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RISK FACTORS

The Company operates in a rapidly changing environment that involves a number of
risks that may significantly affect the Company's results, some of which are
beyond the Company's control. The following discussion highlights some of these
risks, and others are discussed elsewhere herein and in other documents filed by
the Company with the Securities and Exchange Commission.

Early Stage of the Company; Continuing Losses; Uncertainty of Future
Profitability

    Since its formation in January 1992, the Company has been engaged primarily
in organizational and start-up activities, conducting research and development
programs, recruiting officers and key scientists, and negotiating and
consummating technology licensing and research agreements. The Company has no
revenues from product sales and no history of manufacturing or marketing. To
date, substantially all of its funding has been provided by contributions of
capital made by its founders, sales of its stock and an initial payment from
McNeil pursuant to the McNeil License Agreement. There can be no assurance that
the Company will have any source of product revenue or that its operations will
eventually generate sufficient revenues to achieve profitability. The Company
has experienced losses since its inception. The Company had accumulated losses
of approximately $7.0 million through December 31, 1996, and losses are
continuing and are expected to continue for the foreseeable future. Therefore,
the Company has a limited history upon which investors may base an evaluation of
its likely performance. The Company's prospects must be considered in light of
the problems, expenses, complications and delays frequently encountered in
connection with the formation of a new business, the development of new
pharmaceutical products, including obtaining the necessary regulatory approvals,
the utilization of unproven technology and the competitive environment in which
the Company plans to operate.

Uncertainty Associated with Pre-Clinical Studies and Clinical Trials

    In order to receive regulatory approval to sell its products commercially,
the Company must demonstrate in pre-clinical studies and clinical trials that
its potential products are safe and effective in humans. Although the results of
the Company's initial pre-clinical studies and clinical trials to date have been
encouraging, the results of initial pre-clinical studies and clinical trials are
not by themselves predictive of results that will be obtained from subsequent or
more extensive trials. Furthermore, there can be no assurance that clinical
trials of products under development will demonstrate the safety and efficacy of
such products to the extent necessary to obtain regulatory approvals. Many
pharmaceutical companies have suffered significant setbacks in advanced clinical
trials, even after promising results in earlier trials. The failure to
adequately demonstrate the safety and efficacy of a product could delay or
prevent regulatory approval of such product and could have a material adverse
effect on the Company.

    The rate of completion of clinical trials is dependent upon, among other
factors, the enrollment of patients. Patient accrual is a function of many
factors, including the size of the patient population, the proximity of patients
to clinical sites, the eligibility criteria for the study and the existence of
competitive clinical trials. Delays in planned patient enrollment in the
Company's current trials or future clinical trials may result in increased
costs, program delays or both, which could have a material adverse effect on the
Company. There can be no assurance that if clinical trials are completed the
Company will be able to submit an NDA as scheduled or that any such application
will be reviewed and approved by the FDA in a timely manner, or at all. See
"Business -- Government Regulation."

Uncertainty of Market Acceptance

    Even if regulatory approvals are obtained, uncertainty exists as to whether
the Company's products will be accepted by the market. A number of factors may
limit the market acceptance of the Company's products, including the timing of
regulatory approvals and market entry relative to competitive products, the
availability of alternative products, the price of the Company's products
relative to alternative products, the availability of third-party reimbursement
and the extent of marketing efforts by third-party distributors or agents
retained by the Company. There can be no assurance of the Company's ability, or
the length of time required, to achieve market acceptance of the Company's
products. In addition, certain of the Company's products contain narcotic
ingredients that may require stringent record-keeping obligations, strict
storage requirements and other limitations on such products' availability that
may limit the commercial usage of such products.

Certain Risks Associated With the McNeil License Agreement

    The McNeil License Agreement extends until the later of the expiration of
the Company's patent rights or ten years from the date of execution, provided
that the McNeil License Agreement is terminable: (i) by either party in the





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event of a breach by the other party upon 90 days notice or upon certain events
of bankruptcy; (ii) by McNeil, at any time after one year from the effective
date of the agreement; and (iii) by the Company upon certain other
circumstances. Under certain circumstances, the McNeil License Agreement could
terminate with respect to either acetaminophen or NSAID products without
terminating with respect to the other category. In the event of a termination by
McNeil, McNeil must pay all royalty payments and milestone payments due, if any,
through the date of termination and the technology licensed by McNeil reverts to
the Company. In such event, the Company retains the rights to the results of the
two clinical studies funded by the Company, and McNeil retains the rights to the
results of the clinical studies funded by McNeil during the term of the McNeil
License Agreement.

