SEC Filing | Aceragen, Inc.

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IDERA PHARMACEUTICALS, INC. FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2005, or


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

For transition period from .

Commission File Number 001-31918

IDERA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)


Delaware		04-3072298

(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification Number)

345 Vassar Street
Cambridge, Massachusetts 02139
(Address of principal executive offices)

(617) 679-5500
(Registrant’s telephone number, including area code)

Formerly Hybridon, Inc.
(Former name, if changed since last report)

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

Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Common Stock, par value $.001 per share		111,150,126

Class		Outstanding as of November 1, 2005

IDERA PHARMACEUTICALS, INC.

FORM 10-Q

INDEX


	Page
PART I — FINANCIAL STATEMENTS
Item 1 — Unaudited Financial Statements
Consolidated Condensed Balance Sheets as of September 30, 2005 and December 31, 2004		3
Consolidated Condensed Statements of Operations for the Three and Nine Months ended September 30, 2005 and 2004		4
Consolidated Condensed Statements of Cash Flows for the Nine Months ended September 30, 2005 and 2004		5
Notes to Consolidated Condensed Financial Statements		6
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3 — Quantitative and Qualitative Disclosures About Market Risk		29
Item 4 — Controls and Procedures		29
PART II — OTHER INFORMATION
Item 6 — Exhibits		30
Signatures		31
EX-10.1 EMPLOYMENT AGREEMENT - AGRAWAL
EX-31.1 SECTION 302 CERTIFICATION OF C.E.O.
EX-31.2 SECTION 302 CERTIFICATION OF C.F.O.
EX-32.1 SECTION 906 CERTIFICATION OF C.E.O.
EX-32.2 SECTION 906 CERTIFICATION OF C.F.O.

Amplivax®, Hybridon® and IMOxine® are our registered trademarks. IMO™ and Idera™ are also our trademarks. Other trademarks appearing in this quarterly report are the property of their respective owners.

PART I — FINANCIAL STATEMENTS

ITEM 1 — UNAUDITED FINANCIAL STATEMENTS

IDERA PHARMACEUTICALS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)


	SEPTEMBER 30,			DECEMBER 31,
	2005			2004
Assets
Current assets:
Cash and cash equivalents	$	5,440,473		$	5,021,860
Short-term investments		6,704,392			9,391,140
Receivables		175,280			293,113
Prepaid expenses and other current assets		745,484			333,316

Total current assets		13,065,629			15,039,429
Property and equipment, net		462,054			351,791
Deferred financing costs		576,480			—

Total Assets	$	14,104,163		$	15,391,220


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	556,604		$	354,736
Accrued expenses		1,110,181			1,332,150
Current portion of deferred revenue		2,190,037			171,287

Total current liabilities		3,856,822			1,858,173
Non-current portion of accrued expenses		—			240,000
Long term notes payable		5,032,750			—
Capital lease		11,408			—
Deferred revenue, net of current portion		1,761,335			523,655
Stockholders’ equity:
Preferred stock, $0.01 par value
Authorized — 5,000,000 shares
Series A convertible preferred stock
Designated — 1,500,000 shares
Issued and outstanding — 655 at September 30, 2005 and December 31, 2004		7			7
Common stock, $0.001 par value
Authorized—200,000,000 and 185,000,000 shares at September 30, 2005 and December 31, 2004, respectively
Issued and outstanding - 111,137,356 and 110,931,529 shares at September 30, 2005 and December 31, 2004, respectively		111,138			110,932
Additional paid-in capital		312,529,075			311,988,467
Accumulated deficit		(309,119,454	)		(299,293,785	)
Accumulated other comprehensive loss		(2,007	)		(14,989	)
Deferred compensation		(76,911	)		(21,240	)

Total stockholders’ equity		3,441,848			12,769,392

Total Liabilities and Stockholders’ Equity	$	14,104,163		$	15,391,220

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

IDERA PHARMACEUTICALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)


	THREE MONTHS ENDED						NINE MONTHS ENDED
	SEPTEMBER 30,						SEPTEMBER 30,
	2005			2004			2005			2004
Alliance revenue	$	544,778		$	77,967		$	1,027,528		$	811,342

Operating expenses:
Research and development		2,579,654			2,610,184			8,230,400			7,956,290
General and administrative		792,652			1,550,875			2,584,624			3,472,410
Stock-based compensation from repriced options (*)		121,198			(18,574	)		149,236			(592,358	)

Total operating expenses		3,493,504			4,142,485			10,964,260			10,836,342

Loss from operations		(2,948,726	)		(4,064,518	)		(9,936,732	)		(10,025,000	)
Other income (expense):
Investment income, net		106,793			57,296			257,088			143,522
Interest expense		(107,816	)		—			(145,533	)		(29,385	)

Net loss		(2,949,749	)		(4,007,222	)		(9,825,177	)		(9,910,863	)
Accretion of preferred stock dividends (Note 7)		(164	)		(158	)		(492	)		(2,675,836	)

Net loss applicable to common stockholders	$	(2,949,913	)	$	(4,007,380	)	$	(9,825,669	)	$	(12,586,699	)

Basic and diluted net loss per share (Note 3)	$	(0.03	)	$	(0.04	)	$	(0.09	)	$	(0.10	)

Basic and diluted net loss per share applicable to common stockholders (Note 3)	$	(0.03	)	$	(0.04	)	$	(0.09	)	$	(0.13	)

Shares used in computing basic and diluted loss per common share		111,115,039			105,301,234			111,042,768			94,885,691


(*)		The following summarizes the allocation of stock-based compensation from repriced options:


Research and development	$	83,757	$	(13,439	)	$	106,308	$	(429,505	)
General and administrative		37,441		(5,135	)		42,928		(162,853	)

Total	$	121,198	$	(18,574	)	$	149,236	$	(592,358	)

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

IDERA PHARMACEUTICALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)


	NINE MONTHS ENDED
	SEPTEMBER 30,
	2005			2004
Cash Flows From Operating Activities:
Net loss	$	(9,825,177	)	$	(9,910,863	)
Adjustments to reconcile net loss to net cash used in operating activities —
Loss on disposal of property and equipment		2,134			—
Stock-based compensation		149,236			(554,983	)
Depreciation and amortization expense		212,652			236,679
Issuance of common stock for services rendered		27,352			92,874
Non-cash interest expense		71,148			—
Changes in operating assets and liabilities —
Accounts receivable		117,833			6,877
Prepaid expenses and other current assets		(412,168	)		(499,307	)
Accounts payable and accrued expenses		(382,767	)		281,241
Deferred revenue		3,256,430			(33,153	)

Net cash used in operating activities		(6,783,327	)		(10,380,635	)

Cash Flows From Investing Activities:
Purchase of available for sale securities		(9,908,536	)		(15,735,747	)
Proceeds from sale of available-for-sale securities		7,600,000			10,000,000
Proceeds from maturity of available-for-sale securities		5,000,000			2,500,000
Purchase of property and equipment		(206,512	)		(28,611	)

Net cash provided by (used in) investing activities		2,484,952			(3,264,358	)

Cash Flow From Financing Activities:
Proceeds from issuance of convertible notes payable		5,032,750			—
Sale of common stock and warrants, net of issuance costs		—			15,418,864
Payment on debt		—			(1,306,000	)
Issuance costs from financing		(386,480	)		—
Proceeds from exercise of common stock options and warrants		72,348			141,521
Payments on capital lease		(1,630	)		—

Net cash provided by financing activities		4,716,988			14,254,385

Net increase in cash and cash equivalents		418,613			609,392
Cash and cash equivalents, beginning of period		5,021,860			7,607,655

Cash and cash equivalents, end of period	$	5,440,473		$	8,217,047

Cash paid for interest	$	—		$	58,770

Supplemental disclosure of non-cash financing and investing activities:
Issuance of warrants for financing	$	219,385		$	—

Deferred compensation relating to issuance of stock options	$	72,000		$	—

Accretion of Series A convertible preferred stock dividends (Note 7)	$	(492	)	$	(569,524	)

Dividend from induced conversion of Series A preferred stock (Note 7)	$	—		$	3,245,360

Conversion of Series A preferred stock into common stock	$	—		$	14,370

Issuance of stock for services	$	27,352		$	92,874

Equipment acquired under capital lease	$	19,556		$	—

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

IDERA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)

(1) Organization

Idera Pharmaceuticals, Inc. (“Idera” or the “Company”) (AMEX: IDP) is a biotechnology company engaged in the discovery and development of novel therapeutics that modulate immune responses through Toll-like Receptors (TLRs) for the treatment of multiple diseases. The Company has identified proprietary DNA-based structures that modulate TLRs. The Company believes that these immune modulatory oligonucleotide (IMO™) compounds are broadly applicable to large and growing markets where significant unmet medical needs exist, including oncology, asthma/allergy, and infectious diseases. Idera intends to continue identifying new drug candidates specific to various diseases, based on the differentiated biological activities of its IMO™ compounds. The Company’s lead candidate is IMO-2055 (also known as HYB2055), a TLR9 agonist currently in Phase 2 clinical testing as a monotherapy in renal cell carcinoma and in combination with the chemotherapy agents gemcitabine and carboplatin in a Phase 1/2 oncology trial. The Company is also collaborating with Novartis International Pharmaceuticals, Ltd., or Novartis, to develop treatments for asthma and allergies.

Based on its current operating plan, the Company believes that its current cash, cash equivalents and short-term investments will be sufficient to fund operations through mid 2006. The Company’s actual cash requirements will depend on many factors, including particularly the scope and pace of its research and development efforts and its success in entering into strategic alliances.

The Company does not expect to generate significant additional funds internally until it successfully completes development and obtains marketing approval for products, either alone or in collaborations with third parties, which the Company expects will take a number of years. In addition, it has no committed external sources of funds. As a result, in order for the Company to continue to pursue its clinical and preclinical development programs and continue its operations beyond mid 2006, the Company must raise additional funds from debt or equity financings or from collaborative arrangements with biotechnology or pharmaceutical companies. There can be no assurance that the requisite funds will be available in the necessary time frame or on terms acceptable to the Company. If the Company is unable to raise sufficient funds, the Company may be required to delay, scale back or significantly curtail its operating plans and possibly relinquish rights to portions of the Company’s technology or products. In addition, increases in expenses or delays in clinical development may adversely impact the Company’s cash position and require further cost reductions. No assurance can be given that the Company will be able to operate profitably on a consistent basis, or at all, in the future.

On September 12, 2005, the Company changed its name from Hybridon, Inc. to Idera Pharmaceuticals, Inc. On September 13, 2005, Idera’s American Stock Exchange ticker symbol changed from “HBY” to “IDP”.

(2) Unaudited Interim Financial Statements

The accompanying unaudited consolidated condensed financial statements included herein have been prepared by the Company in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of interim period results have been included. The Company believes that its disclosures are adequate to make the information presented not misleading. Interim results for the three and nine-month periods ended September 30, 2005 are not necessarily indicative of results that may be expected for the year ended December 31, 2005. For further information, refer to the financial statements and footnotes thereto included in the Company’s

Annual Report on Form 10-K for the fiscal year ended December 31, 2004, which was filed with the Securities and Exchange Commission on March 25, 2005.

(3) Net Loss per Common Share

The following table sets forth the computation of basic and diluted loss per share:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Numerator:
Net loss	$	(2,949,749	)	$	(4,007,222	)	$	(9,825,177	)	$	(9,910,863	)
Accretion of preferred stock dividends		(164	)		(158	)		(492	)		(2,675,836	)

Numerator for basic and diluted loss per share applicable to common stockholders	$	(2,949,913	)	$	(4,007,380	)	$	(9,825,669	)	$	(12,586,699	)

Denominator for basic and diluted loss per share		111,115,039			105,301,234			111,042,768			94,885,691

Loss per share — basic and diluted:
Net loss per share	$	(0.03	)	$	(0.04	)	$	(0.09	)	$	(0.10	)
Accretion of preferred stock dividends		(0.00	)		(0.00	)		(0.00	)		(0.03	)

Net loss per share applicable to common stockholders	$	(0.03	)	$	(0.04	)	$	(0.09	)	$	(0.13	)

Basic net loss per common share is computed using the weighted average number of shares of common stock outstanding during the period. For the three and nine months ended September 30, 2005 and 2004, diluted net loss per share of common stock was the same as basic net loss per share of common stock, as the effects of the Company’s common stock equivalents are antidilutive. Total antidilutive securities were 39,441,957 and 30,201,511 at September 30, 2005 and 2004, respectively. These antidilutive securities, including stock options, warrants, convertible preferred stock and convertible debt instruments, are not included in the Company’s calculation of diluted net loss per common share.

(4) Cash Equivalents and Investments

The Company considers all highly liquid investments with maturities of 90 days or less when purchased to be cash equivalents. Cash and cash equivalents at September 30, 2005 and December 31, 2004 consisted of cash and money market funds.

The Company accounts for investments in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Management determines the appropriate classification of marketable securities at the time of purchase. In accordance with SFAS No. 115, investments that the Company does not have the positive intent to hold to maturity are classified as “available-for-sale” and reported at fair market value. Unrealized gains and losses associated with “available-for-sale” investments are recorded in “Accumulated other comprehensive loss” on the accompanying consolidated balance sheet. The amortization of premiums and accretion of discounts, and any realized gains and losses and declines in value judged to be other than temporary, and interest and dividends are included in “Investment income, net” on the accompanying consolidated statement of operations for all available-for-sale securities. The Company had no “held-to-maturity” investments, as defined by SFAS No. 115, at September 30, 2005 and December 31, 2004. The cost of securities sold is based on the specific identification method. The Company had no realized gains or losses on its investments for the three and nine months ended September 30, 2005 and 2004, respectively. There were no losses or permanent declines in value included in “investment income” for any securities in the three and nine months ended September 30, 2005 and 2004.

