UNITED STATES

SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, D.C. 20549



FORM 20-F



| |  ̈ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ----------------------------------------------------------------------------------------------

OR



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

For the fiscal
year ended December 31, 2013



OR



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



| |  ̈ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | -------------------------------------------------------------------------------------------



Date of event requiring
this shell company report_______________

For the transition
period from__________ to ____________



Commission file number:
000-28508

Flamel
Technologies S.A.








(Exact name of
Registrant as specified in its charter)



Not Applicable










(Translation of Registrant’s
name into English)



Republic of France










(Jurisdiction of incorporation
or organization)



Parc Club du Moulin
à Vent

33, avenue du Docteur
Georges Levy

69693 Vénissieux
Cedex France










(Address of principal
executive offices)



Siân Crouzet

Principal Financial Officer

Parc Club du Moulin à
Vent

33, avenue du Docteur
Georges Levy

69693 Vénissieux
Cedex France

Fax: +33 472 78 34 35

Tel: +33 472 78 34 34










(Name, Telephone, E-mail
and/or Facsimile number and Address of Company Contact Person)



|Securities registered or to be registered pursuant to Section 12(b) of the Act. | 
|------------------------------------------------------------------------------- | 



|Title of each class                                                                                                                                                                  |  | Name of Exchange

        on which Registered
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------
|Ordinary
Shares, nominal value 0.122 Euros per share, represented by American Depositary Shares (as evidenced by American Depositary Receipts),
each representing one Ordinary Share |  | NASDAQ Global Market                         



Securities registered
or to be registered pursuant to Section 12(g) of the Act. None.



Securities for which there
is a reporting obligation pursuant to Section 15(d) of the Act. None.



Indicate the number of outstanding
shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.



25,612,550 Ordinary
Shares, nominal value 0.122 Euros per Ordinary Share



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



Yes           ̈
           No x



If this report is an annual
or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934.



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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.



Yes          x          No
 ̈



Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.:



Large accelerated
filer  ̈   Accelerated filer x   Non-accelerated
filer  ̈



Indicate by check mark which
basis of accounting the registrant has used to prepare the financial statements included in this filing:



U.S. GAAP x

International Financial
Reporting Standards as issued by the International Accounting Standards

Board  ̈

Other  ̈



If “Other” has
been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected
to follow.



Item 17       ̈          Item
18  ̈



If this is an annual report,
indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Yes          
 ̈           No x











TABLE OF CONTENTS





|PART I                                                                                | 1 
|------------------------------------------------------------------------------------- | --
|                                                                                      |   
|ITEM 1. Identity of Directors, Senior Management and Advisers                         | 1 
|                                                                                      |   
|ITEM 2. Offer Statistics and Expected Timetable                                       | 1 
|                                                                                      |   
|ITEM 3. Key Information                                                               | 1 
|                                                                                      |   
|ITEM 4. Information on the Company                                                    | 18
|                                                                                      |   
|ITEM 4A. Unresolved Staff Comments                                                    | 43
|                                                                                      |   
|ITEM 5. Operating and Financial Review and Prospects                                  | 43
|                                                                                      |   
|ITEM 6. Directors, Senior Management and Employees                                    | 55
|                                                                                      |   
|ITEM 7. Major Shareholders and Related Party Transactions                             | 61
|                                                                                      |   
|ITEM 8. Financial Information                                                         | 64
|                                                                                      |   
|ITEM 9. The Offer and Listing                                                         | 65
|                                                                                      |   
|ITEM 10. Additional Information                                                       | 66
|                                                                                      |   
|ITEM 11. Quantitative and Qualitative Disclosures About Market Risk                   | 73
|                                                                                      |   
|ITEM 12. Description of Securities Other Than Equity Securities                       | 73
|                                                                                      |   
|ITEM 12.A Debt Securities                                                             | 73
|                                                                                      |   
|ITEM 12.B Warrants and Rights                                                         | 73
|                                                                                      |   
|ITEM 12.C Other Securities                                                            | 73
|                                                                                      |   
|ITEM 12.D American Depositary Shares                                                  | 73
|                                                                                      |   
|PART II                                                                               | 75
|                                                                                      |   
|ITEM 13. Defaults, Dividend Arrearages and Delinquencies                              | 75
|                                                                                      |   
|ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds | 75
|                                                                                      |   
|ITEM 15. Controls and Procedures                                                      | 75
|                                                                                      |   
|ITEM 16. [Reserved]                                                                   | 76
|                                                                                      |   
|ITEM 16A. Audit Committee Financial Expert                                            | 76
|                                                                                      |   
|ITEM 16B. Code of Ethics                                                              | 76
|                                                                                      |   
|ITEM 16C. Principal Accountant Fees and Services                                      | 76
|                                                                                      |   
|ITEM 16D. Exemptions from the Listing Standards for Audit Committees                  | 77
|                                                                                      |   
|ITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers      | 77
|                                                                                      |   
|ITEM 16F. Change in Registrant’s Certifying Accountant                                | 77
|                                                                                      |   
|ITEM 16G. Corporate Governance                                                        | 77
|                                                                                      |   
|ITEM 16H. Mine Safety Disclosure                                                      | 78
|                                                                                      |   
|PART III                                                                              | 79
|                                                                                      |   
|ITEM 17. Financial Statements                                                         | 79
|                                                                                      |   
|ITEM 18. Financial Statements                                                         | 79
|                                                                                      |   
|ITEM 19. Exhibits                                                                     | 79





i







As used herein, references
to the Company, “we,” ‘us,” “our,” the Registrant and Flamel refer to Flamel Technologies S.A.
and its subsidiaries on a consolidated basis, unless the context indicates otherwise. References to Shares herein refer to (i)
the Ordinary Shares of Flamel, nominal value 0.122 Euros per Ordinary Share (the “Ordinary Shares”) and (ii) Flamel’s
American Depositary Shares, each of which represents one Ordinary Share (“ADSs”). The ADSs are evidenced by American
Depositary Receipts (“ADRs”). Ordinary Shares and ADSs are referred to herein as “Shares.”



The following product
or drug delivery platforms designations are trademarks of the Company: Flamel Technologies®, BloxiverzTM, Micropump®,
LiquiTime®, Trigger LockTM, MedusaTM, DeliVax®, and VazculepTM.



Flamel publishes its
financial statements in U.S. dollars. In this annual report, references to “dollars” or “$” are to U.S.
dollars and references to “Euros” or “EUR” or “€” are to the currency of the European
Union as used in the Republic of France. Except as otherwise stated herein, all monetary amounts in this annual report have been
presented in dollars. Solely for the convenience of the reader, this annual report contains translations of certain Euro amounts
into dollars at specified rates. See “Item 3.Key Information - Exchange Rates” for information regarding the
rates of exchange between the Euro and the dollar in each of the previous five years.



ii







SPECIAL NOTE REGARDING
FORWARD-LOOKING INFORMATION



This annual report
contains forward-looking statements. We may make additional written or oral forward-looking statements from time to time in filings
with the Securities and Exchange Commission or otherwise. The words “will,” “may,” “believe,”
“expect,” “anticipate,” “estimate,” ”project” and similar expressions identify
forward-looking statements, which speak only as of the date the statement is made. Such forward-looking statements are within the
meaning of that term in Section 27A of the Securities Act of 1933 as amended (the “Securities Act”) and Section 21E
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Although we believe that our expectations
are based on reasonable assumptions within the bounds of our knowledge of our business and operations, our business is subject
to significant risks and there can be no assurance that actual results of our development and manufacturing activities and our
results of operations will not differ materially from our expectations. Factors that could cause actual results to differ from
expectations include, among others, those specified in “Risk Factors” beginning on page 2, including:



| | · | we depend on a small number of customers for the majority of our revenues related to our drug delivery
platforms and drug products (e.g. Coreg CR® microparticles and Éclat products), and the loss of any one of
these customers could reduce our revenues significantly.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | our focus on (i) the development and licensing of versatile, proprietary drug delivery platforms,
(ii) the development of novel, high-value products based on our drug delivery platforms and (iii) as a result of our acquisition
of Éclat Pharmaceuticals, LLC, or Éclat, the development, approval, and commercialization of niche branded and generic
pharmaceutical products in the U.S., rather than primarily on collaborative agreements with pharmaceutical and biotechnology companies,
may not be successful.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | our current revenues from our drug delivery business primarily depend on third party pharmaceutical
and biotechnology companies successfully developing products that incorporate our drug delivery platforms.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | we must invest substantial sums in research and development in order to remain competitive, and
we may not fully recover these investments.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



| | · | we currently depend upon a single site to manufacture some of our drug products and our drug delivery
product, Coreg CR® microparticles, and any interruption of operations could have a material adverse effect on our
business.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | we depend upon a limited number of suppliers for certain raw materials used in our drug delivery
technologies and for the manufacture of certain drug products in development, and any failure to deliver sufficient quantities
of supplies of these raw materials or product could interrupt our production process and could have a material adverse effect on
our business.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | if our competitors develop and market technologies or products that are more effective or safer
than ours, or obtain regulatory approval and market such technologies or products before we do, our commercial opportunity will
be diminished or eliminated.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | we may fail to realize the anticipated benefits expected from the acquisition of Éclat and
its portfolio of late-stage products pipeline products, and any new and complementary businesses, products and technologies we
may acquire in the future.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | if we cannot keep pace with the rapid technological change in our industry, we may lose business,
and our drug delivery platforms and products could become obsolete or noncompetitive.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | if we cannot adequately protect our drug delivery platforms and proprietary information, we may
be unable to sustain a competitive advantage.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------



| | · | even if we and our partners obtain necessary regulatory approvals, our products and drug delivery
platforms, or our partners’ products (incorporating our platforms) may not gain market acceptance.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | our collaborative arrangements may give rise to disputes over commercial terms, contract interpretation
and ownership of intellectual property and may adversely affect the commercial success of the products developed under those partnerships.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



iii







| | · | third parties may claim, that our drug delivery platforms, or the products in which they are used,
or our other products infringe on their rights and we may incur significant costs resolving these claims or may not be able to
resolve.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | if we or our third party collaborative partners are required to obtain licenses from third parties,
our revenues and royalties on any commercialized products could be reduced.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | if our third party collaborative partners face generic competition for their products, our revenues
and royalties from such products may be adversely affected.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | healthcare reform and restrictions on reimbursements may limit our financial returns.
| | - | -------------------------------------------------------------------------------------



| | · | fluctuations in foreign currency exchange rates and the impact of the European sovereign debt crisis
may clause fluctuations in our financial results.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | products that incorporate our drug delivery platforms and our late-stage development products acquired
from Éclat and other products we may develop are subject to regulatory approval. If we or our pharmaceutical and biotechnology
company partners do not obtain such approvals, or if such approvals are delayed, our revenues may be adversely affected.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | commercial products are subject to continuing regulation, and we on our own, and in conjunction
with our pharmaceutical and biotechnology companies partners, may be subject to adverse consequences if we or they fail to comply
with applicable regulations.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | we are subject to U.S. federal and state laws prohibiting “kickbacks” and false claims
that, if violated, could subject us to substantial penalties, and any challenges to or investigation into our practices under these
laws could cause adverse publicity and be costly to respond to, causing harm to our business.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | regulatory reforms may adversely affect our ability to sell our products or technologies drug delivery
platforms profitably.
| | - | ----------------------------------------------------------------------------------------------------------------------------



| | · | we and companies to which we have licensed our drug delivery platforms and subcontractors we engage
for services related to our inthe development of our products are subject to extensive regulation by the FDA and other regulatory
authorities. Their failure to meet these regulatory requirements could adversely affect our business.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | we may face product liability claims related to participation in clinical trials or the use or
misuse of our products or third party products that incorporate our drug delivery platforms.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | if we use hazardous biological and/or chemical materials in a manner that causes injury, we may
be liable for significant damages.
| | - | ----------------------------------------------------------------------------------------------------------------------------------



Forward-looking statements
are subject to inherent risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results
could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. We undertake no
obligation to update these forward-looking statements as a result of new information, future events or otherwise. You should not
place undue reliance on these forward-looking statements. Statements in this annual report including those set forth above and
in “Risk Factors” in this report, describe factors, among others, that could contribute to or cause such differences.



iv







PART
I



ITEM 1. Identity of
Directors, Senior Management and Advisers



Not applicable.



ITEM 2. Offer Statistics
and Expected Timetable



Not applicable.



ITEM 3. Key Information



Selected Financial
Data



The selected consolidated
financial data as of and for each of the five years ended December 31, 2013 are derived from the Consolidated Financial Statements
of the Company, which have been prepared in accordance with U.S. GAAP and audited by an independent registered accounting firm
with the Public Company Accounting Oversight Board (United States). The selected consolidated financial data of the Company set
forth below are qualified by reference to, and should be read in conjunction with, “Item 5. Operating and Financial Review
and Prospects” and the Consolidated Financial Statements and the Notes related thereto appearing elsewhere in this annual
report.



Statement of Operations
Data[1]:



|                                                                     |  | 2009 |         |   | 2010 |   |         | 2011 |  |   | 2012    |   |  | 2013 |        
|-------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | -------
|Revenues                                                             |  |      | 42,118  |   |      |   | 37,094  |      |  |   | 32,600  |   |  |      | 26,101 
|Cost and Expenses                                                    |  |      | (53,871 | ) |      |   | (46,934 | )    |  |   | (42,183 | ) |  |      | (34,464
|Income (Loss) from Operations                                        |  |      | (11,753 | ) |      |   | (9,840  | )    |  |   | (9,583  | ) |  |      | (8,363 
|Interest and foreign exchange gain (loss), net                       |  |      | 342     |   |      |   | 549     |      |  |   | 867     |   |  |      | 331    
|Other income                                                         |  |      | (28     | ) |      |   | 525     |      |  |   | 134     |   |  |      | 102    
|Income (loss) before income tax                                      |  |      | (11,439 | ) |      |   | (8,766  | )    |  |   | (8,582  | ) |  |      | (7,930 
|Income tax benefit (expense)                                         |  |      | -       |   |      |   | (209    | )    |  |   | (192    | ) |  |      | 4,702  
|Net income (loss)                                                    |  |      | (11,439 | ) |      |   | (8,975  | )    |  |   | (8,774  | ) |  |      | (3,228 
|Income (Loss) from Operations per ordinary share                     |  | $    | (0.49   | ) |      | $ | (0.40   | )    |  | $ | (0.39   | ) |  | $    | (0.33  
|Basic earnings (loss) per ordinary share.                            |  | $    | (0.47   | ) |      | $ | (0.37   | )    |  | $ | (0.36   | ) |  | ($   | 0.13   
|Diluted earnings (loss) per ordinary share                           |  | $    | (0.47   | ) |      | $ | (0.37   | )    |  | $ | (0.36   | ) |  | ($   | 0.13   
|Basic weighted average number of shares outstanding (in thousands).  |  |      | 24,225  |   |      |   | 24,411  |      |  |   | 24,669  |   |  |      | 25,135 
|Diluted weighted average number of shares outstanding (in thousands) |  |      | 24,225  |   |      |   | 24,411  |      |  |   | 24,669  |   |  |      | 25,135 
|Dividends per share                                                  |  |      | -       |   |      |   | -       |      |  |   | -       |   |  |      | -      



| | [1] | in thousands of U.S. dollars, except share and per share data.
| | --- | --------------------------------------------------------------



Balance
Sheet Data[2]:



|                                                    |  | 2009 |        |  | 2010 |  |        | 2011 |  |  | 2012   |  |  | 2013 |        
|--------------------------------------------------- |  | ---- | ------ |  | ---- |  | ------ | ---- |  |  | ------ |  |  | ---- | -------
|Cash, Cash equivalents & marketable securities      |  |      | 44,068 |  |      |  | 31,344 |      |  |  | 24,491 |  |  |      | 9,155  
|Working capital[3]                                  |  |      | 44,185 |  |      |  | 25,941 |      |  |  | 18,338 |  |  |      | 10,726 
|Total assets                                        |  |      | 94,296 |  |      |  | 74,614 |      |  |  | 69,402 |  |  |      | 117,311
|Long term liabilities (excluding deferred revenues) |  |      | 20,744 |  |      |  | 15,641 |      |  |  | 19,763 |  |  |      | 72,267 
|Shareholders’ equity                                |  |      | 44,863 |  |      |  | 36,305 |      |  |  | 29,794 |  |  |      | 30,504 



| | [2] | in thousands of U.S. dollars
| | --- | ----------------------------

| | [3] | working capital is calculated by subtracting current liabilities from current assets
| | --- | ------------------------------------------------------------------------------------



1







Exchange Rates:



Flamel publishes
its financial statements in U.S. dollars. The reporting currency of the Company and its wholly-owned subsidiaries is the U.S. dollar
as permitted by the SEC for a foreign private issuer (S-X Rule 3-20(a)). All assets and liabilities in the balance sheets of the
Company, whose functional currency is the Euro, except those of the U.S. subsidiary whose functional currency is the U.S. dollar,
are translated into U.S. dollar equivalents at exchange rates as follows: (1) asset and liability accounts at year-end rates, (2)
income statement accounts at weighted average exchange rates for the year, and (3) shareholders' equity accounts at historical
rates. Corresponding translation gains or losses are recorded in shareholders' equity.



Currently a significant
portion of the Company’s expenses are denominated in Euros. For information regarding the effects of currency fluctuations
on the Company’s results, see “Item 5. Operating and Financial Review and Prospects.”



The following table
sets forth the high, low and average exchange rates for the Euro against the U.S. dollar in each of the last five years and in
each of the previous six months.



|Year Ended December 31, |  |      |        |  |     |  |        |                  | 
|----------------------- |  | ---- | ------ |  | --- |  | ------ | ---------------- | 
|Euro to U.S. Dollar:    |  | High |        |  | Low |  |        | Average Rate [1] | 
|2013                    |  |      | 1.3814 |  |     |  | 1.2768 |                  | 
|2012                    |  |      | 1.3454 |  |     |  | 1.2089 |                  | 
|2011                    |  |      | 1.4882 |  |     |  | 1.2889 |                  | 
|2010                    |  |      | 1.4563 |  |     |  | 1.1942 |                  | 
|2009                    |  |      | 1.512  |  |     |  | 1.2555 |                  | 



|Previous Six Months, |  |      |        |  |     |  |        |               | 
|-------------------- |  | ---- | ------ |  | --- |  | ------ | ------------- | 
|Euro to U.S. Dollar: |  | High |        |  | Low |  |        | Average Rate1 | 
|March 2014           |  |      | 1.3942 |  |     |  | 1.3732 |               | 
|February 2014        |  |      | 1.3813 |  |     |  | 1.3495 |               | 
|January 2014         |  |      | 1.3687 |  |     |  | 1.3516 |               | 
|December 2013        |  |      | 1.3814 |  |     |  | 1.3536 |               | 
|November 2013        |  |      | 1.3611 |  |     |  | 1.3365 |               | 
|October 2013         |  |      | 1.3805 |  |     |  | 1.3493 |               | 



[1] Annual totals represent
the average of the noon buying rates for Euros of each business day during the relevant period, according to the “Banque
de France”. Monthly totals represent the average of the noon buying rates for Euros for each business day during the relevant
month according to the “Banque de France”.



The exchange rate
for the Euro against the U.S. dollar as of April 29, 2014, was $1.3826 to € 1.00. The Company makes no representation that Euro
amounts have been, could have been or could be converted into dollars at any of the exchange rates referred to herein as of a
given date.



Risk Factors



Our business faces
many risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of or that we
currently believe are immaterial may also impair our business operations. If any of the events or circumstances described in the
following risks actually occur, our business, financial condition or results of operations could suffer, and the trading price
of our securities could decline. As a result, you should consider all of the following risks, together with all of the other information
in this Annual Report on Form 20-F, before making an investment decision regarding our securities.



Risks Relating to
Our Business and Industry



We depend on
a small number of customers for the majority of the revenues related to our drug delivery platforms, and the loss of any one of
these customers could reduce our revenues significantly.



We depend on a small
number of customers for the majority of our revenues from our drug delivery platforms and drug products. Revenue from GlaxoSmithKline
plc (GSK) in relation to Coreg CR® generated 66% of total revenues in 2013. With respect to the Éclat products,
four customers, AmeriSource Bergen, Cardinal, McKesson and Morris & Dickson accounted for 95% of revenues from sales of these
products in 2013. The termination of our relationship with any of these customers and our failure to broaden our customer base
could cause our revenues to decrease significantly and result in losses from our operations. Further, we may be unable to negotiate
favorable business terms with customers and partners that represent a significant portion of our revenues. If so, our revenues
and gross profits, if any, may not grow as expected or may not grow at a rate sufficient to make us profitable.



2







Our focus on
(i) the development and licensing of versatile, proprietary drug delivery platforms, (ii) the development of novel, high-value
products based on our drug delivery platforms and (iii) as a result of our acquisition of Éclat Pharmaceuticals, LLC, or
Éclat, the development, approval, and commercialization of niche branded and generic pharmaceutical products in the U.S.,
rather than primarily on collaborative agreements with pharmaceutical and biotechnology companies, may not be successful.



We have relied primarily
over past years on our collaborative agreements and relationships with pharmaceutical and biotechnology companies as partners with
respect to our drug delivery platforms and our strategic change in focus to the development of novel, high-value products based
on our drug delivery platforms and, as a result of our acquisition of Éclat, the development, approval, and commercialization
of niche branded and generic pharmaceutical products in the U.S. may not be successful in the near or long term and may negatively
impact our business, financial condition, and results of operations, and further increase our research and development expenses.



Our current revenues
from our drug delivery business primarily depend on third party pharmaceutical and biotechnology companies successfully developing
products that incorporate our drug delivery platforms.



We market and sell
our drug delivery platforms to third parties who incorporate our technologies into their products. We depend upon collaborative
agreements with pharmaceutical and biotechnology companies to develop, test, obtain regulatory approval for and commercialize products
that incorporate our drug delivery technologies. We currently have collaborative agreements or relationships with GSKand other
pharmaceutical and biotechnology companies whose identities remain confidential.



The products that our
partners successfully develop under these collaborative agreements will affect our revenues. We cannot control the timing or other
aspects of the development or marketing by our partners of their products that incorporate our drug delivery platforms and may
not be informed by our partners concerning the timing and other aspects of their development or marketing efforts. The failure
of one or more of our partners to develop successful products that incorporate our drug delivery platforms or to perform as we
expect under our agreements with them could have a material adverse effect on our drug delivery business, financial condition and
results of operations. We face risks relating to our collaborative agreements, including risks that:



| | · | our collaborative agreements may not result in any new commercial products;
| | - | ---------------------------------------------------------------------------



| | · | our pharmaceutical and biotechnology company partners may not successfully obtain regulatory approval
in a timely manner, or at all, and may not market any commercial products;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the products developed under our collaborative agreements may not be successful commercially;
| | - | ---------------------------------------------------------------------------------------------



| | · | we cannot control the amount and timing of resources that our pharmaceutical and biotechnology
company partners devote to the development or commercialization of products using our drug delivery platforms or to the marketing
and distribution of those products;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | we may not be able to meet the milestones established in current or future collaborative agreements;
| | - | ----------------------------------------------------------------------------------------------------



| | · | we may not be able to successfully develop products based on current drug delivery platforms and/or
new drug delivery platforms that would be attractive to develop new products with potential pharmaceutical or biotechnology company
partners;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | our collaborative partners may terminate their relationships with us; and
| | - | -------------------------------------------------------------------------



| | · | our collaborative partners may enter bankruptcy or otherwise dissolve.
| | - | ----------------------------------------------------------------------



3







Although products
that incorporate our drug delivery platforms and late-stage development products acquired through our acquisition of Éclat
may appear promising, in particular, at their early stages of development and in clinical trials, none of these potential platforms
or products may reach the commercial market for a number of reasons.



Drug development is
an inherently uncertain process with a high risk of failure at every stage of development. Successful research and development
of pharmaceutical products is difficult, expensive and time consuming. Many product candidates fail to reach the market. We intend
to continue to enhance our current technologies and pursue additional or complementary proprietary drug delivery platforms. Our
success will depend on the development and the successful commercialization of products that can utilize our drug delivery platforms
and development products from Éclat. If products incorporating our drug delivery platforms or our development products fail
to reach the commercial market, our future revenues would be adversely affected.



Even if our products
and current drug delivery platforms appear promising during various stages of development, there may not be successful commercial
applications developed for them for a number of reasons, including:



| | · | the U.S. Food and Drug Administration (“FDA”), the European Medicines Agency (“EMA”),
the competent authority of an EU Member State or an Institutional Review Board (“IRB”), or an Ethics Committee (EU
equivalent to IRB), or our pharmaceutical or biotechnology partners may delay or halt applicable clinical trials;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | we or our pharmaceutical or biotechnology partners may face slower than expected rate of patient
recruitment and enrollment in clinical trials, or may devote insufficient funding to the clinical trials;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | we or our current drug delivery platforms and drug products or our pharmaceutical and biotechnology
company partners’ products may be found to be ineffective or cause harmful side effects, or may fail during any stage of
pre-clinical testing or clinical trials;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | we may not find additional pharmaceutical or biotechnology companies to adopt our technologies
or, if partnered, the business strategy of our partners may change;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | we or our pharmaceutical and biotechnology company partners may find certain products using our
current drug delivery platforms cannot be manufactured on a commercial scale and, therefore, may not be economical to produce;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | we or our partners may determine that managed care providers are unwilling or unable to reimburse
patients at an economically attractive level for products under development; or
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | products that use our current drug delivery platforms and products in development acquired from
Éclat could fail to obtain regulatory approval or, if approved, fail to achieve market acceptance, fail to be included within
the pricing and reimbursement schemes of the U.S. or EU Member States, or be precluded from commercialization by proprietary rights
of third parties.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We must invest
substantial sums in research and development in order to remain competitive, and we may not fully recover these investments.



To be successful in
the highly competitive pharmaceutical industry, we must commit substantial resources each year to research and development in order
to develop technologies and new products. In 2013, we spent $26.7 million on research and development. Our ongoing investments
in research and development for future products could result in higher costs without a proportionate increase, or any increase,
in revenues. The research and development process is lengthy and carries a substantial risk of failure. If our research and development
does not yield sufficient new technologies and products that achieve commercial success, our future operating results will be adversely
affected.



We depend upon
a single site to manufacture some of our drug products and our drug delivery products, Coreg CR®microparticles,
and any interruption of operations could have a material adverse effect on our business.



4







All of our manufacturing
for some of our drug products and our drug delivery products, Coreg CR® microparticles, currently takes place in
our production facilities located in Pessac, France. A significant interruption of operations at this facility for any reason,
such as fire, flood, labor disruptions or other manmade or natural disaster or a failure to obtain or maintain required regulatory
approvals, could have a material adverse effect on our business, financial condition and results of operations. In case of a disruption,
we may need to establish alternative manufacturing sources for our drug delivery products, and this would likely lead to substantial
production delays as we build or locate replacement facilities and seek to satisfy necessary regulatory obligations, including
undergoing a successful inspection by the FDA, EMA, the competent authorities of EU Member States or our clients and obtaining
the required regulatory approvals with respect to our drug delivery products. If this occurs, we may be unable to demonstrate compliance
with applicable regulatory requirements governing manufacturing and to satisfy contractual obligations related to our drug delivery
products with our pharmaceutical or biotechnology partners in a timely manner.



We depend on
a limited number of suppliers for certain raw materials used in our drug delivery platforms and for the manufacture of certain
drug products in development, and any failure of such suppliers to deliver sufficient quantities of supplies of these raw materials
or product could interrupt our production process and could have a material adverse effect on our business.



We purchase a number
of raw materials used in our current drug delivery platforms and drug products in development from a limited number of suppliers,
including a single supplier for certain key ingredients. These raw materials include excipients such as, microsphere starting materials
(e.g. cellulose beads) and active ingredients, such as, neostigmine methylsulfate for the production of BloxiverzTM and carvedilol
phosphate used for the production of Coreg CR® microparticles
and other drug substances. Specialized ingredients, such as polyglutamate are used in the production of our Medusa polymers. We
use contract manufacturing organizations for the supply of our products in development and the manufacture of BloxiverzTM,
currently takes place in a single third party manufacturing facility. We have contracts in place with these suppliers, which are
reviewed based on future forecast requirements. We determine minimum inventory levels based on our goal of holding at least three
months of future requirements in inventory. If the supplies of these materials were interrupted for any reason, our manufacturing
and marketing of certain products could be delayed. These delays could be extensive and expensive, especially in situations where
a substitution was not readily available or required variations of existing regulatory approvals and certifications or additional
regulatory approval. For example, an alternative supplier may be required to pass an inspection by the FDA, EMA or the competent
authorities of EU Member States for compliance with current Good Manufacturing Practices (“cGMP”) requirements before
we may incorporate that supplier’s ingredients into our manufacturing. We expect to continue relying on our current suppliers
for the foreseeable future, but failure to obtain adequate supplies in a timely manner could have a material adverse effect on
our business, financial condition and results of operations.



We depend on
key personnel to execute our business plan. If we cannot attract and retain key personnel, we may not be able to successfully implement
our business plan.



Our success depends
in large part upon our ability to attract and retain highly qualified personnel. During our operating history, we have assigned
many key responsibilities within our Company to a relatively small number of individuals, each of whom has played key roles in
executing various important components of our business. We do not maintain material key person life insurance for any of our key
personnel. If we lose the services of Mr. Anderson, our Chief Executive Officer, we may have difficulty executing our business
plan in the manner we currently anticipate. Further, because each of our key personnel is involved in numerous roles in various
components of our business, the loss of any one or more of such individuals could have an adverse effect on our business.



