10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009

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

Commission File Number 0-33489

ZYMOGENETICS, INC.

(exact name of registrant as specified in its charter)

Washington	91-1144498
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1201 Eastlake Avenue East, Seattle, WA 98102 (Address of principal executive offices)

Registrant’s telephone number, including area code (206) 442-6600

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, no par value	The NASDAQ Stock Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  ¨.  No  x.

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes  ¨.  No  x.

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, and (2) has been subject to such filing requirements for the past 90 days.

Yes  x.  No  ¨.

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

Yes  ¨   No  ¨.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. x

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

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

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

Yes  ¨  No  x.

The aggregate market value of the common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of June 30, 2009 was: $173,248,521.

Common stock outstanding at February 19, 2010: 85,477,565 shares.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of the Company’s definitive Proxy Statement for the annual meeting of shareholders to be held on June 17, 2010 are incorporated by reference in Part III.

ZYMOGENETICS, INC.

ANNUAL REPORT ON FORM 10-K

For the Year Ended December 31, 2009

TABLE OF CONTENTS

		Page No.
	PART I
Item 1.	Business	2
Item 1A.	Risk Factors	24
Item 1B.	Unresolved Staff Comments	45
Item 2.	Properties	45
Item 3.	Legal Proceedings	46
Item 4.	Submission of Matters to a Vote of Security Holders	46
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	47
Item 6.	Selected Financial Data	49
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	50
Item 7A.	Qualitative and Quantitative Disclosures About Market Risk	61
Item 8.	Financial Statements and Supplementary Data	62
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	91
Item 9A.	Controls and Procedures	91
Item 9B.	Other Information	92
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	92
Item 11.	Executive Compensation	92
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	92
Item 13.	Certain Relationships and Related Transactions, and Director Independence	93
Item 14.	Principal Accountant Fees and Services	93
	PART IV
Item 15.	Exhibits, Financial Statement Schedules	94
	Signatures	99

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PART I

Item 1.    Business

This Annual Report on Form 10-K contains, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. This Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about themselves. All statements other than statements of historical fact, including statements regarding company and industry prospects and future results of operations, financial position and cash flows, made in this Annual Report on Form 10-K are forward-looking. We use words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “potential,” “seek,” “should,” “target” and similar expressions, including negatives, to identify forward-looking statements. Forward-looking statements reflect management’s current expectations, plans or projections and are inherently uncertain. Our actual results could differ significantly from the results discussed in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Factors that could cause or contribute to such differences include those discussed in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as those discussed elsewhere in this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are urged, however, to review the information provided in reports that we file from time to time with the Securities and Exchange Commission or otherwise make public.

Overview

We are a biopharmaceutical company focused on the development and commercialization of therapeutic proteins for the treatment of human diseases. In 2009, through a series of strategic initiatives and workforce and cost reductions, we restructured our organization and are now focused on developing and commercializing a limited number of products, which we believe have substantial therapeutic and commercial potential and in which we retain a significant ownership position. Our current portfolio includes one commercial product, RECOTHROM^® Thrombin, topical (Recombinant), and three immunology product candidates.

Commercial Product

RECOTHROM.    We have developed and are marketing RECOTHROM in the United States for use as a topical hemostat to control moderate bleeding during surgical procedures. Our product, which is a recombinant version of the human blood-clotting protein thrombin, provides an effective and safe alternative to other thrombin products marketed in the United States in forms derived from bovine (cattle) plasma or human plasma. We hold worldwide rights to RECOTHROM, except for Canada, where Bayer Schering Pharma AG is responsible for commercializing the product.

Immunology Product Candidates

PEG-IFN-lambda.    Pegylated Interferon-lambda (PEG-IFN-lambda) is being studied in collaboration with Bristol-Myers Squibb Company in a Phase 2 clinical trial for treatment of hepatitis C virus infection. In November 2009, we presented final results from an open-label Phase 1b study in patients with hepatitis C. We hold co-development rights to PEG-IFN-lambda in the United States and Europe and the option to co-promote and share profits on product sales in the United States. Bristol-Myers Squibb is responsible for commercializing the product outside the United States, for which we will receive milestones and royalties on sales.

IL-21.    Interleukin-21 (IL-21) is currently being tested in an open-label Phase 2 clinical trial as a potential immunotherapy treatment for metastatic melanoma. In May 2009, we presented interim results from this study, with final results expected to be available in 2010. In addition, we presented results from an open-label Phase 2 study in renal cell carcinoma in May 2009. We hold worldwide rights to IL-21.

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IL-31 mAb.    Interleukin-31 monoclonal antibody (IL-31 mAb) is currently in preclinical development as a potential treatment for atopic dermatitis. We hold worldwide rights to IL-31 mAb and expect to begin clinical testing for this candidate in 2011.

Our goal is to substantially increase the value of our company by advancing our products and candidates to key value inflection points associated with the achievement of development and/or commercial milestones. We intend to continue to build the market for RECOTHROM in the United States, which we expect will provide net cash flows that we may use to fund the further development of our immunology product candidates. Where appropriate, we intend to enter into strategic collaborations for the commercialization of our immunology product candidates, which we believe will enable us to maximize long-term value of these assets, while leveraging our internal resources and accessing complementary technologies, infrastructure and expertise. For example, we established the PEG-IFN-lambda collaboration with Bristol-Myers Squibb in January 2009, which provided substantial near-term cash and long-term commercial value retention.

We have out-licensed several product candidates previously identified through our discovery research efforts to third parties, including atacicept, FGF-18, IL-22RA mAb and IL-17RC soluble receptor to Merck Serono SA and IL-20 mAb and IL-21 mAb to Novo Nordisk A/S. These candidates are either outside our core area of interest or require levels of capital investment that we could not justify considering our available financial resources. We are not actively involved in the development of these product candidates. We are, however, eligible to receive milestone payments and royalties and, thus, we consider these product candidates to be important assets that could result in the generation of substantial value over the long term.

We intend to maintain strong patent protection for our asset portfolio. We file detailed patent applications with respect to our discoveries covering multiple patentable inventions, typically including composition of matter, method of making and method of use claims. We have issued patents or pending applications covering RECOTHROM and all of our internal product candidates. In total, we have more than 340 unexpired issued or allowed U.S. patents and over 180 U.S. patent applications pending. Outside of the United States, we have more than 790 issued or allowed foreign patents.

We were incorporated in the state of Washington in 1981. From 1988 to 2000, we were a wholly owned subsidiary of Novo Nordisk, one of the world’s largest producers of therapeutic proteins. In November 2000, as part of a restructuring by Novo Nordisk, we became an independent company. In February 2002, we completed our initial public offering. In addition to RECOTHROM, we have contributed to the discovery or development of seven recombinant protein products currently on the market. Our principal executive offices are located at 1201 Eastlake Avenue East, Seattle, Washington, 98102. Our telephone number is (206) 442-6600. Our website is www.zymogenetics.com. At the Investor Relations section of this website, we make available free of charge our annual report on Form 10-K, our annual proxy statement, our quarterly reports on Form 10-Q, any current reports on Form 8-K, and any amendments to these reports, as soon as reasonably practicable after we electronically file them with, or furnish them to, the Securities and Exchange Commission (SEC). The information on our website is not a part of, and is not incorporated into, this annual report on Form 10-K. In addition to our website, the SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding us and other issuers that file electronically with the SEC.

Commercial Product and Product Pipeline

Our current focus is the continued commercialization of our first product, RECOTHROM, and the development of three product candidates: PEG-IFN-lambda in partnership with Bristol-Myers Squibb, IL-21, and IL-31 mAb. We have out-licensed several product candidates that are outside of our core areas of interest or for which we could not justify the required capital investment. We are eligible to receive milestone payments and royalties related to these assets. The following table summarizes our commercial product and product candidates that are being internally developed or co-developed, as well as out-licensed product candidates.

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(1) Subject to certain opt-in rights granted to Merck Serono.

(2) Subject to certain opt-in rights granted to ZymoGenetics.

In the preceding table, “Research” refers to the stage in which we analyze the biology and therapeutic potential of proteins using a variety of laboratory methods. “Preclinical” refers to the stage in which safety, pharmacology and proof of efficacy in non-human animal models of specific human disease are evaluated. “Pre-IND” refers to the stage in which investigational new drug enabling preclinical toxicology studies are performed and materials in support of the investigational new drug (IND) and clinical studies are manufactured. “Phase 1” refers to clinical trials designed primarily to determine safety and pharmacokinetics in healthy volunteers or a limited patient population. “Phase 1b” refers to clinical trials designed to demonstrate biomarker or clinical outcome that could be considered for proof of concept in a limited patient population. “Phase 2” refers to clinical trials designed to evaluate preliminary efficacy, further characterize safety and optimize dosing in a limited patient population. “Phase 2/3” refers to large-scale clinical trials designed to establish safety and confirm efficacy in comparison to standard therapies or placebo in a patient population large enough to generate statistically significant results. “Phase 3” refers to clinical trials in a broad patient population with the intention of generating statistical evidence of efficacy and safety to support product approval.

Commercial Product

RECOTHROM^®

RECOTHROM Thrombin, topical (Recombinant) was approved by the U.S. Food and Drug Administration (FDA) on January 17, 2008 for use as a general aid to control diffuse (non-arterial) bleeding during surgery. Net RECOTHROM sales in the United States totaled $8.8 million and $28.2 million during the years ended December 31, 2008 and December 31, 2009, respectively. RECOTHROM is available in a 5,000 international unit (IU) vial, a 20,000 IU vial and a 20,000 IU vial co-packaged with a spray applicator kit. Three wholesalers, AmerisourceBergen Corporation, Cardinal Health, Inc. and McKesson Corporation, accounted for approximately 90% of U.S. sales in 2009. If any of these wholesalers ceased distributing RECOTHROM, other wholesalers already distributing RECOTHROM would likely absorb the incremental sales volume with minimal interruption to the business or we would sell directly to hospitals.

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Thrombin is a specific blood-clotting enzyme that converts fibrinogen to fibrin, the primary protein contained in newly formed blood clots. Thrombin also promotes clot formation by activating Factor XIII, which cross-links the fibrin molecules and strengthens the newly forming clot. Topical thrombin is widely used to stop diffuse (non-arterial) bleeding occurring during surgical procedures, when control of bleeding by standard surgical techniques, such as direct pressure, ligation, or cautery, is ineffective or impractical. Minimizing bleeding during surgical procedures is important to maintain visibility in the operating field, limit the use of transfused blood products and reduce peri- and post-operative complications. Thrombin is generally sold as a lyophilized powder stored at room temperature, which is dissolved in saline and absorbed onto a surgical sponge, embedded onto a hemostatic pad or sprayed directly for topical application to wounds. Currently, there are three types of topical thrombin available in the United States: bovine (cattle) plasma-derived (Thrombin-JMI^® marketed by King Pharmaceuticals), human-plasma derived (Evithrom^® marketed by Ethicon, Inc. and the thrombin contained in GELFOAM Plus hemostasis kit marketed by Baxter Healthcare Corporation) and recombinant human thrombin (RECOTHROM marketed by ZymoGenetics). The thrombin market, based on the combined sales to hospitals of RECOTHROM, Thrombin-JMI, Evithrom and GELFOAM Plus, was estimated at $228 million in 2009, with full-year RECOTHROM sales representing approximately 13% market share.

We believe that there are several important advantages to recombinant human thrombin. Some patients may experience allergic reactions to plasma-derived products. Patients could also develop antibodies to bovine plasma-derived thrombin or to bovine Factor V or other protein impurities in the bovine plasma-derived product. In some cases, these antibodies can cross-react with analogous human proteins, creating a bleeding condition that can be difficult to manage and which has been fatal in patients who develop the most severe cases. Use of bovine plasma-derived thrombin in patients with pre-existing antibodies to bovine clotting factors may increase these risks and is, therefore, contraindicated. The package insert for bovine plasma-derived thrombin contains a black box warning, the most serious form of warning the FDA can require for approved products, describing these potential risks. In addition, all human plasma-derived products carry an FDA-mandated warning addressing a potential risk of transmitting infectious and other diseases, including HIV, hepatitis, parvovirus, Creutzfeldt-Jakob disease (CJD) and variant CJD. RECOTHROM, which is human thrombin produced using recombinant DNA technology, is inherently free from these potential risks and its package insert does not have a black box warning or any other warnings associated with the risk of transmitting blood-borne pathogens or infectious diseases.

In August 2009, we submitted a Citizen Petition to the FDA requesting that the FDA remove Thrombin-JMI Thrombin, topical (bovine origin) from the market in the interest of patient safety. The Citizen Petition was prompted by reports of serious or fatal bleeding-related adverse events in surgical patients exposed to bovine thrombin. In January 2010, we received an interim response from the FDA indicating that additional time was needed for the agency to reach a decision and provide a final response to the Citizen Petition. We can provide no assurance that the petition will be granted or that Thrombin-JMI will be removed from the market.

Prior to launch, we established the supply chain for RECOTHROM, from sourcing of critical raw materials and manufacturing to distribution to end customers, and built commercial inventories to satisfy expected market demand and provide what we believe are sufficient levels of safety stock. We have developed a patent-protected two-step process for the manufacture of recombinant thrombin. First, recombinant human prethrombin-1 is produced in mammalian cells. Then, using an enzyme activation step, prethrombin-1 is converted to recombinant human thrombin. The commercial-scale manufacturing process was developed in collaboration with Abbott Laboratories, our commercial manufacturer of the RECOTHROM bulk drug substance.

In December 2009, we announced a restructuring of our U.S. co-promotion agreement with Bayer HealthCare LLC and our license and collaboration agreement with Bayer Schering Pharma AG. Effective December 31, 2009 we ended the co-promotion with Bayer HealthCare such that Bayer HealthCare will no longer participate in the sales and marketing of RECOTHROM in the United States. We are currently in the process of increasing the size of our sales organization and intend to have the additional sales personnel fully trained and in the field by the end of first quarter of 2010. Outside the United States, we regained all rights to RECOTHROM, except for Canada, where the product was approved in December 2009. Bayer Schering Pharma

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will market and sell RECOTHROM in Canada and pay us royalties on net sales. Also, in December 2009, Bayer Schering Pharma withdrew the Marketing Authorization Application (MAA) to the European Medicines Agency (EMEA) for approval to market RECOTHROM in Europe. The application was withdrawn in response to indications from the European regulatory authorities that approval would require additional clinical trial data.

Clinical Trials.     In September 2006, we completed a pivotal Phase 3 clinical study designed to evaluate the comparative efficacy of RECOTHROM and bovine thrombin, both administered with an absorbable gelatin sponge. The randomized, double-blind study was conducted at 34 sites in the United States and enrolled 411 patients in four surgical settings: spinal surgery, liver resection, peripheral artery bypass and arteriovenous graft construction. Both the primary and secondary endpoints of the study were met. RECOTHROM was shown to have comparable efficacy to bovine thrombin, as measured by the overall percentage of patients achieving hemostasis within 10 minutes. Both treatments were well tolerated and exhibited similar adverse event profiles. RECOTHROM also demonstrated a superior immunogenicity profile to bovine thrombin, based on a significantly lower incidence of post-treatment anti-product antibody development. The study was not powered to detect differences in clinical outcomes based on differences in antibody formation.

In 2007, we completed an open-label, non-comparative Phase 2 clinical study designed to evaluate safety and immunogenicity of RECOTHROM administered using a spray device in patients with burns undergoing autologous skin grafting. The study results demonstrated a safety and immunogenicity profile similar to that observed in the pivotal Phase 3 study.

In 2008, we completed an open-label Phase 3b study designed to evaluate the safety and immunogenicity of RECOTHROM in subjects at increased risk for having anti-bovine thrombin product antibodies as a result of prior surgical history. The study enrolled 205 subjects, 16% of whom had pre-existing antibodies to bovine thrombin. The study results demonstrated that no patients developed antibodies against RECOTHROM. Following a 29-day period after topical RECOTHROM application during a single spinal or vascular surgical procedure, the immunogenicity profile of RECOTHROM did not differ among subjects with or without pre-existing antibodies to bovine thrombin. RECOTHROM was well tolerated and observed adverse events were consistent with those commonly seen in post-surgical settings.

Adverse events observed in clinical trials with RECOTHROM were consistent with those commonly observed in surgical patients. In pooled results from completed clinical trials involving 583 patients exposed to RECOTHROM, the most common adverse events were incision site pain, procedural pain, and nausea. Of the 552 patients for whom complete immunogenicity observations were available, only 5 patients (0.9%) developed specific anti-product antibodies, and none of these antibodies were found to neutralize native human thrombin.

As part of our post-marketing approval commitments, we are conducting an open-label Phase 4 clinical study to evaluate the safety and immunogenicity of re-exposure to RECOTHROM in approximately 30 subjects previously treated with RECOTHROM. We expect to complete patient enrollment in the re-exposure Phase 4 study in 2011. In addition, pursuant to the Pediatric Research Equity Act, we are conducting an open-label Phase 4 clinical study to evaluate the safety of RECOTHROM as an aid to hemostasis in a pediatric population. We completed patient enrollment in the pediatric study in December 2009 and expect to report study results in 2010.

In November 2008, we borrowed $25 million under a $100 million financing arrangement with Deerfield Management. The draw entitles Deerfield to a royalty equal to 2% of RECOTHROM net sales in the United States until repayment, which is due by June 27, 2014. No further draws on the remaining $75 million available for borrowing under the facility were taken prior to expiration of the facility in February 2010.

We own issued U.S. and foreign patents directed to a genetically engineered thrombin precursor termed “prethrombin-1”, methods of producing recombinant human thrombin from prethrombin-1, formulations, and methods of activation and therapeutic use of the protein.

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Product Candidates

PEG-IFN-lambda

Interferon-lambda 1 (IFN-lambda 1, also known as IL-29) is a type III interferon that belongs to the 4-helical-bundle cytokine family. Native IFN-lambda 1 is generated in response to a viral infection and exhibits broad cellular anti-viral activity similar to type I interferons, such as interferon-alpha. However, IFN-lambda 1 signals through a receptor that is distinct from the type I interferon receptor and that has a more selective expression pattern compared to the widely expressed receptor for type I interferons. The difference in the receptor tissue distribution suggests that IFN-lambda 1 may serve as an alternative to interferon-alpha based therapy for viral infection by providing comparable antiviral activity with potentially fewer side effects.

In vitro studies have shown that IFN-lambda 1 has antiviral activity against human hepatitis C virus (HCV) in HCV preclinical models. Additionally, we have demonstrated that IFN-lambda 1 induces antiviral gene expression similar to interferon-alpha in primary human hepatocytes. Combined with the significant expression of the receptor for IFN-lambda 1 in liver samples from HCV positive individuals, these data provided the rationale for selecting HCV infection as our first clinical indication. Recent clinical studies have also demonstrated the importance of type III interferons in controlling HCV infection. Correlative data from these studies showed that patients with certain genotypes who had poor response to the current standard of care regimen of interferon-alpha plus ribavirin also produced lesser amounts of endogenous type III interferon, thus illustrating the importance of type III interferons in controlling the viral replication pathway.

Chronic infection with HCV is a leading cause of cirrhosis, liver failure, and hepatocellular carcinoma worldwide. It is estimated that there are over 170 million people worldwide infected with hepatitis C virus. In the United States, an estimated 4.0 million people have been exposed to HCV, and approximately 3.2 million have chronic HCV infection. HCV is associated with an estimated 8,000-10,000 deaths per year and is the main indication for liver transplantation in the United States. The current standard of care for chronic HCV infection involves treatment with the combination of pegylated interferon-alpha and ribavirin. Standard of care therapy has been associated with a number of significant side effects, including flu-like symptoms, anorexia, depression, hemolytic anemia and myelosuppression, which continue to be treatment-limiting factors. With a response rate to the current standard treatment for the most common form of HCV (genotype 1) in the United States of approximately 40%, there remains a need for better tolerated and more effective therapy for HCV infection. Our product candidate, PEG-IFN-lambda, is a pegylated version of the IFN-lambda 1 protein, produced using recombinant DNA technology. Pegylation extends the in vivo half-life of the protein, allowing for convenient dose scheduling, such as once per week.

In January 2009, we entered into an exclusive global collaboration with Bristol-Myers Squibb Company for PEG-IFN-lambda. Under the terms of the collaboration, we will co-develop PEG-IFN-lambda in the United States and Europe with Bristol-Myers Squibb and share development costs. We will have the option to co-promote PEG-IFN-lambda and to share profits on product sales in the United States, while receiving royalties on sales in the rest of the world. We may opt out of the co-development, co-promotion and profit sharing arrangement in the United States, in which case we would no longer be obligated to co-fund development or commercialization activities, and we would receive royalties on worldwide product sales.

In 2007, we completed a randomized, placebo-controlled, dose-escalation Phase 1a clinical trial in healthy volunteers to evaluate the safety, tolerability and pharmacokinetics of a single dose of PEG-IFN-lambda administered subcutaneously. The study enrolled 20 subjects who were randomized to four dose levels of PEG-IFN-lambda, ranging from 0.5 to 7.5 mcg/kg, or placebo. The results from this study demonstrated that administration of a single dose of PEG-IFN-lambda was associated with dose-related pharmacokinetic and pharmacodynamic effects, with evidence of biological activity, including up-regulation of interferon response markers, being observed at dose levels of 1.5 mcg/kg and above. No fever or hematologic effects, which are typically seen with interferon-alpha, were observed at all tested dose levels in this study.

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In 2009, we completed a Phase 1b study to evaluate the safety and antiviral effect of repeat dosing of PEG-IFN-lambda administered subcutaneously for four weeks as a single agent or in combination with ribavirin in genotype 1 HCV patients. Final study results were presented in November 2009 at the American Association for the Study of the Liver Diseases (AASLD) annual meeting. A total of 56 patients were enrolled in this three-part study. In Part 1, a total of 24 relapsed HCV patients were enrolled in 4 cohorts, consisting of 6 patients each. PEG-IFN-lambda was administered as a single agent weekly or bi-weekly at dose levels of 1.5 or 3.0 mcg/kg. In Part 2, a total of 25 relapsed HCV patients were treated in 4 cohorts, consisting of 6 or 7 patients each. PEG-IFN-lambda was administered weekly at dose levels of 0.5, 0.75, 1.5, or 2.25 mcg/kg in combination with ribavirin. In Part 3, a total of 7 previously untreated HCV patients were enrolled in a single cohort receiving 1.5 mcg/kg of PEG-IFN-lambda in combination with ribavirin. The results from this study demonstrated anti-viral activity of PEG-IFN-lambda at all dose levels tested in both relapsed and previously untreated HCV patients. A majority of patients across all treatment arms achieved a greater than 2 log reduction in HCV RNA measured by a test that identifies the presence of hepatitis C virus in patient’s blood. Minimal constitutional symptoms or hematologic effects were observed with PEG-IFN-lambda given as a single agent or in combination with ribavirin. The majority of adverse events and laboratory changes were mild or moderate. Dose-limiting elevations in liver enzymes, with or without an increase in bilirubin, were dose-dependent and reversible.

In October 2009, in collaboration with our partner Bristol-Myers Squibb, we initiated a two-part, randomized, controlled Phase 2 study of PEG-IFN-lambda administered subcutaneously for up to 48 weeks in combination with ribavirin in treatment-naïve patients with chronic genotype 1, 2, 3, or 4 HCV infection (the “EMERGE” study). The EMERGE study will evaluate the safety, tolerability and antiviral efficacy of PEG-IFN-lambda and ribavirin compared to PEGASYS^® (PEG-IFN alfa-2a) and ribavirin. The primary efficacy endpoint of the study is the proportion of patients who achieve complete early virologic response (cEVR), defined as undetectable levels of HCV RNA after 12 weeks of treatment. A secondary efficacy endpoint is the proportion of patients who achieve sustained virologic response (SVR), defined as undetectable levels of HCV RNA 24 weeks after completed treatment. Part A of the EMERGE study is an open-label study that will explore four fixed doses of PEG-IFN-lambda compared to standard dose of PEGASYS in approximately 55 patients. Up to four doses of PEG-IFN-lambda will be selected from Part A for testing in the second part of the study. Part B of the study will be conducted as a randomized, blinded study and is designed to enroll up to 600 patients. We began enrolling patients in Part A of the study in October 2009 and expect to begin Part B in 2010.

We own issued patents for IFN-lambda 1 polypeptides, polynucleotides, expression vectors, cells, methods of treating a hepatitis infection, and a method of producing IFN-lambda 1, as well as patents on all known related molecules in the type III interferon family. We have filed patent applications for IFN-lambda 1 polypeptides, IFN-lambda 1 fusion proteins, antibodies, methods of expressing and purifying IFN-lambda 1, methods of using IFN-lambda 1 alone and in combination with other therapeutic agents to treat various viral diseases, cancers and autoimmune disorders. We will continue to file patent applications as new inventions are made. As part of our agreement with Bristol-Myers Squibb, we have assigned to Bristol-Myers Squibb a one-half ownership interest in each core patent relating to PEG-IFN-lambda filed outside the United States and a security interest in each core patent relating to PEG-IFN-lambda filed in the United States.

IL-21

IL-21 is a cytokine that activates several types of immune cells thought to be critical in eliminating cancerous or virally infected cells from the body. More specifically, IL-21 enhances the activity of mature natural killer (NK) cells; it has multiple effects on cytotoxic T lymphocyte cells (CTL), including increased activation and proliferation, extended longevity in circulation and improved ability to kill cancerous cells; and it enhances B-cell antibody production.

Preclinical studies have indicated that our recombinant version of IL-21 is an effective therapy in a number of animal models of cancer. In an animal model of metastatic melanoma, IL-21 was associated with significant

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anti-tumor activity. Animals in this model develop aggressive metastases to the lung, which can be readily measured. Treatment with IL-21 led to a significant reduction in the number of lung metastases relative to controls. IL-21 also was found to have potent inhibitory activity in other animal models of cancer. These models demonstrated that the in vivo effects of IL-21 were mediated through the activation of CTL and NK cells, which contribute to rejection of the tumors in the animal models. Moreover, this led to establishment of immunological memory, which protected animals from re-challenge with the parent tumor.

We believe that IL-21 could represent a potentially better tolerated and more efficacious immunotherapeutic agent than other cancer immunotherapies, such as interleukin-2 (IL-2) and interferon-alpha. In clinical practice, IL-2 produces durable responses in a very small percentage of patients with metastatic melanoma and metastatic renal cell carcinoma. Accompanying this relatively low level of efficacy are significant toxicities, including vascular leak syndrome and the release of pro-inflammatory cytokines, which profoundly limit the utility of IL-2 in treating disease. These side effects can be so severe that many patients are either hospitalized or stop the therapy before completion of the treatment program. Although somewhat better tolerated, interferon-alpha therapy is associated with significant chronic toxicities limiting its administration and produces a lower overall response rate with fewer complete responses compared to IL-2.

We own worldwide rights to our product candidate, recombinant human IL-21 protein. We had previously out-licensed rights to the IL-21 protein outside North America to Novo Nordisk and entered into a collaborative data sharing and cross-licensing agreement with them. In January 2009, subsequent to a strategic decision by Novo Nordisk to exit all of its oncology development programs, we reacquired rights to the IL-21 protein outside North America. Simultaneously, we and Novo Nordisk terminated a collaborative data sharing and cross-license agreement and a manufacturing agreement, under which Novo Nordisk was supplying clinical materials. As part of this termination, we acquired rights to all patent applications and data generated by Novo Nordisk as well as clinical product manufactured by Novo Nordisk. The reacquisition agreements did not require any upfront payment to Novo Nordisk. However, we will owe milestone payments and royalties to Novo Nordisk upon commercialization of IL-21 outside North America.

Metastatic Melanoma.    We are pursuing metastatic melanoma as the lead indication for IL-21. There are an estimated 69,000 new cases of melanoma per year in the United States, with over 8,650 deaths per year attributed to this disease. Metastatic melanoma is essentially an incurable cancer with no established standard of care. Because of poor prognosis of overall survival for patients with advanced stages of metastatic melanoma, with a median of six to nine months, there is a significant unmet need for the development of therapies that can prolong overall survival. Several drugs have previously failed in late-stage clinical trials of metastatic melanoma. Most recently, Nexavar^® (a product marketed by Bayer HealthCare AG and Onyx Pharmaceuticals, Inc.) failed to meet its endpoint of improved overall survival in a Phase 3 trial and a Phase 3 trial of elesclomol (Synta Pharmaceuticals Corp.) was suspended due to safety concerns. In October 2005, the FDA granted IL-21 orphan drug status for the treatment of melanoma patients with advanced or aggressive disease.

We are developing IL-21 as a single-agent treatment for metastatic melanoma. In 2007, we initiated an open-label Phase 2 clinical trial of IL-21 in previously untreated patients with metastatic or recurrent melanoma. The study, which is being conducted by the National Cancer Institute of Canada (NCIC), is designed to evaluate two dose levels of IL-21 at 30 and 50 mcg/kg. The interim results from 24 patients, presented at the World Congress on Melanoma annual meeting in May 2009, showed IL-21 to be biologically active, with 7 patients, or 29%, having a partial response and 8 patients, or 33%, having stable disease. Administered at a dose of 30 mcg/kg during three 5- day cycles, IL-21 was well tolerated. The most common adverse events were mild or moderate fatigue and rash. The 50 mcg/kg dose of IL-21 was poorly tolerated, with severe adverse events including neutropenia and skin rash. In August 2009, we completed study enrollment. A total of 30 patients received IL-21 at a dose of 30 mcg/kg and 10 patients received IL-21 at a dose of 50 mcg/kg. Final results from the study are expected to be available in 2010. In collaboration with the NCIC, we expect to initiate a larger randomized study versus DTIC (dacarbazine) in the first half of 2010. The study will evaluate safety and efficacy of IL-21 versus DTIC as first-line therapy in metastatic melanoma.

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Metastatic Renal Cell Carcinoma.    In 2009, we completed an open-label Phase 2 clinical trial of IL-21 in combination with the tyrosine kinase inhibitor Nexavar in patients with advanced renal cell carcinoma. The study was designed to evaluate the safety, pharmacokinetics and anti-tumor activity of the combination therapy at the IL-21 maximum tolerated dose, previously established at 30 mcg/kg. The final study results were presented at the American Society of Clinical Oncology (ASCO) meeting in May 2009. The results indicated that the combination of IL-21 with Nexavar was well tolerated, with side effects that were manageable in an outpatient setting. The combination therapy was associated with anti-tumor activity both in terms of tumor response and duration of disease control, measured by progression-free survival (PFS). An independent data review completed for 33 patients showed an overall response rate of 21%, with 7 patients having a partial response. Median PFS was 5.7 months. No further investigation of IL-21 in renal cell carcinoma is planned at this time based on an evaluation of the competitive landscape and commercial opportunity.

B-cell Lymphoma.    We have explored the use of IL-21 in combination with monoclonal antibodies, such as Rituxan^® (a product marketed by Genentech, Inc. and Biogen Idec Inc.), an anti-CD20 antibody, that functions via antibody-dependent cellular cytotoxicity, a process enhanced by IL-21. In 2008, we completed an open-label Phase 1 clinical trial of IL-21 in combination with Rituxan in patients with relapsed low-grade B-cell lymphoma. The final study results, which were presented at the ASCO annual meeting in 2008, demonstrated that the combination of IL-21 at 100 mcg/kg with Rituxan was well tolerated and provided evidence of anti-tumor activity in this heavily pre-treated population, including one confirmed complete response, and three partial responses. No further investigation of IL-21 in B-cell lymphoma is planned.

We own issued patents for IL-21 polypeptides, polynucleotides and methods of using IL-21 to stimulate immune responses, particularly in tumor-bearing subjects as well as to the cell lines and methods of producing the recombinant IL-21 clinical product. We have filed patent applications for pharmaceutical compositions, IL-21 fusion proteins and other methods of using IL-21 for the treatment of disease. We have additional patent applications relating to IL-21 directed to methods for expressing and purifying recombinant IL-21; methods of treating specific cancers and viral diseases; combination therapies for IL-21 and monoclonal antibodies and IL-21 and tyrosine kinase inhibitors; and antagonist IL-21 ligands. We will continue to file patent applications as new inventions are made.

IL-31 mAb

Interleukin-31 (IL-31) is a cytokine derived from T cells. Analysis of IL-31 and IL-31 receptor levels in human and murine disease tissues suggests that IL-31 could play a role in atopic dermatitis (AD) and neuropathic pain. Transgenic animals over-expressing the IL-31 gene develop a severe type of dermatitis that resembles human AD, characterized by a destructive chronic scratching behavior in response to IL-31 mediated itch. Itch is a characteristic of human AD and the scratch response to itch is thought to be a major contributor to the severity of skin damage and disease. Treatment of animals in a murine model of spontaneous AD with a neutralizing antibody against IL-31 results in the reduction of scratching behavior. In addition, data shows that elevated levels of IL-31 mRNA and protein in skin correlate with both mouse and human AD, and that elevated circulating levels of IL-31 in serum correlate with severity of AD in patients. Analysis of peripheral blood T cells from human atopic dermatitis patients provides an association between IL-31 and skin-homing T cells, suggesting that skin diseases, such as AD, may be a promising therapeutic area for inhibition of IL-31.

Atopic dermatitis is a relapsing, chronic, inflammatory skin disorder that affects over 50 million people in the United States, major European countries and Japan. The disease has a high prevalence in children, with as many as 85% of cases developing AD before age 5. Some patients suffer from the disease into adulthood. AD typically resolves over time, but the disease becomes severe for those patients that do not go into remission, representing approximately 10% of the total affected population. Severe AD patients suffer from intense itching resulting in psychological problems, significant sleep loss and skin disfigurement. Current therapies on the market, such as topical corticosteroids, topical calcineurin inhibitors and antihistamines, are not effective for patients with severe disease, have safety concerns with long-term use, and do not target the disease mechanism. We believe that an inhibitor of IL-31 may be an effective therapy for treatment of these severely affected AD patients.

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Our product candidate is an IL-31 monoclonal antibody (IL-31 mAb) that has been shown to neutralize the activity of IL-31 in preclinical settings in a highly specific manner. IL-31 mAb is currently in the pre-IND development stage as a potential treatment for AD. We are in the process of manufacturing sufficient quantities of drug to supply toxicology studies, which are expected to begin in 2010, and Phase 1 clinical trials, which we intend to initiate in 2011. We own worldwide rights to IL-31, including protein products that target IL-31 such as monoclonal antibodies, subject to certain opt-in rights held by Merck Serono.

We have issued patents to IL-31 and IL-31 antibodies. We also have filed several patent applications relating to IL-31 and IL-31 antagonists, compositions and uses in disease on a worldwide basis, which cover protein products that target IL-31, including monoclonal antibodies, and therapeutic uses and will continue to file new patent applications as new inventions are made.

Out-licensed Product Candidates

Atacicept (formerly known as TACI-Ig)

Atacicept is a soluble form of the TACI receptor, a member of the tumor necrosis factor receptor family of proteins. Atacicept binds to and inhibits the activity of two ligands, BLyS and APRIL, which are implicated in B-cell survival, maturation and antibody production. We believe that atacicept could represent a more specific immunosuppressive agent for the treatment of autoimmune diseases.

Until August 2008, atacicept was developed jointly by us and Merck Serono SA pursuant to a collaborative development and marketing agreement established in 2001. In 2008, we converted this agreement to a worldwide royalty-bearing license, granting Merck Serono exclusive worldwide development and commercialization rights for atacicept.

Merck Serono is conducting a randomized, double-blind, placebo-controlled Phase 2/3 clinical trial of atacicept in patients with general systemic lupus erythematosus (SLE). In 2008, Merck Serono discontinued a Phase 2/3 study in patients with lupus nephritis. The study was discontinued due to the observation of the increased risk of severe infection, possibly resulting from significant underlying disease activity and the concomitant use of several immunosuppressive agents. In order to obtain regulatory approval in SLE, Merck Serono will need to complete additional studies of atacicept in patients with SLE.

Merck Serono is conducting three Phase 2 studies investigating atacicept in rheumatoid arthritis (RA): one in RA patients with inadequate response to TNF inhibitor therapy, another in RA patients who have not previously received TNF inhibitor therapy, and a third to evaluate the safety and efficacy of atacicept in combination with Rituxan. Preliminary results of the two single-agent atacicept Phase 2 studies confirmed the biological effect of atacicept on immunoglobulin and autoantibody production and no new safety signals were observed. However, the studies did not meet the pre-specified level of disease control activity to support moving directly into Phase 3 clinical testing. Following completion of further exploratory analysis, Merck Serono decided not to initiate further studies of atacicept in RA patients.

In September 2009, Merck Serono voluntarily discontinued two studies investigating atacicept in multiple sclerosis (MS) based upon a recommendation from an Independent Data Monitoring Committee (IDMC). In one of the MS studies, the IDMC observed an increase in MS disease activity in the atacicept treatment arms compared to the placebo arm. No comparable issues have been identified in the Phase 2/3 clinical trial in SLE or in the Phase 2 clinical trials in RA.

IL-21 monoclonal antibody (IL-21 mAb)

IL-21 mAb is a fully human monoclonal antibody we developed as an inhibitor of IL-21. IL-21 is a T-cell derived cytokine that exerts multiple effects on both T-cell and B-cell responses, which can be beneficial in fighting cancer or infections. In some situations, over expression of IL-21 can lead to autoimmune or

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inflammatory disease. In particular, IL-21 is a key regulator of two types of T cells: Th17 cells and T follicular helper (TFH) cells. Th17 cells are known to be involved in inflammation. By blocking IL-21 with IL-21 mAb, inflammation may be reduced in a number of diseases that share this pathway, such as psoriasis, Crohn’s disease and rheumatoid arthritis. TFH cells are specialized types of T cells that promote antibody responses from B cells. Blocking IL-21’s effect on B cells may have an impact on human diseases that are driven by antibody responses, such as systemic lupus erythematous (SLE). Murine models of psoriasis, Crohn’s disease (colitis), rheumatoid arthritis and SLE have demonstrated that inhibition of IL-21 leads to significant reductions in disease scores and pathology.

We and Novo Nordisk A/S have been parties to a license agreement for IL-21 since 2001, pursuant to which Novo Nordisk had certain rights to IL-21 outside North America, including monoclonal antibodies targeting IL-21. In December 2009, we and Novo Nordisk amended this license agreement, giving Novo Nordisk worldwide rights to IL-21 mAb and certain other embodiments of IL-21. Under the agreement, we have a right to co-promote the IL-21 mAb product in the United States and receive increased royalties on net sales in the United States if we contribute to Phase 3 clinical development costs. This license does not affect our IL-21 Phase 2 development candidate, which is recombinant human IL-21 protein and as to which we maintain worldwide rights.

IL-21 mAb is currently in the pre-IND stage. We expect to complete the transfer of IL-21 mAb technology and information to Novo Nordisk in 2010, which will enable them to begin clinical testing.

Other Out-licensed Product Candidates

rFactor XIII.    rFactor XIII is a recombinant version of a human protein that is involved in blood clotting, and is being developed for the treatment of bleeding disorders. Novo Nordisk acquired rights to this protein from us in October 2004 after we completed several Phase 1 clinical trials in healthy volunteers and in patients with congenital Factor XIII deficiency. Novo Nordisk is conducting a Phase 3 study of rFactor XIII in patients with congenital Factor XIII deficiency and a Phase 2 study in patients undergoing cardiac surgery.

Fibroblast growth factor-18 (FGF-18).    FGF-18 is a member of the fibroblast growth factor family of proteins. Our preclinical data suggest that FGF-18 may be useful for healing cartilage damaged by injury or disease. We out-licensed this protein to Merck Serono in October 2004 in conjunction with the strategic alliance. Merck Serono is conducting a Phase 1 clinical trial of FGF-18 for the treatment of osteoarthritis.

IL-17 receptor C (IL-17RC) soluble receptor.    IL-17RC is a soluble receptor that binds to both IL-17A and IL-17F, the two most closely related cytokines in the IL-17 family. Both cytokines are highly expressed in a variety of inflammatory and autoimmune diseases, including rheumatoid arthritis, inflammatory bowel disease, multiple sclerosis and transplant rejection. We hypothesize that use of IL-17RC soluble receptor to neutralize the pro-inflammatory properties of IL-17A and IL-17F could have a beneficial therapeutic effect in any or all of these diseases. In August 2008, as part of the restructuring of our relationship, Merck Serono acquired an exclusive development and commercialization license to IL-17RC soluble receptor worldwide, subject to certain opt-in rights that we hold. The product candidate is currently in preclinical development.

IL-20 monoclonal antibody (IL-20 mAb).    IL-20 is a member of the IL-10 cytokine family. In September 2001, Novo Nordisk licensed the rights to IL-20 outside North America pursuant to the option and license agreement. In March 2004, they licensed the rights to IL-20 in North America under a separate agreement. Our preclinical data suggest that IL-20 may play an important role in the regulation of skin inflammation and the pathology of psoriasis, as well as other inflammation diseases. Novo Nordisk is currently conducting Phase 1 clinical trials in psoriasis and rheumatoid arthritis patients.

IL-22 receptor subunit alpha monoclonal antibody (IL-22RA mAb).    IL-22RA is a cytokine receptor that binds to both IL-20 and IL-22 cytokines and may be a potential target for the treatment of psoriasis. We

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out-licensed rights to IL-22RA monoclonal antibodies and to IL-22RA as a target to Merck Serono in October 2004 as part of the strategic alliance. The IL-22RA mAb product candidate is currently in preclinical development by Merck Serono.

Out-licensed Commercial Products

In addition to RECOTHROM, we have contributed to the discovery or development of seven recombinant protein products marketed by other companies.

Augment™ Bone Graft (formerly GEM-OS1^TM)/Augment™ Injectable Bone Graft (formerly GEM-OS2^TM).    Augment Bone Graft/Augment Injectable Bone Graft is a combination of platelet-derived growth factor (PDGF-BB) and a synthetic bone matrix. PDGF-BB is a growth factor that stimulates the growth of a variety of cell types, including bone forming cells. We cloned the gene that codes for platelet-derived growth factor, which we have out-licensed to BioMimetic Therapeutics, Inc. In November 2009, BioMimetic received approval to market Augment Bone Graft as an alternative to the use of autograft in foot and ankle fusion indications in Canada. In addition, BioMimetic completed submission of a modular Product Market Approval (PMA) to the U.S. FDA in February 2010.

Cleactor™ (tPA analog).    Cleactor is a modified form of the protein tissue plasminogen activator, marketed in Japan by Eisai for the treatment of myocardial infarction, or heart attacks. In collaboration with Eisai, we developed this modified protein, which has enhanced properties that allow it to be given as a single injection.

GEM 21S^® (platelet-derived growth factor).    GEM 21S is a combination of a platelet-derived growth factor with a synthetic bone matrix, developed by BioMimetic Therapeutics, Inc. and marketed by Osteohealth Company, a division of Luitpold Pharmaceuticals, Inc. for the treatment of bone loss and gum tissue recession associated with advanced periodontal disease. We cloned the gene that codes for platelet-derived growth factor, the active agent in GEM 21S.

GlucaGen^® (glucagon).    GlucaGen is a protein therapeutic marketed by Novo Nordisk, Bedford Laboratories and Eisai Co., Ltd. (Eisai) for use as an aid for gastrointestinal motility inhibition and for the treatment of severe hypoglycemia in diabetic patients treated with insulin. In collaboration with Novo Nordisk, we developed a process for the production of this protein that is currently used by Novo Nordisk in the manufacture of GlucaGen.

Insulin and insulin analogs.    Insulin and insulin analogs manufactured using recombinant DNA technology are marketed by Novo Nordisk worldwide for the treatment of diabetes. In collaboration with Novo Nordisk, we developed a process for the production of recombinant human insulin in yeast that is used by Novo Nordisk.

NovoSeven^® (recombinant Factor VIIa).    Factor VIIa is a protein involved in the generation of blood clots, and NovoSeven is marketed worldwide by Novo Nordisk for the treatment of patients with hemophilia and certain other coagulation deficiencies. We cloned the gene that codes for human Factor VII and developed the process for the production of activated recombinant human Factor VII, or recombinant Factor VIIa, which led to the establishment of the manufacturing process that Novo Nordisk currently uses to produce this protein.

Regranex^® (platelet-derived growth factor).    Regranex, until recently a product of Ethicon, Inc., a Johnson & Johnson Company, is a growth factor approved for the treatment of non-healing diabetic ulcers. In December 2008, One Equity Partners LLC announced the acquisition of Regranex from Ethicon Inc., which will be marketed and distributed by Systagenix Wound Management, a company created by One Equity Partners LLC. We cloned the gene that codes for platelet-derived growth factor and demonstrated the importance of this protein in stimulating wound healing.

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We have earned royalties on sales of some of these products. In the aggregate, from sales of these products and other technology licenses, we earned royalties of $1.3 million, $6.3 million, and $6.3 million for the years ended December 31, 2009, 2008, and 2007, respectively.

Commercialization

To commercialize RECOTHROM in the United States, we established our own dedicated commercial operations team with sales and sales operations, marketing, and supply chain and inventory management functions. We believe that the thrombin market, with its concentrated customer base, can be addressed with a relatively small sales force and that our recombinant technology gives us a competitive advantage in the current market.

In June 2007, we entered into a co-promotion agreement with Bayer HealthCare LLC, under which Bayer HealthCare provided sales people and medical liaisons to support RECOTHROM commercialization in the United States. During 2008 and 2009, the combined sales force worked to convert larger bovine thrombin accounts to RECOTHROM, by focusing on key surgeons, clinical pharmacists, operating room nurses and Pharmacy and Therapeutics (P&T) committee members within each account. Three wholesalers, AmerisourceBergen Corporation, Cardinal Health, Inc. and McKesson Corporation, accounted for approximately 90% of U.S. sales in 2009. If any of these wholesalers ceased distributing RECOTHROM, other wholesalers already distributing RECOTHROM would likely absorb the incremental sales volume with minimal interruption to the business or we would sell directly to hospitals.

In December 2009, we amended the U.S. co-promotion whereby Bayer HealthCare will no longer participate in the sales and marketing of RECOTHROM in the United States. We are currently in the process of increasing the size of our sales organization and intend to have the additional sales personnel fully trained and in the field by the end of first quarter 2010.

With our other product candidates, we intend, where appropriate, to enter into strategic collaborations for the commercialization of these candidates. We believe that this approach will enable us to maximize the long-term value of these assets.

Research and Development

In 2009, through a series of strategic initiatives and workforce and cost reductions, we restructured our organization to focus on developing and commercializing a smaller number of product candidates, which we believe have substantial therapeutic and commercial potential and in which we retain a significant ownership position. As part of these changes, we discontinued ongoing immunology and oncology discovery research programs, while retaining the research and development capabilities necessary to support the ongoing development programs for our product candidates.

Our research and development infrastructure draws upon a broad range of skills and technologies, including scientific computing, molecular and cellular biology, animal models of human disease, protein chemistry, antibody generation and engineering, pharmacology and toxicology, clinical development, medical and regulatory affairs, drug formulation, process development and protein manufacturing methods. We believe that this comprehensive approach enables us to effectively and efficiently develop our pipeline of therapeutic proteins.

We have a development organization with the skills and expertise to design and implement clinical trials for multiple product candidates and to file license applications with the FDA and other regulatory agencies. Our in-house development resources include a clinical development group responsible for designing, conducting and analyzing clinical trials. The group includes clinical research, clinical operations, biometrics, medical writing and drug safety. Our preclinical development group provides support in the areas of bioanalytical research and

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development, pharmacology (including pharmacogenomics), toxicology, pathology and pharmacokinetics. Our regulatory affairs group develops regulatory strategies and manages communications and submissions to regulatory agencies.

For additional details for research and development activities, refer to the Operating Expenses section under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview”.

Manufacturing

RECOTHROM^®

We have established a RECOTHROM commercial supply chain, which relies on several single-source vendors. We have entered into a long-term manufacturing agreement with Abbott Laboratories for commercial-scale production of bulk recombinant human thrombin (rThrombin), the active drug substance in RECOTHROM. Under the agreement, Abbott manufactures rThrombin using the two-step process developed by ZymoGenetics, according to specifications developed and agreed upon by both companies. First, recombinant human prethrombin-1 is produced in mammalian cells. Then, using an enzyme activation step, prethrombin-1 is converted to rThrombin. Abbott has committed to annually supply up to a maximum amount, which we believe is sufficient to meet our projected market demand and provide adequate safety stock. We have agreed to purchase annual minimum amounts from Abbott. The agreement terminates in 2018. We have also entered into a manufacturing services agreement with Patheon Italia S.p.A. for fill and finish of rThrombin, which expires in December 2013, and are currently negotiating with an additional fill and finish supplier located in the United States. In addition, we have entered into agreements with two vendors for the final packaging of RECOTHROM and with Cardinal Health SPS, Inc. for third party logistics services. Furthermore, we have entered into agreements with several suppliers of critical raw materials, manufacturing aids, and components for RECOTHROM, some of which are located outside the United States.

Under the terms of the amended license and collaboration agreement, we agreed to supply vials of rThrombin approved for sale in the United States to Bayer Schering Pharma for sale in Canada throughout the term of the agreement.

PEG-IFN-lambda

We manufactured initial clinical supplies of PEG-IFN-lambda in our pilot-scale GMP manufacturing facility, using a high-yield internally developed E. coli process and believe we have adequate supply of product to support clinical development though Phase 2. Under the terms of our co-development and co-promotion agreement with Bristol-Myers Squibb, they will be responsible for all future manufacturing of PEG-IFN-lambda, including product for Phase 3 clinical trials and commercial sale.

IL-21

Our initial clinical supply of IL-21, which is made in E. coli, was manufactured by a third party using a process we developed. Subsequently, Novo Nordisk manufactured clinical materials for Phase 2 and initial Phase 3 development under a manufacturing agreement established in 2007. In January 2009, Novo Nordisk terminated the agreement and we acquired all rights to the manufacturing processes and obtained the existing supply of the product. We will need to identify and enter into an agreement with a third-party contract manufacturer for commercial supply of IL-21.

IL-31 mAb

Our initial supplies of IL-31 mAb product for toxicology studies and Phase 1 clinical trials are currently being manufactured by a third-party contractor.

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Manufacturing Changes

In 2009, we discontinued operation of our pilot-scale GMP manufacturing facility that was used to supply materials for toxicology studies and early-stage clinical trials. Going forward, we intend to rely on collaborative partners or third-party contractors for production of all preclinical, clinical and commercial supplies.

Collaborative Relationships

Bristol-Myers Squibb Co-Development and Co-Promotion Agreement for PEG-IFN-lambda

In January 2009, we entered into a co-development/co-promotion and license agreement with Bristol-Myers Squibb Company that covers all members of the type III interferon family, including interferon-lambda 1. Under the terms of the agreement, we are obligated to work exclusively with Bristol-Myers Squibb to develop biopharmaceutical products based on the type III interferon family. Currently, the companies intend to only develop PEG-IFN-lambda, a pegylated version of interferon-lambda 1, which is in development as a treatment for hepatitis C.

As part of the co-development/co-promotion and license agreement, Bristol-Myers Squibb receives an exclusive worldwide license to the core patents relating to the type III interferon family and a co-ownership interest in all core patents relating to the type III interferon family filed outside of the United States. In addition, Bristol-Myers Squibb receives a non-exclusive license to other intellectual property rights relating to the licensed products. We will be responsible for funding the first $100 million of development costs in the United States and Europe, which we expect to incur during Phase 1b and Phase 2 clinical testing, and 20% of all further development costs in the United States and Europe.

In return, during 2009 we have received:

• $105 million in license fees; and

• $95 million in milestone payments related to initiation of Phase 2 activities.

In addition, we may receive:

• Additional payments of up to $335 million based on pre-defined development and regulatory milestones for hepatitis C, up to $287 million in development and regulatory milestones for other potential indications, and up to $285 million based on pre-defined annual sales milestones;

• 40% of the profits from the co-commercialization of any type III interferon family product within the United States. We will also be responsible for 40% of any loss from the co-commercialization of any product within the United States, provided that a portion of our share of losses incurred through the initial launch phase will be deferred, and deferred losses will subsequently be deducted from milestones, royalties and our share of profits; and

• Royalties on product sales outside the United States.

The research and development activities are governed by a steering committee made up of an equal number of representatives from each company. Bristol-Myers Squibb is responsible for all future manufacturing of PEG-IFN-lambda, including product for Phase 3 clinical trials and commercial sale.

We have the right to co-promote or co-fund PEG-IFN-lambda in the United States, and must exercise this right within 30 days after acceptance by the FDA of a Biologics License Application (BLA) filing, in which case we will share any profits or losses in the United States. In certain circumstances, we may opt out of co-promotion while retaining the option to co-fund and share product profits and losses. We have the right to discontinue co-promotion and co-funding in the United States, in which case we would be eligible to receive royalties on product sales in the United States. Under certain restricted circumstances, Bristol-Myers Squibb may terminate our right to co-promote in the United States, provided that, in certain of these circumstances, we will retain the

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option to co-fund and share product profits and losses. If Bristol-Myers Squibb terminates our co-promotion right and we do not have the option to co-fund or choose not to exercise that option, we would receive royalties on product sales instead of sharing profits and losses in the United States.

Royalties on sales vary based on annual sales volume and the degree of patent protection provided by the licensed intellectual property. Royalty payments may be reduced if Bristol-Myers Squibb is required to license additional intellectual property from one or more third parties in order to commercialize a product or, in certain circumstances, if product sales suffer from direct competition. Royalty obligations under the agreement continue on a country-by-country basis until the date on which no valid patent claims relating to a product exist or, if the product is not covered by a valid patent claim, eleven years after the date of first sale of the product in that country.

The term of the agreement began on February 26, 2009 and will continue for as long as a type III interferon product is the subject of an active development project or there is an obligation to pay royalties under the agreement.

Bayer License and Collaboration Agreement for rThrombin and U.S. Co-Promotion Agreement for RECOTHROM^®

In June 2007, we executed a license and collaboration agreement with Bayer Schering Pharma AG and a U.S. co-promotion agreement with Bayer HealthCare LLC. Under the terms of the license and collaboration agreement, Bayer Schering Pharma was responsible for developing and commercializing rThrombin outside of the United States. Under the co-promotion agreement, Bayer HealthCare agreed to contribute sales people and medical science liaisons for the first three years following the launch of RECOTHROM in the United States. Through December 31, 2009, we received an initial milestone of $30.0 million upon signing of the agreements, an additional $40.0 million upon the U.S. approval of rThrombin, and $6.5 million upon the initial filings for approval in Canada, Europe and Asia.

In December 2009, we executed amendments to both agreements. Pursuant to the amended license and collaboration agreement, Bayer Schering Pharma will develop and commercialize the initial presentations of rThrombin in Canada, where it received marketing approval in December 2009, but will return all other rights to RECOTHROM outside the United States and Canada to us. As part of the agreement, we will also supply vials of rThrombin approved for sales in the United States to Bayer Schering Pharma for sale in Canada for the term of the license. Pursuant to the amended co-promotion agreement, Bayer HealthCare’s active role in promoting RECOTHROM in the United States ceased as of December 31, 2009, but they are entitled to commissions on sales in the United States for up to two years subject to an aggregate maximum amount of $12 million.

Merck Serono Development and Marketing Agreement for Atacicept

In August 2001, we entered into a collaborative development and marketing agreement with Ares Trading S.A., a wholly owned subsidiary of Serono S.A., focused on product candidates derived from two cellular receptors (designated TACI and BCMA) that are involved in the regulation of the human immune system. Following the acquisition of Serono by Merck KGaA in 2007, Serono’s rights under this agreement have been held by Merck Serono S.A. Pursuant to the collaborative development and marketing agreement, the parties had been co-developing atacicept in autoimmune diseases and cancer. In August 2008, we entered into an amended and restated development and marketing agreement, providing Merck Serono with exclusive worldwide rights to develop, market and sell products developed under the agreement, for which we will be entitled to receive milestone fees and royalties on worldwide net sales.

We granted Merck Serono an exclusive license to our intellectual property relating to TACI, BCMA and certain other related technologies to make, use, have made, sell, offer to sell and import products based on TACI and BCMA. Merck Serono is required to pay royalties on sales, which vary based on annual sales volume and the

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degree of patent protection provided by the licensed intellectual property. Royalty payments may be reduced if Merck Serono is required to license additional intellectual property from one or more third parties in order to commercialize a product or, in certain circumstances, if product sales suffer from direct competition. Royalty obligations under the agreement continue on a country-by-country basis until the date on which no valid patent claims relating to a product exist or, if the product is not covered by a valid patent claim, 15 years from the date of first sale of the product in that country.

The agreement will continue for as long as a TACI or BCMA product is the subject of an active development project or there is an obligation to pay royalties under the agreement. The agreement provides for an initial fee and milestone payments to be paid by Merck Serono in connection with the development and approval of products, up to an aggregate of $52.5 million of which $15.5 million has been received to date.

Novo Nordisk License Agreements for IL-21

As a result of a series of agreements, we now have worldwide development and commercialization rights for products based on our intellectual property to IL-21 protein and Novo Nordisk has development and commercialization rights for products based on our intellectual property to other embodiments of IL-21, including antibodies to IL-21.

In 2001, Novo Nordisk initially licensed the rights under our intellectual property to various embodiments of IL-21 in territories outside of North America. In 2005, we entered into a collaborative data sharing and cross-license agreement with Novo Nordisk to develop and execute a joint global clinical development plan for the IL-21 protein to achieve regulatory approval of a common product in the companies’ respective territories. In January 2007, the parties also entered into a manufacturing agreement whereby Novo Nordisk agreed to supply us with IL-21 protein for use in clinical trials. In January 2009, the parties restructured their relationship as it relates to IL-21. As part of the restructuring, the parties:

• Amended and restated the license agreement to no longer cover the IL-21 protein. However, Novo Nordisk continued to be responsible for developing other embodiments of IL-21, including antibodies to IL-21, outside North America.

• Entered into a license and transfer agreement pursuant to which we received an exclusive license outside North America to the intellectual property rights that Novo Nordisk developed relating to the IL-21 protein, and are obligated to make milestone payments based on approval and sales and pay single-digit royalties on sales of any resulting products outside North America. In addition, we will pay Novo Nordisk a portion of any third-party license fees above a specified threshold.

• Terminated the collaborative data sharing and cross-license agreement. However, our exclusive license in North America to the intellectual property rights that Novo Nordisk developed relating to the IL-21 protein survived termination.

• Terminated the manufacturing agreements and Novo Nordisk transferred to us all manufacturing processes developed and its existing stock of IL-21 protein.

In December 2009, the parties further amended and restated the license agreement to provide Novo Nordisk worldwide rights to embodiments of IL-21 (other than IL-21 protein), including antibodies to IL-21. Novo Nordisk is obligated to make milestone payments based on the achievement of development milestones and royalties on sales of any resulting products. In addition, we will have a right to co-promote the IL-21 mAb product in the United States and receive double-digit royalties on net sales in the United States if we contribute to Phase 3 clinical development costs directed to achieving regulatory approval in the United States or European Union. We must make an election to contribute to Phase 3 clinical development costs within 90 days following receipt of data from the Phase 2b studies, in which case we will pay a one-time fee of $10 million and 15% of Phase 3 clinical development costs. Royalty obligations under the agreement continue on a country-by-country basis until the date on which no valid patent claims relating to a product exist or, if the product is not covered by

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a valid patent claim, 10 years from the date of first sale of the product in that country. Royalty payments may be reduced if Novo Nordisk is required to license additional intellectual property from one or more third parties in order to commercialize a product or, in certain circumstances, if product sales suffer from direct competition.

Merck Serono Strategic Alliance Agreement

In October 2004, we executed a strategic alliance agreement with Serono S.A. to research, develop and commercialize product candidates, including protein and antibody therapeutics, based on a specific portfolio of our proprietary genes. Following the acquisition of Serono in 2007 by Merck KGaA, Serono’s rights under this agreement have been held by Merck Serono SA, an affiliate of Merck KGaA. In August 2008, we amended the strategic alliance agreement, while retaining the original five-year term, which expired in October 2009.

At the time of the original agreement, we executed agreements granting Merck Serono exclusive worldwide licenses to two preclinical candidates, FGF-18 and IL-22RA mAb, and entered into a co-development agreement relating to IL-31 mAb. Subsequently, in June 2007, we entered into a co-development agreement with Merck Serono for the IL-17RC soluble receptor, under the strategic alliance agreement. In connection with the original agreement we received a $20.0 million upfront option fee and $11.25 million in license fees for FGF-18, IL-22RA mAb and IL-31 mAb. In addition, Merck Serono purchased approximately 3.2 million shares of our common stock for a total of $50.0 million, and entered into a related lockup agreement and a standstill agreement.

In connection with the 2008 amendment of the strategic alliance agreement, we amended and restated the co-development agreements for IL-31 mAb and IL-17RC soluble receptor to provide for exclusive licenses to, in the case of IL-31 mAb, ZymoGenetics and, in the case of IL-17RC soluble receptor, Merck Serono. Pursuant to these exclusive licenses we will receive (in the case of IL-17RC soluble receptor) and pay (in the case of IL-31 mAb):

• Potential milestone payments related to development progress, regulatory submissions and approvals for product candidates.

• Royalties on worldwide sales of licensed products. The licensee is required to pay royalties on sales, which vary based on annual sales volume and the degree of patent protection provided by the licensed intellectual property. Royalty payments may be reduced if the licensee is required to license additional intellectual property from one or more third parties in order to commercialize a product or, in certain circumstances, if product sales suffer from direct competition. Royalty obligations under the agreements continue on a country-by-country basis until the date on which no valid patent claims relating to a product exist or, if the product is not covered by a valid patent claim, 15 years from the date of first sale of the product in that country.

In addition, these exclusive licenses provide that if the licensee (whether us or Merck Serono) seeks a partner for the applicable product candidate, the licensor will have the right to opt in to co-develop and co-commercialize the product candidate on pre-negotiated terms, including retroactive and prospective cost sharing, royalties and milestone fees. In addition to having co-development and co-commercialization rights within the United States, Merck Serono would have an exclusive license outside of the United States whether Merck Serono opts in to develop a product candidate of ours or we opt in to develop a product candidate of Merck Serono.

Patents and Proprietary Rights

We seek appropriate patent protection for our proprietary technologies and product candidates by filing patent applications in the United States. We have more than 340 unexpired issued or allowed U.S. patents, and over 180 pending U.S. patent applications. When appropriate, we also seek foreign patent protection and to date have more than 790 issued or allowed foreign patents.

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Our patents and patent applications are primarily directed to therapeutic protein-based products. We commonly seek claims directed to compositions of matter for genes and proteins, including antibodies, methods of using and methods of making. When appropriate, we also seek claims to related technologies, such as reagents used in release assays and formulations. We maintain patents and prosecute applications, worldwide, for technologies that we have outlicensed. Similarly, for development projects that are partnered, we work closely with our development partners to coordinate patent efforts, including filings, prosecution, term extension, defense and enforcement. As our development product candidates advance through research and development, we seek to diligently identify and protect new inventions, such as combinations, improvements to methods of manufacturing or purification, and methods of treatment. We also work closely with our scientist personnel to identify and protect new inventions that could eventually add to our development pipeline.

Patents expire, on a country by country basis, at various times depending on various factors, including the filing date of the corresponding patent application(s), the availability of patent term extension and supplemental protection certificates and terminal disclaimers. For our commercial product and each of our product candidates, we have filed or expect to file multiple patent applications and expect to obtain multiple patents. The table below provides expected dates for the first patent expiration in patent portfolios for our commercial product, RECOTHROM, and product candidates in our development pipeline. Each expiration date may be subject to patent term extension, where the length of term extension would not exceed five years under current law and depends on factors such as the amount of time taken by the FDA to review the first marketing approval application of a drug covered by the patent.

Commercial Product/Product Candidate	First Patent Expiration Date
RECOTHROM	December 2012; expected to extend until July 2015 under patent term extension
PEG-IFN-lambda	September 2021
IL-21	March 2020
IL-31 mAb	January 2023

We require our scientific personnel to maintain laboratory notebooks and other research records in accordance with our policies, which are designed to strengthen and support our patent efforts. In addition to our patented intellectual property, we also develop and seek to protect unpatented technology, trade secrets and confidential information, including our genetic sequence database, bioinformatics algorithms, research, preclinical and clinical data, development and manufacturing strategies. Our policy is to require our employees, consultants and advisors to execute a confidentiality and proprietary information agreement before beginning their employment, consulting or advisory relationship with us. These agreements generally provide that the individual must keep confidential and not disclose to other parties any confidential information developed or learned by the individual during the course of their relationship with us except in limited circumstances. These agreements also generally provide that we shall own all inventions conceived by the individual in the course of rendering services to us. These agreements, however, may not provide effective protection of our technology, confidential information or, in the event of unauthorized use or disclosure, may not provide adequate remedies.

As part of our business strategy, we often work with third parties in our research and development activities. Accordingly, disputes may arise about inventorship, ownership and corresponding rights to know-how and inventions resulting from the joint creation or use of intellectual property by us and our corporate partners, licensors, licensees, scientific collaborators and consultants. In addition, other parties may circumvent any proprietary protection we do have. These parties may independently develop equivalent technologies or independently gain access to and disclose substantially equivalent information, and confidentially agreements and material transfer agreements we have entered into with them may not provide us with effective protection.

Refer to “Item 1A. Risk Factors” for additional information relating to our patents and proprietary rights.

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Government Regulation

Regulation by government authorities in the United States, Canada, Europe, Japan and other countries is a significant consideration in our ongoing research and product development activities and in the manufacture and marketing of our products and product candidates. Both before and after the approval of our products and product candidates, we, our products, our product candidates, our operations, our facilities, our suppliers, and our contract manufacturers, contract research organizations, and contract testing laboratories are subject to extensive regulation by government authorities in the United States and other countries. The FDA and comparable regulatory bodies in other countries currently regulate therapeutic proteins and related pharmaceutical products as biologics. Biologics cannot be lawfully marketed in the United States without FDA approval. Biologics are subject to extensive pre- and post-market regulation by the FDA, including regulations that govern the collection, testing, manufacture, safety, efficacy, potency, labeling, storage, record keeping, advertising, promotion, sale and distribution of the products. The time required for completing testing and obtaining approvals of our product candidates is uncertain and varies among product candidates for several reasons, but the process takes many years. In addition, we may encounter delays in product development or rejections of product applications due to changes in FDA or foreign regulatory laws or policies during the period of product development and testing. Failure to comply with regulatory requirements may subject us to, among other things, warning letters, civil penalties and criminal prosecution; fines and other monetary penalties; restrictions on product development and production; suspension, delay, rejection, or withdrawal of approvals; injunctions; and the seizure or recall of products. The lengthy process of obtaining regulatory approvals and ensuring compliance with appropriate statutes and regulations requires the expenditure of substantial resources. Any delay or failure, by us or our corporate partners, to obtain regulatory approvals could adversely affect our ability to commercialize product candidates, receive royalty payments and generate sales revenue.