The Company had no long-term investments as of September 30, 2005 and December 31, 2004. Available-for-sale securities are classified as short-term regardless of their maturity date if the Company has them available to fund operations within one year of the balance sheet date. Auction securities are highly liquid securities that have floating interest or dividend rates that reset periodically through an auctioning process that sets rates based on bids. Issuers include municipalities, closed-end bond funds and corporations. These securities can either be debt or preferred shares. The Company’s short-term investments consisted of the following at September 30, 2005 and December 31, 2004:


	September 30,		December 31,
	2005		2004
Short-term available-for-sale investments at market value:
Corporate bonds	$	1,304,392	$	2,004,150
Government bonds		—		2,986,990
Auction securities		5,400,000		4,400,000

Total	$	6,704,392	$	9,391,140

(5) Property and Equipment

At September 30, 2005 and December 31, 2004, net property and equipment at cost consists of the following:


	September 30,		December 31,
	2005		2004
Leasehold improvements	$	424,500	$	424,500
Laboratory equipment and other		1,921,754		1,804,799

Total property and equipment, at cost		2,346,254		2,229,299
Less: Accumulated depreciation and amortization		1,884,200		1,877,508

Property and equipment, net	$	462,054	$	351,791

In the first quarter of 2005, the Company wrote off unused property and equipment that had a cost of approximately $109,000 resulting in a loss of approximately $2,000.

As of September 30, 2005, laboratory equipment includes approximately $20,000 of office equipment financed under a capital lease.

(6) Stock-Based Compensation Related to Repriced Options

In September 1999, the Company’s Board of Directors authorized the repricing of options to purchase 5,251,827 shares of common stock to an exercise price of $0.50 per share, which represented the market value of the common stock on the date of the repricing. These options are subject to variable plan accounting which requires the Company to remeasure the intrinsic value of the repriced options, through the earlier of the date of exercise, cancellation or expiration, at each reporting date. For the three months and nine months ended September 30, 2005, the Company recognized an expense of approximately $121,000 and $149,000, respectively, as stock compensation relating to these repriced options as a result of an increase in the intrinsic value of these options between December 31, 2004 and September 30, 2005. For the three and nine months ended September 30, 2004, the Company recognized a credit of approximately $19,000 and $592,000, respectively, for stock compensation from repriced options as a result of a decrease in the intrinsic value of these options between December 31, 2003 and September 30, 2004. As of September 30, 2005, options to purchase 2,088,802 shares remained subject to variable plan accounting.

(7) Series A Convertible Preferred Stock

On December 4, 2003, the Company’s stockholders approved amendments to the Company’s Restated Certificate of Incorporation that:

•

reduced the liquidation preference of the Company’s Series A convertible preferred stock from $100 per share to $1 per share;

	•		reduced the annual dividend on the Company’s Series A convertible preferred stock from 6.5% to 1%; and

	•		increased the number of shares of the Company’s common stock issuable upon conversion of the Company’s Series A convertible preferred stock by 25% over the number of shares that would otherwise be issuable for a 60-day conversion period between December 4, 2003 and February 2, 2004 inclusive.

During the 60-day conversion period, the conversion ratio was increased so that the Series A convertible preferred stockholders could receive approximately 29.41 shares of common stock for each share of Series A convertible preferred stock converted instead of the stated conversion rate of 23.53 shares. The value of the additional shares issued during the 60-day conversion period was recorded as an addition to dividends in the statement of operations at the time of conversion. For the nine months ended September 30, 2004 the Company recorded $3.2 million of preferred stock dividends related to the additional shares issued in 2004.

From January 1, 2004 through February 2, 2004, 488,570 shares of Series A convertible preferred stock were converted into 14,369,740 shares of the Company’s common stock at the adjusted conversion ratio. As a result of these conversions, $570,000 of dividends accreted during the year ended December 31, 2003 were reversed during the nine month period ended September 30, 2004 because the former holders of these shares of Series A convertible preferred stock were no longer entitled to such dividends once their shares of series A convertible preferred stock were converted into common stock.

(8) Stock-Based Compensation

The Company applies the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. The Company continues to account for employee stock compensation at intrinsic value, in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations, with disclosure of the effects of fair value accounting on net income or net loss and related per share amounts on a pro forma basis.

The pro forma effect of applying SFAS No. 123 for the three and nine months ended September 30, 2005 and 2004 would be as follows:


	Three months ended September 30,						Nine months ended September 30,
	2005			2004			2005			2004
Net loss applicable to common stockholders, as reported	$	(2,949,913	)	$	(4,007,380	)	$	(9,825,669	)	$	(12,586,699	)
Less: stock-based compensation expense (income) included in reported net loss		121,198			(18,574	)		149,236			(592,358	)
Add: stock-based employee compensation expense determined under fair value based method for all awards		(266,851	)		(1,053,845	)		(719,595	)		(1,533,593	)

Pro forma net loss applicable to common stockholders, as adjusted for the effect of applying SFAS No. 123	$	(3,095,566	)	$	(5,079,799	)	$	(10,396,028	)	$	(14,712,650	)

Basic and diluted net loss per share applicable to common stockholders —
As reported	$	(0.03	)	$	(0.04	)	$	(0.09	)	$	(0.13	)

Pro forma	$	(0.03	)	$	(0.05	)	$	(0.09	)	$	(0.16	)

The effects on the three and nine months ended September 30, 2005 and 2004 pro forma net loss and net loss per share of expensing the estimated fair value of stock options are not necessarily representative of the effects on reported net loss for the years ended December 31, 2005 and 2004 and future years because of the vesting periods of stock options and the potential for issuance of additional stock options in future periods.

(9) Related Party Transactions

In the nine months ended September 30, 2005, the Company paid Pillar Investment Limited, which is controlled by a director of the Company, approximately $264,000 in cash and issued warrants to purchase 565,478 shares of common stock at an exercise price of $0.89 per share as fees in connection with Pillar Investment Limited acting as placement agent for the sale of the 4% convertible subordinated notes in May 2005 (Note 11). The warrants are exercisable on or prior to May 24, 2010 and have a Black-Scholes value of approximately $219,000 based on the following assumptions: (1) volatility — 75%, (2) discount rate — 3.8%, (3) term — 5 years and (4) no dividends.

In the three and nine months ended September 30, 2005, the Company paid directors of the Company $15,000 and $25,000, respectively, for consulting services.

(10) Comprehensive Income

The following table includes the components of comprehensive income for the three and nine months ended September 30, 2005 and 2004.


	Three months ended September 30,						Nine months ended September 30,
	2005			2004			2005			2004
Net loss	$	(2,949,749	)	$	(4,007,222	)	$	(9,825,177	)	$	(9,910,863	)
Other comprehensive income (loss)		173			12,815			12,982			(8,908	)

Total comprehensive loss	$	(2,949,576	)	$	(3,994,407	)	$	(9,812,195	)	$	(9,919,771	)

Other comprehensive income represents the net unrealized losses on available-for-sale investments.

(11) Notes Payable

On May 24, 2005, Idera sold approximately $5.0 million in principal amount of 4% convertible subordinated notes due April 30, 2008 (the 4% Notes). The Company has agreed to pay interest on the 4% Notes in arrears on December 15, 2005 for the period from the issuance to that date, and thereafter semi-annually in arrears on April 30 and October 30 and at maturity or conversion. The Company has the option to pay interest on the 4% Notes in cash or in shares of the Company’s common stock at the then current market value of the Company’s common stock. Holders of the 4% Notes may convert, at any time prior to maturity, the principal amount of the 4% Notes (or any portion thereof) into shares of the Company’s common stock at a conversion price of $0.89 per share. The Company may cause the principal amount of the 4% Notes to be converted into shares of the Company’s common stock at the then current conversion price at any time prior to May 24, 2006 if the volume weighted average of the closing sales prices of the Company’s common stock for 10 consecutive trading days is equal to at least $1.78 per share or at any time on or after May 24, 2006 if the volume weighted average of the closing sales prices of the Company’s common stock for 10 consecutive trading days is equal to at least $1.12 per share. If the Company conducts a financing resulting in greater than $10.0 million in gross proceeds, the Company may elect to convert the 4% Notes into shares of the Company’s common stock at the then current conversion price if the purchase price paid by the new investors in the financing (on a common stock equivalent basis) is greater than the then current conversion price of the 4% Notes. Holders of the 4% Notes may demand that the Company redeem the 4% Notes upon a change in control, a merger with an independent company, or a change in the Company’s listing status.

The Company capitalized its financing costs associated with the sale of the 4% Notes and is amortizing them over the term of the 4% Notes. These costs include the Black-Scholes value of the warrants, legal expenses and miscellaneous costs related to the placement agent.

On April 1, 2004, the Company’s 9% convertible subordinated notes matured. As a result, the Company paid $1,306,000 to the note holders in payment of the principal amount outstanding under the notes plus accrued interest through the maturity date of $58,770. Upon payment, these notes were cancelled.

(12) Financing

In April 2004, the Company raised approximately $11.8 million in gross proceeds through a registered direct offering. In the offering, the Company sold 16,899,800 shares of common stock and warrants to purchase 3,041,964 shares of common stock to institutional and other investors. The warrants to purchase common stock have an exercise price of $1.14 per share and are exercisable on or prior to April 20, 2009. The warrants may be exercised by cash payment only. On or after October 21, 2005, the Company may redeem the warrants if the closing sales price of the common stock for each day of any 20 consecutive trading day period ending within 30 days prior to providing notice of redemption is greater than or equal to $2.60 per share. The redemption price will be $0.01 per share of common stock underlying the warrants. The redemption criteria have not been met as of November 1, 2005. The Company may exercise its right to redeem the warrants by providing 30 days prior written notice to the holders of the warrants. The net proceeds to the Company from the offering, excluding the proceeds of any future exercise of the warrants, totaled approximately $10.7 million.

In August 2004, the Company raised approximately $5.1 million in gross proceeds from a private placement to institutional and overseas investors. In the private placement, the Company sold 8,823,400 shares of common stock and warrants to purchase 1,764,680 shares of common stock. The warrants to purchase common stock have an exercise price of $0.67 per share and will expire if not exercised on or prior to August 27, 2009. The warrants may be exercised by cash payment only. On or after February 27, 2005, the Company may redeem the warrants if the closing sales price of the common stock for each day of any 20 consecutive trading day period is greater than or equal to $1.34 per share. The redemption price will be $0.01 per share of common stock underlying the warrants. The Company may exercise its right to redeem the warrants by providing 30 days prior written notice to the holders of the warrants. The redemption criteria have not been met as of November 1, 2005. The net proceeds to the Company from the offering, excluding the proceeds of any future exercise of the warrants, totaled approximately $4.7 million.

(13) Option Awards

On May 12, 2005, Idera’s Compensation Committee of the Board of Directors approved a grant of 1,000,000 stock options to the Company’s Chief Executive Officer. These options vest quarterly over a three-year period. In addition, on May 12, 2005, the Compensation Committee agreed to grant additional stock options to the CEO to purchase an aggregate of 1,000,000 shares of the Company’s common stock upon the achievement of specified milestones. Any options granted as a result of the achievement of these milestones will vest over a three-year period commencing on the date the specified milestone was achieved.

On June 1, 2005, options to purchase 400,000 of the additional 1,000,000 shares mentioned above were granted upon the achievement of a milestone. Unlike the balance of the option shares which will be granted with an exercise price equal to the fair market value on the date of grant, this grant was made with an exercise price equal to the fair market value on May 12, 2005. As a result, the Company recorded a charge to deferred compensation of $72,000, which represents the difference between the option exercise price and the market price on the date that the milestone was achieved.

(14) Novartis Collaboration

On May 31, 2005, the Company entered into a research collaboration and option agreement and a license, development and commercialization agreement with Novartis International Pharmaceutical Ltd. to discover, develop and potentially commercialize immune-modulatory oligonucleotides that are toll-like receptor 9 agonists and that are identified as potential treatments for human allergy and respiratory diseases. Under the terms of the agreements, Novartis paid the Company a $4,000,000 license fee in July 2005. In addition to the $4,000,000 upfront payment, Novartis agreed to fund substantially all research activities and make milestone payments to Idera upon the achievement of clinical development, regulatory approval and cumulative net sales milestones. If Novartis elects to exercise its option to develop and commercialize licensed IMOs in the initial collaboration disease areas, Novartis is potentially obligated to pay the Company up to $132,000,000 in milestone payments. Novartis is also obligated to pay the Company a royalty on net sales of all products, if any, commercialized by Novartis, its affiliates and sublicensees. The Company is recognizing the $4,000,000 upfront payment as revenue over the two-year term of the research collaboration.

Beginning on May 31, 2007, if specified conditions are satisfied, Novartis may expand the collaboration to include additional human disease areas, other than oncology and infectious diseases. Novartis is potentially obligated to pay the Company additional milestone payments if Novartis elects to expand the collaboration to include additional disease areas and then develops and commercializes licensed IMOs in the additional disease areas based on the achievement of clinical development and regulatory approval milestones.

(15) New Accounting Pronouncement

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”, which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and amends SFAS No. 95, “Statement of Cash Flows”. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure will no longer be an alternative. The new standard will be effective for the Company in the quarter beginning January 1, 2006.

As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using APB 25’s intrinsic value method and, as such, generally, except for marking to market the repriced options discussed in Note 6, the Company recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123(R)’s fair value method may have a material impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position. The impact of adopting SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the company adopted SFAS 123(R) in a prior period, the impact of applying that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net loss and net loss per share in Note 8 to these financial statements. The Company is currently evaluating the impact of adopting SFAS 123(R) on its financial position and results of operations, including the valuation methods and support for the assumptions that underlie the valuation of the awards.