If our competitors
develop and market technologies or products that are safer or more effective than ours, or obtain regulatory approval and market
such technologies or products before we do, our commercial opportunity will be diminished or eliminated.



Competition in the
pharmaceutical and biotechnology industry is intense and is expected to increase. We compete with academic laboratories, research
institutions, universities, joint ventures and other pharmaceutical and biotechnology companies, including other companies developing
niche brand or generic specialty pharmaceutical products or drug delivery platforms. Some of these competitors may be also our
business partners. Our drug delivery platforms all compete with technologies provided by several other companies (for details see
“Item 4. Competition and Market Opportunities”). There could be new biological or chemical entities that are
being developed that, if successful, could compete against the drug delivery platforms or products we are developing. Further,
unless and until the FDA has removed the “unapproved marketed products”, the Éclat products may compete with
products of companies such as, for BloxiverzTM, West-Ward Pharmaceutical Corp., APP (a division of Fresenius Kabi USA, LLC),
American Regent Inc., and others. Additionally, the FDA could also approve generic versions of our marketed products. For any partnerships
Flamel has with other companies, our collaborators could choose a competing drug delivery platform to use with their drugs instead
of one of our drug delivery platforms.



5







Many of these competitors
have substantially greater financial, technological, manufacturing, marketing, managerial and research and development resources
and experience than we do Furthermore, acquisitions of competing drug delivery companies by large pharmaceutical companies could
enhance our competitors’ resources. Accordingly, our competitors may succeed in developing competing technologies and products,
obtaining regulatory approval and gaining market share for these products more rapidly than we do.



Additionally, New Biological
or Chemical Entities (“NBEs” or “NCEs”) could be developed that, if successful, could compete against our
technologies or products. Among the many experimental therapies being tested in the U.S. and in the EU, there may be some that
we do not now know of that may compete with our drug delivery platforms or products in the future. These new biological or chemical
products may be safer or may work better than our technologies-based products.



We may fail to
realize the anticipated benefits expected from the acquisition of Éclat and its portfolio of late-stage products
pipeline and any new and complementary businesses, products and technologies we may acquire in the future.



With the acquisition
of Éclat, a new part of our business strategy is to obtain FDA approval and commercialize its portfolio of potential niche
brand and generic specialty pharmaceutical products. We also are aiming to transition to a more vertically integrated business
model that adds increased commercial capabilities in the U.S. to our existing drug delivery platforms. There can be no assurance
that this strategy will be successful or that we will be able to successfully integrate and grow these two businesses, which could
negatively impact our business and operating results.



If we choose to acquire
new and complementary businesses, products or technologies, we may be unable to complete these acquisitionsor to successfully integrate them in a cost effective and non-disruptive manner.



Our success depends
in part on our ability to continually enhance and broaden our product offerings in response to market demands, competitive pressures
and evolving technologies. Accordingly, we may in the future pursue the acquisition of complementary businesses, products or technologies
instead of developing them ourselves. We do not know if we would be able to successfully complete any acquisitions, or whether
we would be able to successfully integrate any acquired business, product or technology or retain any key employees. Integrating
any business, product or technology we acquire could be expensive and time consuming, disrupt our ongoing business and distract
our management. If we were to be unable to integrate any acquired businesses, products or technologies effectively, our business
would suffer. In addition, any amortization or charges resulting from the costs of acquisitions could negatively impact our operating
results.



If we cannot
keep pace with the rapid technological change in our industry, we may lose business, and our drug delivery platforms could become
obsolete or noncompetitive.



Our success also depends,
in part, on maintaining a competitive position in the development of products and technologies in a rapidly evolving field. Major
technological changes can happen quickly in the biotechnology and pharmaceutical industries. If we cannot maintain competitive
products and technologies, our current and potential pharmaceutical and biotechnology company partners may choose to adopt the
drug delivery platforms of our competitors. Our competitors may succeed in developing competing technologies or obtaining regulatory
approval for products before us, and the products of our competitors may gain market acceptance more rapidly than our products.
Such rapid technological change, or the development by our competitors of technologically improved or different products, could
render our drug delivery platforms obsolete or noncompetitive.



If we cannot
adequately protect our intellectual property and proprietary information, we may be unable to sustain a competitive advantage.



Our success depends,
in part, on our ability to obtain and enforce patents for our products, processes and drug delivery platforms and to preserve our
trade secrets and other proprietary information. If we cannot do so, our competitors may exploit our innovations and deprive us
of the ability to realize revenues and profits from our developments.



6







Any patent applications
that we may have made or may make relating to our potential products, processes and technologies may not result in patents being
issued. Patent law relating to the scope of claims in the pharmaceutical field in which we operate is continually evolving and
can be the subject of some uncertainty. The laws providing patent protection may change in a way that would limit protection. Our
current patents may not be exclusive, valid or enforceable. They may not protect us against competitors that challenge our patents,
such as companies that submit drug marketing applications to the FDA, the EMA, or the competent authorities of EU Member States
that rely, at least in part, on safety and efficacy data from our products or our business partners’ products (e.g., abbreviated
new drug applications), obtain patents that may have an adverse effect on our ability to conduct business or are able to circumvent
our patents. The scope of any patent protection may not be sufficiently broad to cover our products or to exclude competing products.
Our collaborations with third parties expose us to risks that they will claim intellectual property rights on our inventions or
fail to keep our unpatented technology confidential.



We may not have the
necessary financial resources to enforce our patents. Further, patent protection once obtained is limited in time, after which
competitors may use the covered technology without obtaining a license from us. Because of the time required to obtain regulatory
marketing approval, the period of effective patent protection for a marketed product is frequently substantially shortened.



We also rely on trademarks,
copyrights, trade secrets and know-how to develop, maintain and strengthen our competitive position. To protect our trade secrets
and proprietary technologies and processes, we rely, in part, on confidentiality agreements with our employees, consultants, advisors
and partners. These agreements may not provide adequate protection for our trade secrets and other proprietary information in the
event of any unauthorized use or disclosure, or if others lawfully develop the information. If these agreements are breached, we
cannot be certain that we will have adequate remedies. Further, we cannot guarantee that third parties will not know, discover
or independently develop equivalent proprietary information or techniques, or that they will not gain access to our trade secrets
or disclose our trade secrets to the public. Therefore, we cannot guarantee that we can maintain and protect unpatented proprietary
information and trade secrets. Misappropriation or other loss of our intellectual property would adversely affect our competitive
position and may cause us to incur substantial litigation or other costs.



Third parties
may claim, that our drug delivery platforms, or the products in which they are used, or our other products infringe on their rights,
and we may incur significant costs resolving these claims.



Third parties may claim,
that the manufacture, use, import, offer for sale or sale of our drug delivery platforms or our products infringes on their patent
rights. In response to such claims, we may have to seek licenses, defend infringement actions or challenge the validity of those
patent rights in court. If we cannot obtain required licenses, are found liable for infringement or are not able to have such patent
rights declared invalid, we may be liable for significant monetary damages, encounter significant delays in bringing products to
market or be precluded from the manufacture, use, import, offer for sale or sale of products or methods of drug delivery covered
by the patents of others. We may not have identified, or be able to identify in the future, U.S. or foreign patents that pose a
risk of potential infringement claims.



Any claims that our
products or drug delivery platforms infringe or may infringe proprietary rights of third parties, with or without merit, could
be time-consuming, result in costly litigation or divert the efforts of our technical and management personnel, any of which could
disrupt our relationships with our partners and could significantly harm our operating results.



The implementation
of the Leahy-Smith America Invents Act of 2011 may adversely affect our business.



The Leahy-Smith America
Invents Act of 2011 (“AIA”), which was signed into law on September 16, 2011, includes several provisions that may
impact our business and patent protection in the United States. The AIA changes the current U.S. “first-to-invent”
system to a system that awards a patent to the “first-inventor-to-file” for an application for a patentable invention.
This change alters the pool of available materials that can be used to challenge patents in the U.S. and eliminates the ability
to rely on prior research to lay claim to patent rights. Disputes will be resolved through new derivation proceedings and the AIA
creates mechanisms to allow challenges to newly issued patents in reexamination proceedings. Although many of the changes bring
U.S. law into closer harmony with EU and other national patent laws, the new bases and procedures may make it easier for competitors
to challenge our patents, which could result in increased competition and have a material adverse effect on our business and results
of operations. The changes may also make it harder to challenge third-party patents and place greater importance on being the first
inventor to file a patent application on an invention. The AIA amendments to patent filing and litigation procedures in the U.S.
may result in litigation being more complex and expensive and divert the efforts of our technical and management personnel.



7







Even if we and
our partners obtain necessary regulatory approvals, our products and our drug delivery platforms or our partners’ products
(incorporating our platforms) may not gain market acceptance.



Even if we and our
pharmaceutical and biotechnology company partners obtain the necessary regulatory approval to market products or products that
incorporate our platforms, such products, technologies and product candidates may not gain market acceptance among physicians,
patients, healthcare payers and medical communities. The degree of market acceptance of any product, technology or product candidate
will depend on a number of factors, including:



| | · | the scope of regulatory approvals, including limitations or warnings in a product’s regulatory-approved
labeling;
| | - | -----------------------------------------------------------------------------------------------------------------



| | · | demonstration of the clinical efficacy and safety of the product or technology;
| | - | -------------------------------------------------------------------------------



| | · | the absence of evidence of undesirable side effects that delay or extend trials;
| | - | --------------------------------------------------------------------------------



| | · | the lack of regulatory delays or other regulatory actions;
| | - | ----------------------------------------------------------



| | · | its cost-effectiveness;
| | - | -----------------------



| | · | its potential advantage over alternative treatment methods;
| | - | -----------------------------------------------------------



| | · | the availability of third-party reimbursement; and
| | - | --------------------------------------------------



| | · | the marketing and distribution support it receives.
| | - | ---------------------------------------------------



If any of our products
or drug delivery platforms or our partners’ products fail to achieve market acceptance, our ability to generate revenue will
be limited, which would have a material adverse effect on our business. In addition, even if we gain regulatory market acceptance,
further delays due to, for example, the FDA not removing unapproved products from the market in a timely manner, may affect our
ability to generate revenue quickly after market acceptance.



Our collaborative
arrangements may give rise to disputes over commercial terms, contract interpretation and ownership of our intellectual property
and may adversely affect the commercial success of the products developed under those partnerships.



While we are currently
shifting our business model, our business currently remains dependent on our ability to work with customers and partners in collaborative
relationships to develop products using our drug delivery platforms. While, we now have marketed products and products in late
stage development that are not dependent on these collaborative relationships, most of our current revenues come from those partnerships.
Therefore, as we have in the past, we are still exploring to enter into new collaborative arrangements, some of which are not evidenced
by formal or executed definitive agreements, but rather by memoranda of understanding, material transfer agreements, options or
feasibility agreements. If those collaborative relationships give rise to disputes regarding the relative rights, obligations and
revenues of the parties, including the ownership of intellectual property and associated rights and obligations, such disputes
may delay collaborative research, development or commercialization of potential products and may lead to lengthy and expensive
litigation or arbitration. In some cases, the terms of our collaborative arrangements, particularly feasibility studies, may preclude
us from disclosing the identity of the partners and/or of the products we are co-developing with them. The terms of collaborative
arrangements may also limit or preclude us from fully developing other related products or specific applications of our drug delivery
platforms used under such partnerships. Such arrangements generally include also termination provisions in the event either party
decides that, for strategic or other reasons, it does not wish to pursue the partnership. Additionally, the partners under these
arrangements may breach the terms of their respective agreements or fail to prevent infringement of the licensed patents by third
parties. Moreover, negotiating collaborative arrangements often takes considerably longer to conclude than the parties initially
anticipate, which could cause us to agree to less favorable agreement terms that delay or defer recovery of our development costs
and reduce the funding available to support key programs or the development of our products and technologies.



We may be unable to
enter into future collaborative arrangements on acceptable terms, which could also adversely affect our ability to develop and
commercialize our current and potential future products. Further, even if we do enter into acceptable collaboration arrangements,
it is possible that our collaborative partners may not choose to develop and commercialize products using our technologies or may
not devote sufficient resources to the development and commercial sales of products using our technologies. Our collaborative arrangements
may also limit or preclude us with respect to the development of our products or technologies that may compete with those of our
collaborators, but may not necessarily restrict our collaborative partners from competing with us or restrict their ability to
market or sell competitive products. Our current and any future collaborative partners may pursue existing or other development-stage
products or alternative technologies in preference to those being developed in collaboration with us or may terminate their relationships
with us or otherwise decide not to proceed with development and commercialization of products containing our drug delivery platforms.



8







We enter into collaborative
agreements with pharmaceutical and biotechnology companies to apply our drug delivery platforms to drugs developed by others. Ultimately,
we receive license revenues and product development fees, as well as revenues from royalties and the sale of products incorporating
our technology. The drugs to which our drug delivery platforms are applied are generally the property of, or controlled by, our
pharmaceutical and biotechnology company partners. Those drugs may be the subject of patents or patent applications and other forms
of protection owned by such companies or third parties. If those patents or other forms of protection expire, are challenged or
become ineffective, sales of the drugs by such companies may be restricted or may cease and adversely affect our revenues.



If we or our
third party collaborative partners are required to obtain licenses from third parties, our revenues and royalties on any commercialized
products could be reduced.



The development of
some of our drug delivery platforms-based products may require the use of raw materials (e.g. proprietary excipient), active ingredients
or drugs (e.g. proprietary proteins), technologies/processes, etc. developed by third parties. The extent to which efforts by other
researchers have resulted or will result in patents and the extent to which we or our collaborative partners are forced to obtain
licenses from others, if available, on commercially reasonable terms is currently unknown. If we or our collaborative partners
must obtain licenses from third parties, fees must be paid for such licenses, which could reduce the revenues and royalties we
may receive on commercialized products that incorporate our drug delivery platforms.



If our third
party collaborative partners face generic competition for their products, our revenues and royalties from such products may be
adversely affected.



Some of our third party
collaborative partners may utilize our drug delivery platforms in products with exclusive rights secured by patents or other means.
These rights are limited in time and do not always provide effective protection for the developed products. If our collaborative
partners are unable to protect the developed products’ exclusivity or patent rights, generic competition may erode their
market share, undermine the profitability of their products and limit the royalties we could collect from product sales. The expiration
of the Hatch Waxman exclusivity for Coreg CR in April 2010 opens Coreg CR to potential generic competition, which may negatively
affect further milestone payments and the royalties we could collect in the future. Abbreviated New Drug Applications (ANDA) have
been submitted to the FDA by Mutual Pharmaceuticals Co. (now Caraco Pharmaceutical Laboratories, Ltd.), Lupin Pharmaceuticals,
Inc. and Impax Laboratories, Inc. requesting marketing approval of generic formulations of Coreg CR and by Anchen Pharmaceuticals,
Inc. regarding only 40 mg dosage strength. Should the FDA grant approval to any of these applications, our royalty income from
sales of Coreg CR and further milestone payments would be negatively affected. To date, we have generated (i) $23 million in milestone
payments and (ii) $56.2 million in royalty revenue from Coreg CR, the sole product sold in the U.S. using our Micropump drug delivery
platform.



Healthcare reform
and restrictions on reimbursements may limit our financial returns.



Our ability to successfully
commercialize our products and technologies may depend on the extent to which the government health administration authorities,
the health insurance funds in the EU Member States, private health insurers and other third party payers in the U.S. will reimburse
consumers for the cost of these products, which would affect the volume of drug products sold by pharmaceutical and biotechnology
companies that incorporate our technology into their products. Third party payers are increasingly challenging both the need for,
and the price of, novel therapeutic drugs and uncertainty exists as to the reimbursement status of newly approved therapeutics.
The commercial success of our products depends in part on the conditions under which products incorporating our technology are
reimbursed. Adequate third party reimbursement may not be available for such drug products to enable us to maintain price levels
sufficient to realize an appropriate return on our investments in research and product development, which could materially and
adversely affect our business. We cannot predict the effect that changes in the healthcare system, especially cost containment
efforts, may have on our business. In particular, it is difficult to predict the effect of health care reform legislation enacted
in the U.S. in 2010, certain provisions of which are still subject to regulatory implementation, further legislative change and
ongoing judicial review. Any such changes or changes due to future legislation governing the pricing and reimbursement of healthcare
products in the EU Member States may adversely affect our business.



9







Security breaches
and other disruptions could compromise confidential information and expose us to liability and cause our business and reputation
to suffer.



In the ordinary course
of our business, we collect and store proprietary data, including intellectual property, our proprietary business information and
that of our customers, suppliers and business partners, on our networks. The secure maintenance and transmission of this information
is critical to our operations and business strategy. Despite our security measures, our information systems and infrastructure
may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could
compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access,
disclosure or other loss of information could result in legal claims or proceedings, investigations by regulatory authorities in
the U.S. and EU Member States, disruption to our operations and damage to our reputation, any of which could adversely affect our
business.



Failure to comply
with domestic and international privacy and security laws could result in the imposition of significant civil and criminal penalties.



The costs of compliance
with these laws, including protecting electronically stored information from cyber-attacks, and potential liability associated
with failure to do so could adversely affect our business, financial condition and results of operations. We are subject to various
domestic and international privacy and security regulations, including but not limited to The Health Insurance Portability and
Accountability Act of 1996 (“HIPAA”). HIPAA mandates, among other things, the adoption of uniform standards for the
electronic exchange of information in common healthcare transactions, as well as standards relating to the privacy and security
of individually identifiable health information, which require the adoption of administrative, physical and technical safeguards
to protect such information. In addition, many states have enacted comparable laws addressing the privacy and security of health
information, some of which are more stringent than HIPAA.



Fluctuations
in foreign currency exchange rates and the impact of the European sovereign debt crisis may cause fluctuations in our financial
results.



For the year ended
December 31, 2013, we derived 46% of our total revenues from transactions in U.S. dollars, but have 35% of our cash and cash equivalents,
all of our marketable securities, and the majority of our expenses denominated in Euros. Our functional currency is the Euro and
our reporting currency is the U.S. Dollar. As a result, both our actual and reported financial results could be significantly affected
by fluctuations of the Euro relative to the U.S. dollar. We do not engage in substantial hedging activities with respect to the
risk of exchange rate fluctuations, although we do, from time to time, purchase Euros against invoiced Dollar receivables.



Recent developments
in the EU have created uncertainty about the ability of certain EU Member States to continue to service their sovereign debt obligations.
This debt crisis and the related financial restructuring efforts may cause the value of the Euro to deteriorate, reducing the value
of the Euro relative to the U.S. Dollar. Any strengthening in the U.S. Dollar relative to the Euro would have a negative effect
on our balance sheet while a weakening in the U.S. Dollar relative to the Euro would have a positive effect. In addition, the sovereign
debt crisis affecting some EU Member States is contributing to instability in global credit markets. If global economic and market
conditions, or economic conditions in the European Union, the U.S. or other key markets, remain uncertain, persist or deteriorate
further, our business, financial condition, results of operations and cash flows may be adversely affected.



Risks Relating to
Regulatory and Legal Matters



Products that
incorporate our drug delivery platforms and our late-stage development products acquired from Éclat and other products we
may develop are subject to regulatory approval. If we or our pharmaceutical and biotechnology company partners do not obtain such
approvals, or if such approvals are delayed, our revenues may be adversely affected.



Although products that
incorporate our drug delivery platforms and late-stage development products acquired through our acquisition of Éclat, and
other products we may develop may appear promising, in particular at their early stages of development and in clinical trials,
none of these potential platforms or products may gain regulatory approval and reach the commercial market for any number of reasons.



10







In the U.S., federal
state and local government agencies, primarily the FDA, regulate all pharmaceutical products, including existing products and those
under development. We, or our pharmaceutical and biotechnology company partners, may experience significant delays in expected
product releases while attempting to obtain regulatory approval for products incorporating our technologies. If we, or our partners,
are not successful, our revenues and profitability may decline. We cannot control, and our pharmaceutical and biotechnology company
partners cannot control, the timing of regulatory approval for any of these products, or if approval is obtained at all.



Applicants for FDA
approval often must submit to the FDA extensive clinical and pre-clinical data, as well as, information about product manufacturing
processes and facilities and other supporting information. Varying interpretations of the data obtained from pre-clinical and clinical
testing could delay, limit or prevent regulatory approval of a drug product. The FDA also may require us, or our partners, to conduct
additional pre-clinical studies or clinical trials. For instance, we do not anticipate the necessity to conduct individual toxicity
and carcinogenicity tests for each product that we develop using the Medusa’s polymers developed and have been extensively
studied previously. However, the FDA may require additional toxicology tests and clinical trials to confirm the safety and effectiveness
of Medusa-based product candidates, which would impact development plans for product candidates. In addition, although Flamel has
submitted a Drug Master File (“DMF”) for its lead Medusa polymer, the FDA may require additional information prior
to the conduct of clinical trials or for commercialization of any product that uses our Medusa polymers and cross-references our
DMF.



Similarly, although
we anticipate submitting applications for approval for the development products acquired from Éclat that rely on existing
data to demonstrate safety and effectiveness, FDA may determine that additional studies particular to our products are necessary.
If FDA requires such additional data, it would impact development plans for those products.



Changes in FDA approval
policy during the development period, or changes in regulatory review for each submitted new product application, also may delay
an approval or result in rejection of an application. For instance, under the Food and Drug Administration Amendments Act of 2007
(“FDAAA”), we or our partners may be required to develop Risk Evaluations and Mitigation Strategies, or REMS, to ensure
the safe use of their product candidates. If the FDA disagrees with our or our partners’ REMS proposals, it may be more difficult
and costly for us, or our partners, to obtain regulatory approval for product candidates. Similarly, FDAAA provisions may make
it more likely that the FDA will refer a marketing application for a new product to an advisory committee for review, evaluation
and recommendation as to whether the application should be approved. This review may add to the wait time for approval, and, although
the FDA is not bound by the recommendation of an advisory committee, objections or concerns expressed by an advisory committee
may cause the FDA to delay or deny approval.



The FDA
has substantial discretion in the approval process and may disagree with our or our partners’ interpretations of data and
information submitted in an application, which also could cause delays of an approval or rejection of an application. Even if the
FDA approves a product, the approval may limit the uses or indications for which a product may be marketed, restrict distribution
of the product or require further studies. With respect to the Éclat product BloxiverzTM, the FDA has required the
Company to conduct post-marketing non-clinical, toxicity studies by December 2016.



The FDA
may also withdraw product clearances and approvals for failure to comply with regulatory requirements or if problems follow initial
marketing. In the same way, medicinal products for supply on the EU market are subject to marketing authorization by either the
European Commission, following an opinion by the EMA, or by the competent authorities of EU Member States. Applicants for marketing
authorization must submit extensive technical and clinical data essentially in the form of the ICH Common Technical Document. The
data is subject to extensive review by the competent authorities and may be considered inappropriate or insufficient. If applications
for marketing authorization by pharmaceutical and biotechnology company partners are delayed, or rejected, if the therapeutic indications
for which the product is approved are limited, or if conditional marketing authorization imposing post-marketing clinical trials
or surveillance is imposed, our revenues may decline and earnings may be negatively impacted.



Manufacturers of drugs,
including the active pharmaceutical ingredients, also must comply with applicable cGMP requirements, both as a condition of approval
and for continued authority to manufacture and distribute products. Our manufacturing facilities, and those of our pharmaceutical
and biotechnology company partners, may be required to pass a pre-approval inspection by the FDA, the EMA, the competent authorities
of EU Member States or our customers, and will be subject to periodic inspection after that, all intended to ensure compliance
with cGMP. The cGMP requirements govern quality control of the manufacturing process and documentation policies and procedures,
and we and our pharmaceutical and biotechnology company partners will need to ensure that all of our processes, methods and equipment
are compliant with cGMP. We will be obligated to expend time, money and effort in production, record keeping and quality control
to assure that the product meets applicable specifications and other requirements. If we, our pharmaceutical and biotechnology
company partners or suppliers of key ingredients cannot comply with these practices, the sale of our products or products developed
by our partners that incorporate our technologies may be suspended. This would reduce our revenues and gross profits.



11







Commercial products
are subject to continuing regulation, and we on our own, and in conjunction with our pharmaceutical and biotechnology companies
partners, may be subject to adverse consequences if we or they fail to comply with applicable regulations.



We on our own and in
conjunction with our pharmaceutical and biotechnology companies partners will be subject to extensive regulatory requirements for
our and the co-developed products and product candidates that incorporate our drug delivery platforms, even if the products receive
regulatory approval. These regulations are wide-ranging and govern, among other things:



| | · | adverse drug experiences and other reporting requirements;
| | - | ----------------------------------------------------------



| | · | product promotion and marketing;
| | - | --------------------------------



| | · | product manufacturing, including cGMP compliance;
| | - | -------------------------------------------------



| | · | record keeping;
| | - | ---------------



| | · | distribution of drug samples;
| | - | -----------------------------



| | · | required post-marketing studies or clinical trials;
| | - | ---------------------------------------------------



| | · | authorization renewal procedures;
| | - | ---------------------------------



| | · | authorization variation procedures;
| | - | -----------------------------------



| | · | compliance with any required REMS;
| | - | ----------------------------------



| | · | updating safety and efficacy information;
| | - | -----------------------------------------



| | · | processing of personal data;
| | - | ----------------------------



| | · | use of electronic records and signatures; and
| | - | ---------------------------------------------



| | · | changes to product manufacturing or labeling.
| | - | ---------------------------------------------



If we or our partners,
including any contract manufacturers that we use, fail to comply with these laws and regulations, the FDA, the European Commission,
competent authorities of EU Member States, or other regulatory organizations, may take actions that could significantly restrict
or prohibit commercial distribution of our products and products that incorporate our technologies. If the FDA, the European Commission
or competent authorities of EU Member States determine that we are not in compliance with these laws and regulations, they could,
among other things:



| | · | issue warning letters;
| | - | ----------------------



| | · | impose fines;
| | - | -------------



| | · | seize products or request or order recalls;
| | - | -------------------------------------------



| | · | issue injunctions to stop future sales of products;
| | - | ---------------------------------------------------



| | · | refuse to permit products to be imported into, or exported out of, the United States or the European
Union;
| | - | -----------------------------------------------------------------------------------------------------------



| | · | suspend or limit our production;
| | - | --------------------------------



| | · | withdraw or vary approval of marketing applications;
| | - | ----------------------------------------------------



| | · | order the competent authorities of EU Member States to withdraw or vary national authorization;
and
| | - | ---------------------------------------------------------------------------------------------------



| | · | initiate criminal prosecutions.
| | - | -------------------------------



We are subject
to U.S. federal and state laws prohibiting “kickbacks” and false claims that, if violated, could subject us to substantial
penalties, and any challenges to or investigation into our practices under these laws could cause adverse publicity and be costly
to respond to, and thus could harm our business.



12







We are subject to extensive
and complex U.S. federal and state and international laws and regulations, including but not limited to, health care “fraud
and abuse” laws, such as anti-kickback and false claims laws and regulations pertaining to government benefit program reimbursement,
price reporting and regulations, and sales and marketing practices. These laws and regulations are broad in scope and they are
subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or to alter one
or more of our sales or marketing practices. In addition, violations of these laws, or allegations of such violations, could disrupt
our business and result in a material adverse effect on our revenues, profitability, and financial condition. In the current environment,
there appears to be a greater risk of investigations of possible violations of these laws and regulations. This is reflected by
recent enforcement activity and pronouncements by the US Office of Inspector General of the Department of Health and Human Services
that it intends to continue to vigorously pursue fraud and abuse violations by pharmaceutical companies, including through the
potential to impose criminal penalties on pharmaceutical company executives. If any such actions are instituted against us, and
we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business,
including the imposition of significant fines or other sanctions.



Regulatory reforms
may adversely affect our ability to sell our products or drug delivery platforms profitably.



From time to time,
the US Congress, the Council of the European Union and the European Parliament, as well as the legislators of the EU Member States,
adopt changes to the statutes that the FDA, the European Commission and the competent authorities of the EU Member States enforce
in ways that could significantly affect our business. In addition, the FDA, the European Commission and the competent authorities
of the EU Member States often issue new regulations or guidance, or revise or reinterpret their current regulations and guidance
in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will
be enacted or FDA, EU or EU Member State's regulations, guidance or interpretations changed, and what the impact of any such changes
may be.



It is possible, however,
that such changes could have a significant impact on the path to approval of products incorporating our drug delivery platforms,
our products or of competing products, and to our obligations and those of our pharmaceutical and biotechnology company partners.



We and companies
to which we have licensed our drug delivery platform and subcontractors we engage for services related to the development of our
products are subject to extensive regulation by the FDA and other regulatory authorities. Our and their failure to meet strict
regulatory requirements could adversely affect our business.



We, and companies to
which we license our technology, as well as, companies acting as subcontractors for our products are subject to extensive regulation
by the FDA, other domestic regulatory authorities and equivalent foreign regulatory authorities, particularly the European Commission
and the competent authorities of EU Member States. Those regulatory authorities may conduct periodic audits or inspections of the
applicable facilities to monitor compliance with regulatory standards and we remain responsible for the compliance of our subcontractors.
If the FDA or another regulatory authority finds failure to comply with applicable regulations, the authority may institute a wide
variety of enforcement actions, including: warning letters or untitled letters; fines and civil penalties; delays in clearing or
approving, or refusal to clear or approve, products; withdrawal, suspension or variation of approval of products; product recall
or seizure; orders to the competent authorities of EU Member States to withdraw or vary national authorization; orders for physician
notification or device repair, replacement or refund; interruption of production; operating restrictions; injunctions; and criminal
prosecution. Any adverse action by a competent regulatory agency could lead to unanticipated expenditures to address or defend
such action and may impair the ability to produce and market applicable products, which could significantly impact our revenues
and royalties that we receive from our customers.