The nature and extent of the governmental pre-market review process for our potential products will vary, depending on the regulatory categorization of particular products. The necessary steps before a new biological product may be marketed in the United States ordinarily include:

• nonclinical laboratory and animal tests;

• submission to the FDA of an IND application, which must become effective before clinical trials may commence in the United States;

• completion of adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug for its intended use;

• submission to the FDA of a BLA;

• satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with current Good Manufacturing Practices (cGMP); and

• FDA review and approval of the BLA.

Nonclinical tests include laboratory evaluation of the product, as well as animal studies to assess the potential safety and efficacy of the product. The results of nonclinical tests, together with extensive manufacturing information, analytical data and proposed clinical trial protocols, are submitted to the FDA as part of an IND application, which must become effective before the initiation of clinical trials. The IND application will automatically become effective 30 days after receipt by the FDA unless before that time the FDA raises concerns or questions and imposes a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding FDA concerns or questions before clinical trials can proceed. FDA may also impose a clinical hold on an ongoing clinical trial if, for example, safety concerns arise, in which case the trial cannot recommence without FDA authorization.

Clinical trials involve the administration of the product to human subjects under the supervision of qualified personnel. Clinical trials are conducted under protocols that detail the objectives of the trial, inclusion and exclusion criteria, and the parameters to be used to monitor safety and the efficacy criteria to be evaluated.

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Protocols for each phase of the clinical trials are submitted to the FDA as part of the original IND application or as an amendment to the IND application. Further, each clinical trial must be reviewed and approved by an independent institutional review board at each participating institution. The institutional review board will consider, among other things, ethical factors and the safety of human subjects, and may approve the protocol as submitted, require changes, or decline to approve it.

Clinical trials generally are conducted in three sequential phases that may overlap. In Phase 1, the potential product is administered to healthy human subjects or patients, or both, to assess safety, metabolism, pharmacokinetics and pharmacological actions, and side effects associated with increasing doses of the drug. Phase 2 usually involves one or more trials to evaluate the efficacy of the potential product for a particular indication or indications in patients with the disease or condition under study, to determine dosage tolerance and optimum dosage, and to further identify possible adverse reactions and safety risks. If a compound appears to be effective and to have an acceptable safety profile in Phase 2 evaluations, Phase 3 trials may be undertaken to evaluate further clinical efficacy, usually in comparison to standard therapies or placebo, generally within a broader patient population with the disease state or condition for which an indication for use will be sought, and at geographically dispersed clinical sites. Phase 1, Phase 2 or Phase 3 testing may not be completed successfully within any specific period of time, if at all, with respect to any of our potential products. Furthermore, we, an institutional review board, the FDA or other regulatory bodies may suspend a clinical trial at any time for any reason, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

The results of pharmaceutical development, nonclinical studies and clinical trials are submitted to the FDA in the form of a BLA for approval of the manufacture, marketing and commercial shipment of the biological product. A BLA contains extensive manufacturing information, and FDA usually inspects each manufacturing facility and quality system to assess compliance with cGMP before approving a BLA. The inspection and approval process require substantial time, effort and resources, and approvals may not be granted on a timely basis, if at all. If FDA determines that the BLA is not acceptable, it may issue a complete response letter outlining the deficiencies and stating what additional information or studies it requires for approval. Notwithstanding the submission of any requested additional testing or information, the FDA ultimately may decide that the application does not satisfy the criteria for approval, and deny the application. If a product is approved, the FDA may limit the indications for which the product may be marketed, require extensive warnings on the product label, impose restrictive distribution or other risk mitigation measures, and /or require post-approval clinical studies. After approval, certain changes to the approved product, such as adding new indications, manufacturing changes, or additional labeling claims, will require submittal of a new BLA or, in some instances, a BLA supplement, for further FDA review and approval.

Some of our product candidates may qualify as orphan drugs under the Orphan Drug provisions of the Food, Drug, and Cosmetic Act. Orphan drug designation must be requested before an application for marketing authorization is submitted. If granted, orphan drug designation applies to a drug for a specific indication and it is possible for more than one drug to receive orphan drug designation for the same indication. If a product which has an orphan drug designation subsequently receives the first FDA approval for the indication for which it has such designation, the product is entitled to orphan exclusivity, which means the FDA may not approve any other application to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as the showing of clinical superiority to the product with orphan exclusivity. The FDA granted IL-21 orphan drug status for the treatment of melanoma patients with advanced or aggressive disease. However, orphan drug designation for IL-21 may not have a positive effect on our revenues even if the product is approved, and it is possible that in the future none of our other product candidates will be designated as an orphan drug by the FDA.

In addition, the FDA regulates the advertising and promotion of biologic products and medical devices, emphasizing areas such as appropriate disclosure of risks, prohibition of off-label promotion, industry-sponsored scientific and educational activities, comparative advertising, and promotional activities involving the Internet.

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FDA marketing approval is only applicable in the United States. Marketing approval in foreign countries is subject to the regulations of those countries. The approval procedures vary among countries and can involve additional testing. The time required to obtain approval outside of the United States may differ from that required for FDA approval. There are centralized procedures for filings in the European Union (EU) countries, which allow submission of a single marketing authorization application to obtain approval in the approximately 25 countries of the EU. Outside of the EU, most countries generally have their own procedures and requirements, and compliance with these procedures and requirements may be expensive and time-consuming. Accordingly, there may be delays in obtaining required approvals from foreign regulatory authorities after the relevant applications are filed, if approvals are ultimately received at all.

We are also subject to various federal, state and local laws, regulations, industry guidelines and recommendations relating to employment practices; safe working conditions; laboratory and manufacturing practices; the experimental use of animals; the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents; product liability; and unfair competition, including advertising and other promotional efforts. Government regulations that might result from future legislation or administrative action, including additions or changes to environmental laws, may materially affect our business operations and revenues.

Competition

We face competition from a broad range of biotechnology and pharmaceutical companies as well as academic and research institutions. We compete with these entities to develop and obtain proprietary rights to new therapeutic proteins and to commercialize the products we develop from these proteins. Some of our competitors have greater resources and experience than we have in discovering, developing, manufacturing and selling protein-based products. We expect that competition in our field will continue to be intense.

RECOTHROM, which was approved in January 2008 by the FDA for use as a topical hemostat in the United States, faces substantial competition in the topical hemostat market. In addition to RECOTHROM, there are two stand-alone thrombin products currently available in the United States: Thrombin-JMI, a bovine plasma-derived thrombin from King Pharmaceuticals, Inc., and Evithrom, a pooled human plasma-derived thrombin, from Ethicon, Inc., a Johnson & Johnson Company. Also, a number of other topical hemostatic agents are currently available on the market from Johnson & Johnson Wound Management, a division of Ethicon, Inc. and the BioSurgery business unit of Baxter BioScience, including GELFOAM Plus, a gelatin sponge product co-packaged with human-plasma derived thrombin. Furthermore, new products and technologies could be developed in the future to limit or control bleeding during surgeries.

We anticipate that our other product candidates currently in development will face intense competition in their respective therapeutic areas. PEG-IFN-lambda, which we are co-developing with Bristol-Myers Squibb as a potential treatment for hepatitis C virus (HCV), is targeting a market with an established standard of care, i.e., interferon-alpha based therapy plus ribavirin. We believe that PEG-IFN-lambda may be a better alternative to the current standard of care due to the potential for fewer side effects and equivalent or potentially better antiviral activity. However, we would have to compete with two well established interferon-alpha based drugs, Roche’s PEGASYS^® and Schering-Plough’s PEG-Intron^®. Furthermore, the introduction of a new class of drugs, such as HCV protease inhibitors or polymerase inhibitors or a combination thereof, may result in transition to a different treatment regimen and, if this regimen excludes an interferon component, may represent an additional competitive threat to our product. Two HCV protease inhibitors, Vertex’s telaprevir and Schering-Plough’s boceprevir, are currently in Phase 3 development.

Our other product candidates, such as IL-21 for metastatic melanoma and IL-31 mAb for severe atopic dermatitis, target diseases for which there is a significant unmet medical need; however, this may change with the introduction of new products currently in development by other companies. There are several product candidates currently in Phase 3 development for metastatic melanoma, including ipilimumab, an immunotherapy being developed by Bristol-Myers Squibb, and PLX4032, a targeted therapy being co-developed by Plexxikon Inc. and Roche.

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Although we believe that currently we are well positioned to compete effectively with respect to our existing and potential competitors, our ability to compete successfully in the future will depend on many factors, including our ability to:

• successfully maintain and expand as appropriate RECOTHROM commercial infrastructure, including the product supply and sales force, and establish commercial infrastructure for other product candidates as necessary;

• develop products that are safer, more efficacious or more convenient to administer than other products in the marketplace;

• leverage our established collaborations and enter into new collaborations to support the development of our products;

• obtain timely regulatory approvals;

• manufacture our products in a cost-effective manner in quantities sufficient to meet market demands;

• obtain adequate reimbursement from government health administration authorities, private health insurers and health maintenance organizations;

• obtain and enforce adequate patent protection for our product candidates and technologies;

• maintain adequate capital levels; and

• attract and retain key personnel.

Employees

As part of our strategic refocus, we reduced headcount by approximately 33% in April 2009 and by an additional 15% in December 2009. As of December 31, 2009, we had 323 full-time employees, including 176 employees dedicated to research and development and 64 employees dedicated to sales and marketing. Each of our employees had signed confidentiality and intellectual property agreements, and no employees are covered by a collective bargaining agreement. We have never experienced employment-related work stoppages and consider our employee relations to be good.

Website Access to Our SEC Reports

Our Internet address is www.zymogenetics.com. We make our periodic SEC reports (Form 10-Q and Form 10-K), current reports (Form 8-K) and amendments to these reports available free of charge through our website as soon as reasonably practicable after they are filed electronically with the SEC. We may from time to time provide important disclosures to investors by posting them in the investor relations section of our website, as allowed by SEC rules.

Item 1A.    Risk Factors

You should carefully consider the risks described below together with the other information set forth in this Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. The risks described below are not the only risks facing our company. The risks described below are not the only ones that we face. Additional risks not presently known to us or that we currently deem immaterial may also affect our business, operating results and financial condition.

Risks Related to Our Business

If we fail to increase sales of RECOTHROM^® recombinant human thrombin or to successfully develop and commercialize product candidates in our pipeline, we will not meet our financial goals.

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Our near-term financial success is highly dependent on our ability to increase revenue from the commercialization of RECOTHROM. The successful commercialization of RECOTHROM will depend on many factors, including the following:

• the effectiveness of our product differentiation, marketing, promotion, distribution, sales and pricing strategies and programs, and those of our competitors;

• our ability to maintain effective promotional materials that are acceptable to regulatory officials;

• product demand within the medical community;

• our ability to penetrate the existing thrombin market and develop complementary products;

• the introduction of new alternative topical hemostats that may compete with RECOTHROM and offer desirable features or benefits;

• new data or adverse event information relating to RECOTHROM or any similar products and any resulting regulatory action;

• clinical practice or other guidelines regarding topical hemostats published by professional organizations or specialty groups;

• successfully maintaining a product supply chain to meet demand;

• successfully maintaining a commercial infrastructure, including a sales force; and

• the ability to gain formulary acceptance and favorable formulary positioning in a timely fashion or at all.

Part of our business strategy involves developing and commercializing new products, such as PEG-IFN-lambda, IL-21 and IL-31 monoclonal antibody (IL-31 mAb), at times through entry into strategic alliances and collaborations. This part of our strategy requires us or our collaborators to conduct clinical trials to support approval of these new products. The success of this component of our strategy will depend on the outcome of these clinical trials, the success of our collaborators, the content and timing of our submissions to regulatory authorities and whether and when those authorities determine to grant approvals. The other element of our business strategy is maximizing the commercial opportunity for RECOTHROM. If we fail to significantly increase sales of RECOTHROM, our ability to successfully complete development and commercialization activities for our other product candidates, and our ability to become profitable in the future, will be adversely affected.

We anticipate incurring additional losses and may not achieve profitability.

As of December 31, 2009, we had an accumulated deficit of $805.2 million. We expect to continue to incur significant losses over the next several years, and we may never become profitable. Although we began generating RECOTHROM sales revenue in 2008, it will be a number of years before we generate revenues from sales of other product candidates, if ever. Our revenues from the sales of RECOTHROM and existing collaborative and licensing arrangements are currently insufficient to fund our operating expenses, and we may never generate revenues sufficient to fund these expenses. In addition, we will continue to incur substantial expenses relating to our product development and commercialization efforts. The development and commercialization of our product candidates will require significant further research, development, testing, regulatory approvals and sales and marketing activities. We will continue to incur substantial operating losses for at least the near term as we continue to support the commercialization of RECOTHROM and as a result of our development activities for the product candidates in our development pipeline. These losses have had and will have an adverse effect on our shareholders’ equity (deficit) and working capital. Even if we become profitable in the future, we may not remain profitable.

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If we fail to obtain or generate the capital we need to fund our operations, we will be unable to continue operations.

Our business does not currently generate the cash needed to finance our operations, and we do not expect it to do so in the foreseeable future. We anticipate that we will continue to expend substantial funds on the development of our product candidates, and the amount of these expenditures may increase in the future. We expect to seek additional funding through public or private financings, including equity financings, credit facilities, or through other arrangements, including collaborative and licensing arrangements. Poor financial results, including sales of RECOTHROM being less than expected, unanticipated expenses or unanticipated opportunities that require financial commitments could give rise to additional financing requirements or require us to obtain additional financing sooner than we expect. However, financing may be unavailable when we need it or may be unavailable on acceptable terms, especially in light of the current global economic conditions. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our existing shareholders will be diluted, and these securities may have rights superior to those of our common stock. If we are unable to raise additional funds when we need them, we may be required to delay, scale back or eliminate expenditures for some of our development or commercial programs. We may also be required to grant rights to third parties to develop and commercialize products and product candidates that we would prefer to develop and commercialize ourselves, and such rights may be granted on terms that are not favorable to us. If we were required to grant such rights, the ultimate value of these products or product candidates to us would be reduced. In addition, if our cash and cash equivalents drop below specified levels it may result in the loss of co-promotion rights and U.S. patent rights under our agreement with Bristol-Myers Squibb relating to PEG-IFN-lambda and constitute an event of default under our June 28, 2008 Facility Agreement with Deerfield Private Design Fund, L.P., Deerfield Private Design International, L.P. and Deerfield ZG Corporation, which would result in the principal and accrued and unpaid interest on the loans made under the agreement to become immediately due and payable.

Additionally, a substantial portion of our operating expenses are funded through our collaborative agreements with third parties. For example, as part of the co-development/co-promotion and license agreement with Bristol-Myers Squibb for PEG-IFN-lambda, we received $200.0 million in 2009. To the extent that we lose collaborative partners for a program or a portion of a program that we do not fund internally, or to the extent that we do not receive the funding that we expect from our collaborative agreements, unless we are able to obtain alternative sources of funding, we would be delayed in or unable to continue developing product candidates under the affected program. In addition, to the extent that funding is provided by a collaborator for non-program-specific uses, the loss of significant amounts of collaborative funding could result in the delay, reduction or termination of additional research and development programs, a reduction in capital expenditures or business development and other operating activities, or any combination of these measures, which would harm our business. Subject to the terms of the relevant agreement, each collaborator has the right to terminate its obligation to provide research funding.

We are focused on a limited number of product candidates, and adverse developments with respect to one or more of those candidates could harm our business.

Our business is focused on a limited number of product candidates. We have discontinued discovery research activities in oncology and immunology and have retained only those research capabilities necessary to support the continued development of PEG-IFN-lambda, IL-21, and our IL-31 mAb product candidate. Our focus on a limited number of internal product candidates means that adverse developments with respect to one or more of these candidates could have a more significant adverse impact on our business than if we maintained a broader portfolio of product candidates.

One of our limited number of internal product candidates relates to therapeutic antibodies where we have limited experience and where we may be unsuccessful developing or commercializing a product.

One of our internal product candidates, the IL-31 mAb, involves therapeutic antibody technology, an area where we have limited experience and we may be unsuccessful in our efforts to develop and commercialize this

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product candidate. Moreover, we may be unsuccessful in obtaining adequate, if any, patent coverage for our discoveries and therapeutic antibody products. In addition, third parties may own key technology or dominating patents that may prevent us from developing, manufacturing or commercializing therapeutic antibodies.

For example, we are aware of broad patents owned by others relating to the discovery, development, manufacture, use and sale of recombinant humanized antibodies, recombinant humanized single chain antibodies, recombinant human antibodies, and recombinant human single chain antibodies and other technologies. Our IL-31 mAb product candidate may use or include such technologies. While we are investigating and contemplating entering into agreements with certain third parties in order to gain access to their technology, we have no assurance that a license to a particular technology will be available and such third parties may not be willing to grant licenses to the technology. We may be unable to obtain necessary rights to key technologies needed for the discovery, development, production or commercialization of therapeutic antibodies through licensing agreements on terms attractive to us, if at all. If these licenses are not obtained, we might be prevented from developing IL-31 monoclonal antibodies. If we are unsuccessful in our efforts to obtain needed licenses, our ability to develop and commercialize our IL-31 mAb product candidate could be limited. Any patent infringement or other legal claims that might be brought against us may cause us to incur significant expenses, enjoin our development or commercialization of such products, divert the attention of our management and key personnel from other business concerns and, if successfully asserted against us, require us to pay substantial damages.

We are subject to extensive and rigorous governmental regulation including the requirement of approval before our products may be lawfully marketed.

Both before and after the approval or our product and product candidates, we, our product, our product candidates, our operations, our facilities, our suppliers, and our contract manufacturers, contract research organizations, and contract testing laboratories are subject to extensive regulation by governmental authorities in the United States and other countries, with regulations differing from country to country. In the United States, the FDA regulates, among other things, the pre-clinical testing, clinical trials, manufacturing, safety, efficacy, potency, labeling, storage, record keeping, quality systems, advertising, promotion, sale and distribution of therapeutic products. Failure to comply with applicable requirements could result in, among other things, one or more of the following actions: notices of violation, untitled letters, warning letters, fines and other monetary penalties, unanticipated expenditures, delays in approval or refusal to approve a product candidate; product recall or seizure; interruption of manufacturing or clinical trials; operating restrictions; injunctions; and criminal prosecution. We or the FDA, or an institutional review board, may suspend or terminate human clinical trials at any time on various grounds, including a finding that the subjects are being exposed to an unacceptable health risk. Except for RECOTHROM, none of our product candidates has been approved for sale in the United States. Our product candidates, PEG-IFN-lambda, IL-21, IL-31 mAb, or any subsequent product candidates cannot be lawfully marketed in the United States without FDA approval. Any failure to receive the marketing approvals necessary to commercialize our product candidates could harm our business.

The regulatory review and approval process of governmental authorities, which includes the need to conduct nonclinical studies and clinical trials of each product candidate, is lengthy, expensive and uncertain, and regulatory standards may change during the development of a particular product candidate. We are not permitted to market our product candidates in the United States or other countries until we have received requisite regulatory approvals. For example, securing FDA approval requires the submission of a new drug approval (NDA) or biologics license approval (BLA) application to the FDA. The approval application must include extensive nonclinical and clinical data and supporting information to establish the product candidate’s safety and effectiveness for each indication. The approval application must also include significant information regarding the chemistry, manufacturing and controls for the product. The FDA review process typically takes many years to complete and approval is never guaranteed. If a product is approved, FDA may limit the indications for which the product may be marketed, require extensive warnings on the product labeling, impose restricted distribution programs, require expedited reporting of certain adverse events, or require costly ongoing requirements for post-

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marketing clinical studies and surveillance or other risk management measures to monitor the safety or efficacy of the product candidate. Markets outside of the United States also have requirements for approval of drug candidates with which we must comply prior to marketing. Obtaining regulatory approval for marketing of a product candidate in one country does not ensure we will be able to obtain regulatory approval in other countries but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in other countries. Also, any regulatory approval of any of our products or product candidates, once obtained, may be withdrawn.

The FDA may grant orphan drug designation to a drug intended to treat a “rare disease or condition,” which generally is a disease or condition that affects fewer than 200,000 persons in the United States. Orphan drug designation must be requested before submitting an application for marketing authorization. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. If a product which has an orphan drug designation subsequently receives the first FDA approval for the indication for which it has such designation, the product is entitled to orphan exclusivity, which means the FDA may not approve any other application to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as the showing of clinical superiority to the product with orphan exclusivity. Also, competitors may receive approval of other different drugs or biologics for the indications for which the orphan product has exclusivity.

FDA has increased its attention to product safety concerns in light of recent high profile safety issues with certain drug products, in the United States. Moreover, heightened Congressional scrutiny on the adequacy of the FDA’s drug approval process and the agency’s efforts to assure the safety of marketed drugs has resulted in proposed agency initiatives and new legislation addressing drug safety issues. If adopted, any new legislation or agency initiatives could result in delays or increased costs during the period of product development, clinical trials and regulatory review and approval, as well as increased costs to assure compliance with any new post-approval regulatory requirements. Any of these restrictions or requirements could force us to conduct costly studies.

In addition, we, our suppliers, our operations, our facilities, and our contract manufacturers, our contract research organizations, and our contract testing laboratories are required to comply with extensive FDA requirements both before and after approval of our products. For example, we are required to report certain adverse reactions and production problems, if any, to FDA, and to comply with certain requirements concerning advertising and promotion for our products. Also, quality control and manufacturing procedures must continue to conform to current Good Manufacturing Practices (“cGMP”) regulations after approval, and the FDA periodically inspects manufacturing facilities to assess compliance with cGMP. Accordingly, we and others with whom we work must continue to expend time, money, and effort in all areas of regulatory compliance, including manufacturing, production, and quality control. In addition, discovery of safety issues may result in changes in labeling or restrictions on a product manufacturer or BLA holder, including removal of the product from the market.

Our ability to differentiate RECOTHROM in the marketplace may be limited if FDA challenges our promotional and marketing materials.

FDA has authority to regulate advertising and promotional labeling for RECOTHROM under the Federal Food, Drug, and Cosmetic Act and implementing regulations. In general, that authority requires advertising and promotional labeling to be truthful and not misleading, and marketed only for the approved indications. FDA routinely provides its interpretations of that authority in informal communications and also in more formal communications such as untitled letters or warning letters, and although such communications are not final agency decisions, companies may decide not to contest the agency’s interpretations so as to avoid disputes with FDA, even if they believe the claims to be truthful, not misleading and otherwise lawful. FDA has generally given close scrutiny to claims making a comparison of the attributes of one product to another. We have made such claims for RECOTHROM as a means of differentiating RECOTHROM from competitive products containing bovine thrombin, and are aware that King Pharmaceuticals, Inc. has repeatedly complained to FDA

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about those claims. In April 2008, we received an untitled letter from FDA identifying concerns with certain comparative statements contained in a press release relating to antibody formation for RECOTHROM and bovine thrombin. We provided our response to the FDA and received a letter from the FDA confirming that the matter was closed in May 2008. Subsequently, in its response filed in October 2009 to a Citizen Petition we filed with FDA in August 2009 requesting that FDA remove King’s bovine thrombin product from the market in the interest of patient safety, King identified comparative claims from our promotional materials that it believes are false and misleading. We believe our claims, including those challenged by King, are truthful, not misleading, and otherwise lawful, but it is possible that the FDA or other regulatory authorities may disagree with our conclusion. If FDA or other regulatory authorities were to challenge our promotional materials or activities, and if we were to elect not to contest such a challenge or were unable to resolve it in a satisfactory manner, our ability to differentiate RECOTHROM in the marketplace could be adversely affected.

Our success with RECOTHROM will depend on our ability to effectively compete with large and well established competitors who have greater resources and broader product lines than we do.

The biotechnology and pharmaceutical field is extremely competitive, and RECOTHROM faces substantial competition from alternative topical hemostats. In the United States, stand-alone plasma-derived thrombin products on the market include Thrombin-JMI, a bovine plasma-derived thrombin sold by King, and Evithrom, a pooled human plasma-derived thrombin sold by Ethicon, Inc., a division of Johnson & Johnson. In addition, Baxter International, Inc. markets the GELFOAM Plus Hemostasis Kit, which is Pfizer Inc.’s GELFOAM sterile sponge co-packaged with human plasma-derived thrombin. Further, a number of companies, including Johnson & Johnson and Baxter International, Inc., currently market other hemostatic agents that may compete with RECOTHROM, including passive agents such as gelatin and collagen pads and flowable hemostats, as well as fibrin sealants and tissue glues. Many of these alternative hemostatic agents are relatively inexpensive and have been widely used for many years. Consequently, physicians and hospital formulary decision-makers may be hesitant to adopt RECOTHROM.

Several companies, some of which have substantial experience and resources, have products or are developing product candidates in the areas we have targeted for our product candidates.

For our product candidates in development, we face competition from other entities involved in the research and development of therapeutic proteins, antibody products and pharmaceuticals, including Human Genome Sciences, Inc., Biolex Therapeutics, Inc., Bristol-Myers Squibb Company, Plexxikon Inc., and Genentech, Inc., among others. A number of our largest competitors are pursuing the development or marketing of pharmaceuticals that address the same diseases that we are pursuing, and it is possible that the number of companies seeking to develop products and therapies for these diseases will increase. We also face competition from entities developing other types of products related to particular diseases or medical conditions, including other biotechnology and pharmaceutical companies, universities, public and private research institutions, government entities and other organizations.

Furthermore, our potential products, if approved and commercialized, may compete against well-established therapeutic protein-based products or well-established antibody products, many of which may be currently reimbursed by government health administration authorities, private health insurers and health maintenance organizations.

Many of our existing and potential competitors have substantially greater research, product development and commercial capabilities and financial, scientific, marketing and human resources than we do. As a result, these competitors may:

• succeed in developing therapeutic protein-based products or alternative therapies, earlier than we do;

• obtain approvals for products from the FDA or other regulatory agencies more rapidly than we do;

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• obtain patents that block or otherwise inhibit our ability to develop and commercialize our product candidates;

• develop treatments or cures that are safer, more effective, convenient or economical than those we propose to develop;

• devote greater resources to marketing or selling their products;

• introduce products that make the continued development of our potential products uneconomical;

• withstand price competition more successfully than we can;

• negotiate more favorable terms with third-party collaborators, licensees, group purchasing organizations and other large customers; and

• take advantage of acquisitions or other opportunities more readily than we can.

Because of these and other potential disadvantages, we may be unable to compete effectively with these competitors. All of our product candidates face competition and we expect that competition in our industry will continue to be intense.

Clinical trials may fail to demonstrate the safety and effectiveness of our product candidates, which could delay, limit or prevent their regulatory approval.

Clinical trials involving PEG-IFN-lambda, IL-21, IL-31 mAb or any subsequent product candidates may reveal that those candidates are ineffective, are insufficiently effective given their safety profile, have unacceptable toxicity or safety profiles or have other unacceptable side effects. In addition, data obtained from tests and trials are susceptible to varying interpretations and FDA or other regulatory authorities may interpret the results of our preclinical studies or clinical trials less favorably than we do, which may delay, limit or prevent regulatory approval. Likewise, the results of preliminary studies do not predict clinical success, and larger and later-stage clinical trials may not produce the same results as earlier-stage trials. Frequently, product candidates that have shown promising results in early clinical trials have subsequently suffered significant setbacks in later clinical trials. Similarly, clinical trial results may vary between different arms of a clinical trial for reasons that we cannot adequately explain. In addition, the design of a clinical trial can determine whether its results will support approval of a product and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced. We have limited experience in designing clinical trials that have supported the approval of a product and may be unable to do so successfully. Further, clinical trials of potential products often reveal that it is not practical or feasible to continue development efforts. The failure to provide clinical and preclinical data that are adequate to demonstrate to the satisfaction of the regulatory authorities that our product candidates are safe and effective for their proposed use will delay, limit or prevent approval and will prevent us from marketing those products.

If we or others identify previously unknown side effects or safety concerns for RECOTHROM our business could be harmed.

If we or others identify previously unknown side effects, safety concerns, for RECOTHROM or any products perceived to be similar to RECOTHROM, then in any of these circumstances:

• sales of RECOTHROM may decrease significantly;

• regulatory approvals for RECOTHROM may be restricted or withdrawn;

• we may decide to, or be required to, initiate a recall or send product warning letters to physicians, pharmacists and hospitals;

• reformulation of the product, additional preclinical or clinical studies, changes in labeling or changes to or re-approvals of manufacturing facilities may be required;

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• our reputation in the marketplace may suffer; and

• government investigations and lawsuits, and private party lawsuits, including class action suits, may be brought against us.

Any of the above occurrences could harm or prevent sales of RECOTHROM, increase our expenses and impair our ability to successfully commercialize RECOTHROM.

Furthermore, now that RECOTHROM is approved in the United States, it is being used in a wider population and in a less rigorously controlled fashion than in clinical studies. It is expected that some patients exposed to RECOTHROM will become sick or die suddenly, that in some or even many of these cases there will not be sufficient information available to rule out RECOTHROM as a contributing factor or cause of sickness or mortality, and that safety reporting from physicians or from us to regulatory authorities may link RECOTHROM to death or other serious adverse effects. As a result, regulatory authorities, healthcare practitioners, third-party payers or patients may perceive or conclude that the use of RECOTHROM is associated with death or other serious adverse effects, any of which could mean that our ability to commercialize RECOTHROM could be adversely affected and our business could be impaired.

We may be required to defend lawsuits and pay damages in connection with alleged or actual harm caused by our products and product candidates.

The design, testing, manufacture and sale of therapeutic products involve an inherent risk of product liability claims and associated adverse publicity, even if the claims arise from use of the product in a manner inconsistent with label or other instructions. In addition, RECOTHROM is and will be used on patients undergoing surgery, where there are significant risks to patients, and adverse outcomes in patients exposed to RECOTHROM could result in lawsuits.

If any of these potential lawsuits against us were to be successful, we may incur significant costs and could be required to make significant modifications to our business. Even if such lawsuits are without merit or otherwise unsuccessful, they could cause adverse publicity, divert management attention and be costly to respond to, and, therefore, could have an adverse effect on our business. Although we maintain product liability and general insurance, our coverage may not be adequate to cover product liability or other claims. We do not know if we will be able to maintain existing or obtain additional product liability insurance on acceptable terms or with adequate coverage against potential liabilities. This type of insurance is expensive and may in the future be unavailable on acceptable terms, if at all. Any product liability claims, whether or not ultimately successful, could have a negative effect on our reputation, stock price, ability to penetrate the market and sell our products and our financial condition and results.

Guidelines, recommendations, codes and other literature published by various organizations, including competitors, may affect our ability to effectively promote and sell RECOTHROM.

Various professional societies, industry trade associations, practice management groups, private health/science foundations, and organizations periodically publish guidelines, codes, recommendations and other literature to the healthcare and patient communities. These organizations have in the past made recommendations about RECOTHROM or products that compete with RECOTHROM, such as the treatment guidelines of the Society of Thoracic Surgeons. Competitors may also conduct and publish the results of clinical trials or support the conduct and publishing of other reviews or analyses aimed at diminishing concerns about their own products or indicating advantages over RECOTHROM. We have no control over the content of many of these publications, even those for which we may provide some form of financial support. For example, from time to time, we make medical education grants to organizations that in some cases result in a publication. The content of these publications or independent medical education programs may not be favorable to RECOTHROM and may negatively impact our ability to penetrate the market.

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Pending litigation by our primary competitor for RECOTHROM could have an adverse impact on our business.

King Pharmaceuticals, Inc. is our primary competitor in the stand-alone thrombin market, and they have been aggressive in defending their leading position in that market. In November 2009, King and affiliated entities filed a lawsuit against us in federal district court in Greeneville, Tennessee (near King’s headquarters in Bristol, Tennessee), seeking to prevent us from making certain claims relating to Thrombin-JMI and RECOTHROM and from making certain comparative claims regarding King’s products and our RECOTHROM product. King alleges that we have engaged in unfair competition, false advertising, trademark infringement, and related claims under federal law and Tennessee state law. King also filed motions with the District Court seeking temporary restraining orders and preliminary injunctive relief. On December 10, 2009, the judge denied King’s motions for a preliminary injunction. However, the lawsuit continues and will likely not be resolved for some time. In the lawsuit, King is seeking a permanent injunction, as well as monetary damages, and if they ultimately prevail in the litigation our business could be harmed. Further, King’s litigation efforts, even if they are not successful, will require significant management time and attention, potentially diverting focus from direct efforts to secure additional customers for RECOTHROM.

Our patents and patent applications, including those relating to RECOTHROM, may not result in meaningful protection against competitors, provide us with any competitive advantage, or provide adequate protection or rights for new discoveries, and our competitors may commercialize the discoveries we patent or attempt to patent.

While we hold patents to the manufacture of RECOTHROM, our composition of matter patent protection is limited to a key intermediate in the production of recombinant thrombin. Accordingly, we may be unable to prevent other parties from developing alternate methods of manufacturing recombinant thrombin or from selling recombinant thrombin. If a third party sold recombinant thrombin manufactured using an alternate method of manufacturing, it could impair our business. In addition, after FDA approval of RECOTHROM, we filed an application for patent term extension of our relevant U.S. patents, but thus far we have not received confirmation from the U.S. Patent and Trademark Office that the extension will be granted to the extent we requested, or at all. If we are unable to obtain the requested term extension of our RECOTHROM patents, it could limit our ability to stop competitors and could impair our business. Additionally, we are aware of certain U.S. and European patents and patent applications held by third parties relating to thrombin and to methods of manufacture of thrombin and other recombinant proteins. Based on our analyses of these patents, we believe that we do not and will not infringe these patents and that many of the claims of these patents are invalid or unenforceable; however, the patent holders, courts or other governmental or legal entities may conclude that our products, processes or actions in developing, manufacturing or selling RECOTHROM do infringe one or more valid and enforceable claims of these patents. We may seek licenses to such patents if, in our judgment, such licenses are needed. If any licenses are required, we may be unable to obtain any such licenses on commercially favorable terms, if at all. If these licenses are not obtained, we might be prevented from selling RECOTHROM or from using certain of our technologies for the manufacture of RECOTHROM. Our failure to obtain a license to any technology that we may require may harm our business.

We own or hold exclusive rights to many issued U.S. and foreign patents and pending patent applications related to the development and commercialization of RECOTHROM and our product candidates. These patents and applications cover composition-of-matter for genes, proteins, and antibodies, medical indications, methods of use, methods of making, formulations, technologies and other inventions related to therapeutic proteins and antibodies. Our success will depend in part on our ability to obtain and maintain patent protection for our products and product candidates in the United States and other countries.

Although we diligently seek to identify and protect our important discoveries and inventions, we may fail to file timely patent applications. We cannot guarantee that any patents will issue from any pending or future patent applications owned by or licensed to us. Our pending and future patent applications covering products and product candidates may not meet the statutory requirements for patentability, meaning that our applications may

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not result in the issuance of any patents, and, if issued, such patents may not be valid or enforceable. Our rights under any patents may not provide us with sufficient protection against competitive products or otherwise cover commercially valuable products or processes. In addition, because patent applications in the United States are maintained in secrecy for eighteen months after the filing of the applications, and publication of discoveries in the scientific or patent literature often lag behind actual discoveries, we cannot be sure that the inventors of subject matter covered by our patents and patent applications were the first to invent or the first to file patent applications for these inventions.

Our patents may not provide us with any competitive advantage. Although we have a number of issued patents, the discoveries or technologies covered by these patents may not have any value. These issued patents may not provide commercially meaningful protection against competitors, nor may they provide all rights necessary to commercialize our products or product candidates. In addition, we may be unable or not allowed to obtain patent term extension or restoration on patents covering our products in a manner that would provide commercially meaningful protection against competitors.

Other parties may have a dominating or blocking patent position covering a composition of matter, or methods of making or using our products or product candidates. In addition, other parties may be able to design around our issued patents or independently develop products having attributes or uses similar or identical to our patented product candidates. The business model of some companies is to “design around” patented marketed protein-based products by altering the amino acid sequence of the marketed product, thereby avoiding the patent, but maintaining functional equivalence. Similarly, it may be easier to develop equivalent versions of monoclonal antibodies and competitive soluble receptors, or receptor antibodies than to develop equivalent versions of the proteins with which they interact because there is often more than one antibody or receptor that can have the same therapeutic effect. Consequently, any of our existing or future patents that cover monoclonal antibodies or soluble receptors may not provide any meaningful protection against competitors. In addition, other parties may discover uses for genes, proteins or antibodies that are different from the uses described in our patents, and these other uses may be separately patentable. If another party holds a patent on the use of a gene, protein or antibody, then even if we hold the patent covering the composition of matter of the gene, protein or antibody itself, that party might prevent us from promoting and selling any product directed to such use. Also, other parties may have patents covering the composition of matter of genes or proteins for which we have patents covering only methods of use or methods of manufacture. Furthermore, our patents on recombinant proteins or their precursors or methods of manufacturing such proteins, such as our patents covering the precursor to RECOTHROM and its method of manufacture, may not prevent competitors from developing other precursors or methods of manufacturing these proteins.

Third parties may infringe our patents and challenge the validity or enforceability of our patents.

Competitors and other third parties may infringe our patents, or use inventions described in our patent applications. It may be difficult or impossible for us to police third party activities and detect such infringement. For example, we may be unable to discover a competitor’s manufacturing process to determine whether it infringes patent claims to a method of manufacture. Patent litigation is very expensive and time-consuming and is a distraction to management and personnel who are needed to supply evidence and support to litigation efforts. Enforcing our patents against third parties may require significant expenditures regardless of outcome. We may incur substantial expenditures in such patent litigation and the outcome of any lawsuit is uncertain.

Additionally, challenges raised in patent infringement litigation initiated by us or by third parties may result in determinations that our patents have not been infringed or that they are invalid, unenforceable or otherwise subject to limitations. Consequently, third parties, including licensees, may be able to use the discoveries or technologies claimed or described in our patents without paying licensing fees or royalties to us, which could diminish the value of our intellectual property.

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Moreover, the issuance of a patent is not conclusive as to its scope, validity or enforceability. Third parties, including our competitors and licensees, may initiate proceedings to limit the scope, validity or enforceability of our patents, including but not limited to inter-partes re-examination proceedings in the U.S. Patent and Trademark Office, opposition proceedings in patent authorities outside of the United States, declaratory judgment proceedings in U.S. courts, or in the event a third party independently makes an invention similar to ours, interference proceedings in the U.S. Patent and Trademark Office to determine priority of invention. Likewise, we may initiate inter-partes proceedings to challenge the scope, validity or enforceability of third-party patents. The outcome of any such proceeding is uncertain and could result in judicial determinations that our patents are invalid, limited in scope, not infringed, or unenforceable, which would impair our business. Participating in such proceedings or other challenges, whether initiated by us or by third parties may require significant expenditures and divert the attention of our management and key personnel from other business concerns, which may also impair our business.

Patent protection for protein-based therapeutic products and other biotechnology inventions is subject to a great deal of uncertainty, and if patent laws or the interpretation of patent laws change, our competitors may be able to develop and commercialize products based on our discoveries.

Patent protection for protein-based therapeutic products is highly uncertain and involves complex legal and factual questions. In recent years, there have been significant changes in patent law, including the legal standards that govern the scope of protein and biotechnology patents. Standards for patentability of full-length and partial genes, and their corresponding proteins, are changing. Court decisions have made it more difficult to obtain patents, by making it more difficult to satisfy the requirements of written description, enablement, utility and non-obviousness, have decreased the availability of injunctions against infringers, have decreased the likelihood of proving willfulness, and have increased the likelihood of challenging the validity of a patent through a declaratory judgment action. Taken together, these decisions make it more difficult and costly for us to obtain, license and enforce our patents. In addition, in recent years, several members of the U.S. Congress have made numerous proposals to change the patent statute. These proposals include measures that, among other things, would expand the ability of third parties to oppose U.S. patents, introduce the “first to file” standard to the U.S. patent system, and limit damages an infringer is required to pay. If the patent statute is changed, the scope, validity and enforceability of our patents may be decreased.

There also have been, and continue to be, policy discussions concerning the scope of patent protection awarded to biotechnology inventions. Social and political opposition to patents on genes and proteins may lead to narrower patent protection, or narrower claim interpretation, for genes, their corresponding proteins and inventions related to their use, formulation and manufacture. Patent protection relating to biotechnology products is also subject to a great deal of uncertainty outside the United States, and patent laws are evolving and undergoing revision in many countries. Changes in, or different interpretations of, patent laws worldwide may result in our inability to obtain or enforce patents, and may allow others to use our discoveries to develop and commercialize competitive products, which would impair our business.

We may be subject to patent infringement claims, which could result in substantial costs and liability and prevent us from commercializing our products and product candidates.

Third parties may claim that our products or product candidates, or processes or related technologies infringe their patents. The risk of infringement claims filed against us is likely to increase as we commercialize products or move product candidates closer to commercialization. Furthermore, we may not have identified or analyzed all U.S. and foreign patents that pose a risk of our infringement.

Any patent infringement or other legal claims that might be brought against us may cause us to incur significant expenses, divert the attention of our management and key personnel from other business concerns and, if successfully asserted against us, require us to pay substantial damages. In addition, as a result of a patent infringement suit, we may be forced to stop or delay developing, manufacturing or selling products or product

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candidates that are claimed to infringe a third party’s patent unless that party grants us rights to use its intellectual property. We may be unable to obtain these rights on terms acceptable to us, if at all. Even if we are able to obtain rights to a third party’s patented intellectual property, these rights may be non-exclusive, which would allow our competitors to obtain access to the same intellectual property. Ultimately, we may be unable to commercialize our potential products or may have to cease some of our business operations, which could harm our business.

We may be unable to protect our unpatented proprietary technology and information.

In addition to our patented intellectual property, we also rely on trade secrets and confidential information. We may be unable to effectively protect our rights to such proprietary technology or information. Other parties may independently develop or gain access to equivalent technologies or information and disclose it for others to use. Disputes may arise about inventorship and corresponding rights to know-how and inventions resulting from the joint creation or use of intellectual property by us and our corporate partners, licensees, scientific and academic collaborators and consultants. In addition, confidentiality agreements and material transfer agreements we have entered into with these parties and with employees and advisors may not provide effective protection of our proprietary technology or information or, in the event of unauthorized use or disclosure, may not provide adequate remedies.

We rely to a significant extent, and expect to continue to rely, on obtaining and maintaining third-party relationships to assist us in developing and commercializing our product candidates.

We have historically entered into collaboration arrangements with partners to co-develop and co-commercialize products and expect to continue to pursue similar opportunities. To be successful, we must identify and attract partners whose competencies and priorities complement ours. We must enter into collaboration agreements on terms beneficial to us and integrate and coordinate their processes, resources and capabilities with our own on a continuing basis. We may be unsuccessful in entering into collaboration agreements with acceptable partners or negotiating favorable terms in these agreements or maintaining such relationships so as to benefit from them over time. Also, we may be unsuccessful in integrating the resources, processes, capabilities or priorities of these collaborators on a continuing basis. In addition, our collaborators may prove difficult to work with or less skilled than we expected. If we are unsuccessful in our collaborative efforts, our ability to develop and market our product candidates could be limited.

In January 2009, we entered into a co-development/co-promotion and license agreement with Bristol-Myers Squibb, under which we and Bristol-Myers Squibb will co-develop PEG-IFN-lambda and Bristol-Myers Squibb will be solely responsible for commercializing PEG-IFN-lambda outside of the United States. While we believe that we will be able to continue working effectively with our counterparts at Bristol-Myers Squibb, we have limited experience with them and are unable to accurately predict our ultimate ability to collaborate with them.

Collaboration arrangements require close and frequent communications between several different teams within the respective companies, technology transfer, and in general a collaborative sharing of responsibilities for clinical studies and all other development activities. Difficulties in collaboration arrangements could result in lower than expected revenue, delays in development, loss of market opportunities, and significant deterioration in the value of the related product candidate and our company.

With the termination of the co-promotion arrangement with Bayer HealthCare as of the end of 2009, we are solely responsible for commercialization of RECOTHROM in the United States, and we have limited experience with respect to commercial activities.

Bayer HealthCare’s active participation in the promotion of RECOTHROM in the United States ended as of December 31, 2009, and we are now solely responsible for all sales and marketing activities for RECOTHROM in the United States. Our commercial organization was formed only within the past few years, and we are still

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developing capabilities in some key areas. In order to compensate for the loss of the Bayer HealthCare promotional effort, we will need to add additional personnel, and our ability to do so on a timely basis and to rapidly integrate the new personnel into our existing organization is uncertain. Accordingly, while we expect to be able to manage the transition effectively, it is possible that it could take some time before we have a fully effective and optimal sales organization in place, and it is possible that some customer relationships for which Bayer HealthCare was primarily responsible could be negatively impacted.

We rely on contract suppliers to manufacture commercial supplies of RECOTHROM and clinical material for our product candidates and, therefore, we may be unable to effectively control production or obtain adequate supplies, particularly in situations where we rely on a sole source of supply, which could cause delays in product manufacturing, subject us to product shortages or reduce product sales.

We rely and expect to continue to rely on contract manufacturers and suppliers over whom we exercise little control and who may not always be motivated to do what is in our best interests. The manufacture and delivery of sufficient quantities of pharmaceutical products is a time-consuming and complex process. In order to successfully commercialize our products, including RECOTHROM, and continue to develop our product candidates, including PEG-IFN-lambda, we need to contract or otherwise arrange for the necessary manufacturing. For example, we have entered into an agreement with Abbott Laboratories for commercial-scale production of RECOTHROM bulk drug substance and an agreement with Patheon Italia S.p.A., Inc. for fill and finish of the dosage form of RECOTHROM. We have also entered into agreements with several suppliers of critical raw materials, manufacturing aids, and components for RECOTHROM, some of which are located outside the United States. For our PEG-IFN-lambda product candidate, we will rely on our collaborative partner Bristol-Myers Squibb to manufacture supplies for late-stage clinical trials and, if approved, commercial sales.

Reliance on contract manufacturers, other vendors and collaborators limits our control regarding many aspects of the manufacturing and delivery processes and therefore exposes us to a variety of significant risks relating to the following, particularly in situations where we rely on a sole-source manufacturer, vendor or other collaborator as with RECOTHROM:

• our ability to schedule production with contract suppliers when needed to supply market demand or clinical trials;

• reliance on contract suppliers for legal and regulatory compliance and quality assurance;

• contract suppliers’ insistence on exclusivity, minimum and/or maximum levels of supply and related restrictions on our ability to increase or decrease supply, including provisions whereby we pay a penalty if we fail to order a minimum amount;

• breach of agreements by contract suppliers; and

• termination, price increases, or non-renewal of agreements by contract suppliers, based on other business priorities, at times that are costly or inconvenient for us.

Moreover, these contract manufacturers must comply with FDA’s cGMP requirements. These requirements include quality control, quality assurance, and the maintenance of records and documentation. One or more of these suppliers may be unable to comply with these cGMP requirements and with other FDA, state, or foreign regulatory requirements. A failure to comply with these requirements may result in, among other things, notices of violation, untitled letters, warning letters, fines and other monetary penalties, unanticipated expenditures, delays in approval or refusal to approve a product, suspension of production, product seizure or recall, interruption of manufacturing or clinical trials, operating restrictions, withdrawal of product approval injunctions, and criminal prosecution. If the safety of any quantities supplied of RECOTHROM or any other product we commercialize that is manufactured by a contract party is compromised due to that party’s failure to adhere to applicable laws or for other reasons, we may be unable to obtain regulatory approval for or successfully commercialize our products, which would harm our business.

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If any of the circumstances described in these risks occur, our product supply could be interrupted resulting in lost or delayed revenues, delayed clinical trials, and significant increase in production costs and cost of goods. While we seek to negotiate effective remedies in our agreements, we may not have an adequate remedy for all performance-related issues. In particular, terminating a manufacturing arrangement entails significant risks associated with identifying an alternative manufacturer, the length of time it takes for an alternative manufacturer to meet the regulatory requirements and the possibility of litigation arising from any alleged breach.

We and the manufacturers of our products rely on suppliers of raw materials used in the production of our products. Some of these materials are available from only one source and others may become available from only one source. In addition, if, for any reason, we are required to engage an additional, second-source or replacement manufacturer or other vendor, the investment of funds and management time could be significant. There are a limited number of manufacturers and other vendors that operate under the FDA’s cGMP regulations capable of manufacturing for us, and we have not established backup manufacturers and suppliers for RECOTHROM or any of our product candidates. Accordingly, if we are unable to maintain third-party manufacturing on commercially reasonable terms, or if we lose a significant supplier used for RECOTHROM or for our other product candidates, we may be unable to market our products, meet certain contractual supply obligations or complete development of our product candidates on a timely basis, if at all. For example, under our agreements with Bayer Schering Pharma, we are required to provide Bayer Schering Pharma with RECOTHROM and may be in breach of the agreement if we cannot make the required deliveries on time.

In addition, some of the inventions and patents licensed to us were initially developed at universities or other not-for-profit institutions with funding support from an agency of the U.S. government. In accordance with federal law, our licensees or we may be required to manufacture in the United States products covered by those patents, unless we can obtain a waiver from the government on the basis that such domestic manufacture is not commercially feasible. We have not attempted to secure any such waivers from the government, and do not know if they will be sought or available if sought. If we are unable to obtain such waivers, if requested, on a timely basis, we might be forced to seek manufacturing arrangements at higher prices, or on otherwise less favorable terms, than might be available to us in the absence of this domestic manufacturing requirement.

We cannot predict whether any of the manufacturers and vendors that we may use will continue to meet our requirements for quality, quantity or timeliness for the manufacture of RECOTHROM, its intermediates or components or for our other product candidates.

We may be unable to generate any revenue from product candidates developed by collaborators or licensees.

We may be unable to derive any value from product candidates developed by or with collaborators or licensees, including Novo Nordisk, Merck Serono and Bristol-Myers Squibb. Our ability to generate revenues from existing or future collaborations and license arrangements is subject to numerous risks, including:

• the possibility that our collaborators or licensees lack sufficient financial, technical or other capabilities to develop these product candidates;

• the possibility that our collaborators or licensees choose to scale back or discontinue their development activities due to changes in their strategies, restructuring, mergers or acquisitions or because their view of the commercial market or regulatory landscape in their licensed territory has changed;

• the length of time that it takes for our collaborators or licensees to solve technical problems or achieve various clinical development and regulatory approval milestones;

• differences in opinion about development, clinical and regulatory strategies and timeframes;

• the inability of collaborators or licensees to successfully address any regulatory or technical challenges they may encounter; and

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• the possibility that these product candidates may not be effective or may prove to have undesirable side effects, unacceptable toxicities or other characteristics that preclude regulatory approval or prevent or limit commercial use.

RECOTHROM has not been approved for sale outside of the United States and Canada and we intend to seek new licensing arrangements with one or more third parties, which we will depend on to seek approval for and market and promote RECOTHROM outside the United States.

In the United States, RECOTHROM was approved for marketing on the basis of clinical studies showing non-inferiority to bovine plasma-derived thrombin. The only other country where RECOTHROM has been approved is Canada. In December 2009, our then licensee outside the United States, Bayer Schering Pharma, withdrew the Marketing Authorization Application for RECOTHROM in Europe, due to concerns raised by European regulatory authorities regarding the extent to which the application met the standards described in their guidance applicable to approval of fibrin sealant products. The European Medicines Agency will likely require an additional clinical trial using a comparator other than bovine thrombin in order to support the approval of RECOTHROM, especially because bovine plasma-derived thrombin is not currently on the market in Europe. In addition, other foreign regulatory authorities may not be satisfied with the safety and efficacy data submitted in support of the foreign applications, which could result in either non-approval or a requirement of additional clinical trials or further analysis of existing data. Furthermore, as an element of the foreign approval process, the applicable regulatory authority must be satisfied with the processes and facilities for all stages of the manufacture, packaging and distribution of RECOTHROM, which may include physical inspections of many or all relevant facilities. Any conclusion that there are shortcomings in the processes, facilities, quality control or oversight of contract manufacturers, or other quality assurance procedures related to manufacture, packaging and distribution of the drug could result in a significant delay in or failure to receive foreign approval.

Effective January 1, 2010, our License and Collaboration Agreement with Bayer Schering Pharma was amended to return to ZymoGenetics all rights to develop and commercialize RECOTHROM in territories outside the United States other than Canada, where Bayer Schering Pharma will commercialize RECOTHROM and pay royalties to ZymoGenetics. No form of thrombin is currently sold in Canada and, therefore, Bayer Schering Pharma will have to create a new market for RECOTHROM, an endeavor in which it may not be successful.

We will seek to establish licensing arrangements with one or more third parties to pursue development and approval of RECOTHROM outside the United States and Canada, but our ability to do so on a timely basis on favorable terms is uncertain, if at all. Even if we are able to identify interested third parties and enter into one or more license arrangements in the near future, the ability of any licensee to obtain approval for RECOTHROM in these territories and to successfully commercialize the product, as well as the timing for these activities, is uncertain.

Failure to effectively manage the RECOTHROM supply chain could result in inventory shortages, supply interruptions or inventory obsolescence.

Our supply chain for RECOTHROM, its intermediates and components is particularly complex and involves a number of third parties on several continents. In addition to coordinating the efforts of these third-party contractors, we must navigate the laws and regulations of multiple jurisdictions, and our failure to do so effectively may negatively impact our business. Failure to adequately manage our supply chain could result in inventory shortages or other supply interruptions that could negatively impact RECOTHROM sales and, consequently, negatively impact product revenue.

We have limited expiration dating for RECOTHROM. Consequently, if we are unable to sell at forecasted levels we may have excess RECOTHROM inventory, resulting in inventory obsolescence, increased costs of product sales and ineffective use of our financial resources.

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Because we will depend on third parties to conduct certain laboratory tests, clinical trials and other critical services, we have limited control and may encounter delays in our efforts to develop product candidates.

We commonly rely on third parties to conduct laboratory tests, clinical trials and other critical services for us, especially to the extent clinical trials include sites outside the United States. If we are unable to obtain these services on acceptable terms, we may be unable to complete our product development efforts in a timely manner. Also, to the extent we will rely on third parties for laboratory tests and clinical trials, we will have limited control over these activities or may be unable to manage them appropriately, or may become too dependent on these parties. These third parties may not complete the tests or trials on our schedule, and the tests or trials may be methodologically flawed, may not comply with applicable laws or be otherwise defective. We may experience unexpected cost increases that are beyond our control. Problems with the timeliness or quality of the work of a contract research organization may lead us to seek to terminate the relationship and use an alternative service provider. However, making this change may be costly and may delay our trials, and contractual restrictions may make such a change difficult. Additionally, it may be difficult to find a replacement organization that can conduct our trials in an acceptable manner and at an acceptable cost.

We may expand our business through the acquisition of companies or businesses or in-licensing products or product candidates that could disrupt our business and harm our financial condition.

We may in the future seek to expand our products and capabilities by acquiring one or more companies or businesses or in-licensing one or more product candidates. Acquisitions and in-licenses involve numerous risks, which may include:

• substantial cash expenditures;

• dilutive issuances of equity securities;

• incurrence of debt and contingent liabilities, some of which may be difficult or impossible to identify at the time of acquisition;

• difficulties in assimilating the operations of the acquired companies;

• diverting our management’s attention away from other business concerns;

• entering markets in which we have limited or no direct experience; and

• potential loss of our key employees or key employees of the acquired companies or businesses.

Historically, we have not expanded our business through acquisition or in-licensing and, therefore, our experience in making acquisitions and in-licensing is limited. Any acquisition or in-license may not result in short-term or long-term benefits to us. We may incorrectly judge the value or worth of an acquired company or business or in-licensed product candidate. In addition, our future success could depend in part on our ability to manage the rapid growth associated with some of these acquisitions and in-licenses. We may be unable to make the combination of our business with that of acquired businesses or companies or in-licensed product candidates work or be successful. Furthermore, the development or expansion of our business or any acquired business or company or in-licensed product candidate may require a substantial capital investment by us. We may not have the necessary funds or they may be unavailable to us on acceptable terms, if at all. We may also seek to raise funds by selling shares of our stock, which could dilute our current shareholders’ ownership interest, or securities convertible into our stock, which could dilute current shareholders’ ownership interest upon conversion.

The failure to attract or retain key management or other personnel could decrease our ability to discover, develop and commercialize potential products.

We depend on our senior executive officers as well as key scientific, management and other personnel. Only a small number of our key personnel are bound by employment agreements, and those with employment agreements are bound only for a limited period of time. Competition for qualified employees is intense among

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pharmaceutical and biotechnology companies. The loss of qualified employees, or an inability to attract, retain and motivate the highly skilled employees required for our activities, could hinder our ability to develop and commercialize our product candidates.

Our restructuring activities in 2009 may place a strain on certain of our remaining personnel, and may have unanticipated effects.

Our restructuring in April 2009 resulted in a workforce reduction of approximately 160 employees, and a further restructuring in December 2009 resulted in an additional workforce reduction of approximately 50 employees. Following these workforce reductions, we had approximately 250 employees at our facility in Seattle, Washington. Our restructuring may yield unanticipated consequences such as attrition beyond our planned reduction in workforce. These workforce reductions may place a significant strain on certain of our remaining personnel. As a result, our ability to respond to unexpected challenges may be impaired and we may be unable to take advantage of new opportunities. In addition, certain of the terminated employees possess specific knowledge or expertise, and that knowledge or expertise may prove to have been important to our operations. In that case, their absence may create significant difficulties. Furthermore, this headcount reduction may subject us to the risk of litigation, which could result in substantial costs to us and could divert management’s time and attention away from business operations.

Environmental and health and safety laws may result in liabilities, expenses and restrictions on our operations.

State and federal laws and regulations and those of foreign jurisdictions regarding environmental protection, hazardous substances and human health and safety may adversely affect our business. The use of hazardous substances in our operations exposes us to the risk of accidental releases. If our operations, including those of our third-party service providers and collaborators, result in contamination of the environment or expose individuals to hazardous substances, we could be liable for damages and fines. Future changes to environmental and health and safety laws could cause us to incur additional expenses or restrict our operations. In addition, the site where our principal headquarters and facilities are located has been listed as a contaminated property by the state of Washington due to its previous use by the city of Seattle as an electricity-generating plant. The city of Seattle has agreed to defend us against and indemnify us for any claims that arise from this pre-existing contamination, except to the extent that we caused the claim through our negligence or intentional fault, or to the extent that we contributed to the contamination that is the subject of the claim, caused an increase in the clean-up costs or failed to comply with our obligations under our agreement with the city of Seattle. This indemnity may be insufficient and we may be subject to environmental liabilities or be prohibited from using or occupying some or all of the property as a result of environmental claims.

If we use biological and hazardous materials in a manner that causes contamination or injury or violates laws, we may be liable for damages.

Our research and development activities and clinical trials involve the use of potentially harmful biological materials, as well as hazardous materials, chemicals, and various radioactive compounds. We cannot completely eliminate the risk of accidental contamination or injury from the distribution, use, storage, handling, or disposal of these materials. In the event of contamination or injury, we could be held liable for damages that result, and any liability could exceed our available financial resources. We do not maintain liability insurance coverage for our handling of biological or hazardous materials. We, our collaborative partners, the third parties that conduct clinical trials on our behalf, and our third-party manufacturers are subject to federal, state, local or foreign laws and regulations governing the use, storage, handling, and disposal of these materials and waste products. The cost of compliance with these laws and regulations could be significant. The failure to comply with any of these laws and regulations could result in significant fines and work stoppages and may harm our business.

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We are exposed to financial risks related to foreign currency exchange rates.

Some of our costs and expenses are denominated in foreign currencies and, even if they are not as a matter of contract, vendors may seek concessions in the event that their anticipated economic return is impaired by exchange rate fluctuations. Most of our existing foreign expenses are associated with the manufacture of RECOTHROM and global clinical studies. We are primarily exposed to changes in exchange rates with the Euro. When the U.S. dollar weakens against other currencies, the dollar value of the foreign-currency denominated expense increases, and when the dollar strengthens against other currencies, the dollar value of the foreign-currency denominated expense decreases. Consequently, changes in exchange rates, and in particular a weakening of the U.S. dollar, may adversely affect our operating results. We currently do not hedge against our foreign currency exposure.

Our liquidity, capital resources and results of operations may be adversely affected by declines in the value of our investments in marketable securities.

As of December 31, 2009, we had $174.1 million in cash and cash equivalents, and investments in marketable securities. Until required for use in our business, we invest our cash reserves in bank deposits, money market funds, high-grade corporate notes, asset-backed securities and U.S. government instruments. As of December 31, 2009, we held asset-backed securities with an estimated fair value of $7.5 million, which had an original cost of $10.5 million.

We do not intend to purchase any additional asset-backed securities, but our liquidity, capital resources and results of operations may be adversely affected by further declines in the value of our existing investments in asset-backed securities. These investments may be adversely affected by rating downgrades, deterioration in the underlying collateral or bankruptcies affecting the issuers of such securities, whether caused by instability in the global financial markets, lack of liquidity in the credit and capital markets, or other factors.

Risks Related to Our Industry

If the healthcare system, coverage and reimbursement policies or any other healthcare-related regulations change, the prices of our products and product candidates may fall or our potential sales may decline.

In recent years, U.S. government officials have made numerous proposals to change the healthcare system in the United States. These proposals include measures that would limit or prohibit payments for certain medical procedures and treatments or subject the pricing of pharmaceuticals to government control. Government and other third-party payers increasingly have attempted to control healthcare costs by limiting both coverage and the level of reimbursement of newly approved healthcare products. Increasingly, third-party payors have been challenging the prices charged for products. They may also refuse to provide any coverage of uses of approved products for medical indications other than those for which the FDA has granted marketing approval. The government may adopt future legislative proposals, such as price controls on prescription drugs, and federal, state or private payors for healthcare goods and services may take further action to limit payments for healthcare products and services. Our success depends on the acceptance of our products and product candidates by the medical community. If physicians, hospitals and other providers are unable to obtain adequate coverage and reimbursement for procedures using RECOTHROM, they may be less likely to use it and our business would be adversely impacted. In addition, in certain foreign countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control with many of the same types of challenges as in the United States. Any of these factors could limit our ability to successfully commercialize our potential products.

We may face increased competition from lower-priced products re-imported into the United States from Canada and other countries. The current law, enacted in December 2003, allows the importation of drugs from Canada, but only if the Secretary of Health and Human Services certifies that importation will pose no additional risk to the public’s health and safety. To date, no such certifications have been given. Legislative proposals have

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been made to change the law to allow importation without any certification. If this or other new legislation or regulations were passed allowing the reimportation of drugs, it could adversely affect the prices of our potential products.

In addition, there has been much discussion regarding the creation of laws permitting “follow-on” or “generic” versions of biologics. While there is not currently an abbreviated approval pathway for biologics as there is with branded drugs, Congress and the FDA are studying the issue and legislation addressing this issue could be passed as a part of the healthcare reform initiative. An abbreviated pathway for “follow-on” biologics may permit the FDA to rely on clinical data submitted by innovator developers like ourselves when evaluating applications filed by sponsors of follow-on biologics and may not require full or any clinical trials, significantly lowering the risks and financial barriers to entry. The approval of “follow-on” biologics could result in new and increased competition, including competition prior to expiration of our patents covering our products, and related litigation. In addition, if “follow-on” or “generic” versions are permitted, “data exclusivity,” the period during which generic manufacturers may not cite the clinical trial results of the innovator, will become critical. Adoption of a relatively short “data exclusivity” period could result in products that, over the life of such product, are less profitable.

Negative public opinion and increased regulatory scrutiny of genetic and clinical research may limit our ability to conduct our business.

Ethical, social and legal concerns about genetic and clinical research could result in additional regulations restricting or prohibiting some of our activities or the activities of our suppliers and collaborators. In recent years, federal and state agencies, congressional committees and foreign governments have expressed interest in further regulating the biotechnology industry. More restrictive regulations could delay or complicate nonclinical studies or clinical trials, or prevent us from obtaining regulatory approvals or commercializing any products. In addition, animal rights activists may protest our use of animals in research and development and may attempt to disrupt our operations, which could cause us to incur significant expenses and distract management attention from other business concerns.

The marketing and sale of pharmaceutical products and biologics is subject to extensive regulation and aggressive government enforcement, and our corporate compliance program cannot guarantee that we are in compliance with all relevant laws and regulations.

Our activities relating to the sale and marketing of RECOTHROM and any other products we commercialize will be subject to extensive regulation under the U.S. Federal Food, Drug and Cosmetic Act and other federal statutes and associated regulations. These laws and regulations limit the types of marketing claims and other communications we can make regarding marketed products. We are also subject to various U.S. federal and state laws pertaining to healthcare “fraud and abuse,” including anti-kickback and false claims laws. Anti- kickback laws prohibit payments of any kind intended to induce physicians or others either to purchase or arrange for or recommend the purchase of healthcare products or services, including the selection of a particular prescription drug. These laws make certain business practices that are relatively common in other industries illegal in our industry. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented for payment to third-party payors, including Medicare and Medicaid, claims for reimbursed drugs or services that are false or fraudulent. The government has asserted very broad interpretations of these laws against pharmaceutical manufacturers, even though these manufacturers did not directly submit claims for reimbursement to government payors. In addition, regulation is not static and regulatory authorities, including the FDA, evolve in their staff, interpretations and practices and may impose more stringent requirements than currently in effect, which may adversely affect our sales and marketing efforts. In addition, it is possible that action by federal or state regulatory authorities, such as the FDA, or private legal actions related to our sales and marketing efforts could result in additional investigations or legal actions by state attorneys general. Violations of the above laws may be punishable by criminal and/or civil sanctions, including fines and civil monetary penalties, as well as the possibility of exclusion from federal healthcare programs, including Medicare and

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Medicaid. Many pharmaceutical and biotechnology companies have in recent years been the target of lawsuits and investigations, by both federal and state governmental authorities, alleging violations of government regulation, including claims asserting violations of the federal False Claims Act, the federal anti-kickback statute, state consumer protection statutes and other violations in connection with off-label promotion of products, pricing, and government price reporting. While we will strive to comply with these complex requirements, the interpretation of these laws as applied to particular sales and marketing practices continues to evolve, and it is possible that our sales and marketing practices might be challenged. Further, although we have taken measures to prevent potential challenges, including through our corporate compliance program, we cannot guarantee that such measures will protect us from future challenges, lawsuits or investigations. Even if such challenges are without merit, they could cause adverse publicity, divert management attention and be costly to respond to, and thus could have a material adverse effect on our business, including impact on our stock price. In addition, our strategic partners and licensees are required to comply with comparably complex requirements in jurisdictions outside the United States.