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

GENERAL

We are engaged in the discovery and development of novel therapeutics that modulate immune responses through Toll-like Receptors, or TLRs, for the treatment of multiple diseases. We have identified proprietary DNA-based structures that modulate TLRs. We believe that these immune modulatory oligonucleotides, or IMO^TM, compounds are broadly applicable to large and growing markets where significant unmet medical needs exist, including oncology, asthma/allergy, and infectious diseases. We intend to continue identifying new drug candidates specific to various diseases, based on the differentiated biological activities of our IMO^TM compounds. IMO-2055, our lead candidate, is a synthetic DNA-based sequence designed to mimic bacterial DNA and be recognized by a specific protein receptor called TLR9, which triggers the activation and modulation of the immune system. IMO-2055 is a TLR9 agonist currently in Phase 2 clinical testing as a monotherapy in renal cell carcinoma and in combination with the chemotherapy agents gemcitabine and carboplatin in a Phase 1/2 oncology trial. We are also collaborating with Novartis International Pharmaceuticals, Ltd., or Novartis, to develop treatments for asthma and allergy indications. We also have been a pioneer in the development of antisense technology, which uses synthetic DNA to block the production of disease-causing proteins at the cellular level. Since 2003, we have devoted substantially all of our research and development efforts to our IMO technology and products and expect to continue that focus in the fourth quarter of 2005 and in future years.

We have incurred total losses of $309.1 million through September 30, 2005 and expect to incur substantial operating losses in the future. In order to commercialize our therapeutic products, we need to address a number of technological challenges and to comply with comprehensive regulatory requirements.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

This management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition. Management bases its estimates and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We regard an accounting estimate or assumption underlying our financial statements as a “critical accounting estimate” where (i) the nature of the estimate or assumption is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and (ii) the impact of the estimates and assumptions on financial condition or operating performance is material.

Our significant accounting policies are described in Note 2 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2004. Not all of these significant accounting policies, however, fit the definition of “critical accounting estimates.” We believe that our accounting policies relating to revenue recognition, as described under the caption “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2004, fit the definition of “critical accounting estimates and judgments.”

RESULTS OF OPERATIONS

Three and Nine Months Ended September 30, 2005 and 2004

Alliance Revenues

Total alliance revenue increased by $467,000, or 599%, from $78,000 for the three months ended September 30, 2004 to $545,000 for the three months ended September 30, 2005 and increased by $217,000, or 27%, from $811,000 for the nine months ended September 30, 2004 to $1,028,000 for the nine months ended September 30, 2005. Alliance revenue consists of revenue we receive under our collaboration and licensing agreements and includes research and development payments, milestone payments, license fees, sublicense fees, and royalty payments. In July 2005, we received from Novartis the $4,000,000 upfront fee under the Novartis agreements. Of this $4,000,000, we recognized $500,000 and $667,000, as revenue in the third quarter and first nine months of 2005, respectively, with the balance being recorded in deferred revenue. The increase in revenue in the third quarter and first nine months of 2005 reflects the recognition of these amounts, as well as research and development revenue associated with the Novartis agreements. The increase in the nine months ended September 30, 2005, as compared to the same period one year earlier, was partially offset by research and development revenue in 2004 associated with supplying a collaborator, Aegera Therapeutics, Inc., with drug product for clinical trials during the first quarter of 2004 and the achievement of a milestone for which milestone fees were earned in the first quarter of 2004.

Research and Development Expenses

Research and development expenses were $2,580,000 in the third quarter of 2005, which was approximately the same as the $2,610,000 in the third quarter of 2004. Research and development expenses increased by $275,000, or 3%, from $7,956,000 for the nine months ended September 30, 2004 to $8,231,000 for the nine months ended September 30, 2005. The increase for the nine months ended September 30, 2005 primarily reflects higher clinical trial costs and increased raw material and other costs of manufacturing the clinical drug supply being utilized in our ongoing Phase 2 study of IMOxine for the treatment of renal cell carcinoma and other future trials. The increase in

costs in the nine-month period ending September 30, 2005, as compared to the same period one year earlier, was partially offset by lower preclinical development costs in the first nine months of 2005 and a decrease in the cost resulting from supplying Aegera with drug product for clinical trials during the first quarter of 2004. Our other research and development costs in both periods relate primarily to the cost of advancing our basic IMO research program and developing our IMO technology. These costs include salaries, allocated overhead, general lab supplies and patent preparation costs and related filing fees.

Our lead drug candidate in our IMO program is IMO-2055 (also known as HYB2055). We are developing IMO-2055 for oncology applications under the name IMOxine. In connection with developing IMO-2055, we incurred approximately $0.9 million and $0.6 million in direct external expenses in the three months ended September 30, 2005 and 2004, respectively, and we incurred approximately $2.8 million and $1.9 million in direct external expenses in the nine months ended September 30, 2005 and 2004, respectively. These expenses include payments to independent contractors and vendors for clinical and preclinical studies and drug manufacturing and related costs but exclude internal costs such as payroll and overhead.

In October 2004, we commenced patient recruitment for an open label, multi-center Phase 2 clinical trial of IMOxine as a monotherapy in patients with metastatic or recurrent clear cell renal carcinoma. We originally planned to recruit a minimum of 46 patients who had previously failed one prior therapy, or “second-line” patients, into the first stage of the trial. We also expected to enroll in the trial some treatment-naïve patients, although the original protocol did not specify a target enrollment for treatment-naïve patients. On October 20, 2005, in response to a higher than expected enrollment rate of treatment-naïve patients in the Phase 2 trial, we submitted to the U.S. Food and Drug Administration a protocol amendment that provides for enrollment of up to 46 treatment-naïve patients in the first stage of the trial, in addition to the 46 second-line patients provided for by the original study design. As a result, we plan to continue first stage patient recruitment into the first half of 2006 and we are now seeking to enroll a total of up to 92 patients in the first stage of the trial.

On October 26, 2005, we initiated a new Phase 1/2 clinical trial of IMO-2055 in combination with the chemotherapy agents gemcitabine, marketed by Eli Lilly and Company as Gemzar^®, and carboplatin at the Lombardi Comprehensive Cancer Center at Georgetown University Medical Center. We are seeking to enroll 12 to 18 refractory solid tumor patients in the Phase 1 portion of the trial. If successful, we plan to use Phase 1 data for dose selection for the subsequent Phase 2 portion of the trial in the treatment of naïve non-small cell lung cancer patients.

We are also conducting a Phase 1 clinical trial of IMOxine as a monotherapy in patients with refractory solid tumor cancers, which is being conducted at the Lombardi Comprehensive Cancer Center. Except for one patient who has received IMOxine treatment in the trial for over twenty-one months, treatment under the protocol was completed in September 2004 and results were presented at the American Society of Clinical Oncology annual meeting in May 2005. In the trial, 19 advanced cancer patients received weekly IMOxine treatment for at least 4 weeks. IMOxine dosage was escalated to 0.64 mg/kg/week and was well tolerated at all dose levels. IMOxine treatment was associated with evidence of immunological activity by several parameters.

Because these projects are in the early stage of development and given the technological and regulatory hurdles likely to be encountered in the development and commercialization of our products, the future timing and costs of our various research and development programs are uncertain.

General and Administrative Expenses

General and administrative expenses decreased by $758,000, or 49%, from $1,551,000 in the three months ended September 30, 2004 to $793,000 in the three months ended September 30, 2005 and decreased by $887,000, or 26%, from $3,472,000 in the nine months ended September 30, 2004 to $2,585,000 in the nine months ended September 30, 2005. The decrease for the three- and nine-month periods, as compared to the same periods one year earlier, primarily reflects the charge of $720,000 we incurred relating to the resignation of our former Chief Executive Officer in August 2004, representing the amount to be paid to our former Chief Executive Officer through September 1, 2006 under his employment agreement.

Stock-Based Compensation

As a result of repricing of our stock options in September 1999, some of our outstanding stock options are subject to variable plan accounting which requires us to measure the intrinsic value of the repriced options through the earlier of the date of exercise, cancellation or expiration at each reporting date. Operating results include charges of $121,000 for the third quarter of 2005 and $149,000 for the first nine months of 2005 as a result of increases in the instrinsic value of the repriced options during these periods. Operating results include credits of $19,000 for the third quarter of 2004 and $592,000 for the first nine months of 2004 as a result of decreases in the intrinsic value of the repriced options during those periods. Compensation charges and credits will likely occur in the future based upon changes in the market value of our common stock.

Investment Income, net

Investment income increased by approximately $50,000, or 88%, from $57,000 in the three months ended September 30, 2004 to $107,000 in the three months ended September 30, 2005 and increased by approximately $113,000, or 78%, from $144,000 in the nine months ended September 30, 2004 to $257,000 in the nine months ended September 30, 2005. The change for the three and nine months ended September 30, 2005 was primarily a result of higher interest rates.

Interest Expense

Interest expense in the three and nine months ended September 30, 2005 consisted of interest on our 4% notes issued in May 2005 and amortization of deferred financing costs associated with these notes. Our interest expense for the nine months ended September 30, 2004 consisted of interest on our 9% notes. On April 1, 2004, upon the maturity of our 9% notes, we paid $1,306,000 representing the outstanding principal amount of our 9% notes, plus accrued interest. As a result, we had no interest expense for the three months ended September 30, 2004.

Preferred Stock Dividends

Dividends on the remaining 655 shares of Series A preferred stock outstanding are accreted at an annual rate of 1%. Accretion of preferred stock dividends decreased by approximately $2,676,000, or 100%, from $2,676,000 for the nine months ended September 30, 2004 to nearly zero for the nine months ended September 30, 2005. The decrease for the nine-month period was primarily attributable to the conversions of Series A convertible preferred stock into common stock in the fourth quarter of 2003 and the first quarter of 2004. The conversion took place in accordance with an amendment to our Restated Certificate of Incorporation approved by our stockholders on December 4, 2003 that increased the number of shares of our common stock issuable upon conversion of our series A convertible preferred stock by 25% over the number of shares that would otherwise have been issuable upon conversion during a 60-day conversion period. The value of the additional shares issued during the 60-day conversion period was recorded as an addition to dividends in the statement of operations at the time of conversion. The value of the additional dividend amounted to $3,245,000 during the first nine months of 2004 and was partially offset by a reversal of $570,000 of dividends accreted during the year ended December 31, 2003 with respect to these shares that was reversed during the nine month period ended September 30, 2004 because the former holders of these shares of Series A convertible preferred stock were no longer entitled to such dividends once their shares of series A convertible preferred stock were converted into common stock.

Net Loss Applicable to Common Stockholders

As a result of the factors discussed above, our net loss applicable to common stockholders amounted to approximately $2,950,000 and $4,007,000 for the three months ended September 30, 2005 and 2004, respectively and to approximately $9,826,000 and $12,587,000 for the nine months ended September 30, 2005 and 2004, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

We require cash to fund our operating expenses, to make capital expenditures and to pay debt service. We have funded our cash requirements primarily through equity and debt financing, license fees and research funding under collaborative and license agreements.

Cash Flows

As of September 30, 2005, we had approximately $12,145,000 in cash, cash equivalents and short-term investments, a decrease of approximately $2,268,000 from December 31, 2004.

We used $6,783,000 of cash for operating activities during the nine months ended September 30, 2005, principally to fund our research and development expenses and our general and administrative expenses. The $6,783,000 primarily consists of our net loss of $9,825,000 for the period, less the $3,256,000 increase in our deferred revenue reflecting, primarily, the unamortized portion of the upfront license fee received pursuant to our collaboration agreement with Novartis.

Net cash provided by investing activities reflects the proceeds of $7,600,000 and $5,000,000 that we received from the sale and maturity, respectively, of “available-for-sale” securities offset by the purchase of $9,909,000 in “available-for-sale” securities and $207,000 in equipment purchases during the nine months ended September 30, 2005.

Net cash provided by financing activities primarily reflects the $5,033,000 we received from the issuance of our 4% notes offset by the expenses associated with their issuance in the nine months ended September 30, 2005.

Funding Requirements

Based on our current operating plan, we believe that our existing cash, cash equivalents and short-term investments will be sufficient to fund operations through mid 2006. Our actual cash requirements will depend on many factors, including particularly the scope and pace of our research and development efforts and our success in entering into strategic alliances.

In May 2005, we issued $5,033,000 in principal amount of 4% convertible subordinated notes due April 30, 2008. Interest on the 4% convertible subordinated notes is payable in arrears on December 15, 2005 for the period from issuance to that date, and thereafter semi-annually on April 30 and October 30 and at maturity or conversion. We have the option to pay interest on the 4% convertible subordinated notes in cash or in shares of common stock at the then current market value of the common stock.

We do not expect to generate significant additional funds internally until we successfully complete development and obtain marketing approval for products, either alone or in collaboration with third parties, which we expect will take a number of years. In addition, we have no committed external sources of funds. As a result, in order for us to continue to pursue our clinical and preclinical development programs and continue operations beyond mid 2006, we will need to raise additional funds from debt or equity financings or from collaborative arrangements with biotechnology or pharmaceutical companies. There can be no assurance that the requisite funds will be available in the necessary time frame or on terms acceptable to us. Should we be unable to raise sufficient funds, we may be required to significantly curtail our operating plans and possibly relinquish rights to portions of our technology or products. In addition, increases in expenses or delays in clinical development may adversely impact our cash position and require further cost reductions. No assurance can be given that we will be able to operate profitably on a consistent basis, or at all, in the future. We believe that the key factors that will affect our internal and external sources of cash are:

	•		the success of our clinical and preclinical development programs;

	•		the receptivity of the capital markets to financings by biotechnology companies; and

	•		our ability to enter into strategic collaborations with biotechnology and pharmaceutical companies and the success of such collaborations.

Contractual Obligations

We have contractual obligations in the form of employment agreements, operating leases and consulting and collaboration agreements. Our contractual obligations as of December 31, 2004 were set forth under the caption “Contractual Obligations” in our Annual Report on Form 10-K for the year ended December 31, 2004 and have not materially changed from such date except as provided below.