We may face product
liability claims related to clinical trials we may sponsor or for which we provide investigational products or technologies or
the use or misuse of our products or products that incorporate our drug delivery platforms.



13







The testing, including
through clinical trials, manufacturing and marketing of our products or products that incorporate our drug delivery platforms may
expose us to potential product liability and other claims resulting from their use. If any such claims against us are successful,
we may be required to make significant compensation payments. Any indemnification that we have obtained, or may obtain, from contract
research organizations or pharmaceutical and biotechnology companies or hospitals conducting human clinical trials on our behalf
may not protect us from product liability claims or from the costs of related litigation. Insurance coverage is expensive and difficult
to obtain, and we may be unable to obtain coverage in the future on acceptable terms, if at all. We currently maintain general
liability insurance with a limit of €8 million and product liability and recall insurance with a limit of €10 million
for products incorporating our drug delivery platforms, and coverage of $5 million for products marketed by Éclat. Although
we believe the amounts to be commercially reasonable, we cannot be certain that the coverage limits of our insurance policies or
those of our strategic partners will be adequate. If we are unable to obtain sufficient insurance at an acceptable cost, a product
liability claim or recall could adversely affect our financial condition. Similarly, any indemnification we have obtained, or may
obtain, from pharmaceutical and biotechnology companies with whom we are developing our drug delivery platforms may not protect
us from product liability claims from the consumers of those products or from the costs of related litigation. If we are subject
to a product liability claim, our product liability insurance may not reimburse us, or be sufficient to reimburse us, for any expenses
or losses we may suffer. A successful product liability claim against us, if not covered by, or if in excess of, our product liability
insurance, may require us to make significant compensation payments. These payments would be reflected as expenses on our statement
of operations and reduce our earnings.



If we use hazardous
biological and/or chemical materials in a manner that causes injury, we may be liable for significant damages.



Our research and development
activities involve the controlled use of potentially harmful biological and/or chemical materials, and are subject to U.S., state,
EU, national and local laws and regulations governing the use, storage, handling and disposal of those materials and specified
waste products. We cannot completely eliminate the risk of accidental contamination or injury from the use, storage, handling
or disposal of these materials, including fires and/or explosions, storage tank leaks and ruptures and discharges or releases
of toxic or hazardous substances. These operating risks can cause personal injury, property damage and environmental contamination,
and may result in the shutdown of affected facilities and the imposition of civil or criminal penalties. The occurrence of any
of these events may significantly reduce the productivity and profitability of a particular manufacturing facility and adversely
affect our operating results.



We currently maintain
environmental liability, property, business interruption and casualty insurance with aggregate maximum limits of €115 million,
which are limits that we believe to be commercially reasonable, but may be inadequate to cover any actual liability or damages.
If we fail to comply with environmental regulations, we could be subject to criminal sanctions and/or substantial liability for
any damages that result, and any such liability could be significant.



Risks Relating to
Ownership of Our Securities



Our share price
has been volatile and may continue to be volatile.



The trading price of
our shares has been, and is likely to continue to be, highly volatile. The market value of an investment in our shares may fall
sharply at any time due to this volatility. During the year ended December 31, 2013, the closing sale price of our ADSs as reported
on the NASDAQ National Market ranged from $3.25 to $8.21. During the year ended December 31, 2012, the closing sale price of our
ADSs as reported on the NASDAQ National Market ranged from $2.99 to $7.67. The market prices for securities of drug delivery, specialty
pharma, biotechnology and pharmaceutical companies historically have been highly volatile. Factors that could adversely affect
our share price include, among others:



| | · | fluctuations in our operating results;
| | - | --------------------------------------



| | · | announcements of technological collaborations, innovations or new products by us or our competitors;
| | - | ----------------------------------------------------------------------------------------------------



| | · | actions with respect to the acquisition of new or complementary businesses;
| | - | ---------------------------------------------------------------------------



| | · | governmental regulations;
| | - | -------------------------



| | · | developments in patent or other proprietary rights owned by us or others;
| | - | -------------------------------------------------------------------------



| | · | public concern as to the safety of drug delivery platforms developed by us or drugs developed by
others using our platform;
| | - | ---------------------------------------------------------------------------------------------------------------------------



| | · | the results of pre-clinical testing and clinical studies or trials by us or our competitors;
| | - | --------------------------------------------------------------------------------------------



| | · | adverse events related to our products or products developed by pharmaceutical and biotechnology
company partners that use our drug delivery platforms;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | lack of efficacy of our products;
| | - | ---------------------------------



| | · | litigation;
| | - | -----------



14







| | · | decisions by our pharmaceutical and biotechnology company partners relating to the products incorporating
our technologies;
| | - | ---------------------------------------------------------------------------------------------------------------------------



| | · | actions by the FDA, the EMA or national authorities of EU Member States in connection with submissions
related to the products incorporating our technologies;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the perception by the market of biotechnology and high technology companies generally; and
| | - | ------------------------------------------------------------------------------------------



| | · | general market conditions, including the impact of the current financial environment.
| | - | -------------------------------------------------------------------------------------



Because we have
limited commercial sales, evaluating our prospects may be difficult.



Our primary commercial
sales currently include only Coreg CR®. We have had no commercial sales to date of products incorporating our Medusa
technology. Accordingly, we have only a limited history of commercial sales, which may make it difficult to evaluate our prospects.
The difficulty in evaluating our prospects may cause volatile fluctuations in the market price of our shares as investors and holders
react to information about our prospects. Since 1995, we have generated revenues from product development fees and licensing arrangements
and royalties. Our business and prospects must be evaluated in light of the risks and uncertainties of a company with limited commercial
sales of products and only two currently marketed products, Coreg CR® and BloxiverzTM).



If we are not
profitable in the future, the value of our shares may fall.



We have a history of
operating losses and have accumulated aggregate net loss from inception of approximately $236 million through December 31, 2013.
If we are unable to earn a profit in future periods, the market price of our stock may fall. The costs for research and product
development of our drug delivery platforms and general and administrative expenses have been the principal causes of our net losses
in recent years. Our ability to operate profitably depends upon a number of factors, many of which are beyond our direct control.
These factors include:



| | · | the demand for our technologies and products;
| | - | ---------------------------------------------



| | · | the level of product and price competition;
| | - | -------------------------------------------



| | · | our ability to develop new collaborative partnerships and additional commercial applications for
our products;
| | - | --------------------------------------------------------------------------------------------------------------



| | · | our ability to control our costs;
| | - | ---------------------------------



| | · | our ability to broaden our customer base;
| | - | -----------------------------------------



| | · | the effectiveness of our marketing strategy;
| | - | --------------------------------------------



| | · | the effectiveness of our partners’ marketing strategy for products that use our technology;
and
| | - | -----------------------------------------------------------------------------------------------



| | · | general economic conditions.
| | - | ----------------------------



We may require
additional financing, which may not be available on favorable terms or at all, and which may result in dilution of our shareholders’
equity interest.



We may require additional
financing to fund the development and possible acquisition of new drug products and delivery platforms and to increase our production
capacity beyond what is currently anticipated. We may consume available resources more rapidly than currently anticipated, resulting
in the need for additional funding. If we cannot obtain financing when needed, or obtain it on favorable terms, we may be required
to curtail our plans to continue to develop drug delivery platforms. We also may elect to pursue additional financing at any time
to more aggressively pursue development of new drug delivery platforms. Other factors that will affect future capital requirements
and may require us to seek additional financing include:



| | · | the development and acquisition of new products and technologies;
| | - | -----------------------------------------------------------------



| | · | the progress of our research and product development programs;
| | - | --------------------------------------------------------------



| | · | results of our collaborative efforts with current and potential pharmaceutical and biotechnology
company partners; and
| | - | ----------------------------------------------------------------------------------------------------------------------



| | · | the timing of, and amounts received from, future product sales, product development fees and licensing
revenue and royalties.
| | - | -----------------------------------------------------------------------------------------------------------------------------



15







If adequate funds are
not available, we may be required to significantly reduce or refocus our product development efforts, resulting in loss of sales,
increased costs and reduced revenues.



Our operating
results may fluctuate, which may adversely affect our share price.



Fluctuations in our
operating results may lead to fluctuations, including declines, in our share price. Our operating results may fluctuate from period
to period due to a variety of factors, including:



| | · | demand by consumers for the products we and our partners produce;
| | - | -----------------------------------------------------------------



| | · | new product introductions;
| | - | --------------------------



| | · | pharmaceutical and biotechnology company ordering patterns;
| | - | -----------------------------------------------------------



| | · | the number of new collaborative agreements into which we enter;
| | - | ---------------------------------------------------------------



| | · | the number and timing of product development milestones that we achieve under collaborative agreements;
| | - | -------------------------------------------------------------------------------------------------------



| | · | the level of our development activity conducted for, and at the direction of, pharmaceutical and
biotechnology companies under collaborative agreements; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the level of our spending on new drug delivery platform development and technology acquisition,
and internal product development.
| | - | ---------------------------------------------------------------------------------------------------------------------------------



Variations in the timing
of our revenue and expenses also could cause significant fluctuations in our operating results from period to period and may result
in greater than expected losses or more difficulty achieving earnings.



We are subject
to different corporate disclosure standards than U.S based companies that may limit the information available to holders of our
ADSs.



As a foreign private
issuer, we are not required to comply with the notice and disclosure requirements under the Exchange Act, relating to the solicitation
of proxies for shareholder meetings. Although we are subject to the periodic reporting requirements of the Exchange Act, the periodic
disclosure required of non-U.S. issuers under the Exchange Act is more limited than the periodic disclosure required of U.S. issuers.
Therefore, there may be less publicly available information about us than is regularly published by or about other public companies
in the United States.



We currently
do not intend to pay dividends and cannot assure shareholders that we will make dividend payments in the future.



We have never declared
or paid a cash dividend on any of our capital stock and do not anticipate declaring cash dividends in the foreseeable future. Declaration
of dividends on our shares will depend upon, among other things, future earnings, if any, the operating and financial condition
of our business, our capital requirements, general business conditions and such other factors as our Board of Directors deems relevant.



Judgments of
United States courts, including those predicated on the civil liability provisions of the federal securities laws of the United
States, may not be enforceable in French courts.



An investor in the
U.S. may find it difficult to:



| | · | effect service of process within the U.S. against us and our non-U.S. resident directors and officers;
| | - | ------------------------------------------------------------------------------------------------------



| | · | enforce United States court judgments based upon the civil liability provisions of the United States
federal securities laws against us and our non-U.S. resident directors and officers in France; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                       

| | · | bring an original action in a French court to enforce liabilities based upon the U.S. federal securities
laws against us and our non-U.S. resident directors and officers.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Holders of ADSs
have fewer rights than shareholders and have to act through the Depositary to exercise those rights.



16







Holders of ADSs do
not have the same rights as shareholders and, accordingly, cannot exercise rights of shareholders against us. The Bank of New York
Mellon, as depositary, or the “Depositary”, is the registered shareholder of the deposited shares underlying the ADSs.
Therefore, holders of ADSs will generally have to exercise the rights attached to those shares through the Depositary. We will
use reasonable efforts to request that the Depositary notify the holders of ADSs of upcoming votes and ask for voting instructions
from them. If a holder fails to return a voting instruction card to the Depositary by the date established by the Depositary for
receipt of such voting instructions, or if the Depositary receives an improperly completed or blank voting instruction card, or
if the voting instructions included in the voting instruction card are illegible or unclear, then such holder will be deemed to
have instructed the Depositary to vote its shares, and the Depositary shall vote such shares in favor of any resolution proposed
or approved by our Board of Directors and against any resolution not so proposed or approved.



Preferential
subscription rights may not be available for U.S. persons.



Under French law, shareholders
have preferential rights to subscribe for cash issuances of new shares or other securities giving rights to acquire additional
shares on a pro rata basis. U.S. holders of our securities (which might not be shares but ADRs) may not be able to exercise preferential
subscription rights for their securities unless a registration statement under the Securities Act is effective with respect to
such rights or an exemption from the registration requirements imposed by the Securities Act is available. We may, from time to
time, issue new shares or other securities giving rights to acquire additional shares (such as warrants) at a time when no registration
statement is in effect and no Securities Act exemption is available. If so, United States holders of our securities will be unable
to exercise any preferential rights and their interests will be diluted. We are under no obligation to file any registration statement
in connection with any issuance of new shares or other securities.



For holders of our
shares in the form of ADSs, the Depositary may make these rights or other distributions available to holders in the United States
if we instruct it to do so. If we fail to issue such instruction and the Depositary determines that it is impractical to sell the
rights, it may allow these rights to lapse. In that case, the holders will receive no value for them.



Our largest shareholders
own a significant percentage of the share capital and voting rights of the Company.



On March 31, 2014,
Deerfield Capital and certain of its affiliates beneficially owned approximately 11.3% of our outstanding shares (in the form of
ADRs) and Broadfin Capital. and certain of its affiliates beneficially owned approximately 9.9% of our outstanding shares (in the
form of ADRs). See “Item 7. Major Shareholders and Related Party Transactions — A. Major Shareholders.”
To the extent these shareholders continue to hold a large percentage of our share capital and voting rights, they will remain in
a position to exert heightened influence in the election of the directors of the Company and in other corporate actions that require
shareholder approval, including change of control transactions.



17







ITEM 4. Information
on the Company



General Overview



Flamel Technologies
SA, or Flamel, is a specialty pharmaceutical company with a long history of expertise in drug delivery, focusing on the development
of safer and more efficacious formulations, tackling unmet medical needs in the process. The acquisition of Éclat Pharmaceuticals,
LLC, or Éclat, on March 13, 2012 (for more details on the Éclat acquisition and its debt financing, see “Item
7.Major Shareholders and Related Party Transactions” and “Item 10. Additional Information – Material
Contracts”) has created a more vertically integrated company, benefiting from greater development and commercial expertise,
best in class drug delivery platforms and more near-term and mid-term potential value creating catalysts (for more details, see
“Item 4. Lead Products” and “Item 4. Other Products Under Development”).



Corporate Information



The Company was incorporated
as a Société Anonyme (or SA), a form of corporation under the laws of the Republic of France, in August 1990
as Flamel Technologies S.A. and its shares, represented by American Depositary Shares, began to be quoted on the NASDAQ National
Market in 1996 and are now quoted on the NASDAQ Global Market. As per the Company’s by-laws, its legal existence expires
in 2099, unless extended. Flamel’s principal place of business is located at Parc Club du Moulin àVent, 33, avenue du Docteur Georges Lévy, 69693 Venissieux
Cedex, France; phone number +33 472 78 34 34, fax number +33 472 78 34 35 and website www.flamel.com.



The Company currently
has one direct wholly owned operating subsidiary: Flamel US Holdings, Inc., a Delaware corporation, created for the acquisition
of Éclat in March 2012. Éclat Pharmaceuticals, LLC, a Delaware limited liability company, is a wholly owned subsidiary
of Flamel US Holdings, Inc. Talec Pharma, LLC, a Delaware limited liability company, is a wholly owned subsidiary of Éclat
Pharmaceuticals, LLC. A complete list of the Company’s subsidiaries can be found in Exhibit 8.1 to this Annual Report.



Our Business
Model



As a result of our
acquisition of Éclat, we have implemented an altered business model allowing Flamel to blend novel, high-value internally
developed products with its leading drug delivery capabilities and to commercialize niche branded and generic pharmaceutical products
in the U.S. and other countries as appropriate. Éclat, which has focused on pursuing FDA approvals through the 505(b)(2)
regulatory pathway (see “Item 4. Patent Restoration and Exclusivity”), adds marketing and licensing knowledge
of the commercial and regulatory process in the U.S and EU, which we believe will enhance the ability of the Company to identify
potential product candidates for development, leverage new opportunities for the application of our drug delivery platforms, and
to license and market products in the U.S and EU.



By adopting this revised
strategy, the Company makes itself less dependent on the often changing strategies of its partners, in the future. Nevertheless,
Flamel is still exploring development, supply and licensing opportunities for its drug delivery platforms with carefully selected
third parties, but, unlike our historical operations, will not rely completely on those partnerships to create revenue and profit
opportunities.



Since our acquisition
of Éclat, the Company is now focusing not only on (i) the development and licensing of versatile, proprietary drug delivery
platforms (Micropump® oral sustained release platform and its derivatives LiquiTime® and Trigger
LockTM and, the long acting injectable platform, MedusaTM; see “Item 4. Flamel’s
Drug Delivery Platforms Overview” for details) but also on (ii) the development of novel, high-value products based on
those delivery platforms (for more details, see “Item 4. Other Products Under Development”), most of which are
self-funded, and, (iii) the development, approval, and commercialization of niche branded and generic pharmaceutical products in
the U.S. acquired from Éclat (for more details, see “Item 4. Lead Products” and “Item 4. Other
Products Under Development”).



On October 18, 2012,
Flamel received U.S. Food and Drug Administration (“FDA”) acceptance for its first New Drug Application (“NDA”)
with a Prescription Drug User Fee Act (“PDUFA”) date of May 31, 2013. The product - later identified as BloxiverzTM
(Neostigmine Methylsulfate Injection for the reversal of effects of blocking agents after surgery) - was approved on May 31, 2013
and launched in the U.S. in July 2013 (for more details, see “Item 4. Lead Products”). Flamel believes that
BloxiverzTM could have a significant impact on the Company’s revenue generation and favorably impact its progression
to profitability. This launch is an important milestone for our business and we believe it demonstrates the expanded capabilities
of Flamel. This is the first of what we expect to be multiple new product successful development to come from our internal pipeline
over the next few years.



18







Business Strengths
and Strategies



The acquisition of
Éclat provides the Company with additional competencies and business strengths. To complement the historical science-oriented
strengths of Flamel as an innovator of drug delivery platforms, we now have enhanced our ability to pursue commercial opportunities
and identify new product candidates (see “Item 4. Other Products Under Development”) and have gained a four
products portfolio in various stages of development. The first product from the acquired Éclat’s portfolio, BloxiverzTM,
was approved by the FDA, and is currently being marketed in the U.S. (see “Item 4. Lead Products”). The second
product from the acquired Éclat’s portfolio was accepted for review NDA with a PDUFA date of April 28, 2014 (see “Item
4. Other Products Under Development”).



We anticipate this
enhanced commercialization capability will allow us to retain a greater portion of the economic benefits associated with sales
not only of those potentially three (3) additional “Unapproved to Approved” products developed using the Unapproved
Marketed Drug (or UMD) strategy (see “Item 4. Other Products Under Development - Three (3) “Unapproved to Approved”
Products using the Unapproved Marketed Drug (or UMD) Strategy”), but also, in some instances, of new products developed
using our drug delivery platforms (see “Item 4. Other Products Under Development - Proprietary pipeline to deliver several
regulatory filings (US and/or EU) through 2017”). We also benefit from the addition of a different perspective on the
business (including, but not limited to, the regulatory and commercial environments in the U.S.) and products to be developed in
the future.



Our versatile, proprietary
drug delivery platforms (Micropump®, LiquiTime®, Trigger LockTM, MedusaTM)
allow us to select unique product development opportunities, representing “life cycle” opportunities for marketed chemical
and biological drugs (via 505(b)(2) or ANDA regulatory paths), to the development of innovative formulations for NCEs or NBEs (via
NDA regulatory path). Our drug delivery platforms allow us to generate competitive differentiated product profiles (e.g. improvement
of pharmacokinetics, efficacy and/or safety). These product development opportunities offer the ability to grow market share and
to protect market position, through patent protection and/or product differentiation in multiple marketplaces. Indeed, as part
of our new business model, and the building-up of an internal product portfolio, several products formulated using our proprietary
drug delivery platforms are currently under development at Flamel, in various stages of development and using a variety of registration
pathways. These products will be marketed either by the Company and/or by partners via licensing/distribution agreements (see “Item
4. Other Products Under Development - Proprietary pipeline to deliver several regulatory filings (US and/or EU) through 2017”).



Altogether, the key
elements of our strategy that enable us to build upon our strengths are:



| | · | to maximize the commercial potential of our “Unapproved to Approved” products acquired
from Éclat;
| | - | --------------------------------------------------------------------------------------------------



| | · | to continue to build the efficacy and utility of Micropump®;
| | - | ------------------------------------------------------------



| | · | to identify and optimize time-to-market for our (not yet approved) drug delivery platforms, i.e.
LiquiTime®, Trigger LockTM and MedusaTM.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



| | · | to maximize the technical potential of our existing drug delivery platform for developing new and
proprietary products with the appropriated development pathway (as identified above);
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | to develop and validate additional drug delivery platforms for unmet applications with our current
platforms; and,
| | - | ------------------------------------------------------------------------------------------------------------------



| | · | to leverage the capabilities of our existing (and additional, in the future) drug delivery platforms
with pharmaceutical and biotechnology partners.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------



Developments
in 2013 and early 2014



On May 7, 2013, we
announced that the Company had filed a NDA for the second product from the portfolio of Éclat products acquired in March
2012with the FDA in the first quarter. However, the Company received shortly thereafter a “refusal to file”
letter from the FDA, citing the need to reformat parts of certain datasets in the application. The Company announced that it was
working closely with the FDA to provide - in the requested format - the information requested for resubmission of this application
as quickly as possible. This represented the second NDA filing after the first one accepted by the FDA for BloxiverzTM in
October 2012, which is Flamel’s first NDA approval (see “Item 4. Lead Products”).



19







On May 23, 2013, we
announced that the Company had exercised its right to regain control of two drugs that use its Trigger LockTM delivery platform
that were formerly being developed in partnership with an undisclosed partner.



On June 3, 2013, we
announced that the FDA had approved the Company’s NDA for BloxiverzTM, the first product from the portfolio of Éclat
products acquired in March 2012 (see “Item 4. Lead Products”).



On June 6, 2013, we
announced that the Company had entered into a multi-year development partnership agreement with an undisclosed, large international
pharmaceutical company. The development work, which will be done in Flamel’s Pessac facility.



On July 1, 2013, we
announced that the Company had resubmitted to FDA its second NDA the second undisclosed drug acquired from Éclat. As Flamel
previously announced on May 7, 2013, this second NDA had been filed with the FDA in the first quarter of 2013 and the Company received
a “refusal to file” letter from the FDA, citing the need to reformat parts of certain datasets in the application.
The resubmission of the NDA is consistent with the Company’s planned timetable.



On July 29, 2013, we
announced that launch of BloxiverzTM (0.5 and 1.0 mg/mL strengths) had commenced.



On September 11, 2013,
we announced that FDA had accepted for review the Company’s second new drug NDA the second product from the portfolio of
Éclat products acquired in March 2012. Flamel has received a PDUFA date, the target date for the FDA to complete its review
of the NDA, of April 28, 2014. For competitive reasons, the Company has decided not to identify the product at this time, but intends
to provide additional information at a later date. Flamel anticipates the potential filing of two (2) additional NDAs from the
Éclat pipeline in 2014.



On October 31, 2013,
we announced that Company completed preclinical studies with its proprietary extended-release Medusa hGH XL product, a customized
version of recombinant human growth hormone (rhGH) based upon Flamel’s proprietary Medusa platform. The study was conducted
on hypophysectomized (“hypoX”) rats, e.g. animals that have had their pituitary glands removed. This animal model is
relevant for assessing efficacy evaluation of the condition of growth hormone deficiency. Flamel’s study data provided significant
evidence to move this proprietary drug forward into a human clinical trial in 2015 with once weekly dosing.





On December 4, 2013,
we announced that Company had established a $15.0 million secured line of credit with Broadfin Capital, a current Flamel shareholder,
to support our operations. The Company drew $5.0 million initially upon closing of the facility. The interest rate on any outstanding
loan was 12.5% and the loan was required to be repaid on or before November 15, 2015. There was no cost for undrawn capital or
any penalty or premium for early repayment. Broadfin Capital also received a royalty of less than 1.0% on net sales of Bloxiverz
and the other products resulting from the R&D projects of the former Éclat until December 31, 2024, subject to required
regulatory approvals and sales of these products. The outstanding loan was repaid in March 2014, using the net proceeds of ADSs
sold by the Company described below; however, the royalty obligation remains in place.



On February 14, 2014,
we announced the voting results of the resolutions with regards to the issuance of ADSs, presented at the Extraordinary General
Meeting of the holders of its ordinary shares held on February 11, 2014. The resolutions related to the Company’s ability
to raise additional capital, an initiative that has to be approved by shareholders. Approximately 96% of the outstanding ordinary
shares were represented at the meeting and granted to the Board of Directors the authorization for carrying out the resulting capital
increases. A description of each resolution presented at the meeting was previously provided as Exhibit 99.2 to Form 6-K filed
by the Company on January 31, 2014.



On March 6, 2014, we
announced we had offered to sell 10.8 million ADSs, representing Company’s ordinary shares, in an underwritten public offering.
In connection with the offering, Company granted the underwriters a 30-day option to purchase up to an additional 15% (1.6 million)
of the ADSs offered in the public offering to cover over-allotments, if any. The offering closed on March 12, 2014. The ADSs described
were offered by Company pursuant to a shelf registration statement on Form F-3 previously filed with the SEC. The ADSs were sold
at a price to the public of $9.75 per ADS. All of the ADSs in this offering are to be sold by Flamel. The underwriters subsequently
exercised the over-allotment option in full. As a result we sold a total of 12.4 million ADSs (representing an equal number of
our ordinary shares) for total net proceeds (after deducting commission) of approximately $113 million.



20









We used some of the
net proceeds from the offering for the repayment of all outstanding amounts under the secured lines of credit previously provided
by our shareholders Deerfield Capital L.P and Broadfin Capital LLC, as well as the notes issued in connection with our acquisition
of Éclat. The Company intends to use the remaining net proceeds for the continued development of its product pipeline, including
possible clinical trials, and general corporate purposes, including working capital.



On April 7, 2014, we
announced that our proprietary Micropump® platform applied to sodium oxybate has achieved, in a First-in-Man (FIM)
clinical study in healthy volunteers, the objective of one single dose before bedtime for patients suffering from narcolepsy, eliminating
the need for a second dose. The current dosing regimen for the standard of care, Xyrem® (sodium oxybate), in the
United States is two equal, divided doses: the first dose at bedtime and the second dose 2.5 to 4 hours later. The FIM clinical
study was designed as a 16 subject four-way crossover evaluating three different formulations of Micropump® sodium
oxybate and Xyrem at a nightly dose of 4.5g (two doses of 2.25g for Xyrem) with an extension phase at 6g for successful Micropump®
formulations. The key data for the 14 evaluable subjects at 4.5g are: onset of action similar to Xyrem®, Cmax lower
than Xyrem® and, mean blood concentration (mg/ml) at hours 7 and 8 similar
to Xyrem®. For the extension phase of the study, two formulations were moved forward for dosing at 6g. Thirteen
subjects were evaluable as one subject dropped out for a reason unrelated to drug. The profiles for both formulations were consistent
with expectations. The current study will continue to treat subjects at higher doses. Given these results, the Company plans to
begin a new clinical study before the end of 2014 in a larger number of subjects.





On April 29, 2014,
the Company announced the receipt of a complete response letter (CRL) from the FDA for its second application from the Eclat Portfolio.



Lead Products



BloxiverzTM,
Flamel’s first NDA approval from the portfolio of Éclat products acquired in March 2012. Bloxiverz’s NDA
was filed in August 2012 and approved by the FDA on May 2013. The launch of Bloxiverz (10mL multiple dose vial at 0.5 and 1.0 mg/mL
strengths) commenced in July 2013. Bloxiverz (Neostigmine Methylsulfate Injection) is a drug used intravenously in the operating
room for the reversal of the effects of non-depolarizing neuromuscular blocking agents after surgery. Bloxiverz is the first and
only FDA-approved version of neostigmine methylsulfate, even though other versions of neostigmine have been on the market as unapproved,
grandfathered products under the Food, Drug and Cosmetic Act of 1938. Compared with the remaining unapproved marketed products,
Bloxiverz has proven and approved safety, efficacy and quality. Today, neostigmine is the most common agent used for the reversal
of the effects of other agents used for neuromuscular blocks. There are approximately 5 million vials sold annually in the U.S.
The volume of sales of Bloxiverz is dependent upon, as per FDA guidance (see “Item 4. Other Products Under Development
- Unapproved Marketed Drug (or UMD) Strategy”), the FDA removing all unapproved products from the market in a timely
manner (typically one year post approval) and the Company enjoying a period of defacto exclusivity through the 505(b)(2) approval
pathway (see “Item 4. Patent Restoration and Exclusivity”).



