	•		a regulatory authority may require changes to a protocol for a clinical trial that then may require approval from regulatory agencies in other jurisdictions where the trial is being conducted;
	•		an institutional review board (“IRB”) or its foreign equivalent may require changes to a protocol that then require approval from regulatory agencies and other IRBs and their foreign equivalents, or regulatory authorities may require changes to a protocol that then require approval from the IRBs or their foreign equivalents;
	•		for clinical trials conducted in foreign countries, the time and resources required to identify, interpret and comply with foreign regulatory requirements or changes in those requirements, and political instability or natural disasters occurring in those countries;
	•		lack of effectiveness of our drug candidates during clinical trials;
	•		unforeseen safety issues;
	•		inadequate supply of clinical trial materials;
	•		uncertain dosing issues;
	•		failure by us, our partners, or clinical research organizations, investigators or site personnel engaged by us or our partners to comply with good clinical practices and other applicable laws and regulations;
	•		inability or unwillingness of investigators or their staffs to follow clinical protocols;
	•		inability to monitor patients adequately during or after treatment;
	•		introduction of new therapies or changes in standards of practice or regulatory guidance that render our drug candidates or their clinical trial endpoints obsolete; and
	•		results from non-clinical studies that may adversely impact the timing or further development of our drug candidates.

     We do not know whether planned clinical trials will begin on time, or whether planned or currently ongoing clinical trials will need to be restructured or will be completed on schedule, if at all. Significant delays in clinical trials will impede our ability to commercialize our drug candidates and generate revenue and could significantly increase our development costs.

If we fail to enter into and maintain successful strategic alliances for our drug candidates, potential drug candidates or research and development programs, we will have to reduce, delay or discontinue our advancement of those drug candidates, potential drug candidates and programs or expand our research and development capabilities and increase our expenditures.

     Drug development is complicated and expensive. We currently have limited financial and operational resources to carry out drug development. Our strategy for developing, manufacturing and commercializing our drug candidates and potential drug candidates currently requires us to enter into and successfully maintain strategic alliances with pharmaceutical companies or other industry participants to advance our programs and reduce our expenditures on each program. Accordingly, the success of our development activities depends in large part on our current and future strategic partners’ performance, over which we have little or no control.

     We have retained all rights to develop and commercialize CK-2017357, ispinesib, SB-743921 and GSK-923295. We currently do not have a strategic partner for these drug candidates. We are relying on GSK to complete its Phase I clinical trial for GSK-923295. We expect to rely on one or more strategic partners or other arrangements with third parties to advance and develop each of CK-2017357 and other compounds from our skeletal muscle contractility program, ispinesib, SB-743921, GSK-923295 and our smooth muscle myosin inhibitors. However, we may not be able to negotiate and enter into such strategic alliances or arrangements on acceptable terms, if at all, or in accordance with our planned timelines.

     We rely on Amgen to conduct non-clinical and clinical development for omecamtiv mecarbil for the potential treatment of heart failure. If Amgen elects to terminate its development activities with respect to omecamtiv mecarbil, we currently do not have an alternative strategic partner for this drug candidate.

     Our ability to commercialize drugs that we develop with our partners and that generate royalties from product sales depends on our partners’ abilities to assist us in establishing the safety and efficacy of our drug candidates, obtaining and maintaining regulatory approvals and achieving market acceptance of the drugs once commercialized. Our partners may elect to delay or terminate development of one or more drug candidates, independently develop drugs that could compete with ours or fail to commit sufficient resources to the marketing and distribution of drugs developed through their strategic alliances with us. Our partners may not proceed with the development and commercialization of our drug candidates with the same degree of urgency as we would because of other priorities they face. In addition, new business combinations or changes in a partner’s business strategy may adversely affect its willingness or ability to carry out its obligations under a strategic alliance.

     If we are not able to successfully maintain our existing strategic alliances or establish and successfully maintain additional strategic alliances, we will have to limit the size or scope of, or delay or discontinue, one or more of our drug development programs or research programs, or undertake and fund these programs ourselves. Alternatively, if we elect to continue to conduct any of these drug development programs or research programs on our own, we will need to expand our capability to conduct clinical development by bringing additional skills, technical expertise and resources into our organization. This would require significant additional funding, which may not be available to us on acceptable terms, or at all.

We depend on contract research organizations to conduct our clinical trials and have limited control over their performance.