In May 2005, we issued approximately $5,033,000 in principal amount of 4% convertible subordinated notes. On April 30, 2008 the entire principal amount of 4% convertible subordinated notes will become due and payable.

On October 19, 2005, we entered into an amended and restated employment agreement with Sudhir Agrawal, D. Phil., our Chief Executive Officer and Chief Scientific Officer. This agreement is filed as Exhibit 10.1 to this quarterly report.

FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included or incorporated in this report regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words “believes,” “anticipates,” “estimates,” “plans,” “expects,” “intends,” “may,” “projects,” “will,” and “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. There are a number of important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking statements. These important factors include those set forth below under “Risk Factors.” These factors and the other cautionary statements made in this quarterly report should be read as being applicable to all related forward-looking statements whenever they appear in this quarterly report. In addition, any forward-looking statements represent our estimates only as of the date that this quarterly report is filed with the SEC and should not be relied upon as representing our estimates as of any subsequent date.

We do not assume any obligation to update any forward-looking statements. We disclaim any intention or obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

RISK FACTORS

Investing in our common stock involves a high degree of risk, and you should carefully consider the risks and uncertainties described below in addition to the other information included or incorporated by reference in this quarterly report. If any of the following risks actually occurs, our business, financial condition or results of operations would likely suffer, possibly materially. In that case, the trading price of our common stock could fall.

Risks Relating to Our Financial Results and Need for Financing

We have incurred substantial losses and expect to continue to incur losses. We will not be successful unless we reverse this trend.

We have incurred losses in every year since our inception, except for 2002 when our recognition of revenues under a license and collaboration agreement resulted in us reporting net income for that year. As of September 30, 2005, we had incurred operating losses of approximately $309.1 million. We expect to continue to incur substantial operating losses in future periods. These losses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity, total assets and working capital.

We have received no revenues from the sale of drugs. To date, almost all of our revenues have been from collaborative and license agreements. We have devoted substantially all of our efforts to research and development, including clinical trials, and we have not completed development of any drugs. Because of the numerous risks and uncertainties associated with developing drugs, we are unable to predict the extent of any future losses, whether or when any of our products will become commercially available, or when we will become profitable, if at all.

We will need additional financing, which may be difficult to obtain. Our failure to obtain necessary financing or doing so on unattractive terms could adversely affect our discovery and development programs and other operations.

We will require substantial funds to conduct research and development, including preclinical testing and clinical trials of our drugs. We will also require substantial funds to conduct regulatory activities and to establish commercial manufacturing, marketing and sales capabilities. We believe that, based on our current operating plan, our existing cash, cash equivalents and short-term investments will be sufficient to fund our operations through mid 2006. However, we could reduce planned activities if we need to conserve such funds.

We will need to raise additional funds to operate our business beyond such time. We believe that the key factors that will affect our ability to obtain additional funding are:

	•		the success of our clinical and preclinical development programs;

	•		the receptivity of the capital markets to financings by biotechnology companies; and

	•		our ability to enter into strategic collaborations with biotechnology and pharmaceutical companies and the success of such collaborations.

Additional financing may not be available to us when we need it or may not be available to us on favorable terms. We could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our technologies, drug candidates or drugs which we would otherwise pursue on our own. In addition, if we raise additional funds by issuing equity securities, our then existing stockholders will experience dilution. The terms of any financing may adversely affect the holdings or the rights of existing stockholders. If we are unable to obtain adequate funding on a timely basis or at all, we may be required to significantly curtail one or more of our discovery or development programs. For example, we significantly curtailed expenditures on our research and development programs during 1999 and 2000 because we did not have sufficient funds available to advance these programs at planned levels.

Risks Relating to Our Business, Strategy and Industry

We are depending heavily on the success of our lead drug candidate, IMOxine, which is in clinical development. If we are unable to commercialize this product, or experience significant delays in doing so, our business will be materially harmed.

We are investing a significant portion of our time and financial resources in the development of our lead drug candidate, IMOxine. We anticipate that our ability to generate product revenues will depend heavily on the successful development and commercialization of this product. The commercial success of this product will depend on several factors, including the following:

•

successful completion of clinical trials;

	•		receipt of marketing approvals from the FDA and equivalent foreign regulatory authorities;

	•		establishing commercial manufacturing arrangements with third party manufacturers;

	•		launching commercial sales of the product, whether alone or in collaboration with others; and

	•		acceptance of the product in the medical community and with third party payors.

Our efforts to commercialize this product are at an early stage, as we are currently conducting a Phase 2 clinical trial in patients with metastatic or recurrent clear cell renal carcinoma. If we are not successful in commercializing this product, or are significantly delayed in doing so, our business will be materially harmed.

If our clinical trials are unsuccessful, or if they are significantly delayed, we may not be able to develop and commercialize our products.

We may not be able to successfully complete any clinical trial of a potential product within any specified time period. In some cases, we may not be able to complete the trial at all. Moreover, clinical trials may not show our potential products to be both safe and efficacious. Thus, the FDA and other regulatory authorities may not approve any of our potential products for any indication.

In order to obtain regulatory approvals for the commercial sale of our products, we will be required to complete extensive clinical trials in humans to demonstrate the safety and efficacy of our drug candidates. We may not be able to obtain authority from the FDA or other equivalent foreign regulatory agencies to complete these trials or commence and complete any other clinical trials.

The results from preclinical testing of a drug candidate that is under development may not be predictive of results that will be obtained in human clinical trials. In addition, the results of early human clinical trials may not be predictive of results that will be obtained in larger scale, advanced stage clinical trials. A failure of one or more of our clinical trials can occur at any stage of testing. Further, there is to date little data on the long-term clinical safety of our lead compounds under conditions of prolonged use in humans, nor on any long-term consequences subsequent to human use. We may experience numerous unforeseen events during, or as a result of, preclinical testing and the clinical trial process that could delay or inhibit our ability to receive regulatory approval or commercialize our products, including:

	•		regulators or institutional review boards may not authorize us to commence a clinical trial or conduct a clinical trial at a prospective trial site;

	•		our preclinical tests or clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional preclinical testing or clinical trials or we may abandon projects that we expect may not be promising;

	•		we might have to suspend or terminate our clinical trials if the participating patients are being exposed to unacceptable health risks;

	•		regulators or institutional review boards may require that we hold, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;

	•		the cost of our clinical trials may be greater than we currently anticipate; and

	•		the effects of our products may not be the desired effects or may include undesirable side effects or the products may have other unexpected characteristics.

As an example, in 1997, after reviewing the results from the clinical trial of GEM91, a 1st generation antisense compound and our lead drug candidate at the time, we determined not to continue the development of GEM91 and suspended clinical trials of this product candidate.

The rate of completion of clinical trials is dependent in part upon the rate of enrollment of patients. The statistical design of our ongoing Phase 2 clinical trial of IMO-2055 in renal cell carcinoma was originally based on patients who had already failed one course of therapy (“second-line patients”). As of October 14, 2005, our enrollment of second-line patients has been slower than anticipated, whereas the enrollment of treatment-naïve patients has been higher than expected. As a result, the trial protocol was subsequently amended to accommodate statistical endpoints for both treatment-naïve and second-line patients, thus extending the completion of the trial beyond the time we expected. Patient accrual is a function of many factors, including:

	•		the size of the patient population,

	•		the proximity of patients to clinical sites,

	•		the eligibility criteria for the study,

	•		the nature of the study,

	•		the existence of competitive clinical trials and

	•		the availability of alternative treatments.

Our product development costs will increase if we experience delays in our clinical trials. We do not know whether planned clinical trials will begin as planned, will need to be restructured or will be completed on schedule, if at all. Significant clinical trial delays also could allow our competitors to bring products to market before we do and impair our ability to commercialize our products.

We face substantial competition which may result in others discovering, developing or commercializing drugs before or more successfully than us.

The biotechnology industry is highly competitive and characterized by rapid and significant technological change. We face, and will continue to face, intense competition from organizations such as pharmaceutical and biotechnology companies, as well as academic and research institutions and government agencies. Some of these organizations are pursuing products based on technologies similar to our technologies. Other of these organizations have developed and are marketing products, or are pursuing other technological approaches designed to produce products, that are competitive with our product candidates in the therapeutic effect these competitive products have on diseases targeted by our product candidates. Our competitors may discover, develop or commercialize products or other novel technologies that are more effective, safer or less costly than any that we are developing. Our competitors may also obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours.

Many of our competitors are substantially larger than we are and have greater capital resources, research and development staffs and facilities than we have. In addition, many of our competitors are more experienced than we are in drug discovery, development and commercialization, obtaining regulatory approvals and drug manufacturing and marketing.

We anticipate that the competition with our products and technologies will be based on a number of factors including product efficacy, safety, availability and price. The timing of market introduction of our products and competitive products will also affect competition among products. We expect the relative speed with which we can develop products, complete the clinical trials and approval processes and supply commercial quantities of the products to the market to be important competitive factors. Our competitive position will also depend upon our ability to attract and retain qualified personnel, to obtain patent protection or otherwise develop proprietary products

or processes and to secure sufficient capital resources for the period between technological conception and commercial sales.

Because the products that we may develop will be based on new technologies and therapeutic approaches, the market may not be receptive to these products upon their introduction.

The commercial success of any of our products for which we may obtain marketing approval from the FDA or other regulatory authorities will depend upon their acceptance by the medical community and third party payors as clinically useful, cost-effective and safe. Many of the products that we are developing are based upon technologies or therapeutic approaches that are relatively new and unproven. The FDA has only granted marketing approval for one product based on antisense technology which is currently being marketed by another company for the treatment of cytomegalovirus retinitis, an infectious disease, in patients with AIDs. The FDA has not granted marketing approval to any products based on IMO technology and no such products are currently being marketed. As a result, it may be more difficult for us to achieve regulatory approval or market acceptance of our products. Our efforts to educate the medical community on these potentially unique approaches may require greater resources than would be typically required for products based on conventional technologies or therapeutic approaches. The safety, efficacy, convenience and cost-effectiveness of our products as compared to competitive products will also affect market acceptance.

Competition for technical and management personnel is intense in our industry, and we may not be able to sustain our operations or grow if we are unable to attract and retain key personnel.

Our success is highly dependent on the retention of principal members of our technical and management staff, including Sudhir Agrawal. Dr. Agrawal serves as our Chief Scientific Officer and Chief Executive Officer. Dr. Agrawal has extensive experience in the pharmaceutical industry, has made significant contributions to the field of nucleic acid chemistry and is named as an inventor on over 200 patents and patent applications worldwide. Dr. Agrawal provides the scientific leadership for our research and development activities and directly supervises our research staff. The loss of Dr. Agrawal’s services would be detrimental to our ongoing scientific progress and the execution of our business plan.

We are a party to an employment agreement with Dr. Agrawal for a term ending on October 19, 2008, subject to annual renewals. This agreement may be terminated by us or Dr. Agrawal for any reason or no reason at any time upon notice to the other party. We do not carry key man life insurance for Dr. Agrawal.

Furthermore, our future growth will require hiring a significant number of qualified technical and management personnel. Accordingly, recruiting and retaining such personnel in the future will be critical to our success. There is intense competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. If we are not able to continue to attract and retain, on acceptable terms, the qualified personnel necessary for the continued development of our business, we may not be able to sustain our operations or grow.

Regulatory Risks

We may not be able to obtain marketing approval for products resulting from our development efforts.

All of the products that we are developing or may develop in the future will require additional research and development, extensive preclinical studies and clinical trials and regulatory approval prior to any commercial sales. This process is lengthy, often taking a number of years, is uncertain and is expensive. Since our inception, we have conducted clinical trials of a number of compounds. In 1997, we determined not to continue clinical development of GEM91, our lead product candidate at the time. Currently, we are conducting clinical trials of IMOxine, our lead IMO drug candidate.

We may need to address a number of technological challenges in order to complete development of our products. Moreover, these products may not be effective in treating any disease or may prove to have undesirable or

unintended side effects, unintended alteration of the immune system over time, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use.

We are subject to comprehensive regulatory requirements, which are costly and time consuming to comply with; if we fail to comply with these requirements, we could be subject to adverse consequences and penalties.

The testing, manufacturing, labeling, advertising, promotion, export and marketing of our products are subject to extensive regulation by governmental authorities in Europe, the United States and elsewhere throughout the world.

In general, submission of materials requesting permission to conduct clinical trials may not result in authorization by the FDA or any equivalent foreign regulatory agency to commence clinical trials. In addition, submission of an application for marketing approval to the relevant regulatory agency following completion of clinical trials may not result in the regulatory agency approving the application if applicable regulatory criteria are not satisfied, and may result in the regulatory agency requiring additional testing or information.

Any regulatory approval of a product may contain limitations on the indicated uses for which the product may be marketed or requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Any product for which we obtain marketing approval, along with the facilities at which the product is manufactured, any post-approval clinical data and any advertising and promotional activities for the product will be subject to continual review and periodic inspections by the FDA and other regulatory agencies.

Both before and after approval is obtained, violations of regulatory requirements may result in:

	•		the regulatory agency’s delay in approving, or refusal to approve, an application for approval of a product;

	•		restrictions on such products or the manufacturing of such products;

	•		withdrawal of the products from the market;

	•		warning letters;

	•		voluntary or mandatory recall;

	•		fines;

	•		suspension or withdrawal of regulatory approvals;

	•		product seizure;

	•		refusal to permit the import or export of our products;

	•		injunctions or the imposition of civil penalties; and

	•		criminal penalties.

We have only limited experience in regulatory affairs and our products are based on new technologies; these factors may affect our ability or the time we require to obtain necessary regulatory approvals.