Coreg CR®,
the lead product using our Micropump drug delivery platform. Coreg CR is an extended-release formulation (once-a-day) of Coreg
(i.e. carvedilol phosphate), a non-selective antagonist of Beta 1, Beta 2 adrenergic receptors and a selective antagonist of Alpha
1 adrenergic receptors. Coreg and Coreg CR are the only beta blockers indicated for the treatment of moderate to severe heart failure
and left ventricular dysfunction following myocardial infarction. Coreg CR has been developed in partnership with GlaxoSmithKline
(or GSK; for more details, see “Item 4. Strategic Alliances”) and is approved, marketed and sold in the U.S
since 2007. To date, we have generated (i) $23 million in milestone payments and (ii) $56.2 million in royalty revenue from Coreg
CR. Flamel still is eligible to receive additional payments, which are not expected to be material, if certain milestones are achieved.
In 2013, we recognized royalty revenue of $6.8 million. Since the Hatch-Waxman exclusivity period for Coreg CR ended on April 20,
2010, it is possible that Coreg CR may experience generic competition from one or more competitors following approval of an Abbreviated
New Drug Application (ANDA), which may negatively affect the milestone payments and royalties we could collect in the future. We
have submitted a Citizen’s Petition to the FDA requesting the FDA to require that any generic formulations of Coreg CR should
meet the same requirements that the FDA required for the approval of Coreg CR, which is a higher standard than is otherwise required
under the minimum bioequivalence regulations. In October 2010, the FDA granted our petition in part and denied it in part. In addition,
US Patent 8,101,209 covering Coreg CR formulation has been granted in the US and listed in the FDA Orange Book by our partner GSK
on February 23, 2012. To date, no generic formulation of Coreg CR has received tentative or final approval.



21







Other Products
Under Development



Three “Unapproved
to Approved” Products using the Unapproved Marketed Drug (or UMD) Strategy. We are pursuing the development and will
seek FDA approval (NDA) of drugs that are currently marketed, as yet still “unapproved” products, but with well-established
medical efficacy. This should create opportunities, which may offer significant economic returns, to have the only “branded”
products in niche markets, enjoying a period of defacto exclusivity through the 505(b)(2) approval pathway. Indeed, many products
are marketed in the U.S., but have never received FDA approval and are not covered by DESI (Drug Efficacy Study Implementation).
This strategy has, however, a limited number of opportunities where a meaningful return on investment is possible. Through Éclat,
Flamel has acquired three additional opportunities beyond Bloxiverz with expected launches in the U.S. by the end of 2015.



| | · | The Company’s second NDA has a PDUFA date, the target date for the FDA to complete its review
of the NDA, of April 28, 2014. For competitive reasons, the Company has decided not to identify the product at this time, but intends
to provide additional information at a later date.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Flamel anticipates the potential filing of two additional NDAs in 2014.
| | - | -----------------------------------------------------------------------



| | · | Those products will be marketed by Flamel’s subsidiary, Éclat Pharmaceuticals.
| | - | ------------------------------------------------------------------------------



Proprietary
pipeline to deliver several regulatory filings (US and/or EU) through 2017. Using the acquired marketing and commercial capability
of Éclat, six new products development opportunities (i.e. four using Micropump® or LiquiTime®
or Trigger LockTM, and two using MedusaTM) have been selected for internal development. After setting
differentiated targeted product profiles and establishing development plans, pharmaceutical development activities have been initiated.



| | · | Sodium oxybate, a Micropump®-based formulation for one single dose before
bedtime for patients suffering from narcolepsy, eliminating the need for a second dose. Flamel’s results of its FIM clinical
study in healthy volunteers, published in April 2014, demonstrated the elimination of the second nighttime dose. The elimination
of the second dose for narcolepsy patients not only provides more convenience, but may improve the benefit sodium oxybate provides
as there will be no disruption to nighttime sleep. The potential for additional benefits, including improved safety, will be studied.
The current study will continue to treat subjects at higher doses. Given these results, the Company plans to begin a new clinical
study before the end of 2014 in a larger number of subjects further evaluating its formulations as well as certain pharmacodynamic
endpoints. This study is not expected to be a registration study. Flamel plans to meet with regulatory authorities prior to embarking
upon registration studies which are expected to begin prior to the end of 2015.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | hGH XL, a once-a week MedusaTM-based injectable formulation of recombinant
human growth hormone (rhGH). Flamel’s pharmacodynamics pre-clinical data, published in October 2013, provided significant
evidence to move this proprietary drug forward into a human clinical trial in 2015.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | We have several other products based on our proprietary drug delivery platforms at various stages
of development, i.e. two LiquiTime®-based (for pain or respiratory indications), and one Trigger LockTM-based
(for pain indication), and an additional MedusaTM-based (for metabolic indication). For competitive reasons, the
Company has decided not to identify those products for the time being, but intends to provide additional information upon the achievement
of pre-clinical, clinical and regulatory milestones.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Those products will be marketed either by Flamel (and/or its subsidiary Éclat) and/or by
partners via licensing/distribution agreements (e.g. after clinical proof of concept is achieved).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As part of the rationalization
of the Company’s products pipeline initiated in 2012, considering the evolution of the Hepatitis (HCV but also HBV) market
in developing countries towards IFN-alpha free treatments, we have discontinued the development of IFN-alpha XL (a once-a week
Medusa-based formulation of recombinant human interferon alpha-2b IFN-alpha XL (long-acting interferon alpha-2b which has completed
a Phase 2 trial in HCV patients; Study “ANRS HC23 COAT-IFN”). The Company believes the commercial opportunity to be
very limited, even in emerging markets.



Products in development
with partners. Although our business model has changed, we still have partnerships (e.g. feasibility study and/or license agreements)
with pharmaceutical and biotechnology partners. These alliances involve both novel and already-marketed drugs. Flamel expects some
of these co-developed products to reach the marketplace as a function of many factors. These include the promise of the drug itself
(particularly with respect to NCEs/NBEs there is a high rate of attrition); the success of formulation development activities that
we conduct for our partners; the evolving strategy and marketing focus of our partners; and the pharmaco-economics associated with
the eventual product and the indication(s) for which it is being developed. In particular, among those partnerships, we are developing
a Micropump®-based once-daily formulation of a drug that is currently being marketed by undisclosed specialty pharmaceutical
company (for more details see “Item 4. Strategic Alliances”). Flamel intends to provide additional information
on the development progress of these co-developed products once the Company has obtained clearance from the partners.



22







Proprietary and
Partnered Product Pipeline. The status of Flamel’s proprietary and partnered product pipelines is detailed in the followings
table:







|Proprietary Product Pipeline  
|------------------------------
|Development
 Strategy/Platform
|UMD[1]                        
|Undisclosed (UD)[2]           
|UD                            
|UD                            
|Micropump®                    
|LiquiTime®                    
|UD                            
|Trigger LockTM                 
|MedusaTM                       
|UD                            





|Partnered Product Pipeline
|--------------------------
|Micropump®                
|Micropump®                
|MedusaTM                   





| | [1] | Company’s “Unapproved to Approved” products using the Unapproved Marketed Drug
(or UMD) strategy.
| | --- | -------------------------------------------------------------------------------------------------

| | [2] | For competitive reasons, Flamel has decided not to identify those products for the time being,
but intends to provide additional information upon the achievement of pre-clinical, clinical and regulatory milestones.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | [3] | Those products will be marketed either by Flamel (and/or its subsidiary Éclat) and/or by
partners via licensing/distribution agreements (e.g. after clinical proof of concept is achieved).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Competition and
Market Opportunities



Competition



Competition in the
pharmaceutical and biotechnology industry is intense and is expected to increase. We compete with academic laboratories, research
institutions, universities, joint ventures, and other pharmaceutical and biotechnology companies, including other companies developing
niche brand or generic specialty pharmaceutical products or drug delivery platforms. Some of these competitors may be also our
business partners. There can be no assurance that our competitors will not obtain patent protection or other intellectual property
rights that would make it difficult or impossible for us to compete with their products. Further, major technological changes can
happen quickly in the pharmaceutical and biotechnology industries. Such rapid technological change, or the development by our competitors
of technologically improved or different products, could render our drug delivery platforms obsolete or noncompetitive.



23







The drug delivery industry
landscape has dramatically changed over the past decade and even more so during the past five years, largely as a function of the
growing importance of generic drugs. The growth of generics (typically small molecules) and of large molecules (biosimilars) have
accelerated the demand for drug delivery solutions while, at the same time, reducing the overall market for drug delivery formulations
due to reduced pricing power.



In addition, the overall
landscape of the Pharma/Biotech industry has changed, as consolidation has reduced our pool of potential partners and further accelerated
the competition among drug delivery companies. Over the past ten years, numerous stand-alone drug delivery companies have been
acquired (partly or entirely) by pharmaceutical, biotech, generic or other drug delivery companies. By acquiring drug delivery
platforms, those companies are internalizing their previously outsourced R&D efforts while potentially preventing competitors
from accessing the acquired technologies. In the meantime, certain drug delivery companies have consolidated their existing positioning
or have entered new markets via M&A transactions and/or restructuring.



Very few of Flamel’s
“historical” competitors still pursue a sole drug delivery business model as many other have moved or are moving to
the Specialty Pharma model, e.g. Actavis (acquisition of Forest Laboratories in February 2014 which acquired Aptalis (formerly
Eurand) in January 2014), Alkermes, BioAlliance Pharma, Depomed, Ethypharm, Octoplus (acquired by Dr. Reddy’s Laboratories
Ltd. in February 2013), Veloxis Pharmaceuticals (formerly LifeCycle Pharma), or to the fully integrated biotech model, e.g. Human
Genome Sciences International (or HGSI), developing human serum albumin (HSA) biotherapeutic fusions acquired by GSK in July 2012
(note that before GSK’s acquisition, HGSI spun-out in 2005 CoGenesys (which had a license to develop and commercialize certain
HSA-fusions), which was acquired by Teva in 2008), Nektar Therapeutics developing PEGylation technology which is used e.g. in UCB’s
Cimzia® approved by the FDA for Crohn’s disease.



Our drug delivery platforms
primarily compete with technologies from companies such as:



|Flamel’s Drug Delivery Platforms |                                                                                 | Competition category*                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                             | Selected Competitive Companies*                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-------------------------------- | ------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Micropump® (oral)                |                                                                                 | Solid sustained release                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                             | Alkermes (Elan’s drug delivery technologies), COSMO PharmaceuticalsSpA, Depomed, Inc., Durect Corp., Actavis (acquisition of Forest Laboratories, Inc. which previously acquired Aptalis(formerly Eurand)), Supernus Pharmaceuticals, Inc., Tris Pharma, Inc., Veloxis Pharmaceuticals A/S (formerly LifeCycle Pharma)                                                                                                                                             
|LiquiTime® (oral)                |                                                                                 | Liquid sustained release                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                             | Neos Therapeutics, Inc. (“Neos”), Tris Pharma, Inc. (“Tris”)                                                                                                                                                                                                                                                                                                                                                                                                       
|Trigger-LockTM (oral)             |                                                                                 | Abuse deterrence                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                             | Acura Pharmaceuticals, Inc., Atlantic Pharmaceuticals, Inc., Cima, Collegium Pharmaceutical, Inc., Durect Corp., Egalet Corporation, Elite Pharmaceuticals, Inc., Ethypharm, Grünenthal Group, Inspirion Delivery Technologies, Intellipharmaceutics International, Inc., Paladin Labs Inc. (acquired Labopharm; acq. offer by Endo Health Solutions in November 2013), QRx Pharma, Ltd., Signature Therapeutics, Supernus Pharmaceuticals, Inc., Tris Pharma, Inc.
|MedusaTM (injectable)             |                                                                                 | Protein Engineering (PEGylation, Protein fusion and other conjugation technologies) |                                                                                                                                                                                                                                                                                                                                                                                                                                             | Affibody AB, Ambrx, Inc., Ascendis Pharma A/S, Bolder Biotechnology, Inc., Enzon Pharmaceuticals, Inc., Fresenius Kabi AG, Nektar Therapeutics, Novozymes A/S, PharmaIN Corporation, Polytherics Ltd., Prolor Biotech Inc., Versartis, Inc., Xenetic Biosciences plc (formerly Lipoxen plc), XL-protein GmbH                                                                                                                                                       
|                                 | Depot
        (PLA/PLGA microspheres,
        liposomes and other technologies) |                                                                                     | Alkermes plc., BioAlliance Pharma, Biodel Inc., Debiopharm Group, Durect Corp., LG Life Sciences, InnoCore Pharmaceuticals, Marina Biotech, Inc. (Novosom AG technology), MedinCell SA, Octoplus N.V. (subsidiary of Dr. Reddy's), Pacira Pharmaceuticals, Inc., Q Chip Ltd., REcoly N.V., Soligenix, Inc. (formerly DOR BioPharma Inc), Surmodics, Inc. (PR Pharmaceuticals technologies), Xenetic Biosciences plc. (formerly Lipoxen plc)



*From companies’
web site and/or press releases.



24







“New” Flamel’s
Specialty Pharma’s model (focusing on optimized re-formulations development capabilities) primarily competes with the one
of other public companies such as (non-exhaustive list):



|                        |  |                                                       |  | “New” Flamel’s capabilities  
|----------------------- |  | ----------------------------------------------------- |  | -----------------------------
|Companies*              |  | Focus*                                                |  | 505(b)(2)
regulatory
pathway*
|Actavis                 |  | Global                                                |  | Y                            
|Salix Pharmaceuticals   |  | Gastrointestinal (GI) 
disorders                      |  | Y                            
|H. Lundbeck A/S         |  | Brain diseases                                        |  | Y                            
|Impax Laboratories      |  | Generic (high value, 
ANDA) and branded 
(CNS )       |  | Y                            
|Cadence Pharmaceuticals |  | Products principally for 
use in the hospital setting |  | Y                            
|Idenix Pharmaceuticals  |  | Human viral and other 
infectious diseases            |  | Y                            
|Emergent BioSolutions   |  | Medical needs and 
emerging health threats            |  | Y                            
|Insmed                  |  | Lung diseases                                         |  | Y                            
|Horizon Pharma          |  | Arthritis, pain and 
inflammatory diseases            |  | Y                            



*From companies’
web site and/or press releases.



Until the FDA has removed
the “unapproved marketed products”, the Éclat products may compete with products of companies such as, for Bloxiverz,
APP (a division of Fresenius Kabi USA, LLC) and West-Ward Pharmaceuticals Corp.



Market Opportunities



Drug delivery platforms
are of particular interest for managing the life cycle of medicines, as they offer many advantages: i.e., improvement of drug characteristics
such as bioavailability, pharmacokinetics, efficacy, compliance, and side effects; protection of market position through patent
extension or differentiation; and extension of market to new indications thanks to improvement of the drug’s characteristics.
The global drug delivery market was estimated by BCC Research at $181.9 billion in 2013. The increased number of geriatric patients
and the demand for convenient drug delivery options offer major opportunities for the development of innovative and easy-to-use
drug delivery platforms. However, the industry faces many challenges.



There are four main
forces currently affecting all standalone drug delivery companies and forcing the industry to adapt and to change: (i) the
rise of generics (customers need to fill their drug pipelines with patent-protected reformulations
to mitigate generics impact (“life cycle”)), (ii) the rise in costs for new product
development (increasing development costs for new chemicals or biological entities is in favor
of developing new formulations of already approved drugs at lower costs, (iii) the commoditization
and acquisition of drug delivery technologies (more and more drug delivery customers (mainly
“Big Pharmas”) have developed internal drug delivery capabilities; the integration
of the drug delivery-based formulation development occurs at much earlier stage in the overall pharmaceutical development
and (iv) the higher regulatory and reimbursement hurdles (“as good as” with increased
convenience is now insufficient to get approved and reimbursed for drug products; therefore, technology-based drugs need to show
improved efficacy too).



These forces have affected
the small molecule space to a greater extent, as biologics enjoy higher barriers to entry and have been sheltered as a consequence.
But they are at work in the biologics space as well. In particular, in today’s environment, a drug has to demonstrate significant
therapeutic efficacy advantage over current standard of care in order to successfully solicit third party payer coverage. Alternately,
changes in the delivery of a drug must create a demonstrable reduction in costs. Dosing convenience, by itself, is no longer sufficient
to gain reimbursement acceptance. It has a serious impact on drug deliverycompanies as they
have to now demonstrate, through costly phase 3 trials, therapeutic efficacy of their new formulations. Interestingly, this trend
directly contradicts the “improvement in patients’ convenience first” approach supported in the past by drug
deliverycompanies. More positively, in parallel, the FDA has encouraged drug companies developing enhanced formulations
to use an abbreviated regulatory pathway: the 505(b)(2) NDA. Most drug deliverycompanies today
are using this approach or the supplemental NDA pathway (sNDA). An NDA or sNDA is necessary to market an already approved drug
for a new indication, or in a different dosage form or formulation. However, the sNDA approach requires cross-referencing the originator’s
drug dossier, and eventually, an alliance with the originator’s company for commercialization.



25







Because the drug delivery
industry is highly competitive, participants must find ways to lessen the pressure and increase profitability. The “new”
Flamel, resulting from the combination of its existing proprietary drug delivery platforms with the established commercial capability
of Éclat, is evolving into a Specialty Pharma company focusing on re-formulations and requiring shorter product development
cycles by using a “fast track” NDA mechanism (505(b)(2)). The pharmaceutical and biotechnology sectors, with an impending
“patent cliff”, are forcing Big Pharma/Biotech to reorganize and creating niche opportunities for Specialty Pharma
companies like the “new” Flamel.



Flamel’s Drug Delivery
Platforms



Overview



Flamel owns and develops
outstanding drug delivery platforms that are able to tackle key challenges in the formulation, in various dosage forms (e.g. capsules,
tablets, sachets or oral liquid suspensions; or injectable for subcutaneous administration) of a broad range of drugs (novel, already-marketed,
or off-patent):



| | · | Micropump® allows generating and marketing modified and/or controlled release
of solid, oral dosage formulations of drugs (Micropump-carvedilol and Micropump-aspirin formulations have been approved in the
U.S. and in E.U., respectively; see “Item 4. Strategic Alliances”).
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Micropump’s derivative LiquiTime® allows developing modified/controlled
release of liquid formulations for patients having issues swallowing tablets or capsules such as children and the elderly.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Micropump’s derivative Trigger LockTM allows developing tamper-resistant
modified/controlled release formulations of narcotic/opioid analgesics and other drugs susceptible to abuse.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We believe
in the competitive advantages represented by the versatility of Micropump which permits us to develop differentiated product profiles
(modified/controlled release formulations) under various dosage forms e.g. capsules, tablets, sachets or oral liquid suspensions
(LiquiTime). With Trigger Lock potentially addressing the issue of narcotic/opioid analgesics tampering, we have broad and versatile
presentations to serve most markets from pediatric to geriatric.



| | · | MedusaTM allows developing extended/modified release of injectable dosage
formulations of drugs (e.g. peptides, polypeptides, proteins, vaccines, and small molecules).
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



We believe
also that our Medusa-based formulations give us a competitive advantage in developing differentiated product profiles. Indeed,
Medusa-based formulations permit drugs’ full activity to be preserved and, extended release, as well as other advantages,
such as, improved solubility, stability, and resistance to aggregation. Overall, Medusa improves the patient experience though
a change in the route of administration (e.g. switching from intravenous to subcutaneous injection) and compliance (e.g. from once-a-day
to once-a-week) while potentially improving efficacy and/or safety.



The Company is developing
specific applications of its proprietary, versatile drug delivery platforms with its exiting pharmaceutical and biotechnology partners
(see “Item 4. Strategic Alliances”). In addition, Flamel will continue to partner its proprietary formulations
capabilities and will seek to commercialize and/or partner internally developed novel products after clinical proof of concept
is achieved (see “Item 4. Other Products Under Development”).



Micropump®:	
Delivery Platform for the Modified and/or Controlled Release of Solid, Oral Dosage Formulations of Drugs



The oral drug delivery
market was valued at $49 billion in 2010, and is forecast to grow at a Compound Annual Growth Rate (“CAGR”) of 10.3%
until reaching $97 billion by 2017. The market is expected to show this increase due to continuing upswing in demand for innovative
oral drugs (contractpharma.com, 2012). In 2009, the FDA has approved more reformulations (75) than NCEs (26) (contractpharma.com,
2012); 27 NCEs were approved by the FDA in 2013 (fda.gov).



26







Flamel’s Micropump®
platform permits either extended, or both delayed and extended, delivery of small molecule drugs via the oral route. It is particularly
suitable for drugs with a narrow window of absorption in the upper part of the small intestine. Micropump consists of a multiple-particulate
system containing 5,000 to 10,000 microparticles per capsule or tablet. The 200-500 microns diameter-sized microparticles are released
in the stomach and pass into the small intestine, where each microparticle, operating as a miniature delivery platform, releases
the drug by osmotic pressure at an adjustable rate and over an extended period of time. The design of the Micropump microparticles
allows an extended transit time in the small intestine with a mean plasma residence time extended up to 24 hours, which is especially
suitable for short-lived drugs known to be absorbed only in the small intestine. The microparticles’ design can be potentially
adapted to each drug’s specific characteristics by modifying the coating thickness and composition (including “Generally
Regarded as Safe” (GRAS) excipients encapsulated with the drug) for improved efficacy (i.e., extending therapeutic coverage),
reduced toxicity and/or side effects (i.e., reduced Cmax or peak drug concentration in the plasma; with also reduced
intra- and inter-patient variability) and improved patient compliance (once-a-day regimen). It is applicable to poorly soluble
(< 0.01mg/L) as well as highly soluble (> 500g/L) and to low dose (4 mg) or high dose (1,000 mg) of drugs, while providing
good mouth feel and taste masking. Micropump allows the development of extremely precise pharmacokinetic profiles [extended (and/or
delayed) release] of single or combination of drugs, in a variety of formats (tablet, capsule, sachet, or liquid), while preserving
the targeted release rate over the shelf-life of the product.



Considering R&D
costs for reformulating a drug are typically lower than for developing NCEs, “reformulation approvals” provide an opportunity
to extend the exclusivity period of an already marketed or create new market exclusivity for off-patent drug. The Micropump drug
delivery platform has successfully transitioned to commercial stage with Coreg CR®, (see “Item 4. Lead
Products”). Coreg CR Micropump-based microparticles are being manufactured for GSK by Flamel at the Company’s cGMP
FDA-approved manufacturing site in Pessac, France (for more details, see “Item 4. Manufacturing”). Flamel has
one Micropump®-based internal product in development (i.e. Micropump®-Sodium
oxybate successfully tested in FIM for narcolepsy)and a pivotal clinical study is expected to begin prior to the end of
2015 (see “Item 4. Proprietary Product Pipeline”).



Micropump®is
being utilized in collaborations with pharmaceutical and specialty pharma companies (see “Item 4. Strategic
Alliances”) Micropump® (and related products) is patented (see “Item 4. Proprietary
Intellectual Property”).



LiquiTime®:
Delivery Platform for the Modified/Controlled Release of Liquid, Oral Dosage Formulations of Drugs



The U.S. sales of
drugs (Rx and OTC) in liquid form for oral administration exceeded $ 5.3 billion for the year 2013 (IMS Health). Amongst marketed
“extended release” (twice-a-day or once-daily) liquid products are Tussionex® (hydrocodone polistirex
and chlorpheniramine polistirex combo based on Neos’ Dynamic Time Release Suspension Technology® and sold
by UCB), three generic of Tussionex (one sold by Aristos Pharmaceuticals, one sold by Par Pharmaceuticals (developed using Tris’
LiquiXRTM technology) and one sold by Kremers Urban Pharmaceuticals Inc.), Delsym® and Delsym Children®
(dextromethorphan polistirex developed and sold by Reckitt Benckiser plc.) and Quillivant XR (an a priori “true” once
daily methylphenidate, approved by the FDA in January 2013, developed using Tris’ LiquiXRTM technology and marketed
by Pfizer; 2013 sales were $25.1 M). These products totaled $206 million sales in 2013 (IMS Health).



Flamel’s LiquiTime®
platform uses Micropump®’s competitive advantages to allow us to develop modified/controlled release (e.g.
zero-order kinetics) of liquid formulations for patients having issues swallowing tablets or capsules such as children and the
elderly. LiquiTime may a priori not have the limitation of working solely with ionic drugs as for resin-complex based technologies.
As with Micopump®, LiquiTime® is easy to scale-up to commercial quantities.



The increased number
of geriatric patients and the demand for convenient drug delivery options for children offer striking opportunities for the development
LiquiTime®-based formulations. LiquiTime has reached, with an undisclosed partner, clinical proof of concept in
humans for a liquid suspension of an undisclosed drug for treatment of children (confidential). Flamel has two LiquiTime®-based
and self-funded products at various stages of development; first pivotal clinical study could be expected to be initiated as early
as in 2015 (see “Item 4. Proprietary Product Pipeline”).



LiquiTime®
(and related products) is patented (see “Item 4. Proprietary Intellectual Property”).



27







Trigger LockTM:
Delivery Platform for the Tamper-Resistant Modified/Controlled Release Formulations of Narcotic/Opioid Analgesics



A major problem faced
by the industry is the growing abuse and misuse of opioids by drug abusers, who extract the opioids from the drugs and achieve
their immediate release. The proportion of narcotic/opioid analgesics abuse associated with emergency room admissions has more
than tripled, from 6.8% in 1998 to 26.5% in 2008 (TEDS report, July 15, 2010). Narcotic/opioid analgesics abuse continues to increase
as current products remain easy to abuse. In 2010, enough prescription painkillers were prescribed to medicate every American adult
every 4 hours for one month (PBS 2013). The number of prescription medicine abusers in 2010 was 8.76 million, 5.1 million of which
abused painkillers (drugabuse.com 2013). The market for opioid drugs, used to treat patients suffering from severe and chronic
pain in the seven major markets (USA, Japan, and five European countries) was estimated to exceed $7.4 billion in 2010, dominated
by oxycodone. In 2013, the U.S. opioids containing market was evaluated to be $4.6 billion (IMS Health).



Flamel’s Trigger
LockTM platform is using Micropump’s competitive advantages to allow us developing tamper-resistant modified/controlled
release formulations of narcotics and other drugs susceptible to abuse:



| | · | Micropump particles are extremely difficult to crush to extract the narcotic/opioid analgesics;
| | - | -----------------------------------------------------------------------------------------------

| | · | Additional modifications tailored to prevent other less publicized methods of foiling controlled
release technologies; and,
| | - | ---------------------------------------------------------------------------------------------------------------------------

| | · | Provides either bioequivalent or improved pharmacokinetics to marketed narcotic/opioid analgesics.
| | - | --------------------------------------------------------------------------------------------------



The FDA’s move
to restrict prescribing extended-release opioid analgesics should benefit tamper-resistant formulations, such as, Trigger Lock-based
formulations of opioids. The FDA has issued a “Draft Guidance for Abuse Deterrent Opioids” on January 9, 2013. Recent
FDA decisions on drug abuse are as follows:



| | · | April 16, 2013 – US FDA will not accept or approved ANDAs for generic version of Purdue’s
OxyContin (oxycodone) that lack abuse-deterrent properties. FDA had approved abuse-deterrent labeling for reformulated OxyContin
(oxycodone hydrochloride controlled-release tablets from Purdue Pharma L.P.). Additionally, because original OxyContin provides
the same therapeutic benefits as reformulated OxyContin, but poses an increased potential for certain types of abuse, the FDA has
determined that the benefits of original OxyContin no longer outweigh its risks and that original OxyContin was withdrawn from
sale for reasons of safety or effectiveness. Consequently, the FDA will not accept or approve ANDAs for generic versions of OxyContin
that lack abuse-deterrent properties. OxyContin sales made comprised about $2.81 billion of the $9.38 billion U.S. market for prescription
painkillers in 2012 (IMS Health).
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | May 10, 2013 – US FDA denied Endo’s citizen petition to block generic forms of its
widely abuse prescription pain drug Opana ER (oxymorphone; non-crush resistant formulation of Opana ER was discontinued from sale
for safety reasons and thus can no longer serve as a reference listed drug).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | September 10, 2013 – FDA announces safety labeling changes and postmarket study requirements
for extended-release and long-acting opioid analgesics; New boxed warning to include neonatal opioid withdrawal syndrome.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



It is thought that
Trigger LockTM has the potential to satisfy the FDA Draft Guidance for Abuse Deterrent Opioids:



| | · | Laboratory-based in vitro manipulation and extraction studies (Category 1) – Success with
Trigger LockTM
| | - | -------------------------------------------------------------------------------------------------------

| | · | Pharmacokinetic studies (Category 2) – Success with Trigger LockTM
| | - | -----------------------------------------------------------------

| | · | Clinical abuse potential studies (Category 3) – To be performed prior marketing
| | - | -------------------------------------------------------------------------------

| | · | Analysis of post marketing data to assess the impact of an abuse-deterrent formulation on actual
abuse in a community setting (Category 4) – To be performed post marketing
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Flamel has one Trigger
LockTM-based internal product under development for which a pivotal clinical study is expected to be initiated
in 2015 (see “Item 4. Proprietary Product Pipeline”).



On May 2013, the
Company exercised its right to regain control of two drugs that use its Trigger LockTM delivery technology that
were formerly being developed in partnership with an undisclosed partner (see “Item 4. Recent Developments”
and “Item 4. Strategic Alliances”).



28







Trigger LockTM
(and related products) is patented (see “Item 4. Proprietary Intellectual Property”).



MedusaTM
Delivery Platform for the Modified/Controlled Release of Injectable Dosage Formulations of Drugs



The injectable drug
delivery market could be worth $43.3 billion by 2017 (MarketsandMarkets). Conversely, global sales of biologics were approximately
$178 billion in 2013, and are expected to reach $252 billion by 2017, which represents a CAGR of 9% (BCC Research). By comparison,
in 2016 biosimilars will be worth only about $5 billion in an even larger biologics business (IMS Health).