In order to sell RECOTHROM to federal institutions, such as military hospitals and the Veterans Administration, we must satisfy the requirements of listing on the Federal Supply Schedule and we are required to periodically report product pricing-related information. The calculations used to generate the pricing-related information are complex. If we fail to accurately and timely report product pricing-related information or to comply with any of these or any other laws or regulations, various negative consequences could result, including criminal and/or civil prosecution, substantial criminal and/or civil penalties, exclusion of the approved product from coverage under governmental healthcare programs (including Medicare and Medicaid), costly litigation and restatement of our financial statements. In addition, our efforts to comply with this wide range of laws and regulations are, and will continue to be, time-consuming and expensive.

Risks Related to Ownership of Our Stock

We may issue additional equity securities in the future, which may result in dilution to existing investors.

We believe that our existing cash, cash equivalents and short-term investments will be sufficient to meet our projected operating requirements through at least the next 24 months. However, we may need to raise additional capital in the future. Any additional financing we undertake could impose covenants upon us that restrict our operating flexibility and, to the extent such capital is raised through our issuance of additional equity securities, our then existing shareholders may experience dilution or the new securities may have rights senior to those of our common stock. In addition, to the extent outstanding stock options are exercised, there will be further dilution to investors.

Our operating results are subject to fluctuations that may cause our stock price to decline.

Our operating results have fluctuated in the past and are likely to continue to do so in the future. Our revenues have been unpredictable and could fluctuate due to slow or erratic uptake of RECOTHROM sales or the timing of licensing fees or the achievement of milestones under new or existing licensing and collaborative arrangements. In addition, our expenses may fluctuate from quarter to quarter due to the timing of expenses, particularly with respect to contract manufacturing and clinical and nonclinical testing.

Accordingly, we believe that period-to-period comparisons of our past operating results are not good indicators of our future performance and should not be relied on to predict our future operating results. It is possible that in the future our operating results in a particular quarter or quarters will not meet the expectations of securities analysts or investors, causing the market price of our common stock to decline, perhaps substantially.

Our stock price is volatile and subject to many factors beyond our control.

The market price of our common stock may fluctuate significantly in response to many factors beyond our control, including:

• changes in the recommendations of securities analysts or changes in their financial estimates of our operating results;

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• recommendations or opinions of journalists, media personalities or market commentators;

• failures in meeting performance expectations of securities analysts or investors;

• acts or omissions of our licensees, collaborators and suppliers;

• changes in the political climate and changes in or uncertainties about federal and state legislation, policies, and programs affecting healthcare and pharmaceuticals;

• fluctuations in the valuations of companies perceived by securities analysts or investors to be comparable to us; and

• share price and volume fluctuations attributable to inconsistent trading volume levels of our shares.

Furthermore, the stock markets often experience significant price and volume fluctuations that affect the market prices of equity securities of many companies. In particular, there have been high levels of volatility in the market prices of securities of biotechnology companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our common stock.

Certain of our shareholders have significant control of our management and affairs, which they could exercise against other shareholders’ best interests.

Novo Nordisk, together with Warburg Pincus Equity Partners, L.P., beneficially owned an aggregate of approximately 43.7% of our outstanding common stock as of December 31, 2009, with Novo Nordisk beneficially owning approximately 30.1% and Warburg beneficially owning approximately 13.6%. Four of the nine members of our board of directors are representatives or designees of these shareholders pursuant to a shareholders’ agreement. Novo Nordisk, acting independently or together with Warburg, has the ability to significantly influence our management and affairs and matters requiring shareholder approval, including the election of directors and approval of corporate strategy and significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, Novo Nordisk, acting independently or together with Warburg, may be able to cause a change in control, as well as delay or prevent a change in control. They may also discourage a potential acquirer from making a tender offer or otherwise attempting to effect a change in control, even if such a change in control would benefit our other shareholders.

Sales of shares of common stock by our significant shareholders could cause the price of our common stock to decline.

Novo Nordisk and Warburg Pincus Equity Partners, L.P. entered into lock-up agreements in connection with the underwritten public offering of our common stock that occurred in January 2010, pursuant to which each has agreed not to sell or transfer any shares of our common stock. These agreements expire on March 8, 2010. Collectively, these shareholders beneficially owned approximately 44% of our outstanding common stock, as of December 31, 2009, and we have previously filed a registration statement covering the resale of the majority of the shares they own. The expiration of the lock-up agreements, or the sale by either shareholder of a substantial number of shares of our common stock or the perception among investors that these sales may occur, could result in the decline of the market price of our common stock.

Provisions in Washington law, our charter documents and executive employment agreements we have entered into may prevent, discourage or delay a change in control.

We are subject to the Washington laws regulating corporate takeovers, which, with limited exceptions, prohibit a “target corporation” from engaging in certain “significant business transactions” for a period of five years after the share acquisition by an acquiring person, unless (i) the prohibited transaction or the acquiring person’s purchase of shares was approved by a majority of the members of the target corporation’s board of directors prior to the acquiring

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person’s share acquisition or (ii) the prohibited transaction was both approved by the majority of the members of the target corporation’s board and authorized at a shareholder meeting by at least two-thirds of the outstanding voting shares (excluding the acquiring person’s shares) at or subsequent to the acquiring person’s share acquisition. An “acquiring person” is defined as a person or group of persons that beneficially owns 10% or more of the voting securities of the target corporation. Such prohibited transactions include, among other things:

• certain mergers or consolidations with, dispositions of assets to, or issuances of stock to or redemptions of stock from, the acquiring person;

• termination of 5% or more of the employees of the target corporation as a result of the acquiring person’s acquisition of 10% or more of the shares;

• allowing the acquiring person to receive any disproportionate benefit as a shareholder; and

• liquidating or dissolving the target corporation.

After the five-year period, certain “significant business transactions” are permitted, as long as they comply with certain “fair price” provisions of the Washington statute or are approved by a majority of the outstanding shares other than those of which the acquiring person has beneficial ownership. A corporation may not “opt out” of this statute.

As such, these laws could prohibit or delay mergers or a change in control and may discourage attempts by other companies to acquire us.

In addition, our articles of incorporation and bylaws contain provisions, such as undesignated preferred stock and prohibitions on cumulative voting in the election of directors that could make it more difficult for a third party to acquire us without the consent of our board of directors. Also, our articles of incorporation provide for a staggered board, removal of directors generally only for cause and certain requirements for calling special shareholder meetings. Further, our bylaws require advance notice of shareholder proposals and nominations and impose restrictions on the persons who may call special shareholder meetings. These provisions may have the effect of preventing or hindering any attempts by our shareholders to replace our current board of directors or management.

We may become involved in securities class action litigation that could divert management’s attention and harm our business.

The stock markets have from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stock of biopharmaceutical companies. These broad market fluctuations may cause the market price of our common stock to decline. In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology and biopharmaceutical companies have experienced significant stock price volatility in recent years. We may become involved in this type of litigation in the future. Litigation often is expensive and diverts management’s attention and resources, which could adversely affect our business.

Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

We are headquartered in Seattle, Washington, where we lease space in several buildings in close proximity to one another. We lease a total of 271,000 square feet in these buildings, as shown in the following table.

Property	Square Feet	Use	Lease Expiration Dates
Lake Union Steam Plant	106,000	Laboratories and offices	May 2019
Earl Davie Building	98,000	Laboratories, manufacturing and offices	May 2019
1144 Eastlake Building	67,000	Offices	April 2019

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Effective March 2008, we consolidated the existing lease and sublease agreements for the 1144 Eastlake Building into a single lease, under which the lease term was extended to April 2019. Following the reduction of our workforce in 2009, we have ceased using certain space in this building and intend to sublease the unused space. We believe that our existing facilities, excluding the subleased space, will be adequate to fulfill our needs for the foreseeable future.

For additional details on our headquarter lease, refer to “Note 7. Lease Obligation” under Notes to Consolidated Financial Statements.

Item 3.    Legal Proceedings

On November 2, 2009, King Pharmaceuticals, Inc. and affiliated entities (Monarch Pharmaceuticals, Inc., King Pharmaceuticals Research and Development, Inc., and GenTrac, Inc.), or, collectively, King, filed suit against us in the United States District Court for the Eastern District of Tennessee, naming as defendants ZymoGenetics, Inc. and fifty unnamed individuals. King alleges that we have engaged in unfair competition, false advertising, trademark infringement, and related claims under federal law and Tennessee state law. King seeks various forms of relief, including damages and permanent injunctive relief precluding us from making certain representations regarding King’s products and our RECOTHROM product. King also filed motions with the District Court seeking temporary restraining orders and preliminary injunctions with respect to certain comparative advertising claims, use of King trademarks as Google ad words, and certain alleged statements regarding the existence of lawsuits against King. On December 10, 2009 the court denied all three motions for preliminary injunction in their entirety. We dispute the allegations of wrongdoing in King’s complaint and will continue to vigorously defend ourselves in this matter.

Item 4.    Submission of Matters to a Vote of Security Holders

On November 10, 2009, we held a Special Meeting of Shareholders to consider a proposal to approve a voluntary stock option exchange program for eligible employees, including executive officers, as set forth in the definitive proxy statement for a Special Meeting of Shareholders filed on October 20, 2009. The stock option exchange program was approved by shareholders at the Special Meeting of Shareholders. Of the votes cast on this matter, 43,884,835 votes were cast for, 10,903,960 votes were cast against; 12,180 votes abstained; and there were 14,460,307 broker non-votes. The offer to exchange expired at 9:00 p.m., Pacific Time on Monday, December 14, 2009. Pursuant to the offer to exchange, eligible stock options to purchase an aggregate of 3,260,763 shares of our stock were tendered, representing 54.7% of the total eligible stock options. All surrendered options were cancelled and in exchange, on December 16, 2009, we granted awards of new stock options to purchase an aggregate of 1,629,632 shares of our common stock under the 2001 Stock Incentive Plan, in accordance with the terms of the offer to exchange. The exercise price of the new stock options is $6.35 (the closing price of our common stock on December 16, 2009 as reported by Nasdaq).

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PART II

Item 5.    Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Our common stock began trading on the NASDAQ Stock Market under the symbol ZGEN on February 1, 2002. As of February 10, 2010, we had 90 shareholders of record and approximately 7,600 beneficial holders of our stock. We have never paid cash dividends and do not anticipate paying them in the foreseeable future.

The following table sets forth, for the fiscal periods indicated, the range of high and low closing sales prices of our common stock as quoted on the NASDAQ Global Market:

	High		Low
Year Ended December 31, 2009
1st Quarter	$	5.62	$	2.89
2nd Quarter		4.85		3.50
3rd Quarter		6.47		4.27
4th Quarter		7.28		4.65
Year Ended December 31, 2008
1st Quarter	$	13.05	$	8.57
2nd Quarter		10.50		7.64
3rd Quarter		9.10		6.66
4th Quarter		6.42		2.29

The graph on the next page compares the cumulative total shareholder return on our common stock with the cumulative total shareholder return of the CRSP Total Return Index for The NASDAQ Stock Market (U.S. Companies) and the NASDAQ Biotechnology Index, for the period beginning January 1, 2005 and ending on December 31, 2009 (assuming the investment of $100 in our common stock and in each of the other indices on January 1, 2005 and reinvestment of all dividends).

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The comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of our common stock.

	1/1/05		12/31/05		12/31/06		12/31/07		12/31/08		12/31/09
ZymoGenetics, Inc.	$	100.00	$	73.96	$	67.70	$	50.74	$	13.04	$	27.78
NASDAQ Stock Market (U.S.)		100.00		102.13		112.19		121.68		58.64		84.28
NASDAQ Biotechnology Index		100.00		102.84		103.89		108.65		94.93		109.77

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Item 6.    Selected Financial Data

The following selected financial data should be read in conjunction with the financial statements and notes to the financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this Form 10-K.

	Years Ended December 31,
	2009			2008			2007			2006			2005
	(in thousands, except per share data)
Statement of Operations Data:
Revenues	$	136,972		$	73,989		$	38,477		$	25,380		$	42,909
Costs and expenses:
Costs of product sales		7,631			5,672			—			—			—
Research and development		99,194			126,678			142,340			128,450			99,615
Selling, general and administrative		62,202			60,238			46,890			33,224			23,321
Total costs and expenses		169,027			192,588			189,230			161,674			122,936
Loss from operations		(32,055	)		(118,599	)		(150,753	)		(136,294	)		(80,027	)
Other income (expense)		(11,289	)		2,358			2,609			6,292			2,000
Loss before income tax benefit		(43,344	)		(116,241	)		(148,144	)		(130,002	)		(78,027	)
Income tax benefit		363			—			—			—			—
Net loss	$	(42,981	)	$	(116,241	)	$	(148,144	)	$	(130,002	)	$	(78,027	)
Basic and diluted net loss per share	$	(0.62	)	$	(1.69	)	$	(2.17	)	$	(1.94	)	$	(1.28	)
Weighted-average shares used in computing basic and diluted net loss per share		69,069			68,696			68,156			66,917			60,928
Balance Sheet Data:
Cash, cash equivalents and short-term investments	$	174,130		$	89,887		$	170,941		$	258,408		$	366,311
Working capital		110,053			75,988			118,822			239,432			343,459
Total assets		319,296			210,046			263,081			347,004			453,353
Total shareholders’ equity (deficit)		(3,958	)		23,359			114,830			235,684			333,663

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a biopharmaceutical company focused on developing and commercializing therapeutic protein-based products for the treatment of human diseases. The process for taking one of our product candidates to the marketplace is long, complex and very costly. It is difficult to predict the time it will take to reach the market with any given product candidate, but it would not be unusual to span ten years or more and cost hundreds of millions of dollars. It is also a business of attrition; it is expected that, for the industry as a whole, less than 20% of the drug candidates entering human clinical trials will actually make it to the marketplace. For the products that do make it, particularly for those that address previously unmet medical needs, the markets can be significant, with a number of successful products selling in excess of $1.0 billion per year.

In late 2006, we began preparations for the commercial launch of our first product, RECOTHROM^®, which was approved by the FDA on January 17, 2008. In 2007, we hired approximately 60 field personnel and additional headquarters-based personnel to support the commercial operations for selling RECOTHROM. We are incurring substantial marketing costs to penetrate the market and to support our selling efforts. We have also built significant levels of inventory in anticipation of expected demand for the product and to minimize the risk of product shortages. These commercialization activities are utilizing substantial cash resources until such time as RECOTHROM sales reach a level, if ever, that will cover our related costs. We recorded net sales revenue of $29.6 million and $8.8 million in 2009 and 2008, respectively, and we anticipate continued increases in RECOTHROM sales over time; however, we cannot be certain of the future rate of market penetration or when, if ever, our revenues will exceed our related costs.

An important element of our business strategy is that we intend to maintain a significant share of the commercial value for our product candidates under development. As a result, we will be required to pay for a portion of the development and commercialization costs for our partnered product candidates, such as PEG-Interferon lambda (PEG-IFN-lambda), and all of the development and commercialization costs for our internal product candidates, such as IL-21 and IL-31 mAb. In some cases, we may out-license our product candidates, as we have done with atacicept, Factor XIII and IL-21 mAb, for example.

Generating the operating capital necessary to fund our business can be challenging. There are a number of potential sources of revenues and cash that we pursue in order to address our funding needs, including the following:

• sales of RECOTHROM, which were $29.6 million in 2009, net of all related discounts and allowances;

• research, development and commercialization collaborations, such as the one we have entered into with Bristol-Myers Squibb for PEG-IFN-lambda, which provide revenues while also enabling us to reduce our ongoing research and development expenses;

• licensing of technologies or product candidates, such as atacicept, recombinant Factor XIII and most recently IL-21 mAb, to other companies, which typically provide license fees and potential milestone payments and royalties on sales;

• issuance of equity or equity-based securities such as the offering of common stock we completed in January 2010;

• debt financing, such as the $100.0 million financing arrangement we entered into with Deerfield Management in June 2008; and

• investment income on our cash reserves.

We expect that it will be at least several years before we can generate enough product-related revenues for our company to reach net income or cash flow breakeven, and we expect to continue to invest significant amounts of cash in developing our business. In the future, we may pursue additional collaborations or license

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transactions related to IL-21 and IL-31 mAb in order to realize the full potential of the product candidate, which would likely generate additional cash and reduce our ongoing related expenses. In addition, we are committed to diligently monitoring our operating cost structure and making changes when necessary, as we did in 2009 through corporate restructurings.

It is possible that we will look for opportunities to raise capital by issuing equity or equity-related securities to help fund our company over the next several years. These opportunities may arise at any time, depending on things such as overall market conditions; dynamics in the biotechnology sector of the market; investor appetite for certain types of companies; and fundamental characteristics of our business. At times, it may be difficult to raise capital on terms favorable to our company, if at all. Accordingly, we would expect to raise capital when it is available, as we did in January 2010, not waiting until there is an immediate need. We believe this strategy is important to minimize the financial risks to our company and our shareholders.

Results of Operations

Revenues

Product sales.    We received U.S. marketing approval of RECOTHROM on January 17, 2008 for the 5,000 IU vial configuration and on May 27, 2008 for the 20,000 IU vial configurations. Sales of RECOTHROM are recognized as revenue when the product is shipped and title and risk of loss have passed. Product sales are recorded net of provisions for estimated discounts, rebates, chargebacks and returns. Net product sales were $29.6 million for the year ended December 31, 2009 and $8.8 million for the year ended December 31, 2008. The 2009 amount includes $28.2 million in U.S. product sales and $1.4 million of sales to Bayer to support the Canadian launch following the Canadian marketing approval of RECOTHROM in December 2009. The increase in U.S. product sales in 2009 versus the prior year is due to overall market share increases as additional hospitals converted usage from bovine thrombin to RECOTHROM and existing customers increased their purchase volumes of RECOTHROM. For the fourth quarter of 2009, our estimated overall share of the U.S. market for stand-alone thrombin products was 17%, an increase from 7% for the fourth quarter of 2008.

Royalties.    We earn royalties on sales of certain products subject to license agreements with other companies. Royalties were $1.3 million for the year ended December 31, 2009 compared to $6.3 million for both years ended December 31, 2008 and 2007. The decrease for 2009 versus 2008 was primarily due to the discontinuation of a minimum royalty obligation payable by BioMimetic Therapeutics, Inc. in December 2008 on its product GEM 21S and the expiration of royalty rights related to BeneFIX, a product of Wyeth Pharmaceuticals, Inc., in December 2008.

Collaborations and licenses.    We enter into various collaborative agreements that may generate license, option or other upfront fees with subsequent milestone payments earned upon completion of development milestones. Where we have no continuing performance obligations under an arrangement, we recognize such payments as revenue when contractually due and payment is reasonably assured, as these payments represent the culmination of a separate earnings process. Where we have continuing performance obligations under an arrangement, revenue is recognized using one of two methods. Where we are able to estimate the total amount of services we must provide under the arrangement, revenue is recognized using a proportional performance model. Costs incurred to date compared to total expected costs are used to determine proportional performance, as this is considered to be representative of the delivery of outputs under the arrangement. Revenue recognized at any point in time is limited to cash received and amounts contractually due. Changes in estimates of total expected costs are accounted for prospectively as a change in estimate. Where we cannot estimate the total amount of service that must be provided, a time-based method is used to recognize revenue. Under the time-based method, revenue is recognized over the arrangement’s estimated performance period, starting with the contract’s commencement, but not before the removal of any contingencies for each milestone. From period to period, license fees and milestone payments can fluctuate substantially based on the completion of new licensing or collaborative agreements and the achievement of development-related milestones.

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Bristol-Myers Squibb

In January 2009, we entered into a co-development/co-promotion and license agreement with Bristol-Myers Squibb for the type-3 interferon family, with PEG-IFN-lambda being the lead product candidate. We received a total of $200.0 million under the agreement in 2009, consisting of $105.0 million in license fees and two milestone payments related to the initiation of Phase 2 clinical trials. We have profit sharing and co-promotion rights in the United States and will receive royalties on sales outside of the United States. We are also eligible for sales bonuses based on worldwide sales of licensed products. We granted a license to related technology and are obligated to fund the first $100.0 million of costs for development in the United States and Europe, after which we will be responsible for 20% of such costs. We are recognizing revenue using a proportional performance model and are recording revenue related to the license fees and near-term milestone payments through June 2012, which corresponds to the period over which we anticipate satisfying our performance obligations under the agreement.

Novo Nordisk

In December 2009, we amended our license agreement with Novo Nordisk related to IL-21 antagonists, whereby we added certain intellectual property, expanded their commercial rights to include North America and provided exclusive rights to our IL-21 mAb product candidate. In exchange, Novo Nordisk paid us a $24.0 million upfront payment, which was received in December 2009, and will pay future milestone payments and royalties. We are obligated to perform certain transition activities, which are expected to take approximately six months to complete, and to transfer all related patents and technology to Novo Nordisk who will reimburse us for our internal costs and for all our direct external costs for activities. We do not have any substantive obligations beyond the expected six-month transition period. We are recognizing the initial $24.0 million milestone over the expected six-month transition period from December 2009 to May 2010.

Bayer Schering Pharma AG and Bayer HealthCare LLC

In June 2007, we entered into license and collaboration agreement with Bayer Schering Pharma AG and a U.S. co-promotion agreement with Bayer HealthCare LLC (collectively, Bayer) which were significantly amended in December 2009. The original agreements provided Bayer with an exclusive license to develop and sell rThrombin outside the United States and to co-promote rThrombin in the United States for up to four years. Under the original agreement, we recorded all U.S. sales and Bayer was entitled to commissions and sales bonuses on those sales for up to six years, two years longer than the period Bayer co-promoted in the United States. We received a $30.0 million upfront milestone payment in 2007, a $40.0 million milestone in January 2008 upon the U.S. marketing approval of rThrombin, and $6.5 million upon the initial filings for approval in Canada, Europe, and Asia.

In December 2009, we amended the license and collaboration agreement, whereby Bayer returned all license territories to us except Canada, where they received marketing approval in December 2009. As part of the amendment, Bayer will launch RECOTHROM in Canada during 2010 and we will supply them with U.S. approved product. With regards to the U.S. co-promotion agreement, Bayer discontinued co-promotion effective December 31, 2009 and we agreed to pay Bayer up to $12.0 million in commissions based on net sales over the two-year period ending December 31, 2011. Bayer has no further performance obligations to receive the $12.0 million in commission payments. Immediately preceding the effective date of the amendments, we had deferred revenue and guaranteed U.S. bonus payment accruals totaling $46.4 million. Our only substantive obligations subsequent to the amendments are the U.S. commissions of $12.0 million and the supply of U.S. finished drug product for which we have reliable evidence of fair value. Accordingly, we recognized deferred revenue of $34.4 million in the fourth quarter of 2009, leaving a $12.0 million liability recorded for future commission payments.

Collaboration and license revenues were $106.1 million for the year ended December 31, 2009, reflecting an increase of $47.2 million compared to the prior year. The increase resulted primarily from recognition of $38.7 million related to the Bristol-Myers Squibb agreement for PEG-IFN-lambda, $5.0 million related to the Novo

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Nordisk IL-21 mAb agreement, $4.2 million related to the accelerated recognition of deferred revenue resulting from the August 2008 restructuring of our agreements with Merck Serono and $34.4 million in December 2009 related to the amended license and U.S. co-promotion agreement with Bayer. These increases were partially offset by a decrease in Bayer collaboration revenue of $11.6 million recognized under the proportional performance model prior to the December 2009 amendment, license revenue of $21.0 million in 2008 related to the Bristol-Myers Squibb agreement for Ig-fusion; and decreases in milestone revenue related to licenses with Novo Nordisk and BioMimetic Therapeutics, Inc.

Collaboration and license revenues were $58.9 million for the year ended December 31, 2008, reflecting an increase of $26.7 million compared to the prior year. The increase resulted primarily from license fees of $21.0 million related to the Bristol-Myers Squibb agreement for Ig-fusion and an increase in the recognition Bayer collaboration revenue. Partially offsetting these increases were milestones earned in 2007 under our IL-21 and IL-31 agreements with Novo Nordisk for which no comparable amounts were earned in 2008.

Costs and expenses

Costs of product sales.    Prior to FDA approval of RECOTHROM in January 2008, all third-party manufacturing costs and an allocation of our labor and overhead associated with the manufacturing of RECOTHROM for commercial sale were expensed as research and development costs as incurred. Subsequent to RECOTHROM approval, these costs are recorded as inventory. Costs of product sales include the inventory and distribution costs associated with RECOTHROM product sales revenue and costs incurred subsequent to FDA approval for product that is not expected to be sold. Accordingly, we expect that costs of product sales will be lower as a percentage of product sales revenue during the time we are selling product manufactured prior to approval.

Costs of product sales for 2009 were $7.6 million compared to $5.7 million in 2008. The 2009 costs of product sales includes $1.3 million for product sales to Bayer related to the Canadian launch of RECOTHROM for which we recorded $1.4 million in product sales revenue. The 2008 amount includes a $4.2 million charge for obsolete product not expected to be sold. Excluding these items, costs of product sales as a percentage of net product sales were 22.4% for the year ended December 31, 2009 as compared to 17.3% for the same period in 2008. The percentage was higher in 2009 compared to 2008 primarily because units sold in 2009 included a higher proportion of manufacturing costs incurred subsequent to FDA approval.

Research and development.    Research and development expense consists primarily of salaries and benefit expenses, costs of consumables, facility costs, contracted services and stock-based compensation. These amounts are offset by certain cost reimbursements from collaborators. We evaluate cost reimbursements received under our collaboration arrangements based on the underlying nature of the collaboration. Where the collaboration embodies the principles of cost sharing and revenue sharing, cost reimbursements are recorded as reductions to research and development expenses.

A breakdown of research and development expenses is shown in the following table (in thousands):

	2009			2008			2007
Salaries and benefits	$	49,814		$	53,457		$	57,731
Consumables		6,318			10,907			11,658
Facility costs		8,704			8,886			8,934
Contracted services		24,516			47,391			55,668
Depreciation and amortization		4,621			4,902			5,421
Stock-based compensation		7,563			13,572			13,591
Subtotal		101,536			139,115			153,003
Cost reimbursement from collaborators		(2,342	)		(12,437	)		(10,663	)
Net research and development expense	$	99,194		$	126,678		$	142,340

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Salaries and benefits and consumables generally track with changes in our employee base from year to year. The $3.6 million decrease in salaries and benefits in 2009, as compared to 2008, and the corresponding decrease in consumables were related to the April and December 2009 terminations of 184 research and development employees. We recorded severance related charges of $7.0 million in the second quarter of 2009 and $3.6 million in the fourth quarter of 2009. Excluding these severance-related amounts, salaries and benefits declined by 30.0% for the year ended December 31, 2009, as compared to the prior year, reflecting the impact of the headcount reductions. The $4.3 million decrease in salaries and benefits and the corresponding decrease in consumables in 2008, as compared to 2007, was due to the February 2008 termination of 37 research and development employees and costs related to RECOTHROM manufacturing being included in inventory costs subsequent to the January 17, 2008 FDA approval of RECOTHROM instead of being recorded as research and development expense.

Contracted services include the cost of items such as contract research, contract manufacturing, clinical trials, non-clinical studies and payments to collaborators. These costs relate primarily to clinical development programs and can fluctuate substantially from period to period depending on the stage of our various programs. Generally, these external costs increase as a program advances toward commercialization, but there can be periods between major clinical trials or manufacturing campaigns during which costs decline. Our contracted services costs decreased by $22.9 million for the year ended December 31, 2009, as compared to the prior year, primarily due to the discontinuation of our co-development and co-funding obligations under the atacicept collaboration with Merck Serono, which became effective in August 2008 when we converted to a milestone and royalty bearing agreement. These reductions were partially offset by increased costs related to our PEG-IFN-lambda collaboration with Bristol-Myers Squibb.

Contracted services decreased by $8.3 million in 2008 compared to 2007 due to reduced contract manufacturing costs, reflecting the discontinued expensing of pre-approval manufacturing of RECOTHROM bulk drug and finished product inventory after FDA approval in January 2008. This decrease was partially offset by cost increases for other development programs. Our clinical trial costs increased in 2008 as compared to 2007, primarily reflecting the costs incurred for the atacicept lupus nephritis clinical trial that began in late 2007. Payments to collaborators also increased for the same period primarily reflecting our portion of atacicept development costs under our collaboration with Merck Serono prior to the August 2008 conversion to a milestone and royalty bearing agreement.

Cost reimbursements from our collaborators decreased by $10.0 million for the year ended December 31, 2009, as compared to the prior year, primarily due to the discontinuation of our co-development and cost sharing under the atacicept collaboration with Merck Serono, which became effective in August 2008. Additionally, there was a decrease in cost reimbursements from Bayer during this same period. Cost reimbursements increased by $1.8 million in 2008 compared to 2007 primarily related to work performed under the Bayer agreement.

To date, our business needs have not required us to fully allocate all research and development costs among our various programs. However, we track direct labor, contracted services and certain consumable costs by program, which we monitor to assist us in appropriately utilizing our company resources. We also incur indirect costs that are not allocated to specific programs. These costs include indirect labor, certain consumable costs, facility costs, and depreciation and amortization, all of which benefit all of our research and development programs. The following table presents our research and development costs allocated to clinical development, pre-development and discovery research programs, together with the unallocated costs that benefit all programs for the periods presented (in thousands):

	2009		2008		2007		Inception To Date
Clinical development programs:
Hemostasis	$	11,101	$	18,708	$	39,690	$	209,831
Autoimmunity and oncology		6,016		30,119		25,962		118,511
Antiviral		20,840		5,094		5,125		39,777
Preclinical and research programs		15,540		22,836		22,051
Unallocated indirect costs		45,697		49,921		49,512
Total	$	99,194	$	126,678	$	142,340

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The following summarizes the reasons for fluctuations in research and development program costs for the three years presented in the table:

• Hemostasis clinical development programs (primarily rThrombin) expenses decreased between 2008 and 2009 due to the completion of a Phase 3b rThrombin clinical trial programs. Additionally, all internal and external RECOTHROM commercial product manufacturing costs were recorded as inventory in 2009, while in 2008, certain of these costs were charged to research and development prior to FDA approval on January 17, 2008. The reduction in expense from 2007 to 2008 was primarily due to $19.0 million of RECOTHROM manufacturing costs being charged to expense in 2007 prior to FDA approval.

• Autoimmunity and oncology clinical development program (atacicept and IL-21) expenses decreased significantly between 2008 and 2009 due to the August 2008 amended atacicept agreement with Merck Serono, whereby the collaboration was converted to a license arrangement and Merck Serono became responsible for all subsequent development costs. The increased expense in 2008 compared to 2007 was primarily due to an increase in our share of costs related to the manufacturing of clinical material and clinical trial activity for atacicept.

• Antiviral clinical development program expenses increased significantly in 2009 compared to 2008 primarily due to an increase in both internal and external costs related to PEG-IFN-lambda clinical trials in our collaboration with Bristol-Myers Squibb.

• Preclinical and research program expenses decreased in 2009 compared to 2008 primarily due to the discontinuation of certain preclinical and research programs following our corporate restructuring in April 2009.

• Unallocated indirect expenses decreased in 2009 as compared to 2008 primarily due to the corporate restructurings that occurred in April and December 2009.

Selling, general and administrative.    Selling, general and administrative expense, which consists primarily of salaries and benefit expenses, professional fees and other corporate costs, increased 3% in 2009 as compared to 2008 and 28% in 2008 as compared to 2007. The increase in 2009 as compared to 2008 was primarily due to an increase in commissions payable to Bayer related to RECOTHROM offset by a decrease in legal expenses. The increase in 2008 as compared to 2007 was primarily due to the hiring of our sales force early in the third quarter of 2007 to support the launch and commercialization of RECOTHROM in 2008 and increased sales and marketing activities throughout all of 2008.

Stock-based compensation.    Stock-based compensation expense decreased by $8.3 million for the year ended December 31, 2009, as compared to the prior year. The decrease was primarily due to a lower underlying share price for stock options granted in 2008 and 2009, forfeiture of stock options related to the termination of employees in 2009, and the unrestricted stock grants made to all employees in recognition of the FDA approval of RECOTHROM in January 2008. The following table summarizes stock-based compensation expense by expense classification and type of award for the periods presented (in thousands):

	2009		2008		2007
Research and development expense
Stock options	$	6,638	$	11,797	$	13,591
Restricted stock units		925		1,256		—
Unrestricted stock grants		—		519		—
		7,563		13,572		13,591
Selling, general and administrative expense
Stock options		5,148		7,182		7,286
Restricted stock units		307		290		—
Unrestricted stock grants		—		228		—
		5,455		7,700		7,286
Total	$	13,018	$	21,272	$	20,877

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Other Income (Expense)

Investment income.    Investment income is generated primarily from investment of our cash in fixed-income securities. The primary factors affecting the amount of investment income that we report are: the amount of cash invested, the effective interest rate, the amount of realized gains or losses on investments sold during the period and the amount of other-than-temporary impairment losses recorded in the period. The decrease in 2009 compared to 2008 was primarily due to a reduced effective interest rate and an other-than-temporary-impairment loss of $1.6 million. The decrease in 2008 as compared to 2007 was primarily due to a lower average cash balance and a lower effective interest rate, as well as realized losses on investments and an other-than-temporary impairment loss of $400,000. The following table shows how each of these factors affected investment income for the three years reported (in thousands, except percentages):

	2009			2008			2007
Weighted average amount of cash available to invest	$	122,465		$	119,939		$	207,817
Effective interest rate		1.09	%		3.72	%		4.92	%
Investment income before gains (losses)		1,333			4,464			10,218
Net gain (loss) on investments		3			(231	)		66
Other-than-temporary impairment loss		(1,638	)		(400	)		—
Investment income, as reported	$	(302	)	$	3,833		$	10,284

Interest expense.    We have accounted for a sale-leaseback transaction completed in October 2002 as a financing transaction. Under this method of accounting, an amount equal to the net proceeds of the sale is considered a long-term interest-bearing liability. Rent payments under the leases are considered to be payments toward the liability and are allocated to principal and interest. We recorded related interest expense of $7.6 million for the year ended December 31, 2009 and $7.7 million for both the years ended December 31, 2008 and 2007. In addition, we recorded interest expense of $3.4 million and $933,000 for the years ended December 31, 2009 and 2008, respectively, related to the Deerfield financing arrangement, which represents amortization of the deferred financing costs, including the fair value of the warrants issued; 4.9% interest on the $25.0 million drawn in November 2008; and additional interest expense equal to 2% of RECOTHROM net sales in the United States. beginning upon receipt of the $25.0 million draw.

Gain on sale of fixed assets, net.    In August of 2008, we sold undeveloped land near our corporate headquarters for $11.8 million and recognized a gain of $7.0 million.

Liquidity and Capital Resources

As of December 31, 2009, we had cash, cash equivalents and short-term investments of $174.1 million, an increase of $84.2 million from December 31, 2008. The increase was attributable to cash received from Bristol-Myers Squibb totaling $200.0 million in 2009 related to the PEG-IFN-lambda collaboration and license agreement, partially offset by cash used to fund our net loss and to manufacture RECOTHROM. In January 2010, we received $90.9 million in net proceeds from the sale of 16.1 million shares of our common stock. We intend to use these assets to fund our operations and capital expenditures over the next several years. Our cash has been held in a variety of fixed-income securities, including corporate bonds, commercial paper and money market instruments that were investment grade at the time of purchase. Subsequent to our purchase, some asset-backed securities have been downgraded by the major bond rating agencies. Together with the discretionary investment manager responsible for investing our portfolio, we monitor our investments closely and, based on market conditions and our expected working capital requirements, recorded other-than-temporary impairment losses of $1.6 million and $400,000 as of December 31, 2009 and 2008, respectively. We consider all other unrealized losses, totaling $1.1 million as of December 31, 2009, to be temporary.

We expect to fund our future operations using our existing cash; revenues from RECOTHROM sales; cash generated from existing and newly established collaborations and licenses; and public or private financings,

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including debt or equity financings. We believe these existing and future cash resources including the proceeds from our January 2010 stock offering will be sufficient to fund our operations for at least the next two years, however, this outlook is dependent upon future events, including the sales performance of RECOTHROM and progress in the development activities for our product candidates.

Cash flows from operating activities

The amount of cash used to fund our operating activities differs from our reported net losses due to the following items:

• non-cash items, such as depreciation and amortization of fixed assets, amortization of deferred debt issue costs, gain or loss on sale or disposal of assets, other-than-temporary impairment losses on investments and stock-based compensation, which do not result in uses or sources of cash;

• net realized gains and losses and accretion and amortization of discounts and premiums on short-term investments, which are reflected as sources of cash from investing activities upon maturity or sale of the respective investments;

• changes in receivables, which generally represent temporary timing differences between the recognition of certain revenues and the subsequent receipt of cash payments;

• additions to RECOTHROM inventory subsequent to the January 17, 2008 approval date, which reflect the use of cash but will not be expensed until the related product is sold;

• changes in deferred revenue, which reflect the difference in timing between the receipt of cash from option fees, license fees, other upfront payments and milestone payments, and the subsequent recognition of these amounts as revenue over the period we are contractually required to provide other rights or services that represent continuing obligations;

• the Collaboration Obligation under the Bristol-Myers Squibb agreement to fund the first $100.0 million of certain development costs, which is anticipated to be paid through early 2011; and

• changes in other assets and liabilities, which generally represent temporary timing differences between the recognition of certain expenses and their payment.

Most of these items do not cause material year-to-year fluctuations in the relationship between our net loss and the amount of net cash used in operating activities. Exceptions are non-cash items, changes in deferred revenue and collaboration obligations and RECOTHROM inventory increases. Substantial license or upfront fees may be received when we enter into new licensing or collaborative agreements and be recorded as deferred revenue, which is then recognized as revenue over a future period. For example, we received $200.0 million in upfront and milestone payments from Bristol-Myers Squibb in 2009, of which $100.0 million was recorded as a collaboration obligation reflecting our responsibility to fund the first $100.0 million of research and development costs incurred for the collaboration. The remaining $100.0 million was recorded as deferred revenue. As of December 31, 2009, the remaining collaboration obligation was $76.0 million, which is expected to be paid through early 2011. The deferred revenue is currently expected to be recognized as revenue through mid-2012. The timing of additional collaboration transactions is expected to be irregular and, accordingly, has the potential to create additional future fluctuations in the relationship between our net loss and the amount of cash used in operating activities.

The supply chain for RECOTHROM involves single source suppliers in various countries. These suppliers often require annual minimum production levels, significant lead times and firm purchase commitments to ensure that manufacturing capacity is available. We have established safety stocks of inventory at each stage in the RECOTHROM manufacturing supply chain in an effort to ensure that sufficient product is available to meet anticipated demand. The purchase of inventory under these arrangements has resulted in a significant use of cash. Our current levels of inventory are higher than necessary to support our current volume of sales; however, work

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in process and finished goods inventories have shelf lives of five and three years, respectively. We perform periodic reviews of inventory levels, including reviews of the product expiration dates and forecasted sales, and write-down the value of inventory to reflect any anticipated obsolescence. Such write-downs are reflected as a component of cost of product sales. For example, we recorded an obsolete inventory charge of $4.2 million in the fourth quarter of 2008. At December 31, 2009, we have concluded there is no need to recognize any additional inventory obsolescence.

Cash flows from investing activities

Our most significant use of cash in investing activities is for capital expenditures. We expend a certain amount each year on routine items to maintain the effectiveness of our business, such as to adopt newly developed technologies, expand into new functional areas, adapt our facilities to changing needs or replace obsolete assets. All of the $1.8 million, $4.8 million and $6.4 million expended for purchases of property and equipment for the years ended December 31, 2009, 2008 and 2007, respectively, were of this nature. In August 2008, we sold land for $11.8 million that we had purchased in 2001 and 2002. Cash flows from investing activities also reflect large amounts of cash used to purchase short-term investments and receipts from the sale and maturity of short-term investments. These amounts primarily relate to shifts between cash and cash equivalents and short-term investments. Because we manage our cash usage with respect to our total cash, cash equivalents and short-term investments, we do not consider these cash flows to be important to an understanding of our liquidity and capital resources.

Cash flows from financing activities

In 2008, we borrowed $25.0 million under our debt financing arrangement with Deerfield and incurred related financing costs of $1.2 million. We did not borrow any additional amounts from Deerfield prior to the lapse of the credit facility in February 2010. We received $1.6 million, $454,000 and $5.0 million of proceeds from the exercise of stock options for the years ended December 31, 2009, 2008 and 2007, respectively. The amounts we receive from stock option exercises are dependent upon our stock price and the expiration date of the stock option grants.

We expect to incur substantial additional losses in the coming years as we continue to build the market for RECOTHROM and advance our pipeline candidates, such as PEG-IFN-lambda. It might be some time, if ever, before our RECOTHROM revenues enable us to achieve positive operating cash flow. If at any time our prospects for funding our various initiatives decline, we may decide to look for ways to reduce our ongoing investment. For instance, we might consider discontinuing our funding under existing co-development arrangements, as we did with our atacicept collaboration with Merck Serono in August of 2008. Further, we may establish new co-development arrangements for other product candidates to provide additional funding sources, as we did in early 2009 with our PEG-IFN-lambda collaboration with Bristol-Myers Squibb. Also, we may out-license products, product candidates or certain rights related to products or product candidates that we might otherwise choose to develop and commercialize internally as we did in late 2009 with our IL-21 mAb license agreement with Novo Nordisk. Additionally, we could consider delaying or discontinuing development of product candidates to reduce the level of our related expenditures.

In January 2010, we sold 16.1 million shares of our common stock in an underwritten public offering and received $90.9 million in net proceeds. We believe our existing cash and cash equivalents, short-term investments and the proceeds from our stock offering provide us with sufficient cash resources to fund our operations for at least the next two years; however, this outlook depends on future events, including the sales performance of RECOTHROM and progress in the development activities for PEG-IFN-lambda and our other product candidates. We may seek additional funding through new license and/or collaboration transactions or public or private financings, including debt or equity financings. If we are unable to raise additional funds when we need them, we could be required to delay, scale back or eliminate expenditures for some of our development programs, or grant rights to third parties to develop and market product candidates that we would prefer to develop and market internally, with license terms that are not favorable to us.

58

Contractual Obligations

At December 31, 2009, we were contractually obligated to make payments as follows (in thousands):

	Payments Due by Period
	Total		Less than 1 Year		1-3 Years		4-5 Years		More than 5 Years
Building lease obligations	$	92,091	$	8,437	$	17,771	$	19,037	$	46,846
Operating leases		28,674		2,631		5,553		5,967		14,523
Collaboration obligation		75,959		60,105		15,854		—		—
RECOTHROM manufacturing contracts		57,886		10,378		18,108		9,800		19,600
Total	$	254,610	$	81,551	$	57,286	$	34,804	$	80,969

The building lease obligations resulted from our 2002 sale-leaseback financing transaction and extends until May 2019. The operating leases relate to office space near our corporate headquarters buildings and expire in April 2019. We have certain renewal provisions at our option, which are not reflected in the above table, for the building leases and the operating leases. The collaboration obligation relates to the collaboration and license agreement we entered into with Bristol-Myers Squibb, which obligates us to fund the first $100.0 million of costs for development in the United States and Europe, after which we will be responsible for 20% of such costs unless we elect to convert to a royalty arrangement. RECOTHROM manufacturing contracts include the manufacture of rThrombin bulk drug and RECOTHROM finished product for commercial sale.

Off-Balance Sheet Arrangements

As of December 31, 2009, we did not have any material off-balance sheet arrangements (as defined by Item 303(a)(4)(ii) of Regulation S-K).

Critical Accounting Estimates

Product sales returns and allowances

We primarily sell RECOTHROM to wholesalers, who in turn sell to hospitals. Sales of RECOTHROM are recognized as revenue when the product is received by the wholesaler and title and risk of loss have passed.

Product sales are recorded net of estimated cash discounts, wholesaler fees for service, chargebacks and GPO fees (collectively gross-to-net adjustments) and returns and are recognized as a reduction in product sales revenue. Gross-to-net adjustments are based on actual amounts allowed plus estimates of the amounts yet to be claimed on previously recorded sales. These estimates take into consideration the terms of our current contracts with group purchasing organizations and wholesalers, levels of wholesaler inventory, known sales trends, historical claims experience and forecasted customer buying patterns. Amounts accrued for gross-to-net adjustments are revised when trends or significant events indicate that an adjustment is appropriate. Accrued amounts are also adjusted to reflect actual results. To date, such adjustments have not been material to our results of operations or financial position.

Accruals for estimated sales returns are recorded in the same period that the related product sales are recorded and are also recognized as reductions in product sales revenue. Returns are estimated by comparing and analyzing inventory information provided by our wholesalers, shipping information and historical return data on a production lot basis. To date, sales returns have been insignificant and the impact of any adjustments have not been material to our results of operations or financial position.

License fees, milestone payments and upfront fees

We enter into various collaborative agreements that generate significant license, option or other upfront fees with subsequent milestone payments earned upon completion of development milestones. Where we have no

59

continuing performance obligations under an arrangement, we recognize milestone payments as revenue upon receipt, as these payments represent the culmination of a separate earnings process. Where we have continuing performance obligations under an arrangement, revenue is recognized using one of two methods. Where we are able to estimate the total amount of services under the arrangement, revenue is recognized using a proportional performance model. Costs incurred to date compared to total expected costs are used to determine proportional performance, as this is considered to be representative of the delivery of outputs under the arrangement. Revenue recognized at any point in time is limited to cash received and amounts contractually due. Changes in estimates of total expected costs are accounted prospectively as a change in estimate. Where we cannot estimate the total amount of service that is to be provided, a time-based method is used to recognize revenue. Under the time-based method, revenue is recognized over the arrangement’s estimated performance period, starting with the contract’s commencement, but not before the removal of any contingencies for each milestone. Revenue recognition is determined based on the elapsed time compared to the total estimated performance period. Revenue recognized at any point in time is limited to the completed portion of the non-contingent payments received or due.

Inventory obsolescence

We establish provisions for obsolete and excess inventory and include it as a component of costs of product sales. The bulk drug substance form of RECOTHROM has a shelf life of five years and finished (vialed) product has a shelf life of three additional years. The provision for obsolete and excess inventory is evaluated for adequacy at each quarter end based on estimated future product sales, production commitments, and existing inventory levels at all stages of manufacturing.

Investment impairment

We determine the impairment classification of any individual security as either temporary or other-than-temporary. An other-than-temporary impairment for debt securities is recorded when we intend to sell the security, it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, or we do not expect to recover the security’s entire amortized cost basis. In addition, if we determine that a credit loss exists with respect to an individual debt security, we would record an other-than-temporary impairment if we concluded that we would not be able to recover the entire amortized cost of the security, even if we do not intend to sell the security. The differentiating factors for equity securities, between temporary and other-than-temporary impairments, are primarily the length of the time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer and the intent and ability to retain our investment in the issuer for a period of time sufficient to allow for an anticipated recovery in fair value. We record other-than-temporary impairments in gain (loss) on investments, net in our consolidated statements of operations and we record temporary impairments within accumulated other comprehensive (loss) income in our consolidated balance sheets.

Stock-based compensation

In 2009, our assumption for expected stock price volatility was based on the historical volatility of our common stock over a period commensurate with the expected term of the options. Prior to 2009, the expected volatility assumption was based on a blend of historical stock price volatility with the implied volatility of market traded options. In 2008, the calculation of historical volatility was based solely on the trading of our common stock. Prior to 2008, however, historical trading information for our common stock was not available for a long enough period and, thus, was augmented with the historical volatility of similar companies. Furthermore, the implied volatility of market traded options of similar companies was used since the market for options on our common stock was illiquid and could not be relied upon as a source of implied volatility. The risk-free interest rate used in the option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term of the options. We used historical data to determine an estimate for the expected life of our stock options granted in 2009 and 2008 and used the simplified method for determining the expected term for 2007. We do not anticipate paying any cash dividends in the foreseeable future and therefore an expected

60

dividend yield of zero is used in the option valuation model. Forfeitures are estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. Accordingly, stock-based compensation expense is recorded only for those awards that vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

Item 7A.    Qualitative and Quantitative Disclosures About Market Risk

Until recently, our exposure to market risk has been primarily limited to interest income sensitivity, which is affected by changes in the general level of United States interest rates, particularly because the majority of our investments are in short-term debt securities. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. To minimize risk, we maintain our portfolio of cash, cash equivalents and short-term investments in a variety of interest-bearing instruments, which have included United States government and agency securities, high-grade United States corporate bonds, asset-backed securities, commercial paper and money market funds.

In 2008 and continuing through 2009, due to deteriorating conditions in the debt markets, our exposure to market risk increased and impacted our investment portfolio. Overall liquidity for many debt issues has declined substantially, meaning that we may realize losses if we are required to liquidate securities upon short notice. Additionally, with respect to asset backed securities, overall economic conditions have generated concerns about the value of underlying assets held as collateral, and highlighted risks associated with insurance policies used to enhance the credit of the related debt issues. To date, we have not experienced defaults on any of our asset backed securities, but we have seen the time for expected repayment increase significantly. In 2009, we revised our investment guidelines to exclude future purchases of asset backed securities; however, we continue to hold several of these securities that were purchased prior to the revision of our guidelines. We continue to monitor these investments closely and, based on market conditions, recorded other-than-temporary impairment losses of $1.6 million and $400,000 in the fourth quarter of 2009 and the third quarter of 2008, respectively.

We have no material foreign currency exposure, nor do we hold derivative financial instruments.

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Item 8.    Financial Statements and Supplementary Data

	Page in Form 10-K
Report of Independent Registered Public Accounting Firm	63
Consolidated Balance Sheets	64
Consolidated Statements of Operations	65
Consolidated Statement of Changes in Shareholders’ Equity (Deficit)	66
Consolidated Statements of Cash Flows	67
Notes to Consolidated Financial Statements	68 –90

62

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

and Shareholders of ZymoGenetics, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in shareholder’s equity (deficit) and cash flows present fairly, in all material respects, the financial position of ZymoGenetics, Inc. and its subsidiaries at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting section under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP

Seattle, Washington

February 26, 2010

63

ZYMOGENETICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

	December 31,
	2009			2008
Assets
Current assets:
Cash and cash equivalents	$	141,634		$	50,088
Short-term investments		32,496			39,799
Receivables		7,672			11,249
Inventory		63,024			28,241
Prepaid expenses		5,043			3,579
Total current assets		249,869			132,956
Property and equipment, net		58,565			63,676
Deferred financing costs		5,172			6,726
Long-term investment		2,002			1,547
Other assets		3,688			5,141
Total assets	$	319,296		$	210,046
Liabilities and Shareholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	14,000		$	8,834
Accrued liabilities		24,299			13,099
Lease obligations		928			563
Deferred revenue		40,484			34,472
Collaboration obligation		60,105			—
Total current liabilities		139,816			56,968
Lease obligations		67,563			67,366
Debt obligation		25,000			25,000
Deferred revenue		63,899			33,374
Collaboration obligation		15,854			—
Other long-term liabilities		11,122			3,979
Commitments and contingencies
Shareholders’ equity:
Preferred stock, no par value, 30,000 shares authorized, no shares issued and outstanding		—			—
Common stock, no par value, 150,000 shares authorized, 69,353 and 68,736 issued and outstanding at December 31, 2009 and 2008, respectively		801,318			786,736
Non-voting common stock, no par value, 30,000 shares authorized, no shares issued and outstanding		—			—
Accumulated deficit		(805,184	)		(762,203	)
Accumulated other comprehensive loss		(92	)		(1,174	)
Total shareholders’ equity (deficit)		(3,958	)		23,359
Total liabilities and shareholders’ equity (deficit)	$	319,296		$	210,046

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

64

ZYMOGENETICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Year ended December 31,
	2009			2008			2007
Revenues:
Product sales, net	$	29,596		$	8,779		$	—
Royalties		1,307			6,290			6,259
Collaborations and licenses		106,069			58,920			32,218
Total revenues		136,972			73,989			38,477
Costs and expenses:
Costs of product sales		7,631			5,672			—
Research and development		99,194			126,678			142,340
Selling, general and administrative		62,202			60,238			46,890
Total costs and expenses		169,027			192,588			189,230
Loss from operations		(32,055	)		(118,599	)		(150,753	)
Other income (expense):
Investment income (loss)		(302	)		3,833			10,284
Interest expense		(10,994	)		(8,582	)		(7,677	)
Gain on sale of fixed assets, net		7			7,107			2
Total other income		(11,289	)		2,358			2,609
Loss before income tax benefit		(43,344	)		(116,241	)		(148,144	)
Income tax benefit		363			—			—
Net loss	$	(42,981	)	$	(116,241	)	$	(148,144	)
Basic and diluted net loss per share	$	(0.62	)	$	(1.69	)	$	(2.17	)
Weighted-average number of shares used in computing net loss per share		69,069			68,696			68,156

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

65

ZYMOGENETICS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

(in thousands)

	Common stock			Accumulated deficit			Accumulated other comprehensive income (loss)			Total
	Shares	Amount
Balance at January 1, 2007	67,499	$	732,914	$	(497,818	)	$	588		$	235,684
Comprehensive loss:
Net loss	—		—		(148,144	)		—			(148,144	)
Unrealized gain on short-term investment	—		—		—			667			667
Unrealized gain on long-term investments	—		—		—			701			701
Total comprehensive loss											(146,776	)
Common stock issued in connection with stock option exercises	1,029		5,045		—			—			5,045
Stock-based compensation expense	—		20,877		—			—			20,877
Balance at December 31, 2007	68,528		758,836		(645,962	)		1,956			114,830
Comprehensive loss:
Net loss	—		—		(116,241	)		—			(116,241	)
Unrealized loss on short-term investment, net	—		—		—			(2,163	)		(2,163	)
Unrealized loss reclassified to other-than-temporary impairment	—		—		—			400			400
Unrealized loss on long-term investments	—		—		—			(1,367	)		(1,367	)
Total comprehensive loss											(119,371	)
Common stock issued in connection with stock option exercises	151		454		—			—			454
Common stock issued in connection with stock awards	57		746		—			—			746
Warrants issued in connection with financing arrangement	—		6,174		—			—			6,174
Stock-based compensation expense	—		20,526		—			—			20,526
Balance at December 31, 2008	68,736		786,736		(762,203	)		(1,174	)		23,359
Comprehensive loss:
Net loss	—		—		(42,981	)		—			(42,981	)
Unrealized loss on short-term investment	—		—		—			(1,011	)		(1,011	)
Unrealized loss reclassified to other-than-temporary impairment	—		—		—			1,638			1,638
Unrealized gain on long-term investments	—		—		—			455			455
Total comprehensive loss											(41,899	)
Common stock issued in connection with stock option exercises	428		1,564		—			—			1,564
Vesting of restricted stock units	189		—		—			—			—
Stock-based compensation expense	—		13,018		—			—			13,018
Balance at December 31, 2009	69,353	$	801,318	$	(805,184	)	$	(92	)	$	(3,958	)

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

66

ZYMOGENETICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year ended December 31,
	2009			2008			2007
Operating activities
Net loss	$	(42,981	)	$	(116,241	)	$	(148,144	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		6,906			7,173			7,221
Amortization of debt issuance costs		1,544			673			—
Stock-based compensation		13,018			21,272			20,877
Inventory impairment		—			4,150			—
Net gain on disposition of property and equipment		(7	)		(7,107	)		(2	)
Net realized loss (gain) on sale of short-term investments		(3	)		231			(66	)
Impairment loss on short-term investments		1,638			400			—
Net amortization (accretion) of premium (discount) on short-term investments		23			204			(769	)
Changes in operating assets and liabilities
Receivables		3,577			(4,012	)		(1,980	)
Inventory		(34,783	)		(32,391	)		—
Prepaid expenses		(1,464	)		1,025			(879	)
Other assets		1,453			1,542			(750	)
Accounts payable		5,166			(3,118	)		4,054
Accrued liabilities		11,200			(9,856	)		8,833
Lease obligations		562			885			(43	)
Deferred revenue		36,537			26,929			23,398
Collaboration obligation		75,959			—			—
Other long-term liabilities		7,143			(1,404	)		749
Net cash provided by (used in) operating activities		85,488			(109,645	)		(87,501	)
Investing activities
Purchases of property and equipment		(1,801	)		(4,802	)		(6,442	)
Purchases of short-term investments		(25,072	)		(63,397	)		(171,094	)
Proceeds from sale of property and equipment		13			11,761			3
Proceeds from sale and maturity of short-term investments		31,343			162,704			283,649
Net cash provided by investing activities		4,483			106,266			106,116
Financing activities
Proceeds from debt financing		—			25,000			—
Proceeds from exercise of stock options		1,564			454			5,045
Other financing costs		11			(1,224	)		—
Net cash provided by financing activities		1,575			24,230			5,045
Net increase in cash and cash equivalents		91,546			20,851			23,660
Cash and cash equivalents at beginning of period		50,088			29,237			5,577
Cash and cash equivalents at end of period	$	141,634		$	50,088		$	29,237
Supplemental disclosures
Cash paid for interest	$	7,954		$	7,721		$	7,677
Warrants issued in connection with the Deerfield financing arrangement	$	—		$	6,174		$	—

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

67

ZYMOGENETICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Organization and summary of significant accounting policies

Nature of operations

ZymoGenetics, Inc. (the Company) was incorporated in the state of Washington in June 1981 and operated independently until it was acquired in 1988 by Novo Nordisk North America, a wholly owned subsidiary of Novo Nordisk A/S (Novo Nordisk). In November 2000, the Company became independent from Novo Nordisk upon completion of a private placement of Series B mandatorily redeemable convertible preferred stock with an investor consortium. In February 2002, the Company completed an initial public offering of common stock; at which time all Series A and B mandatorily redeemable convertible preferred stock was converted to common stock. Through this and other subsequent stock offerings and stock option exercises, Novo Nordisk’s ownership percentage has been reduced to approximately 30% at December 31, 2009.

ZymoGenetics, Inc. is a biopharmaceutical company focused on the development and commercialization of therapeutic proteins for the treatment of human diseases. In 2009, through a series of strategic initiatives and workforce and cost reductions, the Company restructured its organization and is now focused on developing and commercializing a limited number of products, which it believes has substantial therapeutic and commercial potential and in which it retains a significant ownership position. The Company’s current portfolio includes one commercial product, RECOTHROM^® Thrombin, topical (Recombinant) which is approved in the United States and Canada for use as a recombinant topical hemostat to control moderate bleeding during surgical procedures. Additionally, the Company has three immunology product candidates: PEG-Interferon lambda (PEG-IFN-lambda), which is being developed in collaboration with Bristol-Myers Squibb Company in a Phase 2 clinical trial for treatment of hepatitis C virus infection; Interleukin-21 (IL-21) which is being tested in a Phase 2 clinical trial as a potential immunotherapy treatment for metastatic melanoma; and Interleukin-31 monoclonal antibody (IL-31 mAb) which is currently in preclinical development as a potential treatment for atopic dermatitis.

The Company has $174.1 million in cash and cash equivalents and short-term investments as of December 31, 2009 and on January 12, 2010, received an additional $90.9 million in net proceeds from the sale of 16.1 million shares of its common stock (See Note 16). The Company expects to fund its future operations using these cash resources, revenues from RECOTHROM sales, and cash generated from existing and newly established collaborations and licenses and additional public and private financings. The Company believes that it has sufficient cash resources to fund its operations for at least the next two years; however, this outlook is dependent upon future events, including the sales performance of RECOTHROM and progress in the development activities for its product candidates.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities; 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. Actual results could differ from those estimates.

Cash and cash equivalents

The Company considers all highly liquid investments with a contractual maturity at date of purchase of three months or less to be cash and cash equivalents. The Company invests its cash and cash equivalents with major financial institutions, the amount of which usually exceed federally insured limits. The Company has not experienced any losses on its cash and cash equivalents.

68

ZYMOGENETICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Available-for-sale securities

Short-term investments

Short-term investments are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported as a separate component of shareholders’ equity or deficit. Interest on securities classified as available-for-sale is included in investment income. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to expected maturity and the amortization is included in interest income. For investments in asset-backed securities, amortization of premiums and accretion of discounts are recognized in interest income using the interest method, adjusted for anticipated prepayments, as applicable. Estimates of expected cash flows are updated periodically and changes are recognized in the calculated effective yield prospectively. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method.

Long-term investments

Included in other assets is a long-term investment in common shares of BioMimetic Therapeutics, Inc., a company that licensed certain technologies from the Company and made certain payments in shares of common stock. These shares are publicly traded and are adjusted to fair value, with the unrealized gains and losses reported as a separate component of shareholders’ equity or deficit. As of December 31, 2009 and 2008, the unrealized gain on the investment was $1.0 million and $547,000, respectively.

Fair value of financial instruments

The Company records its short-term and long-term investments at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price) and establishes a fair value hierarchy based on the inputs used to measure fair value. The three levels of the fair value hierarchy are as follows:

• Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities (for example exchange quoted prices);

• Level 2 – Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not sufficiently active to qualify as Level 1, other observable inputs, or inputs that can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

• Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

Inventory

Inventory is stated at the lower of cost or market. Cost includes amounts related to materials, labor and overhead, and is determined on a specific identification basis in a manner which approximates the first-in, first-out (FIFO) method. Inventory balances reflect the cost of post-approval manufacturing activities for

69

ZYMOGENETICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

RECOTHROM. The manufacturing of RECOTHROM requires multiple steps which are performed by a series of third-party contractors, most of which are single source, based upon the Company’s specifications. As protection against product shortages, the Company maintains safety stocks of inventory at each stage in the manufacturing process and has entered into manufacturing contracts, some of which contain annual minimum purchase commitments. The Company reduces inventory to its estimated net realizable value by reserving for excess and obsolete inventories based on forecasted demand.

Property and equipment

Property and equipment are stated at cost. Additions, betterments and improvements are capitalized and depreciated. When assets are retired or otherwise disposed of, the cost of the assets and related depreciation is eliminated from the accounts and any resulting gain or loss is reflected in the consolidated statements of operations. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which include five years for furniture and lab equipment, ten years for pilot plant equipment and 40 years for buildings. Expenditures for repairs and maintenance are charged to expense as incurred.

Leasehold improvements are amortized ratably over their estimated useful lives or the remaining term of the lease, whichever is shorter. At December 31, 2009, the Company is amortizing its leasehold improvements over 10 years.

Impairment of long-lived assets

The Company assesses the impairment of long-lived assets whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. Measurement of an impairment is required when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The amount of a recognized impairment loss is the excess of an asset’s carrying value over its fair value. The Company has not recognized any impairment losses of long-lived assets in 2009, 2008 or 2007.

Revenue recognition

Product sales

Sales of RECOTHROM are recognized as revenue when the product is shipped and title and risk of loss have passed. Product sales are recorded net of provisions for estimated discounts, rebates, chargebacks and returns.

Royalties

The Company earns royalties on certain products marketed by other companies. Royalties on these products are received within 60 days after the end of each calendar quarter. The Company accrues estimated royalties based on historical sales data and the patent life associated with the product. Adjustments are made in the following quarter reflecting the differences between the Company’s estimates and actual reported royalties and, to date, adjustments have not been significant.

Collaborations and licenses

The Company enters into various collaborative agreements that may generate license, option or other upfront fees with subsequent milestone payments earned upon completion of development milestones. Where the Company has no continuing performance obligations under an arrangement, it recognizes such payments as revenue when

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contractually due and payment is reasonably assured, as these payments represent the culmination of a separate earnings process. Where the Company has continuing performance obligations under an arrangement, revenue is recognized using one of two methods. Where the Company is able to estimate the total amount of services under the arrangement, revenue is recognized using a proportional performance model. Costs incurred to date compared to total expected costs are used to determine proportional performance, as this is considered to be representative of the delivery of outputs under the arrangement. Revenue recognized at any point in time is limited to cash received and amounts contractually due. Changes in estimates of total expected costs are accounted for prospectively as a change in estimate. Where the Company cannot estimate the total amount of service that is to be provided, a time-based method is used to recognize revenue. Under the time-based method, revenue is recognized over the arrangement’s estimated performance period, starting with the contract’s commencement, but not before the removal of any contingencies for each milestone. From period to period, license fees and milestone payments can fluctuate substantially based on the completion of new licensing or collaborative agreements and the achievement of development-related milestones.

Deferred revenue arises from payments received in advance of the culmination of the earnings process. Deferred revenue expected to be recognized within the next twelve months is classified as a current liability. Deferred revenue will be recognized as revenue in future periods when the applicable revenue recognition criteria have been met.

Cost of product sales

Prior to FDA approval, all third party manufacturing costs and an allocation of Company labor and overhead associated with the manufacturing of RECOTHROM for commercial sale were expensed as research and development costs as incurred. Subsequent to RECOTHROM approval, these costs are recorded as inventory. Costs of product sales includes the inventory and distribution costs associated with RECOTHROM product sales and costs incurred subsequent to FDA approval for product that is not expected to be sold before its expiration dating and, thus, considered obsolete. During 2008, a reserve of $4.2 million was included in costs of product sales.

Research and development costs

Research and development costs, consisting of salaries and benefits, costs of consumables, facility costs, contracted services and stock-based compensation, are expensed as incurred. Costs to acquire technologies that are utilized in research and development which have no future use are expensed when incurred. The Company has evaluated its collaboration arrangements and accordingly has recorded research and development cost reimbursements as reductions to research and development expenses or as an increase in collaboration revenue. The reductions to research and development expense were $2.3 million, $12.4 million and $10.7 million in 2009, 2008 and 2007, respectively.