We have only limited experience in filing the applications necessary to gain regulatory approvals. Moreover, the products that result from our research and development programs will likely be based on new technologies and new therapeutic approaches that have not been extensively tested in humans. The regulatory requirements governing these types of products may be more rigorous than for conventional drugs. As a result, we may experience a longer regulatory process in connection with obtaining regulatory approvals of any product that we develop.

Risks Relating to Collaborators

We need to establish collaborative relationships in order to succeed.

An important element of our business strategy includes entering into collaborative relationships for the development and commercialization of products based on our discoveries. We face significant competition in seeking appropriate collaborators. Moreover, these arrangements are complex to negotiate and time-consuming to document. We may not be successful in our efforts to establish collaborative relationships or other alternative arrangements.

The success of collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Our collaborators will have significant discretion in determining the efforts and resources that they will apply to these collaborations. The risks that we face in connection with these collaborations include the following:

	•		disputes may arise in the future with respect to the ownership of rights to technology developed with collaborators;

	•		disagreements with collaborators could delay or terminate the research, development or commercialization of products, or result in litigation or arbitration;

	•		we may have difficulty enforcing the contracts if one of our collaborators fails to perform;

	•		our collaborators may terminate their collaborations with us, which could make it difficult for us to attract new collaborators or adversely affect the perception of us in the business or financial communities;

	•		collaborators have considerable discretion in electing whether to pursue the development of any additional drugs and may pursue technologies or products either on their own or in collaboration with our competitors that are similar to or competitive with our technologies or products that are the subject of the collaboration with us; and

	•		our collaborators may change the focus of their development and commercialization efforts. Pharmaceutical and biotechnology companies historically have re-evaluated their priorities following mergers and consolidations, which have been common in recent years in these industries. The ability of our products to reach their potential could be limited if our collaborators decrease or fail to increase spending relating to such products.

Given these risks, it is possible that any collaborative arrangements into which we enter may not be successful. In May 2005, we entered into collaborative arrangements with Novartis involving our IMO technology. Previous collaborative arrangements to which we were a party with F. Hoffmann-La Roche and G.D. Searle & Co, involving our antisense technology, both were terminated prior to the development of any product. The failure of any of our collaborative relationships could delay our drug development or impair commercialization of our products.

Risks Relating to Intellectual Property

If we are unable to obtain patent protection for our discoveries, the value of our technology and products will be adversely affected.

Our patent positions, and those of other drug discovery companies, are generally uncertain and involve complex legal, scientific and factual questions.

Our ability to develop and commercialize drugs depends in significant part on our ability to:

•

obtain patents;

	•		obtain licenses to the proprietary rights of others on commercially reasonable terms;

	•		operate without infringing upon the proprietary rights of others;

	•		prevent others from infringing on our proprietary rights; and

	•		protect trade secrets.

We do not know whether any of our patent applications or those patent applications which we license will result in the issuance of any patents. Our issued patents and those that may issue in the future, or those licensed to us, may be challenged, invalidated or circumvented, and the rights granted thereunder may not provide us proprietary protection or competitive advantages against competitors with similar technology. Furthermore, our competitors may independently develop similar technologies or duplicate any technology developed by us. Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of our products can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thus reducing any advantage of the patent.

Because patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publications of discoveries in the scientific literature often lag behind actual discoveries, neither we nor our licensors can be certain that we or they were the first to make the inventions claimed in issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in these patent applications.

Third parties may own or control patents or patent applications and require us to seek licenses, which could increase our development and commercialization costs, or prevent us from developing or marketing products.

We may not have rights under some patents or patent applications related to our products. Third parties may own or control these patents and patent applications in the United States and abroad. Therefore, in some cases, to develop, manufacture, sell or import some of our products, we or our collaborators may choose to seek, or be required to seek, licenses under third party patents issued in the United States and abroad or under patents that might issue from United States and foreign patent applications. In such an event, we would be required to pay license fees or royalties or both to the licensor. If licenses are not available to us on acceptable terms, we or our collaborators may not be able to develop, manufacture, sell or import these products.

We may lose our rights to patents, patent applications or technologies of third parties if our licenses from these third parties are terminated. In such an event, we might not be able to develop or commercialize products covered by the licenses.

We are party to ten royalty-bearing license agreements under which we have acquired rights to patents, patent applications and technology of third parties. Under these licenses we are obligated to pay royalties on net sales by us of products or processes covered by a valid claim of a patent or patent application licensed to us. We also are required in some cases to pay a specified percentage of any sublicense income that we may receive. These licenses impose various commercialization, sublicensing, insurance and other obligations on us. Our failure to comply with these requirements could result in termination of the licenses. These licenses generally will otherwise remain in effect until the expiration of all valid claims of the patents covered by such licenses or upon earlier termination by the parties. The issued patents covered by these licenses expire at various dates ranging from 2006 to 2022. If one or more of these licenses is terminated, we may be delayed in our efforts, or be unable, to develop and market the products that are covered by the applicable license or licenses.

We may become involved in expensive patent litigation or other proceedings, which could result in our incurring substantial costs and expenses or substantial liability for damages or require us to stop our development and commercialization efforts.

There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the biotechnology industry. We may become a party to various types of patent litigation or other proceedings regarding intellectual property rights from time to time even under circumstances where we are not practicing and do not intend to practice any of the intellectual property involved in the proceedings. For instance, in 2002 and 2003, we became involved in two interference proceedings declared by the United States Patent and Trademark Office, or USPTO, which have since been resolved. In September 2005, we became aware of a third interference declared by the USPTO related to our Ribozyme technology. We are neither practicing nor intending to practice the intellectual property that is associated with any of these interference proceedings.

The cost to us of any patent litigation or other proceeding, including the interferences referred to above, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the cost of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. If any patent litigation or other proceeding is resolved against us, we or our collaborators may be enjoined from developing, manufacturing, selling or importing our drugs without a license from the other party and we may be held liable for significant damages. We may not be able to obtain any required license on commercially acceptable terms or at all.

Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time.

Risks Relating to Product Manufacturing, Marketing and Sales and Reliance on Third Parties

Because we have limited manufacturing experience, we are dependent on third-party manufacturers to manufacture products for us. If we cannot rely on third-party manufacturers, we will be required to incur significant costs and devote significant efforts to establish our own manufacturing facilities and capabilities.

We have limited manufacturing experience and no commercial scale manufacturing capabilities. In order to continue to develop our products, apply for regulatory approvals and ultimately commercialize products, we need to develop, contract for or otherwise arrange for the necessary manufacturing capabilities.

We currently rely upon third parties to produce material for preclinical and clinical testing purposes and expect to continue to do so in the future. We also expect to rely upon third parties to produce materials that may be required for the commercial production of our products.

There are a limited number of manufacturers that operate under the FDA’s current good manufacturing practices regulations capable of manufacturing our products. As a result, we may have difficulty finding manufacturers for our products with adequate capacity for our needs. If we are unable to arrange for third party manufacturing of our products on a timely basis, or to do so on commercially reasonable terms, we may not be able to complete development of our products or market them.

Reliance on third party manufacturers entails risks to which we would not be subject if we manufactured products ourselves, including:

	•		reliance on the third party for regulatory compliance and quality assurance,

	•		the possibility of breach of the manufacturing agreement by the third party because of factors beyond our control,

	•		the possibility of termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or inconvenient for us,

	•		the potential that third party manufacturers will develop know-how owned by such third party in connection with the production of our products that is necessary for the manufacture of our products, and

•

reliance upon third party manufacturers to assist us in preventing inadvertent disclosure or theft of our proprietary knowledge.

We purchased oligonucleotides for preclinical and clinical testing from Avecia Biotechnology at a preferential price under a supply agreement, which expired in March 2004. We have continued to purchase all of the oligonucleotides we are using in our ongoing clinical trials and pre-clinical testing from Avecia. The terms of the agreement have been extended until such time as a new agreement is negotiated. If Avecia determines not to accept any purchase order for oligonucleotides or we are unable to enter into a new manufacturing arrangement with Avecia or a new contract manufacturer on a timely basis or at all, our ability to supply the product needed for our clinical trials could be materially impaired.

We have no experience selling, marketing or distributing products and no internal capability to do so.

If we receive regulatory approval to commence commercial sales of any of our products, we will face competition with respect to commercial sales, marketing and distribution. These are areas in which we have no experience. To market any of our products directly, we would need to develop a marketing and sales force with technical expertise and with supporting distribution capability. In particular, we would need to recruit a large number of experienced marketing and sales personnel. Alternatively, we could engage a pharmaceutical or other healthcare company with an existing distribution system and direct sales force to assist us. However, to the extent we entered into such arrangements, we would be dependent on the efforts of third parties. If we are unable to establish sales and distribution capabilities, whether internally or in reliance on third parties, our business would suffer materially.

If third parties on whom we rely for clinical trials do not perform as contractually required or as we expect, we may not be able to obtain regulatory approval for or commercialize our products and our business may suffer.

We do not have the ability to independently conduct the clinical trials required to obtain regulatory approval for our products. We depend on independent clinical investigators, contract research organizations and other third party service providers in the conduct of the clinical trials of our products and expect to continue to do so. For example, we have contracted with PAREXEL International to manage our Phase 2 clinical trial of IMO-2055 in renal cell carcinoma. We rely heavily on these parties for successful execution of our clinical trials, but do not control many aspects of their activities. We are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as good clinical practices, for conducting, recording and reporting clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Third parties may not complete activities on schedule or may not conduct our clinical trials in accordance with regulatory requirements or our stated protocols. The failure of these third parties to carry out their obligations could delay or prevent the development, approval and commercialization of our products. If we seek to conduct any of these activities ourselves in the future, we will need to recruit appropriately trained personnel and add to our infrastructure.

If we are unable to obtain adequate reimbursement from third party payors for any products that we may develop or acceptable prices for those products, our revenues and prospects for profitability will suffer.

Most patients will rely on Medicare and Medicaid, private health insurers and other third party payors to pay for their medical needs, including any drugs we may market. If third party payors do not provide adequate coverage or reimbursement for any products that we may develop, our revenues and prospects for profitability will suffer. Congress recently enacted a limited prescription drug benefit for Medicare recipients in the Medicare Prescription Drug and Modernization Act of 2003. While the program established by this statute may increase demand for our products, if we participate in this program, our prices will be negotiated with drug procurement organizations for Medicare beneficiaries and are likely to be lower than we might otherwise obtain. Non-Medicare third party drug procurement organizations may also base the price they are willing to pay on the rate paid by drug procurement organizations for Medicare beneficiaries.

A primary trend in the United States healthcare industry is toward cost containment. In addition, in some foreign countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take six to 12 months or longer after the receipt of regulatory marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost effectiveness of our product candidates or products to other available therapies. The conduct of such a clinical trial could be expensive and result in delays in commercialization of our products.

Third party payors are challenging the prices charged for medical products and services, and many third party payors limit reimbursement for newly-approved healthcare products. In particular, third party payors may limit the indications for which they will reimburse patients who use any products that we may develop. Cost control initiatives could decrease the price we might establish for products that we may develop, which would result in lower product revenues to us.

We face a risk of product liability claims and may not be able to obtain insurance.

Our business exposes us to the risk of product liability claims that is inherent in the manufacturing, testing and marketing of human therapeutic drugs. Although we have product liability and clinical trial liability insurance that we believe is adequate, this insurance is subject to deductibles and coverage limitations. We may not be able to obtain or maintain adequate protection against potential liabilities. If we are unable to obtain insurance at acceptable cost or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may materially and adversely affect our business and financial position. These liabilities could prevent or interfere with our commercialization efforts.

Risks Relating to an Investment in Our Common Stock

Our corporate governance structure, including provisions in our certificate of incorporation and by-laws, our stockholder rights plan and Delaware law, may prevent a change in control or management that stockholders may consider desirable.

Section 203 of the Delaware General Corporation Law and our certificate of incorporation, by-laws and stockholder rights plan contain provisions that might enable our management to resist a takeover of our company or discourage a third party from attempting to take over our company. These provisions include:

	•		a classified board of directors,

	•		limitations on the removal of directors,

	•		limitations on stockholder proposals at meetings of stockholders,

	•		the inability of stockholders to act by written consent or to call special meetings, and

	•		the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval.

These provisions could have the effect of delaying, deferring, or preventing a change in control of us or a change in our management that stockholders may consider favorable or beneficial. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock.

Our stock price has been and may in the future be extremely volatile. In addition, because an active trading market for our common stock has not developed, our investors’ ability to trade our common stock may be limited. As a result, investors may lose all or a significant portion of their investment.

Our stock price has been volatile. During the period from January 1, 2003 to September 30, 2005, the closing sales price of our common stock ranged from a high of $1.69 per share to a low of $0.41 per share. The stock market has also experienced significant price and volume fluctuations, and the market prices of biotechnology companies in particular have been highly volatile, often for reasons that have been unrelated to the operating performance of particular companies. The market price for our common stock may be influenced by many factors, including:

	•		results of clinical trials of our product candidates or those of our competitors;

	•		the regulatory status of our product candidates;

	•		failure of any of our product candidates, if approved, to achieve commercial success;

	•		the success of competitive products or technologies;

	•		regulatory developments in the United States and foreign countries;

	•		developments or disputes concerning patents or other proprietary rights;

	•		the departure of key personnel;

	•		variations in our financial results or those of companies that are perceived to be similar to us;

	•		our cash resources;

	•		the terms of any financing conducted by us;

	•		changes in the structure of healthcare payment systems;

	•		market conditions in the pharmaceutical and biotechnology sectors and issuance of new or changed securities analysts’ reports or recommendations; and

	•		general economic, industry and market conditions.

In addition, our common stock has historically been traded at low volume levels and may continue to trade at low volume levels. As a result, any large purchase or sale of our common stock could have a significant impact on the price of our common stock and it may be difficult for investors to sell our common stock in the market without depressing the market price for the common stock or at all.