Competition and Technological Changes, Uncertainty and Obsolescence

    The Company's success will depend, in part, upon its ability to successfully
achieve market share at the expense of existing and established products in the
Company's target markets. The Company's products will be competing directly with
the products of companies that are well-established and which may have a
significantly higher degree of brand and name recognition and substantially more
financial resources than those of the Company. The Company is also in
competition with other pharmaceutical companies, hospitals, research
organizations, individual scientists and non-profit organizations engaged in the
development of new pain management pharmaceuticals. Many of these companies and
entities have greater research and development capacities, experience,
recognition and marketing, financial and managerial resources than the Company
and represent significant competition for the Company. Also, the Company's
competitors may succeed in developing competing technologies and obtaining FDA
approval for products more rapidly than the Company. There can be no assurance
that developments by others will not render the Company's products or
technologies non-competitive or obsolete.

Government Regulation; No Assurance of United States or Foreign Regulatory
Approval

    The FDA and comparable agencies in foreign countries impose substantial
requirements on the introduction of therapeutic pharmaceutical products through
lengthy and detailed laboratory and clinical testing and other costly and
time-consuming procedures. Satisfaction of these requirements typically takes a
number of years, varies substantially based upon the type, complexity and
novelty of the pharmaceutical products and is subject to uncertainty. Government
regulation also affects the manufacture and marketing of pharmaceutical
products. Regulatory approvals, if granted, may include significant limitations
on the indicated uses for which a product may be marketed. The FDA actively
enforces regulations prohibiting marketing of products for non-indicated use.
Failure to comply with applicable regulatory requirements can result in, among
other things, government imposed fines, suspensions of approvals, seizures or
recalls of products, operating restrictions and criminal prosecutions.
Furthermore, changes in existing regulations or adoption of new regulations
could prevent the Company from obtaining, or affect the timing of, future
regulatory approvals. The effect of government regulation may be to delay
marketing of the Company's new products for a considerable period of time, to
impose costly procedures upon the Company's activities and to furnish a
competitive advantage to larger companies that compete with the Company. There
can be no assurance that FDA or other regulatory approval for any products
developed by the Company will be granted on a timely basis, if at all. Any such
delay in obtaining, or failure to obtain, such approvals would adversely affect
the marketing of the Company's products and the ability to generate product
revenue. The Company is also subject to certain DEA regulations, including
restrictions on storage, transportation and administration, for its narcotic
products. Government regulation may increase at any time, creating additional
hurdles for the Company. The extent of potentially adverse government regulation
which might arise from future legislation or administrative action cannot be
predicted. See 'Business -- Government Regulation.'

Need for Additional Funds

    The amount and timing of the Company's expenditures will depend on the
progress of its research and development, the cost and timing of regulatory
approvals, general market conditions, relationships with potential strategic
partners, changes in the focus and direction of the Company's research and
development programs, competitive and technological advances and other factors.
The Company's cash requirements may vary materially from those now planned and
no assurance can be given that development costs will not exceed the amounts
budgeted for such purposes. The Company may require additional funding for its
research and product development programs, operating expenses, regulatory
clearances and sales and marketing expenses. Adequate funds for these purposes,
whether obtained through financial markets or through collaborative or other
arrangements with partners or from other sources, may not be available when
needed or on terms acceptable to the Company. Insufficient funds may require the
Company to delay, scale back or eliminate certain of its research and
development programs or to make arrangements with third parties to commercialize
products or technologies that the Company would otherwise seek to develop
itself. As a result, the Company may not be able to independently develop any or
all of the products described in this Report.





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Limited Sales and Marketing Experience

    The Company intends to market and sell certain of its products, if
successfully developed and approved, through a direct sales force in the United
States. The Company currently has no marketing and sales staff, and has yet to
establish any product distribution channels. In order to market its products
directly, the Company must develop a sales force with technical expertise. There
can be no assurance that the Company will be able to successfully establish a
direct sales organization or distribution channels. Failure to establish a sales
force capability in the U.S. may have a material adverse effect on the Company.

Reliance on Third-Party Manufacturers

    The Company currently uses, and expects to continue to use, outside
contractors to manufacture drug supplies for its clinical trials. In addition,
the Company currently intends to use outside contractors to manufacture products
approved for sale, if any. There is no assurance that supplies from any such
contractor will not be reduced or interrupted due to FDA and DEA regulatory
requirements or other reasons. Such a reduction or interruption could have a
material adverse effect on the Company's development and commercialization
activities. The Company currently uses a single contract manufacturer for
supplies of its most developmentally advanced product, MorphiDex'tm'. The
regulatory qualification of additional suppliers may require significant time
and expense. In addition, the acquisition of narcotics as components of certain
of the Company's products is subject to quota restrictions imposed and
administered by DEA. There is no assurance that the Company will be able to
obtain its requested quantities of such narcotics.