Patent and legal costs

Costs relating to filing, pursuing and defending patent applications are expensed to selling, general and administrative costs as incurred. Other legal costs are expensed as incurred.

Income taxes

The Company records a provision for income taxes using the liability method of accounting for income taxes. Deferred tax assets or liabilities are recorded for all temporary differences between financial and tax reporting. Deferred tax expense or benefit results from the net change during the period of the deferred tax assets and liabilities. A valuation allowance is recorded when it is more likely than not that the deferred tax asset will not be realized.

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Stock-based compensation

The Company recognizes as an expense share-based payment transactions in which the Company receives employee services in exchange for equity instruments of the Company. Fair value is determined using the Black-Scholes valuation method. The Company has elected to use the straight-line method of allocating the fair value of compensation expense over the requisite service period of the related award. Additionally, the Company estimates expected forfeitures and recognizes only the compensation cost for those stock options expected to vest.

The Company recorded the following amounts of stock-based compensation expense for the years ended December 31 (in thousands):

	2009		2008		2007
Research and development expense	$	7,563	$	13,572	$	13,591
Selling, general and administrative expense		5,455		7,700		7,286
Total	$	13,018	$	21,272	$	20,877

Comprehensive income (loss)

Comprehensive income (loss) is the change in shareholders’ equity (deficit) resulting from net income (loss) adjusted for unrealized gains and losses on short-term and long-term investments. Amounts are reclassified from other comprehensive income (loss) into the results of operations when unrealized gains and losses become realized.

Segments

The Company manages and evaluates its operations as one reportable segment.

Guarantees

In the normal course of business, the Company indemnifies other parties, including healthcare providers, wholesalers, collaboration partners, lessors and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold the parties harmless against losses arising from a breach of representations and covenants, or out of intellectual property infringement or other claims made against these parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. It is not possible to determine the maximum potential obligation under these indemnification agreements since any claim would be based on the facts and circumstances of the claim and the particular provisions of each agreement.

Concentration of Risks

The Company’s cash and cash equivalents are invested with financial institutions in deposits that usually exceed federally insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents. Management believes that the institutions are financially sound and, accordingly, that minimal credit risk exists.

The Company is subject to credit risk from its accounts receivable related to product sales, and periodically assesses the financial strength of its customers and establishes allowances for anticipated losses, when necessary. Three wholesalers accounted for approximately 90% and 91% of U.S. sales in 2009 and 2008. The Company

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believes that if these wholesalers ceased distributing RECOTHROM, other wholesalers already distributing RECOTHROM would absorb the incremental sales volume with minimal interruption to the Company’s business or the Company would sell directly to hospitals.

The Company is dependent on various single source vendors for most steps of its manufacturing process, and some of the key components in the Company’s products come from single or limited sources of supply.

Loss per share

Basic and diluted net loss per share have been computed based on net loss and the weighted-average number of common shares outstanding during the applicable period. The Company has excluded options to purchase common stock, restricted stock units and warrants to purchase common stock, as such potential shares are antidilutive for all periods presented.

The following table presents the calculation of basic and diluted net loss per share for years ended December 31 (in thousands, except per share data):

	2009			2008			2007
Net loss	$	(42,981	)	$	(116,241	)	$	(148,144	)
Weighted-average shares used in computing basic and diluted net loss per share		69,069			68,696			68,156
Basic and diluted net loss per share	$	(0.62	)	$	(1.69	)	$	(2.17	)
Securities not included in net loss per share calculation:
Options to purchase common stock		12,977			14,385			12,702
Restricted stock units		256			583			—
Warrants to purchase common stock		1,500			1,500			—

Recent accounting pronouncements

In October 2009, authoritative guidance was provided on revenue arrangements with multiple deliverables. Under this guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The guidance also includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. This guidance is to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. The Company is considering whether to adopt this guidance beginning January 1, 2010 and is currently evaluating the impact of the implementation on its results of operations, cash flows and financial condition.

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2.    Short-term investments

Short-term investments consisted of the following (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
December 31, 2009
Type of security:
Commercial paper and money market	$	11,870	$	8	$	(1	)	$	11,877
Corporate debt securities		13,198		—		(73	)		13,125
Asset-backed securities		8,522		20		(1,048	)		7,494
	$	33,590	$	28	$	(1,122	)	$	32,496
Contractual maturity date:
Less than one year	$	11,870						$	11,877
Due in 1-5 years		14,433							14,379
Due in 5-10 years		—							—
Due in 10 years or more		7,287							6,240
	$	33,590						$	32,496
December 31, 2008
Type of security:
Corporate debt securities	$	7,749	$	4	$	(123	)	$	7,630
Asset-backed securities		24,804		—		(1,760	)		23,044
U.S. government and agency securities		8,967		158		—			9,125
	$	41,520	$	162	$	(1,883	)	$	39,799
Contractual maturity date:
Less than one year	$	16,765						$	16,805
Due in 1-5 years		13,724							13,195
Due in 5-10 years		—							—
Due in 10 years or more		11,031							9,799
	$	41,520						$	39,799

As of December 31, 2009, the weighted average expected maturity dates for all securities did not exceed three years.

In assessing potential impairment of its debt securities, the Company determines if it intends to sell the security, if it is more likely than not that it will be required to sell the security before recovering its amortized cost basis, or if it expects to recover the security’s entire amortized cost basis. In addition, if the Company determines that a credit loss exists with respect to an individual debt security, it would record an other-than-temporary impairment if it concluded that it would not be able to recover the entire amortized cost of the security, even if there was no intent to sell the security. The differentiating factors for equity securities, between temporary and other-than-temporary impairments, are primarily the length of the time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer and the intent and ability to retain our investment in the issuer for a period of time sufficient to allow for an anticipated recovery in fair value. In 2009 and 2008, the Company recorded other-than-temporary impairment losses of $1.6 million and $400,000, respectively, on asset-backed security investments.

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At December 31, 2009, the aggregate estimated fair value of the investments with unrealized losses was as follows (in thousands):

	Fair Value		Unrealized Loss
Commercial paper and money market	$	2,995	$	(1	)
Corporate debt securities		13,125		(73	)
Asset-backed securities		6,240		(1,048	)
	$	22,360	$	(1,122	)

The contractual maturities on unrealized loss positions for which other-than-temporary impairments have not been recognized at December 31, 2009, are summarized as follows (in thousands):

	Fair Value		Unrealized Loss
Less than one year	$	2,995	$	(1	)
Greater than one year		19,365		(1,121	)
	$	22,360	$	(1,122	)

Realized gains were $4,000, $521,000 and $379,000 for the years ended December 31, 2009, 2008 and 2007, respectively. Realized losses were $0, $752,000 and $313,000 for the years ended December 31, 2009, 2008 and 2007, respectively. Other-than-temporary impairment losses were $1.6 million and $400,000 for the years ended December 31, 2009 and 2008, respectively. Reclassification adjustments reflected in other comprehensive loss for net realized losses were $0, $209,000 and $159,000 for the years ended December 31, 2009, 2008 and 2007, respectively.

Fair value measurements

The Company’s short-term and long-term investments accounted for at fair value as of December 31, 2009 are summarized below (in thousands):

	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	117,980	$	—	$	—	$	117,980
Short-term investments:
Commercial paper and money market	$	11,877	$	—	$	—	$	11,877
Corporate debt securities		—		13,125		—		13,125
Asset-backed securities		—		7,494		—		7,494
	$	11,877	$	20,619	$	—	$	32,496
Long-term investment:
BMTI common stock	$	2,002	$	—	$	—	$	2,002

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3.    Inventory

Inventory consisted of the following at December 31 (in thousands):

	2009		2008
Raw materials	$	2,256	$	1,664
Work in process		58,327		25,751
Finished goods		2,441		826
Total	$	63,024	$	28,241

4.    Property and equipment

Property and equipment consisted of the following at December 31 (in thousands):

	2009			2008
Land and buildings	$	71,199		$	71,055
Leasehold improvements		2,998			3,005
Furniture and equipment		55,694			55,351
		129,891			129,411
Less: Accumulated depreciation and amortization		(71,326	)		(65,735	)
	$	58,565		$	63,676

Land and buildings include assets deemed owned in connection with the sale and leaseback financing transaction described in Note 7.

5.    Sale of land

In August 2008, the Company sold land located near its corporate headquarters for $11.8 million and recognized a gain of $7.1 million. The gain is included in other income (expense) on the consolidated statement of operations as gain on sale of fixed assets, net.

6.    Accrued liabilities

Accrued liabilities consisted of the following at December 31 (in thousands):

	2009		2008
Incentive compensation	$	5,923	$	4,315
Severance pay		5,331		55
Vacation pay		2,936		4,043
Contract services		1,538		1,567
Sales discounts and allowances		2,516		1,436
Sales commission to Bayer		4,675		—
Other		1,380		1,683
	$	24,299	$	13,099

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7.    Lease obligation

In October 2002, the Company completed a sale and leaseback transaction involving its headquarter buildings located in Seattle, Washington. The three buildings were sold for a total sale price of $52.3 million. Net proceeds from the transaction amounted to $50.5 million. Simultaneously, the Company agreed to lease the buildings from the purchaser for a period of 15 years, subject to four five-year renewal options. The initial rental payment of $5.1 million per year increases by 3.5% each year during the term. Rent for the renewal terms under these lease agreements will be the greater of fair market value or 90% of the rent for the last year prior to renewal. The Company has provided the lessor a security deposit in the form of pledged securities equal to two months base rent or $1.4 million.

The Company has accounted for the transaction as a financing due to a technical provision within the leases related to condemnation, which could, under remote circumstances, result in continuing ownership involvement by the Company in the three buildings. Under this method of accounting, the net proceeds of the sale are considered to be a long-term interest bearing liability. Rent payments under the leases are considered to be payments toward the liability and are allocated to principal and interest. The Company initially recorded a liability of $50.5 million with an effective annual interest rate of approximately 11%.

In 2003, the Company exercised its option to expand one of the leased buildings and, effective May 2004, the Company assumed occupancy of the new space. The Company incurred total project costs of approximately $21.0 million excluding equipment and received an advance from the landlord of $14.9 million. The advance was included as an addition to the long-term lease obligation with an annual effective interest rate of approximately 12%. At the end of the lease term, the remaining balance of the liability will approximate the net book value of the buildings leased. Upon the completion of the expansion project, the lease terms for all three buildings were reset to 15 years from the date of occupancy of the expansion space.

The Company is required to develop certain space within the expanded facility by June 2011. If this requirement is not satisfied, the Company must post a $1.0 million letter of credit (LOC) made available to the landlord until the lease specifications have been met. If the Company does not develop the space within specification by the end of the 15-year lease term, the landlord will have the right to draw down the full amount of the LOC in satisfaction of this obligation.

The following table presents the Company’s scheduled payments under the lease obligation. In addition, the Company has certain renewal provisions at its option, which are not reflected in the table.

Year ending December 31,
2010	$	8,437
2011		8,733
2012		9,038
2013		9,355
2014		9,682
Thereafter		46,846
	$	92,091

8.    Debt financing

In June 2008, the Company entered into a financing arrangement with Deerfield Management (Deerfield), which was amended on December 31, 2009. Under the amended agreement, the Company could have borrowed up to $100.0 million in four draws of $25.0 million each until February 10, 2010 provided the Company

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requested the funds by January 19, 2010. Interest accrues on amounts outstanding at a rate of 4.9% per annum, compounded quarterly, and will be due, along with outstanding principal, in June 2014. Accrued interest was $1.5 million as of December 31, 2009 and is included in other long-term liabilities. Each $25.0 million draw entitles Deerfield to a royalty equal to 2% of RECOTHROM net sales in the U.S. subject to certain maximum amounts depending on the amount borrowed. Royalties are payable quarterly. In addition, the Company agreed to issue Deerfield warrants to purchase 1.5 million shares of common stock at $10.34 per share upon the earlier of the first draw or January 2010. The warrants have a six-year term and the Company is obligated to register the common stock issuable under the warrants with the SEC. The Company can repay borrowed amounts in whole or in part at any time, without penalty, and all associated interest and royalty obligations will cease.

In November 2008, the Company borrowed the first $25.0 million under the Deerfield financing arrangement and issued the related 1.5 million warrants. No subsequent borrowing requests were made on or before the January 19, 2010 borrowing request deadline. The Company has calculated the fair value of the initial 1.5 million warrants to be $6.2 million using the Black Scholes option pricing model. The amount was recorded as deferred financing costs with a corresponding increase to common stock.

Deferred financing costs totaling $7.4 million including the $6.2 million fair value of the initial 1.5 million warrants, are being amortized to interest expense through June 2014. During 2009 and 2008, approximately $1.5 million and $673,000 respectively, of amortization was included in interest expense.

Based on the total borrowing of $25.0 million, cumulative royalties are capped at $18.8 million over the term of the loan. During 2009 and 2008, royalty expense was approximately $570,000 and $72,000, respectively.

9.    Related party transactions

Novo Nordisk owned approximately 30% of the Company’s outstanding common stock at December 31, 2009, 2008 and 2007, respectively. The following table summarizes revenue earned from Novo Nordisk for the periods presented (in thousands):

	2009		2008		2007
Royalties	$	—	$	290	$	1,261
Collaborations and licenses:
Option and license agreements:
IL-20		3,500		2,000		1,000
IL-21		5,000		—		3,500
Other		—		30		2,183
Factor XIII		2,500		5,000		6,820
Total	$	11,000	$	7,320	$	14,764

Amounts receivable from Novo Nordisk were approximately $1.2 million and $40,000 at December 31, 2009 and 2008, respectively.

Royalties

The Company historically earned royalties on two products marketed and sold by Novo Nordisk. These royalties ceased in 2008 due to patent expiration.

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Collaborations and licenses

Option and license agreements

In 2000, the Company and Novo Nordisk entered into an option and license agreement, which including subsequent amendments, expired in November 2006. Under the terms of the agreement, Novo Nordisk licensed certain of the Company’s product candidates. Novo Nordisk is responsible for all development activities and obligated to make payments upon the achievement of predefined development milestones and to pay royalties on sales of any resulting products.

IL-20

Milestone payments of $3.5 million, $2.0 million and $1.0 million were earned and recognized as revenue for the years 2009, 2008 and 2007, respectively, as the Company has no continuing performance obligations.

IL-21

In 2001, Novo Nordisk licensed the rights to IL-21 in all territories outside of North America. In 2007, the Company received a milestone payment of $3.5 million and recognized the payment as revenue as the Company had no other significant rights or obligations under this agreement.

In January 2009, Novo Nordisk and the Company restructured their relationship as it relates to IL-21. The Company reacquired Novo Nordisk’s rights to the IL-21 protein, Novo Nordisk retained the rights to develop other embodiments of IL-21, including antibodies to IL-21, outside of North America and will be obligated to pay the Company milestones and royalties on any products developed. As a result, the Company has worldwide development and commercialization rights to the IL-21 protein and will be obligated to pay Novo Nordisk milestone payments based on approval of any IL-21 protein products and pay royalties on any sales outside North America and third party license fees above a certain threshold.

In December 2009, the agreement relating to other embodiments of IL-21 was amended to provide worldwide development and commercialization rights to Novo Nordisk. Under the terms of the revised agreement, Novo Nordisk paid an initial milestone payment of $24.0 million and is obligated to pay the Company milestone payments and royalties on any products developed. In addition, the Company is obligated to perform certain transition activities which are expected to take approximately six months to substantially complete. The Company has no other continuing performance obligations. Because of the substantive transition activities for which the Company is responsible, the Company is recognizing the initial $24.0 million milestone payment over the six-month estimated performance period and $4.0 million was recognized as collaboration and license revenue in December 2009. In addition, the Company earned $1.0 million for transition activities during 2009 which are included in collaboration and license revenue.

Other

During 2008 and 2007, the Company had various additional license agreements in place with Novo Nordisk pursuant to the option and license agreement. Under these agreements, the Company had no continuing performance obligations and recognizes revenue when contractually due.

Factor XIII

In 2004, the Company entered into a license agreement with Novo Nordisk with respect to recombinant Factor XIII whereby Novo Nordisk will develop and commercialize recombinant Factor XIII on a worldwide basis. The Company is entitled to milestones and royalties based on future development and commercial sales of Factor XIII.

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In 2009, 2008 and 2007, the Company received $2.5 million, $5.0 million and $6.8 million of milestone payments related to Novo Nordisk’s development of Factor XIII. All amounts were recognized as revenue upon receipt since the Company does not have any significant remaining performance obligations.

10.    Collaboration and license agreements

Bristol-Myers Squibb

Type III interferon collaboration

In January 2009, the Company entered into a co-development/co-promotion and license agreement with Bristol-Myers Squibb Company (BMS) for the type III interferon family, of which PEG-IFN-lambda is the designated development candidate. Per the agreement, the Company is primarily responsible for the completion of certain Phase 1 and Phase 2 clinical trials while BMS is responsible for certain Phase 2 and Phase 3 clinical trials, clinical and commercial manufacturing, the drug approval process and for commercialization of any approved drugs. The Company is required to fund the first $100.0 million of joint development costs and additional development costs will be funded 80.0% by BMS and 20.0% by the Company. The Company is obligated to exchange enabling technology through the commercialization period and to participate on Executive, Development and Commercialization steering committees. The Company does have the right to cease contributing to all development and commercialization costs at any time, which would convert the agreement into a royalty arrangement. If the Company elects to convert to a royalty arrangement, the Company will still be required to fund the first $100.0 million of development costs and it will no longer participate on any of the steering committees.

The Company’s substantive obligations under this agreement are expected to be satisfied in 2012. As the Company is able to estimate its program costs through the performance period, revenue is being recognized using the proportional performance methodology as a single unit of accounting. The Company received a total of $200.0 million under the agreement in 2009, consisting of $105.0 million in license fees and two milestone payments totaling $95.0 million related to the initiation of Phase 2 clinical trials. The Company recorded $100.0 million as deferred revenue and $100.0 million as a liability (the Collaboration Obligation) due to the Company’s commitment to fund the initial $100.0 million of development costs incurred by both companies. The reimbursement of the Company’s development costs from the Collaboration Obligation, together with the milestones earned and expected to be earned during the performance period, will be recognized as collaboration revenue by the Company based on the percentage of its total allowable program costs incurred to date compared to its total expected allowable program costs over the performance period.

In 2009, the Company recorded collaboration and license revenue of $38.7 million, based on the proportional performance formula described above.

As of December 31, 2009, the remaining balance of the Collaboration Obligation was $76.0 million and deferred revenue was $84.4 million.

Immunoglobulin fusion patents

In October 2008, the Company entered into a binding, nonexclusive, worldwide license with Bristol-Myers Squibb Company (BMS) to the Company’s patents related to immunoglobulin fusion. BMS paid the Company a one-time license payment of $21.0 million. The Company has no future performance obligations under this arrangement and, accordingly, recorded the entire amount as license fee revenue in 2008.

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Bayer Schering Pharma AG and Bayer HealthCare LLC

In June 2007, the Company entered into a License and Collaboration Agreement with Bayer Schering Pharma AG and a U.S. Co-Promotion Agreement with Bayer HealthCare, LLC. (collectively, Bayer). The agreements provided Bayer with an exclusive license to develop and sell rThrombin outside the United States and to co-promote rThrombin in the United States for three or four years. The Company records all U.S. sales and Bayer is entitled to commissions on U.S. sales.

The Company received a $30.0 million upfront milestone payment in 2007 and a $40.0 million milestone payment in February 2008, $20.0 million of which was expected to be repaid to Bayer as U.S. sales bonuses under the co-promotion. In addition, in 2008, the Company received milestone payments of $6.5 million for Bayer’s filing of a marketing authorization application in Europe and a new drug submission in Canada. In 2009, the Company received $500,000 for the filing of a new drug application in Asia. The agreements provided for additional payments based on further regulatory filings, approvals and annual sales thresholds achieved by Bayer outside of the United States.

The Company had a number of substantive obligations under the agreements which were expected to be delivered from the execution date of the agreement through the first quarter of 2014. In addition, the Company agreed to supply bulk drug over the entire term of the License and Collaboration Agreement.

The Company evaluated its substantive obligations under the agreements and determined that there were two separate units of accounting. The first unit of accounting consists of the grant of various licenses, participation on the United States co-promotion committee, research and development support prior to regulatory approval, formation and maintenance of a U.S. sales force and supply of finished drug product until the first quarter of 2014. The second unit of accounting consists of supplying bulk drug product over the term of the agreement. The Company concluded that the combined obligations in the first unit of accounting had value to Bayer on a standalone basis. Regarding the second unit of accounting, the Company has objective and reliable evidence of the fair value of the bulk drug product to be supplied over the term of the License and Collaboration Agreement based on the purchase price paid to the third party supplier of the bulk drug product.

Obligations within the first unit of accounting were to be provided until the first quarter of 2014. Thereafter, the only undelivered element was to provide bulk drug product for the remaining term of the License and Collaboration Agreement. The Company used the residual method to allocate its arrangement consideration between the two units of accounting. The Company has recognized revenue attributable to the first unit of accounting using a proportional performance model as the Company was able to estimate the proportional progress based on the costs expected to be incurred under the agreements. The Company determined based upon the nature and timing of its obligations that cost inputs were the best measure of performance under the arrangements. Revenue attributable to the supply of bulk drug product was to be recognized as the bulk drug is delivered to Bayer provided all other revenue recognition criteria are met.

During 2008 and 2007, the Company recognized $18.0 million and $6.2 million, respectively, of license and collaboration revenue related to the collaboration.

On December 18, 2009, the Company and Bayer substantially amended the License and Collaboration Agreement and the U.S. Co-Promotion Agreement. Under the amended agreements, Bayer discontinued development and approval application activities in all countries other than Canada; returned all rights to rThrombin to the Company except in Canada where Bayer will launch rThrombin during 2010; exited the U.S. co-promotion effective December 31, 2009; and forgave the $20.0 million in guaranteed U.S. sales bonuses which the Company had previously recorded as a liability. As part of the amendments, the Company agreed to

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pay Bayer a commission on U.S. net sales for the two-year period ending on December 31, 2011 up to a maximum of $12.0 million; to provide finished U.S. approved drug product for Canada at cost plus a fixed profit margin; and to forgive the $3.5 million milestone associated with Canadian approval of rThrombin in December 2009.

Under the amended agreements, as of December 31, 2009, the Company has completed all the deliverables associated with the first unit of accounting, and the Company has a maximum liability to Bayer associated with U.S. commissions of $12.0 million for which Bayer has no performance obligations in order to receive these U.S. commissions.

Immediately preceding the effective date of the amendments, the Company had deferred revenue and liabilities for U.S. bonus payments totaling $46.4 million. Of this amount, $12.0 million will be paid to Bayer until the related commission liability is extinguished. The remaining $34.4 million was recognized as collaboration and license revenue upon the effective date of the amendments.

In 2009, the Company recognized a total of $40.8 million of license and collaboration revenue related to the collaboration. Also during 2009, the Company sold Bayer $1.4 million of finished drug product with a cost of $1.3 million.

Merck Serono

In August 2001, the Company entered into a Collaborative Development and Marketing Agreement with Merck Serono S.A (Merck Serono) for atacicept whereby the companies shared research and development expenses. In September 2004, the Company entered into a Strategic Alliance Agreement with Merck Serono, providing for a strategic research, development and commercialization alliance. Additionally, in a series of related transactions, the Company entered into four other product-related agreements pursuant to which it received upfront fees and potential milestones and royalties.

Effective August 28, 2008, the Company and Merck Serono modified these agreements as follows:

• the Collaborative Development and Marketing Agreement for atacicept was amended and converted to an exclusive worldwide license whereby the Company’s responsibility for funding development costs ended and Merck Serono will pay the Company milestone fees and royalties on worldwide net sales.

• the Strategic Alliance Agreement was amended, eliminating the future co-development of product candidates jointly researched and establishing a mechanism by which each company would have alternating options to obtain exclusive rights to such product candidates.

• The two other existing co-development and co-commercialization agreements were amended, providing Merck Serono with an exclusive license and all rights to the IL-17RC soluble receptor and the Company with an exclusive license and all rights to IL-31 mAb in exchange for future milestones and royalties to the other party.

Under the August 28, 2008 modification, the Company continued to be responsible for certain transitional activities related to atacicept through June 2009 the costs of which were reimbursed by Merck Serono. The Company also had significant remaining performance obligations under the Strategic Alliance Agreement through its expiration in October 2009.

As part of the August 2008 modification discussed above, the Company was relieved of an obligation to reimburse $9.8 million of research and development costs incurred by Merck Serono from June 1, 2008 to August 28, 2008. The forgiveness of these expenses was determined to be additional consideration for the

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licenses granted to Merck Serono and therefore, the $9.8 million was determined to be incremental revenue which was deferred and recognized as license fee revenue on a straight-line basis from August 28, 2008 through October 12, 2009, the expiration date of the Strategic Alliance Agreement.

The Company recognized collaboration and license revenue of $15.5 million, $11.3 million and $11.0 million in 2009, 2008 and 2007 under these agreements. As of December 31, 2009, all previously deferred revenue under all agreements with Merck Serono has been fully recognized.

11.    Retirement plans

Defined contribution

The Company maintains a 401(k) retirement plan covering substantially all of its employees. The plan provides for matching and discretionary contributions by the Company. Contributions were $1.7 million, $2.6 million and $2.3 million for the years ended December 31, 2009, 2008 and 2007, respectively.

Deferred compensation plan

The Company has a Deferred Compensation Plan (DCP) for key employees. Eligible plan participants are designated by the Company’s Board of Directors. The DCP allows participants to defer up to 50% of their annual compensation and up to 100% of any bonus. At December 31, 2009 and 2008, approximately $2.3 million and $3.8 million, respectively, was deferred under the DCP and was recorded both as a long-term asset and a long-term liability.

12.    Income taxes

At December 31, 2009, the Company had net operating loss carryforwards of $653.1 million, research and development tax credit carryforwards of $36.3 million and alternative minimum tax credit carryforwards of $1.2 million. The carryforwards are available to offset future tax liabilities. The net operating loss carryforwards will begin to expire from 2021 – 2029, the research and development tax credits expire from 2010 – 2029 and the alternative minimum tax credit will carry forward indefinitely. Utilization of the net operating loss and tax credit carryforwards may be subject to annual limitations under ownership change limitations established by the Internal Revenue Code Section 382. The annual limitations may result in the expiration of net operating loss and tax credit carryforwards before they can be utilized.

Deferred tax assets and liabilities arise from temporary differences between financial and tax reporting. The Company has provided a valuation allowance at December 31, 2009 and 2008 to offset the excess of deferred tax assets over the deferred tax liabilities, due to the uncertainty of realizing the benefits of the net deferred tax asset.

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Deferred tax assets and liabilities were as follows as of December 31 (in thousands):

	2009			2008
Deferred tax assets:
Net operating loss carryforwards	$	228,596		$	204,612
Research and development tax credit carryforwards		36,324			34,839
Alternative minimum tax credit carryforwards		1,242			1,242
Deferred gain on sale of assets		9,211			8,861
Deferred revenue		—			22,832
Stock option compensation		2,276			7,332
Commission payable		4,228			—
Other		8,903			9,174
		290,780			288,892
Deferred tax liabilities:
Deferred revenue		—			(4,193	)
		290,780			284,699
Less: Valuation allowance		(290,780	)		(284,699	)
Net deferred tax asset	$	—		$	—

The valuation allowance increased by $6.1 million, $39.5 million and $51.2 million in 2009, 2008 and 2007, respectively, to fully reserve the net deferred tax assets.

In October 2000, the Company entered into a tax sharing agreement with Novo Nordisk. The agreement states that all research and development tax credit carryforwards generated by the Company prior to November 9, 2000 used by the Company to generate a tax benefit in future periods shall be reimbursed to Novo Nordisk. The total amount paid shall not exceed $12.0 million. As of December 31, 2009, the Company has not recognized any of these tax benefits.

The reconciliation between the Company’s effective tax rate and the income tax rate is as follows for the years ended December 31:

	2009		2008		2007
Federal income tax rate	(35	)%	(35	)%	(35	)%
Research and development tax credits	(3	)	(3	)	(3	)
Valuation allowance	35		38		35
Other	3		—		3
Effective tax rate	0	%	0	%	0	%

The Company files its income tax return in the U.S. federal jurisdiction. The Company is no longer subject to U.S. federal tax examinations by tax authorities for years before 2006. However, the Internal Revenue Service (IRS) could adjust certain unused tax attributes carried forward from tax years prior to 2006. The Company believes that if subjected to an IRS income tax audit, any assessments would be immaterial to its financial statements. The Company files state tax returns in states where it has tax obligations.

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A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

Balance at January 1, 2008	$	1,370
Additions based on tax positions related to the current year		—
Additions for tax positions of prior years		—
Reductions for tax positions of prior years		(1,370	)
Settlements/Statute of Limitation Lapse		—
Balance at January 1, 2009		—
Additions based on tax positions related to the current year		—
Additions for tax positions of prior years		—
Reductions for tax positions of prior years		—
Settlements/Statute of Limitation Lapse		—
Balance at December 31, 2009	$	—

When and if applicable, the Company will classify income tax-related interest and penalties as income tax expense in its consolidated statements of operations.

13.    Commitments and Contingencies

Operating lease commitments

Historically, the Company had various operating lease agreements for office and parking space in a building near its corporate headquarters in Seattle, Washington. In March 2008, the Company entered into a noncancelable master lease agreement which extended the lease term for all leased space to April 2019. There are certain renewal provisions at the Company’s option, which are not reflected in the following operating lease commitment table. Total annual payments under the lease averages approximately $2.9 million per year over the term.

The following table presents the Company’s commitments for future minimum rental payments under the noncancelable master operating lease (in thousands):

Year ending December 31,
2010	$	2,631
2011		2,727
2012		2,826
2013		2,930
2014		3,037
Thereafter		14,522
	$	28,673

The master lease agreement provides for scheduled rent increases over its term. The Company is recognizing rent expense on a straight-line basis over the lease term.

The Company reduced its workforce in 2009 and has ceased using certain leased space. Authoritative guidance related to costs associated with exit or disposal activities requires companies to record a liability at the cease use date based on the remaining rental costs for which no economic benefit is derived, reduced by the

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estimated sublease rentals that could reasonably be obtained. This amount is then discounted using a credit-adjusted risk-free rate. Accordingly, the Company recorded a restructuring liability of $1.0 million as of December 31, 2009. This amount is included in the table above that presents the Company’s commitments for future minimum rental payments under the noncancelable master operating lease.

Gross rental expense for the years ended December 31, 2009, 2008 and 2007, including the restructuring liability established in 2009, was $3.1 million, $1.9 million and $2.0 million, respectively.

Purchase commitments

The Company maintains, with its contract manufacturers, rolling firm orders and annual minimum purchase commitments for RECOTHROM. These orders may be rescheduled or cancelled by the Company under limited conditions and, even then, with certain restrictions and penalties up to the full cost of the production.

The following table presents the Company’s noncancelable annual purchase commitments to its contract manufacturers (in thousands):

Year ending December 31,
2010	$	10,378
2011		13,208
2012		4,900
2013		4,900
2014		4,900
Thereafter		19,600
	$	57,886

Other commitments

Certain key employees have employment agreements with the Company which provide for salary, health insurance and certain additional severance benefits.

Contingencies

On November 2, 2009, King Pharmaceuticals, Inc. and affiliated entities (Monarch Pharmaceuticals, Inc., King Pharmaceuticals Research and Development, Inc., and GenTrac, Inc.), or, collectively, King, filed suit against the Company in the United States District Court for the Eastern District of Tennessee, naming as defendants the Company and fifty unnamed individuals. King alleges that the Company has engaged in unfair competition, false advertising, trademark infringement, and related claims under federal law and Tennessee state law. King seeks various forms of relief, including damages and permanent injunctive relief precluding the Company from making certain representations regarding King’s products and the Company’s RECOTHROM product. King also filed motions with the District Court seeking temporary restraining orders and preliminary injunctions with respect to certain comparative advertising claims, use of King trademarks as Google ad words, and certain alleged statements regarding the existence of lawsuits against King. On December 10, 2009 the court denied all three motions for preliminary injunction in their entirety. The Company disputes the allegations of wrongdoing in King’s complaint and will continue to vigorously defend itself in this matter. The Company has not recorded a liability related to this suit.

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14.    Stock incentive plans

The Company maintains stock incentive plans (the Plans) that provide for the issuance of incentive stock options, nonqualified stock options, restricted stock and restricted stock units to employees, directors, consultants and other independent contractors who provide services to the Company. The Company’s Board of Directors is responsible for administration of the Plans and determines the term of each option, exercise price and the vesting period.

Stock options

A summary of stock option activity under the Plans is presented below (shares and aggregate intrinsic value in thousands):

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Balance, January 1, 2007	11,982		$	12.95
Granted	2,724			15.06
Exercised	(1,029	)		4.92
Forfeited	(562	)		17.91
Canceled	(413	)		18.27
Balance, December 31, 2007	12,702		$	13.66	6.6	$	25,295
Granted	2,631			8.18
Exercised	(151	)		3.62
Forfeited	(437	)		15.92
Canceled	(360	)		15.36
Balance, December 31, 2008	14,385		$	12.65	6.3	$	345
Granted	5,324			4.95
Exercised	(428	)		3.66
Forfeited	(2,318	)		10.83
Canceled	(3,986	)		16.74
Balance, December 31, 2009	12,977		$	8.85	6.1	$	13,959
Exercisable, December 31, 2009	7,015		$	11.52	4.2	$	6,178

As of December 31, 2009, there was $13.6 million of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 2.3 years.

Estimated fair values of stock options granted have been determined using the Black-Scholes option pricing model with the following assumptions:

	2009		2008		2007
Expected stock price volatility	55.2 – 61.4	%	53.1 – 55.2	%	50.2 – 54.8	%
Risk-free interest rate	1.92 – 3.34	%	1.63 – 3.72	%	3.46 – 4.96	%
Expected life of options	4.2 – 6.4 years		5.6 – 6.2 years		6.1 years
Expected dividend yield	0	%	0	%	0	%

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In 2009, the Company’s assumption for expected stock price volatility was based on the historical volatility of its common stock over a period commensurate with the expected term of the options. Prior to 2009, the expected volatility assumption was based on a blend of historical stock price volatility with the implied volatility of market traded options. In 2008, the calculation of historical volatility was based solely on the trading of the Company’s common stock. Prior to 2008, however, historical trading information for the Company’s common stock was not available for a long enough period and, thus, was augmented with the historical volatility of similar companies. Furthermore, the implied volatility of market traded options of similar companies was used since the market for options on the Company’s common stock is illiquid and cannot be relied upon as a source of implied volatility. The risk-free interest rate used in the option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term of the options. The Company used historical data to determine an estimate for the expected life of its stock options granted in 2009 and 2008 and used the simplified method for determining the expected term for options granted prior to January 1, 2008. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore an expected dividend yield of zero is used in the option valuation model. Forfeitures are estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. Accordingly, stock-based compensation expense is recorded only for those awards that vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

A summary of stock option values under the Plans is presented below (in thousands, except per stock option share data):

	2009		2008		2007
Weighted average grant date fair value per stock option share granted	$	2.57	$	4.29	$	8.49
Total intrinsic value of stock options exercised	$	860	$	926	$	10,213
Total fair value of stock options vested	$	13,132	$	21,161	$	21,681

Common stock exchange

In December 2009, the Company offered employees the ability to exchange some or all of their outstanding stock options that had an exercise price per share greater than $7.90 for a new stock option to purchase a lesser number of shares based on the following ratios:

Per Share Exercise Price of Eligible Options	New Options for Exchanged Options
$7.90 – $9.79	1.25 to 1.00
$9.80 – $16.62	1.75 to 1.00
$16.63 and higher	2.50 to 1.00

A total of 3,260,763 shares were cancelled and in exchange, the Company granted awards of 1,629,632 shares with an exercise price of $6.35 that vest over two and three year periods. In accordance with authoritative guidance, the Company has elected to continue recording expense for the cancelled shares based on the original fair values and vesting terms. The incremental fair value of the newly awarded shares totaled $36,000.

Restricted stock units

In February 2008, the Company granted 620,500 restricted stock units to non-officer employees. These shares vest over a three-year period with one-third vesting on each anniversary of the grant date. The grant date fair value for the restricted stock unit awards was the closing market price of the Company’s common stock on

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the date of grant, which was $9.26 per share. As of December 31, 2009, total unrecognized compensation costs related to unvested restricted stock units was $1.4 million, which is being expensed on a straight-line basis through February 2011.

A summary of restricted stock unit activity is presented below (number of restricted stock units in thousands):

	Number of Restricted Stock Units		Weighted Average Grant-Date Fair Value Per Share
Outstanding at January 1, 2008	—		$	—
Granted	621			9.26
Forfeited	(38	)		9.26
Vested	—			—
Outstanding at December 31, 2008	583			9.26
Granted	—			—
Forfeited	(138	)		9.26
Vested	(189	)		9.26
Outstanding at December 31, 2009	256		$	9.26

Common stock award

In January 2008, the Company issued a total of 57,200 unrestricted shares of common stock to employees of the Company in recognition of FDA approval of RECOTHROM. The share price used to determine compensation was $13.05, based on the closing price on the date the compensation committee of the Company’s board of directors approved the distribution. Additionally, the compensation amount was increased to include payroll taxes paid on behalf of the employees. The entire $1.1 million of costs related to the issuance were expensed in January 2008.

15.    Restructuring

In 2008 and 2009, the Company restructured its operations and reduced its workforce by a total of 247 employees. Restructuring charges of $13.1 million and $1.7 million were recorded in 2009 and 2008, respectively. In addition to employee severance, benefits and related costs, the Company ceased using certain rental space as a result of these restructurings. The Company recorded a liability of $1.0 million based on the remaining rental costs for which no economic benefit is derived, reduced by the estimated sublease rentals that could reasonably be obtained. The amount was discounted using a credit-adjusted risk-free rate.

The changes in liabilities related to these restructuring plans for the periods presented are as follows: (in thousands):

	Severance			Lease		Total
Balance, January 1, 2008	$	—		$	—	$	—
Severance additions		1,714			—		1,714
Severance payments		(1,659	)		—		(1,659	)
Balance, December 31, 2008		55			—		55
Severance additions		13,051			—		13,051
Severance payments		(7,775	)		—		(7,775	)
Lease accrual		—			1,000		1,000
Balance, December 31, 2009	$	5,331		$	1,000	$	6,331

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16.    Subsequent event

On January 12, 2010, the Company sold 16.1 million shares of common stock in an underwritten public offering at $6.00 per share. Net proceeds from the sale, after deducting underwriter discounts and other issuance costs, were $90.9 million.

Novo Nordisk, who owned approximately 30% of the Company’s outstanding stock at December 31, 2009, purchased an additional 1.25 million shares through the offering. After the sale, Novo Nordisk owned approximately 26% of the Company’s outstanding common stock.

17.    Quarterly financial results (unaudited)

The following table contains selected statements of operations information, which is unaudited and should be read in conjunction with the Company’s financial statements and related notes included elsewhere in this report. The Company believes that the following unaudited information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period. Operating results for each quarter of 2009 and 2008 are summarized as follows (in thousands):

	March 31			June 30			September 30			December 31
2009
Revenue	$	24,845		$	22,572		$	27,456		$	62,099
Net income (loss)	$	(18,129	)	$	(26,977	)	$	(11,443	)	$	13,568
Basic net income (loss) per common share(1)	$	(0.26	)	$	(0.39	)	$	(0.17	)	$	0.20
Diluted net income (loss) per common share(1)	$	(0.26	)	$	(0.39	)	$	(0.17	)	$	0.19
2008
Revenue	$	13,512		$	12,582		$	11,876		$	36,019
Net loss	$	(40,896	)	$	(37,380	)	$	(28,790	)	$	(9,176	)
Basic and diluted net loss per common share(1)	$	(0.60	)	$	(0.54	)	$	(0.42	)	$	(0.13	)

(1) Basic and diluted net income (loss) per common share for the four quarters of each fiscal year may not sum to the total for the fiscal year because of the different number of shares outstanding during each period.

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Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that required information is recorded, processed, summarized and reported within the required timeframe, as specified in the rules set forth by the Securities and Exchange Commission. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2009 and, based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of December 31, 2009.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

Management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on the results of this assessment and on those criteria, management concluded that our internal control over financial reporting was effective as of December 31, 2009.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Changes in Internal Control over Financial Reporting

During the fourth fiscal quarter, there were no changes to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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Item 9B.    Other Information

None.

PART III

Item 10.    Directors, Executive Officers and Corporate Governance

(a) The information required by this item with respect to our directors is incorporated by reference to the sections captioned “Proposal I: Election of Directors” and “Report of the Audit Committee” in the proxy statement for our annual meeting of shareholders to be held on June 17, 2010. We expect to file the proxy statement within 120 days of December 31, 2009, our fiscal year end.

(b) The information required by this item with respect to our executive officers is incorporated by reference to the section captioned “Executive Officers” in the proxy statement for our annual meeting of shareholders to be held on June 17, 2010.

(c) The information required by this item with respect to our corporate governance is incorporated by reference to the sections captioned “Corporate Governance,” “Report of the Audit Committee” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the proxy statement for our annual meeting of shareholders to be held on June 17, 2010. We have adopted a Code of Ethics applicable to our chief executive officer, chief financial officer and others responsible for our corporate financial reporting. A copy of the Code of Ethics is available on our website at www.zymogenetics.com.

Item 11.    Executive Compensation

The information required by this item with respect to executive compensation is incorporated by reference to the sections captioned “Executive Compensation” and “Corporate Governance” in the proxy statement for our annual meeting of shareholders to be held on June 17, 2010.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

The information required by this item with respect to beneficial ownership is incorporated by reference to the section captioned “Security Ownership of Certain Beneficial Owners and Management” in the proxy statement for our annual meeting of shareholders to be held on June 17, 2010.

92

Equity Compensation Plan Information

The following table provides information regarding our equity compensation plans at December 31, 2009.

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)(1)
	(a)	(b)		(c)
Equity compensation plans approved by security holders	12,977,048	$	8.85	4,742,524
Equity compensation plans not approved by security holders	—		—	—
Total	12,977,048	$	8.85	4,742,524

(1) Does not include an increase of 2,700,000 shares, effective January 1, 2010, pursuant to a provision of the 2001 Plan that provides for an annual increase effective the first day of each year equal to the least of (i) 2,700,000 shares; (ii) 5% of the outstanding common stock as of the end of the Company’s preceding fiscal year; and (iii) a lesser amount as determined by the Board of Directors.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

(a) The information required by this item with respect to certain relationships and related transactions is incorporated by reference to the section captioned “Certain Transactions” in the proxy statement for our annual meeting of shareholders to be held on June 17, 2010.

(b) The information required by this item with respect to director independence is incorporated by reference to the section captioned “Corporate Governance” in the proxy statement for our annual meeting of shareholders to be held on June  17, 2010.

Item 14.    Principal Accountant Fees and Services

The information required by this item is incorporated by reference to the section captioned “Independent Registered Public Accounting Firm” in the proxy statement for our annual meeting of shareholders to be held on June 17, 2010.

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PART IV

Item 15.    Exhibits, Financial Statement Schedules

(a) The following documents are filed as part of this Form 10-K:

1.    Financial Statements.    The following financial statements are contained in Item 8 of this Annual Report on Form 10-K:

	Page in Form 10-K
Report of Independent Registered Public Accounting Firm	63
Consolidated Balance Sheets	64
Consolidated Statements of Operations	65
Consolidated Statement of Changes in Shareholders’ Equity	66
Consolidated Statements of Cash Flows	67
Notes to Consolidated Financial Statements	68 – 90

2.    Financial Statement Schedules

All financial statement schedules have been omitted because the required information is either included in the financial statements or the notes thereto or is not applicable.

3.    Exhibits

Exhibit No.	Description
3.1	Amended and Restated Articles of Incorporation of ZymoGenetics, Inc.	(A	)
3.2	Articles of Amendment of ZymoGenetics, Inc.	(C	)
3.3	Amended and Restated Bylaws.	(K	)
10.1†	Amended and Restated Employment Agreement, dated February 3, 2005, between ZymoGenetics, Inc. and Bruce L.A. Carter, Ph.D.	(H	)
10.2†	Amended and Restated 2000 Stock Incentive Plan.	(A	)
10.3†	2001 Stock Incentive Plan.	(A	)
10.4†	Amended and Restated Stock Option Grant Program for Nonemployee Directors under the ZymoGenetics 2001 Stock Incentive Plan.	(S	)
10.5†	2001 Stock Incentive Plan, Form of Stock Option Grant Notice.	(J	)
10.6†	Deferred Compensation Plan for Key Employees.	(A	)
10.7†	First Amendment to ZymoGenetics Deferred Compensation Plan for Key Employees.	(M	)
10.8†	Second Amendment to ZymoGenetics Deferred Compensation Plan for Key Employees.	(M	)
10.9†	Third Amendment to ZymoGenetics Deferred Compensation Plan for Key Employees.	(M	)
10.10†	Executive Compensation Program (as of January 1,2009)	(Q	)
10.11†	Amended and Restated Employment Agreement, dated as of June 16, 2009, between ZymoGenetics, Inc. and Stephen Zaruby	(R	)

94

Exhibit No.	Description
10.12†	Employment Agreement, dated as of June 8, 2009, between ZymoGenetics, Inc. and Eleanor L. Ramos, M.D.	(R	)
10.13†	Separation Agreement, effective as of July 23, 2009, between ZymoGenetics, Inc. and Nicole Onetto, M.D.	(R	)
10.14†	Employment Agreement, dated as of September 28, 2009, between ZymoGenetics, Inc. and Dennis M. Miller, Ph.D.	(S	)
10.15†	Employment Agreement, dated as of July 3, 2008, between ZymoGenetics, Inc. and Heather L. Franklin
10.16†	Amended and Restated Employment Agreement, dated as of July 3, 2008, between ZymoGenetics, Inc. and James A. Johnson.
10.17†	Amended and Restated Employment Agreement, dated as of July 3, 2008, between ZymoGenetics, Inc. and Darren R. Hamby.
10.18†	Amended and Restated Employment Agreement, dated as of March 12, 2009, between ZymoGenetics, Inc. and Douglas E. Williams, Ph.D.
10.19*	License Agreement, dated December 31, 1998, as amended on February 4, 1999 and October 23, 2000, between ZymoGenetics, Inc. and St. Jude Children’s Research Hospital.	(A	)
10.20*	Option and License Agreement, effective November 10, 2000, as amended effective as of June 16, 2000 and October 20, 2000, between ZymoGenetics, Inc. and Novo Nordisk A/S.	(A	)
10.21*	First Amended and Restated Development and Marketing Agreement, dated August 28, 2008, between ZymoGenetics, Inc. and Ares Trading S.A.	(O	)
10.22*	Exclusive Patent License Agreement, effective December 18, 2002, between ZymoGenetics, Inc. and Aventis Behring GmbH.	(D	)
10.23	Shareholders’ Agreement by and among ZymoGenetics, Inc., Novo Nordisk A/S, Novo Nordisk Pharmaceuticals, Inc. and the investors listed on Schedule A thereto, effective as of November 10, 2000.	(A	)
10.24	First Amendment to Shareholders’ Agreement by and among ZymoGenetics, Inc., Novo Nordisk A/S, Novo Nordisk Pharmaceuticals, Inc. and the investors listed on Schedule A thereto, dated as of February 4, 2002.	(B	)
10.25	Investors’ Rights Agreement by and among ZymoGenetics, Inc., Novo Nordisk Pharmaceuticals, Inc. and the persons listed on Schedule A thereto, effective as of November 10, 2000.	(A	)
10.26	Tax Sharing Agreement, effective October 20, 2000, between ZymoGenetics, Inc. and Novo Nordisk of North America, Inc.	(A	)
10.27	Lease Agreement, dated October 4, 2002, between ZymoGenetics, Inc. and ARE-1201/1208 Eastlake Avenue, LLC.	(D	)
10.28	Amendment No. 2 to Lease Agreement, dated July 19, 2004, between ZymoGenetics, Inc. and ARE-1201/1208 Eastlake Avenue, LLC.	(F	)
10.29	Lease Agreement, dated October 4, 2002, between ZymoGenetics, Inc. and ARE-1208 Eastlake Avenue, LLC.	(D	)
10.30	Amendment No. 2 to Lease Agreement, dated June 14, 2004, between ZymoGenetics, Inc. and ARE-/1208 Eastlake Avenue, LLC.	(F	)

95

Exhibit No.	Description
10.31	Restated Office Lease Agreement, dated March 1, 2008, between ZymoGenetics, Inc. and 1144 Eastlake LLC.	(M	)
10.32*	Development and Supply Agreement, dated October 1, 2003, between ZymoGenetics, Inc. and Abbott Laboratories.	(E	)
10.33*	First Amended and Restated Strategic Alliance Agreement, dated August 28, 2008, between ZymoGenetics, Inc. and Serono Technologies S.A.	(O	)
10.34*	License Agreement for Recombinant Factor XIII, dated October 4, 2004, among ZymoGenetics, Inc., Novo Nordisk A/S and Novo Nordisk Health Care AG.	(G	)
10.35*	Amendment No. 1 to License Agreement for Recombinant Factor XIII, dated December 7, 2007, among ZymoGenetics, Inc., Novo Nordisk A/S and Novo Nordisk Health Care AG.	(L	)
10.36*	License and Transfer Agreement, effective as of January 16, 2009, by and between ZymoGenetics, Inc. and Novo Nordisk A/S	(Q	)
10.37*	Third Amended and Restated License Agreement for IL-21 Embodiments, dated December 3, 2009, by and between ZymoGenetics, Inc. and Novo Nordisk A/S
10.38*	Manufacturing Service Agreement relating to rhThrombin between Patheon Italia S.p.A. and ZymoGenetics, Inc., executed January 19, 2007.	(I	)
10.39	Amendment No. 1 to Manufacturing Service Agreement relating to rhThrombin between Patheon Italia S.p.A. and ZymoGenetics, Inc., executed December 3, 2007	(L	)
10.40*	U. S. Co-Promotion Agreement by and between ZymoGenetics, Inc. and Bayer HealthCare, LLC, executed June 18, 2007.	(J	)
10.41*	Amendment to U. S. Co-Promotion Agreement by and among ZymoGenetics, Inc., ZymoGenetics, LLC and Bayer HealthCare, LLC, executed December 18, 2009.
10.42*	License and Collaboration Agreement by and between ZymoGenetics, Inc. and Bayer Schering Pharma AG, executed June 18, 2007.	(J	)
10.43*	Amendment to License and Collaboration Agreement by and among ZymoGenetics, Inc., ZymoGenetics, LLC and Bayer Schering Pharma AG, executed December 18, 2009.
10.44*	Facility Agreement dated June 26, 2008 among ZymoGenetics, Inc., Deerfield Private Design Fund, L.P. and Deerfield Private Design International, L.P.	(N	)
10.45	Amendment No.1 to Facility Agreement, dated October 22, 2008, among ZymoGenetics, Inc., Deerfield Private Design Fund, L.P., Deerfield Private Design International, L.P. and Deerfield ZG Corporation
10.46	Amendment No.2 to Facility Agreement, dated December 31, 2009, among ZymoGenetics, Inc., Deerfield Private Design Fund, L.P., Deerfield Private Design International, L.P. and Deerfield ZG Corporation
10.47*	Promissory Note dated June 26, 2008, with issuer ZymoGenetics, Inc. and holder Deerfield Private Design International, L.P.	(N	)
10.48*	Promissory Note dated June 26, 2008, with issuer ZymoGenetics, Inc. and holder Deerfield Private Design Fund, L.P.	(N	)
10.49*	Royalty Agreement dated June 26, 2008 among ZymoGenetics, Inc., Deerfield Private Design Fund, L.P. and Deerfield Private Design International, L.P.	(N	)
10.50	Registration Rights Agreement dated June 26, 2008 among ZymoGenetics, Inc., Deerfield Private Design Fund, L.P. and Deerfield Private Design International, L.P.	(N	)

96

Exhibit No.	Description
10.51*	Form of Warrant to Purchase Common Stock of ZymoGenetics, Inc. relating to the Facility Agreement.	(N	)
10.52*	Release and License Agreement, dated October 22, 2008, by and between ZymoGenetics and Bristol-Myers Squibb Company	(P	)
10.53*	Co-Development/Co-Promotion and License Agreement relating to Type-3 Interferon Family, dated January 12, 2009, by and among ZymoGenetics, Inc., ZymoGenetics, LLC and Bristol-Myers Squibb Company	(Q	)
23.1	Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.
31.1	Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer and 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.

* Portions of these exhibits have been omitted based on a grant of confidential treatment from the Securities and Exchange Commission. The omitted portions of these exhibits have been filed separately with the SEC.

(A) Incorporated by reference to ZymoGenetics, Inc. Registration Statement on Form S-1 (No. 333-69190) filed on September 10, 2001, as amended.

(B) Incorporated by reference to ZymoGenetics, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.

(C) Incorporated by reference to ZymoGenetics, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.

(D) Incorporated by reference to ZymoGenetics, Inc. Annual Report on Form 10-K for the year ended December 31, 2002.

(E) Incorporated by reference to ZymoGenetics, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.

(F) Incorporated by reference to ZymoGenetics, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.

(G) Incorporated by reference to ZymoGenetics, Inc. Annual Report on Form 10-K for the year ended December 31, 2004.

(H) Incorporated by reference to ZymoGenetics, Inc. Current Report on Form 8-K dated as of February 3, 2005.

(I) Incorporated by reference to ZymoGenetics, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.

(J) Incorporated by reference to ZymoGenetics, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.

(K) Incorporated by reference to ZymoGenetics, Inc. Current Report on Form 8-K dated as of November 15, 2007.

(L) Incorporated by reference to ZymoGenetics, Inc. Annual Report on Form 10-K for the year ended December 31, 2007.

(M) Incorporated by reference to ZymoGenetics, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2008.

(N) Incorporated by reference to ZymoGenetics, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.

97

(O) Incorporated by reference to ZymoGenetics, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2008.

(P) Incorporated by reference to ZymoGenetics, Inc. Annual Report on Form 10-K for the year ended December 31, 2008.

(Q) Incorporated by reference to ZymoGenetics, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.

(R) Incorporated by reference to ZymoGenetics, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.

(S) Incorporated by reference to ZymoGenetics, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2009.

98

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ZYMOGENETICS, INC.
Date: February 26, 2010	By:	/s/    DOUGLAS E. WILLIAMS, PH.D.
	Douglas E. Williams, Ph.D. Chief Executive Officer

Each person whose individual signature appears below hereby authorizes and appoints Douglas E. Williams, Ph.D. and James A. Johnson, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file, any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his or her substitute or substitutes may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

Signature	Title	Date
/S/    DOUGLAS E. WILLIAMS, PH.D.       Douglas E. Williams, Ph.D.	Chief Executive Officer and Director (Principal Executive Officer)	February 26, 2010
/S/    JAMES A. JOHNSON         James A. Johnson	Executive Vice President, Chief Financial Officer and Treasurer (Principal Accounting and Financial Officer)	February 26, 2010
/S/    BRUCE L.A. CARTER, PH.D.         Bruce L.A. Carter, Ph.D.	Chairman of the Board of Directors	February 26, 2010
/S/    JAMES A. HARPER         James A. Harper	Director	February 26, 2010
/S/    DAVID I. HIRSH, PH.D.         David I. Hirsh, Ph.D.	Director	February 26, 2010
/S/    JONATHAN S. LEFF         Jonathan S. Leff	Director	February 26, 2010
/S/    DAVID H. MACCALLUM         David H. MacCallum	Director	February 26, 2010
/S/    KURT ANKER NIELSEN         Kurt Anker Nielsen	Director	February 26, 2010
/S/    EDWARD E. PENHOET, PH.D.         Edward E. Penhoet, Ph.D.	Director	February 26, 2010
/S/    LARS REBIEN SØRENSEN         Lars Rebien Sørensen	Director	February 26, 2010

99

EX-10.15

Exhibit 10.15

EMPLOYMENT AGREEMENT

This AGREEMENT, dated as of July 3, 2008 (the “Effective Date”), is between ZymoGenetics, Inc., a Washington corporation (as supplemented by Section 13, the “Company”), and Heather L. Franklin (“Executive”).

In consideration of the promises and mutual covenants contained herein, the Company and Executive agree as follows:

AGREEMENT

1. Certain Definitions

1.1 “Accrued Obligations” has the meaning set forth in Section 7.1.

1.2 “Annual Performance Bonus” has the meaning set forth in Section 5.5(b).

1.3 “Cause” shall have the meaning set forth in Section 7.6.

1.4 “Change in Control” shall have the meaning set forth in Section 7.7.

1.5 “Change in Control Date” shall mean the first date during the Term (as defined in Section 4.1 on which a Change in Control occurs.

1.6 “Change in Control Period” shall mean the two (2) year period commencing on the Change in Control Date and ending on the second anniversary of such date.

1.7 “COBRA” shall mean the health care continuation requirements set forth in Code Section 4980B.

1.8 “Code” shall mean the Internal Revenue Code of 1986 and any regulations, rulings or other official guidance issued pursuant thereto, all as amended and in effect from time to time.

1.9 “Company Transaction” shall mean the consummation of either (i) a merger or consolidation of the Company with or into any other company, entity or person or (ii) a sale, lease, exchange or other transfer of all or substantially all of the Company’s then outstanding securities or all or substantially all of the Company’s assets in one transaction or a series of related transactions undertaken with a common purpose; provided, however, that a Company Transaction shall not include a Related Party Transaction.

1.10 “Compensation Committee” means the Compensation Committee of the Board of Directors.

1.11 “Fiscal Year” shall mean the fiscal year of the Company.

1.12 “Good Reason” shall have the meaning set forth in Section 7.5.

1.13 “Inventions Agreement” shall mean the Employee Inventions and Proprietary Information Agreement, dated as of November 30, 2000, between the parties.

1.14 “Notice of Termination” shall have the meaning set forth in Section 4.4.

1.15 “Position” shall have the meaning set forth in Section 2.

1.16 “Related Party Transaction” shall mean (i) a merger or consolidation of the Company in which the holders of the outstanding voting securities of the Company immediately prior to the merger or consolidation hold at least a majority of the outstanding voting securities of the successor company immediately after the merger or consolidation; (ii) a sale, lease, exchange or other transfer of the Company’s assets to a majority-owned subsidiary company; (iii) a transaction undertaken for the principal purpose of restructuring the capital of the Company, including but not limited to, reincorporating the Company in a different jurisdiction or creating a holding company; or (iv) a corporate dissolution or liquidation.

1.17 “Successor Company” shall mean the surviving company, the successor company or its parent, as applicable, in connection with a Company Transaction.

1.18 “Term” shall have the meaning set forth in Section 4.1.

1.19 “Termination Date” shall have the meaning set forth in Section 4.5.

2. Employment

The Company employs Executive and Executive accepts employment as Senior Vice President, Business Development of the Company (the “Position”), unless terminated earlier as provided upon the terms and conditions contained in this Agreement. Executive and the Company acknowledge that, except as otherwise may be provided under any other written agreement between Executive and the Company, the employment of Executive by the Company or its affiliated companies is “at will” and may be terminated by either Executive or the Company or its affiliated companies at any time with or without cause.

3. Duties

During the Term, Executive shall serve the Company under the direction of the President of the Company. Executive shall perform the duties of the Position faithfully, diligently and competently and to the best of Executive’s ability, and, except as provided in this Section 3, shall devote Executive’s full business time to Executive’s employment. Executive shall perform such other duties as are assigned to Executive by the President or the Board of Directors of the Company. Executive may devote reasonable periods of time to (a) engaging in personal investment activities, (b) serving on the Board of Directors or Scientific Advisory Boards of other corporations with the consent of the Compensation Committee of the Board of Directors, if such service would not otherwise be prohibited by Section 8 hereof, and (c) engaging in charitable or community service activities, so long as none of the foregoing additional activities materially interfere with Executive’s duties under this Agreement.

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4. Term; Termination

4.1 Term

The “Term” of this Agreement initially shall be for a period of two (2) years from the Effective Date; provided, however, that this Agreement shall renew automatically for successive additional one (1) year periods unless notice of non-renewal is given by either party to the other at least ninety (90) days prior to the end of the then current term; and provided further that if a Change in Control occurs during the Term, the Term shall automatically extend at least for the duration of the Change in Control Period.

4.2 Termination by the Company or Executive

The Company may terminate the employment of Executive, with or without Cause, at any time upon giving “Notice of Termination” (as defined below). Executive may terminate Executive’s employment at any time, for any reason, upon giving Notice of Termination.

4.3 Automatic Termination

This Agreement and Executive’s employment hereunder shall terminate automatically upon the death or Total Disability (as defined below) of Executive. The term “Total Disability” as used herein shall mean Executive’s inability to perform the duties set forth in Section 3 hereof for a period or periods aggregating ninety (90) calendar days in any twelve (12) month period as a result of physical or mental illness, loss of legal capacity or any other cause beyond Executive’s control, unless Executive is granted a leave of absence by the Board of Directors of the Company. Executive and the Company hereby acknowledge that Executive’s ability to perform the duties specified in Section 3 hereof is of the essence to this Agreement.

4.4 Notice of Termination

The term “Notice of Termination” shall mean at least thirty (30) days’ written notice of termination, by either party, of Executive’s employment and of this Agreement, during which period Executive’s employment and performance of services shall continue; provided, however, that the Company may, upon notice to Executive and without reducing Executive’s compensation during such period, excuse Executive from any or all of Executive’s duties during such period. Such a reduction in duties shall not constitute Good Reason for termination so as to trigger termination payments in accordance with Sections 7.2 or 7.3.

4.5 Termination Date

The effective date of the termination (the “Termination Date”) means (a) if Executive’s employment is terminated by reason of death, at the end of the calendar month in which Executive’s death occurs, (b) if Executive’s employment is terminated by reason of Total Disability, immediately upon a determination by the Company of Executive’s Total Disability, and (c) in all other cases, the later of (i) thirty (30) days after the date on which the Company or Executive, as applicable, receives the Notice of Termination from the other party or (ii) the date specified in the Notice of Termination.

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4.6 Survival

Sections 4, 7, 8, 9, 10, 14, 15, 16, 17, 18, 19, 20, 21, and 22 shall survive the termination of Executive’s employment and of this Agreement.

5. Compensation and Benefits

5.1 Salary

During the Term, the Company shall pay to Executive as compensation for the performance of Executive’s duties and obligations a salary of $275,000 per annum. This compensation is subject to annual review and adjustment, as appropriate in the judgment of the Company. The compensation payable pursuant to this Section 5.1 shall be payable in equal semi-monthly installments on the last day of each such pay period.

5.2 Standard Benefits

Executive shall be enrolled and participate in any retirement, group insurance and other fringe benefit plans and arrangements which are applicable to the similarly situated personnel of the Company and in effect from time to time, if Executive is eligible therefor, in each case in accordance with and subject to the provisions thereof.

5.3 Stock Options

(a) Executive has been granted stock options under the Company’s 2001 Stock Incentive Plan which allows Executive to purchase shares of the Company’s common stock; and

(b) Executive shall be eligible to receive future periodic grants under the Company’s stock incentive programs.

5.4 Other Benefits

Executive also shall receive the following executive perquisites for the duration of this contract:

(a) Company-paid term life insurance policy in the amount of $200,000;

(b) Company-paid use of either a laptop computer or personal computer, to be upgraded biennially at the time this contract is renewed;

(c) Company-paid annual executive health physical, to be administered by a physician selected by the Company; and

(d) Company-paid expenses for a residential phone and cellular phone.

5.5 Change in Control Period

As long as Executive remains employed by the Company or a Successor Company during the Change in Control Period, the Company agrees to pay or cause to be paid to Executive, and Executive agrees to accept in exchange for the services rendered hereunder by Executive during the Change in Control Period, the following compensation:

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(a) Executive shall receive an annual base salary at least equal to Executive’s annual base salary for the Fiscal Year in which the Change in Control Date occurs (as in effect immediately prior to the Change in Control Date). Executive’s annual base salary shall be paid in substantially equal installments and at the same intervals as the salaries of other executives of the Company are paid. During the Change in Control Period, the Board of Directors, the Compensation Committee or the Chief Executive Officer (as applicable) shall review Executive’s annual base salary at least annually and shall determine in good faith and consistent with any generally applicable Company policy any increases for future years.

(b) In addition to an annual base salary, for each Fiscal Year ending during the Change in Control Period, Executive shall be awarded an annual performance bonus (the “Annual Performance Bonus”) in cash at least equal to Executive’s target annual bonus for the Fiscal Year containing the Change in Control Date or, if such target annual bonus has not been set as of the Change in Control Date, Executive’s target annual bonus for the immediately preceding Fiscal Year (annualized if Executive was employed by the Company for less than the entire preceding Fiscal Year); provided, however, that except as provided in Section 7.3(b), an Annual Performance Bonus shall be awarded for a Fiscal Year only if Executive is employed by the Company or a Successor Company on the last day of such Fiscal Year. Each Annual Performance Bonus shall be paid in the Fiscal Year following the Fiscal Year for which the Annual Performance Bonus is awarded, but no later than the fifteenth (15th) day of the third (3rd) month of such subsequent Fiscal Year, unless Executive elects to defer the receipt of the Annual Performance Bonus in accordance with the terms of the Company’s deferred compensation program.

(c) Executive shall be entitled to participate in, subject to and in accordance with the eligibility and other terms and requirements thereof, such fringe benefit programs as generally are made available to other executives of the Company and its affiliated companies from time to time during the Change in Control Period, including, without limitation, paid vacations; any stock purchase, savings or retirement plan, practice, policy or program; and welfare benefit plans, practices, policies or programs (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans or programs).

6. Expenses

During the Term, all travel and other reasonable expenses incident to the rendering of service by Executive hereunder shall be paid by the Company subject to Company policy. If such expenses are paid in the first instance by Executive, the Company shall reimburse Executive upon presentation of proper expense accounts and supporting documentation. Reimbursement requests, along with supporting documentation, must be submitted within sixty (60) days after the date on which the expense for which reimbursement is being requested was incurred. Reimbursement shall be made no later than the date that is two and one-half months (2 ¹/2) months after the end of the Fiscal Year in which the expense was incurred.