As a result of the foregoing, investors may not be able to resell their shares at or above the price they paid for such shares. Investors in our common stock must be willing to bear the risk of fluctuations in the price of our common stock and the risk that the value of their investment in our stock could decline.

We may be unable to repay our 4% convertible subordinated notes when due or to repurchase the convertible subordinated notes if we are required to do so under the terms of our agreement with the holders of the 4% convertible subordinated notes.

In May 2005, we sold approximately $5.0 million in principal amount of 4% convertible subordinated notes. On April 30, 2008, the entire outstanding principal amount of our 4% convertible subordinated notes will become due and payable, unless the notes are converted to common stock prior to expiration. In addition, we may be required to redeem all or part of the convertible subordinated notes prior to the final maturity date if specified events occur. We

may not have sufficient funds or may be unable to arrange for additional financing to pay the amount due under the convertible subordinated notes at maturity or to pay the price to repurchase the convertible subordinated notes. Any future borrowing arrangements or debt agreements to which we may become a party may restrict or prohibit us from repaying or repurchasing the convertible subordinated notes. If we are prohibited from repaying or repurchasing the convertible subordinated notes, we could try to obtain the consent of lenders under those arrangements, or we could attempt to refinance the indebtedness that contains the restrictions. If we could not obtain the necessary consents or refinance the indebtedness, we would be unable to repay or repurchase the convertible subordinated notes. Any such failure would constitute an event of default under the agreement with the holders of the 4% convertible subordinated notes, which could, in turn, constitute a default under the terms of any future indebtedness.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Historically, our primary exposures have been related to nondollar-denominated operating expenses in Europe. As of September 30, 2005, we have no assets and liabilities related to nondollar-denominated currencies.

We maintain investments in accordance with our investment policy. The primary objectives of our investment activities are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. Although our investments are subject to credit risk, our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure from any single issue, issuer or type of investments. We do not own derivative financial investment instruments in our investment portfolio.

Based on a hypothetical ten percent adverse movement in interest rates, the potential losses in future earnings, fair value of risk sensitive financial instruments, and cash flows are immaterial, although the actual effects may differ materially from the hypothetical analysis.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2005. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2005, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

(b) Changes in Internal Controls. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during the fiscal quarter ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

IDERA PHARMACEUTICALS, INC.

PART II
OTHER INFORMATION

ITEM 6. EXHIBITS

The list of Exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index immediately preceding such Exhibits, and is incorporated herein by this reference.

SIGNATURES

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


		IDERA PHARMACEUTICALS, INC

Date: November 9, 2005		/s/ Sudhir Agrawal

		Sudhir Agrawal
		Chief Executive Officer and
		Chief Scientific Officer and Director
		(Principal Executive Officer)

Date: November 9, 2005		/s/ Robert G. Andersen

		Robert G. Andersen
		Chief Financial Officer and
		Vice President of Operations
		(Principal Financial and Accounting Officer)

Exhibit Index


Exhibit No.
10.1^†		Employment agreement dated October 19, 2005 between Idera Pharmaceuticals, Inc. and Sudhir Agrawal, D. Phil.

31.1		Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


^†		Management contract or compensatory plan or arrangement required to be filed as an Exhibit to the Quarterly Report on Form 10-Q


                                                                    Exhibit 10.1

                           IDERA PHARMACEUTICALS, INC.

                              EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into by and between
Sudhir Agrawal ("Executive") and Idera Pharmaceuticals, Inc., a Delaware
corporation (the "Company"), and is effective as of the 19th day of October,
2005 (the "Effective Date"). Executive and the Company are referred to herein
individually as a "Party", and collectively as the "Parties".

     WHEREAS, the Company and Executive are a party to an Employment Agreement
dated April 1, 2002 (the "Original Employment Agreement");

     WHEREAS, Executive became the Company's Chief Executive Officer on August
30, 2004;

     WHEREAS, the Company desires to establish its right to the services of
Executive, in his capacity as Chief Executive Officer, on the terms and
conditions hereinafter set forth, and Executive is willing to accept such
employment on such terms and conditions; and

     WHEREAS, the Company and Executive desire to enter into this Agreement, as
an amendment and restatement of the Original Employment Agreement and to
terminate the Original Employment Agreement, effective as of the Effective Date.

     NOW, THEREFORE, in consideration of the mutual agreements hereinafter set
forth, Executive and the Company have agreed and do hereby agree as follows:

     1. Definitions. The capitalized terms in this Agreement shall have the
meanings set forth in this Agreement or Appendix A attached hereto.

     2. Engagement. The Company hereby agrees to employ Executive as its Chief
Executive Officer and Chief Scientific Officer, and Executive hereby accepts
such employment on the terms and conditions hereinafter set forth.

     3. Employment Period. Executive's employment with the Company under this
Agreement shall commence on the Effective Date and shall continue until the
third anniversary of the Effective Date (as such period may be extended as set
forth below, the "Employment Period"), unless such employment is sooner
terminated as hereinafter provided. The Employment Period shall automatically be
extended for an additional year on each anniversary of the Effective Date;
provided however, that the



Employment Period shall not be extended if prior to any such anniversary of the
Effective Date either Party provides written notice to the other Party that the
then-current Employment Period shall not be extended.

     4. Duties and Responsibilities.

          (a) Responsibilities. During the Employment Period, Executive shall
perform his duties and responsibilities fully and faithfully as Chief Executive
Officer and Chief Scientific Officer, subject to the direction and supervision
of the Board of Directors of the Company (the "Board") and the terms and
conditions of this Agreement. During such period, Executive shall report solely
to the Board. Executive shall have the duties and responsibilities customarily
assigned to the Chief Executive Officer and Chief Scientific Officer with such
other duties not inconsistent therewith as may from time to time be assigned to
Executive by the Board. Executive agrees he shall devote substantially his full
business time and attention to, and exert his best efforts in, the performance
of his duties hereunder, so as to promote the business and best interests of the
Company and to comply with the Company's policies as in effect from time to
time. Notwithstanding the foregoing, Executive may engage in ordinary and
customary interactions with the scientific and academic communities, including
writing and reviewing articles and grants, editing books and attending
conferences.

          (b) Location. Executive's principal place of business shall be in
Cambridge, Massachusetts, within 30 miles of Cambridge, Massachusetts or within
10 miles east of Worcester, Massachusetts (the "Permitted Area").
Notwithstanding the foregoing, Executive shall perform services for the Company
at such other locations where Executive's services might be required to be
performed from time to time, provided that Executive shall not be required to
perform services at a location other than in the Permitted Area for a period in
excess of 30 consecutive days without Executive's prior written consent, except
in the event of a change in location of the headquarters of the Company to a
site within the continental United States following a Change of Control.

     5. Compensation. For all services rendered by Executive pursuant to this
Agreement, the Company shall pay Executive, and Executive agrees to accept, the
salary, bonuses and other benefits described below in this Section 5.

          (a) Base Salary. During the Employment Period, the Company shall pay
Executive an annual base salary of $ 425,000.00 ("Base Salary") and such Base
Salary shall be payable at periodic intervals in accordance with the Company's
payroll practices for salaried employees. In accordance with Section 5(c) below,
the amount of Base Salary shall be reviewed and approved, if applicable, by the
Board or the Compensation


                                       -2-



Committee of the Board (the "Compensation Committee"; it being agreed that, for
purposes of this Agreement, any action that may be taken by the Board under this
Agreement may be taken by the Compensation Committee instead of the Board,
whether or not expressly provided in this Agreement) on at least an annual
basis, and any increases in the amount of Base Salary shall be effective as of
the date determined by the Board or the Compensation Committee. Executive's Base
Salary may be increased for any reason, including to reflect inflation or such
other adjustments as the Board or the Compensation Committee may deem
appropriate; provided, however, that Executive's Base Salary, as in effect on
the date hereof or as increased in accordance with the terms of this Agreement,
may not be subsequently decreased, except with the prior written consent of
Executive.

          (b) Bonus. In addition to Base Salary, Executive shall be eligible to
receive, for each fiscal year of the Company ending with or within the
Employment Period, an annual bonus ("Bonus") equal to between 20% and 70% of
Executive's Base Salary on the last day of such fiscal year, whether pursuant to
a formal bonus or incentive plan or program of the Company or otherwise. Subject
to this Section 5(b) and Section 5(c) below, such Bonus shall be based on
criteria, and subject to the achievement of milestones, determined by the Board
or the Compensation Committee, in its discretion. Any Bonus earned by Executive
for service or performance rendered in any fiscal year within the Employment
Period shall be paid to Executive in accordance with the applicable plan or
program, if any, and the Company's policies governing such matters.

          (c) Annual Compensation Review. Executive's compensation, consisting
of salary, equity incentive awards and bonuses, shall be reviewed annually by
the Board or the Compensation Committee.

          (d) Medical, Dental and Other Healthcare Benefits. During the
Employment Period, Executive shall be eligible to participate in and receive
benefits under the Company's medical, dental or other healthcare plans, as in
effect from time to time, that are available to officers and employees of the
Company.

          (e) Retirement Plan Benefits. Executive shall be entitled to
participate in the Company's tax-qualified and nonqualified retirement plans, as
in effect from time to time, that are available to officers and employees of the
Company and shall be entitled to receive the benefit of contributions to be
made, if any, by the Company for the benefit of Executive under the terms of the
applicable tax-qualified or nonqualified retirement plan.

          (f) Incentive Plans. During the Employment Period, Executive shall be
eligible to receive all benefits, including those under stock option, equity
participation or bonus programs, to which key employees are or


                                       -3-



become eligible under such plans or programs as may be established by the
Company from time to time.

          (g) Other Benefits. During the Employment Period, in addition to the
benefit plans contemplated by Sections 5(d), 5(e) and 5(f), Executive shall be
entitled to participate in the other benefit and fringe benefit programs
afforded by the Company to its executives from time to time. Executive shall be
entitled to paid vacation in accordance with the Company's standard vacation
policies in effect from time to time.

          (h) Options. The Company has agreed to grant Executive from and after
the date hereof stock options to purchase shares of common stock as set forth
below if and when the milestones set forth below are achieved, to the extent
such milestones are achieved during the Employment Period. These stock options
shall not be granted until the achievement of the applicable milestones. The
exercise price of stock options granted hereunder shall equal the closing price
of the Company's common stock on the principal trading market on which the
Company's common stock is then traded on the date of the option grant or, if the
common stock is not then traded, the fair market value of one share of common
stock on the date of the option grant as determined in good faith by the Board
in its sole discretion. Options granted hereunder shall vest quarterly over a
three-year period with the first installment vesting upon the end of the first
quarterly period after the date of the option grant. These options shall be
evidenced by an option agreement that is consistent with the form of option
agreement generally used by the Company at the time of the grant and the terms
of this Agreement. The achievement of the milestones shall be determined by the
Board of Directors of the Company in its sole discretion.

               (i) The Company shall grant stock options to purchase 200,000
shares of common stock upon full enrollment on or prior to December 31, 2005 of
the Company's ongoing phase 2 clinical trial of IMOxine in patients with
metastatic or recurrent clear cell renal carcinoma.

               (ii) The Company shall grant stock options to purchase 200,000
shares of common stock upon the Company having cash and cash equivalents on or
prior to May 1, 2006 in excess of $30.0 million.

               (iii) The Company shall grant stock options to purchase 200,000
shares of common stock upon the Company executing on or prior to a date to be
determined by the Board of Directors in its sole discretion a collaboration
agreement that includes specified minimum terms to be determined by the Board of
Directors in its sole discretion.

The number of shares of common stock issuable upon exercise of the options to be
granted hereunder shall be subject to appropriate adjustment for stock


                                       -4-



splits, stock dividends, combinations, recapitalizations and other similar
events affecting the common stock.

     6. Termination of Employment. The remedies described in this Section 6 are
the exclusive remedies of the Executive in connection with the termination of
Executive's employment under this Agreement.

          (a) Death. If Executive's employment hereunder is terminated by reason
of Executive's death, the Company shall pay Executive's designated beneficiary
or beneficiaries any Unpaid Obligations, plus the Termination Bonus Obligations;
provided that such amounts shall be paid in a lump sum cash payment within 30
days after the Company's receipt of notification of Executive's death.
Additionally, any stock options or other equity incentive awards previously
granted to Executive by the Company and held by Executive on the date of his
death shall vest as of such date to the extent such options or equity incentive
awards, as applicable, would have vested had Executive continued to be an
employee of the Company for a period ending on the final day of the Employment
Period in effect immediately prior to Executive's death. Executive's designated
beneficiary or beneficiaries shall be permitted to exercise such stock options
until the second anniversary of Executive's death; provided that such provision
shall not affect and shall be subject to (i) the provisions of the applicable
stock option agreement and/or equity incentive plan relating to the termination
of such stock options in connection with an Acquisition Event, a Change of
Control or a similar transaction involving the Company or (ii) the maximum term
of any such stock option (the "Option Limitation Provisions").

          (b) Disability. The Company may terminate Executive's employment at
any time upon at least 30 days' prior written notice due to the Disability of
Executive. If Executive's employment hereunder is terminated due to Disability,
the Company shall pay Executive any Unpaid Obligations plus the Termination
Bonus Obligations; provided that such amounts shall be paid in a lump sum cash
payment within 30 days after the termination date. Additionally, any stock
options or other equity incentive awards previously granted to Executive by the
Company and held by Executive on the termination date shall vest as of such date
to the extent such options or equity incentive awards, as applicable, would have
vested had Executive continued to be an employee of the Company for a period
ending on the final day of the Employment Period in effect immediately prior to
such termination date. Executive shall be permitted to exercise such stock
options until the second anniversary of the termination date; provided that such
provision shall not affect and shall be subject to the Option Limitation
Provisions.