Flamel’s Medusa,
a hydrogel depot formulation approach that does not alter the drug substance, enables the modified/controlled delivery from one
day up to one week of drugs (e.g. peptides, polypeptides, proteins, vaccines (DeliVax’s application(s)), and small molecules)
while remaining fully active (as distinguished from chemical modification (e.g. PEGylation) or protein engineering or other conjugation
(e.g. HSA-fusion) approaches). Particularly suited for the development of subcutaneously administered formulations of small molecule
drugs that are otherwise given intravenously, this platform may be used also to solve threshold issues for biological drugs, such
as solubility/aggregation/poor stability issues.



The MedusaTM
platform consists of proprietary, a versatile drug carrier polymer that forms a hydrogel depot after injection. MedusaTM
polymers are made of glutamic acid, a naturally occurring aminoacid, and alpha tocopherol (Vitamin E). These polymers are amphiphilic
and spontaneously form stable hydrogels in water. These hydrogels contain hydrophobic nanodomains rich in Vitamin E and hydrophilic
polyglutamate that are exposed to water. The hydrogels are robust over a wide range of pH values and can be stored, in particular
as a stable freeze-dry form, that can be easily reconstituted in Water for Injection. Those polymers, which are fairly easy and
cost effective to produce under cGMP requirements, have been proven to be safe and biodegradable. A comprehensive ADME and regulatory
toxicology package for key Medusa polymer is being completed in order to update the Type IV Drug Master File (“DMF”)
filed with the FDA in February 2011 (assigned number 024634).



The drug is loaded
in MedusaTM’s hydrogel (nano- or micro-gel) via non-covalent, hydrophobic and electrostatic, bonds. Once
in the body, the hydrogel releases the drugs in a controlled manner with potentially no burst effect, lower initial Cmax
and uniform plasma concentration, over an extended period of time. Both drug loading (in fully aqueous solution, and usually, under
solvent- and surfactant-free conditions) and release (essentially by displacement of the loaded drug by circulating endogenous
proteins) are non-denaturing, which preserves structural integrity - and hence the activity - of the drug. The transient, non-covalent
interactions dictate the pharmacokinetic parameters (Cmax and bioavailability in particular) of the released drugs.



The Company is focusing
on MedusaTM-based “biobetters” development opportunities, which can be summarized as follows:



| | · | Validated drugs, established market and proven clinical development approaches as starting points;
| | - | --------------------------------------------------------------------------------------------------



| | · | Product differentiation e.g. improvement of pharmacokinetic (and potentially pharmacodynamics)
parameters;
| | - | ----------------------------------------------------------------------------------------------------------



| | · | Protection of market position through product differentiation and/or patent extension; and,
| | - | -------------------------------------------------------------------------------------------



| | · | Ability to grow market share and resist price competition.
| | - | ----------------------------------------------------------



Flamel has two MedusaTM-based
internal products at various stages of development. The first, hGH XL, has achieved pharmacodynamics pre-clinical proof of concept;
human clinical trial is expected to be initiated in 2015 (see “Item 4. Proprietary Product Pipeline”). The second
Medusa-based (for metabolic indication) is at pre-clinical stage; dose ranging clinical study could be expected in 2014.



MedusaTM
(and related products) is patented (see “Item 4. Proprietary Intellectual Property”). It is being utilized in
collaborations with pharmaceutical and biotechnology companies (see “Item 4. Strategic Alliances”).



Proprietary Intellectual
Property



Patents and other proprietary
rights are essential to our business. Our proprietary product pipeline and our strategic alliances are dependent on our drug delivery
platforms and related products (formulation, process, etc.) being patent protected. As a matter of policy, we seek patent protection
of our inventions and trademarks (see key trademarks listed on page ii herein) and also rely upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to maintain and develop our competitive position.



29







Generally, we first
file a patent application covering an invention in France and in the United States (provisional application). Within one year,
we file a U.S. non-provisional patent application for that invention, together with an international patent application, pursuant
to the Patent Cooperation Treaty (PCT). In addition to seeking patent protection in the United States and France, to further protect
the inventions that we consider important to the development of our business, from the PCT we will usually prosecute patent applications
in Europe, Japan, Canada, and key foreign markets on a selective basis. Therefore, in addition to the above-named countries, we
also have patents granted or patent applications pending in a number of other countries, including, for example, Mexico, Brazil,
China, India, Australia, Israel, South Africa and South Korea.



On a case-by-case basis,
an invention developed jointly by Flamel and a partner may be assigned to and prosecuted by the partner. The information provided
in this section herein, does not refer to such patent applications.



During
2013, we were granted fifty-seven new patents. In addition, in 2013, we filed two patent applications, one provisional application
in the U.S. and one PCT international application. Altogether, as of December 31, 2013, we owned approximately the following patent
and patent applications:



|                                  |  | US |  | EUROPE |  | ROW[1] |  | TOTAL
|--------------------------------- |  | -- |  | ------ |  | ------ |  | -----
|Granted patents                   |  | 23 |  | 252[2] |  | 120    |  | 395  
|Pending patent applications       |  | 26 |  | 28     |  | 121    |  | 175  
|Patents granted in 2013           |  | 3  |  | 28     |  | 26     |  | 57   
|Patent applications filed in 2013 |  | 1  |  | 0      |  | 1      |  | 2    



[1] ROW:
Rest of the Word;

[2] 252 national
patents corresponding to 25 granted European Patents



The Company’s
patents protecting its drug delivery platforms have the following dates of expiration:



|Drug Delivery |  | Date of expiration of granted patents
|------------- |  | -------------------------------------
|Platforms     |  | U.S.                                 
|Micropump®    |  | November 2025                        
|LiquiTime®    |  | September 2025                       
|Trigger LockTM |  | April 2027                           
|MedusaTM       |  | December 2029                        



Flamel’s key
patents include protection for the following:



| | · | Micropump®platform is patented under multiple patents. Among them
is Flamel’s Micropump-related key patent, WO 2003/030878, which discloses an efficacious coating formulation for providing
delayed and sustained release of an active ingredient with absorption limited to the upper part of intestinal tract. It is granted
in the U.S. as US Patent 8,101,209 and will expire on October 2025. It covers Coreg CR formulation and, as such, has been listed
at the FDA Orange Book by our partner GSK on February 23, 2012. Equivalent patents are granted in China, Hong Kong, Israel, India,
Singapore, Japan, South Korea, Canada, South Africa, Mexico (expiry date: October 2022) and in France (expiry date: October 2021).
Patent applications are pending in Brazil and Europe and would expire on October 2022.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | LiquiTime®platform is protected by a Flamel’s patent granted
in the U.S. (US 7,906,145; expiry date: September 2025) and in South Korea, Canada, Israel, Japan, Australia, China, Austria, Belgium,
Switzerland, Liechtenstein, Germany, Spain, France, United Kingdom, Italy, Ireland, Luxembourg, Netherlands, Portugal, Sweden,
Turkey, India, Mexico, South Africa that expire on April 2023. A patent application is pending in Brazil and a continuation application
is pending in the U.S.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Trigger LockTM platform is protected by seven Flamel’s patent application families.
Six patents are granted in the U.S., Europe and Japan; twenty-six (26) patent applications are pending including other countries
and will expire between November 2025 and December 2033.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



30







| | · | MedusaTM platform is patented under Flamel’s key patent WO 2000/30618 and WO
2003/104303, granted in the U.S. and which will expire on November 2019 and July 2023, respectively. Equivalent patents to WO 2003/104303
are granted in China, Israel, Mexico, Australia, Japan, South Korea, Canada and South Africa. Patent applications are pending in
Brazil, Europe and India. These patents will expire on June 2023.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Medusa-based nanogels are protected by issued patents from WO 2005/051416’ family in the
U.S., Australia, China, Israel, Japan, South Korea, Mexico, South Africa, India, Canada and Europe expiring on November 2024. Corresponding
patent applications are pending in Brazil and Thailand.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Medusa-based microgels are protected by granted patents from WO 2007/141344’ patents family
in the U.S., Australia, Japan and South Africa. Applications are pending in Europe and other countries. This patents family will
expire on June 2027.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Strategic Alliances



As focus shifts to
a more “specialty pharma” model the Company’s business is becoming less dependent on its ability to work with
partners in collaborative relationships to develop products using our drug delivery platforms. Indeed, we have now marketed product
and products in late stage development that are not dependent on these collaborative relationships (see “Item 4. Lead
Products” and “Item 4. Other Products Under Development”). As part of the rationalization of the Company’s
products pipeline initiated in 2012, we have continued our efforts to streamline and optimize existing partnerships, as follows:



| | · | In January 2013: Effective termination of the development and license agreement with Merck Serono
(Medusa-based formulation of interferon beta-1a (Rebif));
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | In April 2013: Monetization of our controlled release Micropump-based formulation of aspirin to
New Haven Pharmaceuticals (second Micropump-based product approved in EU, noticeably U.K.).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | In May 2013: Regained control of two drugs that use our Trigger Lock platform that were formerly
being developed in partnership with an undisclosed specialty pharmaceutical company; and,
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | In July 2013: Termination of joint development partnerships with Digna Biotech SL (Medusa-based
formulations of P144 and P17) and with Theralpha SAS (Medusa-based formulation of THA902).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



While we are moving
to a specialty pharma model, currently most of our revenues come from partnerships. Therefore, as we have in the past, we are still
exploring to enter into new partnerships, in particular, with pharmaceutical and biotechnology companies providing new formulation
development opportunities (especially, based on partners’ proprietary or controlled therapeutic compounds) and access to
complementary expertise (regulatory, medical and commercial).



Under our partnership
agreements, our partners typically assume responsibility for all formulation development, manufacturing, polymer supply, clinical,
regulatory and marketing costs and make payments to us at the time the agreement is signed and upon the achievement of significant
technical, pre-clinical, clinical and regulatory milestones. We also typically are entitled to receive royalty payments on the
sales of products that incorporate our drug delivery platforms.



A summary of our major
existing agreements is provided below.



31







GlaxoSmithKline
(or GSK)



We began work with
GSK on a Micropump-based formulation of Coreg in 2003 when we entered into a license agreement for use of our Micropump platform
for an extended release formulation of carvedilol phosphate. The product was approved by the FDA in October 2006 and launched in
the U.S. in March 2007. We are eligible to receive low to mid-single digit royalty payments on net sales of Coreg CR. To date,
we have generated (i) $23 million in milestone payments and (ii) $56.2 million in royalty revenue from Coreg CR. Flamel still is
eligible to receive additional payments, which are not expected to be material, if certain milestones are achieved. In 2013, we
recognized royalty revenue of $6.8 million. This agreement expires on the later of: (i) ten (10) years from the date of the first
commercial sale of product in such country, or (ii) the expiration of the last to expire Flamel patent right in such country. Prior
to 2011, we produced Coreg CR microparticles in our Pessac cGMP facility on a cost plus basis pursuant to a separate supply agreement
that expired on December 31, 2010. In October, 2011, we announced that we signed a new supply agreement with GSK for the production
of Coreg CR microparticles and remain the sole supplier of Coreg CR microparticles for GSK. Under this new supply agreement, we
will receive guaranteed minimum payments to supply Coreg CR microparticles over a minimum period of five years. GSK may terminate
the agreement at their sole discretion by giving six months written notice. Pursuant to this new supply agreement, we received
a payment of €1.3 million ($1.8 million) during the third quarter of 2011 and a further €1.3 million ($1.8 million) payment
in the fourth quarter of 2011, as well as a higher margin on all product produced by Flamel for GSK since January 1, 2011. For
2012, the Company recognized as revenues from product sales a total amount of $9,097,000 of which $852,000 relates to the €2,600,000
received in 2011. For 2013, the Company recognized as revenues from product sales a total amount of $7,969,000 (for more details,
see “Item 18. Financial Statements – Notes to Consolidated Financial Statements, “Subcontracting agreements
F-17””).



Undisclosed specialty
pharmaceutical company (Micropump formulation of marketed drug)



In May, 2011 we entered
into a license and development agreement with an undisclosed specialty pharmaceutical company for the development of a Micropump-based,
once-daily formulation of a central nervous system medication that is currently being marketed by that company. Pursuant to the
agreement, we received a $0.5 million up-front payment and are entitled to additional payments, which are not expected to be material,
upon development and regulatory milestones, as well as, low to mid-single digit royalty payments upon commercial sales of the product.
Our partner pays for all formulation development, manufacturing and regulatory costs, as well as sales and marketing.



Undisclosed large
international pharmaceutical company (Medusa formulation of new drug for cardiovascular indication)



In July 2013, we entered
into a pilot (feasibility) study agreement, including an option for a license to be exercised prior engaging IND-/IMPD-enabling
studies, with an undisclosed large international pharmaceutical company for the development of a Medusa-enabled formulation of
a partner’s controlled compound for cardiovascular indication (confidential).



Undisclosed large
international pharmaceutical company (multi-year development and manufacturing partnership)



In June 2013, we entered
into a multi-year development partnership agreement with an undisclosed, large international pharmaceutical company. The development
work will be done in Flamel’s Pessac facility (see “Item 4. Manufacturing”). In April 2014, this strategic
partner announced its intention to terminate the current product under development, however the overall partnership remains in
place and we may agree to develop future products with this partner. As a result, we cannot predict what future revenues, if any,
will result from this partnership. In addition, the development of a performing manufacturing process may trigger interest in additional
supply agreement. In 2013, we received $556,000 in development fees.



Manufacturing



The manufacturing
facilities for our drug delivery platforms are located in Pessac, France, near Bordeaux (hereinafter referred as “Pessac
facility”). These facilities provide us with two commercial scale production lines for the manufacture of Coreg CR microparticles,
and another production line used for other Micropump-based formulations (i.e. the production of certain pharmaceutical products,
including commercial quantities of our microencapsulated drugs). The facility has been audited and is approved by the U.S., the
European (EMA) and the French regulatory agencies, ANSM (formerly “AFSSAPS”)) and is, we believe, cGMP compliant. Such
approval qualifies us to manufacture certain approved pharmaceutical products for sale in most countries in Europe and the U.S.



In the past, in addition
to production activities related to our core businesses, we were able to build on our capabilities and experience with GSK and
other pharmaceutical customers to engage in toll manufacturing for pharmaceutical partners.



Our Pessac facility
equally provides us with one cGMP pilot plant for our MedusaTM platform. We are able to manufacture qualification batches
and clinical batches of our polymers. This facility supports the production of polymer for the needs of our projects based on our
Medusa platform.



The facility also
provides us with non-commercial capabilities for both our Micropump® and MedusaTM platforms. With our experienced
workforce and cGMP operations, we are able to perform scale-up activities and clinical batch manufacturing for our Micropump platform,
and synthesis of Medusa’s polymers specific and pilot batch manufacturing of our Medusa-based formulations.



32







During 2013, our
commercial manufacturing capacity utilization ranged from 50% to 65% of total capacity.



The manufacture of
the NDA-submitted products by Éclat is outsourced to contract manufacturing organizations (CMO) in accordance with supply
agreements that expire in 2017. Flamel is currently investigating the transfer of the scale up of its own proprietary products
to CMOs in the US, in particular for products regulated and sold in the U.S. marketplace.



Government Regulation



The design, testing,
manufacturing and marketing of certain new or substantially modified drugs, biological products or medical devices must be approved,
cleared or certified by regulatory agencies, regulatory authorities and Notified Bodies under applicable laws and regulations,
the requirements of which may vary from country to country. This regulatory process is lengthy, expensive and uncertain. In the
United States, the FDA regulates such products under various federal statutes, including the Federal Food, Drug, and Cosmetic Act
(FDCA) and the Public Health Service Act. Similar requirements exist in the Member States of the European Union and are imposed
by the European Commission and the competent authorities of EU Member States. There can be no assurance that we or our collaborative
partners will be able to obtain such regulatory approvals or clearances or certification of conformity on a timely basis, if at
all, for any products under development. Delays in receipt or failure to receive such approvals, clearances, or certifications
of conformity, the revocation of previously received approvals or clearances, or certifications of conformity, or failure to comply
with existing or future regulatory requirements could have a material adverse effect on our business, financial condition and results
of operations.



We believe our delivery
platforms, when used in conjunction with therapeutic pharmaceuticals, and development products acquired from Éclat, are
subject to drug and biological product approval or marketing authorization requirements. In the United States and the European
Union, biological products, such as therapeutic proteins and peptides, generally are subject to the same FDA and EU regulatory
requirements as other drugs, although some differences exist. For example, for some biological products a biologic license application
(BLA) is submitted for approval for commercialization instead of the New Drug Application (“NDA”) or Abbreviated New
Drug Application (“ANDA”) used for other drugs. Also, unlike drug products, some biological products are subject to
FDA lot-by-lot release requirements and those approved under a BLA currently cannot be the subject of ANDAs. Insulin, which is
regulated as a drug product, typically has not been the subject of ANDAs. However, the FDA is working on a variety of issues pertaining
to the possible development of biosimilars and there can be no assurance that this type of submission will continue to be unavailable
for insulin. Additionally, our delivery platforms likely will be regulated by the FDA as ‘combination products’ if
they are used together with a biologic or medical device. In order to facilitate pre-market review of combination products, the
FDA designates one of its centers to have primary jurisdiction for the pre-market review and regulation of both components. In
the European Union, applications for marketing authorization of innovative drugs, which are essentially products that are neither
generics nor biosimilars, are addressed on a case by case basis by the EMA, followed by a decision of the European Commission,
or by the competent authorities of the EU Member States.



New Drug and Biological
Product Development and Approval Process



United States
and European Union



Regulation by governmental
authorities in the United States and other countries is a significant impact in the development, manufacture, and marketing of
biological and drug products and in ongoing research and product development activities. The products of all of our pharmaceutical
and biotechnology partners as well as our own products will require regulatory approval by governmental agencies and regulatory
authorities prior to commercialization. In particular, these products are subject to manufacturing according to stringent cGMP
quality principles, and rigorous, pre-clinical and clinical testing and other pre-market approval requirements by the FDA, the
European Commission and regulatory authorities in other countries. In the United States and the European Union, various statutes
and regulations also govern, or influence the manufacturing, safety, labeling, storage, record keeping and marketing of pharmaceutical
and biological products. The lengthy process of seeking these approvals, and the subsequent compliance with applicable statutes
and regulations, require the expenditure of substantial resources.



The FDA and European
Union’s statutes, regulations, or policies may change and additional statutes or government regulations may be enacted which
could prevent or delay regulatory approvals of biological or drug products.  We cannot predict the likelihood, nature or extent
of adverse governmental regulation that might arise from future legislative or administrative action, either in the U.S. or abroad.



33







Regulatory approval,
when and if obtained, may be limited in scope. In particular, regulatory approvals will restrict the marketing of a product to
specific uses. Approved biological and other drugs, as well as their manufacturers, are subject to ongoing review (including requirements
and restrictions related to record keeping and reporting, FDA, European Commission and EU Member States competent authorities'
approval of certain changes in manufacturing processes or product labeling, product promotion and advertising, and pharmacovigilance,
which includes monitoring and reporting adverse reactions, maintaining safety measures, and conducting dossier reviews for marketing
authorization renewal). Discovery of previously unknown problems with these products may result in restrictions on their manufacture,
sale or use, or in their withdrawal from the market. Failure to comply with regulatory requirements may result in criminal prosecution,
civil penalties, recall or seizure of products, total or partial suspension of production or injunction, as well as other actions
affecting the commercial prospects of our pharmaceutical and biotechnology partners’ potential products or uses or products
that incorporate our technologies. Any failure by our pharmaceutical and biotechnology partners to comply with current or new and
changing regulatory obligations, and any failure to obtain and maintain, or any delay in obtaining, regulatory approvals, could
materially adversely affect our business.



The process for new
drug and biological product development and approval has many steps, including:



Chemical and
Formulation Development



Pharmaceutical formulation
taking into account the chemistry and physical characteristics of the drug or biological substance is the beginning of a new product.
If initial laboratory experiments reveal that the concept for a new drug or biological product looks promising, then, a variety
of further development steps and tests complying with internationally recognized guidance documents will have to be continued,
in order to provide for a product ready for testing in animals and, after sufficient animal test results, also in humans.



Concurrent
with pre-clinical studies and clinical trials, companies must continue to develop information about the properties of the drug
product and finalize a process for manufacturing the product in accordance with cGMP requirements. The manufacturing process must
be capable of consistently producing quality batches of the product, and the manufacturer must develop and validate methods for
testing the quality, purity and potency of the final products. Additionally, appropriate packaging must be selected and tested,
and stability studies must be conducted to demonstrate that the product does not undergo unacceptable deterioration over its shelf-life.



Pre-Clinical
Testing



Once a biological or
drug candidate is identified for development, the candidate enters the pre-clinical testing stage. This includes laboratory evaluation
of product chemistry and formulation, as well as animal studies of pharmacology (mechanism of action, pharmacokinetics) and toxicology
which may have to be conducted over lengthy periods of time, to assess the potential safety and efficacy of the product as formulated.
Pre-clinical tests must be conducted in compliance with good laboratory practice regulations, the Animal Welfare Act and its regulations
in the US and the Clinical Trials Directive and related national laws and guidelines in the EU Member States. Violations of these
laws and regulations can, in some cases, lead to invalidation of the studies, then requiring such studies to be replicated. In
some cases, long-term pre-clinical studies are conducted while clinical studies are ongoing.



Investigational
New Drug Application



USA:
The entire body of chemical or biochemical, pharmaceutical and pre-clinical development work necessary to administer investigational
drugs to human volunteers or patients is summarized in an Investigational New Drug (“IND”) application to the FDA.
The IND becomes effective if not rejected by the FDA within thirty (30) days after filing. There is no assurance that the submission
of an IND will eventually allow a company to commence clinical trials.  All clinical trials must be conducted under the supervision
of a qualified investigator in accordance with good clinical practice regulations to ensure the quality and integrity of clinical
trial results and data. These regulations include the requirement that, with limited exceptions, all subjects provide informed
consent. In addition, an institutional review board (“IRB”), composed primarily of physicians and other qualified experts
at the hospital or clinic where the proposed studies will be conducted, must review and approve each human study. The IRB also
continues to monitor the study and must be kept aware of the study’s progress, particularly as to adverse events and changes
in the research. Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and
more frequently if adverse events occur.  Failure to adhere to good clinical practices and the protocols, and failure to obtain
IRB approval and informed consent, may result in FDA rejection of clinical trial results and data, and may delay or prevent the
FDA from approving the drug for commercial use.



34







European Union:The European equivalent to the IND is the Investigational Medicinal Product Dossier (“IMPD”) which likewise
has to contain pharmaceutical, pre-clinical and, if existing, previous clinical information on the drug substance and product.
An overall risk-benefit assessment critically analyzing the non-clinical and clinical data in relation to the potential risks and
benefits of the proposed trial must also be included. The intended clinical trial must be submitted for authorization by the regulatory
authority(ies) of each EU Member States in which the trial is intended to be conducted prior to its commencement. The trial shall
be conducted on the basis of the protocol as approved by an Ethics Committee(s) in each EU Member State (EU equivalent to IRBs)
before the trial commences. Before submitting an application to the competent authority, the sponsor must register the trial in
the EudraCT database where it will be provided with a unique EudraCT number from the EudraCT database.



Clinical Trials



Typically, clinical
testing involves the administration of the drug or biological product first to healthy human volunteers and then to patients with
conditions needing treatment under the supervision of a qualified principal investigator, usually a physician, pursuant to a ‘protocol’
or clinical plan reviewed by the FDA- and the competent authorities of the EU Member States along with the IRB
or Ethics Committee (via the IND or IMPD submission). The protocol details matters such as a description of the condition to be
treated, the objectives of the study, a description of the patient population eligible for the study and the parameters to be used
to monitor safety and efficacy.



Clinical trials are
time-consuming and costly, and typically are conducted in three sequential phases, which sometimes may overlap. Phase I trials
consist of testing the product in a small number of patients or normal volunteers, primarily for safety, in one or more dosages,
as well as characterization of a drug’s pharmacokinetic and/or pharmacodynamic profile. In phase II, in addition to safety,
the product is studied in a patient population to evaluate the product’s efficacy for the specific, targeted indications
and to determine dosage tolerance and optimal dosage. Phase III trials typically involve additional testing for safety and clinical
efficacy in an expanded patient population at geographically dispersed sites. With limited exceptions, all patients involved in
a clinical trial must provide informed consent prior to their participation. Meeting clinical endpoints in early stage clinical
trials does not assure success in later stage clinical trials. Phase I, II, and III testing may not be completed successfully within
any specified time period, if at all.



The FDA and the competent
authorities of EU Member States monitor the progress of each clinical trial phase conducted under an IND or IMPD and may, at their
discretion, reevaluate, alter, suspend or terminate clinical trials at any point in this process for various reasons, including
a finding that patients are being exposed to an unacceptable health risk or a determination that it is unethical to continue the
study. The FDA, the European Commission and the competent authorities of EU Member States can also request additional clinical
trials be conducted as a condition to product approval. The IRB, the Ethics Committee, and sponsor also may order the temporary
or permanent discontinuance of a clinical trial at any time for a variety of reasons, particularly if safety concerns arise. Such
holds can cause substantial delay and in some cases may require abandonment of product development. These clinical studies must
be conducted in conformance with the FDA’s bioresearch monitoring regulations, the Clinical Trials Directive and/or internationally
recognized guidance (such as “ICH”, or “International Conference on Harmonization”).



New Drug Application
or Biological License Application



After the completion
of the clinical trial phases of development, if the sponsor concludes that there is substantial evidence that the drug or biological
candidate is effective and that the drug is safe for its intended use, an NDA or “BLA” (“Biological License Application”)
may be submitted to the FDA. The application must contain all of the information on the drug or biological candidate gathered to
that date, including data from the pre-clinical and clinical trials, information pertaining to the preparation of the drug or biologic,
analytical methods, product formulation, details on the manufacture of finished products, proposed product packaging, labeling
and stability (shelf-life). NDAs and BLAs are often over 100,000 pages in length. If FDA determines that a Risk Evaluation And
Mitigation Strategy (“REMS”) is necessary to ensure that the benefits of the drug outweigh the risks, a sponsor may
be required to include as part of the application a proposed REMS, including a package insert directed to patients, a plan for
communication with healthcare providers, restrictions on a drug’s distribution, or a medication guide to provide better information
to consumers about the drug’s risks and benefits. Submission of an NDA or BLA does not assure FDA approval for marketing.



35







The FDA reviews all
submitted NDAs and BLAs before it accepts them for filing (the U.S. prerequisite for dossier review).  It may refuse to file
the application and request additional information rather than accepting an application for filing. In this event, the application
must be resubmitted with the additional information.  The resubmitted application is also subject to review before the FDA
accepts it for filing.  Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA or BLA to
determine, among other things, whether a product is safe and effective for its intended use. As part of this review, the FDA may
refer the application to an appropriate advisory committee, typically a panel of clinicians, for review, evaluation and a recommendation.
There is a strong presumption for advisory committee review for any drug containing an active ingredient not previously approved.
The FDA is not bound by the recommendation of an advisory committee. Under the Prescription Drug User Fee Act (PDUFA), submission
of an NDA or BLA with clinical data requires payment of a fee. In return, the FDA assigns an action date of 10 months from acceptance
of the application to return of a first ‘complete response,’ in which the FDA may approve the product or request additional
information. (Although PDUFA also provides for a six-month “priority review” process, we do not anticipate it applying
to any of our products or our partners’ products.) There can be no assurance that an application will be approved within
the performance goal timeframe established under PDUFA, if at all. If the FDA’s evaluation of the NDA or BLA is not favorable,
the FDA usually will outline the deficiencies in the submission and request additional testing or information. Notwithstanding
the submission of any requested additional information, or even in lieu of asking for additional information, the FDA may decide
that the marketing application does not satisfy the regulatory criteria for approval and issue a complete response letter, communicating
the agency’s decision not to approve the application.



FDA approval of an
NDA or BLA will be based, among other factors, on the agency’s review of the pre-clinical and clinical data submitted, a
risk/benefit analysis of the product, and an evaluation of the manufacturing processes and facilities. Data obtained from clinical
activities are not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory
approval. The FDA has substantial discretion in the approval process and may disagree with an applicant’s interpretation
of the data submitted in its NDA or BLA. For instance, FDA may require us to provide data from additional preclinical studies or
clinical trials to support approval of certain development products acquired from Éclat. Among the conditions for NDA or
BLA approval is the requirement that each prospective manufacturer’s quality control and manufacturing procedures conform
to cGMP standards and requirements. Manufacturing establishments often are subject to inspections prior to NDA or BLA approval
to assure compliance with cGMPs and with manufacturing commitments made in the relevant marketing application.



Patent Restoration
and Exclusivity



The Drug Price Competition
and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, establishes two abbreviated approval pathways for drug products
that are in some way follow-on versions of already approved products.



Generic Drugs.A
generic version of an approved drug is approved by means of an Abbreviated New Drug Application, or ANDA, by which the sponsor
demonstrates that the proposed product is the same as the approved, brand-name drug, which is referred to as the “Reference
Listed Drug,” or “RLD”. Generally, an ANDA must contain data and information showing that the proposed generic
product and RLD (1) have the same active ingredient, in the same strength and dosage form, to be delivered via the same route of
administration, (2) are intended for the same uses, and (3) are bioequivalent. This is instead of independently demonstrating the
proposed product’s safety and effectiveness, which are inferred from the fact that the product is the same as the RLD, which
the FDA previously found to be safe and effective. .