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7. Termination Payments

In the event of termination of the employment of Executive, all compensation and benefits set forth in this Agreement shall terminate except as specifically provided in this Section 7.

7.1 Termination for Cause or Other than for Good Reason

If during the Term Executive’s employment is terminated by the Company for Cause or by Executive for other than Good Reason, this Agreement shall terminate without further obligation on the part of the Company to Executive, other than the Company’s obligation to pay (as provided in Section 7.8(a)) Executive the following accrued obligations (the “Accrued Obligations”):

(a) Executive’s then current annual base salary through the Termination Date;

(b) any Annual Performance Bonus to which Executive is entitled pursuant to Section 5.5(b) (i.e., a bonus paid for a Fiscal Year ending during the Change in Control Period if Executive was employed by the Company or a Successor Company on the last day of such Fiscal Year);

(c) any compensation previously deferred by Executive (together with accrued interest or earnings thereon, if any); and

(d) any accrued vacation pay that would be payable under the Company’s standard policy;

in each case, to the extent not theretofore paid.

7.2 Termination Other than for Cause or for Good Reason NOT During Change in Control Period

Subject to Section 9, if at any time during the Term, except during the Change in Control Period, the Company terminates Executive’s employment other than for Cause or Executive terminates Executive’s employment for Good Reason, Executive shall be entitled to:

(a) any Accrued Obligations to the extent theretofore unpaid;

(b) if, as a result of the termination of Executive’s employment, Executive and Executive’s spouse and dependent children are eligible for and timely (and properly) elect COBRA continuation coverage under the Company’s group health plan(s), the Company shall pay the premium for such coverage for a period of twelve (12) months following the Termination Date, until Executive becomes covered under a comparable group health plan, or until Executive is no longer entitled to COBRA continuation coverage under the Company’s group health plan(s), whichever period is the shortest, but only to the extent that the Company would have paid such premiums had Executive remained employed by the Company;

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(c) severance payments equal, in the aggregate, to one (1) times Executive’s annual base salary as of the date of the Notice of Termination, payable as provided in Section 7.8(b).

7.3 Termination Other than for Cause or for Good Reason During Change in Control Period

Subject to Section 9, if during the Change in Control Period, the Company terminates Executive’s employment other than for Cause or Executive terminates Executive’s employment for Good Reason, Executive shall be entitled to:

(a) any Accrued Obligations to the extent theretofore unpaid;

(b) a bonus for the Fiscal Year that contains the Termination Date, which bonus shall not be less than the Annual Performance Bonus multiplied by a fraction, the numerator of which is the number of days in such Fiscal Year up to and including the Termination Date and the denominator of which is three hundred sixty-five (365), payable as provided in Section 7.8(c). This Section 7.3(b) shall not apply if Executive is entitled to an Annual Performance Bonus pursuant to Section 5.5(b) for the Fiscal Year containing the Termination Date;

(c) if, as a result of the termination of Executive’s employment, Executive and Executive’s spouse and dependent children are eligible for and timely (and properly) elect COBRA continuation coverage under the Company’s group health plan(s) pursuant to COBRA, the Company shall pay the premium for such coverage for a period of twelve (12) months following the Termination Date, until Executive becomes covered under a comparable group health plan, or until Executive is no longer entitled to COBRA continuation coverage under the Company’s group health plan(s), whichever period is the shortest, but only to the extent that the Company would have paid such premiums had Executive remained employed by the Company;

(d) immediate vesting of all outstanding stock options previously granted to Executive by the Company;

(e) an amount as severance pay equal to the sum of (i) one (1) times the Annual Performance Bonus and (ii) one (1) times Executive’s annual base salary as of the date of the Notice of Termination, payable as provided in Section 7.8(c).

7.4 Termination as a Result of Death or Total Disability

In the event of termination of Executive’s employment pursuant to Section 4.3, Executive or Executive’s estate shall be paid the compensation set forth in Section 7.1.

7.5 Good Reason

(a) “Good Reason” shall mean the occurrence of any of the following conditions, without the consent of Executive:

(i) a material reduction in Executive’s base compensation;

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(ii) a material reduction in Executive’s authority, duties or responsibilities; provided, however, that a change in the person or office to which Executive reports, without a corresponding reduction in authority, duties or responsibilities, shall not constitute Good Reason;

(iii) a material reduction in the budget over which Executive retains authority;

(iv) requirement by a Successor Company that Executive relocate Executive’s principal place of employment to a location that is more than fifty (50) miles from the principal place of employment where Executive was employed immediately prior to such relocation; or

(v) any other action or inaction that constitutes a material breach by the Company or a Successor Company of this Agreement.

(b) Notwithstanding any provision in this Agreement to the contrary, termination of employment by Executive will not be for Good Reason unless (i) Executive notifies the Company or the Successor Company in writing of the existence of the condition which Executive believes constitutes Good Reason within ninety (90) days of the initial existence of such condition (which notice specifically identifies such condition), (ii) the Company or the Successor Company fails to remedy such condition within thirty (30) days after the date on which it receives such notice (the “Remedial Period”), and (iii) Executive actually terminates employment within thirty (30) days after the expiration of the Remedial Period and before the Company or the Successor Company remedies such condition. If Executive terminates employment before the expiration of the Remedial Period or after the Company or the Successor Company remedies the condition (even if after the end of the Remedial Period), then Executive’s termination will not be considered to be for Good Reason. Executive may combine the notice required by this Section 7.5(b) with the Notice of Termination.

7.6 Cause

Wherever reference is made in this Agreement to termination being with or without Cause, “Cause” shall include, without limitation, the occurrence of one or more of the following events:

(a) willful misconduct or insubordination in the performance of Executive’s duties or other knowing and material violation of the Company’s policies and procedures in effect from time to time which results in a material adverse effect on the Company;

(b) willful actions in bad faith (or intentional failures to act) by Executive with respect to the Company that materially impair the Company’s business, goodwill or reputation;

(c) current abuse by Executive of controlled substances; deception, fraud, misrepresentation or dishonesty by Executive; or any incident materially compromising Executive’s reputation or ability to represent the Company with investors, customers or the public;

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(d) conviction of Executive of a felony involving an act of dishonesty, moral turpitude, deceit or fraud, or the commission or omission of acts that could reasonably be expected to result in such a conviction; or

(e) any material violation by Executive of this Agreement or the Inventions Agreement with the Company, subject to the notice and opportunity-to-cure requirements of Section 11 hereof.

7.7 Change in Control

As used herein, a “Change in Control” shall mean any of the following events or occurrences, provided such event or occurrence also constitutes a change in ownership or effective control of the Company, or in the ownership of a substantial portion of the Company’s assets, within the meaning of Code Section 409A(a)(2)(A)(v):

(a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”), either directly or indirectly through one or more affiliated entities (collectively “Series B Purchasers”), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either (x) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this Section 7.7(a), the following acquisitions shall not constitute a Change in Control: (A) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or (B) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of Section 7.7(b); or

(b) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination: (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than fifty percent (50%) of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries), (B) no Person (excluding (1) any one or more Series B Purchasers, (2) any corporation resulting from such Business Combination, or (3) any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, fifty percent (50%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination

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and (C) at least a majority of the members of the Board of Directors of the corporation resulting from such Business Combination were members of the incumbent Board of Directors of the Company at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination;

(c) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company; or

(d) A “Board Change” that, for purposes of this Agreement, shall have occurred if, during any twelve (12) month period, a majority of the members of the Company’s Board of Directors is replaced by directors whose appointment or election is not endorsed by a majority of the members of the Company’s Board of Directors before the date of the appointment or election.

7.8 Payment Schedule

(a) All payments of Accrued Obligations, or any portion thereof payable pursuant to this Section 7, other than deferred compensation, shall be made to Executive within ten (10) working days of the Termination Date. Deferred compensation pursuant to Section 7.1(b) shall be payable pursuant to the terms of the deferred compensation plan, program or arrangement pursuant to which it was deferred.

(b) Subject to Section 21, the payments payable to Executive pursuant to Section 7.2(c) shall be paid to Executive in equal installments on each of the Company’s semi-monthly pay days during the twelve (12) month period immediately following the Termination Date, subject to the following:

(i) If Code Section 409A does not apply to the payments that would be made during the first sixty (60) days following the Termination Date, then payments shall begin as of the first semi-monthly pay day following the date on which Executive’s release under Section 9(a) becomes effective. The initial payment shall include any such installments that would have been paid prior to such pay day had payments commenced on the first semi-monthly pay day following the Termination Date; and

(ii) If Code Section 409A applies to the payments that would be made during the first sixty (60) days following the Termination Date, then payments shall begin as of the first semi-monthly pay day following the sixtieth (60th) day after the Termination Date. The initial payment shall include any such installments that would have been paid prior to such pay day had payments commenced on the first semi-monthly pay day following the Termination Date.

For purposes of Code Section 409A, each installment payable pursuant to Section 7.2(c) and this Section 7.8(b) shall be treated as a separate payment.

(c) Subject to Section 21, any payments payable to Executive pursuant to Sections 7.3(b) and (e) shall be made to Executive in a lump sum on the first business day following the date on which Executive’s release under Section 9(a) becomes effective, unless any portion of such payments is subject to Code Section 409A, in which case they shall be made on the first business day that is at least sixty-one (61) days following the Termination Date.

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7.9 Parachute Payments.

(a) Notwithstanding any other provision in this Agreement, in the event any payments or benefits Executive receives or would become entitled to receive from the Company, any person whose actions result in a Change in Control or any person affiliated with the Company or such person (in the aggregate, the “Payments”) would (i) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code or any similar or successor provision (the “Excise Tax”), then the amount of the Payments shall be equal to either (x) the largest portion of the Payments that would result in no portion of the Payments being subject to the Excise Tax (the “Reduced Amount”), or (y) the full amount of the Payments, whichever of the foregoing amounts, after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest marginal rate applicable to individuals in the year in which the Payments are to be made), results in Executive’s receipt, on an after-tax basis, of the greatest amount of the Payments notwithstanding that all or some portion of the Payments may be subject to the Excise Tax. If a reduction in the Payments is required so that the amount of the Payments equals the Reduced Amount, the Payments shall be reduced in the following order: (1) reduction of cash Payments otherwise payable to Executive that are exempt from Section 409A of the Code; (2) cancellation of accelerated vesting of equity awards (other than stock options) that are exempt from Section 409A of the Code; (3) cancellation of accelerated vesting of stock options that are exempt from Section 409A of the Code; (4) reduction of any other payments and benefits otherwise payable to Executive that are exempt from Section 409A of the Code; and (5) reduction of any other benefits and payments otherwise payable to Executive on a pro-rata basis or such other manner that complies with Section 409A of the Code, as determined by the Company. If acceleration of vesting of Executive’s stock options or other equity awards is to be reduced pursuant to clauses (2) or (3) of the immediately preceding sentence, such acceleration of vesting shall be cancelled by first canceling such acceleration for the vesting installment that will vest last and continuing by canceling as a first priority such acceleration for the vesting installment with the latest vesting.

(b) All computations and determinations called for by this Section 7.9 shall be made and reported in writing to the Company and Executive by an independent accounting firm or independent tax counsel appointed by the Company (the “Tax Advisor”), and all such computations and determinations shall be conclusive and binding on the Company and Executive. For purposes of such calculations and determinations, the Tax Advisor may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and Executive shall furnish to the Tax Advisor such information and documents as the Tax Advisor may reasonably request in order to make their required calculations and determinations. The Company shall bear all fees and expenses charged by the Tax Advisor in connection with its services.

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7.10 Withholding

The Company may deduct from any amounts payable under this Agreement, any amounts that it is required by law to withhold, including, without limitation, social security taxes, federal and state income taxes, and state disability insurance; provided, however, that any and all such obligations shall be Executive’s responsibility.

8. Non-competition and Non-solicitation

8.1 Non-competition

During the Term and for a period of twelve (12) months after the Termination Date, Executive shall not directly or indirectly work or otherwise engage in research, development, manufacture, sale or distribution of any product, method or matter:

(a) For any business, whose commercial efforts are in competition with the products manufactured or marketed by the Company during Executive’s employment with the Company or under research or development by the Company during Executive’s employment with the Company (and on which the Company has expended at least $500,000); or

(b) For any research institution whose research efforts pertain to the same products manufactured or marketed by the Company during Executive’s employment with the Company or under research or development by the Company during Executive’s employment with the Company (and on which the Company has expended at least $500,000), unless Executive is not involved in any manner in the design, conduct or supervision of such research efforts, or unless such research is being conducted solely for scientific and not for commercial purposes.

Executive shall be deemed to be engaged in a business if such business is carried on by partnership in which Executive is a general or limited partner, consultant or employee, or a corporation or association of which Executive is a shareholder, officer, director, employee, member, consultant or agent; provided, that nothing herein shall prevent the purchase or ownership by Executive of shares of less than one percent (1%) of the outstanding shares in a publicly or privately held corporation.

Said twelve (12) months’ period shall commence on the day on which Executive actually leaves Executive’s employment with the Company, even if this date is prior to the expiration of any given Notice of Termination.

8.2 Waiver of Non-competition

The Company’s Board of Directors may, at its own discretion, by express or written consent, release Executive from the restriction in Section 8.1.

8.3 Non-solicitation

During the Term and for a period of one (1) year after the Termination Date, Executive shall not personally or through others (a) recruit, solicit or induce in any way any employee, advisor or consultant of the Company to terminate his, her or its relationship with the Company or to engage in activities competitive with the Company, (b) hire or attempt to hire for any purpose, as an employee, agent, consultant or contractor, any person who then is an employee of

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the Company, or (c) solicit, induce or encourage in any way any customers (that Executive sold to, serviced or solicited on behalf of the Company), strategic partners, contractors, suppliers, or vendors to terminate or reduce their relationships with the Company or to refrain from entering or expanding any business or relationship with the Company.

9. General Release of Claims and Compliance by Executive

(a) As a condition to the payments and benefits contemplated by Section 7 (other than Accrued Obligations), Executive must execute (and not later revoke) a general release and waiver of claims against the Company in a form satisfactory to the Company in its sole discretion. By way of example and not limitation, the general release and waiver of claims will include any claims for wages, bonuses, employment benefits, or damages of any kind whatsoever, arising out of any contracts, express or implied, any covenant of good faith and fair dealing, express or implied, any theory of wrongful discharge, any legal restriction on the Company’s right to terminate employment, or any federal, state or other governmental statute or ordinance, including, without limitation, Title VII of the Civil Rights Act of 1964, the federal Age Discrimination in Employment Act, the Americans with Disabilities Act, the Family and Medical Leave Act, the Washington Law Against Discrimination, or any other legal limitation on the employment relationship. Such release and waiver must be executed and effective (and the applicable revocation period must have expired without the release and waiver being revoked) not more than sixty (60) days after the Termination Date or Executive shall not be entitled to any such payments or benefits.

(b) In addition, the payments and benefits contemplated by Section 7 (other than Accrued Obligations) are expressly contingent upon Executive’s full compliance with Executive’s obligations towards the Company, including, without limitation, the terms of the Inventions Agreement and the non-competition provision of Section 8.1. In the event Executive materially breaches the Inventions Agreement or Section 8.1, Executive’s right to any payments or benefits under Section 7 (including those that have already been made or provided), other than Accrued Obligations, shall be forfeited and extinguished, regardless of whether the Company takes legal action or otherwise tries to enforce its rights. In such event, the Company shall cease payments, and Executive shall immediately return to the Company any payments already made. The Company reserves all rights it may have under contract or law to relief or damages in addition to termination of the above-described payments.

10. Return of Materials

All documents, records, notebooks, notes, memoranda, drawings or other documents made or compiled by Executive at any time while employed by the Company, or in Executive’s possession, including any and all copies thereof, shall be the property of the Company and shall be held by Executive in trust and solely for the benefit of the Company, and shall be delivered to the Company by Executive upon termination of employment or at any other time upon request by the Company.

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11. Notice and Cure of Breach

Except as provided otherwise in Section 7.5(b), whenever a breach of this Agreement by either party is relied upon as justification for any action taken by the other party pursuant to any provision of this Agreement, other than clauses (a), (b), or (c) of Section 7.6, before such action is taken, the party asserting the breach of this Agreement shall give the other party at least twenty (20) days’ prior written notice of the existence and the nature of such breach before taking further action hereunder and shall give the party purportedly in breach of this Agreement the opportunity to correct such breach during the twenty (20) day period.

12. No Violation of Other Agreements

In order to induce the Company to enter into this Agreement, Executive represents and warrants to the Company that neither the execution nor the performance of this Agreement by Executive shall violate or conflict in any way with any other agreement or obligations by which Executive may be bound.

13. Rights of Assignment or Delegation

This Agreement is personal to Executive and shall not be assignable by Executive. The Company may assign its rights hereunder to (a) any corporation resulting from any merger, consolidation, or other reorganization to which the Company is a party or (b) any corporation, partnership, association, or other person to which the Company may transfer all or substantially all of the assets in business of the Company existing at such time. As used in this Agreement, “Company” shall mean ZymoGenetics, Inc. and any successor to its business and/or assets that assumes and agrees to perform this Agreement by operation of law, or otherwise. All the terms and provisions of this Agreement shall be binding upon and shall inure to the benefit and be enforceable by the parties hereto and their respective heirs, legal or personal representatives, successors and permitted assigns.

14. Waiver

No delay or failure by any party in exercising, protecting or enforcing any of its rights, titles, interests, or remedies hereunder and no course of dealing or performance with respect thereto, shall constitute a waiver. The express waiver by a party of any right, title, interest, or remedy in a particular instance or circumstance shall not constitute a waiver in any other instance or circumstance. All rights and remedies shall be cumulative and not exclusive of any rights or remedies.

15. Arbitration

Any controversies or claims arising out of or relating to this Agreement shall be settled finally and fully by arbitration in Seattle, Washington in accordance with the Employment Arbitration Rules of the American Arbitration Association then in effect (the “AAA Rules”), conducted by one arbitrator, mutually agreed upon by the Company and Executive or chosen in accordance with the AAA Rules, except the parties thereto shall have any right to discovery that would be permitted by the Federal Rules of Civil Procedure for a period of ninety (90) days following the commencement of such arbitration and the arbitrator shall resolve any dispute which arises in connection with such discovery. The prevailing parties shall be entitled to costs, expenses, reasonable attorneys’ fees, and judgment upon the award rendered by the arbitrator. The award may be entered in any court having jurisdiction. To the extent necessary to prevent Executive from being subject to any additional tax pursuant to Code Section 409A(a)(1)(B), any amounts payable to Executive pursuant to this paragraph shall be paid in no event later than the year following the year during which such costs and fees were incurred.

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16. Amendments in Writing

No amendment, modification, waiver, termination or discharge of any provision of this Agreement, nor consent to any departure by either party, shall in any event be effective unless the same shall be in writing, specifically identifying this Agreement and the provision intended to be amended, modified, waived, terminated, or discharged and assigned by the Company and Executive. Each such amendment, modification, waiver, termination, or discharge shall be effective only in the specific instance and for the specific purpose for which given. No provision of this Agreement shall be varied, contradicted, or explained by any oral agreement, course of dealing or performance or any other matter not set forth in agreement in writing and signed by the Company and Executive.

17. Notices

Any notice required or desired to be given hereunder shall be in writing and shall be deemed sufficiently given when delivered or when mailed by first class certified or registered mail, postage prepaid, to the party for whom intended at the following address:

To the Company:

President

ZymoGenetics, Inc.

1201 Eastlake Avenue East

Seattle, WA 98102

To Executive:

Heather L. Franklin

212 Osprey Lane

Brinnon, WA 98320

or to such other address, as to either party, as such party shall from time to time designate by like notice to the other.

18. Entire Agreement

This Agreement constitutes the entire agreement between the Company and Executive with respect to the subject matter hereof, and all prior or contemporaneous oral or written communications, understandings or agreements between the Company and Executive with respect to such subject matter, are hereby superseded and nullified in their entireties, except that the Inventions Agreement shall continue in full force and effect.

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19. Governing Law

This Agreement is made under and shall be governed by and construed in accordance with the laws of the State of Washington (without regard to any rules governing conflict of laws), except to the extent preempted by Federal law.

20. Severability

If any provision of this Agreement shall be held invalid, illegal or unenforceable in any jurisdiction, for any reason, including without limitation, the duration of such provision, its geographical scope or the extent of the activities prohibited or required by it, then, to the full extent permitted by law (a) all other provisions hereof shall remain in full force and effect and such provision shall be liberally construed in order to carry out the intent of the parties as nearly as may be possible, (b) such invalidity, illegality, or unenforceability shall not affect the validity, legality or enforceability of any other provision, and (c) any court or arbitrator having jurisdiction thereover shall have the power to reform such provision to the extent necessary for such provision to be enforceable under applicable law.

21. 409A Interpretation Provision

The parties intend that this Agreement and the benefits provided hereunder be exempt from the requirements of Code Section 409A to the maximum extent possible, whether pursuant to the short-term deferral exception described in Treasury Regulation Section 1.409A-1(b)(4), the involuntary separation pay plan exception described in Treasury Regulation Section 1.409A-1(b)(9)(iii), or otherwise. To the extent Code Section 409A is applicable to this Agreement, the parties intend that this Agreement comply with the deferral, payout and other limitations and restrictions imposed under Code Section 409A. Notwithstanding any other provision of this Agreement to the contrary, this Agreement shall be interpreted, operated and administered in a manner consistent with such intentions. Without limiting the generality of the foregoing, and notwithstanding any other provision of this Agreement to the contrary, with respect to any payments and benefits under this Agreement to which Code Section 409A applies, all references in this Agreement to the termination of Executive’s employment are intended to mean Executive’s “separation from service,” within the meaning of Code Section 409A(a)(2)(A)(i). In addition, if Executive is a “specified employee,” within the meaning of Code Section 409A, then to the extent necessary to avoid subjecting Executive to the imposition of any additional tax under Code Section 409A, amounts that would otherwise be payable under this Agreement during the six (6) month period immediately following Executive’s “separation from service,” within the meaning of Code Section 409A(a)(2)(A)(i), shall not be paid to Executive during such period, but shall instead be accumulated and paid to Executive (or, in the event of Executive’s death, Executive’s estate) in a lump sum on the first business day after the earlier of the date that is six (6) months following Executive’s separation from service or Executive’s death. If the Company or Executive determines that any provision of this Agreement is or might be inconsistent with the requirements of Code Section 409A, the parties shall attempt in good faith to agree on such amendments to this Agreement as may be necessary or appropriate to avoid subjecting Executive to the imposition of any additional tax under Code Section 409A. Notwithstanding the foregoing, no provision of this Agreement shall be interpreted or construed to transfer any liability for failure to comply with Code Section 409A from Executive or any other individual to the Company or any of its affiliates.

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22. Multiple Copies

This Agreement may be executed in two (2) or more counterparts of like tenor and effect, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the parties have executed and entered into this Agreement as of the Effective Date.

ZYMOGENETICS, INC.
By:	/s/ Douglas E. Williams
	Douglas E. Williams, Ph.D.
	Chief Executive Officer

EXECUTIVE

/s/ Heather L. Franklin

Heather L. Franklin

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EX-10.16

Exhibit 10.16

AMENDED AND RESTATED

EMPLOYMENT AGREEMENT

This AGREEMENT, dated as of July 3, 2008 (the “Effective Date”), is between ZymoGenetics, Inc., a Washington corporation (as supplemented by Section 13, the “Company”), and James A. Johnson (“Executive”).

RECITALS

A. The Company and Executive previously entered into the Original Agreement (as defined below) detailing compensation and benefit arrangements for Executive in the event of termination of Executive’s employment by the Company under certain circumstances.

B. The Company and Executive desire to update the terms of Executive’s employment.

Accordingly, in consideration of the promises and mutual covenants contained herein, the Company and Executive agree as follows:

AGREEMENT

1. Certain Definitions

1.1 “Accrued Obligations” has the meaning set forth in Section 7.1.

1.2 “Annual Performance Bonus” has the meaning set forth in Section 5.5(b).

1.3 “Cause” shall have the meaning set forth in Section 7.6.

1.4 “Change in Control” shall have the meaning set forth in Section 7.7.

1.5 “Change in Control Date” shall mean the first date during the Term (as defined in Section 4.1 on which a Change in Control occurs.

1.6 “Change in Control Period” shall mean the two (2) year period commencing on the Change in Control Date and ending on the second anniversary of such date.

1.7 “COBRA” shall mean the health care continuation requirements set forth in Code Section 4980B.

1.8 “Code” shall mean the Internal Revenue Code of 1986 and any regulations, rulings or other official guidance issued pursuant thereto, all as amended and in effect from time to time.

1.9 “Company Transaction” shall mean the consummation of either (i) a merger or consolidation of the Company with or into any other company, entity or person or (ii) a sale, lease, exchange or other transfer of all or substantially all of the Company’s then outstanding securities or all or substantially all of the Company’s assets in one transaction or a series of related transactions undertaken with a common purpose; provided, however, that a Company Transaction shall not include a Related Party Transaction.

1.10 “Compensation Committee” means the Compensation Committee of the Board of Directors.

1.11 “Fiscal Year” shall mean the fiscal year of the Company.

1.12 “Good Reason” shall have the meaning set forth in Section 7.5.

1.13 “Inventions Agreement” shall mean the Employee Inventions and Proprietary Information Agreement, dated as of February 1, 2001, between the parties.

1.14 “Notice of Termination” shall have the meaning set forth in Section 4.4.

1.15 “Original Agreement” shall mean the Employment Agreement, dated as of April 30, 2001, between the parties.

1.16 “Position” shall have the meaning set forth in Section 2.

1.17 “Related Party Transaction” shall mean (i) a merger or consolidation of the Company in which the holders of the outstanding voting securities of the Company immediately prior to the merger or consolidation hold at least a majority of the outstanding voting securities of the successor company immediately after the merger or consolidation; (ii) a sale, lease, exchange or other transfer of the Company’s assets to a majority-owned subsidiary company; (iii) a transaction undertaken for the principal purpose of restructuring the capital of the Company, including but not limited to, reincorporating the Company in a different jurisdiction or creating a holding company; or (iv) a corporate dissolution or liquidation.

1.18 “Successor Company” shall mean the surviving company, the successor company or its parent, as applicable, in connection with a Company Transaction.

1.19 “Term” shall have the meaning set forth in Section 4.1.

1.20 “Termination Date” shall have the meaning set forth in Section 4.5.

2. Employment

The Company employs Executive and Executive accepts employment as Executive Vice President, Chief Financial Officer of the Company (the “Position”), unless terminated earlier as provided upon the terms and conditions contained in this Agreement. Executive and the Company acknowledge that, except as otherwise may be provided under any other written agreement between Executive and the Company, the employment of Executive by the Company or its affiliated companies is “at will” and may be terminated by either Executive or the Company or its affiliated companies at any time with or without cause.

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3. Duties

During the Term, Executive shall serve the Company under the direction of the Chief Executive Officer of the Company. Executive shall perform the duties of the Position faithfully, diligently and competently and to the best of Executive’s ability, and, except as provided in this Section 3, shall devote Executive’s full business time to Executive’s employment. Executive shall perform such other duties as are assigned to Executive by the Chief Executive Officer or the Board of Directors of the Company. Executive may devote reasonable periods of time to (a) engaging in personal investment activities, (b) serving on the Board of Directors or Scientific Advisory Boards of other corporations with the consent of the Compensation Committee of the Board of Directors, if such service would not otherwise be prohibited by Section 8 hereof, and (c) engaging in charitable or community service activities, so long as none of the foregoing additional activities materially interfere with Executive’s duties under this Agreement.

4. Term; Termination

4.1 Term

The “Term” of this Agreement initially shall be for a period of two (2) years from the Effective Date; provided, however, that this Agreement shall renew automatically for successive additional one (1) year periods unless notice of non-renewal is given by either party to the other at least ninety (90) days prior to the end of the then current term; and provided further that if a Change in Control occurs during the Term, the Term shall automatically extend at least for the duration of the Change in Control Period.

4.2 Termination by the Company or Executive

The Company may terminate the employment of Executive, with or without Cause, at any time upon giving “Notice of Termination” (as defined below). Executive may terminate Executive’s employment at any time, for any reason, upon giving Notice of Termination.

4.3 Automatic Termination

This Agreement and Executive’s employment hereunder shall terminate automatically upon the death or Total Disability (as defined below) of Executive. The term “Total Disability” as used herein shall mean Executive’s inability to perform the duties set forth in Section 3 hereof for a period or periods aggregating ninety (90) calendar days in any twelve (12) month period as a result of physical or mental illness, loss of legal capacity or any other cause beyond Executive’s control, unless Executive is granted a leave of absence by the Board of Directors of the Company. Executive and the Company hereby acknowledge that Executive’s ability to perform the duties specified in Section 3 hereof is of the essence to this Agreement.

4.4 Notice of Termination

The term “Notice of Termination” shall mean at least thirty (30) days’ written notice of termination, by either party, of Executive’s employment and of this Agreement, during which period Executive’s employment and performance of services shall continue; provided, however,

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that the Company may, upon notice to Executive and without reducing Executive’s compensation during such period, excuse Executive from any or all of Executive’s duties during such period. Such a reduction in duties shall not constitute Good Reason for termination so as to trigger termination payments in accordance with Sections 7.2 or 7.3.

4.5 Termination Date

The effective date of the termination (the “Termination Date”) means (a) if Executive’s employment is terminated by reason of death, at the end of the calendar month in which Executive’s death occurs, (b) if Executive’s employment is terminated by reason of Total Disability, immediately upon a determination by the Company of Executive’s Total Disability, and (c) in all other cases, the later of (i) thirty (30) days after the date on which the Company or Executive, as applicable, receives the Notice of Termination from the other party or (ii) the date specified in the Notice of Termination.

4.6 Survival

Sections 4, 7, 8, 9, 10, 14, 15, 16, 17, 18, 19, 20, 21, and 22 shall survive the termination of Executive’s employment and of this Agreement.

5. Compensation and Benefits

5.1 Salary

During the Term, the Company shall pay to Executive as compensation for the performance of Executive’s duties and obligations a salary of $369,200 per annum. This compensation is subject to annual review and adjustment, as appropriate in the judgment of the Company. The compensation payable pursuant to this Section 5.1 shall be payable in equal semi-monthly installments on the last day of each such pay period.

5.2 Standard Benefits

Executive shall be enrolled and participate in any retirement, group insurance and other fringe benefit plans and arrangements which are applicable to the similarly situated personnel of the Company and in effect from time to time, if Executive is eligible therefor, in each case in accordance with and subject to the provisions thereof.

5.3 Stock Options

(a) Executive has been granted stock options under the Company’s 2001 Stock Incentive Plan which allows Executive to purchase shares of the Company’s common stock; and

(b) Executive shall be eligible to receive future periodic grants under the Company’s stock incentive programs.

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5.4 Other Benefits

Executive also shall receive the following executive perquisites for the duration of this contract:

(a) Company-paid term life insurance policy in the amount of $200,000;

(b) Company-paid use of either a laptop computer or personal computer, to be upgraded biennially at the time this contract is renewed;

(c) Company-paid annual executive health physical, to be administered by a physician selected by the Company; and

(d) Company-paid expenses for a residential phone and cellular phone.

5.5 Change in Control Period

As long as Executive remains employed by the Company or a Successor Company during the Change in Control Period, the Company agrees to pay or cause to be paid to Executive, and Executive agrees to accept in exchange for the services rendered hereunder by Executive during the Change in Control Period, the following compensation:

(a) Executive shall receive an annual base salary at least equal to Executive’s annual base salary for the Fiscal Year in which the Change in Control Date occurs (as in effect immediately prior to the Change in Control Date). Executive’s annual base salary shall be paid in substantially equal installments and at the same intervals as the salaries of other executives of the Company are paid. During the Change in Control Period, the Board of Directors, the Compensation Committee or the Chief Executive Officer (as applicable) shall review Executive’s annual base salary at least annually and shall determine in good faith and consistent with any generally applicable Company policy any increases for future years.

(b) In addition to an annual base salary, for each Fiscal Year ending during the Change in Control Period, Executive shall be awarded an annual performance bonus (the “Annual Performance Bonus”) in cash at least equal to Executive’s target annual bonus for the Fiscal Year containing the Change in Control Date or, if such target annual bonus has not been set as of the Change in Control Date, Executive’s target annual bonus for the immediately preceding Fiscal Year (annualized if Executive was employed by the Company for less than the entire preceding Fiscal Year); provided, however, that except as provided in Section 7.3(b), an Annual Performance Bonus shall be awarded for a Fiscal Year only if Executive is employed by the Company or a Successor Company on the last day of such Fiscal Year. Each Annual Performance Bonus shall be paid in the Fiscal Year following the Fiscal Year for which the Annual Performance Bonus is awarded, but no later than the fifteenth (15th) day of the third (3rd) month of such subsequent Fiscal Year, unless Executive elects to defer the receipt of the Annual Performance Bonus in accordance with the terms of the Company’s deferred compensation program.

(c) Executive shall be entitled to participate in, subject to and in accordance with the eligibility and other terms and requirements thereof, such fringe benefit programs as generally are made available to other executives of the Company and its affiliated companies from time to time during the Change in Control Period, including, without limitation, paid vacations; any

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stock purchase, savings or retirement plan, practice, policy or program; and welfare benefit plans, practices, policies or programs (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans or programs).

6. Expenses

During the Term, all travel and other reasonable expenses incident to the rendering of service by Executive hereunder shall be paid by the Company subject to Company policy. If such expenses are paid in the first instance by Executive, the Company shall reimburse Executive upon presentation of proper expense accounts and supporting documentation. Reimbursement requests, along with supporting documentation, must be submitted within sixty (60) days after the date on which the expense for which reimbursement is being requested was incurred. Reimbursement shall be made no later than the date that is two and one-half months (2 ¹/2) months after the end of the Fiscal Year in which the expense was incurred.

7. Termination Payments

In the event of termination of the employment of Executive, all compensation and benefits set forth in this Agreement shall terminate except as specifically provided in this Section 7.

7.1 Termination for Cause or Other than for Good Reason

If during the Term Executive’s employment is terminated by the Company for Cause or by Executive for other than Good Reason, this Agreement shall terminate without further obligation on the part of the Company to Executive, other than the Company’s obligation to pay (as provided in Section 7.8(a)) Executive the following accrued obligations (the “Accrued Obligations”):

(a) Executive’s then current annual base salary through the Termination Date;

(b) any Annual Performance Bonus to which Executive is entitled pursuant to Section 5.5(b) (i.e., a bonus paid for a Fiscal Year ending during the Change in Control Period if Executive was employed by the Company or a Successor Company on the last day of such Fiscal Year);

(c) any compensation previously deferred by Executive (together with accrued interest or earnings thereon, if any); and

(d) any accrued vacation pay that would be payable under the Company’s standard policy;

in each case, to the extent not theretofore paid.

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7.2 Termination Other than for Cause or for Good Reason NOT During Change in Control Period

Subject to Section 9, if at any time during the Term, except during the Change in Control Period, the Company terminates Executive’s employment other than for Cause or Executive terminates Executive’s employment for Good Reason, Executive shall be entitled to:

(a) any Accrued Obligations to the extent theretofore unpaid;

(b) if, as a result of the termination of Executive’s employment, Executive and Executive’s spouse and dependent children are eligible for and timely (and properly) elect COBRA continuation coverage under the Company’s group health plan(s), the Company shall pay the premium for such coverage for a period of twelve (12) months following the Termination Date, until Executive becomes covered under a comparable group health plan, or until Executive is no longer entitled to COBRA continuation coverage under the Company’s group health plan(s), whichever period is the shortest, but only to the extent that the Company would have paid such premiums had Executive remained employed by the Company;

(c) severance payments equal, in the aggregate, to one (1) times Executive’s annual base salary as of the date of the Notice of Termination, payable as provided in Section 7.8(b).

7.3 Termination Other than for Cause or for Good Reason During Change in Control Period

Subject to Section 9, if during the Change in Control Period, the Company terminates Executive’s employment other than for Cause or Executive terminates Executive’s employment for Good Reason, Executive shall be entitled to:

(a) any Accrued Obligations to the extent theretofore unpaid;

(b) a bonus for the Fiscal Year that contains the Termination Date, which bonus shall not be less than the Annual Performance Bonus multiplied by a fraction, the numerator of which is the number of days in such Fiscal Year up to and including the Termination Date and the denominator of which is three hundred sixty-five (365), payable as provided in Section 7.8(c). This Section 7.3(b) shall not apply if Executive is entitled to an Annual Performance Bonus pursuant to Section 5.5(b) for the Fiscal Year containing the Termination Date;

(c) if, as a result of the termination of Executive’s employment, Executive and Executive’s spouse and dependent children are eligible for and timely (and properly) elect COBRA continuation coverage under the Company’s group health plan(s) pursuant to COBRA, the Company shall pay the premium for such coverage for a period of twelve (12) months following the Termination Date, until Executive becomes covered under a comparable group health plan, or until Executive is no longer entitled to COBRA continuation coverage under the Company’s group health plan(s), whichever period is the shortest, but only to the extent that the Company would have paid such premiums had Executive remained employed by the Company;

(d) immediate vesting of all outstanding stock options previously granted to Executive by the Company;

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(e) an amount as severance pay equal to the sum of (i) one and one-half (1.5) times the Annual Performance Bonus and (ii) one and one-half (1.5) times Executive’s annual base salary as of the date of the Notice of Termination, payable as provided in
Section 7.8(c).

7.4 Termination as a Result of Death or Total Disability

In the event of termination of Executive’s employment pursuant to Section 4.3, Executive or Executive’s estate shall be paid the compensation set forth in Section 7.1.

7.5 Good Reason

(a) “Good Reason” shall mean the occurrence of any of the following conditions, without the consent of Executive:

(i) a material reduction in Executive’s base compensation;

(ii) a material reduction in Executive’s authority, duties or responsibilities; provided, however, that a change in the person or office to which Executive reports, without a corresponding reduction in authority, duties or responsibilities, shall not constitute Good Reason;

(iii) a material reduction in the budget over which Executive retains authority;

(iv) requirement by a Successor Company that Executive relocate Executive’s principal place of employment to a location that is more than fifty (50) miles from the principal place of employment where Executive was employed immediately prior to such relocation; or

(v) any other action or inaction that constitutes a material breach by the Company or a Successor Company of this Agreement.

(b) Notwithstanding any provision in this Agreement to the contrary, termination of employment by Executive will not be for Good Reason unless (i) Executive notifies the Company or the Successor Company in writing of the existence of the condition which Executive believes constitutes Good Reason within ninety (90) days of the initial existence of such condition (which notice specifically identifies such condition), (ii) the Company or the Successor Company fails to remedy such condition within thirty (30) days after the date on which it receives such notice (the “Remedial Period”), and (iii) Executive actually terminates employment within thirty (30) days after the expiration of the Remedial Period and before the Company or the Successor Company remedies such condition. If Executive terminates employment before the expiration of the Remedial Period or after the Company or the Successor Company remedies the condition (even if after the end of the Remedial Period), then Executive’s termination will not be considered to be for Good Reason. Executive may combine the notice required by this Section 7.5(b) with the Notice of Termination.

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7.6 Cause

Wherever reference is made in this Agreement to termination being with or without Cause, “Cause” shall include, without limitation, the occurrence of one or more of the following events:

(a) willful misconduct or insubordination in the performance of Executive’s duties or other knowing and material violation of the Company’s policies and procedures in effect from time to time which results in a material adverse effect on the Company;

(b) willful actions in bad faith (or intentional failures to act) by Executive with respect to the Company that materially impair the Company’s business, goodwill or reputation;

(c) current abuse by Executive of controlled substances; deception, fraud, misrepresentation or dishonesty by Executive; or any incident materially compromising Executive’s reputation or ability to represent the Company with investors, customers or the public;

(d) conviction of Executive of a felony involving an act of dishonesty, moral turpitude, deceit or fraud, or the commission or omission of acts that could reasonably be expected to result in such a conviction; or

(e) any material violation by Executive of this Agreement or the Inventions Agreement with the Company, subject to the notice and opportunity-to-cure requirements of Section 11 hereof.

7.7 Change in Control

As used herein, a “Change in Control” shall mean any of the following events or occurrences, provided such event or occurrence also constitutes a change in ownership or effective control of the Company, or in the ownership of a substantial portion of the Company’s assets, within the meaning of Code Section 409A(a)(2)(A)(v):

(a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”), either directly or indirectly through one or more affiliated entities (collectively “Series B Purchasers”), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either (x) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this Section 7.7(a), the following acquisitions shall not constitute a Change in Control: (A) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or (B) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of Section 7.7(b); or

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(b) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination: (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than fifty percent (50%) of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries), (B) no Person (excluding (1) any one or more Series B Purchasers, (2) any corporation resulting from such Business Combination, or (3) any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, fifty percent (50%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the Board of Directors of the corporation resulting from such Business Combination were members of the incumbent Board of Directors of the Company at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination;

(c) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company; or

(d) A “Board Change” that, for purposes of this Agreement, shall have occurred if, during any twelve (12) month period, a majority of the members of the Company’s Board of Directors is replaced by directors whose appointment or election is not endorsed by a majority of the members of the Company’s Board of Directors before the date of the appointment or election.

7.8 Payment Schedule

(a) All payments of Accrued Obligations, or any portion thereof payable pursuant to this Section 7, other than deferred compensation, shall be made to Executive within ten (10) working days of the Termination Date. Deferred compensation pursuant to Section 7.1(b) shall be payable pursuant to the terms of the deferred compensation plan, program or arrangement pursuant to which it was deferred.

(b) Subject to Section 21, the payments payable to Executive pursuant to Section 7.2(c) shall be paid to Executive in equal installments on each of the Company’s semi-monthly pay days during the twelve (12) month period immediately following the Termination Date, subject to the following:

(i) If Code Section 409A does not apply to the payments that would be made during the first sixty (60) days following the Termination Date, then payments shall begin as of the first semi-monthly pay day following the date on which

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Executive’s release under Section 9(a) becomes effective. The initial payment shall include any such installments that would have been paid prior to such pay day had payments commenced on the first semi-monthly pay day following the Termination Date; and

(ii) If Code Section 409A applies to the payments that would be made during the first sixty (60) days following the Termination Date, then payments shall begin as of the first semi-monthly pay day following the sixtieth (60th) day after the Termination Date. The initial payment shall include any such installments that would have been paid prior to such pay day had payments commenced on the first semi-monthly pay day following the Termination Date.

For purposes of Code Section 409A, each installment payable pursuant to Section 7.2(c) and this Section 7.8(b) shall be treated as a separate payment.

(c) Subject to Section 21, any payments payable to Executive pursuant to Sections 7.3(b) and (e) shall be made to Executive in a lump sum on the first business day following the date on which Executive’s release under Section 9(a) becomes effective, unless any portion of such payments is subject to Code Section 409A, in which case they shall be made on the first business day that is at least sixty-one (61) days following the Termination Date.

7.9 Parachute Payments.

(a) Notwithstanding any other provision in this Agreement, in the event any payments or benefits Executive receives or would become entitled to receive from the Company, any person whose actions result in a Change in Control or any person affiliated with the Company or such person (in the aggregate, the “Payments”) would (i) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code or any similar or successor provision (the “Excise Tax”), then the amount of the Payments shall be equal to either (x) the largest portion of the Payments that would result in no portion of the Payments being subject to the Excise Tax (the “Reduced Amount”), or (y) the full amount of the Payments, whichever of the foregoing amounts, after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest marginal rate applicable to individuals in the year in which the Payments are to be made), results in Executive’s receipt, on an after-tax basis, of the greatest amount of the Payments notwithstanding that all or some portion of the Payments may be subject to the Excise Tax. If a reduction in the Payments is required so that the amount of the Payments equals the Reduced Amount, the Payments shall be reduced in the following order: (1) reduction of cash Payments otherwise payable to Executive that are exempt from Section 409A of the Code; (2) cancellation of accelerated vesting of equity awards (other than stock options) that are exempt from Section 409A of the Code; (3) cancellation of accelerated vesting of stock options that are exempt from Section 409A of the Code; (4) reduction of any other payments and benefits otherwise payable to Executive that are exempt from Section 409A of the Code; and (5) reduction of any other benefits and payments otherwise payable to Executive on a pro-rata basis or such other manner that complies with Section 409A of the Code, as determined by the Company. If acceleration of vesting of Executive’s stock options or other equity awards is to be reduced pursuant to clauses

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(2) or (3) of the immediately preceding sentence, such acceleration of vesting shall be cancelled by first canceling such acceleration for the vesting installment that will vest last and continuing by canceling as a first priority such acceleration for the vesting installment with the latest vesting.

(b) All computations and determinations called for by this Section 7.9 shall be made and reported in writing to the Company and Executive by an independent accounting firm or independent tax counsel appointed by the Company (the “Tax Advisor”), and all such computations and determinations shall be conclusive and binding on the Company and Executive. For purposes of such calculations and determinations, the Tax Advisor may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and Executive shall furnish to the Tax Advisor such information and documents as the Tax Advisor may reasonably request in order to make their required calculations and determinations. The Company shall bear all fees and expenses charged by the Tax Advisor in connection with its services.

7.10 Withholding

The Company may deduct from any amounts payable under this Agreement, any amounts that it is required by law to withhold, including, without limitation, social security taxes, federal and state income taxes, and state disability insurance; provided, however, that any and all such obligations shall be Executive’s responsibility.

8. Non-competition and Non-solicitation

8.1 Non-competition

During the Term and for a period of twelve (12) months after the Termination Date, Executive shall not directly or indirectly work or otherwise engage in research, development, manufacture, sale or distribution of any product, method or matter:

(a) For any business, whose commercial efforts are in competition with the products manufactured or marketed by the Company during Executive’s employment with the Company or under research or development by the Company during Executive’s employment with the Company (and on which the Company has expended at least $500,000); or

(b) For any research institution whose research efforts pertain to the same products manufactured or marketed by the Company during Executive’s employment with the Company or under research or development by the Company during Executive’s employment with the Company (and on which the Company has expended at least $500,000), unless Executive is not involved in any manner in the design, conduct or supervision of such research efforts, or unless such research is being conducted solely for scientific and not for commercial purposes.

Executive shall be deemed to be engaged in a business if such business is carried on by partnership in which Executive is a general or limited partner, consultant or employee, or a corporation or association of which Executive is a shareholder, officer, director, employee, member, consultant or agent; provided, that nothing herein shall prevent the purchase or ownership by Executive of shares of less than one percent (1%) of the outstanding shares in a publicly or privately held corporation.

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Said twelve (12) months’ period shall commence on the day on which Executive actually leaves Executive’s employment with the Company, even if this date is prior to the expiration of any given Notice of Termination.

8.2 Waiver of Non-competition

The Company’s Board of Directors may, at its own discretion, by express or written consent, release Executive from the restriction in Section 8.1.

8.3 Non-solicitation

During the Term and for a period of one (1) year after the Termination Date, Executive shall not personally or through others (a) recruit, solicit or induce in any way any employee, advisor or consultant of the Company to terminate his, her or its relationship with the Company or to engage in activities competitive with the Company, (b) hire or attempt to hire for any purpose, as an employee, agent, consultant or contractor, any person who then is an employee of the Company, or (c) solicit, induce or encourage in any way any customers (that Executive sold to, serviced or solicited on behalf of the Company), strategic partners, contractors, suppliers, or vendors to terminate or reduce their relationships with the Company or to refrain from entering or expanding any business or relationship with the Company.

9. General Release of Claims and Compliance by Executive

(a) As a condition to the payments and benefits contemplated by Section 7 (other than Accrued Obligations), Executive must execute (and not later revoke) a general release and waiver of claims against the Company in a form satisfactory to the Company in its sole discretion. By way of example and not limitation, the general release and waiver of claims will include any claims for wages, bonuses, employment benefits, or damages of any kind whatsoever, arising out of any contracts, express or implied, any covenant of good faith and fair dealing, express or implied, any theory of wrongful discharge, any legal restriction on the Company’s right to terminate employment, or any federal, state or other governmental statute or ordinance, including, without limitation, Title VII of the Civil Rights Act of 1964, the federal Age Discrimination in Employment Act, the Americans with Disabilities Act, the Family and Medical Leave Act, the Washington Law Against Discrimination, or any other legal limitation on the employment relationship. Such release and waiver must be executed and effective (and the applicable revocation period must have expired without the release and waiver being revoked) not more than sixty (60) days after the Termination Date or Executive shall not be entitled to any such payments or benefits.

(b) In addition, the payments and benefits contemplated by Section 7 (other than Accrued Obligations) are expressly contingent upon Executive’s full compliance with Executive’s obligations towards the Company, including, without limitation, the terms of the Inventions Agreement and the non-competition provision of Section 8.1. In the event Executive materially breaches the Inventions Agreement or Section 8.1, Executive’s right to any payments or benefits under Section 7 (including those that have already been made or provided), other than Accrued

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Obligations, shall be forfeited and extinguished, regardless of whether the Company takes legal action or otherwise tries to enforce its rights. In such event, the Company shall cease payments, and Executive shall immediately return to the Company any payments already made. The Company reserves all rights it may have under contract or law to relief or damages in addition to termination of the above-described payments.

10. Return of Materials

All documents, records, notebooks, notes, memoranda, drawings or other documents made or compiled by Executive at any time while employed by the Company, or in Executive’s possession, including any and all copies thereof, shall be the property of the Company and shall be held by Executive in trust and solely for the benefit of the Company, and shall be delivered to the Company by Executive upon termination of employment or at any other time upon request by the Company.

11. Notice and Cure of Breach

Except as provided otherwise in Section 7.5(b), whenever a breach of this Agreement by either party is relied upon as justification for any action taken by the other party pursuant to any provision of this Agreement, other than clauses (a), (b), or (c) of Section 7.6, before such action is taken, the party asserting the breach of this Agreement shall give the other party at least twenty (20) days’ prior written notice of the existence and the nature of such breach before taking further action hereunder and shall give the party purportedly in breach of this Agreement the opportunity to correct such breach during the twenty (20) day period.

12. No Violation of Other Agreements

In order to induce the Company to enter into this Agreement, Executive represents and warrants to the Company that neither the execution nor the performance of this Agreement by Executive shall violate or conflict in any way with any other agreement or obligations by which Executive may be bound.

13. Rights of Assignment or Delegation

This Agreement is personal to Executive and shall not be assignable by Executive. The Company may assign its rights hereunder to (a) any corporation resulting from any merger, consolidation, or other reorganization to which the Company is a party or (b) any corporation, partnership, association, or other person to which the Company may transfer all or substantially all of the assets in business of the Company existing at such time. As used in this Agreement, “Company” shall mean ZymoGenetics, Inc. and any successor to its business and/or assets that assumes and agrees to perform this Agreement by operation of law, or otherwise. All the terms and provisions of this Agreement shall be binding upon and shall inure to the benefit and be enforceable by the parties hereto and their respective heirs, legal or personal representatives, successors and permitted assigns.

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14. Waiver

No delay or failure by any party in exercising, protecting or enforcing any of its rights, titles, interests, or remedies hereunder and no course of dealing or performance with respect thereto, shall constitute a waiver. The express waiver by a party of any right, title, interest, or remedy in a particular instance or circumstance shall not constitute a waiver in any other instance or circumstance. All rights and remedies shall be cumulative and not exclusive of any rights or remedies.

15. Arbitration

Any controversies or claims arising out of or relating to this Agreement shall be settled finally and fully by arbitration in Seattle, Washington in accordance with the Employment Arbitration Rules of the American Arbitration Association then in effect (the “AAA Rules”), conducted by one arbitrator, mutually agreed upon by the Company and Executive or chosen in accordance with the AAA Rules, except the parties thereto shall have any right to discovery that would be permitted by the Federal Rules of Civil Procedure for a period of ninety (90) days following the commencement of such arbitration and the arbitrator shall resolve any dispute which arises in connection with such discovery. The prevailing parties shall be entitled to costs, expenses, reasonable attorneys’ fees, and judgment upon the award rendered by the arbitrator. The award may be entered in any court having jurisdiction. To the extent necessary to prevent Executive from being subject to any additional tax pursuant to Code Section 409A(a)(1)(B), any amounts payable to Executive pursuant to this paragraph shall be paid in no event later than the year following the year during which such costs and fees were incurred.

16. Amendments in Writing

No amendment, modification, waiver, termination or discharge of any provision of this Agreement, nor consent to any departure by either party, shall in any event be effective unless the same shall be in writing, specifically identifying this Agreement and the provision intended to be amended, modified, waived, terminated, or discharged and assigned by the Company and Executive. Each such amendment, modification, waiver, termination, or discharge shall be effective only in the specific instance and for the specific purpose for which given. No provision of this Agreement shall be varied, contradicted, or explained by any oral agreement, course of dealing or performance or any other matter not set forth in agreement in writing and signed by the Company and Executive.

17. Notices

Any notice required or desired to be given hereunder shall be in writing and shall be deemed sufficiently given when delivered or when mailed by first class certified or registered mail, postage prepaid, to the party for whom intended at the following address:

To the Company:

Chief Executive Officer

ZymoGenetics, Inc.

1201 Eastlake Avenue East

Seattle, WA 98102

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To Executive:

James A. Johnson

8503 Inverness Drive NE

Seattle, WA 98115

or to such other address, as to either party, as such party shall from time to time designate by like notice to the other.

18. Entire Agreement

This Agreement supersedes and replaces the Original Agreement and constitutes the entire agreement between the Company and Executive with respect to the subject matter hereof, and all prior or contemporaneous oral or written communications, understandings or agreements between the Company and Executive with respect to such subject matter, are hereby superseded and nullified in their entireties, except that the Inventions Agreement shall continue in full force and effect.

19. Governing Law

This Agreement is made under and shall be governed by and construed in accordance with the laws of the State of Washington (without regard to any rules governing conflict of laws), except to the extent preempted by Federal law.

20. Severability

If any provision of this Agreement shall be held invalid, illegal or unenforceable in any jurisdiction, for any reason, including without limitation, the duration of such provision, its geographical scope or the extent of the activities prohibited or required by it, then, to the full extent permitted by law (a) all other provisions hereof shall remain in full force and effect and such provision shall be liberally construed in order to carry out the intent of the parties as nearly as may be possible, (b) such invalidity, illegality, or unenforceability shall not affect the validity, legality or enforceability of any other provision, and (c) any court or arbitrator having jurisdiction thereover shall have the power to reform such provision to the extent necessary for such provision to be enforceable under applicable law.

21. 409A Interpretation Provision

The parties intend that this Agreement and the benefits provided hereunder be exempt from the requirements of Code Section 409A to the maximum extent possible, whether pursuant to the short-term deferral exception described in Treasury Regulation Section 1.409A-1(b)(4), the involuntary separation pay plan exception described in Treasury Regulation Section 1.409A-1(b)(9)(iii), or otherwise. To the extent Code Section 409A is applicable to this Agreement, the parties intend that this Agreement comply with the deferral, payout and other limitations and restrictions imposed under Code Section 409A. Notwithstanding any other provision of this Agreement to the contrary, this Agreement shall be interpreted, operated and administered in a manner consistent with such intentions. Without limiting the generality of the foregoing, and notwithstanding any other provision of this Agreement to the contrary, with respect to any

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payments and benefits under this Agreement to which Code Section 409A applies, all references in this Agreement to the termination of Executive’s employment are intended to mean Executive’s “separation from service,” within the meaning of Code Section 409A(a)(2)(A)(i). In addition, if Executive is a “specified employee,” within the meaning of Code Section 409A, then to the extent necessary to avoid subjecting Executive to the imposition of any additional tax under Code Section 409A, amounts that would otherwise be payable under this Agreement during the six (6) month period immediately following Executive’s “separation from service,” within the meaning of Code Section 409A(a)(2)(A)(i), shall not be paid to Executive during such period, but shall instead be accumulated and paid to Executive (or, in the event of Executive’s death, Executive’s estate) in a lump sum on the first business day after the earlier of the date that is six (6) months following Executive’s separation from service or Executive’s death. If the Company or Executive determines that any provision of this Agreement is or might be inconsistent with the requirements of Code Section 409A, the parties shall attempt in good faith to agree on such amendments to this Agreement as may be necessary or appropriate to avoid subjecting Executive to the imposition of any additional tax under Code Section 409A. Notwithstanding the foregoing, no provision of this Agreement shall be interpreted or construed to transfer any liability for failure to comply with Code Section 409A from Executive or any other individual to the Company or any of its affiliates.

22. Multiple Copies

This Agreement may be executed in two (2) or more counterparts of like tenor and effect, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the parties have executed and entered into this Agreement as of the Effective Date.

ZYMOGENETICS, INC.
By:	/s/ Bruce L.A. Carter
	Bruce L.A. Carter, Ph.D.
	Chairman

EXECUTIVE

/s/ James A. Johnson

James A. Johnson

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EX-10.17

Exhibit 10.17

AMENDED AND RESTATED

EMPLOYMENT AGREEMENT

This AGREEMENT, dated as of July 3, 2008 (the “Effective Date”), is between ZymoGenetics, Inc., a Washington corporation (as supplemented by Section 13, the “Company”), and Darren R. Hamby (“Executive”).

RECITALS

A. The Company and Executive previously entered into the Original Agreement (as defined below) detailing compensation and benefit arrangements for Executive in the event of termination of Executive’s employment by the Company under certain circumstances.

B. The Company and Executive desire to update the terms of Executive’s employment.

Accordingly, in consideration of the promises and mutual covenants contained herein, the Company and Executive agree as follows:

AGREEMENT

1. Certain Definitions

1.1 “Accrued Obligations” has the meaning set forth in Section 7.1.

1.2 “Annual Performance Bonus” has the meaning set forth in Section 5.5(b).

1.3 “Cause” shall have the meaning set forth in Section 7.6.

1.4 “Change in Control” shall have the meaning set forth in Section 7.7.

1.5 “Change in Control Date” shall mean the first date during the Term (as defined in Section 4.1 on which a Change in Control occurs.

1.6 “Change in Control Period” shall mean the two (2) year period commencing on the Change in Control Date and ending on the second anniversary of such date.

1.7 “COBRA” shall mean the health care continuation requirements set forth in Code Section 4980B.

1.8 “Code” shall mean the Internal Revenue Code of 1986 and any regulations, rulings or other official guidance issued pursuant thereto, all as amended and in effect from time to time.

1.9 “Company Transaction” shall mean the consummation of either (i) a merger or consolidation of the Company with or into any other company, entity or person or (ii) a sale, lease, exchange or other transfer of all or substantially all of the Company’s then outstanding securities or all or substantially all of the Company’s assets in one transaction or a series of related transactions undertaken with a common purpose; provided, however, that a Company Transaction shall not include a Related Party Transaction.

1.10 “Compensation Committee” means the Compensation Committee of the Board of Directors.

1.11 “Fiscal Year” shall mean the fiscal year of the Company.

1.12 “Good Reason” shall have the meaning set forth in Section 7.5.

1.13 “Inventions Agreement” shall mean the Employee Inventions and Proprietary Information Agreement, dated as of August 30, 1997, between the parties.

1.14 “Notice of Termination” shall have the meaning set forth in Section 4.4.

1.15 “Original Agreement” shall mean the Employment Agreement, dated as of July 1, 2007, between the parties.

1.16 “Position” shall have the meaning set forth in Section 2.

1.17 “Related Party Transaction” shall mean (i) a merger or consolidation of the Company in which the holders of the outstanding voting securities of the Company immediately prior to the merger or consolidation hold at least a majority of the outstanding voting securities of the successor company immediately after the merger or consolidation; (ii) a sale, lease, exchange or other transfer of the Company’s assets to a majority-owned subsidiary company; (iii) a transaction undertaken for the principal purpose of restructuring the capital of the Company, including but not limited to, reincorporating the Company in a different jurisdiction or creating a holding company; or (iv) a corporate dissolution or liquidation.

1.18 “Successor Company” shall mean the surviving company, the successor company or its parent, as applicable, in connection with a Company Transaction.

1.19 “Term” shall have the meaning set forth in Section 4.1.

1.20 “Termination Date” shall have the meaning set forth in Section 4.5.

2. Employment

The Company employs Executive and Executive accepts employment as Senior Vice President, Human Resources of the Company (the “Position”), unless terminated earlier as provided upon the terms and conditions contained in this Agreement. Executive and the Company acknowledge that, except as otherwise may be provided under any other written agreement between Executive and the Company, the employment of Executive by the Company or its affiliated companies is “at will” and may be terminated by either Executive or the Company or its affiliated companies at any time with or without cause.

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3. Duties

During the Term, Executive shall serve the Company under the direction of the President of the Company. Executive shall perform the duties of the Position faithfully, diligently and competently and to the best of Executive’s ability, and, except as provided in this Section 3, shall devote Executive’s full business time to Executive’s employment. Executive shall perform such other duties as are assigned to Executive by the President or the Board of Directors of the Company. Executive may devote reasonable periods of time to (a) engaging in personal investment activities, (b) serving on the Board of Directors or Scientific Advisory Boards of other corporations with the consent of the Compensation Committee of the Board of Directors, if such service would not otherwise be prohibited by Section 8 hereof, and (c) engaging in charitable or community service activities, so long as none of the foregoing additional activities materially interfere with Executive’s duties under this Agreement.

4. Term; Termination

4.1 Term

The “Term” of this Agreement initially shall be for a period of two (2) years from the Effective Date; provided, however, that this Agreement shall renew automatically for successive additional one (1) year periods unless notice of non-renewal is given by either party to the other at least ninety (90) days prior to the end of the then current term; and provided further that if a Change in Control occurs during the Term, the Term shall automatically extend at least for the duration of the Change in Control Period.

4.2 Termination by the Company or Executive

The Company may terminate the employment of Executive, with or without Cause, at any time upon giving “Notice of Termination” (as defined below). Executive may terminate Executive’s employment at any time, for any reason, upon giving Notice of Termination.

4.3 Automatic Termination

This Agreement and Executive’s employment hereunder shall terminate automatically upon the death or Total Disability (as defined below) of Executive. The term “Total Disability” as used herein shall mean Executive’s inability to perform the duties set forth in Section 3 hereof for a period or periods aggregating ninety (90) calendar days in any twelve (12) month period as a result of physical or mental illness, loss of legal capacity or any other cause beyond Executive’s control, unless Executive is granted a leave of absence by the Board of Directors of the Company. Executive and the Company hereby acknowledge that Executive’s ability to perform the duties specified in Section 3 hereof is of the essence to this Agreement.

4.4 Notice of Termination

The term “Notice of Termination” shall mean at least thirty (30) days’ written notice of termination, by either party, of Executive’s employment and of this Agreement, during which period Executive’s employment and performance of services shall continue; provided, however,

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that the Company may, upon notice to Executive and without reducing Executive’s compensation during such period, excuse Executive from any or all of Executive’s duties during such period. Such a reduction in duties shall not constitute Good Reason for termination so as to trigger termination payments in accordance with Sections 7.2 or 7.3.

4.5 Termination Date

The effective date of the termination (the “Termination Date”) means (a) if Executive’s employment is terminated by reason of death, at the end of the calendar month in which Executive’s death occurs, (b) if Executive’s employment is terminated by reason of Total Disability, immediately upon a determination by the Company of Executive’s Total Disability, and (c) in all other cases, the later of (i) thirty (30) days after the date on which the Company or Executive, as applicable, receives the Notice of Termination from the other party or (ii) the date specified in the Notice of Termination.

4.6 Survival

Sections 4, 7, 8, 9, 10, 14, 15, 16, 17, 18, 19, 20, 21, and 22 shall survive the termination of Executive’s employment and of this Agreement.

5. Compensation and Benefits

5.1 Salary

During the Term, the Company shall pay to Executive as compensation for the performance of Executive’s duties and obligations a salary of $260,000 per annum. This compensation is subject to annual review and adjustment, as appropriate in the judgment of the Company. The compensation payable pursuant to this Section 5.1 shall be payable in equal semi-monthly installments on the last day of each such pay period.

5.2 Standard Benefits

Executive shall be enrolled and participate in any retirement, group insurance and other fringe benefit plans and arrangements which are applicable to the similarly situated personnel of the Company and in effect from time to time, if Executive is eligible therefor, in each case in accordance with and subject to the provisions thereof.

5.3 Stock Options

(a) Executive has been granted stock options under the Company’s 2001 Stock Incentive Plan which allows Executive to purchase shares of the Company’s common stock; and

(b) Executive shall be eligible to receive future periodic grants under the Company’s stock incentive programs.

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5.4 Other Benefits

Executive also shall receive the following executive perquisites for the duration of this contract:

(a) Company-paid term life insurance policy in the amount of $200,000;

(b) Company-paid use of either a laptop computer or personal computer, to be upgraded biennially at the time this contract is renewed;

(c) Company-paid annual executive health physical, to be administered by a physician selected by the Company; and

(d) Company-paid expenses for a residential phone and cellular phone.

5.5 Change in Control Period

As long as Executive remains employed by the Company or a Successor Company during the Change in Control Period, the Company agrees to pay or cause to be paid to Executive, and Executive agrees to accept in exchange for the services rendered hereunder by Executive during the Change in Control Period, the following compensation:

(a) Executive shall receive an annual base salary at least equal to Executive’s annual base salary for the Fiscal Year in which the Change in Control Date occurs (as in effect immediately prior to the Change in Control Date). Executive’s annual base salary shall be paid in substantially equal installments and at the same intervals as the salaries of other executives of the Company are paid. During the Change in Control Period, the Board of Directors, the Compensation Committee or the Chief Executive Officer (as applicable) shall review Executive’s annual base salary at least annually and shall determine in good faith and consistent with any generally applicable Company policy any increases for future years.

(b) In addition to an annual base salary, for each Fiscal Year ending during the Change in Control Period, Executive shall be awarded an annual performance bonus (the “Annual Performance Bonus”) in cash at least equal to Executive’s target annual bonus for the Fiscal Year containing the Change in Control Date or, if such target annual bonus has not been set as of the Change in Control Date, Executive’s target annual bonus for the immediately preceding Fiscal Year (annualized if Executive was employed by the Company for less than the entire preceding Fiscal Year); provided, however, that except as provided in Section 7.3(b), an Annual Performance Bonus shall be awarded for a Fiscal Year only if Executive is employed by the Company or a Successor Company on the last day of such Fiscal Year. Each Annual Performance Bonus shall be paid in the Fiscal Year following the Fiscal Year for which the Annual Performance Bonus is awarded, but no later than the fifteenth (15th) day of the third (3rd) month of such subsequent Fiscal Year, unless Executive elects to defer the receipt of the Annual Performance Bonus in accordance with the terms of the Company’s deferred compensation program.