          (c) Termination by the Company for Cause. The Company may terminate
Executive's employment under this Agreement for Cause at


                                       -5-



any time. If Executive's employment hereunder is terminated by the Company for
Cause, the Company shall pay Executive any Unpaid Obligations, provided that
such amounts shall be paid in a lump sum cash payment within 30 days after such
termination date. All options or other equity incentive awards, whether vested
or unvested on the termination date, shall expire and terminate on that date.

          (d) Termination by the Company Other than for Death, Disability or
Cause. The Company may, at its option and upon 30 days' prior written notice,
terminate Executive's employment under this Agreement without Cause at any time.
If Executive's employment is terminated by the Company other than on account of
Executive's death, Disability, or for Cause, then the Company shall pay
Executive any Unpaid Obligations plus the Termination Bonus Obligations;
provided that such amounts shall be paid in a lump sum cash payment within 30
days after the termination date. In addition, subject to Section 6(h)(i) below,
the Company shall pay Executive (i) on the date six months and one day after the
termination date a lump sum payment in cash equal to six months of Executive's
Base Salary as in effect immediately prior to such termination and (ii) in
accordance with the Company's payroll practices applicable to salaried
executives, Executive's Base Salary as in effect immediately prior to such
termination for a period commencing on the date six months and one day after the
termination date and ending on the earlier of (x) the final day of the
Employment Period in effect immediately prior to such termination and (y) the
second anniversary of the termination date. Additionally, any stock options or
other equity incentive awards previously granted to Executive by the Company and
held by Executive on the termination date shall vest as of such date to the
extent such options or equity incentive awards, as applicable, would have vested
had Executive continued to be an employee of the Company for a period ending on
the final day of the Employment Period in effect immediately prior to such
termination. Executive shall be permitted to exercise such stock options until
the second anniversary of the termination date; provided that such provision
shall not affect and shall be subject to the Option Limitation Provisions.

          (e) Termination by Executive for Good Reason. Executive may, for Good
Reason, terminate this Agreement upon 30 days' prior written notice to the
Company. If Executive's employment is terminated by Executive for Good Reason,
the Company shall pay Executive any Unpaid Obligations plus the Termination
Bonus Obligations; provided that such amounts shall be paid in a lump sum cash
payment within 30 days after the termination date. In addition, subject to
Section 6(h)(i) below, the Company shall pay Executive (i) on the date six
months and one day after the termination date a lump sum payment in cash equal
to six months of Executive's Base Salary as in effect immediately prior to such
termination


                                       -6-



and (ii) in accordance with the Company's payroll practices applicable to
salaried executives, Executive's Base Salary in effect immediately prior to such
termination for a period commencing on the date six months and one day after the
termination date and ending on the earlier of (x) the final day of the
Employment Period in effect immediately prior to such termination and (y) the
second anniversary of the termination date. Additionally, any stock options or
other equity incentive awards previously granted to Executive by the Company and
held by Executive on the termination date shall vest as of such date to the
extent such options or equity incentive awards, as applicable, would have vested
had Executive continued to be an employee of the Company for a period ending on
the final day of the Employment Period in effect immediately prior to such
termination. Executive shall be permitted to exercise such stock options until
the second anniversary of the termination date; provided that such provision
shall not affect and shall be subject to the Option Limitation Provisions.

          (f) Voluntary Termination by Executive. Executive may, without Good
Reason, terminate Executive's employment upon 30 days' prior written notice to
the Company. If Executive's employment is terminated by Executive without Good
Reason, the Company shall pay Executive any Unpaid Obligations, provided that
such amounts shall be paid in a lump sum cash payment within 30 days after such
termination date. All options that remain unvested on such termination date
shall expire and terminate as of that date. Executive shall be permitted to
exercise such stock options until the first anniversary of the termination date;
provided that such provision shall not affect and shall be subject to the Option
Limitation Provisions.

          (g) No Offset. Any compensation derived by Executive from any
subsequent employment or self-employment shall not be offset against or reduce
any amounts to which Executive is entitled under this Agreement.

          (h) Change of Control.

               (i) Continuation of Salary. If Executive's employment with the
Company is terminated by Executive for Good Reason or by the Company other than
for death, Disability or Cause in connection with, or within one year after the
effective date of, a Change of Control, in lieu of the severance payments
provided for in the third sentence of Section 6(d) or the third sentence of
Section 6(e), as applicable, the Company shall pay Executive a lump sum cash
payment in an amount equal to Executive's Base Salary as in effect immediately
prior to the termination date multiplied by the lesser of (x) the aggregate
number of years (or any portion thereof, calculated on a daily basis) remaining
in the Employment Period in effect immediately prior to such termination and (y)
two years. Such amounts shall be paid to Executive within 10 days after the
termination date.


                                       -7-



               (ii) Parachute Payments. If all or any portion of the amounts
payable to Executive under this Agreement or otherwise are subject to the excise
tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended or
a similar state tax or assessment, the Company shall pay to Executive an amount
necessary to place Executive in the same after-tax position as Executive would
have been had no such excise tax or assessment been imposed. The amount payable
pursuant to the preceding sentence shall be increased to the extent necessary to
pay income and excise taxes on such amounts. The determination of any amounts
payable under this Section 6(h)(ii) shall be made by an independent accounting
firm employed by the Company and such determination shall be final, binding and
conclusion on the Parties.

               (iii) Acceleration of Vesting. Any provisions of this Agreement
regarding vesting of stock options notwithstanding, the vesting of all stock
options held by Executive shall be accelerated in full and such stock options
shall become fully exercisable upon the execution by the Company of an agreement
to effect an Acquisition Event or, if not previously accelerated in full, upon
the consummation of a Change of Control.

          (i) Continuation of Benefits. If Executive's employment with the
Company is terminated pursuant to Section 6(d) or 6(e) (irrespective of whether
such termination follows a Change of Control), the Company shall provide, for
the period ending on the earlier of (i) the final day of the Employment Period
in effect immediately prior to such termination and (ii) the second anniversary
of the termination date, and at its sole cost and expense, Executive and his
eligible dependents (if any) with healthcare, disability, and life insurance
benefits substantially similar to those benefits Executive and his eligible
dependents (if any) were receiving immediately prior to the termination date;
provided, however, that

                    (A) the Company shall not be required to provide medical
coverage to the extent another employer of the Executive provides comparable
coverage,

                    (B) with respect to death and disability coverage, the
Company shall not be required to provide coverage to the extent another employer
of Executive provides comparable coverage; and shall pay the cost of
supplemental coverage if a new employer provides less than comparable coverage,
to allow Executive to purchase coverage to make total coverage comparable, and

                    (C) the coverage provided by the Company pursuant to this
Section 6(i) shall be in lieu of any other continued coverage for which
Executive or his dependents, if any, would otherwise be eligible pursuant to
COBRA.


                                       -8-



     7. Proprietary Information; Company Documents and Materials.

          (a) Proprietary Information. Executive acknowledges that during his
employment with the Company, Executive has occupied and will occupy a position
of trust and confidence with respect to Proprietary Information of the Company.
Executive understands that he possesses or will possess Proprietary Information
that is important to the Company's business and operation. Executive
acknowledges that such Proprietary Information is specialized, unique in nature
and of great value to the Company and its Affiliates, and that such information
gives the Company and its Affiliates a competitive advantage. Executive
acknowledges that all Proprietary Information is and shall remain the sole
property of the Company or any of its Affiliates. Executive shall not disclose
to others or use, whether directly or indirectly, any Proprietary Information,
or anything relating to such information, regarding the Company or any of its
Affiliates; provided, however that Executive's obligations under this Section 7
shall not apply to any information that (i) is or becomes known to the general
public under circumstances involving no breach by Executive of the terms of this
Section 7, (ii) is generally disclosed to third parties by the Company without
restriction on such third parties, (iii) is approved for release by written
authorization of the Board or an authorized employee of the Company, (iv) is
communicated to Executive by a third party under no duty of confidentiality with
respect to such information to the Company or another party, or (v) is required
to be disclosed by Executive to comply with applicable laws, governmental
regulations, or court order, provided that Executive provides prior written
notice of such disclosure to the Company and an opportunity for the Company to
object to such disclosure and further provided that Executive cooperates with
the Company and takes reasonable and lawful actions requested by the Company
(the out-of-pocket costs of which shall be paid by the Company) to avoid and/or
minimize the extent of such disclosure.

          (b) Company Documents and Materials. Executive agrees that during
Executive's employment by the Company, Executive will not remove any Company
documents or materials, including Proprietary Information, from the business
premises of the Company or deliver any such Company documents or materials to
any person or entity outside the Company, except as Executive is required to do
in connection with performing the duties of Executive's employment. Executive
agrees that, immediately upon the termination of Executive's employment by
Executive or by the Company for any reason, or during Executive's employment if
so requested by the Company, Executive will return all Company documents and
materials, computer tapes and disks, records, lists, data, drawings, prints,
notes and written information, apparatus, equipment and other physical property,
or any reproduction of such property, excepting only (i) Executive's personal
copies of records relating to Executive's compensation;


                                       -9-



(ii) Executive's personal copies of any materials previously distributed
generally to stockholders of the Company; and (iii) Executive's copy of this
Agreement. Provided that the Company has copies and the matters covered therein
do not contain Proprietary Information, Executive may keep copies of
correspondence or publications relating to scientific or academic matters.

     8. Non-solicitation and Non-competition.

          (a) Non-solicitation. Executive agrees that during his employment with
the Company and for a period of one year following the termination of his
employment with the Company, Executive shall not hire, attempt to hire, or
assist in or facilitate in any way the hiring of any person who, at the time of
any such action by Executive, is an employee of the Company (or any of its
Affiliates).

          (b) Non-competition. Executive agrees that if his employment with the
Company is terminated for any reason, including upon the expiration of the
Employment Period, for a period of one year from the date of such termination of
employment, Executive shall not, directly or indirectly, engage in any business
or enterprise (whether as owner, partner, officer, director, employee,
consultant, investor, lender or otherwise, except as the holder of not more than
1% of the outstanding stock of a publicly-held company) that develops,
manufactures, markets, licenses or sells any products developed using antisense
therapeutics or oligonucleotide-based immunostimulatory therapeutics or any
other technology or product developed, manufactured, marketed, licensed or sold
by the Company while the Executive is employed by the Company (the "Restricted
Business").

          (c) Notwithstanding the foregoing, Section 8(b) shall not preclude
Executive from becoming an employee of, or from otherwise providing services to,
a separate division or operating unit of a multi-divisional pharmaceutical
business or enterprise (a "Division") if: (i) the Division by which Executive is
employed, or to which the Employee provides services, is not competitive with
the Restricted Business, (ii) Executive does not provide services, directly or
indirectly, to any other division or operating unit of such multi-divisional
pharmaceutical business or enterprise that is competitive with the Restricted
Business (individually, a "Competitive Division" and collectively, the
"Competitive Divisions") and (iii) the Competitive Divisions, in the aggregate,
accounted for less than one-third of the multi-divisional pharmaceutical
business or enterprises' consolidated revenues for the fiscal year, and each
subsequent quarterly period, prior to the Executive's commencement of employment
with the Division.

     9. Assignment of Rights. All inventions, discoveries, computer programs,
data, technology, designs, innovations and improvements (whether or not
patentable and whether or not copyrightable) related to the business of


                                      -10-



the Company that are or have been made, conceived, reduced to practice, created,
written, designed or developed by Executive, solely or jointly with others and
whether during normal business hours or otherwise, during his employment by the
Company pursuant to this Agreement ("Inventions") shall be the sole property of
the Company. Executive hereby assigns to the Company all such Inventions and any
and all related patents, copyrights, trademarks, trade names, and other
industrial and intellectual property rights and applications therefor, in the
United States and elsewhere and appoints any officer of the Company as his duly
authorized attorney, but without any out-of-pocket expenses to Executive, to
executive, file, prosecute and protect the same before any government agency,
court or authority. Executive hereby waives all claims to moral rights in any
Invention. Upon the request of the Company and at the Company's expense,
Executive shall execute such further assignments, documents and other
instruments as may be necessary or desirable to fully and completely assign all
such Inventions to the Company and to assist the Company in applying for,
obtaining and enforcing patents or copyrights or other rights in the United
States and in any foreign county with respect to any such Invention. Executive
shall promptly disclose to the Company all such Inventions and will maintain
adequate and current written records (in the form of notes, sketches, drawings
and as may be reasonably specified by the Company) to document the conception
and/or first actual reduction to practice of any such Invention. Such written
records shall be available to and remain the sole property of the Company at all
times. Executive shall, upon the Company's request, whether during or after the
Employment Period, promptly execute and deliver to the Company all such
assignments, certificates and instruments, and shall promptly perform such other
acts, as the Company may from time to time in its discretion deem necessary or
desirable to evidence, establish, maintain, perfect, enforce or defend the
Company's rights in the inventions. These services (the "IP Services"), shall be
rendered by Executive without additional compensation during the Employment
Period, and at any time when the Company is paying Executive his Base Salary
pursuant to Section 6(b), 6(d), 6(e), 6(f) or 6(h). Executive shall otherwise
render the IP Services at the rate of compensation provided in the last sentence
of this paragraph. In addition, Executive agrees, from time to time, and for as
long as reasonably required, to make himself available on a consulting basis to
assist the Company in the prosecution of patent applications or other filings or
proceedings before the Office of Patents and Trademarks and to advise with
respect to issues arising in the licensing of the Company's patents and the
pursuit or defense of infringement claims. The Company's requests under the
preceding sentence shall be made upon reasonable notice to Executive, and the
Company shall pay Executive for such services at the hourly rate of $300 per
hour plus reasonable expenses.