505(b)(2) NDAs.If a product is similar, but not identical, to an already approved product, it may be submitted for approval via an NDA under
Section 505(b)(2) of the Act. Unlike an ANDA, this does not excuse the sponsor from demonstrating the proposed product’s
safety and effectiveness. Rather, the sponsor is permitted to rely to some degree on published scientific literature and the FDA’s
finding that the RLD is safe and effective, and must submit its own data of safety and effectiveness to an extent necessary because
of the differences between the products. With regard to certain development products acquired from Éclat, we intend to submit
505(b)(2) NDAs, relying solely on published scientific literature. We do not plan to conduct additional preclinical studies or
clinical trials for these 505(b)(2) NDAs.



RLD Patents.
An NDA sponsor must advise the FDA about patents that claim the drug substance or drug product or a method of using the drug. When
the drug is approved, those patents are among the information about the product that is listed in the FDA publication, Approved
Drug Products with Therapeutic Equivalence Evaluations, which is referred to as the Orange Book. The sponsor of an ANDA
or 505(b)(2) application seeking to rely on an approved product as the RLD must make one of several certifications regarding each
listed patent. A “Paragraph III” certification is the sponsor’s statement that it will wait for the patent to
expire before obtaining approval for its product. A “Paragraph IV” certification is a challenge to the patent; it is
an assertion that the patent does not block approval of the later product, either because the patent is invalid or unenforceable
or because the patent, even if valid, is not infringed by the new product.



36







Once the FDA accepts
for filing an ANDA or 505(b)(2) application containing a Paragraph IV certification, the applicant must within 20 days provide
notice to the RLD NDA holder and patent owner that the application with patent challenge has been submitted, and provide the factual
and legal basis for the applicant’s assertion that the patent is invalid or not infringed. If the NDA holder or patent owner
file suit against the ANDA or 505(b)(2) applicant for patent infringement within 45 days of receiving the Paragraph IV notice,
FDA is prohibited from approving the ANDA or 505(b)(2) application for a period of 30 months from the date of receipt of the notice.
If the RLD has NCE exclusivity and the notice is given and suit filed during the fifth year of exclusivity, the 30-month stay does
not begin until five years after the RLD approval. The FDA may approve the proposed product before the expiration of the 30-month
stay if a court finds the patent invalid or not infringed or if the court shortens the period because the parties have failed to
cooperate in expediting the litigation.



Regulatory Exclusivities.The Hatch-Waxman Act may provide periods of regulatory exclusivity for products that would serve as RLDs. If a product is a
“new chemical entity,” or NCE, – generally meaning that the active moiety has never before been approved in any
drug – there may be a period of five years from the product’s approval during which the FDA may not accept for filing
any ANDA or 505(b)(2) application for a drug with the same active moiety. An ANDA or 505(b)(2) application may be submitted after
four years, however, if the sponsor makes a Paragraph IV certification challenging a listed patent. Because it takes time for the
FDA to review and approve an application once it has been accepted for filing, five-year NCE exclusivity usually effectively means
the ANDA or 505(b)(2) application is not approved for a period well beyond five years from approval of the RLD.



A product that is not
an NCE may qualify for a three-year period of exclusivity, if the NDA contains clinical data that were necessary for approval.
In that instance, the exclusivity period does not preclude filing or review of the ANDA or 505(b)(2) application; rather, the FDA
is precluded from granting final approval to the ANDA or 505(b)(2) application until three years after approval of the RLD. Additionally,
the exclusivity applies only to the conditions of approval that required submission of the clinical data. For example, if an NDA
is submitted for a product that is not an NCE, but that seeks approval for a new indication, and clinical data were required to
demonstrate the safety or effectiveness of the product for that use, the FDA could not approve an ANDA or 505(b)(2) application
for another product with that active moiety for that use. For example, Coreg CR received three-year exclusivity for the clinical
trials that demonstrated the safety and efficacy of the new, controlled-release dosage form; that exclusivity, which has expired,
blocked other controlled-release products.



Patent Term Restoration.Under the Hatch-Waxman Act, a portion of the patent term lost during product development and FDA review of an NDA or 505(b)(2)
application is restored if approval of the application is the first permitted commercial marketing of a drug containing the active
ingredient. The patent term restoration period is generally one-half the time between the effective date of the IND and the date
of submission of the NDA, plus the time between the date of submission of the NDA and the date of FDA approval of the product.
The maximum period of restoration is five years, and the patent cannot be extended to more than 14 years from the date of
FDA approval of the product. Only one patent claiming each approved product is eligible for restoration and the patent holder must
apply for restoration within 60 days of approval. The United States Patent and Trademark Office, or PTO, in consultation with
the FDA, reviews and approves the application for patent term restoration. When any of our products is approved, we intend to seek
patent term restoration for an applicable patent when it is appropriate.



Other Marketing Exclusivity



Pediatric Exclusivity.
Section 505A of the FDC Act provides for six months of additional exclusivity and patent protection if an NDA sponsor submits pediatric
data that fairly respond to a written request from the FDA for such data. The data does not need to show the product to be effective
in the pediatric population studied; rather, if the clinical trial is deemed to fairly respond to the FDA’s request, the
additional protection is granted. If reports of requested pediatric studies are submitted to and accepted by FDA within the statutory
time limits, whatever statutory or regulatory periods of exclusivity or Orange Book listed patent protection cover the drug are
extended by six months. This is not a patent term extension, but it effectively extends the regulatory period during which the
FDA cannot approve an ANDA or 505(b)(2) application owing to regulatory exclusivity or listed patents. Coreg CR received such pediatric
exclusivity, which extended the three-year new clinical trial exclusivity it previously obtained, as well as the protection of
the listed patents.  The statutory provision permitting the award of pediatric exclusivity expired on October 1, 2012, and
there can be no guarantee that Congress will reauthorize this provision, or do so without significant changes.



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Other Countries



Whether or not FDA
approval has been obtained, approval of a pharmaceutical product by regulatory authorities must be obtained in any other country
prior to the commencement of marketing of the product in that country. The approval procedure may vary from country to country,
can involve additional testing, and the time required may differ from that required for FDA approval.  Under European Union
legislation, product authorization is granted for an initial period of five years. The authorization may subsequently be renewed
for an unlimited period on the basis of a re-evaluation of the risk-benefit balance by the competent authorizing authority. In
the EU, marketing authorization of drugs is according to either a centralized, decentralized or mutual recognition procedure, generally
depending on the nature and type of drug.  Certain designated drugs may be authorized only in accordance with the centralized
procedure by the European Commission following an opinion by the European Medicines Agency (“EMA”). The centralized
procedure is mandatory for pharmaceutical products developed by means of biotechnological processes (recombinant DNA, controlled
expression of genes coding, hybridoma and monoclonal antibody methods), products containing new actives substances indicated for
the treatment of AIDS, cancer, diabetes and neuro-degenerative diseases, orphan designated medicinal products and advanced therapy
products. Other pharmaceutical products may be authorized in accordance with the centralized procedure where it is demonstrated
that they contain new active substances or are demonstrated to have a significant therapeutic benefit, or where they constitute
a scientific or technical innovation, or are in the interest of patients at Community level. Where authorization is in accordance
with the decentralized or mutual recognition procedures, approval is either by “mutual recognition,” whereby the authorization
granted by the competent authorities of one EU Member States are recognized by the authorities of other EU Member States, or where
the competent authorities of each EU Member State authorize a product on the basis of an identical dossier, with one national authority
taking care of the dossier intensively and coordinating activities. To the extent possible, clinical trials of our products are
designed to develop a regulatory package sufficient for the grant of marketing authorization in the EU approval according to the
Community Code on medicinal products.



Regulatory approval
of prices for certain drugs is required in France and in many other countries outside the United States.  In particular, many
EU Member States make the reimbursement of a product within the national social security system conditional on the agreement by
the seller not to sell the product above a fixed price in that country. Also common is the unilateral establishment of a reimbursement
price by the national authorities, often accompanied by the inclusion of the product on a list of reimbursable products. 
Related pricing discussions and ultimate governmental approvals can take several months to years. Some countries require periodic
pricing updates and renewals at intervals ranging from two to five years. Some countries also impose price freezes or obligatory
price reductions. We cannot assure you that, if regulatory authorities establish lower prices for any product incorporating our
technology in any one EU Member State, this will not have the practical effect of requiring our collaborative partner correspondingly
to reduce its prices in other EU Member States. We can offer no assurance that the resulting prices would be sufficient to generate
an acceptable return on our investment in our products.



Regulation of Combination
Drugs



Medical products containing
a combination of drugs or biological products may be regulated as ‘combination products’ in the United States. A combination
product generally is defined as a product comprising components from two or more regulatory categories (e.g., drug/device, device/biologic,
drug/biologic). Each component of a combination product is subject to the requirements established by the FDA for that type of
component, whether a drug, biologic or device.



To determine which
FDA center or centers will review a combination product submission, companies may submit a request for assignment to the FDA. Those
requests may be handled formally or informally. In some cases, jurisdiction may be determined informally based on FDA experience
with similar products. However, informal jurisdictional determinations are not binding on the FDA. Companies also may submit a
formal Request for Designation to the FDA Office of Combination Products. The Office of Combination Products will review the request
and make its jurisdictional determination within 60 days of receiving a Request for Designation.



In order to facilitate
pre-market review of combination products, the FDA designates one of its centers to have primary jurisdiction for the pre-market
review and regulation of both components.  The determination whether a product is a combination product or two separate products
is made by the FDA on a case-by-case basis. It is possible that our delivery platforms, when coupled with a drug, biologic or medical
device component, could be considered and regulated by the FDA as a combination product.



38







If the primary mode
of action is determined to be a drug, the product will be reviewed by the Center for Drug Evaluation and Research (“CDER”)
either in consultation with another center or independently. If the primary mode of action is determined to be a medical device,
the product would be reviewed by Center for Devices and Radiological Health (“CDRH”) either in consultation with another
center, such as CDER, or independently. In addition, FDA could determine that the product is a biologic and subject to the jurisdiction
of the Center for Biologic Evaluation and Research (“CBER”), although it is also possible that a biological product
will be regulated by CDER.



In the European Union,
drug combinations, that is, drug products containing two or more drug substances each of which has to contribute a proven advantage
of therapy (e.g., synergism, less adverse reactions), are subject to drug regulations like all others. Products combining drug
substances or drugs with a device may be subject to device and/or drug regulations, or may be classified as medical devices, depending
on the individual case.



Marketing Approval
and Reporting Requirements



If the FDA approves
an NDA or BLA, the product becomes available for physicians to prescribe.  The FDA may require post-marketing studies, also
known as phase IV studies, as a condition of approval to develop additional information regarding the safety of a product. These
studies may involve continued testing of a product and development of data, including clinical data, about the product’s
effects in various populations and any side effects associated with long-term use. After approval, the FDA may require post-marketing
studies or clinical trials, as well as periodic status reports, if new safety information develops. These post-marketing studies
may include clinical trials to investigate known serious risks or signals of serious risks or identify unexpected serious risks.
Failure to conduct these studies in a timely manner may result in substantial civil fines and can result in withdrawal of approval.



In addition, the FDA
may require distribution to patients of a medication guide or impose other requirements under a REMS for prescription products
that the agency determines pose a serious and significant health concern in order to provide information necessary to patients’
safe and effective use of such products.



In the European Union,
the marketing authorization of a medicinal product may be made conditional on the conduct of phase IV post-marketing studies. Failure
to conduct these studies in relation to centrally authorized products can lead to the imposition of substantial fines. Moreover,
phase IV studies are often run by companies in order to obtain further information on product efficacy and positioning on the market
in view of competitors and to assist in application for pricing and reimbursement.



Post-Marketing Obligations



Any products manufactured
and/or distributed pursuant to FDA approvals are subject to continuing regulation by the FDA, including recordkeeping requirements,
reporting of adverse experiences with the product, submitting other periodic reports, drug sampling and distribution requirements,
notifying the FDA and gaining its approval of certain manufacturing or labeling changes, complying with certain electronic records
and signature requirements, submitting periodic reports to the FDA, maintaining and providing updated safety and efficacy information
to the FDA, and complying with FDA promotion and advertising requirements. For example, with respect to the Éclat product
BloxiverzTM, the FDA has required the Company to conduct post-marketing non-clinical, toxicity studies by December 2016.



Drug and biologics
manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and
to list their products with the FDA.  The FDA periodically inspects manufacturing facilities in the United States and abroad
in order to assure compliance with the applicable cGMP regulations and other requirements.  Facilities also are subject to
inspections by other federal, foreign, state or local agencies.  In complying with the cGMP regulations, manufacturers must
continue to expend time, money and effort in recordkeeping and quality control to assure that the product meets applicable specifications
and other post-marketing requirements.  Failure of the Company or our licensees to comply with FDA’s cGMP regulations
or other requirements could have a significant adverse effect on the Company’s business, financial condition and results
of operations.



Also, newly discovered
or developed safety or efficacy data may require changes to a product’s approved labeling, including the addition of new
warnings and contraindications, additional pre-clinical or clinical studies, or even in some instances, revocation or withdrawal
of the approval. Violations of regulatory requirements at any stage, including after approval, may result in various adverse consequences,
including the FDA’s delay in approving or refusal to approve a product, withdrawal or recall of an approved product from
the market, other voluntary or FDA-initiated action that could delay or restrict further marketing, and the imposition of civil
fines and criminal penalties against the manufacturer and NDA or BLA holder. In addition, later discovery of previously unknown
problems may result in restrictions on the product, manufacturer or NDA or BLA holder, including withdrawal of the product from
the market. Furthermore, new government requirements may be established that could delay or prevent regulatory approval of our
products under development, or affect the conditions under which approved products are marketed.



39







The Food and Drug Administration
Amendments Act of 2007 provides the FDA with expanded authority over drug products after approval. This legislation enhances the
FDA’s authority with respect to post-marketing safety surveillance, including, among other things, the authority to require
additional post-marketing studies or clinical trials, labeling changes as a result of safety findings, registering clinical trials,
and making clinical trial results publicly available.



In the European Union,
stringent pharmacovigilance regulations oblige companies to appoint a suitably qualified and experienced Qualified Person resident
in the European Economic Area, to prepare and submit to the competent authorities adverse event reports within specific time lines,
prepare Periodic Safety Update Reports (PSURs) and provide other supplementary information, report to authorities at regular intervals
and take adequate safety measures agreed with regulatory agencies as necessary. Failure to undertake these obligations can lead
to the imposition of substantial fines.



Biologics Price Competition
and Innovation Act of 2009



The Hatch-Waxman
construct applies only to conventional chemical drug compounds, sometimes referred to as small molecule compounds approved under
an NDA. On March 23, 2010, however, the “Biologics Price Competition and Innovation Act” of 2009, or “BPCIA”,
was signed into law. It creates an abbreviated approval pathway for biological products that are “biosimilar” to a
previously approved biological product, which is called the “reference product.” This abbreviated approval pathway
is intended to permit a biosimilar product to come to market more quickly and less expensively than if a “full” BLA
were submitted, by relying to some extent on FDA’s previous review and approval of the reference product to which the proposed
product is similar. If a proposed biosimilar product meets the statutory standards for approval (which include demonstrating that
it is highly similar to the reference product and there are no clinically meaningful differences in safety, purity or potency between
the products), the proposed biosimilar may be approved on the basis of an application that is different than the standard BLA.
In addition, a biosimilar product may be approved as interchangeable with the reference product if the proposed product application
meets standards intended to ensure that the biosimilar product can be expected to produce the same clinical result as the reference
product.



Regulation of
Medical Devices



United States



In the United States,
medical devices are classified into Class I, II or III on the basis of the controls deemed by the FDA to be reasonably necessary
to ensure their safety and effectiveness. Class I devices are subject to general controls (e.g., labeling, and adherence to cGMPs)
and Class II devices are subject to special controls (e.g., performance standards, postmarket surveillance, patient registries,
and FDA guidelines). Generally, Class III devices are those which must require premarket approval by the FDA to ensure their safety
and effectiveness (e.g., life-sustaining, life-supporting and implantable devices or those found not to be substantially equivalent
to legally marketed devices).



Other Countries



The marketing of medical
devices in the EU is governed by a variety of EU legislative provisions and related guidance documents commonly referred to as
MEDDEVs, the consequences of which depend on the intended use and the classification of the device. Although medical devices are
not subject to authorization by the national authorities of EU Member States, manufacturers must ensure that the device complies
with Essential Requirements established in applicable EU legislation with respect to design, safety, performance and manufacture.
Medical Devices are, in addition, often subject to existing or future national regulation on pricing and reimbursement, which varies
from country to country.



40







The manufacturer of
a medical device cannot add a CE mark, which is a mandatory mark for medical devices sold in the EU, to the device unless the devices
are demonstrated to comply with the obligations concerning safety and performance requirements of the EU medical device legislation.
For devices other than those falling within Class I, the manufacturing facility and the medical device must undergo conformity
assessment by a notified body in order to demonstrate compliance. The nature of this assessment will depend on the class of the
product. Once all the necessary conformity assessment tasks have been completed, the notified body shall issue certificates of
conformity, and the CE Mark may be affixed on the medical devices concerned by its manufacturer as that term is defined in applicable
EU legislation. Although EU Member States must accept for marketing medical devices bearing a CE Marking without imposing further
requirements related to product safety and performance, national regulatory authorities who are required to enforce compliance
with requirements of the EU medical device legislation may restrict, prohibit and recall CE Marked medical devices if they consider,
on the basis of available information that they are unsafe. EU Member States can impose additional requirements as long as they
do not exceed the obligations provided for in EU medical device legislation or constitute technical barriers to trade. They can
also dispute the classification of the device chosen by the device manufacturer. Within the EU, pre CE marking compliance for all
medical devices must be supported by clinical data of a type and to the extent set out by the EU directives. When the CE mark has
been placed on a medical device its manufacturer must comply with a strict vigilance system. This includes establishment of a vigilance
reporting system in accordance with the MEDDEVs provided by the European Commission, which are intended to ensure that reportable
adverse events are reported to the competent authority, that information is collected and maintained and that regular reporting
obligations are fulfilled.



Other Regulation



Controlled Substances
Act. Our Trigger LockTM delivery platform is designed to control the release of narcotics and other active ingredients
subject to abuse. Narcotics are “controlled substances” under the Controlled Substances Act. The federal “Controlled
Substances Act” (“CSA”), Title II of the Comprehensive Drug Abuse Prevention and Control Act of 1970, regulates
the manufacture and distribution of narcotics and other controlled substances, including stimulants, depressants and hallucinogens.
The CSA is administered by the “Drug Enforcement Administration” (“DEA”), a division of the U.S. Department
of Justice, and is intended to prevent the abuse or diversion of controlled substances into illicit channels of commerce.



Any person or
firm that manufactures, distributes, dispenses, imports, or exports any controlled substance (or proposes to do so) must register
with the DEA. The applicant must register for a specific business activity related to controlled substances, including manufacturing
or distributing, and may engage in only the activity or activities for which it is registered. The DEA conducts periodic inspections
of registered establishments that handle controlled substances and allots quotas of controlled drugs to manufacturers and marketers’
failure to comply with relevant DEA regulations, particularly as manifested in the loss or diversion of controlled substances,
can result in regulatory action including civil penalties, refusal to renew necessary registrations, or proceedings to revoke those
registrations. In certain circumstances, violations can lead to criminal prosecution. In addition to these federal statutory and
regulatory obligations, there may be state and local laws and regulations relevant to the handling of controlled substances or
listed chemicals.



cGMP.Current
Good Manufacturing Practices rules apply to the manufacturing of drugs and medical devices. Our manufacturing facilities and laboratories
are subject to inspection and regulation by French regulatory authorities in accordance with applicable EU provisions governing
cGMP and may also be subject to the United States’ and other countries’ regulatory agencies. Mutual recognition agreements
for government inspections exist between the United States, the EU, Canada, Australia and New Zealand.



In addition to regulations
enforced by the FDA, we are also subject to French, U.S. and other countries’ rules and regulations governing permissible
laboratory activities, waste disposal, handling of toxic, dangerous or radioactive materials and other matters. Our research and
development involves the controlled use of hazardous materials, chemicals, viruses and various radioactive compounds. Although
we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by French,
EU, U.S. and other foreign rules and regulations, the risk of accidental contamination or injury from these materials cannot be
completely eliminated.



Health Care Fraud
and Abuse. We are subject to a number of federal and state laws pertaining to health care “fraud and abuse,” such
as anti-kickback and false claims laws. Under anti-kickback laws, it is illegal for a prescription drug manufacturer to solicit,
offer, receive, or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription
of a particular drug. Due to the breadth of the statutory provisions and the absence of guidance via regulations and that there
are few court decisions addressing industry practices, it is possible that our practices might be challenged under anti-kickback
or similar laws. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented for payment
to third-party payors (such as the Medicare and Medicaid programs) claims for reimbursed drugs or services that are false or fraudulent,
claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Our sales and marketing
activities relating to our products could be subject to scrutiny under these laws. Violations of fraud and abuse laws may be punishable
by criminal and/or civil sanctions, including fines and civil monetary penalties, the possibility of exclusion from federal health
care programs (including Medicare and Medicaid) and corporate integrity agreements, which impose, among other things, rigorous
operational and monitoring requirements on companies. In addition, similar sanctions and penalties can be imposed upon executive
officers and employees, including criminal sanctions against executive officers. As a result of the potential penalties that can
be imposed on companies and individuals if convicted, allegations of such violations often result in settlements even if the company
or individual being investigated admits no wrongdoing. Settlements often include significant civil sanctions, including fines and
civil monetary penalties, and corporate integrity agreements. If the government were to allege or convict us or our executive officers
of violating these laws, our business could be harmed. In addition, private individuals have the ability to bring similar actions.
In addition to the reasons noted above, our activities could be subject to challenge due to the broad scope of these laws and the
increasing attention being given to them by law enforcement authorities. There also are an increasing number of federal and state
laws that require manufacturers to make reports to states on pricing, marketing information, and payments and other transfers of
value to healthcare providers. Many of these laws contain ambiguities as to what is required to comply with the laws. Given the
lack of clarity in laws and their implementation, our reporting actions could be subject to the penalty provisions of the pertinent
authorities.



41







Healthcare Reimbursement



In both U.S. and foreign
markets, sales of our potential products as well as products of pharmaceutical and biotechnology companies that incorporate our
technology into their products, if any, will depend in part on the availability of reimbursement by third-party payers, such as
government health administration authorities, private health insurers and other organizations. The U.S. market for pharmaceutical
products is increasingly being shaped by managed care organizations, pharmacy benefit managers, cooperative buying organizations
and large drugstore chains. Third-party payers are challenging the price and cost effectiveness of medical products and services.
Uncertainty particularly exists as to the reimbursement status of newly approved healthcare products. There can be no assurance
reimbursement will be available to enable us to maintain price levels sufficient to realize an appropriate return on our product
development investment. Legislation and regulations affecting the pricing of pharmaceuticals may change before our proposed products
are approved for marketing and any such changes could further limit reimbursement for medical products and services.



Description of Property



Our corporate headquarters
and the research center are located in Venissieux, France (a suburb of Lyon) in four adjacent leased facilities totaling approximately
58,000 square feet. One building of approximately 12,800 square feet houses administrative offices and research laboratories, including
equipment dedicated to polymer characterization and analytical research. The lease on this facility expires in 2016. A second facility
comprising approximately 12,800 square feet houses equipment dedicated to our Micropump technology has a lease which expires in
2015. The third facility of approximately 6,800 square feet houses analytical laboratories and quality control and the lease expires
in 2016. The fourth facility of approximately 26,000 square feet houses a biological laboratory and research laboratories with
equipment for organic synthesis and polymerization, polymer formulation and small scale processing. The lease on this facility
expires at the end of 2014 and is expected to be renewed. The facility has been audited by U.S., the European (EMA) and the French
regulatory agencies, ANSM (formerly “AFSSAPS”) and is, we believe, cGMP compliant. Such approval qualifies us to manufacture
certain approved pharmaceutical products for sale in most countries in Europe and the U.S (see “Item 4. Manufacturing”).



We own manufacturing
facilities, of approximately 103,900 square feet, located in Pessac, France, which are housed on a 470,000 square foot lot in an
industrial park not far from the Bordeaux airport (“Pessac Facility”). The facilities include manufacturing capabilities
with spray-coating equipment and a clean room for the synthesis of Medusa’s polymers (see “Item 4. Manufacturing”).



The initial value of
the facility is recorded in our financial books at the value of the liabilities corresponding to the retirement indemnities of
the plant staff that we assumed at the time of the plant purchase in 1996, plus the additional investments made by us, less the
depreciation and appropriate amortization.



We built a a new building
on the site in 2004, which includes 8,600 square feet dedicated to our Medusa platform with a cGMP pilot plant, extended synthesis
capacity and increased capacity to manufacture qualification batches and clinical batches of our polymers. This facility supports
the production of polymer for the needs of our projects based on our Medusa platform. This facility was successfully inspected
by the French Agency, ANSM (formerly “AFSSAPS”) in June 2008 and recorded officially as a GMP excipient manufacturing
facility.



42







Our manufacturing facility
of approximately 6,800 square feet is used for the manufacture of Coreg CR microparticles for GSK as well as other Micropump-based
formulations (i.e. the production of certain pharmaceutical products, including commercial quantities of our microencapsulated
drugs)and houses two suites of equipment, as well as a dedicated warehouse, analytical control laboratory and a technical area
with air compressor units, refrigeration units for solvents, and heat boiler. In 2008 we expanded our Micropump Pilot Development
facilities of this site increasing the available area by 14,300 square feet and renovating a further 4,500 square feet. The new
facility houses administrative offices and process development areas which can be utilized for the production of both clinical
and commercial batches, thus increasing our production capacity from two lines to three.



We have commercial
and administrative activities located in St. Louis, Missouri. The office space consists of 5,300 square feet, and the lease expires
in 2018.



During 2013, we expended
$1.0 million on property and equipment.



See “Item 5,
Operations and Financial Review and Prospects” for more information regarding our investment activities and principal
capital expenditures over the last three years.



ITEM 4A. Unresolved
Staff Comments



Not applicable



ITEM 5. Operating
and Financial Review and Prospects



The following should
be read in conjunction with ”Item 3. Key Information” and the Company’s Financial Statements and the Notes
related thereto appearing elsewhere in this Annual Report. See also “Item 11. Quantitative and Qualitative Disclosures
About Market Risk”.



Overview



We are a specialty
pharmaceutical company with a long history of expertise in drug delivery, focusing on the development of safer and more efficacious
formulations, tackling unmet medical needs in the process. The acquisition of Éclat on March 13, 2012 has created a more
vertically integrated company, benefiting from greater development and commercial expertise, best in class drug delivery platforms
and more near-term and mid-term potential value creating catalysts. Since our acquisition of Éclat, Flamel is now focusing
not only on the development and licensing of versatile, proprietary drug delivery platforms but also on the development of novel,
high-value products based on those delivery platforms. Flamel’s new model allows us now to select, develop, seek approval
for, and commercialize niche branded and generic products in the U.S. and most of the opportunities are self-funded. For more details,
see “Item 4. Information on the Company”.



The addition of Éclat,
which has focused on pursuing FDA approvals through the 505(b)(2) regulatory pathway, adds marketing and licensing knowledge of
the commercial and regulatory process in the U.S. and EU, which we believe will enhance the ability of Flamel to identify potential
product candidates for development, leverage new opportunities for the application of our drug delivery platforms, and to license
and market products in the U.S and EU. By adopting this revised strategy, the Company makes itself less dependent on the often,
changing strategies of its partners, in the future. Revenues generated by Coreg CR remain a significant portion of our revenue
and total revenues from GSK contributed to 66% of our revenues in 2013. However, we now have marketed product and products in late
stage development that are not dependent on these collaborative relationships. The first product from the acquired Éclat’s
portfolio, Bloxiverz is currently marketed in the U.S and could have a significant impact on the Company’s revenue generation
and favorably impact its progression to profitability.



To complement the historical
science-oriented strengths of Flamel as an innovator of drug delivery platforms, we now have enhanced our ability to pursue commercial
opportunities and identify new product candidates. Our drug deliveryplatforms allow us to
generate competitive differentiated product profiles (e.g. improvement of pharmacokinetics, efficacy and/or safety). These product
development opportunities offer the ability to grow market share and to protect market position, through patent protection and/or
product differentiation in multiple marketplaces. In 2013, we have specifically focused our Research and Development (R&D)
efforts towards building-up an internal product portfolio; several products formulated using our proprietary drug
deliveryplatforms are currently under development at Flamel in various stages of development. These products will be marketed
either by the Company and/or by partners via licensing/distribution agreements. For more details, see “Item 4. Lead Products”
and “Item 4. Other Products Under Development”.



43







As a result of the
shift to a specialty pharma model, Flamel’s business is now becoming less dependent on its ability to work with partners
in collaborative relationships to develop products using our drug delivery platforms. Nevertheless, Flamel is still exploring development,
supply and licensing opportunities for its drug delivery platforms with carefully selected third parties, but does not intend to
rely completely on those partnerships to create revenue and profit opportunities. As part of the rationalization of the Company’s
products pipeline initiated in 2012, we have continued our efforts to streamline and optimize existing partnerships (see “Item
4. Strategic Alliances”). Consequently, over 2013, our external project portfolio continued to reduce resulting in
the decrease in R&D revenues.