(c) Executive shall be entitled to participate in, subject to and in accordance with the eligibility and other terms and requirements thereof, such fringe benefit programs as generally are made available to other executives of the Company and its affiliated companies from time to time during the Change in Control Period, including, without limitation, paid vacations; any

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stock purchase, savings or retirement plan, practice, policy or program; and welfare benefit plans, practices, policies or programs (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans or programs).

6. Expenses

During the Term, all travel and other reasonable expenses incident to the rendering of service by Executive hereunder shall be paid by the Company subject to Company policy. If such expenses are paid in the first instance by Executive, the Company shall reimburse Executive upon presentation of proper expense accounts and supporting documentation. Reimbursement requests, along with supporting documentation, must be submitted within sixty (60) days after the date on which the expense for which reimbursement is being requested was incurred. Reimbursement shall be made no later than the date that is two and one-half months (2 ¹/2) months after the end of the Fiscal Year in which the expense was incurred.

7. Termination Payments

In the event of termination of the employment of Executive, all compensation and benefits set forth in this Agreement shall terminate except as specifically provided in this Section 7.

7.1 Termination for Cause or Other than for Good Reason

If during the Term Executive’s employment is terminated by the Company for Cause or by Executive for other than Good Reason, this Agreement shall terminate without further obligation on the part of the Company to Executive, other than the Company’s obligation to pay (as provided in Section 7.8(a)) Executive the following accrued obligations (the “Accrued Obligations”):

(a) Executive’s then current annual base salary through the Termination Date;

(b) any Annual Performance Bonus to which Executive is entitled pursuant to Section 5.5(b) (i.e., a bonus paid for a Fiscal Year ending during the Change in Control Period if Executive was employed by the Company or a Successor Company on the last day of such Fiscal Year);

(c) any compensation previously deferred by Executive (together with accrued interest or earnings thereon, if any); and

(d) any accrued vacation pay that would be payable under the Company’s standard policy;

in each case, to the extent not theretofore paid.

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7.2 Termination Other than for Cause or for Good Reason NOT During Change in Control Period

Subject to Section 9, if at any time during the Term, except during the Change in Control Period, the Company terminates Executive’s employment other than for Cause or Executive terminates Executive’s employment for Good Reason, Executive shall be entitled to:

(a) any Accrued Obligations to the extent theretofore unpaid;

(b) if, as a result of the termination of Executive’s employment, Executive and Executive’s spouse and dependent children are eligible for and timely (and properly) elect COBRA continuation coverage under the Company’s group health plan(s), the Company shall pay the premium for such coverage for a period of twelve (12) months following the Termination Date, until Executive becomes covered under a comparable group health plan, or until Executive is no longer entitled to COBRA continuation coverage under the Company’s group health plan(s), whichever period is the shortest, but only to the extent that the Company would have paid such premiums had Executive remained employed by the Company;

(c) severance payments equal, in the aggregate, to one (1) times Executive’s annual base salary as of the date of the Notice of Termination, payable as provided in Section 7.8(b).

7.3 Termination Other than for Cause or for Good Reason During Change in Control Period

Subject to Section 9, if during the Change in Control Period, the Company terminates Executive’s employment other than for Cause or Executive terminates Executive’s employment for Good Reason, Executive shall be entitled to:

(a) any Accrued Obligations to the extent theretofore unpaid;

(b) a bonus for the Fiscal Year that contains the Termination Date, which bonus shall not be less than the Annual Performance Bonus multiplied by a fraction, the numerator of which is the number of days in such Fiscal Year up to and including the Termination Date and the denominator of which is three hundred sixty-five (365), payable as provided in Section 7.8(c). This Section 7.3(b) shall not apply if Executive is entitled to an Annual Performance Bonus pursuant to Section 5.5(b) for the Fiscal Year containing the Termination Date;

(c) if, as a result of the termination of Executive’s employment, Executive and Executive’s spouse and dependent children are eligible for and timely (and properly) elect COBRA continuation coverage under the Company’s group health plan(s) pursuant to COBRA, the Company shall pay the premium for such coverage for a period of twelve (12) months following the Termination Date, until Executive becomes covered under a comparable group health plan, or until Executive is no longer entitled to COBRA continuation coverage under the Company’s group health plan(s), whichever period is the shortest, but only to the extent that the Company would have paid such premiums had Executive remained employed by the Company;

(d) immediate vesting of all outstanding stock options previously granted to Executive by the Company;

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(e) an amount as severance pay equal to the sum of (i) one (1) times the Annual Performance Bonus and (ii) one (1) times Executive’s annual base salary as of the date of the Notice of Termination, payable as provided in Section 7.8(c).

7.4 Termination as a Result of Death or Total Disability

In the event of termination of Executive’s employment pursuant to Section 4.3, Executive or Executive’s estate shall be paid the compensation set forth in Section 7.1.

7.5 Good Reason

(a) “Good Reason” shall mean the occurrence of any of the following conditions, without the consent of Executive:

(i) a material reduction in Executive’s base compensation;

(ii) a material reduction in Executive’s authority, duties or responsibilities; provided, however, that a change in the person or office to which Executive reports, without a corresponding reduction in authority, duties or responsibilities, shall not constitute Good Reason;

(iii) a material reduction in the budget over which Executive retains authority;

(iv) requirement by a Successor Company that Executive relocate Executive’s principal place of employment to a location that is more than fifty (50) miles from the principal place of employment where Executive was employed immediately prior to such relocation; or

(v) any other action or inaction that constitutes a material breach by the Company or a Successor Company of this Agreement.

(b) Notwithstanding any provision in this Agreement to the contrary, termination of employment by Executive will not be for Good Reason unless (i) Executive notifies the Company or the Successor Company in writing of the existence of the condition which Executive believes constitutes Good Reason within ninety (90) days of the initial existence of such condition (which notice specifically identifies such condition), (ii) the Company or the Successor Company fails to remedy such condition within thirty (30) days after the date on which it receives such notice (the “Remedial Period”), and (iii) Executive actually terminates employment within thirty (30) days after the expiration of the Remedial Period and before the Company or the Successor Company remedies such condition. If Executive terminates employment before the expiration of the Remedial Period or after the Company or the Successor Company remedies the condition (even if after the end of the Remedial Period), then Executive’s termination will not be considered to be for Good Reason. Executive may combine the notice required by this Section 7.5(b) with the Notice of Termination.

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7.6 Cause

Wherever reference is made in this Agreement to termination being with or without Cause, “Cause” shall include, without limitation, the occurrence of one or more of the following events:

(a) willful misconduct or insubordination in the performance of Executive’s duties or other knowing and material violation of the Company’s policies and procedures in effect from time to time which results in a material adverse effect on the Company;

(b) willful actions in bad faith (or intentional failures to act) by Executive with respect to the Company that materially impair the Company’s business, goodwill or reputation;

(c) current abuse by Executive of controlled substances; deception, fraud, misrepresentation or dishonesty by Executive; or any incident materially compromising Executive’s reputation or ability to represent the Company with investors, customers or the public;

(d) conviction of Executive of a felony involving an act of dishonesty, moral turpitude, deceit or fraud, or the commission or omission of acts that could reasonably be expected to result in such a conviction; or

(e) any material violation by Executive of this Agreement or the Inventions Agreement with the Company, subject to the notice and opportunity-to-cure requirements of Section 11 hereof.

7.7 Change in Control

As used herein, a “Change in Control” shall mean any of the following events or occurrences, provided such event or occurrence also constitutes a change in ownership or effective control of the Company, or in the ownership of a substantial portion of the Company’s assets, within the meaning of Code Section 409A(a)(2)(A)(v):

(a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”), either directly or indirectly through one or more affiliated entities (collectively “Series B Purchasers”), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either (x) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this Section 7.7(a), the following acquisitions shall not constitute a Change in Control: (A) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or (B) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of Section 7.7(b); or

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(b) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination: (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than fifty percent (50%) of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries), (B) no Person (excluding (1) any one or more Series B Purchasers, (2) any corporation resulting from such Business Combination, or (3) any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, fifty percent (50%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the Board of Directors of the corporation resulting from such Business Combination were members of the incumbent Board of Directors of the Company at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination;

(c) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company; or

(d) A “Board Change” that, for purposes of this Agreement, shall have occurred if, during any twelve (12) month period, a majority of the members of the Company’s Board of Directors is replaced by directors whose appointment or election is not endorsed by a majority of the members of the Company’s Board of Directors before the date of the appointment or election.

7.8 Payment Schedule

(a) All payments of Accrued Obligations, or any portion thereof payable pursuant to this Section 7, other than deferred compensation, shall be made to Executive within ten (10) working days of the Termination Date. Deferred compensation pursuant to Section 7.1(b) shall be payable pursuant to the terms of the deferred compensation plan, program or arrangement pursuant to which it was deferred.

(b) Subject to Section 21, the payments payable to Executive pursuant to Section 7.2(c) shall be paid to Executive in equal installments on each of the Company’s semi-monthly pay days during the twelve (12) month period immediately following the Termination Date, subject to the following:

(i) If Code Section 409A does not apply to the payments that would be made during the first sixty (60) days following the Termination Date, then payments shall begin as of the first semi-monthly pay day following the date on which

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Executive’s release under Section 9(a) becomes effective. The initial payment shall include any such installments that would have been paid prior to such pay day had payments commenced on the first semi-monthly pay day following the Termination Date; and

(ii) If Code Section 409A applies to the payments that would be made during the first sixty (60) days following the Termination Date, then payments shall begin as of the first semi-monthly pay day following the sixtieth (60th) day after the Termination Date. The initial payment shall include any such installments that would have been paid prior to such pay day had payments commenced on the first semi-monthly pay day following the Termination Date.

For purposes of Code Section 409A, each installment payable pursuant to Section 7.2(c) and this Section 7.8(b) shall be treated as a separate payment.

(c) Subject to Section 21, any payments payable to Executive pursuant to Sections 7.3(b) and (e) shall be made to Executive in a lump sum on the first business day following the date on which Executive’s release under Section 9(a) becomes effective, unless any portion of such payments is subject to Code Section 409A, in which case they shall be made on the first business day that is at least sixty-one (61) days following the Termination Date.

7.9 Parachute Payments.

(a) Notwithstanding any other provision in this Agreement, in the event any payments or benefits Executive receives or would become entitled to receive from the Company, any person whose actions result in a Change in Control or any person affiliated with the Company or such person (in the aggregate, the “Payments”) would (i) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code or any similar or successor provision (the “Excise Tax”), then the amount of the Payments shall be equal to either (x) the largest portion of the Payments that would result in no portion of the Payments being subject to the Excise Tax (the “Reduced Amount”), or (y) the full amount of the Payments, whichever of the foregoing amounts, after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest marginal rate applicable to individuals in the year in which the Payments are to be made), results in Executive’s receipt, on an after-tax basis, of the greatest amount of the Payments notwithstanding that all or some portion of the Payments may be subject to the Excise Tax. If a reduction in the Payments is required so that the amount of the Payments equals the Reduced Amount, the Payments shall be reduced in the following order: (1) reduction of cash Payments otherwise payable to Executive that are exempt from Section 409A of the Code; (2) cancellation of accelerated vesting of equity awards (other than stock options) that are exempt from Section 409A of the Code; (3) cancellation of accelerated vesting of stock options that are exempt from Section 409A of the Code; (4) reduction of any other payments and benefits otherwise payable to Executive that are exempt from Section 409A of the Code; and (5) reduction of any other benefits and payments otherwise payable to Executive on a pro-rata basis or such other manner that complies with Section 409A of the Code, as determined by the Company. If acceleration of vesting of Executive’s stock options or other equity awards is to be reduced pursuant to clauses

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(2) or (3) of the immediately preceding sentence, such acceleration of vesting shall be cancelled by first canceling such acceleration for the vesting installment that will vest last and continuing by canceling as a first priority such acceleration for the vesting installment with the latest vesting.

(b) All computations and determinations called for by this Section 7.9 shall be made and reported in writing to the Company and Executive by an independent accounting firm or independent tax counsel appointed by the Company (the “Tax Advisor”), and all such computations and determinations shall be conclusive and binding on the Company and Executive. For purposes of such calculations and determinations, the Tax Advisor may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and Executive shall furnish to the Tax Advisor such information and documents as the Tax Advisor may reasonably request in order to make their required calculations and determinations. The Company shall bear all fees and expenses charged by the Tax Advisor in connection with its services.

7.10 Withholding

The Company may deduct from any amounts payable under this Agreement, any amounts that it is required by law to withhold, including, without limitation, social security taxes, federal and state income taxes, and state disability insurance; provided, however, that any and all such obligations shall be Executive’s responsibility.

8. Non-competition and Non-solicitation

8.1 Non-competition

During the Term and for a period of twelve (12) months after the Termination Date, Executive shall not directly or indirectly work or otherwise engage in research, development, manufacture, sale or distribution of any product, method or matter:

(a) For any business, whose commercial efforts are in competition with the products manufactured or marketed by the Company during Executive’s employment with the Company or under research or development by the Company during Executive’s employment with the Company (and on which the Company has expended at least $500,000); or

(b) For any research institution whose research efforts pertain to the same products manufactured or marketed by the Company during Executive’s employment with the Company or under research or development by the Company during Executive’s employment with the Company (and on which the Company has expended at least $500,000), unless Executive is not involved in any manner in the design, conduct or supervision of such research efforts, or unless such research is being conducted solely for scientific and not for commercial purposes.

Executive shall be deemed to be engaged in a business if such business is carried on by partnership in which Executive is a general or limited partner, consultant or employee, or a corporation or association of which Executive is a shareholder, officer, director, employee, member, consultant or agent; provided, that nothing herein shall prevent the purchase or ownership by Executive of shares of less than one percent (1%) of the outstanding shares in a publicly or privately held corporation.

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Said twelve (12) months’ period shall commence on the day on which Executive actually leaves Executive’s employment with the Company, even if this date is prior to the expiration of any given Notice of Termination.

8.2 Waiver of Non-competition

The Company’s Board of Directors may, at its own discretion, by express or written consent, release Executive from the restriction in Section 8.1.

8.3 Non-solicitation

During the Term and for a period of one (1) year after the Termination Date, Executive shall not personally or through others (a) recruit, solicit or induce in any way any employee, advisor or consultant of the Company to terminate his, her or its relationship with the Company or to engage in activities competitive with the Company, (b) hire or attempt to hire for any purpose, as an employee, agent, consultant or contractor, any person who then is an employee of the Company, or (c) solicit, induce or encourage in any way any customers (that Executive sold to, serviced or solicited on behalf of the Company), strategic partners, contractors, suppliers, or vendors to terminate or reduce their relationships with the Company or to refrain from entering or expanding any business or relationship with the Company.

9. General Release of Claims and Compliance by Executive

(a) As a condition to the payments and benefits contemplated by Section 7 (other than Accrued Obligations), Executive must execute (and not later revoke) a general release and waiver of claims against the Company in a form satisfactory to the Company in its sole discretion. By way of example and not limitation, the general release and waiver of claims will include any claims for wages, bonuses, employment benefits, or damages of any kind whatsoever, arising out of any contracts, express or implied, any covenant of good faith and fair dealing, express or implied, any theory of wrongful discharge, any legal restriction on the Company’s right to terminate employment, or any federal, state or other governmental statute or ordinance, including, without limitation, Title VII of the Civil Rights Act of 1964, the federal Age Discrimination in Employment Act, the Americans with Disabilities Act, the Family and Medical Leave Act, the Washington Law Against Discrimination, or any other legal limitation on the employment relationship. Such release and waiver must be executed and effective (and the applicable revocation period must have expired without the release and waiver being revoked) not more than sixty (60) days after the Termination Date or Executive shall not be entitled to any such payments or benefits.

(b) In addition, the payments and benefits contemplated by Section 7 (other than Accrued Obligations) are expressly contingent upon Executive’s full compliance with Executive’s obligations towards the Company, including, without limitation, the terms of the Inventions Agreement and the non-competition provision of Section 8.1. In the event Executive materially breaches the Inventions Agreement or Section 8.1, Executive’s right to any payments or benefits under Section 7 (including those that have already been made or provided), other than Accrued

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Obligations, shall be forfeited and extinguished, regardless of whether the Company takes legal action or otherwise tries to enforce its rights. In such event, the Company shall cease payments, and Executive shall immediately return to the Company any payments already made. The Company reserves all rights it may have under contract or law to relief or damages in addition to termination of the above-described payments.

10. Return of Materials

All documents, records, notebooks, notes, memoranda, drawings or other documents made or compiled by Executive at any time while employed by the Company, or in Executive’s possession, including any and all copies thereof, shall be the property of the Company and shall be held by Executive in trust and solely for the benefit of the Company, and shall be delivered to the Company by Executive upon termination of employment or at any other time upon request by the Company.

11. Notice and Cure of Breach

Except as provided otherwise in Section 7.5(b), whenever a breach of this Agreement by either party is relied upon as justification for any action taken by the other party pursuant to any provision of this Agreement, other than clauses (a), (b), or (c) of Section 7.6, before such action is taken, the party asserting the breach of this Agreement shall give the other party at least twenty (20) days’ prior written notice of the existence and the nature of such breach before taking further action hereunder and shall give the party purportedly in breach of this Agreement the opportunity to correct such breach during the twenty (20) day period.

12. No Violation of Other Agreements

In order to induce the Company to enter into this Agreement, Executive represents and warrants to the Company that neither the execution nor the performance of this Agreement by Executive shall violate or conflict in any way with any other agreement or obligations by which Executive may be bound.

13. Rights of Assignment or Delegation

This Agreement is personal to Executive and shall not be assignable by Executive. The Company may assign its rights hereunder to (a) any corporation resulting from any merger, consolidation, or other reorganization to which the Company is a party or (b) any corporation, partnership, association, or other person to which the Company may transfer all or substantially all of the assets in business of the Company existing at such time. As used in this Agreement, “Company” shall mean ZymoGenetics, Inc. and any successor to its business and/or assets that assumes and agrees to perform this Agreement by operation of law, or otherwise. All the terms and provisions of this Agreement shall be binding upon and shall inure to the benefit and be enforceable by the parties hereto and their respective heirs, legal or personal representatives, successors and permitted assigns.

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14. Waiver

No delay or failure by any party in exercising, protecting or enforcing any of its rights, titles, interests, or remedies hereunder and no course of dealing or performance with respect thereto, shall constitute a waiver. The express waiver by a party of any right, title, interest, or remedy in a particular instance or circumstance shall not constitute a waiver in any other instance or circumstance. All rights and remedies shall be cumulative and not exclusive of any rights or remedies.

15. Arbitration

Any controversies or claims arising out of or relating to this Agreement shall be settled finally and fully by arbitration in Seattle, Washington in accordance with the Employment Arbitration Rules of the American Arbitration Association then in effect (the “AAA Rules”), conducted by one arbitrator, mutually agreed upon by the Company and Executive or chosen in accordance with the AAA Rules, except the parties thereto shall have any right to discovery that would be permitted by the Federal Rules of Civil Procedure for a period of ninety (90) days following the commencement of such arbitration and the arbitrator shall resolve any dispute which arises in connection with such discovery. The prevailing parties shall be entitled to costs, expenses, reasonable attorneys’ fees, and judgment upon the award rendered by the arbitrator. The award may be entered in any court having jurisdiction. To the extent necessary to prevent Executive from being subject to any additional tax pursuant to Code Section 409A(a)(1)(B), any amounts payable to Executive pursuant to this paragraph shall be paid in no event later than the year following the year during which such costs and fees were incurred.

16. Amendments in Writing

No amendment, modification, waiver, termination or discharge of any provision of this Agreement, nor consent to any departure by either party, shall in any event be effective unless the same shall be in writing, specifically identifying this Agreement and the provision intended to be amended, modified, waived, terminated, or discharged and assigned by the Company and Executive. Each such amendment, modification, waiver, termination, or discharge shall be effective only in the specific instance and for the specific purpose for which given. No provision of this Agreement shall be varied, contradicted, or explained by any oral agreement, course of dealing or performance or any other matter not set forth in agreement in writing and signed by the Company and Executive.

17. Notices

Any notice required or desired to be given hereunder shall be in writing and shall be deemed sufficiently given when delivered or when mailed by first class certified or registered mail, postage prepaid, to the party for whom intended at the following address:

To the Company:

President

ZymoGenetics, Inc.

1201 Eastlake Avenue East

Seattle, WA 98102

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To Executive:

Darren R. Hamby

2820 31^st Avenue W.

Seattle, WA 98199

or to such other address, as to either party, as such party shall from time to time designate by like notice to the other.

18. Entire Agreement

This Agreement supersedes and replaces the Original Agreement and constitutes the entire agreement between the Company and Executive with respect to the subject matter hereof, and all prior or contemporaneous oral or written communications, understandings or agreements between the Company and Executive with respect to such subject matter, are hereby superseded and nullified in their entireties, except that the Inventions Agreement shall continue in full force and effect.

19. Governing Law

This Agreement is made under and shall be governed by and construed in accordance with the laws of the State of Washington (without regard to any rules governing conflict of laws), except to the extent preempted by Federal law.

20. Severability

If any provision of this Agreement shall be held invalid, illegal or unenforceable in any jurisdiction, for any reason, including without limitation, the duration of such provision, its geographical scope or the extent of the activities prohibited or required by it, then, to the full extent permitted by law (a) all other provisions hereof shall remain in full force and effect and such provision shall be liberally construed in order to carry out the intent of the parties as nearly as may be possible, (b) such invalidity, illegality, or unenforceability shall not affect the validity, legality or enforceability of any other provision, and (c) any court or arbitrator having jurisdiction thereover shall have the power to reform such provision to the extent necessary for such provision to be enforceable under applicable law.

21. 409A Interpretation Provision

The parties intend that this Agreement and the benefits provided hereunder be exempt from the requirements of Code Section 409A to the maximum extent possible, whether pursuant to the short-term deferral exception described in Treasury Regulation Section 1.409A-1(b)(4), the involuntary separation pay plan exception described in Treasury Regulation Section 1.409A-1(b)(9)(iii), or otherwise. To the extent Code Section 409A is applicable to this Agreement, the parties intend that this Agreement comply with the deferral, payout and other limitations and restrictions imposed under Code Section 409A. Notwithstanding any other provision of this Agreement to the contrary, this Agreement shall be interpreted, operated and administered in a manner consistent with such intentions. Without limiting the generality of the foregoing, and notwithstanding any other provision of this Agreement to the contrary, with respect to any

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payments and benefits under this Agreement to which Code Section 409A applies, all references in this Agreement to the termination of Executive’s employment are intended to mean Executive’s “separation from service,” within the meaning of Code Section 409A(a)(2)(A)(i). In addition, if Executive is a “specified employee,” within the meaning of Code Section 409A, then to the extent necessary to avoid subjecting Executive to the imposition of any additional tax under Code Section 409A, amounts that would otherwise be payable under this Agreement during the six (6) month period immediately following Executive’s “separation from service,” within the meaning of Code Section 409A(a)(2)(A)(i), shall not be paid to Executive during such period, but shall instead be accumulated and paid to Executive (or, in the event of Executive’s death, Executive’s estate) in a lump sum on the first business day after the earlier of the date that is six (6) months following Executive’s separation from service or Executive’s death. If the Company or Executive determines that any provision of this Agreement is or might be inconsistent with the requirements of Code Section 409A, the parties shall attempt in good faith to agree on such amendments to this Agreement as may be necessary or appropriate to avoid subjecting Executive to the imposition of any additional tax under Code Section 409A. Notwithstanding the foregoing, no provision of this Agreement shall be interpreted or construed to transfer any liability for failure to comply with Code Section 409A from Executive or any other individual to the Company or any of its affiliates.

22. Multiple Copies

This Agreement may be executed in two (2) or more counterparts of like tenor and effect, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the parties have executed and entered into this Agreement as of the Effective Date.

ZYMOGENETICS, INC.
By:	/s/ Douglas E. Williams
	Douglas E. Williams, Ph.D.
	Chief Executive Officer

EXECUTIVE

/s/ Darren R. Hamby

Darren R. Hamby

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EX-10.18

Exhibit 10.18

AMENDED AND RESTATED

EMPLOYMENT AGREEMENT

This AGREEMENT, dated as of March 12, 2009 (the “Effective Date”), is between ZymoGenetics, Inc., a Washington corporation (as supplemented by Section 13, the “Company”), and Douglas E. Williams (“Executive”).

RECITALS

A. The Company and Executive previously entered into the Prior Agreement (as defined below) detailing compensation and benefit arrangements for Executive in the event of termination of Executive’s employment by the Company under certain circumstances.

B. The Company and Executive desire to update the terms of Executive’s employment.

Accordingly, in consideration of the promises and mutual covenants contained herein, the Company and Executive agree as follows:

AGREEMENT

1. Certain Definitions

1.1 “Accrued Obligations” has the meaning set forth in Section 7.1.

1.2 “Annual Performance Bonus” has the meaning set forth in Section 5.5(b).

1.3 “Cause” shall have the meaning set forth in Section 7.6.

1.4 “Change in Control” shall have the meaning set forth in Section 7.7.

1.5 “Change in Control Date” shall mean the first date during the Term (as defined in Section 4.1 on which a Change in Control occurs.

1.6 “Change in Control Period” shall mean the two (2) year period commencing on the Change in Control Date and ending on the second anniversary of such date.

1.7 “COBRA” shall mean the health care continuation requirements set forth in Code Section 4980B.

1.8 “Code” shall mean the Internal Revenue Code of 1986 and any regulations, rulings or other official guidance issued pursuant thereto, all as amended and in effect from time to time.

1.9 “Company Transaction” shall mean the consummation of either (i) a merger or consolidation of the Company with or into any other company, entity or person or (ii) a sale, lease, exchange or other transfer of all or substantially all of the Company’s then outstanding securities or all or substantially all of the Company’s assets in one transaction or a series of related transactions undertaken with a common purpose; provided, however, that a Company Transaction shall not include a Related Party Transaction.

1.10 “Compensation Committee” means the Compensation Committee of the Board of Directors.

1.11 “Fiscal Year” shall mean the fiscal year of the Company.

1.12 “Good Reason” shall have the meaning set forth in Section 7.5.

1.13 “Inventions Agreement” shall mean the Employee Inventions and Proprietary Information Agreement, dated as of August 29, 2004, between the parties.

1.14 “Notice of Termination” shall have the meaning set forth in Section 4.4.

1.15 “Prior Agreement” shall mean the Employment Agreement, dated as of July 3, 2008, between the parties.

1.16 “Position” shall have the meaning set forth in Section 2.

1.17 “Related Party Transaction” shall mean (i) a merger or consolidation of the Company in which the holders of the outstanding voting securities of the Company immediately prior to the merger or consolidation hold at least a majority of the outstanding voting securities of the successor company immediately after the merger or consolidation; (ii) a sale, lease, exchange or other transfer of the Company’s assets to a majority-owned subsidiary company; (iii) a transaction undertaken for the principal purpose of restructuring the capital of the Company, including but not limited to, reincorporating the Company in a different jurisdiction or creating a holding company; or (iv) a corporate dissolution or liquidation.

1.18 “Successor Company” shall mean the surviving company, the successor company or its parent, as applicable, in connection with a Company Transaction.

1.19 “Term” shall have the meaning set forth in Section 4.1.

1.20 “Termination Date” shall have the meaning set forth in Section 4.5.

2. Employment

The Company employs Executive and Executive accepts employment as Chief Executive Officer of the Company (the “Position”), unless terminated earlier as provided upon the terms and conditions contained in this Agreement. Executive and the Company acknowledge that, except as otherwise may be provided under any other written agreement between Executive and the Company, the employment of Executive by the Company or its affiliated companies is “at will” and may be terminated by either Executive or the Company or its affiliated companies at any time with or without cause.

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3. Duties

During the Term, Executive shall serve the Company under the direction of the Board of Directors of the Company. Executive shall perform the duties of the Position faithfully, diligently and competently and to the best of Executive’s ability, and, except as provided in this Section 3, shall devote Executive’s full business time to Executive’s employment. Executive shall perform such other duties as are assigned to Executive by the Board of Directors of the Company. Executive may devote reasonable periods of time to (a) engaging in personal investment activities, (b) serving on the Board of Directors or Scientific Advisory Boards of other corporations with the consent of the Compensation Committee of the Board of Directors, if such service would not otherwise be prohibited by Section 8 hereof (it is understood and agreed that Executive may continue to serve as a member of the Board of Directors of Anadys Pharmaceuticals, Array Biopharma and Aerovance and as a member of the Scientific Advisory Board of Symphony Capital, and (c) engaging in charitable or community service activities, so long as none of the foregoing additional activities materially interfere with Executive’s duties under this Agreement.

4. Term; Termination

4.1 Term

The “Term” of this Agreement initially shall be for a period of two (2) years from the Effective Date; provided, however, that this Agreement shall renew automatically for successive additional one (1) year periods unless notice of non-renewal is given by either party to the other at least ninety (90) days prior to the end of the then current term; and provided further that if a Change in Control occurs during the Term, the Term shall automatically extend at least for the duration of the Change in Control Period.

4.2 Termination by the Company or Executive

The Company may terminate the employment of Executive, with or without Cause, at any time upon giving “Notice of Termination” (as defined below). Executive may terminate Executive’s employment at any time, for any reason, upon giving Notice of Termination.

4.3 Automatic Termination

This Agreement and Executive’s employment hereunder shall terminate automatically upon the death or Total Disability (as defined below) of Executive. The term “Total Disability” as used herein shall mean Executive’s inability to perform the duties set forth in Section 3 hereof for a period or periods aggregating ninety (90) calendar days in any twelve (12) month period as a result of physical or mental illness, loss of legal capacity or any other cause beyond Executive’s control, unless Executive is granted a leave of absence by the Board of Directors of the Company. Executive and the Company hereby acknowledge that Executive’s ability to perform the duties specified in Section 3 hereof is of the essence to this Agreement.

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4.4 Notice of Termination

The term “Notice of Termination” shall mean at least thirty (30) days’ written notice of termination, by either party, of Executive’s employment and of this Agreement, during which period Executive’s employment and performance of services shall continue; provided, however, that the Company may, upon notice to Executive and without reducing Executive’s compensation during such period, excuse Executive from any or all of Executive’s duties during such period. Such a reduction in duties shall not constitute Good Reason for termination so as to trigger termination payments in accordance with Sections 7.2 or 7.3.

4.5 Termination Date

The effective date of the termination (the “Termination Date”) means (a) if Executive’s employment is terminated by reason of death, at the end of the calendar month in which Executive’s death occurs, (b) if Executive’s employment is terminated by reason of Total Disability, immediately upon a determination by the Company of Executive’s Total Disability, and (c) in all other cases, the later of (i) thirty (30) days after the date on which the Company or Executive, as applicable, receives the Notice of Termination from the other party or (ii) the date specified in the Notice of Termination.

4.6 Survival

Sections 4, 7, 8, 9, 10, 14, 15, 16, 17, 18, 19, 20, 21, and 22 shall survive the termination of Executive’s employment and of this Agreement.

5. Compensation and Benefits

5.1 Salary

During the Term, the Company shall pay to Executive as compensation for the performance of Executive’s duties and obligations a salary of $550,000 per annum. This compensation is subject to annual review and adjustment, as appropriate in the judgment of the Company. The compensation payable pursuant to this Section 5.1 shall be payable in equal semi-monthly installments on the last day of each such pay period.

5.2 Standard Benefits

Executive shall be enrolled and participate in any retirement, group insurance and other fringe benefit plans and arrangements which are applicable to the similarly situated personnel of the Company and in effect from time to time, if Executive is eligible therefor, in each case in accordance with and subject to the provisions thereof.

5.3 Stock Options

(a) Executive has been granted stock options under the Company’s 2001 Stock Incentive Plan which allows Executive to purchase shares of the Company’s common stock; and

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(b) Executive shall be eligible to receive future periodic grants under the Company’s stock incentive programs.

5.4 Other Benefits

Executive also shall receive the following executive perquisites for the duration of this contract:

(a) Company-paid term life insurance policy in the amount of $200,000;

(b) Company-paid use of either a laptop computer or personal computer, to be upgraded biennially at the time this contract is renewed;

(c) Company-paid annual executive health physical, to be administered by a physician selected by the Company; and

(d) Company-paid expenses for a residential phone and cellular phone.

5.5 Change in Control Period

As long as Executive remains employed by the Company or a Successor Company during the Change in Control Period, the Company agrees to pay or cause to be paid to Executive, and Executive agrees to accept in exchange for the services rendered hereunder by Executive during the Change in Control Period, the following compensation:

(a) Executive shall receive an annual base salary at least equal to Executive’s annual base salary for the Fiscal Year in which the Change in Control Date occurs (as in effect immediately prior to the Change in Control Date). Executive’s annual base salary shall be paid in substantially equal installments and at the same intervals as the salaries of other executives of the Company are paid. During the Change in Control Period, the Board of Directors, the Compensation Committee or the Chief Executive Officer (as applicable) shall review Executive’s annual base salary at least annually and shall determine in good faith and consistent with any generally applicable Company policy any increases for future years.

(b) In addition to an annual base salary, for each Fiscal Year ending during the Change in Control Period, Executive shall be awarded an annual performance bonus (the “Annual Performance Bonus”) in cash at least equal to Executive’s target annual bonus for the Fiscal Year containing the Change in Control Date or, if such target annual bonus has not been set as of the Change in Control Date, Executive’s target annual bonus for the immediately preceding Fiscal Year; provided, however, that except as provided in Section 7.3(b), an Annual Performance Bonus shall be awarded for a Fiscal Year only if Executive is employed by the Company or a Successor Company on the last day of such Fiscal Year. Each Annual Performance Bonus shall be paid in the Fiscal Year following the Fiscal Year for which the Annual Performance Bonus is awarded, but no later than the fifteenth (15th) day of the third (3rd) month of such subsequent Fiscal Year, unless Executive elects to defer the receipt of the Annual Performance Bonus in accordance with the terms of the Company’s deferred compensation program.

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(c) Executive shall be entitled to participate in, subject to and in accordance with the eligibility and other terms and requirements thereof, such fringe benefit programs as generally are made available to other executives of the Company and its affiliated companies from time to time during the Change in Control Period, including, without limitation, paid vacations; any stock purchase, savings or retirement plan, practice, policy or program; and welfare benefit plans, practices, policies or programs (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans or programs).

6. Expenses

During the Term, all travel and other reasonable expenses incident to the rendering of service by Executive hereunder shall be paid by the Company subject to Company policy. If such expenses are paid in the first instance by Executive, the Company shall reimburse Executive upon presentation of proper expense accounts and supporting documentation. Reimbursement requests, along with supporting documentation, must be submitted within sixty (60) days after the date on which the expense for which reimbursement is being requested was incurred. Reimbursement shall be made no later than the date that is two and one-half months (2 ¹/2) months after the end of the Fiscal Year in which the expense was incurred.

7. Termination Payments

In the event of termination of the employment of Executive, all compensation and benefits set forth in this Agreement shall terminate except as specifically provided in this Section 7.

7.1 Termination for Cause or Other than for Good Reason

If during the Term Executive’s employment is terminated by the Company for Cause or by Executive for other than Good Reason, this Agreement shall terminate without further obligation on the part of the Company to Executive, other than the Company’s obligation to pay (as provided in Section 7.8(a)) Executive the following accrued obligations (the “Accrued Obligations”):

(a) Executive’s then current annual base salary through the Termination Date;

(b) any Annual Performance Bonus to which Executive is entitled pursuant to Section 5.5(b) (i.e., a bonus paid for a Fiscal Year ending during the Change in Control Period if Executive was employed by the Company or a Successor Company on the last day of such Fiscal Year);

(c) any compensation previously deferred by Executive (together with accrued interest or earnings thereon, if any); and

(d) any accrued vacation pay that would be payable under the Company’s standard policy;

in each case, to the extent not theretofore paid.

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7.2 Termination Other than for Cause or for Good Reason NOT During Change in Control Period

Subject to Section 9, if at any time during the Term, except during the Change in Control Period, the Company terminates Executive’s employment other than for Cause or Executive terminates Executive’s employment for Good Reason, Executive shall be entitled to:

(a) any Accrued Obligations to the extent theretofore unpaid;

(b) if, as a result of the termination of Executive’s employment, Executive and Executive’s spouse and dependent children are eligible for and timely (and properly) elect COBRA continuation coverage under the Company’s group health plan(s), the Company shall pay the premium for such coverage for a period of twelve (12) months following the Termination Date, until Executive becomes covered under a comparable group health plan, or until Executive is no longer entitled to COBRA continuation coverage under the Company’s group health plan(s), whichever period is the shortest, but only to the extent that the Company would have paid such premiums had Executive remained employed by the Company;

(c) severance payments equal, in the aggregate, to one (1) times Executive’s annual base salary as of the date of the Notice of Termination, payable as provided in Section 7.8(b).

7.3 Termination Other than for Cause or for Good Reason During Change in Control Period

Subject to Section 9, if during the Change in Control Period, the Company terminates Executive’s employment other than for Cause or Executive terminates Executive’s employment for Good Reason, Executive shall be entitled to:

(a) any Accrued Obligations to the extent theretofore unpaid;

(b) a bonus for the Fiscal Year that contains the Termination Date, which bonus shall not be less than the Annual Performance Bonus multiplied by a fraction, the numerator of which is the number of days in such Fiscal Year up to and including the Termination Date and the denominator of which is three hundred sixty-five (365), payable as provided in Section 7.8(c). This Section 7.3(b) shall not apply if Executive is entitled to an Annual Performance Bonus pursuant to Section 5.5(b) for the Fiscal Year containing the Termination Date;

(c) if, as a result of the termination of Executive’s employment, Executive and Executive’s spouse and dependent children are eligible for and timely (and properly) elect COBRA continuation coverage under the Company’s group health plan(s) pursuant to COBRA, the Company shall pay the premium for such coverage for a period of twelve (12) months following the Termination Date, until Executive becomes covered under a comparable group health plan, or until Executive is no longer entitled to COBRA continuation coverage under the Company’s group health plan(s), whichever period is the shortest, but only to the extent that the Company would have paid such premiums had Executive remained employed by the Company;

(d) immediate vesting of all outstanding stock options previously granted to Executive by the Company;

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(e) an amount as severance pay equal to the sum of (i) two (2) times the Annual Performance Bonus and (ii) two (2) times Executive’s annual base salary as of the date of the Notice of Termination, payable as provided in Section 7.8(c).

7.4 Termination as a Result of Death or Total Disability

In the event of termination of Executive’s employment pursuant to Section 4.3, Executive or Executive’s estate shall be paid the compensation set forth in Section 7.1.

7.5 Good Reason

(a) “Good Reason” shall mean the occurrence of any of the following conditions, without the consent of Executive:

(i) a demotion or other material reduction in the nature or status of Executive’s responsibilities; provided, however, that a change in the person or office to which Executive reports, without a corresponding reduction in duties, status and responsibilities, shall not constitute “good reason;”

(ii) a reduction in the Executive’s annual base salary;

(iii) requirement by a Successor Company that the Executive relocate his principal place of employment to a location that is more than fifty (50) miles from the principal place of employment where Executive was employed;

(iv) the failure of Company to obtain a satisfactory agreement from any Successor Company to assume and perform the obligations under this Agreement within thirty (30) calendar days after the consummation of a merger, consolidation, sale or similar transaction;

(v) following a Change in Control (as defined in Section 7.6 ), the Executive ceases to hold the positions of Chief Executive Officer of the parent or combined entity resulting from such Change in Control; or

(vi) even if there is no Change in Control, but the Company enters into a merger, partnership or similar transaction, which results in a person other than the Executive becoming Chief Executive Officer of the new combined entity.

(b) Notwithstanding any provision in this Agreement to the contrary, termination of employment by Executive will not be for Good Reason unless (i) Executive notifies the Company or the Successor Company in writing of the existence of the condition which Executive believes constitutes Good Reason within ninety (90) days of the initial existence of such condition (which notice specifically identifies such condition), (ii) the Company or the Successor Company fails to remedy such condition within thirty (30) days after the date on which it receives such notice (the “Remedial Period”), and (iii) Executive actually terminates employment within thirty (30) days after the expiration of the Remedial Period and before the Company or the Successor Company remedies such condition. If Executive terminates employment before the expiration of the Remedial Period or after the Company or the Successor Company remedies the condition (even if after the end of the Remedial Period), then Executive’s termination will not be considered to be for Good Reason. Executive may combine the notice required by this Section 7.5(b) with the Notice of Termination.

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7.6 Cause

Wherever reference is made in this Agreement to termination being with or without Cause, “Cause” shall include, without limitation, the occurrence of one or more of the following events:

(a) willful misconduct or insubordination in the performance of Executive’s duties or other knowing and material violation of the Company’s policies and procedures in effect from time to time which results in a material adverse effect on the Company;

(b) willful actions in bad faith (or intentional failures to act) by Executive with respect to the Company that materially impair the Company’s business, goodwill or reputation;

(c) current abuse by Executive of controlled substances; deception, fraud, misrepresentation or dishonesty by Executive; or any incident materially compromising Executive’s reputation or ability to represent the Company with investors, customers or the public;

(d) conviction of Executive of a felony involving an act of dishonesty, moral turpitude, deceit or fraud, or the commission or omission of acts that could reasonably be expected to result in such a conviction; or

(e) any material violation by Executive of this Agreement or the Inventions Agreement with the Company, subject to the notice and opportunity-to-cure requirements of Section 11 hereof.

7.7 Change in Control

As used herein, a “Change in Control” shall mean any of the following events or occurrences, provided such event or occurrence also constitutes a change in ownership or effective control of the Company, or in the ownership of a substantial portion of the Company’s assets, within the meaning of Code Section 409A(a)(2)(A)(v):

(a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”), either directly or indirectly through one or more affiliated entities (collectively “Series B Purchasers”), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either (x) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this Section 7.7(a), the following acquisitions shall not constitute a Change in Control: (A) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or (B) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of Section 7.7(b); or

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(b) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination: (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than fifty percent (50%) of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries), (B) no Person (excluding (1) any one or more Series B Purchasers, (2) any corporation resulting from such Business Combination, or (3) any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, fifty percent (50%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the Board of Directors of the corporation resulting from such Business Combination were members of the incumbent Board of Directors of the Company at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination;

(c) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company; or

(d) A “Board Change” that, for purposes of this Agreement, shall have occurred if, during any twelve (12) month period, a majority of the members of the Company’s Board of Directors is replaced by directors whose appointment or election is not endorsed by a majority of the members of the Company’s Board of Directors before the date of the appointment or election.

7.8 Payment Schedule

(a) All payments of Accrued Obligations, or any portion thereof payable pursuant to this Section 7, other than deferred compensation, shall be made to Executive within ten (10) working days of the Termination Date. Deferred compensation pursuant to Section 7.1(b) shall be payable pursuant to the terms of the deferred compensation plan, program or arrangement pursuant to which it was deferred.

(b) Subject to Section 21, the payments payable to Executive pursuant to Section 7.2(c) shall be paid to Executive in equal installments on each of the Company’s semi-monthly pay days during the twelve (12) month period immediately following the Termination Date, subject to the following:

(i) If Code Section 409A does not apply to the payments that would be made during the first sixty (60) days following the Termination Date, then payments shall begin as of the first semi-monthly pay day following the date on which Executive’s release under Section 9(a) becomes effective. The initial payment shall include any such installments that would have been paid prior to such pay day had payments commenced on the first semi-monthly pay day following the Termination Date; and

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(ii) If Code Section 409A applies to the payments that would be made during the first sixty (60) days following the Termination Date, then payments shall begin as of the first semi-monthly pay day following the sixtieth (60th) day after the Termination Date. The initial payment shall include any such installments that would have been paid prior to such pay day had payments commenced on the first semi-monthly pay day following the Termination Date.

For purposes of Code Section 409A, each installment payable pursuant to Section 7.2(c) and this Section 7.8(b) shall be treated as a separate payment.

(c) Subject to Section 21, any payments payable to Executive pursuant to Sections 7.3(b) and (e) shall be made to Executive in a lump sum on the first business day following the date on which Executive’s release under Section 9(a) becomes effective, unless any portion of such payments is subject to Code Section 409A, in which case they shall be made on the first business day that is at least sixty-one (61) days following the Termination Date.

7.9 Parachute Payments.

(a) Notwithstanding any other provision in this Agreement, in the event any payments or benefits Executive receives or would become entitled to receive from the Company, any person whose actions result in a Change in Control or any person affiliated with the Company or such person (in the aggregate, the “Payments”) would (i) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code or any similar or successor provision (the “Excise Tax”), then the amount of the Payments shall be equal to either (x) the largest portion of the Payments that would result in no portion of the Payments being subject to the Excise Tax (the “Reduced Amount”), or (y) the full amount of the Payments, whichever of the foregoing amounts, after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest marginal rate applicable to individuals in the year in which the Payments are to be made), results in Executive’s receipt, on an after-tax basis, of the greatest amount of the Payments notwithstanding that all or some portion of the Payments may be subject to the Excise Tax. If a reduction in the Payments is required so that the amount of the Payments equals the Reduced Amount, the Payments shall be reduced in the following order: (1) reduction of cash Payments otherwise payable to Executive that are exempt from Section 409A of the Code; (2) cancellation of accelerated vesting of equity awards (other than stock options) that are exempt from Section 409A of the Code; (3) cancellation of accelerated vesting of stock options that are exempt from Section 409A of the Code; (4) reduction of any other payments and benefits otherwise payable to Executive that are exempt from Section 409A of the Code; and (5) reduction of any other

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benefits and payments otherwise payable to Executive on a pro-rata basis or such other manner that complies with Section 409A of the Code, as determined by the Company. If acceleration of vesting of Executive’s stock options or other equity awards is to be reduced pursuant to clauses (2) or (3) of the immediately preceding sentence, such acceleration of vesting shall be cancelled by first canceling such acceleration for the vesting installment that will vest last and continuing by canceling as a first priority such acceleration for the vesting installment with the latest vesting.

(b) All computations and determinations called for by this Section 7.9 shall be made and reported in writing to the Company and Executive by an independent accounting firm or independent tax counsel appointed by the Company (the “Tax Advisor”), and all such computations and determinations shall be conclusive and binding on the Company and Executive. For purposes of such calculations and determinations, the Tax Advisor may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and Executive shall furnish to the Tax Advisor such information and documents as the Tax Advisor may reasonably request in order to make their required calculations and determinations. The Company shall bear all fees and expenses charged by the Tax Advisor in connection with its services.

7.10 Withholding

The Company may deduct from any amounts payable under this Agreement, any amounts that it is required by law to withhold, including, without limitation, social security taxes, federal and state income taxes, and state disability insurance; provided, however, that any and all such obligations shall be Executive’s responsibility.

8. Non-competition and Non-solicitation

8.1 Non-competition

During the Term and for a period of twelve (12) months after the Termination Date, Executive shall not directly or indirectly work or otherwise engage in research, development, manufacture, sale or distribution of any product, method or matter:

(a) For any business, whose commercial efforts are in competition with the products manufactured or marketed by the Company during Executive’s employment with the Company or under research or development by the Company during Executive’s employment with the Company (and on which the Company has expended at least $500,000); or

(b) For any research institution whose research efforts pertain to the same products manufactured or marketed by the Company during Executive’s employment with the Company or under research or development by the Company during Executive’s employment with the Company (and on which the Company has expended at least $500,000), unless Executive is not involved in any manner in the design, conduct or supervision of such research efforts, or unless such research is being conducted solely for scientific and not for commercial purposes.

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Executive shall be deemed to be engaged in a business if such business is carried on by partnership in which Executive is a general or limited partner, consultant or employee, or a corporation or association of which Executive is a shareholder, officer, director, employee, member, consultant or agent; provided, that nothing herein shall prevent the purchase or ownership by Executive of shares of less than one percent (1%) of the outstanding shares in a publicly or privately held corporation.

Said twelve (12) months’ period shall commence on the day on which Executive actually leaves Executive’s employment with the Company, even if this date is prior to the expiration of any given Notice of Termination.

8.2 Waiver of Non-competition

The Company’s Board of Directors may, at its own discretion, by express or written consent, release Executive from the restriction in Section 8.1.

8.3 Non-solicitation

During the Term and for a period of one (1) year after the Termination Date, Executive shall not personally or through others (a) recruit, solicit or induce in any way any employee, advisor or consultant of the Company to terminate his, her or its relationship with the Company or to engage in activities competitive with the Company, (b) hire or attempt to hire for any purpose, as an employee, agent, consultant or contractor, any person who then is an employee of the Company, or (c) solicit, induce or encourage in any way any customers (that Executive sold to, serviced or solicited on behalf of the Company), strategic partners, contractors, suppliers, or vendors to terminate or reduce their relationships with the Company or to refrain from entering or expanding any business or relationship with the Company.

9. General Release of Claims and Compliance by Executive

(a) As a condition to the payments and benefits contemplated by Section 7 (other than Accrued Obligations), Executive must execute (and not later revoke) a general release and waiver of claims against the Company in a form satisfactory to the Company in its sole discretion. By way of example and not limitation, the general release and waiver of claims will include any claims for wages, bonuses, employment benefits, or damages of any kind whatsoever, arising out of any contracts, express or implied, any covenant of good faith and fair dealing, express or implied, any theory of wrongful discharge, any legal restriction on the Company’s right to terminate employment, or any federal, state or other governmental statute or ordinance, including, without limitation, Title VII of the Civil Rights Act of 1964, the federal Age Discrimination in Employment Act, the Americans with Disabilities Act, the Family and Medical Leave Act, the Washington Law Against Discrimination, or any other legal limitation on the employment relationship. Such release and waiver must be executed and effective (and the applicable revocation period must have expired without the release and waiver being revoked) not more than sixty (60) days after the Termination Date or Executive shall not be entitled to any such payments or benefits.

(b) In addition, the payments and benefits contemplated by Section 7 (other than Accrued Obligations) are expressly contingent upon Executive’s full compliance with Executive’s obligations towards the Company, including, without limitation, the terms of the Inventions Agreement and the non-competition provision of Section 8.1. In the event Executive materially

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breaches the Inventions Agreement or Section 8.1, Executive’s right to any payments or benefits under Section 7 (including those that have already been made or provided), other than Accrued Obligations, shall be forfeited and extinguished, regardless of whether the Company takes legal action or otherwise tries to enforce its rights. In such event, the Company shall cease payments, and Executive shall immediately return to the Company any payments already made. The Company reserves all rights it may have under contract or law to relief or damages in addition to termination of the above-described payments.

10. Return of Materials

All documents, records, notebooks, notes, memoranda, drawings or other documents made or compiled by Executive at any time while employed by the Company, or in Executive’s possession, including any and all copies thereof, shall be the property of the Company and shall be held by Executive in trust and solely for the benefit of the Company, and shall be delivered to the Company by Executive upon termination of employment or at any other time upon request by the Company.

11. Notice and Cure of Breach

Except as provided otherwise in Section 7.5(b), whenever a breach of this Agreement by either party is relied upon as justification for any action taken by the other party pursuant to any provision of this Agreement, other than clauses (a), (b), or (c) of Section 7.6, before such action is taken, the party asserting the breach of this Agreement shall give the other party at least twenty (20) days’ prior written notice of the existence and the nature of such breach before taking further action hereunder and shall give the party purportedly in breach of this Agreement the opportunity to correct such breach during the twenty (20) day period.

12. No Violation of Other Agreements

In order to induce the Company to enter into this Agreement, Executive represents and warrants to the Company that neither the execution nor the performance of this Agreement by Executive shall violate or conflict in any way with any other agreement or obligations by which Executive may be bound.

13. Rights of Assignment or Delegation

This Agreement is personal to Executive and shall not be assignable by Executive. The Company may assign its rights hereunder to (a) any corporation resulting from any merger, consolidation, or other reorganization to which the Company is a party or (b) any corporation, partnership, association, or other person to which the Company may transfer all or substantially all of the assets in business of the Company existing at such time. As used in this Agreement, “Company” shall mean ZymoGenetics, Inc. and any successor to its business and/or assets that assumes and agrees to perform this Agreement by operation of law, or otherwise. All the terms and provisions of this Agreement shall be binding upon and shall inure to the benefit and be enforceable by the parties hereto and their respective heirs, legal or personal representatives, successors and permitted assigns.

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14. Waiver

No delay or failure by any party in exercising, protecting or enforcing any of its rights, titles, interests, or remedies hereunder and no course of dealing or performance with respect thereto, shall constitute a waiver. The express waiver by a party of any right, title, interest, or remedy in a particular instance or circumstance shall not constitute a waiver in any other instance or circumstance. All rights and remedies shall be cumulative and not exclusive of any rights or remedies.

15. Arbitration

Any controversies or claims arising out of or relating to this Agreement shall be settled finally and fully by arbitration in Seattle, Washington in accordance with the Employment Arbitration Rules of the American Arbitration Association then in effect (the “AAA Rules”), conducted by one arbitrator, mutually agreed upon by the Company and Executive or chosen in accordance with the AAA Rules, except the parties thereto shall have any right to discovery that would be permitted by the Federal Rules of Civil Procedure for a period of ninety (90) days following the commencement of such arbitration and the arbitrator shall resolve any dispute which arises in connection with such discovery. The prevailing parties shall be entitled to costs, expenses, reasonable attorneys’ fees, and judgment upon the award rendered by the arbitrator. The award may be entered in any court having jurisdiction. To the extent necessary to prevent Executive from being subject to any additional tax pursuant to Code Section 409A(a)(1)(B), any amounts payable to Executive pursuant to this paragraph shall be paid in no event later than the year following the year during which such costs and fees were incurred.

16. Amendments in Writing

No amendment, modification, waiver, termination or discharge of any provision of this Agreement, nor consent to any departure by either party, shall in any event be effective unless the same shall be in writing, specifically identifying this Agreement and the provision intended to be amended, modified, waived, terminated, or discharged and assigned by the Company and Executive. Each such amendment, modification, waiver, termination, or discharge shall be effective only in the specific instance and for the specific purpose for which given. No provision of this Agreement shall be varied, contradicted, or explained by any oral agreement, course of dealing or performance or any other matter not set forth in agreement in writing and signed by the Company and Executive.

17. Notices

Any notice required or desired to be given hereunder shall be in writing and shall be deemed sufficiently given when delivered or when mailed by first class certified or registered mail, postage prepaid, to the party for whom intended at the following address:

To the Company:

Chairman of the Board

ZymoGenetics, Inc.

1201 Eastlake Avenue East

Seattle, WA 98102

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To Executive:

Douglas E. Williams

21800 Nootka Road

Woodway, WA 98020

or to such other address, as to either party, as such party shall from time to time designate by like notice to the other.

18. Entire Agreement

This Agreement supersedes and replaces the Prior Agreement and constitutes the entire agreement between the Company and Executive with respect to the subject matter hereof, and all prior or contemporaneous oral or written communications, understandings or agreements between the Company and Executive with respect to such subject matter, are hereby superseded and nullified in their entireties, except that the Inventions Agreement shall continue in full force and effect.

19. Governing Law

This Agreement is made under and shall be governed by and construed in accordance with the laws of the State of Washington (without regard to any rules governing conflict of laws), except to the extent preempted by Federal law.

20. Severability

If any provision of this Agreement shall be held invalid, illegal or unenforceable in any jurisdiction, for any reason, including without limitation, the duration of such provision, its geographical scope or the extent of the activities prohibited or required by it, then, to the full extent permitted by law (a) all other provisions hereof shall remain in full force and effect and such provision shall be liberally construed in order to carry out the intent of the parties as nearly as may be possible, (b) such invalidity, illegality, or unenforceability shall not affect the validity, legality or enforceability of any other provision, and (c) any court or arbitrator having jurisdiction thereover shall have the power to reform such provision to the extent necessary for such provision to be enforceable under applicable law.

21. 409A Interpretation Provision

The parties intend that this Agreement and the benefits provided hereunder be exempt from the requirements of Code Section 409A to the maximum extent possible, whether pursuant to the short-term deferral exception described in Treasury Regulation Section 1.409A-1(b)(4), the involuntary separation pay plan exception described in Treasury Regulation Section 1.409A-1(b)(9)(iii), or otherwise. To the extent Code Section 409A is applicable to this Agreement, the parties intend that this Agreement comply with the deferral, payout and other limitations and restrictions imposed under Code Section 409A. Notwithstanding any other provision of this Agreement to the contrary, this Agreement shall be interpreted, operated and administered in a manner consistent with such intentions. Without limiting the generality of the foregoing, and notwithstanding any other provision of this Agreement to the contrary, with respect to any

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payments and benefits under this Agreement to which Code Section 409A applies, all references in this Agreement to the termination of Executive’s employment are intended to mean Executive’s “separation from service,” within the meaning of Code Section 409A(a)(2)(A)(i). In addition, if Executive is a “specified employee,” within the meaning of Code Section 409A, then to the extent necessary to avoid subjecting Executive to the imposition of any additional tax under Code Section 409A, amounts that would otherwise be payable under this Agreement during the six (6) month period immediately following Executive’s “separation from service,” within the meaning of Code Section 409A(a)(2)(A)(i), shall not be paid to Executive during such period, but shall instead be accumulated and paid to Executive (or, in the event of Executive’s death, Executive’s estate) in a lump sum on the first business day after the earlier of the date that is six (6) months following Executive’s separation from service or Executive’s death. If the Company or Executive determines that any provision of this Agreement is or might be inconsistent with the requirements of Code Section 409A, the parties shall attempt in good faith to agree on such amendments to this Agreement as may be necessary or appropriate to avoid subjecting Executive to the imposition of any additional tax under Code Section 409A. Notwithstanding the foregoing, no provision of this Agreement shall be interpreted or construed to transfer any liability for failure to comply with Code Section 409A from Executive or any other individual to the Company or any of its affiliates.

22. Multiple Copies

This Agreement may be executed in two (2) or more counterparts of like tenor and effect, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the parties have executed and entered into this Agreement as of the Effective Date.

ZYMOGENETICS, INC.
By:	/s/ Bruce L.A. Carter
	Bruce L.A. Carter, Ph.D.
	Chairman

EXECUTIVE

/s/ Douglas E. Williams

Douglas E. Williams

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EX-10.37

Exhibit 10.37

*  Confidential Treatment has been requested for the marked portions of this exhibit pursuant to Rule 24B-2 of the Securities Exchange Act of 1934, as amended.

THIRD RESTATED LICENSE AGREEMENT

FOR IL-21 EMBODIMENTS

by and between

ZymoGenetics, Inc.,

and

Novo Nordisk A/S

Effective Date: December 3, 2009

CONTENTS

ARTICLE ONE Definitions and Terminology			1
1.1	Definitions		1
1.2	Terminology		11
ARTICLE TWO License			11
2.1	License Grant		11
2.2	Nonexclusive License Grant – IL-21 Protein		11
2.3	Sublicensing by NN		11
2.4	ZGEN Reservation of Rights		12
2.5	Transition Plan		12
2.6	Development		12
2.7	Commercialization		13
2.8	[*] Technology		13
ARTICLE THREE Upfront and Milestone Fees			14
3.1	Execution Fee		14
3.2	Milestone Fees		14
3.3	Milestone Fees under [*] Agreement		15
ARTICLE FOUR Royalties			15
4.1	Patent Products		15
4.2	Know-How Products		16
4.3	Not Additive; Aggregation		16
4.4	Third Party Agreements		16
	4.4.1	General	16
	4.4.2	Royalties under [*] Agreement	17
4.5	Generic Products		17
4.6	Additive Offsets; Minimum Royalties		17
4.7	Payments and Reports		18
4.8	Taxation of Payments		18
4.9	Currency Blockage		19
ARTICLE FIVE Co-Funding Phase III Clinical Development and USA Co-Promotion			19
5.1	Election to Co-Fund		19
5.2	Procedure		19
5.3	Consequences of Election to Co-Fund		19
	5.3.1	Cost Sharing	19
	5.3.2	Royalties on Net Sales in the USA	19
	5.3.3	ZGEN’s Right to Co-Promote in USA	20
5.4	Phase III Costs		20
	5.4.1	Cost Sharing of Phase III Costs	20
	5.4.2	Accounting and Reconciliation	20
5.5	Co-Promotion in USA		22

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* Confidential Treatment Requested.

	5.5.1	USA Co-Promotion Agreement	22
	5.5.2	Right to Co-Promote	22
5.6	ZGEN’s Right to Opt Out of Co-Funding		23
ARTICLE SIX Relationship Management			23
6.1	Joint Executive Committee		23
	6.1.1	Formation; Composition; Decisions	23
	6.1.2	Role and Responsibilities	24
	6.1.3	Meetings and Communications	24
6.2	Development and Commercialization Plan		24
6.3	Alliance Managers		25
	6.3.1	Appointment	25
	6.3.2	Responsibilities	25
6.4	Finance Contacts		26
ARTICLE SEVEN Confidentiality			26
7.1	Confidential Information		26
7.2	Confidentiality Obligation		27
7.3	Release from Confidentiality Obligation		27
ARTICLE EIGHT Indemnification			28
8.1	Personal Injury or Property Damage		28
8.2	Insurance		28
ARTICLE NINE Patents			29
9.1	Prosecution		29
9.2	Patent Term Extension		30
9.3	Notice of Infringement and Conference		31
9.4	ZGEN Has First Right		31
9.5	NN Has Secondary Right		32
9.6	Settlement		33
9.7	Patent Contacts		33
9.8	Cooperation		33
9.9	Affiliates, Commercialization Partners and Sublicensees		34
9.10	Filing, Prosecution, Maintenance of Cell Line Patents and Construction Strain Patents		34
9.11	Filing, Prosecution, Maintenance of Patents and Patent Applications arising from Work Performed pursuant to Annual Plan or Long Range Plan		34
ARTICLE TEN Term and Termination			34
10.1	Term and Expiration		34
10.2	Termination by NN for Convenience		34
10.3	Safety Reasons		35
10.4	Insolvency		35
10.5	Breach		35

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10.6	Termination of License With Respect to Contested Patent Rights	36
10.7	Effect of Expiration or Termination	36
10.8	Survival of Obligations under Second Restated License Agreement	36
10.9	Return of Project Following Termination	36
ARTICLE ELEVEN Representations and Warranties		37
11.1	Representations, Warranties and Covenants of NN	37
11.2	Representations, Warranties and Covenants of ZGEN	38
11.3	Warranty Disclaimer	39
11.4	Limited Liability	39
ARTICLE TWELVE Miscellaneous		39
12.1	Assignment	39
12.2	Relationship between the Parties	40
12.3	Public Announcements	40
12.4	Use of Names, Trade Names and Trademarks	41
12.5	Force Majeure	41
12.6	Governing Law	41
12.7	Waiver of Remedies	41
12.8	Entire Agreement	41
12.9	Notices	42
12.10	Severability	42
12.11	Headings	42
12.12	Review of Agreement	42
12.13	Compliance with Laws; Export Regulations	43
12.14	[*]	43
12.15	Counterparts	43

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* Confidential Treatment Requested.

LIST OF SCHEDULES AND APPENDICES
Schedule 1	Illustrative List of Items to be Transferred in Accordance with Section 2.5 – Transition Plan
Schedule 2	Press Release
Schedule 3	Description of Certain Sales Incentives Referenced in the
	Definition of Net Sales
Appendix 1	IL-21 Related Patents, Cell Line Patents and Construction Strain Patents
Appendix 2	[*] Agreement
Appendix 3	Principal Terms of USA Co-Promotion Agreement
Appendix 4	Novo Nordisk Invoice Instructions
Appendix 5	List of Countries Pursuant to Section 9.1
Appendix 6	[*]

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* Confidential Treatment Requested.

THIRD RESTATED LICENSE AGREEMENT

FOR IL-21 EMBODIMENTS

This Third Restated License Agreement for IL-21 Embodiments (as defined herein) (“Agreement”) is entered into as of December 3, 2009 (“Effective Date”) by and between ZymoGenetics, Inc., a Washington corporation (“ZGEN”), and Novo Nordisk A/S, a Danish corporation (“NN”).

RECITALS

A. ZGEN and NN were parties to an Option and License Agreement, effective as of November 10, 2000 (as amended, the “Option Agreement”).

B. Pursuant to the Option Agreement, NN exercised its option to receive an exclusive license to various embodiments of IL-21 and ZGEN and NN entered into a License Agreement for IL-21, effective as of August 21, 2001 (the “Original License Agreement”), that covered a territory comprising all the countries of the world other than USA, Canada and Mexico.

C. ZGEN and NN entered into a Restated License Agreement for IL-21, effective as of January 1, 2003 (the “Restated License Agreement”), that superseded the Original License Agreement and added to the intellectual property subject to the license.

D. ZGEN and NN entered into a Second Restated License Agreement for IL-21, effective as of January 16, 2009 (the “Second Restated License Agreement”), that superseded the Restated License Agreement and removed certain embodiments of IL-21 from the license.

E. ZGEN and NN desire to supersede the Second Restated License Agreement with this Agreement, which further adds to the intellectual property subject to the license and expands the territory to include all the countries of the world.

AGREEMENT

NOW, THEREFORE, the parties, intending to be legally bound, agree as follows:

ARTICLE ONE

Definitions and Terminology

1.1 Definitions

In addition to other terms defined elsewhere in this Agreement, words and phrases with initial capitals shall have the meanings stated in this Section 1.1.

1.1.1 “Ab Embodiment of IL-21 Product” means: a Product based on an Ab Embodiment of IL-21.

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1.1.2 “Affiliate” means: with respect to a party, any other business entity which directly or indirectly controls, is controlled by or is under common control with the party. The direct or indirect ownership of at least fifty percent (50%) or, if smaller, the maximum allowed by applicable law, of the voting securities of a business entity or of an interest in the assets, profits or earnings of a business entity shall be deemed to constitute control of the business entity. For the avoidance of doubt, ZGEN and NN are not (as of the Effective Date) Affiliates of each other. Notwithstanding the above, the Novo Nordisk Foundation, Novo A/S and Novozymes A/S shall not be considered Affiliates of NN; provided that any transfers of Product by NN to any of such entities shall be at an arm’s length price.