                                      -11-



     10. Publications. Following the expiration or termination of the Employment
Period, Executive will have a continuing right, on the terms and conditions set
forth in this Section 10, to disclose in scientific journals or publications or
in presentations at scientific conferences the results of any research performed
by Executive while employed by the Company. Executive will provide the Company
with an advance copy of any proposed publication or presentation before
submission of such advance copy to any publisher or before the intended date of
presentation, as the case may be. If the Company informs Executive, within 30
days of receipt of such advance copy, that such publication or presentation
would have an adverse effect on the confidentiality of any Proprietary
Information of the Company or on the ability of the Company to obtain, enforce
or maintain any intellectual property rights in any Proprietary Information of
the Company, Executive will delay or prevent such publication or presentation as
proposed by the Company. In addition, Executive will incorporate in such
proposed publication or presentation prior to its submission such changes,
including without limitation deletions, as the Company believes are necessary to
preserve the confidentiality of any Proprietary Information, and Executive will
delay such proposed publication or presentation until such time as the Company
has filed a U.S. patent application covering any proprietary information.

     11. Successors. Any successor to the Company (whether direct or indirect
and whether by purchase, lease, merger, consolidation, liquidation or otherwise)
or to all or substantially all of the Company's business and/or assets shall
assume the obligations under this Agreement and shall perform the obligations
under this Agreement in the same manner and to the same extent as the Company
would be required to perform such obligations in the absence of a succession.
The Company may assign this Agreement without Executive's consent to any company
that acquires all or substantially all of the Company's stock or assets.
Executive may not assign this Agreement and no person other than Executive (or
his estate) may assert Executive's rights under this Agreement.

     12. Notice. All notices, requests, consents and other communications
hereunder to any Party shall be contained in a written instrument addressed to
such Party at the address set forth below or such other address as may hereafter
be designated in writing by the addressee to the addressor listing all Parties
and shall be deemed given (a) when delivered in person or duly sent by fax
showing confirmation of receipt, (b) three days after being duly sent by first
class mail postage prepaid, or (c) two days after being duly sent by DHL,
Federal Express or other recognized express courier service:


                                      -12-



          (a) if to the Company, to:

          Idera Pharmaceuticals, Inc.
          345 Vassar Street
          Cambridge, MA 02139
          fax: (617) 679-5582

          (b) if to Executive, to:

          Sudhir Agrawal
          61 Lamplighter Drive
          Shrewsbury, MA 01545

     13. Company Plans. To the extent any provision of this Agreement conflicts
with or is inconsistent with any awards made to Executive under any Company
compensation or benefit plan, program, or arrangement, the provisions of this
Agreement shall govern. Except to the extent otherwise explicitly provided by
this Agreement, any awards made to Executive under any Company compensation or
benefit plan, program, or arrangement shall be governed by the terms of that
plan, program, or arrangement and any applicable award agreement thereunder, as
in effect from time to time.

     14. Miscellaneous Provisions.

          (a) Entire Agreement. This Agreement constitutes the entire agreement
between the Parties and terminates and supersedes any and all prior agreements
and understandings (whether written or oral) between the Parties with respect to
the subject matter of this Agreement, including the Original Employment
Agreement; provided that (i) the Parties acknowledge that Executive has served
as an employee of the Company since 1990 and (ii) the Employee hereby agrees
that any Proprietary Information disclosed to him or of which he otherwise
became aware during the course of his employment with the Company shall be
deemed Proprietary Information for all purposes under this Agreement, that any
Inventions made, conceived, reduced to practice, created, written, designed or
developed by the Executive in the course of his employment with the Company
shall be deemed Inventions for all purposes under this Agreement and that
notwithstanding any prior agreements the provisions of this Agreement shall
govern such Proprietary Information and Inventions. Executive acknowledges and
agrees that neither the Company, nor anyone acting on its behalf has made, and
in executing this Agreement Executive has not relied upon, any representations,
promises, or inducements except to the extent the same is expressly set forth
herein.

          (b) Waiver. No provision of this Agreement shall be modified, waived,
or discharged unless the modification, waiver, or discharge is agreed


                                      -13-



to in writing and signed by Executive and by an authorized officer or
representative of the Company (other than Executive). No waiver by either Party
of any breach of, or of compliance with, any condition or provision of this
Agreement by the other Party shall be considered a waiver of any other condition
or provision or of the same condition or provision at a preceding or subsequent
time.

          (c) Capacity. Executive represents and warrants to the Company that he
is not now under any obligation, of a contractual nature or otherwise, to any
person, firm, corporation, association or other entity that is inconsistent, or
in conflict, with this Agreement or that would prevent, limit or impair in any
way the performance by Executive of his obligations hereunder.

          (d) Consulting. Executive and the Company may, but are not required
to, enter into an agreement pursuant to which Executive will provide consulting
services to the Company after the date of Executive's retirement or termination
of employment with the Company. Any consulting fees paid to Executive will be in
addition to any retirement or severance payments Executive is entitled to
receive from the Company or under any plans, programs, or arrangements
maintained by the Company.

          (e) Severability. In the event that a court of competent jurisdiction
determines that any portion of this Agreement is in violation of any law or
public policy, only the portion of this Agreement that violates such law or
public policy shall be stricken. All portions of this Agreement that do not
violate any statute or public policy shall continue in full force and effect.
Further, any court order striking any portion of this Agreement shall modify the
stricken terms as narrowly as possible to give effect to the intentions of the
Parties to this Agreement, as expressed herein.

          (f) Survival of Provisions. The obligations contained in Sections 7,
8, 9, and 10 above shall survive the termination or expiration of the Employment
Period or this Agreement, as applicable, and shall be fully enforceable
thereafter in accordance with the terms of this Agreement.

          (g) Withholding. Executive acknowledges that salary and all other
compensation payable under this Agreement shall be subject to withholding for
income and other applicable taxes to the extent required by law, as determined
by the Company in its sole discretion.

          (h) Headings. The headings or other captions contained in this
Agreement are for convenience of reference only and shall not be used in
interpreting, construing or enforcing any of the provisions of this Agreement.


                                      -14-



          (i) Governing Law. This Agreement shall be governed by the laws of the
Commonwealth of Massachusetts without giving effect to any conflict of law rules
that would require the application of the laws of any jurisdiction other than
the internal laws of the Commonwealth of Massachusetts to the rights and duties
of the Parties, except to the extent the laws of the Commonwealth of
Massachusetts are preempted by federal law.

          (j) Terms. Where appropriate in this Agreement, words used in the
singular shall include the plural, and words used in the masculine shall include
the feminine or neuter.

          (k) Legal Fees. The Company shall pay or reimburse to Executive an
amount equal to reasonable fees for legal representation incurred by Executive
in connection with the preparation of this Agreement and the amendment of
existing options agreements in an amount not to exceed $8,000.

          (l) Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original, and all of which
together shall constitute one agreement binding on the Parties hereto.

     IN WITNESS WHEREOF, the Parties hereto have executed this Agreement
effective as of the date first mentioned above.

IDERA PHARMACEUTICALS, INC.             SUDHIR AGRAWAL


BY: /s/ James B. Wyngaarden             /s/ Sudhir Agrawal
    ---------------------------------   ----------------------------------------
    James B. Wyngaarden
TITLE: Chairman

DATE: October 19, 2005                  DATE: October 19, 2005
      -------------------------------         ----------------------------------


                                      -15-



                                   APPENDIX A

                                   DEFINITIONS

     ACQUISITION EVENT means

               (i) any merger or consolidation that results in the voting
securities of the Company outstanding immediately prior thereto representing
(either by remaining outstanding or by being converted into voting securities of
the surviving or acquiring entity) less than 60% of the combined voting power of
the voting securities of the Company or such surviving or acquiring entity
outstanding immediately after such merger or consolidation;

               (ii) any sale of all or substantially all of the assets of the
Company;

               (iii) the complete liquidation of the Company; or

               (iv) the acquisition of "beneficial ownership" (as defined in
Rule 13d-3 under the Exchange Act) of securities of the Company representing 50%
or more of the combined voting power of the Company's then outstanding
securities (other than through a merger or consolidation or an acquisition of
securities directly from the Company) by any "person," as such term is used in
Sections 13(d) and 14(d) of the Exchange Act, other than the Company, any
trustee or other fiduciary holding securities under an employee benefit plan of
the Company or any corporation owned directly or indirectly by the stockholders
of the Company in substantially the same proportion as their ownership of stock
of the Company.

     AFFILIATE. "Affiliate" shall mean any person or entity that directly or
indirectly controls, is controlled by or is under common control with the
Company, including any entity directly or indirectly controlled by the Company
through the Company's ownership of 50% or more of the voting interests of such
entity.

     CAUSE. "Cause" shall mean Executive's (i) material breach of any material
term of this Agreement, (ii) plea of guilty or nolo contendre to, or conviction
of, the commission of a felony offense, (iii) repeated unexplained or
unjustified absence, or refusals to carry out the lawful directions of the Board
or (iv) material breach of a fiduciary duty owed to the Company under this
Agreement, provided that any action or inaction described by (i), (iii) or (iv),
above, shall not be the basis of a termination of Executive's employment with
the Company for "Cause" unless the Company provided Executive with at least 20
days advance written notice specifying in reasonable detail the



conduct in need of being cured and such conduct was not cured within the notice
period.

     CHANGE OF CONTROL. "Change of Control" shall mean the occurrence of any of
the following events:

     (i) a change in the composition of the Board over a period of thirty-six
consecutive months or less such that a majority of the members of the Board
ceases to be comprised of individuals who are Continuing Members; for such
purpose, a "Continuing Member" shall mean an individual who is a member of the
Board on the date of this Agreement and any successor of a Continuing Member who
is elected to the Board or nominated for election by action of a majority of
Continuing Members then serving on the Board; or

     (ii) the consummation of an Acquisition Event.

     DISABILITY. "Disability" shall mean the inability of Executive to perform
all the material duties of Executive's position for a continuous period of at
least 90 days due to a permanent physical or mental impairment, as determined
and certified by a physician selected by Executive and with the concurrence of a
physician selected by the Company, provided that if the physician selected by
Executive and the physician selected by the Company do not agree regarding the
determination and certification, a determination and certification rendered by
an independent physician mutually agreed upon by Executive and the Company shall
be final and binding on the Parties with respect to this Agreement.

     GOOD REASON. "Good Reason" shall mean the occurrence of one or more of the
following: (i) any action by the Company that results in a material diminution
of Executive's position, title, annual base salary, authority, duties or
responsibilities or reporting structure; (ii) any material breach of this
Agreement by the Company that is not remedied by the Company within 30 days
after receipt by the Company of notice thereof given by Executive specifying in
reasonable detail the alleged breach; (iii) failure to elect Executive to serve
on the Board during the Employment Period; or (iv) relocation of the Company's
headquarters outside the Permitted Area, except in the event of a change in the
location of the headquarters of the Company to a site within the continental
United States following a Change of Control.

     PROPRIETARY INFORMATION. "Proprietary Information" shall mean information
that was developed, created, or discovered by or on behalf of the Company, or
that became or will become known by, or was or is conveyed to the Company;
including, but not limited to, trade secrets, designs, technology, know-how,
processes, data, ideas, techniques, inventions (whether patentable or not),
works of authorship, formulae, business and development plans,


                                       -2-



client or customer lists, software programs and subroutines, source and object
code, algorithms, terms of compensation and performance levels of Company
employees, information about the Company or any of its Affiliates, and their
clients and customers that is not disclosed by the Company or any of its
Affiliates for financial reporting purposes and that was learned by Executive in
the course of employment by the Company or any of its Affiliates, other
information concerning the Company's actual or anticipated business, research or
development, or that is received in confidence by or for the Company from any
other person, and all papers, resumes, and records (including electronic or
computer-generated records) of the documents containing such Proprietary
Information. Proprietary Information shall not include information that is
publicly available or available through third party sources so long as it has
not become available through a breach of this Agreement by Executive.

     TERMINATION BONUS OBLIGATIONS. "Termination Bonus Obligations" shall mean
the pro rata portion (based on the total number of days in the calendar year
prior to and including the termination date divided by 365) of the Bonus, if
any, that Executive earned in respect of the year preceding the termination of
Executive's employment with the Company.

     UNPAID OBLIGATIONS. "Unpaid Obligations" shall mean the sum of (i) any
salary earned but unpaid through the date of termination of employment, and (ii)
reimbursement of any reimbursable expense incurred by Executive through the date
of termination of employment.


                                       -3-

EX-31.1 SECTION 302 CERTIFICATION OF C.E.O.

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO EXCHANGE ACT RULES 13a-14 AND 15d-14, AS
ADOPTED PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002

I, Sudhir Agrawal, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Idera Pharmaceuticals, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) [Not Applicable]

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


		/s/ SUDHIR AGRAWAL

		Sudhir Agrawal
		Chief Executive Officer

Dated: November 9, 2005

EX-31.2 SECTION 302 CERTIFICATION OF C.F.O.

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO EXCHANGE ACT RULES 13a-14 AND 15d-14, AS
ADOPTED PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002

I, Robert G. Andersen certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Idera Pharmaceuticals, Inc.;

b) [Not Applicable]

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


		/s/ ROBERT G. ANDERSEN

		Robert G. Andersen
		Chief Financial Officer

Dated: November 9, 2005

EX-32.1 SECTION 906 CERTIFICATION OF C.E.O.

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Idera Pharmaceuticals, Inc. (the “Company”) for the period ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Sudhir Agrawal, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement has been provided to Idera Pharmaceuticals, Inc. and will be retained by Idera Pharmaceuticals, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.


		/s/ SUDHIR AGRAWAL

		Sudhir Agrawal
		Chief Executive Officer

Date: November 9, 2005

EX-32.2 SECTION 906 CERTIFICATION OF C.F.O.

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Idera Pharmaceuticals, Inc. (the “Company”) for the period ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Robert G. Andersen, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


		/s/ ROBERT G. ANDERSEN

		Robert G. Andersen
		Chief Financial Officer

Date: November 9, 2005

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