Dependence on Qualified Personnel

    Because of the specialized scientific nature of the Company's business, the
Company is highly dependent upon its ability to attract and retain qualified
scientific and technical personnel. The loss of significant scientific and
technical personnel or the failure to recruit additional key scientific and
technical personnel could have a material adverse effect on the Company. While
the Company has consulting agreements with certain key individuals and
institutions and has employment agreements with its key executives, there can be
no assurance that the Company will be successful in retaining such personnel or
their services under existing agreements. The loss of John Lyle, the Company's
Chief Executive Officer, could have a material adverse effect on the Company.
The Company currently maintains a $6.0 million life insurance policy on Mr.
Lyle. There is intense competition for qualified personnel in the areas of the
Company's activities, and there can be no assurance that the Company will be
able to continue to attract and retain the qualified personnel necessary for the
development of its business.

Uncertain Ability to Protect Proprietary Technology

    The Company's success, competitive position and amount of potential future
income will depend in part on its ability to obtain patent protection relating
to the technologies, processes and products it is developing and may develop in
the future. The Company's policy is to seek patent protection and enforce
intellectual property rights. With respect to its products, the Company holds
seven U.S. patent applications pending and has exclusive licenses for four
issued U.S. patents, one pending U.S. patent application for which it has
received a notice of allowance and five other U.S. patent applications pending.
No assurance can be given that any patent issued or licensed to the Company will
provide protection against competitive products or otherwise be commercially
viable. In this regard, the patent position of pharmaceutical compounds and
compositions is particularly uncertain. Even issued patents may later be
modified or revoked by the PTO or in legal proceedings. Moreover, the Company
believes that obtaining foreign patents may be more difficult than obtaining
domestic patents because of differences in patent laws, and accordingly, its
patent position may be stronger in the U.S. than abroad. In addition, foreign
patents may be more difficult to protect and/or the remedies available may be
less extensive than in the U.S. Patent applications in the U.S. are maintained
in secrecy until patents issue and, since publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries, the
Company cannot be certain that it was the first creator of the inventions
covered by pending patent applications or the first to file patent applications
on such inventions. No assurance can be given that any of the Company's pending
patent applications will be allowed, or if allowed, whether the scope of the
claims allowed will be sufficient to protect the Company's products.

     The Company also expects to rely upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position. There can be no assurance that others will not
independently develop substantially equivalent proprietary information or be
issued patents that may prevent the sale of the Company's products or know-how
or require licensing and the payment of significant fees or royalties by the
Company in order to produce its products. Moreover, there can be no assurance
that the Company's technology does not infringe upon any valid claims of patents
owned by others. If the Company were found to be infringing on a





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patent held by another, the Company might have to seek a license to use the
patented technology. There can be no assurance that, if required, the Company
would be able to obtain such a license on terms acceptable to the Company, if at
all. If a legal action were to be brought against the Company or its licensors,
the Company could incur substantial costs in defending itself, and there can be
no assurance that such an action would be resolved in the Company's favor. If
such a dispute were to be resolved against the Company, the Company could be
subject to significant damages and the testing, manufacture or sale of one or
more of the Company's technologies or proposed products, if developed, could be
enjoined.

    No assurance can be given as to the degree of protection any patents will
afford, whether patents will be issued or whether the Company will be able to
avoid violating or infringing upon patents issued to others. Despite the use of
confidentiality agreements and non-compete agreements, which themselves may be
of limited effectiveness, it may be difficult for the Company to protect its
trade secrets. See "Business -- Patents, Trade Secrets and Licenses" and "Risk
Factors -- Dependence on Qualified Personnel."

Uncertain Availability of Health Care Reimbursement

    The Company's ability to commercialize its pain management products may
depend in part on the extent to which reimbursement for the costs of such
products will be available from government health administration authorities,
private health insurers and others. There can be no assurance that third-party
insurance coverage will be adequate for the Company to establish and maintain
price levels sufficient for realization of an appropriate return on its
investment. Government, private insurers and other third-party payers are
increasingly attempting to contain health care costs by limiting both coverage
and the level of reimbursement for new products approved for marketing by the
FDA and by refusing, in some cases, to provide any coverage for uses of approved
products for indications for which the FDA has not granted marketing approval.
If adequate coverage and reimbursement levels are not provided by government and
third-party payers for uses of the Company's products, the market acceptance of
these products could be adversely affected.