1.1.3 “Agency” means: the FDA, the EMEA or foreign equivalent of either.

1.1.4 “Annual Plan” is defined in Section 6.2.

1.1.5 “Antisense Embodiment of IL-21 Product” means: a Product based on an Antisense Embodiment of IL-21.

1.1.6 “Applicable Phase IIIB Costs” means: costs incurred by NN or for its account (including costs incurred outside of the USA and the European Union) that are attributable to trials conducted to support the registration of a Product in the USA and/or European Union that are required by an Agency for the granting of the Regulatory Approval. This includes trials or long-term extensions of Phase III trials conducted in order to [*] in the [*] at the [*] The post-approval commitments (if any) [*]

1.1.7 “Bankruptcy Code” is defined in Section 10.4.

1.1.8 “BLA” means: a Biologics License Application, New Drug Application or an application for any other approval from the FDA required to market a Product in the USA or a non-USA equivalent of any of the foregoing filed with an Agency.

1.1.9 “Business Day” means: any day other than a Saturday, Sunday or other day on which commercial banks in Seattle, Washington or Copenhagen, Denmark are authorized or required by applicable law to close.

1.1.10 “Candidate Antibody” means: the Ab Embodiment of IL-21 that constitutes ZGEN’s current development candidate.

1.1.11 “Cell Line Patents” means: the patents and patent applications set forth in Part B of Appendix 1.

1.1.12 “Commercialization Rights” means, subject to the terms and conditions of this Agreement, including ZGEN’s right to make an Election to Co-Fund: (a) the right to conduct research, use, sample, develop (including clinical development), manufacture, promote, market, offer to sell, import, export, distribute, sell, and have sold Products, including the use of , contract research organizations; and (b) the right to conduct research, use, sample, develop (including clinical development), manufacture, promote, market, offer to sell, import, export,

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* Confidential Treatment Requested.

distribute, sell and have sold Products together with one or more third parties as part of a co-marketing agreement, strategic partnership, joint venture relationship or the like in which NN or its Affiliate continues work on research and development of Products; and (c) the right to sublicense one or more third parties to manufacture, promote, market, offer to sell, import, export, distribute, sell or have sold Products.

1.1.13 “Commercialization Partner” means: a third party to whom NN has extended rights consistent with Section 1.1.12(b).

1.1.14 “Construction Strain Patents” means: the patents and patent applications set forth in Part C of Appendix 1.

1.1.15 “Control” or “Controlled” means: with respect to a particular item of information or any intellectual property right or other tangible or intangible property, the entity referenced has the ability to exploit and to license or sublicense the right to exploit the referenced technology or rights, without violating the terms of any agreement or any other arrangement between the entity referenced and a third party.

1.1.16 “[*]” is defined in Section 2.8(c).

1.1.17 “Election to Co-Fund” is defined in Section 5.1.

1.1.18 “EMEA” means: the European Medicines Evaluation Agency or any successor agency thereto.

1.1.19 “FDA” means: the United States Food and Drug Administration or any successor agency thereto.

1.1.20 “First Indication” means: the first disease that a Product is intended to treat.

1.1.21 “FTE” means a total of [*] weeks or [*] hours per year of work on the development or commercialization of Products carried out by employees of a party having the appropriate relevant expertise to conduct such activities.

1.1.22 “FTE Rate” for both parties until December 31, 2009 will be [*] dollars. Thereafter, the FTE Rate will be adjusted annually by a percentage equal to the amount, if any, by which the Consumer Price Index for All Urban Consumers, United States City Average, All Items, Not Seasonally Adjusted (Base Period 1982-84 = 100) as published by the United States Department of Labor, Bureau of Labor Statistics immediately prior to the time of an adjustment differs from such Consumer Price Index as published immediately prior to January 1, 2009. Adjustments shall take place annually on January 1 of each year thereafter. If such Consumer Price Index is discontinued, unavailable or otherwise substantially revised, a comparable index shall be used.

1.1.23 “Generic Product” means: any product marketed by a third party that is not an Affiliate, Commercialization Partner or Sublicensee, that (i) contains the same active pharmaceutical ingredient as the Patent Product marketed by NN or its Affiliates,

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* Confidential Treatment Requested.

Commercialization Partners or Sublicensees and (ii) does not significantly differ from such Patent Product in formulation, quality or effectiveness. For the avoidance of doubt, where the active pharmaceutical ingredient contained in the Patent Product is an Ab Embodiment of IL-21 or an IL-21 Antagonist Protein, then a Generic Product shall be considered to have the “same active pharmaceutical ingredient as the Patent Product” when the active pharmaceutical ingredient in the Generic Product has the same sequence as the Ab Embodiment of IL-21 or the IL-21 Antagonist Protein contained in the Patent Product.

1.1.24 “GT Embodiment of IL-21 Product” means: a Product based on a GT Embodiment of IL-21.

1.1.25 “IL-21 Antagonist Protein” means: a protein, and all species, fragments and modifications of such polypeptide sequence, encoded by an IL-21 Gene that (i) act solely as an antagonist protein on the IL-21 receptor (i.e., such protein binds the receptor but does not elicit receptor signaling), and (ii) competitively inhibits the binding of IL-21 Protein on the IL-21 receptor.

1.1.26 “IL-21 Antagonist Protein Product” means: a Product based on an IL-21 Antagonist Protein.

1.1.27 “IL-21 Embodiment” means: one or more of the following:

(a) an IL-21 Gene;

(b) “GT Embodiments of IL-21”, which are further defined as gene therapy vectors or constructs capable of expressing the IL-21 Protein in vivo;

(c) “Ab Embodiments of IL-21”, which are further defined as a polypeptide (including a monoclonal antibody or fusion protein) or any fragment or derivative thereof that binds to IL-21 Protein;

(d) “Antisense Embodiments of IL-21”, which are further defined as natural or modified polynucleotides, such as triple helix variants or alternative chemistries, that interfere with expression of the IL-21 Protein; or

(e) an IL-21 Antagonist Protein.

1.1.28 “IL-21 Gene” means: the polynucleotide sequence identified in SEQ ID No. [*] in International application number [*], published as [*], and all species, fragments and modifications of such polynucleotide sequence that are disclosed in such application or any patents or patent applications included in Appendix 1.

1.1.29 “IL-21 Gene Product” means: a Product based on an IL-21 Gene.

1.1.30 “IL-21 Protein” means: the protein identified in SEQ ID No. [*] in International application number [*], published as [*] and any protein encoded by an IL-21 Gene, and all species, fragments and modifications of such polypeptide sequence that are disclosed in such

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application or any patents or patent applications included in Appendix 1. Notwithstanding the above, any IL-21 Antagonist Protein shall be expressly excluded from the definition of IL-21 Protein.

1.1.31 “IL-21 Related Know-How” means: all inventions, discoveries, know-how, methodologies, technology, tangible materials (including nucleic acids, peptides, vectors, proteins, and the like) that:

(a) are Controlled by ZGEN as of the Effective Date and either (i) pertain to at least one IL-21 Embodiment or (ii) are otherwise necessary for NN to make, have made, use, sell, offer to sell and import Products in the Territory; and

(b) are Controlled by ZGEN during the term of this Agreement and both (i) pertain to at least one IL-21 Embodiment and (ii) are necessary for NN to make, have made, use, sell, offer to sell and import Products in the Territory.

For the avoidance of doubt, IL-21 Related Know-How shall not include: (A) know-how which at the time of disclosure is in the public domain; (B) know-how which, prior to the disclosure from ZGEN to NN (whether before or after the Effective Date), was in NN’s possession; and (C) know-how developed independently by NN without any use of any confidential ZGEN know-how or confidential ZGEN patent rights whatsoever.

1.1.32 “IL-21 Related Patents” means:

(a) the patents and patent applications set forth in Part A of Appendix 1;

(b) any patents and patent applications that claim (i) an IL-21 Embodiment; (ii) a process, formulation and/or mixture comprising an IL-21 Embodiment; (iii) a method of making or manufacturing an IL-21 Embodiment; or (iv) a method of using an IL-21 Embodiment and are Controlled by ZGEN during the term of this Agreement and that are necessary for NN to make, have made, use, sell, offer to sell and import Products in the Territory;

(c) all divisional or continuation (in whole or in part) applications of the applications described in subsection (a) or (b);

(d) all patents issuing from the applications described in subsections (a), (b) and (c); and

(e) all extensions, supplemental protection certificates (including any form of patent term extensions), reissues, reexaminations, substitutions or renewals of the patents described in subsection (d).

[*]

1.1.33 “IND” means: an Investigational New Drug application, or its foreign equivalent.

1.1.34 “JEC” is defined in Section 6.1.1.

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1.1.35 “Know-How Product” means: a product in final dosage form that contains an IL-21 Embodiment and is not a Patent Product but that was developed through use of any IL-21 Related Patent, Cell Line Patent, Construction Strain Patent or IL-21 Related Know-How, or which otherwise incorporates or embodies IL-21 Related Know-How.

1.1.36 “Letter Agreement” is defined in Appendix 2.

1.1.37 “License Dispute” is defined in Section 4.4.1(b).

1.1.38 “Long-Range Plan” is defined in Section 6.2.

1.1.39 “[*] Agreement” is defined in Appendix 2.

1.1.40 “[*] Commercial License” is defined in Section 2.8(b)(i).

1.1.41 “Milestone Events” is defined in Section 3.2(a).

1.1.42 “Milestone Fee” is defined in Section 3.2(a).

1.1.43 “Net Sales” means: the gross amount invoiced by NN, its Affiliates, Commercialization Partners and Sublicensees from sales or other dispositions of Products to any independent third party (i.e., non-Affiliate), less the following with respect to the invoiced Product:

(a) any credits and allowances on account of retroactive price adjustments or on account of rejection, recall or return of Products previously invoiced;

(b) any price reductions, chargebacks and volume rebates and discounts, including cash discounts, as well as administrative, management and other fees, commissions, reimbursements and similar payments to wholesalers and other third party distributors, government authorities, benefit management organizations, health insurance carriers, hospitals, group purchasing organizations and other institutions such as [*] as further described on Schedule 3;

(c) any sales, excise, turnover, value added, or similar taxes and any duties and other governmental charges imposed upon the sale of Product(s) that are included in the invoice;

(d) the [*] of [*] used for [*], comprising the total of (i) the [*] if such [*] is [*] from [*] or (ii) the [*] of such [*] if such [*] are [*] by NN or its Affiliates. Such [*] shall not include conventional [*].

In the event that the Product is sold as part of a Combination Product (as defined herein) the Net Sales of the Product, for the purposes of determining royalty payments, shall be determined by multiplying the Net Sales of the Combination Product by the fraction, A/(A + B) where A is the average net sale price of the Product when sold separately in finished form and B is the average net sale price of the Other Active Agents (as defined herein) sold separately in finished form. In the event that the average sale price of the Product or Other Active Agents

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cannot be determined, Net Sales of the Product, for the purposes of determining royalty payments, shall be determined by multiplying the Net Sales of the Combination Product by the fraction C/(C+D), where C is the average per unit inventory cost of the Product and D is the average per unit inventory cost of the Other Active Agents. Inventory costs shall be determined in accordance with NN’s regular accounting methods.

The fractions set forth in the preceding two paragraphs, as applicable, for a Combination Product shall be calculated once each calendar year, for a country, and shall be used during all applicable royalty reporting periods for the entire calendar year. When determining the average sale price or inventory cost of a Product or Other Active Agents, data for the preceding calendar year shall be used for calculating the applicable fraction; provided, however, that with respect to the first year of Net Sales of a Combination Product for a country when there have not been prior separate sales of the corresponding Product, a reasonable estimate of the applicable fraction shall be used, and an adjustment made after the end of the year for the actual fraction calculated for the year. As used above, the term “Combination Product” means any pharmaceutical product which comprises (i) a Product and (ii) other pharmaceutically active compounds which are not moieties that are the subject of third-party patents described in Section 4.4 (“Other Active Agents”).

Notwithstanding the foregoing, the Net Sales of a Product in a country shall never be reduced below fifty percent (50%) of the gross amount invoiced for the Combination Product.

Any Product sold or otherwise disposed of in other than an arm’s-length transaction or for other property (e.g., barter) shall be deemed invoiced at its fair market value in the country of sale or disposition.

1.1.44 “Non-Receiving Party” is defined in Section 4.8.

1.1.45 “NN Development Technology” means all of the following Controlled by NN or its Affiliates:

(a) any inventions, discoveries, know-how, methods, processes, data, information, technology, research tools, reagents, compositions, formulas, biologic and other materials (including nucleic acids, peptides, vectors, proteins, antibodies, assays and the like) relating to Products that:

(i) are invented, discovered, developed or otherwise generated by or on behalf of NN or its Affiliates, Commercialization Partners or Sublicensees pursuant to its activities under this Agreement or a Prior Agreement; or

(ii) were actually used by or on behalf of NN or its Affiliates, Commercialization Partners or Sublicensees in the performance of its activities under this Agreement or a Prior Agreement; and

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(b) all patent applications and patent, trademarks, trade secrets and other intellectual property rights anywhere in the world covering any of the technology described in Section 1.1.45(a) or otherwise related to the Product.

1.1.46 “NN Patent” is defined in Section 9.2.

1.1.47 “Original License Effective Date” means: August 21, 2001.

1.1.48 “Patent Attorney” is defined in Section 4.4.1(b).

1.1.49 “Patent Product” means: a product in final dosage form that contains an IL-21 Embodiment, the making, using, importation, exportation, offer for sale, or sale of which would infringe, in the absence of the license granted under this Agreement, any unexpired Valid Claim of an IL-21 Related Patent.

1.1.50 “Phase I Clinical Trial” means: a human clinical trial intended to obtain initial data regarding the safety of a Product.

1.1.51 “Phase IIa Clinical Trial” means: a clinical trial of a Product that utilizes the pharmacokinetic and pharmacodynamic information obtained from one (1) or more previously conducted Phase I Clinical Trial(s) and/or other Phase IIa Clinical Trial(s) in order to confirm the optimal manner of use of such Product (dose and dose regimens) and to better determine safety and efficacy.

1.1.52 “Phase IIb Clinical Trial” means: a clinical trial of a Product on sufficient numbers of patients that is designed to provide a determination of safety and efficacy of such Product in the target patient population over a range of doses and/or dose regimens. A successful Phase IIb Clinical Trial should support moving to Phase III Clinical Trial(s).

1.1.53 “Phase IIb Data Package” means: the following information to be presented by NN to ZGEN in order for ZGEN to determine whether it wants to make an Election to Co-Fund:

(a) a report summarizing all material data relating to the Product including:

(i) preclinical data and plans;

(ii) clinical data and plans;

(iii) manufacturing data and plans;

(iv) intellectual property status; and

(v) marketing data and commercialization plans;

(b) access to all source data for the above;

(c) access to all regulatory correspondence related to or material to the Product; and

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(d) any other information NN knows is material to ZGEN’s decision whether it wants to make an Election to Co-Fund.

1.1.54 “Phase III Clinical Trial” means: a clinical trial to demonstrate efficacy and safety following the approval by NN senior management, in accordance with the policies and procedures as set forth in NN’s Health Care Project Manual. The initiation of a clinical trial that has been prospectively designed to demonstrate in a patient group (of sufficient size) statistically whether the Product is safe and effective for use in a particular indication, in a manner intended as part of a clinical Phase III program to be sufficient to obtain Regulatory Approval to market such Product, shall be deemed to be approval by NN senior management.

1.1.55 “Phase III Clinical Development” means: with respect to a Product, those activities, including Phase III Clinical Trials (which for purposes of this definition shall include Phase IIIb clinical trials generating additional safety documentation) and supporting manufacturing and regulatory activities, that are necessary to obtain the Regulatory Approval of such Product in the USA or European Union. Phase III Clinical Development shall not include (a) Phase IV Clinical Trials or post-approval clinical studies regulated as a condition of Regulatory Approval in the USA or European Union or (b) commercial scale up and process development, including process transfer and validation and assay transfer and validation conducted solely for commercialization of the Product and not for Regulatory Approval of the Product.

1.1.56 “Phase III Costs” means: the costs incurred by NN or for its account during the term of this Agreement in accordance with an Annual Plan (as defined herein) that are specifically identifiable or allocable to the Phase III Clinical Development of a Product and that are directed to achieving Regulatory Approval of such Product in the USA and European Union (including costs incurred outside of the USA and the European Union). The Phase III Costs shall include (a) amounts that NN pays to third parties involved in the Phase III Clinical Development of a Product (excluding any royalties, which are addressed in Section 4.4), (b) all internal costs calculated at the FTE Rate incurred by NN in connection with the Phase III Clinical Development of such Product and (c) Applicable Phase IIIB Costs.

1.1.57 “Phase III Stop/Go Decision” means: the decision on termination or continuation of the development of a Product into Phase III Clinical Trials (i.e., the [*]). The Phase III Stop/Go Decision provides [*] of all available [*] along with [*] is also included in the [*]. A report encompassing [*] supporting the [*] is also prepared for approval.

1.1.58 “Phase IV Clinical Trials” means: a product support clinical trial of a Product commenced after receipt of Regulatory Approval in the country where such trial is conducted. A Phase IV Clinical Trial may include epidemiological studies, modeling and pharmacoeconomic studies, investigator-sponsored clinical trials and trials required by an Agency for safety or other reasons that otherwise fit the foregoing definition.

1.1.59 “Product” means: either a Know-How Product or a Patent Product.

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1.1.60 “Prior Agreements” means: the Option Agreement, Original License Agreement, Restated License Agreement, Second Restated License Agreement and the Confidentiality Agreement, dated January 15, 2008.

1.1.61 “Reasonable Commercial Efforts” means: the exertion on a substantially continuous basis of efforts as would normally be devoted to the applicable task by a motivated commercial party with similar resources to those of the applicable party taking into account, without limitation, consideration of the [*], its [*], the [*], [*] factors, and other [*] factors. Notwithstanding the foregoing, to the extent that the performance of a party’s responsibilities hereunder is adversely affected by the other party’s failure to perform its responsibilities hereunder, such party will not be deemed to have failed to use its Reasonable Commercial Efforts in performing such responsibilities.

1.1.62 “Receiving Party” is defined in Section 4.8.

1.1.63 “Regulatory Approval” means: the authorization by an appropriate Agency to market and sell a Product in a jurisdiction.

1.1.64 “[*]” is defined in Section 12.14.

1.1.65 “Safety Reasons” is defined in Section 10.3.

1.1.66 “Second Indication” means: the second disease that a Product is intended to treat.

1.1.67 “Sublicensee” means: a third party to whom NN has extended a sublicense consistent with Section 1.1.12(c).

1.1.68 “Submission Milestone” means: the submission of the BLA to the FDA. The Submission Milestone is passed when the file has been delivered to, and accepted by, the FDA. The Submission Milestone ensures that all documentation determined by NN to be sufficient to satisfy the applicable requirements for Regulatory Approval is completed and collected and that the BLA is received by the FDA.

1.1.69 “Territory” means: all the countries of the world.

1.1.70 “Third Indication” means: the third disease that a Product is intended to treat.

1.1.71 “Valid Claim” means: (a) a claim of a pending IL-21 Related Patent that has been pending for less than [*] years from the filing date of the earliest filed patent application anywhere in the world from which such pending IL-21 Related Patent claims priority and has not been cancelled, withdrawn or abandoned or (b) an unexpired, granted IL-21 Related Patent that has not: (i) been disclaimed, withdrawn, canceled, or abandoned; or (ii) been finally rejected or held invalid by a decision of a patent-granting authority beyond right of review or appeal; or (iii) been held invalid or unenforceable in an unappealable decision of a court or competent body having jurisdiction (including a decision which was appealable, but which was not timely appealed). For the avoidance of doubt, if a claim of a patent application within the IL-21 Related

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Patents that issues or grants after [*] years from the filing date of the earliest filed patent application anywhere in the world from which such pending IL-21 Related Patent claims priority, such claim from such issued or granted IL-21 Related Patent shall be considered a valid claim in accordance with clause (b) above.

1.2 Terminology

Where words and phrases are used in this Agreement in the singular, such usage is intended to include the plural forms where appropriate to the context, and vice versa. The words “including,” “includes” and “such as” are used in a non-limiting sense and have the same meaning as “including without limitation” and “including, but not limited to.” “Herein” means anywhere in this Agreement. “Hereunder” and “hereto” mean under or pursuant to any provision of this Agreement. References to Articles, Sections, Schedules and Appendices are to Articles, Sections, Schedules and Appendices of this Agreement unless otherwise specified. All Schedules and Appendices annexed hereto or referred to herein are hereby incorporated in and made a part of this Agreement as if set forth in full herein. Any capitalized terms used in any Schedule or Appendix but not otherwise defined therein, shall have the meaning as defined in this Agreement.

ARTICLE TWO

License

2.1 License Grant

Subject to the terms and conditions of this Agreement (including Section 2.4), ZGEN hereby grants to NN the exclusive (even as to ZGEN) right in the Territory to practice all Commercialization Rights under the IL-21 Related Patents and IL-21 Related Know-How for all Products. Subject to Section 2.2, NN shall not use the IL-21 Related Patents or IL-21 Related Know-How for any other purpose.

2.2 Nonexclusive License Grant – IL-21 Protein

Subject to the terms and conditions of this Agreement, ZGEN further grants to NN the nonexclusive right to make and use worldwide the IL-21 Protein [*] only as required to develop (including to clinically develop), produce, and commercialize Products.

2.3 Sublicensing by NN

(a) NN may sublicense its rights granted pursuant to Section 2.1 without ZGEN’s written approval; provided that such sublicense is granted in accordance with the provisions of this Section 2.3. NN may sublicense its rights granted pursuant to Section 2.2 only upon ZGEN’s prior written approval, such approval not to be unreasonably withheld. Each sublicense shall be in writing, shall be subject to and consistent with the terms of this Agreement, and shall contain provisions substantially identical to Sections 2.6(b), 2.7(b) and 4.7, Articles Seven through Eight, and Sections 10.6, 10.7, 10.9, 12.3 and 12.4. Upon execution of each sublicense NN shall promptly provide ZGEN with a copy of each such sublicense (together with an English-language translation where necessary) and of each amendment and notice of termination of each sublicense.

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(b) Each sublicense shall be terminable upon termination of this Agreement upon ZGEN’s written request, and NN shall include a statement to that effect in each sublicense. Notwithstanding the above, ZGEN will consider in good faith maintaining such sublicense upon termination of this Agreement with a sublicensee who is in full compliance with the terms of the applicable sublicense agreement.

2.4 ZGEN Reservation of Rights

ZGEN reserves for itself, its Affiliates, commercialization partners and licensees, the nonexclusive right to make and use in the Territory the IL-21 Embodiments as required for the development (including clinical development), production, and commercialization of products based on the IL-21 Protein.

2.5 Transition Plan

Within ninety (90) days of the Effective Date, the parties shall agree on a plan (the “Transition Plan”) pursuant to which ZGEN shall: (i) fully disclose to NN the IL-21 Related Patents and IL-21 Related Know-How to the extent not previously disclosed and (ii) transfer to NN the manufacturing processes relating to the Candidate Antibody as promptly as practicable, including the items set forth in Schedule 1 attached hereto. NN will reimburse ZGEN for its actual costs incurred in accordance with the Transition Plan or otherwise approved in writing by NN. Such costs shall include all internal costs calculated at the FTE Rate incurred by ZGEN in connection with the Transition Plan and all amounts that ZGEN pays to third parties to the extent approved in advance by NN, such approval not to be unreasonably withheld. The parties anticipate that the activities to be covered by the Transition Plan will be substantively complete within six (6) months after the Effective Date.

2.6 Development

(a) Subject to the terms and conditions of this Agreement, including Section 2.6(b), NN shall have sole control and decision-making authority over the development of Products; provided that NN’s decisions are reflected in the Long-Range Plan or Annual Plan.

(b) NN shall use its Reasonable Commercial Efforts to develop, manufacture and obtain Regulatory Approval for one or more Products, as soon as reasonably practicable, in one or more indications from Agencies in (i) the USA, (ii) Great Britain, (iii) Germany, (iv) France, (v) Italy, (vi) Spain, (vii) Japan and (viii) each of Brazil, Russia, India and China; provided that, in the case of any of the four countries listed in this subsection (viii), NN considers, following consultation with ZGEN, including at the JEC (as defined herein), that it represents a reasonable commercial opportunity to NN.

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(c) Except as expressly set forth elsewhere in this Agreement, NN shall fund and shall bear one hundred percent (100%) of the costs of the development of Products hereunder in the Territory, including the costs of activities performed by ZGEN pursuant to this Agreement.

2.7 Commercialization

(a) Subject to the terms and conditions of this Agreement, including Section 2.7(b), NN shall have sole control and decision-making authority over the commercialization of Products; provided that NN’s decisions are reflected in the Long-Range Plan or Annual Plan.

(b) NN shall use its Reasonable Commercial Efforts to commercialize one or more Products, as soon as reasonably practicable, in one or more indications in (i) the USA, (ii) Great Britain, (iii) Germany, (iv) France, (v) Italy, (vi) Spain, (vii) Japan and (viii) each of Brazil, Russia, India and China provided that, in the case of any of the four countries listed in this subsection (viii), NN considers, following consultation with ZGEN, including at the JEC (as defined herein), that it represents a reasonable commercial opportunity to NN.

(c) Except as expressly set forth elsewhere in this Agreement, NN shall fund and shall bear one hundred percent (100%) of the costs of commercializing Products hereunder in the Territory, including amounts payable to ZGEN under the USA Co-Promotion Agreement.

2.8 [*] Technology

(a) Under the [*] Agreement ZGEN may, and ZGEN hereby does, grant NN an exclusive sublicense under the [*] Technology (as defined in the [*] Agreement) to develop, make, have made, import, have imported, use, offer for sale, sell and have sold the Products. NN acknowledges that it has been given access to a copy of the [*] Agreement, and agrees that its sublicense to the [*] Technology is subordinate thereto.

(b) ZGEN agrees that during the term of this Agreement it shall:

(i) not terminate the commercial license of [*] under the [*] Agreement that relates to the Candidate Antibody (the “[*] Commercial License”) or the Letter Agreement as it relates to the [*] Commercial License without the prior written consent of NN;

(ii) not, without the prior written consent of NN, amend, modify, waive compliance with or assign, or agree to any amendment, modification, waiver of compliance with or any assignment of any rights or obligations under the [*] Commercial License or the Letter Agreement as it relates to the [*] Commercial License, including rights and obligations relating to royalties, fees, milestone achievements and payments therefor, diligent efforts, reports, regulatory filings, research, patent filings, maintenance and enforcement and confidentiality, insofar as any such amendment, modification, waiver of compliance with or assignment or agreement to do any of the foregoing could reasonably be expected to affect any of NN’s rights and obligations hereunder;

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(iii) at all times comply with all provisions of the [*] Commercial License and the Letter Agreement as it relates to the [*] Commercial License and fulfill all of its obligations thereunder, other than those which NN has agreed to fulfill directly hereunder.

(c) In order to [*], NN will be required to [*]. As a condition precedent to the effectiveness of this Agreement, the parties, together with [*] shall have [*] in the form attached hereto as Appendix 6.

ARTICLE THREE

Upfront and Milestone Fees

3.1 Execution Fee

In partial consideration for ZGEN’s entering into this Agreement and making the license grants hereunder, NN shall pay to ZGEN an execution fee of Twenty Four Million Dollars ($24,000,000), which amount shall be non-creditable and non-refundable, and shall be paid within ten (10) Business Days after the Effective Date.

3.2 Milestone Fees

(a) Within ten (10) Business Days after achievement by NN or its Affiliate, Commercialization Partner or Sublicensee of each milestone event stated below (the “Milestone Events”), NN shall pay ZGEN the corresponding milestone fee (the “Milestone Fees”).

Milestone Event	Milestone Fee for First Indication ($)		Milestone Fee for Second Indication ($)		Milestone Fee for Third Indication ($)
Filing of IND with an Agency	1,500,000		—		—
Initiation (i.e., first patient or healthy volunteer, first dose) of the first Phase I Clinical Trial	8,500,000		[	*]	[	*]
[*]	[	*]	[	*]	[	*]
[*]	[	*]	[	*]	[	*]
[*]	[	*]	[	*]	[	*]
[*]	[	*]	[	*]	[	*]
[*]	[	*]	[	*]	[	*]
[*]	[	*]	[	*]	[	*]
[*]	[	*]	[	*]	[	*]
Total	[	*]	[	*]	[	*]

(b) All Milestone Fees hereunder shall be payable only for the first IL-21 Gene Product, GT Embodiment of IL-21 Product, Ab Embodiment of IL-21 Product, Antisense Embodiment of IL-21 Product and/or IL-21 Antagonist Protein Product, as the case may be, that achieves the relevant Milestone Event for the relevant indication. For the avoidance of doubt, if

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multiple IL-21 Gene Products, GT Embodiment of IL-21 Products, Ab Embodiment of IL-21 Products, Antisense Embodiment of IL-21 Products and/or IL-21 Antagonist Protein Products, as the case may be, proceed through development, NN shall pay Milestone Fees only for the first such IL-21 Gene Product, GT Embodiment of IL-21 Product, Ab Embodiment of IL-21 Product, Antisense Embodiment for IL-21 Product and/or IL-21 Antagonist Protein Product to pass each Milestone Event; provided that if an IL-21 Gene Product, GT Embodiment of IL-21 Product, Ab Embodiment of IL-21 Product, Antisense Embodiment for IL-21 Product and/or IL-21 Antagonist Protein Product, as the case may be, achieves one or more Milestone Events but is not developed further the remaining Milestones Fees will be payable if a second IL-21 Gene Product, GT Embodiment of IL-21 Product, Ab Embodiment of IL-21 Product, Antisense Embodiment for IL-21 Product and/or IL-21 Antagonist Protein Product, as the case may be, achieves the remaining Milestone Events. Each Milestone Fee shall be non-refundable and non-creditable against any other amount payable by NN under this Agreement.

3.3 Milestone Fees under [*] Agreement

NN shall pay to ZGEN (or, at ZGEN’s request, directly to [*]) [*] percent ([*]%) of the milestone fees paid or payable in accordance with the [*] Agreement upon the achievement of the [*] milestone events set forth in the [*] Agreement. For clarity, ZGEN shall pay [*] percent ([*]%) of the milestone fee payable under the [*] Agreement upon the achievement of the [*] milestone event set forth in the [*] Agreement, and NN shall not be required to reimburse ZGEN for such payment.

ARTICLE FOUR

Royalties

4.1 Patent Products

NN shall pay a royalty to ZGEN on a country by country basis for each Patent Product made, used, imported, offered for sale or sold by NN, its Affiliates, Commercialization Partners or Sublicensees. NN’s obligation to pay royalties for a Patent Product in a country shall expire on the expiration date of the last-to-expire IL-21 Related Patent with a Valid Claim which would be infringed, in the absence of the license granted under this Agreement, by the making, using, importation, exportation, offer for sale, or sale of the Patent Product in such country (i.e., when the Patent Product ceases being a “Patent Product” as defined and thereafter may become a “Know-How Product”). The royalties shall be calculated by multiplying the applicable royalty rate by the Net Sales of such Patent Product in such country. Unless ZGEN makes an Election to Co-Fund and has not revoked such election pursuant to Section 5.6, the applicable royalty rate shall be as set forth below.

Aggregate Net Sales in Territory in a calendar year	Royalty Rate for Such Net Sales in Territory
Up to and including $[*]	[	*]
Greater than $[*] and up to and including $[*]	[	*]
Greater than $[*]	[	*]

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4.2 Know-How Products

NN shall pay a royalty to ZGEN on a country by country basis for each Know-How Product made, used, imported, offered for sale or sold by NN, its Affiliates, Commercialization Partners or Sublicensees. NN’s obligation to pay royalties for each Know-How Product shall expire in each country on the date [*] years after the first sale of the Product in such country (“Know-How Royalty Period”). The royalties shall be calculated by multiplying the applicable royalty rate by the Net Sales of such Know-How Product. Unless ZGEN makes an Election to Co-Fund and has not revoked such election pursuant to Section 5.6, the applicable royalty rate shall be (i) [*] percent ([*]%) or (ii) if (w) NN exercises its [*] pursuant to Section 9.2(c), (x) there is an [*] that [*], (y) ZGEN has not [*], and (z) NN does not [*] [*] percent ([*]%), of the rate determined in accordance with the table set forth in Section 4.1. If the last-to-expire IL-21 Related Patent expires in a country prior to the end of the Know-How Royalty Period, then NN shall pay to ZGEN Know-How Product royalties in such country for the remainder of the Know-How Royalty Period.

4.3 Not Additive; Aggregation

(a) The royalties under Sections 4.1 and 4.2 and Sections 5.3.2(a) and (b) are not additive. NN shall pay the highest applicable royalty rate only.

(b) All Net Sales in the Territory whether covered by Section 4.1, 4.2 or 5.3.2 shall be aggregated for purposes of determining which royalty rate set forth in the table in Section 4.1 or 5.3.2(a) is payable.

4.4 Third Party Agreements

4.4.1 General

(a) Except for those paid or payable in accordance with the [*] Agreement (as defined herein), NN shall pay one hundred percent (100%) of all third party royalties necessary in order to commercialize any Products in accordance with this Agreement. NN shall pay to ZGEN the royalties set forth in this Agreement except to the extent that a third party (that is not an Affiliate, Commercialization Partner or Sublicensee of NN) has an issued patent in a country claiming a composition of matter or a method of use that the parties agree is necessary to commercialize a Product in such country. In such an event, NN shall be entitled to offset, on a country by country basis, [*] percent ([*]%) of the royalties paid to such third party against royalties due and owing to ZGEN pursuant to Section 4.1, 4.2 or 5.3.2(a) or (b), as applicable, for such Product i.e., whether such Product is a Patent Product or a Know-How Product.

(b) If the parties are unable to reach agreement that a license to a patent is necessary (“License Dispute”), then the parties shall select by mutual agreement within fifteen (15) days a patent attorney from a recognized law firm (the “Patent Attorney”) with suitable expertise in the field of intellectual property in pharmaceuticals to settle such License Dispute. At the time of selection of the Patent Attorney, the Patent Attorney’s firm shall not be rendering (and during the preceding two-year period shall not have rendered) services to either party. The Patent Attorney

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shall have agreed to sign a confidentiality agreement undertaking that all documents exchanged by the parties in reference to the License Dispute, including the Patent Attorney’s decision resolving the License Dispute, shall be maintained in confidence and save as required by applicable law shall not be used for any purpose other than deciding whether a license is necessary. The parties shall seek to obtain a decision on the License Dispute within sixty (60) days from the date the Patent Attorney is chosen by the parties. The decision of the Patent Attorney as to whether a license is necessary shall be final.

(c) Even if the Patent Attorney decides that a license is not necessary, NN may, in its absolute discretion, enter into such a license; provided NN shall not be entitled to offset any amounts paid or payable under such agreement against the royalties owed to ZGEN under this Agreement.

4.4.2 Royalties under [*] Agreement

(a) NN shall pay to ZGEN (or, at ZGEN’s request, directly to [*]) [*] percent ([*]%) of the royalties paid or payable in accordance with the [*] Agreement.

(b) To the extent ZGEN’s obligation to pay royalties under the [*] Agreement extends beyond the Know-How Royalty Period in a country, NN shall pay to ZGEN (or, at ZGEN’s request, directly to [*]) [*] percent ([*]%) of the royalties paid or payable in accordance with the [*] Agreement on sales of Products in such country.

(c) There shall be no offset against the royalties set forth in this Agreement for NN’s payments with respect to the [*] Agreement.

4.5 Generic Products

If, in any country in the Territory, Generic Products reach a market share equal to or higher than [*] percent ([*]%) of the local market for a Product, then the royalty rate on such Product otherwise applicable shall be reduced with respect to such country according to the following scale:

Market Share of the Generic Product	Percentage of Reduction of the Royalty Rates Otherwise Applicable
[*]%	[*]% reduction
Greater than [*]%	[*]% reduction
Greater than [*]%	[*]% reduction
Greater than [*]%	[*]% reduction
Greater than [*]%	[*]% reduction

4.6 Additive Offsets; Minimum Royalties

The royalty offsets and reductions for Products set forth in Sections 4.4 and 4.5 shall be additive; provided that, the minimum royalty payable by NN to ZGEN (i.e., after reducing the

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royalty rate pursuant to Section 4.4.1 and 4.5 and deducting amounts paid by ZGEN to [*], Inc. under Section 4.4.2) shall never be reduced below [*] of the royalties set forth, in the case of Patent Products, in Sections 4.1 or 5.3.2(a) and, in the case of Know-How Products, Sections 4.2 or 5.3.2(b).

4.7 Payments and Reports

(a) Royalties payable pursuant to this Agreement shall be due quarterly within forty-five (45) days following the end of each calendar quarter for Net Sales in such calendar quarter. All sales in foreign currencies shall be converted into United States dollars using the rate of exchange quoted by Bank of America and its successor(s) on the last Business Day of the calendar quarter in which the sales were made. Each such payment shall be accompanied by a statement of Net Sales for the quarter (including number of units), applicable exchange rates and the calculation of royalties payable hereunder by Product and country. All Milestone Fees, royalties and all other amounts which are overdue under this Agreement will bear interest at the rate of one and one-half percent (1 ¹/2%) per month from the date due through the date of payment. NN shall keep and shall cause its Affiliates, Commercialization Partners and Sublicensees to keep complete, true and accurate records for at least five (5) years for the purpose of showing the derivation of all Milestone Fees and royalties payable under this Agreement. ZGEN’s duly accredited representatives, which are reasonably acceptable to NN, shall have the right to inspect and audit such records at any time during reasonable business hours upon reasonable prior notice to NN or any of its Affiliates, Commercialization Partners or Sublicensees, but such right will not be exercised more often than annually (it being understood that a single exercise of such right may include a series of related or continuing inspections and audits).

(b) Except for the execution fee, Milestone Fees and royalties, all payments made under this Agreement will only be made pursuant to NN’s receipt of an invoice prepared in adherence to the guidelines set forth in Appendix 4. Payments will be made within forty-five (45) days after NN’s receipt of each such invoice. For the avoidance of doubt, all bank fees related to receipt of interbank transfers must be borne by the recipient.

4.8 Taxation of Payments

Each party shall be responsible for and shall bear any taxes levied upon payments received by such party (such party, the “Receiving Party”), and authorizes the other party (the “Non-Receiving Party”) to withhold such taxes from the payments which are payable to the Receiving Party in accordance with this Agreement if the Non-Receiving is either required to do so under the applicable tax laws or directed to do so by an agency of the relevant government. Upon the Receiving Party’s written request, the Non-Receiving Party shall, with respect to the laws of Denmark (if NN is the Non-Receiving Party), or the laws of the United States or the State of Washington (if ZGEN is the Non-Receiving Party) and at no cost to the Receiving Party, support the Receiving Party in its legal efforts to minimize any such withholding taxes, and provide the Receiving Party with information about and necessary for any documentation needed to reduce withholding to a legal minimum. In addition, if either party anticipates witholding taxes in accordance with this Section 4.8, it will give the other party prior written notice thereof,

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and the parties will cooperate reasonably to obtain available exemptions or relief from any applicable withholding tax under the provisions of any applicable tax laws or under any other applicable laws, including double tax treaties.

4.9 Currency Blockage

If the laws or regulations of another country prevent the conversion of its currency into United States dollars for the payment of royalties, NN will either (a) pay such royalties by depositing the currency of the other country into a bank account designated by ZGEN in that country or (b) if permitted by law, pay such royalties in the currency of the country in question to ZGEN’s designee in that country.

ARTICLE FIVE

Co-Funding Phase III Clinical Development and USA Co-Promotion

5.1 Election to Co-Fund

ZGEN shall have, subject to this Article Five, the right to elect to co-fund the Phase III Clinical Development of a Product (an “Election to Co-Fund”) and co-fund such costs in which case the royalties payable to ZGEN with respect to Net Sales of such Product in the USA shall be adjusted as provided in Section 5.3.2 (subject to the provisions of Section 5.3.2(c)) and ZGEN shall have the option to co-promote as described in Section 5.3.3.

5.2 Procedure

(a) NN shall provide to ZGEN the Phase IIb Data Package no later than [*] but in any event prior to the date on which the first Product passes the [*].

(b) To exercise its Election to Co-Fund, ZGEN must provide written notice to NN and pay to NN a non-refundable opt-in fee of Ten Million Dollars ($10,000,000) within [*] of receipt of the Phase IIb Data Package, in accordance with payment instructions that shall be provided by NN to ZGEN prior to the date on which such payment is due. Subject to Section 5.6, any Election to Co-Fund shall be irrevocable.

5.3 Consequences of Election to Co-Fund

Following an Election to Co-Fund:

5.3.1 Cost Sharing

The parties shall share Phase III Costs as described in Section 5.4.

5.3.2 Royalties on Net Sales in the USA

(a) Rather than the royalty rates set forth in Section 4.1, the royalty rate applicable to Net Sales of a Patent Product in the USA shall be the rate determined in accordance with the table set forth below.

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Aggregate Net Sales in Territory in a calendar year	Royalty Rate for Such Net Sales in USA
Up to and including $[*]	[	*]%
Greater than $[*] and up to and including $[*]	[	*]%
Greater than $[*]	[	*]%

(b) Rather than the royalty rates set forth in Section 4.2, the royalty rate applicable to Net Sales of a Know-How Product in the USA shall be either (i) [*] percent ([*]%) or (ii) if (w) NN exercises its [*] pursuant to Section 9.2(c), (x) there is an [*] that [*], (y) ZGEN has not [*], and (z) NN does not [*], [*] percent ([*]%), of the rate determined in accordance with the table set forth in Section 5.3.2(a).

(c) For the avoidance of doubt, the royalty rates set forth in Sections 4.1 and 4.2 shall continue to apply to Net Sales of Patent Products and Know-How Products outside the USA, and Net Sales shall be aggregated in accordance with Section 4.3(b).

5.3.3 ZGEN’s Right to Co-Promote in USA

Following an Election to Co-Fund, ZGEN will have the right (but not the obligation) to co-promote the Product to which such Election to Co-Fund relates in the USA as contemplated in Section 5.5.

5.4 Phase III Costs

5.4.1 Cost Sharing of Phase III Costs

All Phase III Costs relating to a Product for which ZGEN made an Election to Co-Fund incurred after ZGEN’s receipt of the Phase IIB Data Package shall be borne by the parties as set forth in the following table:

Name	Percentage of Phase III Costs
NN	85	%
ZGEN	15	%

5.4.2 Accounting and Reconciliation

(a) NN shall submit to ZGEN no later than the twenty fifth (25^th) day of the last month of each calendar quarter a written estimate of Phase III Costs incurred by it during such calendar quarter. In addition, NN shall report to ZGEN within thirty (30) days after the end of each calendar quarter with regard to the Phase III Costs incurred by it during such calendar quarter. Such report shall specify in reasonable detail all expenses included in such Phase III Costs during such calendar quarter and, upon ZGEN’s reasonable request, NN shall provide invoices and other supporting documentation. NN’s report shall include, in addition to the Phase III Costs actually incurred by it during the relevant calendar quarter, a comparison of the amounts budgeted in the applicable Annual Plan for such activities and an explanation of any significant variances. The parties’ Finance Contacts (as defined herein) shall facilitate the reporting of Phase III Costs hereunder and the resolution of any questions concerning such reports.

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(b) NN shall record and account for its FTE effort for the Phase III Clinical Development of a Product to the extent that such FTE efforts are included in Phase III Costs that are, or may in the future be, shared under this Agreement, and shall report such FTE effort to the Finance Contacts on a quarterly basis. Except to the extent provided herein, NN shall calculate and maintain records of FTE effort incurred by it in the same manner as used for other products it develops.

(c) The Phase III Costs shall be accounted for by NN hereunder in accordance with the following cost accounting principles:

(i) The parties intend that all costs defined herein are to be: (A) determined consistent with generally accepted accounting principles and (B) allocated among projects and activities by NN in a good faith attempt to calculate the relative cost of each of such projects and activities in a manner consistent with NN’s customary practices.

(ii) The following guidelines shall be used in determining amounts chargeable to Phase III Costs.

(A) If a cost is specifically and exclusively incurred for Phase III Clinical Development of a Product solely to support a Regulatory Approval in a country other than USA or outside the European Union, then none of such cost shall be included in Phase III Costs.

(B) If a cost is incurred for Phase III Clinical Development of a Product to support a Regulatory Approval in USA or the European Union, and [*] connection with such Phase III Clinical Development [*], then the cost shall be [*]; provided that, if in connection with the incurrence of such cost there are [*] with respect to development of a Product in a [*], then such [*] shall be [*]

(iii) NN shall track FTEs by functional area and by quarter in a manner consistent with its project cost system or using such other time tracking system as NN applies with respect to its internal programs. In general, these project cost systems shall report actual time spent on specific projects by an individual, and apply the FTE Rate. The Finance Contacts shall determine the costs of which individuals or functions will be reimbursed through the application of an FTE Rate, which FTE Rate shall be determined in accordance with the definition thereof.

(d) Within forty-five (45) days after the end of each of the first three (3) calendar quarters and, for the last calendar quarter in a calendar year, within sixty (60) days after the end of such calendar quarter, ZGEN shall make a reconciling payment to NN to achieve the appropriate allocation of Phase III Costs provided for in Section 5.4.1. The Finance Contacts shall seek to resolve any questions related to such accounting statements within fifteen (15) days following receipt by ZGEN of NN’s report.

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(e) Any expenses incurred by NN for development activities related to a Product that do not fall within the definitions of Phase III Costs shall be borne solely by NN. In addition, any expenditure or cost that exceeds the amount set forth in the then applicable Annual Plan by ten percent (10%) or more for a calendar year or any unbudgeted cost that is incurred by NN shall be borne by NN (in the amount of the excess), with the exception of costs incurred due to safety or regulatory reasons not foreseen at the date of the applicable Annual Plan; provided that NN shall consult with ZGEN prior to incurring any such costs.

(f) NN shall keep detailed records of the Phase III Costs it incurs, including all supporting documentation for such expenses. NN shall keep such records for at least seven (7) years after the date that such expense was incurred. ZGEN shall have the right at reasonable times and upon reasonable prior notice to review NN’s records to confirm the accuracy of NN’s costs and reports with respect to Phase III Costs.

5.5 Co-Promotion in USA

5.5.1 USA Co-Promotion Agreement

Promptly following an Election to Co-Fund, NN and ZGEN shall negotiate an agreement for the co-promotion of the Product in the USA (the “USA Co-Promotion Agreement”) that contains provisions consistent with Appendix 3 as well as other terms customary for co-promotion agreements. The parties intend that no later than [*] following the exercise by ZGEN of its Election to Co-Fund, the final form of the USA Co-Promotion Agreement shall be available for review by ZGEN for the purpose of its determining whether it wishes to co-promote the Product in the USA. However, if the parties after good faith efforts to reach reasonable terms on the USA Co-Promotion Agreement are unable to reach agreement within the foregoing [*] period, the dispute shall be referred to the chief executive officers of NN and ZGEN. If the chief executive officers are unable to resolve a dispute within [*] days after the end of the forgoing [*] period, [*]. Notwithstanding the above, upon mutual agreement in writing, the chief executive officers of NN and ZGEN may extend the period for resolving a dispute beyond [*] days.

5.5.2 Right to Co-Promote

Subject to Section 5.5.1, no later than thirty (30) days after ZGEN receives written notice from NN that the first Product for which ZGEN made an Election to Co-Fund has passed the [*], ZGEN shall give NN written notice of its decision whether or not to co-promote such Product in the USA (which decision shall apply to all Indications of such Product). If ZGEN confirms that it desires to co-promote, the parties shall proceed to execute the USA Co-Promotion Agreement that has been negotiated in accordance with Section 5.5.1. If and upon such terms as mutually agreed upon by the parties following the execution of the USA Co-Promotion Agreement, ZGEN’s co-promotion obligations with respect to the applicable Product may be limited to certain specified indications of such Product.

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5.6 ZGEN’s Right to Opt Out of Co-Funding

(a) ZGEN shall have the right to cease contributing to Phase III Costs for a Product (“Opt Out of Co-Funding”). ZGEN may exercise its right to Opt Out of Co-Funding at any time by written notice to NN; provided that the effective date of the Opt Out of Co-Funding shall be the last day of the second full calendar quarter following the calendar quarter in which the notice is given.

(b) ZGEN’s responsibility for a pro rata share of the Phase III Costs shall end upon the effective date of the Opt Out of Co-Funding; provided that ZGEN shall continue to be responsible for its pro rata share of such costs incurred during the period prior to the effective date of the Opt Out of Co-Funding in accordance with the applicable Annual Plan in effect on the date the notice was given.

(c) Upon the effective date of the Opt Out of Co-Funding, ZGEN’s right to co-promote Products under Section 5.5 shall terminate, and the royalty rates set forth in Sections 5.3.2(a) and (b) shall cease to apply to Net Sales of Products in the USA.

ARTICLE SIX

Relationship Management

6.1 Joint Executive Committee

6.1.1 Formation; Composition; Decisions

(a) Following an Election to Co-Fund, the parties’ shall form a joint executive committee (the “Joint Executive Committee” or “JEC”) to manage their relationship in connection with this Agreement. Each party shall appoint its representatives on the initial JEC in writing within thirty (30) days following the Election to Co-Fund and shall promptly thereafter notify the other party in writing of such appointment.

(b) The JEC shall have up to six (6) members. ZGEN and NN shall each appoint at least two (2) members. Each party shall appoint representatives of sufficient seniority to make strategic decisions regarding Phase III Clinical Development, approve the Long-Range Plan and Annual Plan and otherwise make final decisions on the sorts of matters likely to come before the JEC on behalf of their respective companies. NN shall designate one of the members it appoints to be the chairperson of the JEC. If at any time a position on the JEC becomes vacant for any reason, the party that appointed the prior incumbent shall as soon as reasonably practicable appoint a successor. Each party shall promptly notify the other party of any substitution of another person as its appointee on the JEC.

(c) All official actions, decisions or rulings of the JEC under this Agreement shall be taken by consensus; provided that [*] in the event the [*] after a [*] (generally no more than [*]) and [*].

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(d) ZGEN may, in its discretion, withdraw from the JEC at any time, at which time any rights granted to ZGEN with respect to the JEC under this Article 6 shall cease with immediate effect.

6.1.2 Role and Responsibilities

The responsibilities of the JEC shall include:

(a) Review and approval of [*] (as defined herein) and [*].

(b) Review of the [*], in particular [*] and [*].

(c) Such other responsibilities as may be assigned to the JEC pursuant to this Agreement or as may be agreed between the parties from time to time.

6.1.3 Meetings and Communications

The JEC shall meet face-to-face at least semi-annually at mutually agreed upon times and locations. Unless otherwise agreed, the location of such meetings will alternate between the parties’ facilities, and the party hosting a meeting shall be responsible for chairing the meeting and secretarial duties (i.e., circulating an agenda and taking minutes). Either or both of the parties may, with the consent of the other party (not to be unreasonably withheld), bring other personnel employed by them to meetings of the JEC as observers or to present data and information. The JEC shall also address issues as they arise in the interim via telephone conference, videoconference or electronic mail. A written agenda for each face-to-face meeting shall be circulated in advance of the meeting by the Alliance Managers (as defined herein), and written minutes of each meeting shall be taken by the Alliance Managers and shall include the issues discussed, decisions made and action items, if any, arising from the meeting; provided that before adjourning the JEC shall approve a written (including electronic e.g., PowerPoint slides) summary of all actions taken at a particular meeting. Each face-to-face meeting of the JEC shall conclude with approval of the minutes of prior meetings and of all actions taken through interim communications since the last face-to-face meeting. Meeting minutes and written summaries of any action taken by way of interim communications shall be promptly submitted by the Alliance Managers:

(a) to all members of the JEC; and

(b) to the extent such minutes or action involve financial matters, to the Finance Contacts.

6.2 Development and Commercialization Plan

(a) Within one hundred eighty (180) days after the Effective Date, NN shall prepare and provide to ZGEN an initial high-level long-range plan and high-level budget forecast to cover the development and commercialization of Products for a multi-year period of at least three years consistent with NN’s long-range project and financial planning (such long-range plan and high-level budget, as amended from time to time in accordance with this subsection (a), the

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“Long-Range Plan”). Thereafter, NN shall, on an annual basis, prepare and provide to ZGEN updates and amendments to the Long-Range Plan to cover a rolling, multi-year period of at least three (3) years. Following the formation of a JEC updates to the Long-Range Plan will be submitted to the JEC.

(b) Within one hundred eighty (180) days after the Effective Date, NN shall prepare and provide to ZGEN an initial plan and budget to cover in detail the development and commercialization of Products for the remainder of the current calendar year and the next full calendar year broken out by calendar quarter (such plan and budget, as amended from time to time in accordance with this subsection (b), the “Annual Plan”). Thereafter, NN shall, on an annual basis, prepare and provide to ZGEN an updated Annual Plan to cover the forthcoming calendar year. Following the formation of a JEC updated Annual Plans will be submitted to the JEC. NN may amend an Annual Plan previously provided to ZGEN or submitted to the JEC at any time following consultation with ZGEN or at the JEC, as the case may be.

(c) The goals of the Long-Range Plan are (i) the development of Products as required to obtain Regulatory Approval for one or more commercially significant indications as promptly as commercially and technically practicable, (ii) the acquisition of Regulatory Approval for Product in a manner sufficient to allow the commercialization of Product in those countries of the Territory that represent a commercially reasonable opportunity for NN based on the size of the potential market and other relevant factors, (iii) the identification, selection and development of additional Products if appropriate and (iv) allow ZGEN to monitor development and make an informed decision regarding an Election to Co-Fund and its participation in co-promotion in the USA. In addition the Long-Range Plan shall include a summary of marketing, sales, supply and post-approval clinical trial strategies for each Product in the Territory. Following an Election to Co-Fund and so long as ZGEN does not Opt Out of Co-Funding (i.e., ZGEN is co-promoting Products in the USA or retains the right to do so in the future), each Annual Plan will include a comprehensive market development, marketing, sales, supply, distribution, Phase IV Clinical Trial and post-approval clinical trial strategy in the USA for each Product for which ZGEN made an Election to Co-Fund.

6.3 Alliance Managers

6.3.1 Appointment

Within thirty (30) days following the Effective Date, each of the parties shall appoint a single individual to act as a single point of contact between the parties to assure the success of their relationship relating to this Agreement (each, an “Alliance Manager”). Each party may change its designated Alliance Manager from time to time upon written notice to the other party. Any Alliance Manager may designate a substitute to temporarily perform the functions of that Alliance Manager by written notice to the other party.

6.3.2 Responsibilities

Each Alliance Manager shall be charged with creating and maintaining a spirit of collaboration between the parties. In addition, each Alliance Manager:

(a) will be the point of first referral in all matters of conflict resolution;

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(b) will provide a single point of communication for seeking consensus both internally within the respective parties’ organizations and between the parties regarding key strategy and plan issues;

(c) will identify and bring disputes to the attention of senior management or, if formed, the JEC in a timely manner;

(d) will plan and coordinate cooperative efforts and internal and external communications; and

(e) will take responsibility for ensuring that governance activities, such as the conduct of required JEC meetings and production of meeting minutes, occur as set forth in this Agreement, and that relevant action items resulting from such meetings are appropriately carried out or otherwise addressed.

Following the formation of the JEC, the Alliance Managers shall use good faith efforts to attend all JEC meetings and support the chairperson of the JEC in the discharge of his or her responsibilities. Alliance Managers shall be nonvoting participants in JEC meetings. An Alliance Manager may bring any matter to the attention of the JEC if such Alliance Manager reasonably believes that such matter warrants such attention.

6.4 Finance Contacts

(a) Each party shall appoint its initial finance contact (each a “Finance Contact”) within thirty (30) days following the Effective Date and shall promptly thereafter notify the other party of such appointment. Each Finance Contact shall consult with the other regarding accounting policies and practices relevant to this Agreement and otherwise support the Alliance Managers and, if formed, the JEC. If at any time a vacancy occurs for any reason, the party that appointed the prior incumbent shall as soon as reasonably practicable appoint a successor. Each party shall promptly notify the other party in writing of any substitution of another person as its Finance Contact.

(b) Each party’s Finance Contact will be available throughout the term of this Agreement to answer any reasonable questions from the other party’s Finance Contact.

ARTICLE SEVEN

Confidentiality

7.1 Confidential Information

For the purposes of this Agreement, “Confidential Information” shall include all proprietary information and materials, patentable or otherwise, of a party that is disclosed by or on behalf of such disclosing party to the receiving party, including DNA sequences, amino acid sequences, vectors, cells, substances, formulations, techniques, methodology, equipment, data, reports, know-how, assay results, preclinical studies and clinical trials and the results thereof, patent positioning and business plans, including any negative developments.

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7.2 Confidentiality Obligation

Except as otherwise authorized under this Agreement, during the term of this Agreement and for a period of five (5) years thereafter, each party shall maintain as secret and confidential all Confidential Information obtained from the other party pursuant to this Agreement or a Prior Agreement or prior to and in contemplation of this Agreement or a Prior Agreement. Each party shall respect the other party’s proprietary rights in such Confidential Information, use the same exclusively for the purposes of this Agreement, and disclose the same only to those of its representatives to whom and to the extent that such disclosure is reasonably necessary for the purposes of this Agreement. The obligations under this Section 7.2 shall survive the termination of this Agreement. Subject to Section 10.9, upon termination or expiration of this Agreement, each party shall, upon request of the other party, promptly return and destroy all documents and document copies containing Confidential Information belonging to such other party, provided that each party may retain one copy of such Confidential Information for the sole purpose of ensuring compliance with this Article Seven.

7.3 Release from Confidentiality Obligation

Notwithstanding the foregoing provision, a party shall be permitted to disclose any Confidential Information of the other party to (i) its Affiliates, Commercialization Partners, Sublicensees and lenders, (ii) prospective Affiliates, Commercialization Partners, Sublicensees and lenders and (iii) its licensors under third party agreements related to IL-21 Embodiments, (iv) its legal advisors, in particular patent practitioners and (v) its auditors, who are, in the case of each of subsections (i)-(v), subject to written confidentiality and non-use restrictions at least as stringent as those contained herein. Notwithstanding the above, a party shall be permitted to disclose the [*]. The confidentiality and non-use restrictions imposed on [*] shall be [*] that [*]. The party disclosing Confidential Information to [*] or to [*] shall [*] the Confidential Information is disclosed and the [*]. In addition, a party shall be permitted to disclose any Confidential Information of the other party to any patent office in any country, as is reasonably required for filing or prosecuting any patent application permitted to be filed by it hereunder. Furthermore, the obligations of Section 7.2 shall not apply to Confidential Information that:

(a) was properly in the possession of the receiving party, without any restriction on use or disclosure, prior to receipt from the disclosing party, and such possession can be demonstrated by competent evidence of the receiving party;

(b) is in the public domain by public use, publication, general knowledge or the like, or after disclosure hereunder becomes general or public knowledge through no fault of the receiving party;

(c) is properly obtained by the receiving party from a third party not under a confidentiality obligation;

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(d) is independently developed by or on behalf of the receiving party without the assistance of the Confidential Information of the disclosing party; or

(e) is required to be disclosed by order of any court or governmental or regulatory authority after notification to the disclosing party of the necessity to allow the disclosing party to seek protection for the disclosing party’s Confidential Information from such court or governmental or regulatory authority.

ARTICLE EIGHT

Indemnification

8.1 Personal Injury or Property Damage

(a) NN shall indemnify, defend and hold harmless ZGEN, its directors, officers, employees and agents (collectively, the “Indemnitees”) from and against any and all claims, judgments, costs, awards, expenses (including any attorneys’ fees) or liability of any kind arising out of personal injury or property damage caused or alleged to be caused by any Product developed, manufactured, used or sold by NN or any of its Affiliates, Commercialization Partners or Sublicensees or the use of any IL-21 Related Patents or IL-21 Related Know-How by NN or any of its Affiliates, Commercialization Partners or Sublicensees. In addition, NN shall assume all obligations for warranties and product liability claims that accompany or result from the sale or use of any Product developed, manufactured or sold by NN or any of its Affiliates, Commercialization Partners or Sublicensees and shall indemnify, defend and hold harmless the Indemnitees from and against any and all claims, judgments, costs, awards, expenses (including any attorneys’ fees) or liability of any kind arising from customers’ or users’ use of any Product developed, manufactured or sold by NN or any of its Affiliates, Commercialization Partners or Sublicensees and relating to such warranty obligations or product liability claims.

(b) NN’s obligations under this Section 8.1 shall not apply to any Indemnitee to the extent that (i) such Indemnitee is grossly negligent or engaged in willful misconduct or (ii) such claims arise from any material breach by the Indemnitees of any of their representations, warranties or obligations under this Agreement.

(c) ZGEN shall (i) promptly notify NN of any claim, judgment, cost, award or expense covered by this Section 8.1, (ii) reasonably cooperate with NN in the defense of such claim, judgment, cost, award or expense, at NN’s cost and expense in connection therewith, (iii) allow NN to control the defense of the claim, judgment, cost, award or expense, and (iv) not compromise or settle the claim, judgment, cost, award or expense without NN’s prior written consent, which consent shall not be unreasonably withheld.

8.2 Insurance

NN shall use commercially reasonable efforts to maintain and cause its Affiliates, Commercialization Partners and Sublicensees to maintain appropriate product liability insurance with respect to development, manufacture and sale of Products in such amount as NN customarily maintains with respect to its other products. NN shall use commercially reasonable

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efforts to maintain and cause its Affiliates, Commercialization Partners and Sublicensees to maintain such insurance for so long as it continues to manufacture or sell Products, and thereafter for so long as NN customarily maintains insurance with respect to sales of its other products.

ARTICLE NINE

Patents

9.1 Prosecution

ZGEN shall be solely responsible, as it shall determine, for the filing and prosecution of any and all patent applications included in the IL-21 Related Patents (including opposition and interference proceedings) and for the maintenance of any patents included in the IL-21 Related Patents. NN shall reimburse ZGEN within thirty (30) days after date of invoice for all of ZGEN’s out-of-pocket costs for the IL-21 Related Patents incurred after the Effective Date, including translation costs, filing and maintenance fees, and costs of oppositions and interferences, outside attorneys’ and expert fees. ZGEN will in September of each year provide NN with an estimate of reasonable out-of-pocket costs for the IL-21 Related Patents for the following year.

Notwithstanding the above, with at least sixty (60) days written notice to ZGEN, NN may elect to discontinue reimbursing ZGEN’s out-of-pocket costs for a specified patent application or patent within the IL-21 Related Patents, in which case ZGEN may choose to maintain such patent or patent application at its own expense and such patent application or patent shall no longer continue to be considered part of the IL-21 Related Patents and the license granted by ZGEN to NN pursuant to Section 2.1; provided, (i) if the patent application or patent NN elects to discontinue reimbursing ZGEN’s out-of-pocket costs for is a patent or patent application in one or more of the countries set forth in Appendix 5 then for such country(ies) such patent or patent application shall continue to be considered an IL-21 Related Patent for the purposes of Section 10.6; and (ii) if NN elects to discontinue reimbursing ZGEN’s out-of-pocket costs for any patent or patent application in a country not listed in Appendix 5, then for such country such patent or patent application shall not be considered an IL-21 Related Patent for the purposes of Section 10.6.

ZGEN shall deliver to NN a copy of each new patent application within the IL-21 Related Patents and all documents received from patent offices regarding the IL-21 Related Patents. As long as NN is not in material breach of any obligation hereunder, and provided NN has continued to pay ZGEN’s out-of-pocket costs for the IL-21 Related Patents in accordance with this Section 9.1: (a) NN shall have the right to review and comment on the nature and text of such, and ZGEN shall consider in good faith any comments from NN regarding steps that might be taken to strengthen the IL-21 Related Patents, provided that all final decisions regarding the filing and prosecution of IL-21 Related Patents shall be within ZGEN’s sole discretion; and (b) if ZGEN elects not to prosecute or maintain any IL-21 Related Patents in any country in the Territory, ZGEN shall provide NN with written notice of such election, in which case, NN shall be entitled to assume responsibility for prosecuting or maintaining such IL-21 Related Patent at its expense, in ZGEN’s name. Upon NN’s reasonable request and at no out-of-pocket expense to ZGEN, ZGEN shall render such reasonable assistance, execute any documents and do such other acts as may be reasonably necessary in connection with such prosecution or maintenance of any such IL-21 Related Patents by NN.

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For the avoidance of doubt, the ZGEN patent application family 02-11 previously licensed to NN (International Application PCT US/03/17808 titled ‘USE OF ZALPHA11 LIGAND IN CANCER AND OTHER THERAPEUTIC APPLICATIONS’ filed June 6, 2003 and foreign equivalents thereof including US parent patent application 10/456,262) (the “02-11 Patents”) is related to the IL-21 Protein and is excluded from this Agreement. Notwithstanding the preceding sentence, if any claims to IL-21 Antagonist Proteins were to issue from the 02-11 Patents, they would be included in the licenses and reservations pursuant to Article Two as they relate to an IL-21 Antagonist Protein.

9.2 Patent Term Extension

NN shall provide written notice to ZGEN within ten (10) days after receiving (i) Regulatory Approval by any Agency to market any Product or (ii) any other governmental approval obtained by or on behalf of NN, any Affiliate, Commercialization Partner or Sublicensee that is pertinent to any patent term extension (including supplementary protection certificates) for any IL-21 Related Patent. Subject to this Section 9.2, NN shall have the right to seek, or, where appropriate, to direct ZGEN to seek, an extension of the term of any IL-21 Related Patent for a licensed Product (including filing for patent term restoration under the U.S. Patent Statutes (35 U.S.C §§1-376) and seeking supplementary protection certificates in the member states of the European Union or European Economic Area, or Switzerland); provided, that the parties shall follow the procedure described below on a Product-by-Product and country-by-country basis:

(a) At least nine (9) months prior to an anticipated Regulatory Approval the Patent Contacts (as defined in Section 9.7) shall confer and discuss in good faith the IL-21 Related Patents as well as any patent Controlled by NN (a “NN Patent”) eligible for extension for the Product in the given jurisdiction where the Regulatory Approval is sought.