Operating expenses
increased in 2013 largely as a result of an unfavorable non-cash line item of $28.1 million resulting from the change in fair-value
measurement of the liabilities outstanding for the acquisition of Éclat (see 16 and 22 to the Consolidated Financial Statements)
as of December 31, 2013 compared with 2012. These commitments were valued at $31.9 million as of December 31, 2012 and at $58.9
million as of December 31, 2013. The valuations are based on current information and data, including financial projections related
to the potential of the Éclat products, as well as the share price and interest rate in so far as they influence the value
of the warrants. Absent the effects of the fair value measurement and impairment of assets, operating expenses decreased by $1.8
million in 2013. Our investment in research and development, or R&D, has increased as we pursue the development of the Éclat
product portfolio and maintain our research efforts on our in-house product portfolio. We continue to maintain an aggressive approach
to cost controls and are committed to challenging our costs on non-core activities. As projects advance to later stage development
we expect to see an increase in R&D expenditure, including regulatory costs and the payment of FDA filing fees, which are expected
to be $2 million for each of the Éclat products we expect to file for approval. Non-cash expenses relative to stock based
compensation, amounted to $2.0 million in 2013 and $3.0 million in 2012.



In 2013, our investment
in property and equipment was comparable with 2012. Investments were limited to maintenance of our property and equipment.



As in previous years,
the majority of the Company’s expenses were incurred in Euros, since the Company’s base of operations is in France.
However, a portion of revenues were, and will continue to be, denominated in U.S. dollars, see “Item 11. Quantitative and
Qualitative Disclosures about Market Risk”. Although our reporting currency is the U.S. dollar, the Company’s functional
currency is the Euro. Conversion of the Company’s financial accounts to U.S. dollars for reporting purposes is calculated
in accordance with the value of the Euro to the U.S. dollar. See “Item 3. Key Information – Exchange Rates”.
As such, the Financial Statements are translated as follows: (1) asset and liability accounts at year-end rates, (2) income statement
accounts at quarterly weighted average exchange rates for the year, (3) cash flow statement quarterly weighted average exchange
rates for the year, and (4) shareholders' equity accounts at historical rates. Consequently, the variation in the Euro relative
to the U.S. dollar has an impact on the interpretation of the financial statements, which may differ from the underlying variations
in the functional currency. For example, the weakening of the U.S. dollar relative to the Euro has resulted in a 3.3% decrease
in the average value of the US dollar relative to the Euro between 2012 and 2013. Consequently, Euro denominated expenses will
appear to have increased by an equivalent amount year on year simply as a result of the translation from Euro to U.S. dollars for
reporting purposes. The closing value of the Euro relative to the U.S. dollar has increased by 4.5% resulting in a corresponding
increase in amounts represented in the balance sheet as of December 31, 2013, compared with December 31, 2012. The Company does
not engage in substantial hedging activities with respect to the risk of exchange rate fluctuations, although it does, from time
to time, purchase Euros against invoiced Dollar receivables. There is no outstanding hedging agreement as of December 31, 2013.



In certain instances
we may compare expenses from one period to another in this Annual Report on Form 20-F using comparable currency exchange rates
in order to assess our underlying performance before taking into account exchange fluctuations. To present this information, prior
period expenses are converted into U.S. dollars at current year average exchange rates rather than exchange rates for the prior
fiscal year. For example, if SG&A expenses were €6.7 million in each of fiscal year 2013 and fiscal year 2012, we would
report $9.0 million of SG&A expenses in fiscal year 2013 (based on the quarterly weighted average exchange rates during 2013)
and $8.6 million in fiscal year 2012 (based on the quarterly weighted average exchange rates during 2012). The presentation using
comparable currency exchange rates would translate the fiscal 2012 expenses using the fiscal 2013 exchange rates and indicate that
underlying expenses were flat rather than increasing by $0.4 million, as would be reported in the financial statements under U.S.
GAAP. We use figures prepared on a comparable currency basis for internal analysis and communicate similarly externally from time
to time, since we believe this appropriate in order to analyze variations in expenditure from one period to another. However, figures
provided on a comparable currency basis are unaudited and are not measurements under U.S. GAAP.



44







Flamel’s business
is subject to substantial risks, including the uncertainties associated with the research and development of new products or technologies,
the length and uncertainty linked to the results of clinical trials and regulatory procedures, uncertainties relating to collaborative
arrangements with large companies, difficulties in the scale-up and manufacturing of its products, the uncertainty relating to
the market acceptance of new products based on its technologies and uncertainties arising from the Éclat acquisition and
the development and commercialization of its portfolio of products. The time required for the Company to achieve sustained profitability,
and consequently, the amount of future losses, is highly uncertain. Operating losses may also fluctuate from quarter to quarter
as a result of differences in timing of revenues recognized or expenses incurred. See “Item 3. Key Information - Risk
Factors”.



The Company has incurred
substantial losses since its inception, and through December 31, 2013, had an accumulated deficit of approximately $236million.
Flamel expects to maintain its investment in its research and development activities in line with the projects portfolio, while
being vigilant to ensure that investments in non-core activities are limited. Thus, there can be no assurance that the Company
will not continue to incur losses. We expect our research and development costs to increase as we pursue the development of our
own products. We currently have one approved product on the market and an approval requests is pending with the FDA, with a PDUFA
date of April 28 2014. We anticipate generating revenue streams on these products in 2014 and beyond, which will be supplemented
by further products from the Éclat business in subsequent years which could have a significant impact on the Company’s
revenue generation and favorably impact its progression to profitability in the future.. In March 2014 we completed an underwritten
public offering which generated $113.6 million in net proceeds. Subsequently; we repaid substantially all of our outstanding long-term
debt amounting to $32 million and will use the remaining proceeds along with revenues generated from our Éclat pipeline
products to pursue the development of our internal product portfolio, possible including clinical trials.



Critical Accounting
Policies



Revenue Recognition



Revenue
includes upfront licensing fees, milestone payments for R&D achievements, compensation for the execution of research and development
activities.



Where
agreements have more than one deliverable, a determination is made as to whether the license and R&D elements should be recognized
separately or combined into a single unit of account in accordance with ASU 2009-13, Revenue with Multiple Deliverables.



The
Company uses a Multiple Attribution Model, referred to as the milestone-based method:



-	As
milestones relate to discrete development steps (i.e. can be used by the co-development partners to decide whether to continue
the development under the agreement), the Company views that milestone events have substance and represent the achievement of defined
goals worthy of the payments. Therefore, milestone payments based on performance are recognized when the performance criteria are
met and there are no further performance obligations.

-	Non-refundable
technology access fees received from collaboration agreements that require the Company's continuing involvement in the form of
development efforts are recognized as revenue ratably over the development period.

-	Research
and development work is compensated at a non-refundable hourly rate for a projected number of hours. Revenue on such agreements
is recognized at the hourly rate for the number of hours worked as the research and development work is performed. Costs incurred
under these contracts are considered costs in the period incurred. Payments received in advance of performance are recorded as
deferred revenue and recognized in revenue as services are rendered.



Revenue is generally
realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred or services have been
rendered, the seller’s price to the buyer is fixed or determinable, and collectability is reasonably assured. The Company
records revenue from product sales when title and risk of ownership have been transferred to the customer, which is typically upon
delivery to the customer. As is customary in the pharmaceutical industry, the Company’s gross product sales are subject to
a variety of deductions in arriving at reported net product sales. When the Company recognizes revenue from the sale of its products,
an estimate of provision for sales return and allowances is recorded which reduces product sales. These adjustments include estimates
for product returns, chargebacks, payment discounts and other sales allowances and rebates. The return allowance, when estimable,
is based on an analysis of the historical returns of the product or similar products.



45







For new product launches
the Company recognizes revenue based on net product sales of wholesalers to their customers, until sufficient data is available
to determine product acceptance in the marketplace such that product returns may be estimated based on historical data and there
is evidence of reorders and consideration is made of wholesaler inventory levels. Net product sales of wholesalers to their customers
are determined using sales data from an independent, renowned wholesaler inventory tracking service. Net sales of wholesalers to
their customers are calculated by deducting estimates for returns for wholesaler customers, chargebacks, payment discounts and
other sales or discounts offered from the applicable gross sales value. When the Company has the ability to estimate product returns
from wholesalers, product sales are recognized upon shipment, net of discounts, returns and allowances.   Estimates for product
returns are adjusted periodically based upon historical rates of returns, inventory levels in the distribution channel and other
related factors.



The Company launched
BloxiverzTM in July of 2013 and determined that market acceptance of the product had not occurred given the absence
of wholesaler reorders and insufficient data to determine product returns.  For the twelve months ended December 31, 2013,
the criteria for recognizing the revenue were not met and the Company deferred $1.1M of revenue as of December 31, 2013.



The Company receives
royalty revenues under a license agreement with a third party that sells products based on technology developed by the Company.
There are no future performance obligations on the part of the Company under this license agreement. The license agreements provide
for the payment of royalties to the Company based on sales of the licensed product. The Company records these revenues based on
actual sales that occurred during the relevant period and classifies these revenues in ‘Other Revenues’.



The Company receives
revenue under signed feasibility study agreements. Revenue is recognized over the term of the agreement as services are performed.



The Company receives
financial support for various research and investment projects from governmental agencies. Revenue from conditional grants related
to specific development projects is recognized as an offset to operating expenses when all conditions stated in the grant have
been met and the funding has been received.  Revenue from unconditional grants for research and development projects are recognized
as an offset to research and development expense on a pro-rata basis over the duration of the program. Funding can be received
to finance certain research and development projects which are repayable on commercial success of the project. In the absence of
commercial success, the Company is released of its obligation to repay the funds and the funds are recognized in the Income Statement
as ‘Other Income’.



The Company
receives financial support for capital investment programs from partners. Revenue from these operations is amortized on a pro-rata
basis over the expected life of the related assets and reflected as an offset of the depreciation of the related assets in the
consolidated statement of operations.



The Company
benefits from tax credits on a percentage of eligible research and development costs. These tax credits can be refundable in cash
and are not contingent upon future taxable income. As explained in note 5 to the Consolidated Financial Statements, the company
determined that the research tax credit should be classified as a research and development grant and the tax credit is recognized
as an offset to research and development expense.



Research
and Development Costs



R&D
expenses are comprised of the following types of costs incurred in performing R&D activities: salaries, allocated overhead
and occupancy costs, clinical trial and related clinical or developmental manufacturing costs, and contract and other outside service
fees, filing fees and regulatory support. Research and development expenditures are charged to operations as incurred.



Generally,
the Company’s research and development efforts are either funded internally or by third-party partners. The Company’s
research and development efforts are organized to allow internal services to support both internal research programs and partner-sponsored
research programs simultaneously, reflecting the Company’s approach and belief that internal projects can benefit from the
research and development efforts funded by partners and vice versa. Due to this approach, the Company views research and development
costs as a whole across the organization and by technological platform. The Company monitors progress on the basis of the actual
number of hours/days worked and the cost of outside services for pre-clinical and clinical activities.



46







Management
Estimates



The preparation
of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period. Significant estimates reflected in the consolidated
financial statements include, but are not limited to, purchase price allocation of its acquisitions, remeasurement of liabilities
accounted at fair value, the recoverability of the carrying amount and estimated useful lives of long-lived assets, in progress
R&D and goodwill, share-based compensation expenses, evaluation of long term personnel compensation, calculation of R&D
tax credit, and valuation allowance of deferred tax assets. Management makes these estimates using the best information available
at the time the estimates are made; however, actual results could differ from those estimates.



Impairment
of Long-Lived Assets



The Company
reviews the carrying value of its long-lived assets, including fixed assets and intangible assets, for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Recoverability of long-lived
assets is assessed by a comparison of the carrying amount of the asset (or the group of assets, including the asset in question,
that represents the lowest level of separately-identifiable cash flows) to the total estimated undiscounted future cash flows expected
to be generated by the asset or group of assets. If the future net undiscounted cash flows is less than the carrying amount of
the asset or group of assets, the asset or group of assets is considered impaired and an expense is recognized equal to the amount
required to reduce the carrying amount of the asset or group of assets to its then fair value. Fair value is determined by discounting
the cash flows expected to be generated by the asset, when the quoted market prices are not available for the long-lived assets.
Estimated future cash flows are based on management assumptions and are subject to risk and uncertainty.



Long-Term
Debt



Long Term
debt associated with the acquisition liabilities arising from the acquisition of Eclat Pharmaceuticals are accounted at fair-value.
Long-term debt associated with the Deerfied Facility and Broadfin Facility agreements are accounted for at amortized cost. The
Company elected the fair value option for the measurement of the long-term liability associated with the Deerfield and Broadfin
Royalty agreements.



Translation
of Financial Statements



The reporting
currency of the Company is the U.S. dollar and the functional currency of the Company is the Euro. As such, the Financial Statements
are translated for reporting purposes as follows: (1) asset and liability accounts at year-end rates, (2) income statement accounts
at weighted average exchange rates for the year, and (3) shareholders' equity accounts at historical rates. Corresponding translation
gains or losses are recorded in shareholders' equity.



47







Results of Operations



Years Ended December
31, 2013, 2012 and 2011



Operating Revenues



The Company had total
revenues of $22.4 million in 2013, $26.1 million in 2012 and $32.6 million in 2011. The following table shows revenues attributable
to license and research activities in millions of US dollars:



|                              |  |                       |      | 2011 |      |   | 2012 |   |     | 2013 |    
|----------------------------- |  | --------------------- | ---- | ---- | ---- | - | ---- | - | --- | ---- | ---
|                              |  |                       |      |      |      |   |      |   |     |      |    
|LICENSE AND RESEARCH REVENUES |  | $                     | 10.6 |      |      | $ | 9.3  |   |     | $    | 6.5
|                              |  |                       |      |      |      |   |      |   |     |      |    
|RESEARCH                      |  |                       |      | $    | 6.3  |   |      | $ | 5.1 |      |    
|                              |  |                       |      |      |      |   |      |   |     |      |    
|Research                      |  | Merck Serono          |      |      | 2.4  |   |      |   | -   |      |    
|                              |  | Pfizer                |      |      | 0.1  |   |      |   | -   |      |    
|                              |  | Eagle Pharmaceuticals |      |      | 0.3  |   |      |   | 0.7 |      |    
|                              |  | Undisclosed Partners  |      |      | 3.5  |   |      |   | 4.4 |      |    
|                              |  |                       |      |      |      |   |      |   |     |      |    
|LICENSES                      |  |                       |      | $    | 4.3  |   |      | $ | 4.3 |      |    
|                              |  |                       |      |      |      |   |      |   |     |      |    
|Upfront Payment               |  | Merck Serono          |      |      | 1.4  |   |      |   | 2.7 |      |    
|                              |  | Baxter International  |      |      | 0.9  |   |      |   | -   |      |    
|                              |  | Pfizer                |      |      | 0.7  |   |      |   | -   |      |    
|                              |  | Undisclosed Partners  |      |      | 1.3  |   |      |   | 1.3 |      |    
|                              |  |                       |      |      |      |   |      |   |     |      |    
|Milestones                    |  | Merck Serono          |      |      | -    |   |      |   | -   |      |    
|                              |  | Undisclosed Partners  |      |      | -    |   |      |   | 0.3 |      |    
|                              |  |                       |      |      |      |   |      |   |     |      |    
|TOTAL                         |  |                       |      | $    | 10.6 |   |      | $ | 9.3 |      |    
|                              |  | Merck Serono          |      |      | 3.8  |   |      |   | 2.7 |      |    
|                              |  | Baxter International  |      |      | 0.9  |   |      |   | -   |      |    
|                              |  | Pfizer                |      |      | 0.8  |   |      |   | -   |      |    
|                              |  | Eagle Pharmaceuticals |      |      | 0.3  |   |      |   | 0.7 |      |    
|                              |  | Undisclosed Partners  |      |      | 4.8  |   |      |   | 5.9 |      |    



In 2013, license and
research revenue totaled $6.5 million. License and research revenue in 2012 and 2011 totaled $9.3 million and $10.6 million, respectively.
In 2013 research and development revenue totaled $5.0 million and license revenue totaled $1.5 million. In 2012 research and development
revenue totaled $5.1 million and license revenue totaled $4.3 million. In 2011 research and development revenue totaled $6.3 million
and license revenue totaled $4.3 million. License and research revenues in 2013 and 2012 have decreased compared with 2011 due
to the termination of certain partnership agreements with Merck-Serono, Pfizer and Baxter International. This correlates with our
transition from a drug delivery company to a self-funded specialty pharma company.



Research and development
revenues in 2013 consisted primarily of $5.0 million from undisclosed partners. Research and development revenues in 2012 consisted
primarily of $0.7 million from Eagle Pharmaceuticals and $4.4 million from undisclosed partners. Research and development revenues
in 2011 consisted primarily of $2.4 million from Merck Serono, $0.1 million from Pfizer, $0.3 million from Eagle Pharmaceuticals
and $3.5 million from undisclosed partners.



License revenues in
2013 consisted primarily of $1.5 million from undisclosed Partners. License revenues in 2012 consisted primarily of $2.7 million
from Merck Serono (amortization of up-front payments) and $1.6 million from undisclosed partners. License revenues in 2011 consisted
primarily of $1.4 million from Merck Serono (amortization of up-front payments), $0.9 million from Baxter International (amortization
of up-front payments), $0.7 million from Pfizer (amortization of up-font payment) and $1.3 million from undisclosed partners.



In 2013, product sales
and services revenues totaled $9.0 million, $9.7 million in 2012 and $13.4 million in 2011. In 2011 product sales relate solely
to sales of Coreg CR microparticles to GSK. In 2012 and 2013, product sales include sales of Coreg CR microparticles to GSK and
product sales of Hycet for a total of respectively $0.6 million and $1.0 million. The license for commercialization of Hycet was
divested in November 2013. Revenues from the sale of Coreg CR microparticles have decreased in 2013 as a result of the lower demand.
The multi-year supply agreement concluded in 2011 provides for fixed unit pricing, as opposed to a cost-plus arrangement in the
previous supply agreement, and guaranteed minimal payments minimum period of five years. No earlier than January 1, 2013, GSK may
terminate the agreement at its sole discretion by giving six months written notice.



48







Other revenues of $6.9
million in 2013, $7.1 million in 2012 and $8.6 million in 2011, consisted primarily of royalties from GSK related to the sale of
Coreg CR and to a lesser extent royalties from Corning related to the sale of photochromic lenses that incorporate technology licensed
from Flamel.



Operating Expenses



The Company had total
costs and expenses of $72.5 million in 2013, $34.5 million in 2012, and $42.2 million in 2011.



The terms of acquisition
of Éclat Pharmaceuticals in March 2012 included the issuance of a $12 million note, the repayment of which was tied to the
approval and net sales of certain Éclat products, and which was repaid in full in March 2014, 3.3 million warrants and earn-out
payments based on the gross profit achieved on the Éclat products (see note 2 to the Consolidated Financial Statements).
These commitments are revalued and reassessed at each balance sheet date based on information and data available at that time,
including financial projections related to the potential of the Éclat products, as well as the share price and interest
rate in so far as they influence the value of the warrants. An unfavorable $28.1 million adjustment was accounted in 2013 and a
favorable adjustment of $18.8 million in 2012 from the updated fair-value measurement of these liabilities. In addition, in 2012
a $7.2 million charge was recognized to reflect the impairment of acquired R&D assets, mainly reflecting changes in market
opportunities occurring post-acquisition for one of the acquired pipeline products.



As in previous years,
in 2013 the majority of costs were incurred on research and development. R&D costs totaled $26.7 million in 2013, $26.1 million
in 2012 and $25.1 million in 2011. At comparable currency exchange rates, research and development costs increased marginally by
$0.1 million in 2013.



Our total research
and development expenditures can be split in the following categories ($in millions):



|                                                                      |  | 2011 |      |   | 2012 |  |      | 2013 | 
|--------------------------------------------------------------------- |  | ---- | ---- | - | ---- |  | ---- | ---- | 
|Salaries and employee benefits                                        |  |      | 16.9 |   |      |  | 16.5 |      | 
|Materials and Supplies                                                |  |      | 3.9  |   |      |  | 3.4  |      | 
|Pre-clinical, Clinical, Regulatory and Manufacturing outside services |  |      | 2.5  |   |      |  | 3.9  |      | 
|Grants and R&D Tax credit                                             |  |      | (7.8 | ) |      |  | (6.7 | )    | 
|Depreciation of facilities and equipment                              |  |      | 2.0  |   |      |  | 1.7  |      | 
|Other Expenses & Taxes                                                |  |      | 6.4  |   |      |  | 6.2  |      | 
|Stock-based Stock Compensation                                        |  |      | 1.2  |   |      |  | 1.1  |      | 
|Total                                                                 |  |      | 25.1 |   |      |  | 26.1 |      | 



The human resources
allocated to each technological platform over the past three years are as follows:



|Full Time Equivalents |  | 2011 |    |  | 2012 |  |    | 2013 | 
|--------------------- |  | ---- | -- |  | ---- |  | -- | ---- | 
|Micropump®            |  |      | 25 |  |      |  | 33 |      | 
|LiquiTime®            |  |      | -  |  |      |  | 1  |      | 
|Trigger LockTM         |  |      | 10 |  |      |  | 11 |      | 
|MedusaTM               |  |      | 87 |  |      |  | 78 |      | 



The cost of outside
services borne by the Company for pre-clinical, clinical, contract manufacturing and regulatory activities by technological platform
over the past three years are as follows ($USD in millions):



|                       |  |               |  | 2011 |     |  | 2012 |  |     | 2013 | 
|---------------------- |  | ------------- |  | ---- | --- |  | ---- |  | --- | ---- | 
|Pre-Clinical           |  | Micropump®    |  |      | 0.3 |  |      |  |     |      | 
|                       |  | MedusaTM       |  |      | 1.7 |  |      |  | 0.4 |      | 
|                       |  | Micropump®    |  |      |     |  |      |  |     |      | 
|Clinical               |  | Trigger-LockTM |  |      | 0.3 |  |      |  | -   |      | 
|                       |  | MedusaTM       |  |      | 0.2 |  |      |  | 0.3 |      | 
|Contract Manufacturing |  | Éclat         |  |      | -   |  |      |  | 1.7 |      | 
|Regulatory             |  | Éclat         |  |      | -   |  |      |  | 1.5 |      | 



49







As of December 31,
2013, Flamel had total research tax credits receivable of $20.6 million. In 2012 the Company obtained an advance secured against
the tax credit generated in 2011 valued at $6.1 million as of December 31, 2013. This advance would normally have been received
as a cash payment of $6.8 million in 2015. In 2011 the Company obtained an advance secured against the tax credit generated in
2010 valued at $7.1 million as of December 31, 2013. This advance would normally have been received as a cash payment of $7.9 million
in 2014. The Company earned a research and development credit of $5.8 million in 2013, $6.5 million in 2012 and$6.1 million in
2011. In 2013, the Company received reimbursement of the 2012 tax credit since it met the criteria to benefit from immediate reimbursement
(i.e. considered to be a Small and Medium Enterprise under the EU legislation).



The average number
of employees dedicated to research and development activities has decreased year over year. This decrease was driven by the reduction
of the external project portfolio.. Total employees as of December 31, 2013 amounted to 251 compared with 256 at the end of 2012
and 267 at the end of 2011. The Company has spent $0.5 million on pre-clinical and clinical studies in 2013 compared with $0.7
million in 2012 and $2.5 million in 2011. This reduction is predominantly due to a reduction in pre-clinical spending on Medusa
projects as management has reprioritized project development efforts between the platforms, refocused innovative opportunities
to expand the technological platforms, which, in early phases of formulation and prototyping requires, reduced external expenditure.
Costs are expected to increase in the future as projects advance into clinical development. In 2013, costs of $7.4 million have
been incurred on the Éclat portfolio for contract manufacturing services and regulatory activities, including FDA filing
fees. These costs are associated with the development of products with outside contractors and costs for preparation of the FDA
filing, including meetings with the agency at key points in the development program and FDA filing and submission fees.



Costs of products and
services sold were $4.3 million in 2013, $5.9 million in 2012 and $6.3 million in 2011. These costs relate primarily to the supply
of commercial quantities of microparticles of Coreg CR to GSK and the availability of relevant production capacity. In 2013, costs
have continued to decline in line with ongoing demand for the product, optimized production scheduling and reduced payroll costs
from the release of payroll accruals following changes we implemented in employee compensation, moving to a plan that is performance-based
from prior plans that were based on longevity of service.



SG&A expenses,
amounted to $13.3 million in 2013, $14.2 million in 2012 and $10.8 million in 2011. SG&A expenses included stock based compensation
expense of $1.2 million in 2013, $1.9 million in 2012 and $1.2 million in 2011. SG&A expenses in 2013 include Éclat-related
expenses of $4.3 million for 2013 and 2.0 million for 2012. SG&A expenses decreased by $1.2 million over 2012 expenses at comparable
currency exchange rates. This decrease is due to legal costs and severance costs incurred as a consequence of the acquisition of
Éclat in March 2012 and the change in Chief Executive Officer.



Non-Operating Items



Interest income and
realized gains on the sale of monetary SICAVs (Sociétés d’Investissement à Capital Variable)
were $0.3 million in 2013 compared with of $0.6 million in 2012 and $0.7 million in 2011. Interest income has reduced due to the
reduction in cash and marketable securities. Interest expense was $2.6 million in 2013, $118,000 in 2012 and $24,000 in 2010. The
increase in interest expense is due to the $15 million debt financing concluded with Deerfield Management in February 2013 and
to a lesser extent the $5 million tranche drawn down on the $15 million debt financing concluded with Broadfin Healthcare Master
Fund in December 2013.



The characteristics
of the debt financing are as follows:



| | · | Deerfield Management: nominal interest rate of 12.5% payable quarterly in arrears on the first
day of each quarter. Principal amount of the loan repayable over four years as follows: 10% July 1, 2014 and 20%, 30%, and 40%
on the second, third and further anniversary respectively, of the original disbursement date. The total principal amount of the
Debt of $15 million and accrued interest was repaid on March 24, 2014. Deerfield Management will also receive a 1.75% royalty on
net sales of certain products sold by Éclat Pharmaceuticals, subject to required regulatory approvals and sales of these
products, until December 31, 2024.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Broadfin Healthcare Master Fund: $15 million debt financing divided into three tranches of $5 million
each, of which only the initial loan $5 million was drawn. Nominal interest rate of 12.5% payable quarterly in arrears on the first
day of each quarter. Principal amount of the loan repayable by January 1, 2017. The total principal amount and outstanding accrued
interest was repaid on March 24, 2014. Broadfin will also receive a 0.834% royalty on net sales of certain products sold by Éclat
Pharmaceuticals, subject to required regulatory approvals and sales of these products, until December 31, 2024.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



50







The Royalty agreements
concluded with Deerfield Management and Broadfin Healthcare Master Fund of respectively 1.75% and 0.834% on net sales of certain
products sold by Éclat Pharmaceuticals, subject to required regulatory approvals, generated non-cash expense of $2.0 million
in 2013. The fair value option was elected for the measurement of the Royalty liabilities.



Foreign exchange loss
was $288,000 in 2013, $180,000 in 2012 and a gain of $273,000 in 2011. These exchange gains and losses are generated by transactions
denominated in foreign currency and in particular revenues denominated in USD. The variation in foreign exchange gain/loss results
from the volume of operations in foreign currency and the variation in exchange rates over the year.



Other income in 2013
amounted to $0.6 million and consisted of reimbursement of the deductible from a 2007 class action that was dismissed in 2013,
compared with $0.1 million in 2012 and 2011.



Income tax benefit
in 2013 amounted to $11. million, which reflects tax benefit of statutory net operating losses generated by the operations in the
US. In 2012 income tax benefit amounted to 4.7 million of which 4.8 million reflected tax benefits of operations in the US. French
business tax calculated on gross profits generated tax expense of $0.1 million in 2013 and 2012, $0.2 million in 2011.





As of December 31,
2013, the Company had $201.6 million in French net operating loss carry-forwards and $36.6 million in US net operating losses carry-forwards.
The French carry-forwards can be utilized against future operating income indefinitely, subject to an annual limitation of €1.0
million and 50% of taxable income in excess of this threshold and the US carry-forwards can be utilized against future operating
income subject to a limitation of $1.8 million per year on pre-acquisition tax losses of $4.9 million.



Net Income/Loss



For the year ended
December 31, 2013, the Company reported a net loss of $42.9 million or $1.69 per share. For the year ended December 31, 2012, Company
reported a net loss of $3.2 million or $0.13 per share. For the year ended December 31, 2011, the Company reported a net loss of
$8.8 million or $0.36 per share. For the year ended December 31, 2013 adjusted net loss was $16.1 million or $0.63 per share and
for the year ended December 31, 2012 adjusted net loss was $17.7 million or $0.70 per share.