     We have used and intend to continue to use contract research organizations (“CROs”) within and outside of the United States to conduct clinical trials of our drug candidates, such as CK-2017357. We do not have control over many aspects of our CROs’ activities, and cannot fully control the amount, timing or quality of resources that they devote to our programs. CROs may not assign as high a priority to our programs or pursue them as diligently as we would if we were undertaking these programs ourselves. The activities conducted by our CROs therefore may not be completed on schedule or in a satisfactory manner. CROs may also give higher priority to relationships with our competitors and potential competitors than to their relationships with us. Outside of the United States, we are particularly dependent on our CROs’ expertise in communicating with clinical trial sites and regulatory authorities and ensuring that our clinical trials and related activities and regulatory filings comply with applicable laws. Our CROs’ failure to carry out development activities on our behalf according to our and the FDA’s or other regulatory agencies’ requirements and in accordance with applicable U.S. and foreign laws, or our failure to properly coordinate and manage these activities, could increase the cost of our operations and delay or prevent the development, approval and commercialization of our drug candidates. In addition, if a CRO fails to perform as agreed, our ability to collect damages may be contractually limited. If we fail to effectively manage the CROs carrying out the development of our drug candidates or if our CROs fail to perform as agreed, the commercialization of our drug candidates will be delayed or prevented.

We have no manufacturing capacity and depend on our strategic partners and contract manufacturers to produce our clinical trial drug supplies for each of our drug candidates and potential drug candidates, and anticipate continued reliance on contract manufacturers for the development and commercialization of our potential drugs.

     We do not currently operate manufacturing facilities for clinical or commercial production of our drug candidates or potential drug candidates. We have limited experience in drug formulation and manufacturing, and we lack the resources and the capabilities to manufacture any of our drug candidates or potential drug candidates on a clinical or commercial scale. Amgen has assumed responsibility to conduct these activities for the ongoing clinical development of omecamtiv mecarbil worldwide, except Japan. We have relied on GSK to conduct these activities for the clinical development of GSK-923295. For CK-2017357 and our other drug candidates and potential drug candidates, we rely (and for omecamtiv mecarbil, ispinesib and SB-743921, we have relied) on a limited

number of contract manufacturers. In particular, we rely on single-source contract manufacturers for the active pharmaceutical ingredient and the drug product supply for our clinical trials. We expect to rely on contract manufacturers to supply all future drug candidates for which we conduct clinical development. If any of our existing or future contract manufacturers fail to perform satisfactorily, it could delay clinical development or regulatory approval of our drug candidates or commercialization of our drugs, producing additional losses and depriving us of potential product revenues. In addition, if a contract manufacturer fails to perform as agreed, our ability to collect damages may be contractually limited.

     Our drug candidates and potential drug candidates require precise high-quality manufacturing. The failure to achieve and maintain high manufacturing standards, including failure to detect or control anticipated or unanticipated manufacturing errors or the frequent occurrence of such errors, could result in patient injury or death, discontinuance or delay of ongoing or planned clinical trials, delays or failures in product testing or delivery, cost overruns, product recalls or withdrawals and other problems that could seriously hurt our business. Contract drug manufacturers often encounter difficulties involving production yields, quality control and quality assurance and shortages of qualified personnel. These manufacturers are subject to stringent regulatory requirements, including the FDA’s current good manufacturing practices regulations and similar foreign laws and standards. Each contract manufacturer must pass a pre-approval inspection before we can obtain marketing approval for any of our drug candidates and following approval will be subject to ongoing periodic unannounced inspections by the FDA, the U.S. Drug Enforcement Agency and other regulatory agencies, to ensure strict compliance with current good manufacturing practices and other applicable government regulations and corresponding foreign laws and standards. We seek to ensure that our contract manufacturers comply fully with all applicable regulations, laws and standards. However, we do not have control over our contract manufacturers’ compliance with these regulations, laws and standards. If one of our contract manufacturers fails to pass its pre-approval inspection or maintain ongoing compliance at any time, the production of our drug candidates could be interrupted, resulting in delays or discontinuance of our clinical trials, additional costs and potentially lost revenues. In addition, failure of any third party manufacturers or us to comply with applicable regulations, including pre-or post-approval inspections and the current good manufacturing practice requirements of the FDA or other comparable regulatory agencies, could result in sanctions being imposed on us. These sanctions could include fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our products, delay, suspension or withdrawal of approvals, license revocation, product seizures or recalls, operational restrictions and criminal prosecutions, any of which could significantly and adversely affect our business.

     In addition, our existing and future contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required to successfully produce, store and distribute our drug candidates. If a natural disaster, business failure, strike or other difficulty occurs, we may be unable to replace these contract manufacturers in a timely or cost-effective manner and the production of our drug candidates would be interrupted, resulting in delays and additional costs.

     Switching manufacturers or manufacturing sites would be difficult and time-consuming because the number of potential manufacturers is limited. In addition, before a drug from any replacement manufacturer or manufacturing site can be commercialized, the FDA and, in some cases, foreign regulatory agencies, must approve that site. These approvals would require regulatory testing and compliance inspections. A new manufacturer or manufacturing site also would have to be educated in, or develop substantially equivalent processes for, production of our drugs and drug candidates. It may be difficult or impossible to transfer certain elements of a manufacturing process to a new manufacturer or for us to find a replacement manufacturer on acceptable terms quickly, or at all, either of which would delay or prevent our ability to develop drug candidates and commercialize any resulting drugs.