No Product Liability Insurance

    The Company will be exposed to potential product liability risks, which are
inherent in the testing, manufacturing and marketing of human therapeutic
products. The Company is contractually obligated under certain of its license
agreements to indemnify the individuals and/or institutions from whom it has
licensed the technology against claims relating to the manufacture and sale of
the products to be sold by the Company. McNeil, however, has agreed to indemnify
the Company for third party claims or suits resulting from the manufacture, use
or sale of the products pursuant to the McNeil License Agreement. The Company's
indemnification liability, as well as direct liability to consumers for any
defects in the products sold, could expose the Company to substantial risk and
losses. The Company currently does not have any product liability insurance. The
Company plans to purchase such product liability insurance as it deems
appropriate prior to marketing its products. McNeil is required by the McNeil
License Agreement to maintain product liability insurance and may self-insure to
cover its indemnification obligations to the Company. However, there can be no
assurance that the Company will be able to obtain or maintain such insurance on
acceptable terms or that any insurance obtained will provide adequate coverage
against potential liabilities.

Concentration of Ownership

    The Company's directors and officers beneficially own approximately 32% of
the Company's Common Stock. In addition, the Company's largest stockholder,
Unifina AG, and related investors control approximately 11% of the Common Stock.
As a result, these stockholders, if they acted together, would have the ability
to influence significantly the election of the Company's directors as well as
the management and policies of the Company. This concentration of ownership may
have the effect of delaying or preventing a change of control of the Company.

Possible Volatility of Stock Price

    The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market price of the Common Stock may
prove to be highly volatile. Announcements of technological innovations,
regulatory matters or new commercial products by the Company or its competitors,
developments or disputes concerning patent or proprietary rights, publicity
regarding actual or potential clinical results relating to products under
development by the Company or its competitors, regulatory developments in both
the U.S. and foreign countries, public concern as to the safety of
pharmaceutical products, and economic and other external factors, as well as
period-to-period fluctuations in financial results, may have a significant
impact on the market price of the Common Stock.





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Forward Looking Statements

    This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended concerning the Company's operations, economic
performance and financial conditions, including, in particular, the likelihood
of the Company's success in developing and bringing to market the products which
it currently has under development and its schedule for development. These
statements are based upon a number of assumptions and estimates which are
inherently subject to significant uncertainties and contingencies, many of which
are beyond the control of the Company and reflect future business decisions
which are subject to change many of these contingencies are described in "Risk
Factors". Some of these assumptions inevitably will not materialize, and
unanticipated events will occur which will affect the Company's results.
Consequently, actual results will vary from the statements contained herein and
such variance may be, and is likely to be, material. Prospective investors
should not place undue reliance on this information.

Shares Eligible for Future Sale

    No shares of Common Stock, other than the 3,625,000 shares of Common Stock
sold in the Company's initial public offering, are eligible for resale in the
public market without restriction prior to March 31, 1997, after taking into
consideration the effect of lock-up agreements entered into by all officers,
directors and other stockholders of the Company. On March 31, 1997,
approximately 11,840,358 additional shares of Common Stock will become eligible
for resale in the public market, subject as to certain of such shares to
compliance with applicable provisions of Rules 144 and 701.

    The Series B Preferred Stock is convertible into an aggregate of 100,000
shares of Common Stock, subject to customary anti-dilution adjustments, at any
time after February 1, 1997. The initial holder of the Series B Preferred Stock
has the right to require the Company to register the resale of the Common Stock
that such holders receive upon conversion of the Series B Preferred Stock into
Common Stock. If any such stockholders cause a large number of shares to be sold
in the public market, such sales may have an adverse effect on the market price
of the Common Stock and the Company's ability to raise capital.

Dilution; Absence of Dividends

    The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support its
growth strategy and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, current and
anticipated cash needs and plans for expansion.

Effect of Anti-Takeover Provisions

    The Company's Amended and Restated Certificate of Incorporation provides for
a classified Board of Directors and that members of the Board of Directors may
be removed only for cause upon the affirmative vote of holders of at least a
majority of the shares of capital stock of the Company entitled to vote. The
Company's Amended and Restated Certificate of Incorporation requires that any
action required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of stockholders and may not
be effected by any consent in writing, and will require reasonable advance
notice by a stockholder of a proposal or director nomination which such
stockholder desires to present at any annual or special meeting of stockholders.
Special meetings of stockholders may be called only by the Chief Executive
Officer or, if none, the President of the Company or by the Board of Directors.
In addition, the Board of Directors has the authority, without further action by
the stockholders, to fix the rights and preferences of, and issue shares of,
Preferred Stock. The Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which prohibits the Company
from engaging in a 'business combination' with an 'interested stockholder' for a
period of three years after the date of the transaction in which the person
first becomes an 'interested stockholder,' unless the business combination is
approved in a prescribed manner. The application of these provisions could have
the effect of delaying or preventing a change of control of the Company. Certain
other provisions of the Company's Amended and Restated Certificate of
Incorporation could also have the effect of delaying or preventing changes of
control or management of the Company, which could adversely affect the market
price of the Common Stock.