(b) Within two (2) months of the conference in Section 9.2(a) the Patent Contacts shall mutually agree in writing upon (i) a recommendation as to which patent(s) to extend in such jurisdiction, (ii) the preferred patent to select providing such extension is ultimately granted including the party responsible for applying for such extensions, and (iii) the general identification of the documents necessary from each party that will be necessary to support such extension.

(c) Subject to Section 9.2(e) below, if the Patent Contacts cannot mutually agree in accordance to Section 9.2(b) above as to which patent(s) to extend in a jurisdiction, then within three (3) months of the conference in Section 9.2(a) [*] with regard to which patent(s) to extend in such jurisdiction, and the [*] providing such extension is ultimately granted [*]. Exercise of the [*] shall be effective upon receipt of written notice of exercise from NN to ZGEN, within three (3) months of the conference in Section 9.2(a) or shall expire on the last day of such three month period (“[*] Option Period”).

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(d) The parties shall cooperate with any efforts to seek patent term extension of an IL-21 Related Patent or a NN Patent, including diligently supplying all pertinent information pertaining to such patent term extension, and with all information and supporting documents required to comply with all laws pertaining to the extension of such patent term.

(e) If NN by exercise of its [*] elects to extend an IL-21 Related Patent and ZGEN reasonably believes that extension of such an IL-21 Related Patent would conflict with or otherwise interfere with the ability of ZGEN or its commercialization partners, licensees, or affiliates to extend such IL-21 Related Patent based upon anticipated Regulatory Approval of an IL-21 Protein in such jurisdiction, then ZGEN shall provide NN with written notice of such interference within two weeks of receipt of NN’s written notice of exercise of NN’s [*] and immediately upon receipt of ZGEN’s written notice, NN shall no longer be able to select such IL-21 Related Patent with NN’s [*] in Section 9.2(c) with regard to such identified patent for such Product in such jurisdiction. NN shall then have two weeks from receipt of ZGEN’s written notice to use its [*] to select a different patent to extend for such Product in such jurisdiction.

For the avoidance of doubt with respect to this Section 9.2, regardless of the period for which the term of any IL-21 Related Patent is extended in a country, NN shall continue to pay royalties on a Patent Product pursuant to Section 4.1 or 5.3.2 on Net Sales of the Patent Product in such country through the expiration date of the last-to-expire IL-21 Related Patent with a Valid Claim in such country which would be infringed, in the absence of the license granted under this Agreement, by the making, using, importation, exportation, offer for sale, or sale of the Patent Product in such country.

For the avoidance of doubt, NN shall not pay royalties on a Patent Product for Net Sales of such Patent Product in such country for the period by which the extended term of any NN Patent in such country extends beyond the term of the last-to-expire IL-21 Related Patent with a Valid Claim in such country which would be infringed, in the absence of the license granted under this Agreement, by the making, using, importation, exportation, offer for sale, or sale of the Patent Product in such country.

9.3 Notice of Infringement and Conference

Each party shall promptly notify the other party in writing of any alleged or threatened infringement, in the Territory of any IL-21 Related Patent. Any notice provided under this Section 9.3 shall set forth all relevant facts (to the extent known by the party giving notice) in reasonable detail and shall include a reasonable description of available evidence associated therewith or copies of any readily available documentary evidence associated therewith. Upon receipt of such written notice, the parties shall confer regarding all available evidence of infringement or attack, and the manner of addressing such infringement or attack. The parties may agree to pursue the matter jointly.

9.4 ZGEN Has First Right

Unless the parties agree otherwise, ZGEN shall have the first right, but not the obligation, to initiate and control any action, including cease and desist letters and lawsuits, at its expense, to

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enforce the IL-21 Related Patents against any infringer or alleged infringer of the IL-21 Related Patents to the extent exclusively licensed hereunder to NN. ZGEN shall notify NN of ZGEN’s decisions regarding such infringement, and shall keep NN reasonably apprised of the progress of the matter. As long as NN is not in material breach of any obligation hereunder, NN shall have the right, at its own expense, to join any legal proceeding initiated by ZGEN regarding any IL-21 Related Patent in the Territory that is being infringed; it is understood, however, that ZGEN shall have sole control over any issues or matters pertaining to the validity or scope of any and all IL-21 Related Patents. Unless NN joins such suit, as described above, ZGEN shall have the right to retain all damages awarded. If NN does join such suit, then out of any damages awarded, the parties have an equal right to recover their expenses for the proceeding; then NN shall be entitled to retain all damages specifically awarded by the court to NN, e.g., lost profits; then ZGEN shall have the right to retain any damages remaining.

9.5 NN Has Secondary Right

If within sixty (60) days after the conference described in Section 9.3, ZGEN has not taken any action to stop such infringement, and as long as NN is not in material breach of any obligation hereunder, NN shall have the right to take legal action regarding any infringement, at its own expense. If NN initiates legal proceedings hereunder, ZGEN shall have the right to join such suit, at its own expense. If the law governing any proceeding brought by NN under this Section 9.5 requires ZGEN to join such proceeding, then ZGEN shall be represented by NN’s legal counsel, at NN’s expense. If NN’s counsel is unable to represent ZGEN because of a bona fide conflict of interest, then ZGEN may engage other competent legal counsel, reasonably acceptable to NN, to represent ZGEN in such proceeding, at NN’s expense. If ZGEN elects not to use NN’s counsel for any reason other than a bona fide conflict of interest, then ZGEN may engage competent legal counsel of its own choosing, at ZGEN’s expense. If NN unilaterally elects to discontinue any proceeding instituted under this Section 9.5 (other than as part of a settlement), NN shall give ZGEN reasonable prior notice of such election. ZGEN may elect to continue such proceedings in its sole name, under its sole control, and at its own expense; if ZGEN so elects, NN shall reasonably cooperate, at no out-of-pocket expense to NN, in all actions reasonably necessary to transfer control of the proceedings from NN to ZGEN. NN shall indemnify, defend and hold harmless ZGEN and the Indemnitees (as defined in Section 8.1) from any and all claims, damages or other obligations arising out of or resulting from any claim or legal proceedings instituted by NN under this Section 9.5; provided that the foregoing indemnity shall not apply to the extent ZGEN incurs claims, damages or obligations because ZGEN elected to continue the proceedings in its own name as described above. Unless ZGEN voluntarily joins such suit, as described above, NN shall have the right to retain all damages awarded. If ZGEN does voluntarily join such suit, then out of any damages awarded, the parties have an equal right to recover their expenses for the proceeding; then NN shall pay to ZGEN the amount that would have been payable as royalties hereunder if the infringer’s infringing activities had been those of NN; then NN shall have the right to retain any damages remaining. If ZGEN does not voluntarily join such suit and in the event that it is an indispensable party required to be joined as a party in such infringement action involving the NN, ZGEN hereby agrees to waive any objections to such joinder on the grounds of standing, personal jurisdiction, venue and/or forum non conveniens, provided NN shall promptly reimburse ZGEN for all costs associated with such joinder.

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9.6 Settlement

(a) ZGEN may enter into any settlement, consent judgment, or other voluntary final disposition of any action that was initiated by ZGEN in accordance with Section 9.4 without NN’s prior consent; provided that NN receives a general release of any claims against it in such proceeding and NN is promptly provided thereafter a copy of such settlement, consent judgment or other voluntary disposition and such settlement is not otherwise inconsistent with the terms of this Agreement and would not have a material adverse impact on the validity, scope or enforceability of the IL-21 Related Patents, or result in a material payment by NN to a third party. Any other settlement, consent judgment or voluntary final disposition of any proceeding by ZGEN shall require the prior written consent of NN.

(b) NN may enter into any settlement, consent judgment, or other voluntary final disposition of any action that was initiated by NN in accordance with Section 9.5 without ZGEN’s prior consent; provided that ZGEN receives a general release of any claims against it in such proceeding and ZGEN is promptly provided thereafter a copy of such settlement, consent judgment or other voluntary disposition and such settlement is not otherwise inconsistent with the terms of this Agreement and would not have a material adverse impact on the validity, scope or enforceability of the IL-21 Related Patents, or result in a material payment by ZGEN to a third party, or, following the date of such settlement, result in a material reduction in payments by NN to ZGEN pursuant to Article Four. Any other such settlement, consent judgment or voluntary final disposition of any proceeding by NN shall require the prior written consent of ZGEN.

9.7 Patent Contacts

(a) Each party shall appoint its initial patent contact to coordinate patent matters in accordance with this Article Nine (each a “Patent Contact”) within thirty (30) days following the Effective Date and shall promptly thereafter notify the other party of such appointment. If at any time a vacancy occurs for any reason, the party that appointed the prior incumbent shall as soon as reasonably practicable appoint a successor. Each party shall promptly notify the other party in writing of any substitution of another person as its Patent Contact.

(b) Each party’s Patent Contact will be available throughout the term of this Agreement to answer any reasonable questions from the other party’s Patent Contact.

9.8 Cooperation

In any legal proceeding conducted under this Article Nine, each party agrees, without charge, to render such reasonable assistance, execute any documents and do such other acts as may be reasonably necessary in such legal action as the other party may reasonably request.

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9.9 Affiliates, Commercialization Partners and Sublicensees

NN shall require its Affiliates, Commercialization Partners and Sublicensees to comply with this Article Nine.

9.10 Filing, Prosecution, Maintenance of Cell Line Patents and Construction Strain Patents

ZGEN shall be solely responsible at its sole cost and expense for the filing, prosecution, maintenance and enforcement of Cell Line Patents and Construction Strain Patents.

9.11 Filing, Prosecution, Maintenance of Patents and Patent Applications arising from Work Performed pursuant to Annual Plan or Long Range Plan

As among the parties, all intellectual property arising from work performed pursuant to any Annual Plan or Long-Range Plan during the term of this Agreement shall be owned by NN or, if owned by ZGEN or jointly owned by ZGEN and NN, shall be licensed to NN in accordance with this Agreement. NN shall be solely responsible at its sole cost and expense for the filing, prosecution, maintenance and enforcement of all such intellectual property regardless of ownership. Ownership of intellectual property arising from work performed pursuant to any Annual Plan or Long-Range Plan during the term of this Agreement shall be determined in good faith in accordance with a determination of inventorship pursuant to the United States patent laws (Title 35, United States Code). All determinations of such inventorship shall be documented to ensure that divisional or continuation patent applications reflect appropriate inventorship.

ARTICLE TEN

Term and Termination

10.1 Term and Expiration

This Agreement and the licenses contained herein shall come into force on the Effective Date. Unless terminated earlier, the licenses provided hereunder for any Products shall expire on a country-by-country basis on the date on which ZGEN is no longer entitled to receive a royalty with respect thereto, and this Agreement shall expire on the date on which ZGEN is no longer entitled to receive a royalty from NN on any Product under this Agreement. After expiration (but not termination), NN shall have a fully paid-up (except for payments to third parties pursuant to Section 4.4), irrevocable, non-exclusive license under the IL-21 Related Know-How to make, have made, use, sell, offer to sell and import Know-How Products in the Territory.

10.2 Termination by NN for Convenience

NN may terminate this Agreement for any reason by giving ZGEN [*] prior written notice.

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10.3 Safety Reasons

NN may terminate this Agreement and the licenses granted hereunder upon six (6) months prior written notice to ZGEN with an explanation contained therein if, in the reasonable opinion of NN senior management, the development and/or commercialization of IL-21 Embodiments must be terminated for Safety Reasons. In such event, NN shall be obligated to pay to ZGEN all Milestone Fees outlined in Section 3.2 that have been achieved and accrued under this Agreement prior to termination. For purposes of this Section 10.3, “Safety Reasons” means [*], based on [*], that there [*] at [*] of the [*] or, if [*], [*] of the [*] listed in [*] in the [*] for which [*].

If NN terminates this Agreement pursuant to this Section 10.3, then any license granted to ZGEN under Section 10.9(c), any obligation of NN to continue to supply a Product under Section 10.9(d) and any obligation to assign to ZGEN any IND, BLA or Regulatory Approval under Section 10.9(b) shall be of no force or effect.

10.4 Insolvency

Either party shall have the right to terminate this Agreement forthwith by written notice to the other party (a) if the other party is declared insolvent or bankrupt by a court of competent jurisdiction, (b) if a voluntary or involuntary petition in bankruptcy is filed in any court of competent jurisdiction against the other party and such petition remains undismissed, undischarged or unbonded for a period of ninety (90) days after the filing thereof, or (c) if the other party shall make or execute an assignment for the benefit of creditors generally, have a receiver, administrator or an equivalent official appointed with respect to its properties or undertakings, enter into any liquidation or become insolvent. All rights and licenses granted under or pursuant to this Agreement by ZGEN to NN are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the United States Bankruptcy Code, as amended, (“Bankruptcy Code”) licenses of right to “intellectual property” as defined under Section 101 of the Bankruptcy Code. The parties agree that NN, as licensee of such rights under this Agreement, shall retain and may fully exercise all of its rights and elections under the Bankruptcy Code. The parties further agree that, in the event of the commencement of a bankruptcy proceeding by or against ZGEN under the Bankruptcy Code, NN shall be entitled to a complete duplicate of (or complete access to, as appropriate) any such intellectual property and all embodiments of such intellectual property, shall be promptly delivered to NN (i) upon any such commencement of a bankruptcy proceeding upon NN’s written request therefor, unless ZGEN elects to continue to perform all of its obligations under this Agreement, or (ii) if not delivered under (i) above, following the rejection of this Agreement by or on behalf of the party subject to such proceeding upon written request therefor by the non-subject party.

10.5 Breach

Each party shall have the right to terminate this Agreement after written notice to the other party in the event the other party is in material breach of this Agreement (including failure to meet diligence obligations or timely pay any amounts due hereunder), unless the other party cures such breach within sixty (60) days (or ten (10) days in the case of the failure to pay any

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amount due) after the date of notice; provided, however, that any termination shall not release either party from any obligations accrued prior thereto. Upon termination of this Agreement by NN pursuant to this Section 10.5, NN shall be entitled, at its own cost and for its own benefit, to sell or otherwise dispose of all Product that it has on hand on the effective date of termination during the six (6) months following the effective date of termination; provided that all such sales shall bear royalties in accordance with this Agreement.

10.6 Termination of License With Respect to Contested Patent Rights

ZGEN may at its option terminate this Agreement to the extent NN, or its Affiliate, Commercialization Partner or Sublicensee, or any entity acting in concert with or on behalf of any of them, commences any action or asserts any formal position in any forum (including a court, a patent office, or an arbitral tribunal, and whether in the form of petitions for declaratory relief, claims, counterclaims, defenses, interferences, petitions for re-examination, oppositions, or otherwise) that any IL-21 Related Patent is invalid or unenforceable.

10.7 Effect of Expiration or Termination

Expiration or termination of this Agreement shall not relieve the parties of any obligations accruing prior to such expiration or termination. In addition to any provision that expressly provides for its survival, any accrued obligation and the provisions of Article One, Section 2.3(b), Section 4.7, Articles Seven and Eight, Section 10.3, 10.8, 10.9, and Articles Eleven and Twelve shall survive the expiration or termination of this Agreement. Expiration or termination shall not affect any party’s ability to seek any other remedies available at law.

10.8 Survival of Obligations under Second Restated License Agreement

Any obligations accrued under the Second Restated License Agreement shall survive in accordance with the terms set forth in the Second Restated License Agreement. For the avoidance of doubt, obligations that NN has accrued regarding payment of costs accrued for IL-21 Related Patents as defined in the Second Restated License Agreement shall be payable in accordance with the terms set forth in this Agreement i.e., such costs shall rollover.

10.9 Return of Project Following Termination

Upon termination of this Agreement by NN pursuant to Section 10.2 and upon any termination of this Agreement by ZGEN, NN shall:

(a) At ZGEN’s request, transfer to ZGEN as promptly as is reasonably practicable, at no cost to ZGEN, all material data relating to Products that (i) is Controlled by NN or its Affiliates, (ii) has not previously been transferred to ZGEN, and (iii) was generated in the performance of activities by or on behalf of NN or its Affiliates, Commercialization Partners or Sublicensees under this Agreement or a Prior Agreement. During the [*] period commencing on the effective date of termination, NN shall offer, at no cost to ZGEN, such assistance as ZGEN may reasonably request in connection with the transfer of such data. If NN identifies any such data to ZGEN in writing and ZGEN does not request the transfer of an item of data in accordance

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with this Section 10.9(a) within [*] days following the date on which NN identifies such data in writing to ZGEN, NN shall be entitled to destroy such data at its own cost if permitted to do so under applicable law.

(b) At ZGEN’s request, assign to ZGEN all INDs, BLAs and Regulatory Approvals and, to the extent assignable, contracts for the manufacture, distribution or sale of Products.

(c) At ZGEN’s request, NN shall and does hereby grant to ZGEN an exclusive license, with right to sublicense, under the NN Development Technology (including NN Patents) that is necessary to make, have made, use, sell, offer to sell and import Products in the Territory.

(d) At ZGEN’s request, supply Products to ZGEN pursuant to a manufacturing and supply agreement, including costs and delivery terms, to be negotiated by the parties in good faith promptly following the date the notice of termination was given, the period for such manufacture and supply to be, unless the parties otherwise agree, the shorter of (i) a period of [*] years from the effective date of termination, or (ii) until ZGEN has the ability to manufacture the applicable Product in compliance with the Regulatory Approvals therefor and applicable laws following a technology transfer of manufacturing operations for such Product to ZGEN in accordance with terms and conditions to be negotiated by the parties in good faith promptly following the date the notice of termination was given.

ARTICLE ELEVEN

Representations and Warranties

11.1 Representations, Warranties and Covenants of NN

As of the Effective Date, NN represents and warrants to and covenants with ZGEN that:

(a) NN is a corporation duly organized, validly existing and in corporate good standing under the laws of Denmark; and

(b) NN has the corporate and legal right, title, authority and power to enter into this Agreement; and

(c) NN has taken all necessary action to authorize the execution, delivery and performance of this Agreement; and

(d) upon the execution and delivery of this Agreement, this Agreement shall constitute a valid and binding obligation of NN, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ and contracting parties’ rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); and

(e) the performance of its obligations under this Agreement will not conflict with or result in a breach of any agreements, contracts or other arrangements to which it is a party; and

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(f) NN will not during the term of this Agreement enter into any agreements, contracts or other arrangements that would prevent NN from meeting its obligations or adversely impact ZGEN’s rights under this Agreement; and

(g) NN will comply with all applicable laws, regulations and guidelines in connection with the exercise of NN’s license rights under this Agreement, including all applicable product safety, product testing, product labeling, package marking and product advertising laws and regulations and the regulations of any relevant nations concerning any export or other transfer of technology, services or products.

11.2 Representations, Warranties and Covenants of ZGEN

As of the Effective Date, ZGEN represents and warrants to and covenants with NN that:

(a) ZGEN is a corporation duly organized, validly existing and in corporate good standing under the laws of the State of Washington, USA; and

(b) ZGEN has the corporate and legal right, title, authority and power to enter into this Agreement; and

(c) ZGEN has taken all necessary action to authorize the execution, delivery and performance of this Agreement; and

(d) upon the execution and delivery of this Agreement, this Agreement shall constitute a valid and binding obligation of ZGEN enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ and contracting parties’ rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or, at law); and

(e) the performance of its obligations under this Agreement will not conflict with or result in a breach of any agreements, contracts or other arrangements to which it is a party; and

(f) ZGEN will not after the Original License Effective Date enter into any agreements, contracts or other arrangements that would prevent ZGEN from meeting its obligations or adversely impact NN’s rights under this Agreement;

(g) ZGEN will comply with all applicable laws, regulations and guidelines in connection with the performance of ZGEN’s obligations under this Agreement;

(h) Part A of Appendix 1 identifies all patent applications and patents in the Territory that are owned or Controlled by ZGEN that claim an invention with a date of conception prior to the Effective Date and that claim: (i) an IL-21 Embodiment; (ii) a process, formulation and/or mixture comprising an IL-21 Embodiment; (iii) a method of making or manufacturing an IL-21 Embodiment; or (iv) a method of using an IL-21 Embodiment;

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(i) other than the [*] Agreement, there are no agreements or arrangements between ZGEN and any third party relating to the IL-21 Related Patents or which could otherwise affect NN’s ability to market or sell Products in the Territory;

(j) ZGEN has not received any written communications from any third party that any patent within the IL-21 Related Patents is invalid or unenforceable or, except in connection with the ongoing opposition proceedings related to [*], that any patent application or patent within the IL-21 Related Patents is subject to interference, reexamination, reissue, revocation, opposition, appeal or other administrative proceedings (including any third party inventorship dispute); provided that nothing in this Agreement shall be construed as a representation or warranty as to the scope or validity of any patent application or patent within the IL-21 Related Patents;

(k) all required maintenance fees have been paid with regard to the IL-21 Related Patents; and

(l) following execution of the Letter Agreement, ZGEN is not in breach or default of any of its material obligations under the [*] Agreement.

11.3 Warranty Disclaimer

EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, NEITHER PARTY MAKES ANY WARRANTY WITH RESPECT TO IL-21 EMBODIMENTS, PRODUCTS, IL-21 RELATED PATENTS, IL-21 RELATED KNOW-HOW OR OTHER SUBJECT MATTER OF THIS AGREEMENT AND HEREBY DISCLAIMS WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT AND PATENTABILITY WITH RESPECT TO ANY AND ALL OF THE FOREGOING.

11.4 Limited Liability

EXCEPT IN THE CASE OF GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, NEITHER NN NOR ZGEN WILL BE LIABLE WITH RESPECT TO ANY MATTER ARISING UNDER THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR ANY PUNITIVE OR EXEMPLARY DAMAGES.

ARTICLE TWELVE

Miscellaneous

12.1 Assignment

This Agreement may not be assigned by either party without prior written consent of the other party, except to: (a) a successor or a purchaser of all or substantially all of the party’s assets and business or (b) an Affiliate; provided, however, that in the event of an assignment by NN to an Affiliate, the Affiliate’s rights under this Agreement shall terminate once it ceases being an Affiliate of NN (however, its rights may be reassigned back to NN at the time it ceases being an

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Affiliate of NN). If, as a result of any assignment of any rights or interest in this Agreement by NN, any payment by or on behalf of NN to ZGEN is subject to an increased level of tax withholding than would have been the case under this Agreement with payments by NN from Denmark and ZGEN cannot use any related tax credit as an offset against its obligation to pay United States federal income tax in the year in which the withholding is effected, NN shall pay ZGEN an amount such that, after deduction of any amount required to be withheld, ZGEN receives the same amount that it would have received but for the assignment. In the event of any permissible assignment under this Agreement, the assignor shall guarantee the assignee’s performance of the assignor’s obligations hereunder. ZGEN shall have the right to assign its right to receive any payments under this Agreement.

12.2 Relationship between the Parties

Nothing in this Agreement is intended to create or shall be deemed to constitute a partnership, agency or joint venture relationship between the parties or their sublicensees, contractors or licensees. Neither party shall be responsible for the acts or omissions of the other party, and neither party shall have the authority to speak for, represent or obligate the other party in any way without the prior written authority of the other party.

12.3 Public Announcements

(a) The parties will issue a joint press release, substantially in the form set out in Schedule 2, and will cooperate in the release thereof as soon as practicable after the signature of this Agreement by the parties.

(b) No other public announcement or other disclosure to third parties (other than as permitted by Section 7.3) concerning the existence or terms of this Agreement shall be made, either directly or indirectly, by either party hereto, without first obtaining the written approval of the other party, which shall include agreement upon the nature and text of such announcement or disclosure, except as may be required by any applicable law or regulation, including those of the U.S. Securities and Exchange Commission. The party desiring to make any such public announcement or other disclosure shall inform the other party of the proposed announcement or disclosure by providing the other party with a written copy thereof, and allowing reasonably sufficient time prior to public release to permit such other party to comment upon such announcement or disclosure. Once any such public announcement or disclosure has been approved in accordance with this Section 12.3, then either party may appropriately communicate information contained in such permitted announcement or disclosure.

(c) Each party agrees that it shall reasonably cooperate with the other with respect to all disclosures regarding this Agreement to the Securities and Exchange Commission and any other governmental or Agencies, including requests for confidential treatment of proprietary information of either party included in any such disclosure.

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12.4 Use of Names, Trade Names and Trademarks

Except as provided herein, nothing contained in this Agreement shall be construed as conferring any right on either party to use in advertising, publicity or other promotional activities any name, trade name, trademark or other designation of the other party hereto, including any contraction, abbreviation or simulation of any of the foregoing, unless the express written permission of such other party has been obtained.

12.5 Force Majeure

If either party to this Agreement is prevented or delayed in the performance of any of its obligations under this Agreement by force majeure, and if such party gives written notice thereof to the other party specifying the matters constituting force majeure, together with such evidence as it can reasonably give and specifying the period for which it is estimated that such prevention or delay will continue, then the party in question shall be excused from the performance of its obligations or the punctual performance thereof as the case may be as from the date of such notice for so long as such cause of prevention or delay shall continue. For the purpose of this Agreement, “force majeure” shall be deemed to be any cause affecting the performance of this Agreement arising from or attributable to acts, events, omissions or accidents beyond the reasonable control of the party.

12.6 Governing Law

This Agreement shall be governed by and construed in accordance with the law of the State of New York, without regard to the conflicts of law rules of such state.

12.7 Waiver of Remedies

No forbearance, delay or indulgence by either party in enforcing the provisions of this Agreement shall prejudice or restrict the rights of that party, nor shall any waiver of its rights operate as a waiver of any subsequent breach, and no right, power or remedy herein conferred upon or reserved for either party is exclusive of any other right, power or remedy available to that party.

12.8 Entire Agreement

This Agreement and the Appendices hereto constitute the entire agreement between the parties and supersede all prior oral and written agreements, understandings or arrangements relating to the subject matter hereof, including the Second Restated License Agreement and Confidentiality Agreement, dated January 15, 2008. No addition to or modification of any provision of this Agreement shall be binding upon the parties, unless made in writing and signed by a duly authorized representative of each of the parties.

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12.9 Notices

All notices or other communication hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, faxed with receipt acknowledged (and with a confirmation copy also sent by registered mail, return receipt requested), or delivered by a recognized commercial courier service with receipt acknowledged, postage prepaid, as follows:

If to NN:	Novo Nordisk A/S
	Novo Allé
	DK-2880 Bagsvaerd
	Denmark
	Attn: Head of Business Development
	Facsimile:	+45 4442-1830
With a copy to:	Novo Nordisk Legal Department
	Novo Allé
	DK-2880 Bagsvaerd
	Denmark
	Attn: Head of Licensing, Litigation & Trademarks
	Facsimile:	+45 4498 0670
If to ZGEN:	ZymoGenetics, Inc.
	1201 Eastlake Avenue East
	Seattle, WA 98102
	Attn: Vice President, Law & Compliance
	Facsimile:	(206) 442-6697

or to such other addresses as the addressee may have specified in a notice duly given to the sender as provided herein. Such notices or other communication will be deemed effective as of the date so delivered (either personally or by courier service) or faxed.

12.10 Severability

The parties agree that, if any provision of this Agreement shall for any reason be held to be invalid or unenforceable, such provision shall be enforced to the maximum extent permitted by law and the parties’ fundamental intentions hereunder, and the remaining provisions hereof shall not be affected, impaired or invalidated and shall continue in full force and effect.

12.11 Headings

The headings contained herein are for reference only and shall not be considered a part of this Agreement, nor shall they in any way affect the interpretation hereof.

12.12 Review of Agreement

This Agreement has been submitted to the scrutiny of both parties and their counsel and shall be given a fair and reasonable interpretation in accordance with the words hereof, without consideration or weight being given to its being drafted by or for one of the parties.

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12.13 Compliance with Laws; Export Regulations

In performance of this Agreement, each party shall comply with all laws, regulations, rules, orders and other requirements and guidelines, now or hereafter in effect, and governmental authorities having jurisdiction. This Agreement and any information related to IL-21 Related Know-How provided hereunder are subject to restrictions concerning the export of information and materials that may be imposed by government. Accordingly, NN agrees that it will not export, directly or indirectly, any information or materials acquired under this Agreement or any products utilizing such information or materials to any country for which a government or any agency thereof at the time of export requires an export license or other governmental approval, without first obtaining the written consent to do so from the appropriate agency of the government when required by an applicable statute or regulation.

12.14 [*]

Prior to executing the USA Co-Promotion Agreement, the parties shall inform each other of their respective [*] (“[*]”), if any. Thereafter, the parties shall make suitable representatives reasonably available to discuss such [*].

12.15 Counterparts

This Agreement may be executed in two or more counterparts each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

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* Confidential Treatment Requested.

IN WITNESS WHEREOF, the parties have executed and delivered this Agreement to be effective as of the Effective Date.

NOVO NORDISK A/S
By:	/s/ JESPER BRANDGAARD
	Jesper Brandgaard
Its:	Chief Financial Officer
By:	/s/ MADS KROGSGAARD THOMSEN
	Mads Krogsgaard Thomsen
Its:	Chief Science Officer
ZYMOGENETICS, INC.
By:	/s/ DOUGLAS E. WILLIAMS
	Douglas E. Williams, Ph.D.
Its:	Chief Executive Officer

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[*]

Schedule 1

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* Confidential Treatment Requested.

SCHEDULE 2

to the Third Restated License Agreement

for IL-21 Embodiments,

dated December 3, 2009

PRESS RELEASE

Novo Nordisk licenses IL-21 mAb and patent rights to IL-21 antibodies from

ZymoGenetics

24 million US dollars upfront payment with 157.5 million dollars of total potential

milestone payments

Seattle, [month, day], 2009— Novo Nordisk A/S (NYSE: NVO) and ZymoGenetics, Inc. (NASDAQ: ZGEN) today announced an agreement where Novo Nordisk in-licenses a fully-human anti-IL21 monoclonal antibody (IL-21 mAb) developed by ZymoGenetics, as well as broad intellectual property rights covering IL-21 mAb and the development of other IL-21 antibodies. The IL-21 mAb is a pre-IND candidate for the treatment of autoimmune and inflammatory diseases. Novo Nordisk in-licensed intellectual property rights to IL-21 antibodies outside North America in 2001 and now has worldwide rights.

Under the terms of the licence, Novo Nordisk has agreed to pay ZymoGenetics an initial upfront cash payment of 24 million dollars. In addition, as the development programme of the IL-21 mAb advances, ZymoGenetics may receive further milestones from Novo Nordisk of up to 157.5 million dollars over the term of the agreement, including a 1.5 million dollar milestone payment upon filing an investigational new drug application and a 8.5 million dollar milestone payment at the start of phase 1 studies with the mAb, plus royalties on net sales. ZymoGenetics also has a right to co-promote the IL-21 mAb product in the US if the company contributes to phase 3 clinical development costs.

“Novo Nordisk is currently building a pipeline of products to treat autoimmune and inflammatory diseases such as rheumatoid arthritis, lupus and inflammatory bowel disease,” said Mads Krogsgaard Thomsen, executive vice president and chief science officer of Novo Nordisk. “It was important for us to secure the worldwide rights to the IL-21 mAb project as well as worldwide patent rights to IL-21 antibodies, and we look forward to initiating a phase 1 trial with this IL-21 mAb in 2010.”

“ZymoGenetics has a rich pipeline and, while the IL-21 mAb is an exciting molecule, we believe that other development programmes offer us a better opportunity for return on investment,” said Douglas E Williams, PhD, chief executive officer of ZymoGenetics. “We believe that Novo Nordisk will be able to develop and create value for this asset. Furthermore, we have the option to increase our participation in commercialisation of the product, retaining long-term upside potential for our shareholders.”

Schedule 2

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As part of the agreement, ZymoGenetics retains the option to fund a portion of phase 3 clinical development costs in exchange for an increased royalty rate on US sales and US co-promotion rights. If ZymoGenetics exercises the option, it would pay a fixed fee of 10 million dollars together with 15% of the costs of phase 3 clinical trials, and royalties on US sales would increase from single to double digits.

IL-21 mAb

ZymoGenetics developed a fully-human anti-IL-21 monoclonal antibody, or IL-21 mAb, as a potential therapeutic treatment for autoimmune and chronic inflammatory disorders. Cell biology experiments and preclinical models of inflammatory diseases suggest that IL-21 is a key mediator of inflammation, and over-expression patterns of IL-21 and its receptor in inflamed tissues of human diseases, such as in inflammatory bowel disease, rheumatoid arthritis and lupus, further support the role of IL-21 in the disease process.

ZymoGenetics is focused on the creation of novel protein drugs to improve patient care and address unmet medical needs. The company’s strategy is to discover, develop and commercialize its products independently, in collaboration with partner companies or through out-licensing. ZymoGenetics developed and markets RECOTHROM^® Thrombin, topical (Recombinant). The company is developing a proprietary portfolio of immune-based product candidates. PEG-Interferon lambda is a novel type-3 interferon in clinical development for the treatment of chronic hepatitis C infection. Interleukin-21 is a novel cytokine in clinical development for the treatment of metastatic melanoma and renal cell carcinoma. Several other proprietary product candidates are in preclinical development. In addition, ZymoGenetics has licensed rights to multiple clinical and preclinical drug candidates being developed by other companies. For further information, visit www.zymogenetics.com.

Novo Nordisk is a healthcare company and a world leader in diabetes care. In addition, Novo Nordisk has a leading position within areas such as haemostasis management, growth hormone therapy and hormone replacement therapy. Novo Nordisk manufactures and markets pharmaceutical products and services that make a significant difference to patients, the medical profession and society. With headquarters in Denmark, Novo Nordisk employs more than 28,500 employees in 81 countries, and markets its products in 179 countries. Novo Nordisk’s B shares are listed on the stock exchanges in Copenhagen and London. Its ADRs are listed on the New York Stock Exchange under the symbol ‘NVO’. For more information, visit novonordisk.com.

ZymoGenetics Forward-Looking Statements

This press release contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on the current intent and expectations of the management of ZymoGenetics. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. ZymoGenetics actual results and the timing and outcome of events may differ materially from those expressed in or implied by the forward-looking statements because of risks associated with ZymoGenetics dependence on Novo Nordisk to develop and commercialize IL-21 mAb. In particular, ZymoGenetics ability to generate revenues from the license arrangement is subject to numerous risks, including, among other things: the possibility that Novo Nordisk chooses to scale back or discontinue its development of IL-21 mAb due to, among other things, changes in its strategies, restructuring, mergers or acquisitions; the

Schedule 2

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possibility that clinical trials involving IL-21 mAb reveal that it is not effective or has undesirable side effects, unacceptable toxicities or other characteristics that preclude regulatory approval or prevent or limit commercial use; and the length of time that it takes for Novo Nordisk to solve technical problems or achieve various clinical development and regulatory approval milestones. In addition, the forward-looking statements in this press release are subject to the other risks detailed in the other risks detailed in the ZymoGenetics Annual Report on Form 10-K for the year ended December 31, 2008, Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and from time to time in other reports filed by ZymoGenetics with the U.S. Securities and Exchange Commission. Except as required by law, ZymoGenetics undertakes no obligation to update any forward-looking or other statements in this press release, whether as a result of new information, future events or otherwise.

Further information:
Novo Nordisk Media:	Novo Nordisk Investors:
Rachel Curtis Gravesen	Mads Veggerby Lausten
Tel: (+45) 4442 7603	Tel: (+45) 4443 7919
rcgv@novonordisk.com	mlau@novonordisk.com
	Kasper Roseeuw Poulsen
	Tel: (+45) 4442 4471
	krop@novonordisk.com
In North America:	In North America:
Sean Clements	Hans Rommer
Tel: (+1) 609 514 8316	Tel: (+1) 609 919 7937
secl@novonordisk.com	hrmm@novonordisk.com

ZymoGenetics Media and Investors:

Susan W Specht 206-442-6592

Schedule 2

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[*]

Schedule 3

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* Confidential Treatment Requested.

[*]

Appendix 1

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* Confidential Treatment Requested.

[*]

Appendix 2

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* Confidential Treatment Requested.

[*]

Appendix 3

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* Confidential Treatment Requested.

[*]

Schedule 1 to Appendix 3

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* Confidential Treatment Requested.

APPENDIX 4

to the Third Restated License Agreement

for IL-21 Embodiments,

dated December 3, 2009

NOVO NORDISK INVOICE INSTRUCTIONS

Novo Nordisk Invoice Instructions

We kindly ask you to comply with the following guidelines when sending invoices to NN. A properly formulated invoice is a requirement for payment by NN.

Invoices must be addressed to the address directly below and may be sent to NN as a PDF file attached to an email at [*]

[*]

Alternatively, hard copy invoices may be sent by mail or courier to the address above.

NN does not accept invoices received via facsimile.

All invoices must include:

• A clear statement that the document sent is an invoice

• A reference to the NN agreement ID

• A reference to the specific section in the contract that identifies the payment obligation Value Added Tax number or Federal ID/registration number of your affiliation (if relevant)

• Recipient’s bank information that uniquely identifies recipient’s bank account:

1. International Bank Account Number and/or IBAN code (the latter is applicable in all EU countries): [*]

2. Name of Bank: [*]

3. Address of Bank: [*]

4. Bank details (e.g. ACH/ABA/Routing/Fedwire/Transit number/Sort Number):[*]

Appendix 4

-1-

* Confidential Treatment Requested.

5. Swift code: [*]

6. Account Name: [*]

7. Currency: [*]

If you have questions regarding the above, please contact the person identified above as being your NN contact person.

Thank you very much for your cooperation.

Appendix 4

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* Confidential Treatment Requested.

[*]

Appendix 5

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* Confidential Treatment Requested.

[*]

Appendix 6

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* Confidential Treatment Requested.

EX-10.41

Exhibit 10.41

*       Confidential Treatment has been requested for the marked portions of this exhibit pursuant to Rule 24B-2 of the Securities Exchange Act of 1934, as amended.

Amendment to U.S. Co-Promotion Agreement

This amendment (the “Amendment”) to the U.S. Co-Promotion Agreement (the “Agreement”) by and between ZymoGenetics, Inc. (“ZGEN”) and Bayer HealthCare LLC (“Bayer”) effective as of June 18, 2007 is made the 1st day of January 2010 (the “Effective Date”) by and among ZGEN, Bayer and ZymoGenetics, LLC, ZGEN’s assignee under the Agreement (“Zymo”). Capitalized terms not otherwise defined herein shall have those meanings set forth in the Agreement. The term, “Party” shall mean Bayer, ZGEN or Zymo and the term, “Parties” means all of them.

For and in consideration of the promises and covenants contained herein and of the releases executed of even date herewith, the Parties agree as follows:

1. The definition of Active Period shall be amended and restated in its entirety as follows:

“Active Period” means the period of time commencing on the Launch Date and ending on December 31, 2009.

2. Each of the Coordination Committee, CPT and the MET shall be disbanded upon expiration or earlier termination of the Active Period.

3. Bayer’s obligations under Section 2.7 shall terminate at the conclusion of the Active Period.

4. Section 4.2.2 of the Agreement is amended and restated in its entirety as follows:

4.2.2 Sunset Period Commission. In consideration for Bayer’s Detailing and promotional activities during the Active Period, ZGEN shall pay Bayer during the period from December 31, 2009 through December 31, 2011 (the “Sunset Period”) a commission that is equal to [*] percent ([*]%) of Net Sales; provided, however, that in no event shall ZGEN be obligated to pay Bayer aggregate commission in excess of twelve million US dollars ($US 12,000,000) during the Sunset Period (the “Commission Cap”).

5. Sections 3.2.3, 3.2.4, 4.3 and 9.3.2 are deleted.

* Confidential Treatment Requested.

6. Section 9.1 is amended and restated in its entirety as follows:

This Agreement shall be in effect from the Effective Date until the earlier of the expiration of the Sunset Period or, if earlier, the date as of which aggregate payments due and owing by ZGEN or Zymo pursuant to Section 4.2.2 reach the Commission Cap.

7. BAYER AND ITS AFFILIATES HEREBY DO RELEASE, ACQUIT, AND FOREVER DISCHARGE ZGEN AND ITS AFFILIATES, AND THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS AND REPRESENTATIVES, AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS FROM ANY AND ALL LIABILITIES, CLAIMS, AND LOSSES (NOT INCLUDING CLAIMS, DEMANDS AND CAUSES OF ACTION FOR INDEMNIFICATION OR CONTRIBUTION) THAT BAYER OR ITS AFFILIATES HAD, NOW HAVE, OR HEREAFTER MAY HAVE, WHETHER KNOWN OR UNKNOWN, CONTINUING OR COMPLETED, CONTINGENT OR ABSOLUTE, IN CONTRACT OR IN TORT, AT LAW OR IN EQUITY, WHICH RELATE IN ANY WAY TO ANY ACTS OR OMISSIONS OF ZGEN OR ITS AFFILIATES OR THEIR REPRESENTATIVES ARISING UNDER THE AGREEMENT ON OR BEFORE THE EFFECTIVE DATE. BAYER AND ITS AFFILIATES AGREE THAT THIS RELEASE REMAINS AND WILL REMAIN IN EFFECT AND SHALL SURVIVE INDEFINITELY WITHOUT RESTRICTION, QUALIFICATION OR LIMITATION IN ALL RESPECTS AS A COMPLETE RELEASE AS TO THE MATTERS RELEASED AND THE RELEASE SHALL CONSTITUTE A COMPLETE DEFENSE TO ANY CLAIM RELEASED HEREIN.

8. ZGEN AND ITS AFFILIATES HEREBY DO RELEASE, ACQUIT, AND FOREVER DISCHARGE BAYER AND ITS AFFILIATES, AND THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS AND REPRESENTATIVES, AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS FROM ANY AND ALL LIABILITIES, CLAIMS AND LOSSES (NOT INCLUDING CLAIMS, DEMANDS AND CAUSES OF ACTION FOR INDEMNIFICATION OR CONTRIBUTION) THAT ZGEN OR ITS AFFILIATES HAD, NOW HAVE, OR HEREAFTER MAY HAVE, WHETHER KNOWN OR UNKNOWN, CONTINUING OR COMPLETED, CONTINGENT OR ABSOLUTE, IN CONTRACT OR IN TORT, AT LAW OR IN EQUITY, WHICH RELATE IN ANY WAY TO ANY ACTS OR OMISSIONS OF BAYER OR ITS AFFILIATES, OR THEIR REPRESENTATIVES ARISING UNDER THE AGREEMENT ON OR BEFORE THE EFFECTIVE DATE. ZGEN AND ITS AFFILIATES AGREE THAT THIS RELEASE REMAINS AND WILL REMAIN IN EFFECT AND SHALL SURVIVE INDEFINITELY WITHOUT RESTRICTION, QUALIFICATION OR LIMITATION IN ALL RESPECTS AS A COMPLETE RELEASE AS TO THE MATTERS RELEASED AND THE RELEASE SHALL CONSTITUTE A COMPLETE DEFENSE TO ANY CLAIM RELEASED HEREIN.

9. FOR PURPOSES OF THIS AMENDMENT, “LOSSES” SHALL MEAN ANY LOSS, COST, LIABILITY, EXPENSE, SETTLEMENT DAMAGE OF ANY KIND (INCLUDING PUNITIVE OR EXEMPLARY DAMAGES), OBLIGATION, CHARGE, FEE, PENALTY, INTEREST, COURT COSTS AND/OR ADMINISTRATIVE FEES, REASONABLE ATTORNEYS FEES, REASONABLE EXPERT FEES, AND REASONABLE CONSULTING FEES. “CLAIM” SHALL MEAN ANY DISPUTE, CONTROVERSY, DEMAND, OR ACTION.

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10. Except as expressly qualified, modified, amended or supplemented hereby, the Agreement shall continue in full force and effect.

11. This Amendment shall be binding upon and enforceable by and against the Parties and their respective successors, assignees and legal representatives, and there shall be no third party beneficiaries hereof.

12. Each Party hereby represents and warrants that:

(a) each of the execution, delivery and performance of this Amendment by such Party has been duly authorized by all necessary action, does not require any approval, except as has been heretofore obtained, of any member, partner, shareholder, officer or director or any consent of or approval from any trustee, lessor or holder of any indebtedness or other obligation except for such as have been duly obtained, and does not contravene or constitute a default under, any provision of applicable law or regulations, the organizational documents of such Party, or of any agreement, judgment, injunction, order decree or other instrument binding upon such Party, and such Party is in compliance with all applicable laws and regulations which govern its ability to perform its obligations under this Amendment;

(b) such Party has duly executed and delivered this Amendment, and this Amendment constitutes a valid and binding obligation of such Party enforceable against it in accordance with its terms, except as such enforceability may be affected by any bankruptcy, moratorium, rearrangement, insolvency, reorganization or similar law affecting the rights and remedies of creditors generally or the application of principles of equity; and

(c) it has not sold, transferred, conveyed, assigned, hypothecated or subrogated any of its rights, claims, defenses, or causes of action expressly released and/or resolved in this Amendment.

- 3 -

IN WITNESS WHEREOF, the Parties have caused their duly authorized officers to execute and deliver this Amendment as of the Effective Date.

ZYMOGENETICS, INC.		BAYER HEALTHCARE LLC
By:	/s/ DOUGLAS E. WILLIAMS	By:	/s/ R. CHRISTOPHER SEATON
Name:	Douglas E. Williams	Name:	R. Christopher Seaton
Title:	CEO	Title:	Sr. Vice President
	Dec 18 2009
ZYMOGENETICS, LLC
By:	/s/ JOHN DERRY
Name:	John Derry
Title:	Regional Business Director
	12/18/2009

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EX-10.43

Exhibit 10.43

*       Confidential Treatment has been requested for the marked portions of this exhibit pursuant to Rule 24B-2 of the Securities Exchange Act of 1934, as amended.

Amendment To License and Collaboration Agreement

This Amendment (the “Amendment”) to License and Collaboration Agreement (the “Agreement”) by and between ZymoGenetics, Inc. (“ZGEN”) and Bayer Schering Pharma AG (“Bayer”) effective as of June 18, 2007 is made as of the 1st day of January 2010 (the “Effective Date”) by and among ZGEN, Bayer and ZymoGenetics, LLC, ZGEN’s assignee under the Agreement (“Zymo”). Capitalized terms not otherwise defined herein shall have those meanings set forth in the Agreement. The term, “Party” shall mean Bayer, ZGEN or Zymo and the term, “Parties” means all of them.

For and in consideration of the promises and covenants contained herein and for good and valuable consideration, the Parties agree as follows:

1. Notwithstanding anything to the contrary in the Agreement, from and after the Effective Date, Bayer shall have no further obligations (a) to Develop any Initial Licensed Products or Licensed Products or (b) launch or Commercialize any Initial Licensed Products, except the 5K unit vial in Canada under the current terms of the Agreement and[*]. The obligations of Bayer set forth in Subsection (b) above shall be subject to the availability from ZGEN of Initial Licensed Product (other than packaging and labeling) approved by the FDA and acceptable to Health Canada after the sale by Bayer of its initial launch stock of the 5K unit vials.

2. Section 1.2.14 shall be amended and restated in its entirety as follows:

“Bayer Territory” means Canada.

3. Section 1.2.138 shall be amended and restated in its entirety as follows:

“ZGEN Territory” means all countries of the world except Canada.

4. Bayer will use Commercially Reasonable Efforts to promptly transfer to ZGEN ownership of all Regulatory Filings and Regulatory Approvals in all countries of the world other than Canada that are in Bayer’s name for all Licensed Product and will notify the appropriate Regulatory Authorities in any such country and take any other action reasonably necessary to effect such transfer of ownership. ZGEN shall bear all reasonable external costs and expenses incurred by Bayer in connection with any transfer to ZGEN. For the avoidance of doubt, Bayer may withdraw any pending Regulatory Filings that (a) cannot be legally transferred to ZGEN or (b) that Bayer requests be withdrawn, subject to ZGEN’s prior written consent, not to be unreasonably withheld or delayed. Bayer shall bear all reasonable external costs and expenses incurred in connection with any such withdrawal. Bayer will assign to ZGEN Bayer’s interest and responsibilities in the Product Trademarks in all countries of the world other than Canada, including any Product Trademark in such countries that includes the words “Recothrom” or “Recothromb.

* Confidential Treatment Requested.

5. Section 3.5 shall be amended and restated in its entirety as follows:

3.5 Manufacturing Process

The Parties shall enter into an amendment to that certain Manufacturing Agreement for Initial Licensed Products between Bayer and ZGEN dated as of February 27, 2009 (as amended, the “Supply Agreement”) in which ZGEN shall agree to provide to Bayer sufficient quantities of Initial Licensed Product (other than packaging and labeling) approved by the FDA and acceptable to Health Canada for Canada. The amendment to the Supply Agreement shall allow Bayer to place orders for Initial Licensed Product in less than batch sizes. The prices for Initial Licensed Product for Canada shall be consistent with the current pricing principles set forth in the Supply Agreement, but the Parties agree to use Commercially Reasonable efforts to develop the lowest cost-effective pricing options. A minimum order size for each Initial Licensed Product will be mutually agreed as part of the amendment.

6. For the avoidance of doubt, Bayer’s responsibilities under Section 3.7(a) are terminated with respect to all countries except Canada.

7. Section 8.1 of the Agreement shall apply to Canada only with respect to [*] and, subject to Section 1 of this Amendment above, [*].

8. Notwithstanding Section 10.2(a) of the Agreement, Bayer shall never be required to pay any Regulatory Milestone Payments with respect to any Regulatory Milestone Events, including with respect to the First Regulatory Approval of an Initial Licensed Product in Canada.

9. Section 10.2(c) shall be amended and restated in its entirety as follows:

Each of the Sales Milestone Payments shall be paid only once upon the first occurrence of each corresponding Sales Milestone Event. If more than one Sales Milestone Event occurs in a calendar year, the Sales Milestone Payment corresponding to the lowest Sales Milestone Event shall be payable in such calendar year and, provided that the same or higher Sales Milestone Event occurs in the next consecutive calendar years, the Sales Milestone Payment corresponding to the next lowest Sales Milestone Event shall be payable in each subsequent consecutive year until all Sales Milestone Payments have been made for the corresponding Sales Milestone Events. For example, if aggregate Net Sales in year one (1) are [*], aggregate Net Sales in year two (2) are [*], and aggregate Net Sales in year three (3) are [*], then Bayer will pay the [*] Sales Milestone Payment in year one (1), the [*] Sales Milestone Payment in year two (2), and the

* Confidential Treatment Requested.

[*] Sales Milestone Payment in year three (3). Each Sales Milestone Payment (each a “Milestone Payment”) is in addition to any other Milestone Payment set forth on Exhibit B, and each Milestone Payment will be non-refundable and non-creditable against Royalties payable pursuant to Section 10.3 and any other fees, other Milestone Payments or other payments due ZGEN with respect to Licensed Product under this Agreement, the Manufacturing Agreements or any other manufacturing and supply agreement. A Milestone Payment shall be due regardless of whether Bayer, its Affiliates or the respective Sublicensees achieve the corresponding Sales Milestone Event.

10. BAYER AND ITS AFFILIATES HEREBY DO RELEASE, ACQUIT, AND FOREVER DISCHARGE ZGEN, ZYMO AND THEIR AFFILIATES, AND THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS AND REPRESENTATIVES, AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS FROM ANY AND ALL LIABILITIES, CLAIMS, AND LOSSES (NOT INCLUDING CLAIMS, DEMANDS AND CAUSES OF ACTION FOR INDEMNIFICATION OR CONTRIBUTION) THAT BAYER OR ITS AFFILIATES HAD, NOW HAVE, OR HEREAFTER MAY HAVE, WHETHER KNOWN OR UNKNOWN, CONTINUING OR COMPLETED, CONTINGENT OR ABSOLUTE, IN CONTRACT OR IN TORT, AT LAW OR IN EQUITY, WHICH RELATE IN ANY WAY TO ANY ACTS OR OMISSIONS OF ZGEN, ZYMO OR THEIR AFFILIATES OR THEIR REPRESENTATIVES ARISING UNDER THE AGREEMENT ON OR BEFORE THE EFFECTIVE DATE. BAYER AND ITS AFFILIATES AGREE THAT THIS RELEASE REMAINS AND WILL REMAIN IN EFFECT AND SHALL SURVIVE INDEFINITELY WITHOUT RESTRICTION, QUALIFICATION OR LIMITATION IN ALL RESPECTS AS A COMPLETE RELEASE AS TO THE MATTERS RELEASED AND THE RELEASE SHALL CONSTITUTE A COMPLETE DEFENSE TO ANY CLAIM RELEASED HEREIN.

11. ZGEN, ZYMO AND THEIR AFFILIATES HEREBY DO RELEASE, ACQUIT, AND FOREVER DISCHARGE BAYER AND ITS AFFILIATES, AND THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS AND REPRESENTATIVES, AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS FROM ANY AND ALL LIABILITIES, CLAIMS AND LOSSES (NOT INCLUDING CLAIMS, DEMANDS AND CAUSES OF ACTION FOR INDEMNIFICATION OR CONTRIBUTION) THAT ZGEN, ZYMO OR THEIR AFFILIATES HAD, NOW HAVE, OR HEREAFTER MAY HAVE, WHETHER KNOWN OR UNKNOWN, CONTINUING OR COMPLETED, CONTINGENT OR ABSOLUTE, IN CONTRACT OR IN TORT, AT LAW OR IN EQUITY, WHICH RELATE IN ANY WAY TO ANY ACTS OR OMISSIONS OF BAYER OR ITS AFFILIATES OR THEIR REPRESENTATIVES ARISING UNDER THE AGREEMENT ON OR BEFORE THE EFFECTIVE DATE. ZGEN, ZYMO AND THEIR AFFILIATES AGREE THAT THIS RELEASE REMAINS AND WILL REMAIN IN EFFECT AND SHALL SURVIVE INDEFINITELY WITHOUT RESTRICTION, QUALIFICATION OR LIMITATION IN ALL RESPECTS AS A COMPLETE RELEASE AS TO THE MATTERS RELEASED AND THE RELEASE SHALL CONSTITUTE A COMPLETE DEFENSE TO ANY CLAIM RELEASED HEREIN.

* Confidential Treatment Requested.

12. FOR PURPOSES OF THIS AMENDMENT, “LOSSES” SHALL MEAN ANY LOSS, COST, LIABILITY, EXPENSE, SETTLEMENT DAMAGE OF ANY KIND (INCLUDING PUNITIVE OR EXEMPLARY DAMAGES), OBLIGATION, CHARGE, FEE, PENALTY, INTEREST, COURT COSTS AND/OR ADMINISTRATIVE FEES, REASONABLE ATTORNEYS FEES, REASONABLE EXPERT FEES, AND REASONABLE CONSULTING FEES. “CLAIM” SHALL MEAN ANY DISPUTE, CONTROVERSY, DEMAND, OR ACTION.

13. For the sake of clarity, the releases set forth above in Sections 10 and 11 shall not apply to the Supply Agreement, including obligations with respect to time and material charges ZGEN incurred on behalf of Bayer prior to the Effective Date (including those contemplated by the letter agreement, agreed in October 2008, relating to capital expenses).

14. Sections 3.7(c), 6.1, 7.1(a) and 9.3(c) of the Agreement shall be deleted in their entirety.

15. The references to [*] in Sections 4.1(b), 4.3, 6.5(c) (second reference) and 6.5(e) and in Exhibit A shall instead refer to a split of [*] (ZGEN)/[*] (Bayer). The references to [*] in Sections 6.5(a) and 6.5(c) (first reference), shall instead refer to a split of [*] (ZGEN)/[*] (Bayer).

16. The Parties agree to amend, no later than February 28, 2010, that certain Pharmacovigilance Agreement dated as of February 1, 2008 to reflect the changes made in the Amendment, including the changes to the Territories and the obligations of the Parties.

17. Except as expressly qualified, modified, amended or supplemented hereby, the Agreement shall continue in full force and effect.

18. This Amendment shall be binding upon and enforceable by and against, the Parties and their respective successors, assignees and legal representatives, and there shall be no third party beneficiaries hereof.

19. Each Party hereby represents and warrants that:

(a) each of the execution, delivery and performance of this Amendment by such Party has been duly authorized by all necessary action, does not require any approval, except as has been heretofore obtained, of any member, partner, shareholder, officer or director or any consent of or approval from any trustee, lessor or holder of any indebtedness or other obligation except for such as have been duly obtained, and does not contravene or constitute a default under, any provision of applicable law or regulations, the organizational documents of such Party, or of any agreement, judgment, injunction, order decree or other instrument binding upon such Party, and such Party is in compliance with all applicable laws and regulations which govern its ability to perform its obligations under this Amendment;

(b) such Party has duly executed and delivered this Amendment, and this Amendment constitutes a valid and binding obligation of such Party enforceable against it in accordance with its terms, except as such enforceability may be affected by any bankruptcy, moratorium, rearrangement, insolvency, reorganization or similar law affecting the rights and remedies of creditors generally or the application of principles of equity; and

* Confidential Treatment Requested.

(c) it has not sold, transferred, conveyed, assigned, hypothecated or subrogated any of its rights, claims, defenses, or causes of action expressly released and/or resolved in this Amendment.

20. The Parties agree to execute and deliver to each other such other documents, and to do such other acts and things, all as the other Party may reasonably request for the purpose of carrying out the intent of this Amendment and the documents referred to in this Amendment, including, at the request of the other Party, amending and restating the Agreement.

IN WITNESS WHEREOF, the Parties have caused their duly authorized officers to execute and deliver this Amendment as of the Effective Date.

ZYMOGENETICS, INC.		BAYER SCHERING PHARMA AG
By:	/s/ DOUGLAS E. WILLIAMS	By:	/s/ ANDREAS FIBIG
Name:	Douglas E. Williams	Name:	Andreas Fibig
Title:	CEO	Title:	Chairman of the Board
	Dec 18 2009
		By:	/s/ JOACHIM NEIPP
ZYMOGENETICS, LLC		Name:	Dr. Joachim Neipp
		Title:	VP Financial Operations
By:	/s/ JOHN DERRY
Name:	John Derry
Title:	Regional Business Director
	12/18/09

EX-10.45

Exhibit 10.45

AMENDMENT NO. 1 TO FACILITY AGREEMENT

This AMENDMENT NO. 1 TO FACILITY AGREEMENT (this “Amendment No. 1”), dated as of October 22, 2008, is made by and among ZymoGenetics, Inc. and Deerfield Private Design Fund, L.P. and Deerfield Private Design International, L.P. (together the “Original Deerfield Lenders”) and Deerfield ZG Corporation (“DZG”).

W I T N E S S E T H

WHEREAS, the parties hereto other than DZG have entered into the Facility Agreement, dated June 26, 2008 (the “FA”); and

WHEREAS, the parties to this Amendment No. 1 desire to amend the FA to add Deerfield ZG as a party thereto;

NOW, THEREFORE, the parties hereto agree as follows:

1. Deerfield ZG shall become a party to the FA and the definition of “Lenders” shall include the Original Deerfield Lenders and DZG; provided, however, that for the purposes of Sections 2.11 and 5.4, the definition of “Lenders” shall not include DZG.

2. For the purpose of Section 3.3, DZG shall not make the representations and warranties set forth in paragraphs (a) through (g) but shall make the representations and warranties set forth in paragraphs (h) through (k) mutatis mutandis (e.g., in paragraph (h) DZG is a corporation).

3. The last sentence of Section 2.2 shall be deleted and replaced with the following:

“For the purpose of the first paragraph of the Notes, each Disbursement shall be allocated 61.7% to Deerfield Private Design International, L.P. and 38.3% to Deerfield Private Design Fund, L.P.”

4. Except as amended hereby, the FA shall remain in full force and effect.

Signature page follows.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be signed as of the date first above written.

BORROWER: ZYMOGENETICS, INC.		LENDER: DEERFIELD PRIVATE DESIGN FUND, L.P.
By:	/s/ James A. Johnson	By:	/s/ James Flynn
Name:	James A. Johnson	Name:	James Flynn
Title:	Executive Vice President and Chief Financial Officer	Title:	General Partner
LENDER: DEERFIELD PRIVATE DESIGN INTERNATIONAL, L.P.
By:	/s/ James Flynn
Name:	James Flynn
Title:	General Partner
LENDER: DEERFIELD ZG CORPORATION
By:	/s/ James Flynn
Name:	James Flynn
Title:	General Partner

EX-10.46

Exhibit 10.46

AMENDMENT NO. 2 TO FACILITY AGREEMENT

This AMENDMENT NO. 2 TO FACILITY AGREEMENT (this “Amendment”), dated as of December 31, 2009, is entered into by and between ZymoGenetics, Inc., a Washington corporation (the “Borrower”), and Deerfield Private Design Fund, L.P., a Delaware limited partnership, and Deerfield Private Design International, L.P., a limited partnership organized under the laws of the British Virgin Islands (individually, a “Lender” and together, the “Lenders”, and together with the Borrower, the “Parties”).

WHEREAS, the Parties are parties to that certain Facility Agreement, dated as of June 26, 2008 (the “Facility Agreement”); and

WHEREAS, the Parties desire to amend the Facility Agreement to extend the time within which the Borrower may request the Lenders to make disbursements under the Facility Agreement, establish the conditions to the Lenders’ obligation to make disbursements during such extended time and extend the final date for repayment of disbursements;

NOW, THEREFORE, in consideration of the mutual agreements set forth herein and in the Facility Agreement, the Borrower and the Lenders agree as follows:

1. Definition of Final Payment Date. Section 1.1 of the Facility Agreement is hereby amended by replacing the definition of “Final Payment Date” in its entirety with the following:

“Final Payment Date” means the earlier of (i) the date on which the Borrower repays the outstanding principal of the Loan (together with any other amounts accrued and unpaid under this Agreement) to the Lenders pursuant to this Agreement and (ii) the sixth anniversary of the date of this Agreement.

2. Amendment and Restatement of Section 2.2. Section 2.2 of the Facility Agreement is hereby amended and restated in its entirety to read in full as follows:

Section 2.2 Disbursements. Subject to satisfaction of the conditions contained in Article IV, the Lenders jointly and severally agree to disburse portions of the Loan (each a “Disbursement”) to the Borrower in four increments of twenty-five million Dollars ($25,000,000) on such dates prior to February 10, 2010 as specified by the Borrower from time to time upon delivery of a disbursement request (a “Disbursement Request”) in the form of Schedule 1, which shall be delivered no later than January 19, 2010 and in any event not less than fifteen (15) Business Days prior to the requested Disbursement Date. Against such Disbursement, the Borrower shall deliver to the Lenders a complete receipt (the “Evidence of Disbursement”) in the form of Schedule 2, which receipt shall not be effective until the Disbursement is actually advanced to the

1

Borrower. The Loan and the disbursements made hereunder shall be evidenced by the Evidence of Disbursements and one or more accounts or records maintained by the Lenders in the ordinary course of business. The aggregate amount of all Disbursement Requests shall not exceed $100,000,000. Each Disbursement shall be allocated 61.7% to Deerfield Private Design International, L.P. and 38.3% to Deerfield Private Design Fund, L.P.

3. Addition of New Section 4.2. Article IV of the Facility Agreement is hereby amended to add a new Section 4.2 that reads as follows:

Section 4.2 Conditions to Disbursements Made after January 26, 2010. The obligation of the Lenders to make a Disbursement after January 26, 2010 shall be subject to the conditions that: (i) the price per share of the Borrower’s common stock shall exceed $5.40 on the date of delivery of any Disbursement Request, and (ii) during the period from the date of delivery of the Disbursement Request through the Business Day immediately preceding the Disbursement Date, either (A) the price per share of the Borrower’s common stock shall have exceeded $5.40 at all times, or (B) there shall have occurred no one-day decline of more than 10% in the price per share of the Borrower’s common stock.

4. Effect of Amendment. Except as expressly amended by this Amendment, the Facility Agreement shall remain in full force and effect.

5. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the conflicts of laws principles thereof.

6. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall constitute an original and all of which together shall constitute one instrument.

[Signatures are on the following page.]

2

IN WITNESS WHEREOF, the Parties have executed this First Amendment to Facility Agreement as of the date first set forth above.

BORROWER:
ZYMOGENETICS, INC.
By:	/s/ James A. Johnson
Name:	James A. Johnson
Title:	Executive Vice President and Chief Financial Officer

LENDERS:
DEERFIELD PRIVATE DESIGN FUND, L.P.
By:	Deerfield Capital, L.P., General Partner
By:	J.E. Flynn Capital, LLC, General Partner
By:	/s/ James E. Flynn
	James E. Flynn, President
DEERFIELD PRIVATE DESIGN INTERNATIONAL, L.P.
By:	Deerfield Capital, L.P., General Partner
By:	J. E. Flynn Capital, LLC, General Partner
By:	/s/ James E. Flynn
	James E. Flynn, President
DEERFIELD ZG CORPORATION
By:	/s/ Jeff Kaplan
	Jeff Kaplan, Treasurer

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EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-155965 and 333-155664) and Form S-8 (No. 333-82012 and 333-141326) of ZymoGenetics, Inc. of our report dated February 26, 2010, relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Seattle, Washington

February 26, 2010

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Douglas E. Williams, certify that:

1. I have reviewed this report on Form 10-K of ZymoGenetics, Inc. (the “Company”);

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 Company as of, and for, the periods presented in this report;

4. The Company’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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company 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 Company, 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the Company’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 Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

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

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 Company’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 Company’s internal control over financial reporting.

Date: February 26, 2010

/s/ DOUGLAS E. WILLIAMS

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, James A. Johnson, certify that:

1. I have reviewed this report on Form 10-K of ZymoGenetics, Inc. (the “Company”);

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 Company as of, and for, the periods presented in this report;

4. The Company’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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company 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 Company, 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the Company’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 Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

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

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 Company’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 Company’s internal control over financial reporting.

Date: February 26, 2010

/s/ JAMES A. JOHNSON

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION 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 Report of ZymoGenetics, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-K”), I, Douglas E. Williams, Chief Executive Officer and James A. Johnson, Chief Financial Officer, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C 78m or 78o(d)); and

(2) The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: February 26, 2010

/s/ DOUGLAS E. WILLIAMS

Douglas E. Williams

Chief Executive Officer

/s/ JAMES A. JOHNSON

James A. Johnson

Chief Financial Officer