We may not be able to successfully scale-up manufacturing of our drug candidates in sufficient quality and quantity, which would delay or prevent us from developing our drug candidates and commercializing resulting approved drugs, if any.

     To date, our drug candidates have been manufactured in small quantities for preclinical studies and early-stage clinical trials. In order to conduct larger scale or late-stage clinical trials for a drug candidate and for commercialization of the resulting drug if that drug candidate is approved for sale, we will need to manufacture it in larger quantities. We may not be able to successfully increase the manufacturing capacity for any of our drug candidates, whether in collaboration with third-party manufacturers or on our own, in a timely or cost-effective manner or at all. If a contract manufacturer makes improvements in the manufacturing process for our drug candidates, we may not own, or may have to share, the intellectual property rights to those improvements. Significant scale-up of manufacturing may require additional validation studies, which are costly and which the FDA must review and approve. In addition, quality issues may arise during those scale-up activities because of the inherent properties of a drug candidate itself or of a drug candidate in combination with other components added during the manufacturing and packaging process, or during shipping and storage of the finished product or active pharmaceutical ingredients. If we are unable to successfully scale-up manufacture of any of our drug candidates in sufficient quality and quantity, the development of that drug candidate and regulatory approval or commercial launch for any resulting drugs may be delayed or there may be a shortage in supply, which could significantly harm our business.

The mechanisms of action of our drug candidates and potential drug candidates are unproven, and we do not know whether we will be able to develop any drug of commercial value.

     We have discovered and are currently developing drug candidates and potential drug candidates that have what we believe are novel mechanisms of action directed against cytoskeletal targets, and intend to continue to do so. Because no currently approved drugs appear to operate via the same biochemical mechanisms as our compounds, we cannot be certain that our drug candidates and potential drug candidates will result in commercially viable drugs that safely and effectively treat the indications for which we intend to develop them. The results we have seen for our compounds in preclinical models may not translate into similar results in humans, and results of early clinical trials in humans may not be predictive of the results of larger clinical trials that may later be conducted with our drug candidates. Even if we are successful in developing and receiving regulatory approval for a drug candidate for the treatment of a particular disease, we cannot be certain that we will also be able to develop and receive regulatory approval for that or other drug candidates for the treatment of other diseases. If we or our partners are unable to successfully develop and commercialize our drug candidates, our business will be materially harmed.

Our success depends substantially upon our ability to obtain and maintain intellectual property protection relating to our drug candidates and research technologies.

     We own, or hold exclusive licenses to, a number of U.S. and foreign patents and patent applications directed to our drug candidates and research technologies. Our success depends on our ability to obtain patent protection both in the United States and in other countries for our drug candidates, their methods of manufacture and use, and our technologies. Our ability to protect our drug candidates and technologies from unauthorized or infringing use by third parties depends substantially on our ability to obtain and enforce our patents. If our issued patents and patent applications, if granted, do not adequately describe, enable or otherwise provide coverage of our technologies and drug candidates, including omecamtiv mecarbil, CK-2017357, ispinesib, SB-743921 and GSK-923295, we or our licensees would not be able to exclude others from developing or commercializing these drug candidates. Furthermore, the degree of future protection of our proprietary rights is uncertain because legal means may not adequately protect our rights or permit us to gain or keep our competitive advantage.

     Due to evolving legal standards relating to the patentability, validity and enforceability of patents covering pharmaceutical inventions and the claim scope of these patents, our ability to enforce our existing patents and to obtain and enforce patents that may issue from any pending or future patent applications is uncertain and involves complex legal, scientific and factual questions. The standards which the U.S. Patent and Trademark Office and its foreign counterparts use to grant patents are not always applied predictably or uniformly and are subject to change. To date, no consistent policy has emerged regarding the breadth of claims allowed in biotechnology and pharmaceutical patents. Thus, we cannot be sure that any patents will issue from any pending or future patent applications owned by or licensed to us. Even if patents do issue, we cannot be sure that the claims of these patents will be held valid or enforceable by a court of law, will provide us with any significant protection against competitive products, or will afford us a commercial advantage over competitive products. In particular:

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we or our licensors might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;

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we or our licensors might not have been the first to file patent applications for the inventions covered by our pending patent applications and issued patents;

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others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;

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some or all of our or our licensors’ pending patent applications may not result in issued patents or the claims that issue may be narrow in scope and not provide us with competitive advantages;

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our and our licensors’ issued patents may not provide a basis for commercially viable drugs or therapies or may be challenged and invalidated by third parties;

	•		our or our licensors’ patent applications or patents may be subject to interference, opposition or similar administrative proceedings that may result in a reduction in their scope or their loss altogether;
	•		we may not develop additional proprietary technologies or drug candidates that are patentable; or

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the patents of others may prevent us or our partners from discovering, developing or commercializing our drug candidates.