Flamel is providing
below adjusted net income, which is a non-GAAP financial. Flamel believes that an evaluation of its ongoing operations (and comparison
of current operations with historical and future operations) would be difficult if the disclosure of its financial results were
limited to financial measures prepared only in accordance with generally accepted accounting principles (GAAP) in the U.S. In addition
to disclosing its financial results determined in accordance with GAAP, Flamel is disclosing adjusted net income that excludes
the net of tax effect of fair value remeasurement on acquisition liabilities and royalty agreements, impairment of intangible assets
and includes operating cash flows associated with the commitments to make earnout payments to Deerfield, in order to supplement
investors' and other readers' understanding and assessment of the Company's financial performance. The Company's management uses
these non-GAAP measures internally for forecasting, budgeting and measuring its operating performance. Investors and other readers
are encouraged to review the related GAAP financial measures and the reconciliation of non-GAAP measures to their most closely
applicable GAAP measure set forth below and should consider non-GAAP measures only as a supplement to, not as a substitute for
or as a superior measure to, measures of financial performance prepared in accordance with GAAP.



|                                                                          |  | Twelve months ended December 31, |        
|------------------------------------------------------------------------- |  | -------------------------------- | -------
|                                                                          |  | 2012                             |        
|GAAP Net income (loss) and diluted earnings (loss) per share              |  | $                                | (3,228 
|                                                                          |  |                                  |        
|Fair value remeasurement of acquisition liabilities                       |  |                                  | (18,834
|                                                                          |  |                                  |        
|Fair value remeasurement of royalty agreements                            |  |                                  | -      
|                                                                          |  |                                  |        
|Tax effects of the above items                                            |  |                                  | 258    
|                                                                          |  |                                  |        
|Asset Impairment net of tax effects                                       |  |                                  | 4,302  
|                                                                          |  |                                  |        
|Earn-out acquisition payment payable                                      |  |                                  | (160   
|                                                                          |  |                                  |        
|Adjusted Net Income (Loss) and adjusted diluted earnings (loss) per share |  | $                                | (17,661



51







Liquidity and Capital
Resources



On December 31, 2013,
the Company had $6.6 million in cash and cash equivalents and $0.4 million in marketable securities compared with $2.7 million
in cash and cash equivalents and $6.4 million in marketable securities on December 31, 2012 and $3.5 million in cash and cash equivalents
and $21.0 million in marketable securities on December 31, 2011. The decrease in the level of cash and cash equivalents and marketable
securities results from the funding of ongoing operations and the reduction in revenues due to termination of certain projects.



Net cash
used in operating activities was $20.7 million as of December 31, 2013, compared with $23.1 million as of December 31, 2012, and
$10.3 million as of December 31, 2011. As of December 31, 2013 net cash used in operating activities reflected a net loss of $42.9
million, offset by non-cash movements of $23.9 million, including $30.1 million of expenses on remeasurement of acquisition liabilities,
($11.3) million tax benefit which will be set off against future taxable income, $3.1 million of depreciation on property and equipment,
$2.0 million relative to stock compensation expense, ($0.7) million of grants recognized to the income statement and $0.7 million
of calculated interest on amortized method on debt financing. Movement in working capital year on year generated a decrease in
cash of ($1.7) million representing cash decrease of ($1.4) million related to the commercial launch of BloxiverzTM and inventory
build, offset by increased accrued liabilities and decreased prepaid expenses on R&D expenditure of $1.5 million, increase
in R&D tax credit of $0.7 million, offset by a reduction in current and long-term liabilities following the reversal of payroll
accruals following the change in compensation policy for a total of ($2.5) million. Cash used by operating activities decreased
year on year due to a reduction in cash operating expenses.



Net cash provided by
investing activities was $6.0 million in 2013, compared with $15.4 million in 2012. Investing activities included proceeds from
the sale of marketable securities for $7.2 million and purchase of marketable securities for $1.1 million. In 2012 and 2013, the
Company has maintained the same investment policy and the sale and purchase of marketable securities are limited to the financing
of ongoing operations. In 2013, $1.0 million was spent in the purchase of property and equipment compared with $1.1 million in
2012. In 2013, $1.0 million was received as proceeds from the disposal of property and equipment, including the disposal of the
license for commercialization of Hycet. In 2012, $1.8 million of cash was acquired following the acquisition of Éclat in
March, 2012.



Net cash provided by
financing activities was $18.3 million in 2013 and includes loans of $15 million received subsequent to the debt financing concluded
with Deerfield Management in February 2013 and $5 million of the $15 million debt financing concluded with Broadfin Healthcare
Master Fund in December 2013, and earn-out payments for the acquisition of Éclat of $0.9 million. Cash provided by financing
activities was $7.0 million in 2012 and includes an advance of $5.7 million received in the second quarter of 2012 from Oseo, secured
against the research and development tax credit of $6.1 million earned in 2011. Cash provided by financing activities was $6.1
million in 2011 and included an advance of $7.4 million received in the second quarter of 2011 from Oseo, secured against the research
and development tax credit of $7.7 million earned in 2010 and reimbursement of an advance from Oseo of ($1.9) million, secured
against the 2007 research tax credit.



Since its inception,
the Company’s operations have consumed substantial amounts of cash and may continue to do so. In March 2014, the Company
completed an underwritten public offering of 10,800,000 American Depositary Shares, each representing one ordinary share of Flamel,
with an offering price of $9.75 per ADS. Total net proceeds, after deduction of commissions, amounted to $113.6 million. The Company
repaid a total of $32 million of principal on outstanding debt on March 24, 2014 relating to the Acquisition liability note with
Deerfield of $12 million in principal, the Deerfield Facility Agreement of $15 million in principal and the Broadfin Facility Agreement
of $5 million in principal.



The Company believes
that ongoing research and product development programs are adequately funded for the next year and believe current working capital
to be sufficient for the Company’s present requirements, including commercial launch of products from the Éclat pipeline.
The Company also believes current financial resources and cash from various grants, royalty payments, licenses and commercialization
of products will be sufficient to meet the Company’s cash requirements in the near future. We believe we have sufficient
funds to finance operations and cash requirements for at least the next twelve months.



As of December 31,
2013, the Company held marketable securities classified as available-for-sale and recorded at fair value. Total marketable securities
totaled $0.4 million at December 31, 2013 and $6.4 million at December 31, 2012.



52









As of December 31,
2013, the Company had loans of $2.6 million from Oseo, $2.0 million advance from the French Ministry of Industry for a ‘Proteozome’
research project. These loans do not bear interest and are repayable only in the event that the research is successful technically
or commercially. The Company has evaluated the debt due for the purchase of Éclat Pharmaceuticals at $48.4 million as of
December 31, 2013. The obligations relative to the acquisition arise from the $12 million senior note issued by our U.S. subsidiary,
Flamel US Holdings, Inc., that was guaranteed by us and our subsidiaries and secured by the membership interests and assets of
Éclat and the commitment by Flamel US Holdings, to pay 20% of any gross profit generated by certain Éclat launch
products and two warrants to purchase a total of 3,300,000 ADSs. The Company has evaluated the debt due on the Facility Agreement
and Royalty Agreement concluded with Deerfield management at $12.5 million and $4.6 million respectively and the debt due on the
Facility Agreement and Royalty Agreement concluded with Broadfin Healthcare Master Fund at $2.8 million and $2.2 million respectively
as of December 31, 2013 See Item 10. Additional Information – Material Contracts and Note 16 – Long Term Debt
for more information regarding these obligations. Long-term indebtedness associated with the $12 million acquisition note, Deerfield
Facility and Broadfin Facility was subsequently repaid in March 2014 as described above.



In 2004, Flamel and
GSK entered into a four year supply agreement which included provisions for payments to Flamel of $20.7 million to support the
costs and capital expenditure relative to the creation of a manufacturing area for the production of commercial supply of the product.
Flamel has immediate title to the building and fixtures and title to production equipment vests with GSK for the duration of the
supply agreement.



If the Company breaches
the supply agreement through gross negligence, GSK can choose to terminate the supply agreement. In the event of a breach and a
decision to terminate the agreement, all payments received become repayable to GSK and Flamel will receive immediate title to all
production equipment.



Upon cessation of
the supply agreement, in the normal course, GSK will pass title to all production equipment to Flamel without cost. A total of
$8.2 million has been spent on the acquisition of buildings and fixtures and a total of $11.1 million has been spent on behalf
of GSK for the purchase of production equipment. The funds received from GSK to finance the acquisition of assets owned by Flamel
are classified as a current liability for $0.3 million and as a long term liability for $3.4 million. The total liability is being
amortized on a pro-rata basis over the expected life of the related assets and reflected as an offset of the depreciation of the
related assets.



In July 2006, the
supply agreement was supplemented by an agreement with GSK to partly sponsor the expansion of facilities at Pessac from two lines
to three. The provisions of the agreement include payments to Flamel of $8.1 million to partially support the acquisition of equipment,
building and fixtures to which Flamel has immediate title. As of December 31, 2013 these funds are classified as a current liability
for $0.3 million and as a long term liability for $2.6 million. The liability is being amortized on a pro-rata basis over the expected
life of the assets and proportionally based on funding received compared with the total value of the related assets. The amortization
of the liability is reflected as an offset of the depreciation of the related assets.



In June 2011, the
Company obtained an advance from OSEO for $7.4 million secured against the research tax credit due to the Company by the tax authorities
for expenditures incurred in 2010, totaling $7.7 million. In June 2012, the Company obtained an advance from OSEO for $5.7 million
secured against the research tax credit due to the Company by the tax authorities for expenditures incurred in 2011, totaling $6.1
million. The interest rate applied is the monthly average of the Euro Interbank Offered Rate (EURIBOR) plus 0.9%. As of December
31, 2013 the total liability amounted to $13.2 million classified as a current liability for $7.1 million and as a long term liability
for $6.1 million.



53







The contractual cash
obligations of the Company as of December 31, 2013, are as follows:



|                                                                                                 |  | Payments Due by Period |        
|------------------------------------------------------------------------------------------------ |  | ---------------------- | -------
|(in thousands of U.S. dollars)                                                                   |  | Total                  |        
|Long-Term Debt Obligations (see Note 16) [1]                                                     |  | $                      | 124,053
|Capital Lease Obligations (see Note 17)                                                          |  | $                      | 194    
|Operating Leases Obligations (see Note 23.2)                                                     |  | $                      | 1,580  
|Other Long-Term Liabilities reflected on the Registrant’s Balance Sheet under GAAP (see Note 21) |  | $                      | 997    
|Total Contractual Cash Obligations                                                               |  | $                      | 126,824



Future interest payments
included in capital lease obligations amount to a total of $6,000.



[1] The Company
repaid a total of $32 million of principal on outstanding debt on March 24, 2014 relating to the Acquisition liability note, $12
million in principal, Deerfield Facility Agreement, $15 million in principal and Broadfin Facility Agreement, $5 million in principal.



Off-Balance Sheet
Arrangements



As of December 31,
2013, the Company has no off-balance sheet arrangements.



54







ITEM 6. Directors,
Senior Management and Employees



Directors and
Senior Management



The following table
sets forth the name and position of the directors of the Company as of December 31, 2013. Michael S. Anderson, former Chief Executive
Officer of Éclat, was appointed Chief Executive Officer of the Company, effective March 13, 2012.



|Name                           |  | Position                                             |  | Year
                                         of
 Initial
        Appointment
|------------------------------ |  | ---------------------------------------------------- |  | -----------------------------------------------------------------------------
|                               |  |                                                      |  |                                                                              
|Stephen H. Willard (1) (4)     |  | Non-Executive Chairman of the Board of
    Directors |  | 2000                                                                         
|Michael S. Anderson            |  | Chief Executive Officer and Director                 |  | 2012                                                                         
|Catherine Bréchignac (3)       |  | Director                                             |  | 2011                                                                         
|Guillaume Cerutti (1) (2)      |  | Director                                             |  | 2011                                                                         
|Dr. Francis J.T Fildes (1) (2) |  | Director                                             |  | 2008                                                                         
|Craig Stapleton (1) (2) (3)    |  | Director                                             |  | 2011                                                                         
|Elie Vannier (2)  (3)          |  | Director                                             |  | 2005                                                                         



(1) Member of the
Compensation Committee

(2) Member of the
Audit Committee

(3) Member of the
Nominating and Corporate Governance Committee

(4) Appointed as a
Director in 2001



The following table
sets forth the name and position of the executive officers and senior management of the Registrant.



|Name                   |  | Position                                                                |  | Year
ofInitial
Appointment
|---------------------- |  | ----------------------------------------------------------------------- |  | --------------------------
|Michael S. Anderson    |  | Chief Executive Officer                                                 |  | 2012                      
|Siân Crouzet           |  | Principal Financial Officer                                             |  | 2005                      
|Christian Kalita       |  | Directeur Général
    Délégué Pharmacien Responsable (Chief Pharmacist) |  | 2005                      
|Steven A. Lisi         |  | Senior Vice President, Business
    and Corporate Development           |  | 2012                      
|Gregg Stetsko          |  | Vice President, Research and
    Development                            |  | 2013                      
|Phillandas T. Thompson |  | Senior Vice President and General
    Counsel                           |  | 2013                      



The term of office
of each of the directors expires at the year 2014 ordinary shareholders meeting. With the exception of Mr. Anderson, all of the
directors are independent as defined in NASDAQ Marketplace Rule 5605 (a)(2).



In accordance with
French law governing a société anonyme, the Company is managed by its Board of Directors and by its Directeur
Général (Chief Executive Officer), who has full executive authority to manage the affairs of the Company, subject
to the prior authorization of the Board of Directors or of the Company’s shareholders for certain decisions expressly specified
by law. In addition, the Directeur Général may submit to the Board of Directors the nomination of one or
more, but not more than five Directeurs Généraux Délégués.



The Board of Directors
reviews and monitors Flamel’s business, financial and technical strategies. In addition, under French law, the Board of
Directors prepares and presents the year-end French statutory accounts of the Company to the shareholders and convenes shareholders’
meetings. French law provides that the Board of Directors be composed of no fewer than three and not more than 18 members. The
actual number of directors must be within such limits and may be provided for in the statuts, our bylaws, or determined
by the shareholders at the annual general meeting of shareholders. The number of directors may be increased or decreased only
by decision of the shareholders. No more than a third of directors may be over the age of seventy.



Under French law,
a director may be an individual or a legal entity. A legal entity that serves as a director must appoint an individual, as a ‘permanent
representative,’ who represents such legal entity on the Board. There is no limitation, other than applicable age limits,
on the number of terms that a director may serve. Directors are elected by the shareholders and serve until the expiration of
their respective terms, or until their resignation, death or removal, with or without cause, by the shareholders. Vacancies which
exist on the Board of Directors: (i) because of the resignation or death of a director, may be filled by the Board of Directors
pending the next shareholders’ meeting, if the number of remaining directors after such resignation or death exceeds the
minimum number of directors set forth in the Articles of Association; (ii) for whatever reason, must be filled by the Board of
Directors within three months of such vacancy, if the number of remaining directors after such vacancy is less than the minimum
number of directors set forth in the Articles of Association but exceeds the minimum legal requirement; and (iii) for whatever
reason, must be filled immediately at a shareholders’ meeting if the number of directors after such vacancy is less than
the minimum legal requirement.



55







The Company’s
Board of Directors currently consists of seven members, six of whom are outside directors and whom we believe bring broad experience
to Flamel:



| | · | Mr.
                                         Stephen H. Willard was the Chief Executive Officer through March 12, 2012 and has been
                                         Chairman of the Board of Directors of Flamel Technologies SA since June 2012. Prior to
                                         being asked to serve as CEO by the Board of Directors in June 2005, Mr. Willard was the
                                         Company’s Chief Financial Officer and General Counsel;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Catherine
                                         Bréchignac is the Permanent Secretary for the French National Academy of Sciences,
                                         former Chairperson of the French National Centre for Scientific Research (CNRS), a member
                                         of the American Academy of Arts and Sciences and French Ambassador for Sciences and Technology;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Guillaume
                                         Cerutti is the Chairman and Chief Executive Officer of Sotheby’s France, former
                                         CEO of the French Directorate General for Competition, Consumer Affairs and Repression
                                         of Fraud, (Ministry of Finance and Economy) and currently serves as Chairman of the Board
                                         of the ‘Institut de Financement du Cinéma et des Industries Culturelles’;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Francis
                                         JT Fildes is the former Senior Vice President: Head of Global Development for AstraZeneca,
                                         PLC, former Director of ProStrakan Pharmaceuticals PLC and a current Director of Fildes
                                         Partners Ltd and a Fellow of the Royal Society of Medicine and the Royal Society of Chemistry;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The
                                         Honorable Craig Stapleton is the former United States Ambassador to France and Director
                                         of Carlisle Bank and Lead Director of Abercrombie and Fitch;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Elie
                                         Vannier, is the former Group Managing Director of WALLY, former Chief Operating Officer
                                         of GrandVision SA, and a current Director of Ingénico, Famar, New Cities Foundation,
                                         GPPH and Pharmacie Principale;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Board Practices



Non-executive Directors
of the Company receive fees for their services and are entitled to subscribe for warrants (as described in Note 19.3 to our Consolidated
Financial Statements). Directors’ fees and warrants are proposed by the Board of Directors and are submitted for the approval
of shareholders at the annual general shareholders’ meeting. Non-executive directors are reimbursed, upon request, for expenses
incurred in attending Board meetings. Upon termination, no benefits are provided to non-executive directors.



All directors are
elected by the shareholders at each ordinary shareholders’ meeting approving the annual French statutory accounts of the
Company. A quorum of the Board consists of one-half of the members of the Board of Directors, and actions are generally approved
by a vote of the majority of the members present or represented by other members of the Board of Directors. The Chairman of the
Board does not have the ability to cast a deciding vote in the event of a tie vote. A director may give a proxy to another director,
but a director cannot represent more than one other director at any particular meeting. Members of the Board of Directors represented
by another member at meetings do not count for purposes of determining the existence of a quorum.



Directors are required
to comply with applicable law and Flamel’s statuts. Under French law, directors are liable for violations of French
legal or regulatory requirements applicable to ‘sociétés anonymes’, violation of the Company’s
statuts or mismanagement. Directors may be held liable for such actions both individually and jointly with the other directors.



French law requires
that companies having at least 50 employees for a period of 12 consecutive months has a Comité d’Entreprise
(Employee Representation Committee) composed of representatives elected from among the personnel. The Employee Representation
Committee was formed in 1997. Two of those representatives are entitled to attend all meetings of the Board of Directors of the
Company and shareholders’ meetings, but they do not have any voting rights.



56







The Board has a Compensation
Committee comprised of solely independent directors, namely Francis J.T. Fildes (Chairman), Guillaume Cerutti, Ambassador Craig
Stapleton, and Stephen H. Willard. The Compensation Committee makes recommendations to the Board on the compensation of the executive
officers of the Company, including the Chief Executive Officer. The Board makes the final decisions on compensation. The Board
has an Audit Committee comprised of solely independent directors, namely Guillaume Cerutti (Chairman), Francis J.T. Fildes, Ambassador
Craig Stapleton, and Elie Vannier. The Audit Committee recommends to the Board the selection of Flamel’s independent auditors
and reviews the findings of the auditors and operates in accordance with the Audit Committee Charter, which is reviewed annually.
The Board has a Nominating and Corporate Governance Committee, composed of solely independent directors, namely Ambassador Craig
Stapleton (Chairman), Catherine Bréchignac and Elie Vannier. Each of the Compensation Committee, Audit Committee, and Nominating
and Corporate Governance Committee has a written charter. The Audit Committee Charter outlines the roles and responsibilities
of the Audit Committee which includes appointment, compensation and oversight of the work of any registered public accounting
firm employed by the Company and review of all related party transactions. The Audit Committee also assists the Board in oversight
of: (1) the integrity of the financial statements of the Company; (2) the adequacy of the Company’s system of internal controls;
(3) compliance by the Company with legal and regulatory requirements; (4) the qualifications and independence of the Company’s
independent auditors; and (5) the performance of the Company’s independent and internal auditors. The Company also has an
informal Scientific Advisory Board.



The Chief Executive
Officer of Flamel has full executive authority to manage the affairs of Flamel and has broad powers to act on behalf of Flamel
and to represent Flamel in dealings with third parties, subject only to those powers expressly reserved by law or corporate resolutions
of the Board of Directors or the shareholders. The Chief Executive Officer determines, and is responsible for the implementation
of the goals, strategies and budgets of Flamel, which are reviewed and monitored by the Board of Directors. The Board of Directors
has the power to appoint and remove, at any time, the Chief Executive Officer. The Chief Executive Officer is appointed for a
term of one year, expiring at the end of the general shareholders' meeting called to approve the financial statements for the
prior financial year.



Compensation of
Directors and Officers



During 2013, the
amount of compensation paid or accrued for the benefit of executive officers of the Company and its subsidiaries for services
in all capacities was $531,222 for Michael S. Anderson. In the event that Mr. Anderson’s is terminated for any reason, subject
to him being in office at least one year, other than for cause, Flamel will pay Mr. Anderson €500,000, subject to his signing
a settlement agreement with Flamel. A total of $992,000 has been accrued at December 31, 2013, including applicable social charges.



On June 20, 2013,
a shareholders’ meeting approved a total amount of annual attendance fees to be allocated to the Board of 225,000 Euros,
of which 210,000 Euros was subsequently distributed. For the fiscal year 2013 a total amount of 222,500 Euros ($295,525) was paid
or accrued for the benefit of non-executives for their services in that capacity. Executive directors do not receive compensation
for their service in that capacity.



Executive Officers



The Company’s
executive officers and senior management includes the following individuals:



Mr. Michael S. Anderson
has been Chief Executive Officer of Flamel Technologies SA since his appointment effective on March 13, 2012. He has also served
as Chief Executive Officer of Éclat Pharmaceuticals LLC since its creation in November 2010. Previously Mr. Anderson worked
for KV Pharmaceuticals as President and CEO of its generic business, ETHEX Corporation and President and CEO of Ther-Rx Corporation,
a leader in women’s healthcare. Mr. Anderson also has worked for Schein Pharmaceuticals and started his career at A.H Robins.



Mrs. Sian Crouzet
has been Principal Financial Officer of Flamel Technologies SA since March 2008. She previously worked as Financial Controller
France for McCormick & Company Inc. Mrs. Crouzet also worked five years as an external auditor with Ernst and Young (France
and UK). She is a UK Chartered Accountant and a graduate of Bradford University (UK).



Mr. Christian Kalita
has been Responsible Pharmacist, Director of Quality and Regulatory Affairs of Flamel Technologies SA since 2005. He worked previously
at Skye Pharma as Director of Quality for Europe. Mr. Kalita also worked at Merck Lipha and Merck generics for 10 years in different
roles as Chief Pharmacist, Head of Quality Control Management and Head of Industrial Affairs.



57







Mr. Steve Lisi was
appointed Senior Vice President, Business and Corporate Development in June 2012. Previously, he served as partner at Deerfield
Management, a leading global healthcare focused hedge fund, between 2007 and 2012. Prior to that, he was founder and managing
member/portfolio manager at Panacea Asset Management LLC (New York) between 2005 and 2007, and healthcare portfolio manager at
Millenium Partners (New York) between 2002 and 2005. Between 1994 and 2002, he served as analyst in several companies. Mr. Lisi
is a graduate of Pepperdine University (Malibu, California).



Dr. Gregg Stetsko
was appointed Vice President, Research and Development in February 2013. Dr. Stetsko has over 30 years of experience in the pharmaceutical
business, with roles of increasing responsibility at Sandoz, Sterling Winthrop, Ligand Pharmaceutical, and Amylin, where he was
Vice President of Operations and Global Leader for the Amylin-Lilly Exenatide Alliance. More recently, he was Chief Scientific
Officer for Eagle Pharmaceuticals and a Principal at Tahoe Consulting. Dr. Stetsko earned a B.S. degree in Pharmacy from the University
of Rhode Island and a Ph.D. in Industrial and Physical Pharmacy from Purdue University.



Mr. Phil Thompson
was appointed Senior Vice President and General Counsel in November 2013. Previously, he served as Vice President, Legal Affairs
at West-Ward Pharmaceutical Corp., Vice President, General Counsel at Paddock Laboratories, Inc., Vice President, Strategic Business
Transactions and Assistant General Counsel at KV Pharmaceutical Co, Associate General Counsel at Barr Laboratories, Inc. and a
corporate associate at White & Case, LLP. Mr. Thompson earned a B.A. from Washington University and is also a graduate of
the University of Michigan Law School and the University of Michigan’s Ross School of Business.



Options to Purchase
Securities from the Company



On June 20, 2013,
the shareholders of the Company authorized the issuance of up to 300,000 warrants reserved to a category of beneficiaries comprising
directors and Scientific Advisory Board’s members who are neither authorized agents nor employees of the company, but including
the Chairman of the Board of Directors of which 200,000 have been subscribed for.



On June 20, 2013,
the Board of Directors authorized the Directors of the Company, Mrs. Bréchignac and Mssrs, Cerutti, Fildes, Stapleton,Vannier
and Willard, to subscribe for 45,000 warrants each and two members of the Scientific Advisory Board to subscribe for 10,000 warrants
each at a subscription price of 0.43 Euros per warrant ($0.58)based on the historical exchange rate on the grant date.
Each warrant is exercisable to purchase one share at a price of 4.58 Euros ($6.14) based on the historical exchange rate on the
grant date.



On June 20, 2013 the
shareholders of the Company authorized the creation of a share option plan (the ‘2013 Plan’), which authorizes the
Board of Directors to issue options to subscribe for up to 600,000 Shares. The 2013 Plan is designed to permit the granting of
‘qualifying stock options’ under French tax law principles as well as ‘incentive stock options’ under
the Internal Revenue Code of 1986, as amended. Options granted under the 2013 Plan will have an exercise price based on the market
price of the share, in the form of ADS, on NASDAQ, on the day preceding the date of the Board meeting, provided however, that
such price is not less than 80% of the average market price for the shares on the NASDAQ, in the form of ADSs, during the last
twenty trading days preceding said meeting. In this case, the price of the shares should be equal or superior to 80% of the average
market price for the share on NASDAQ, in the form of ADS, during the last twenty trading days preceding such meeting. The options
granted under the 2013 Plan are exercisable up to ten years from the date of grant.



On June 20, 2013,
the shareholders of the Company authorized the issuance of 200,000 new shares that the Board of Directors was authorized to award
and issue free of charge to officers and employees of the Company as compensation for services rendered. Under the terms of the
awards, the shares are definitively owned by the beneficiaries two years following their allocation, and the beneficiaries are
required to retain the shares for a further two years.



58







Free Share Awards Granted
and Warrants Subscribed from January 1, 2013 to March 31, 2014



|           |  | Stock
    Options |         |  | Exercise
    Price
    in Euros |  |      | Exercise
    Price
    in USD (1) |  |  | Expiration |  |  | Free
    Share
    Awards |                                                       
|---------- |  | ----------------- | ------- |  | ------------------------------- |  | ---- | --------------------------------- |  |  | ---------- |  |  | ------------------------- | ------------------------------------------------------
|Anderson   |  |                   | 80,500  |  |                                 |  | 3.00 |                                   |  |  | 4.07       |  |  |                           | February
                                         2023
|Bourboulou |  |                   | -       |  |                                 |  | -    |                                   |  |  | -          |  |  |                           | -                                                     
|Capelle    |  |                   | 5,000   |  |                                 |  | 3.00 |                                   |  |  | 4.07       |  |  |                           | February
                                         2023
|           |  |                   | 6,000   |  |                                 |  | 5.35 |                                   |  |  | 7.36       |  |  |                           | December
                                         2023
|Chatellier |  |                   | 7,000   |  |                                 |  | 3.00 |                                   |  |  | 4.07       |  |  |                           | February
                                         2023
|           |  |                   | 20,000  |  |                                 |  | 5.35 |                                   |  |  | 7.36       |  |  |                           | December
                                         2023
|Crouzet    |  |                   | 10,000  |  |                                 |  | 3.00 |                                   |  |  | 4.07       |  |  |                           | February
                                         2023
|           |  |                   | 20,000  |  |                                 |  | 5.35 |                                   |  |  | 7.36       |  |  |                           | December
                                         2023
|Kalita     |  |                   | 5,000   |  |                                 |  | 3.00 |                                   |  |  | 4.07       |  |  |                           | February
                                         2023
|           |  |                   | 6,000   |  |                                 |  | 5.35 |                                   |  |  | 7.36       |  |  |                           | December
                                         2023
|Lisi       |  |                   | 25,000  |  |                                 |  | 3.00 |                                   |  |  | 4.07       |  |  |                           | February
                                         2023
|           |  |                   | 95,000  |  |                                 |  | 5.35 |                                   |  |  | 7.36       |  |  |                           | December
                                         2023
|Macke      |  |                   | 7,500   |  |                                 |  | 3.00 |                                   |  |  | 4.07       |  |  |                           | February
                                         2023
|           |  |                   | 20,000  |  |                                 |  | 5.35 |                                   |  |  | 7.36       |  |  |                           | December
                                         2023
|Stetsko    |  |                   | 100,000 |  |                                 |  | 3.00 |                                   |  |  | 4.07       |  |  |                           | February
                                         2023
|           |  |                   | 80,000  |  |                                 |  | 5.35 |                                   |  |  | 7.36       |  |  |                           | December
                                         2023
|Thompson   |  |                   | 100,000 |  |                                 |  | 5.35 |                                   |  |  | 7.36       |  |  |                           | December
                                         2023



(1) Historical value
at date of grant.



Employees



As of December 31,
2013, Flamel had 246 full-time employees and an average of 251 employees over 2013. The following table sets forth the average
number of employees for each of the last three years based on their principal geographic locations.



Employees



|Year End |  | Venissieux (1) |     |  | Pessac (2) |  |     | U.S. (3) |  |  | Total | 
|-------- |  | -------------- | --- |  | ---------- |  | --- | -------- |  |  | ----- | 
|2011     |  |                | 141 |  |            |  | 138 |          |  |  | 3     | 
|2012     |  |                | 125 |  |            |  | 131 |          |  |  | 8     | 
|2013     |  |                | 118 |  |            |  | 124 |          |  |  | 9     | 



(1) Primarily engaged
in research activities

(2) Primarily engaged
in technical and pharmaceutical development activities and manufacturing

(3) Primarily engaged
in administrative, commercial and marketing activities



The Company’s
future will depend on its ability to attract and retain highly qualified personnel. The Company believes that its employee relations
are good. As required by French law, the Company has created an Employee Representation Committee (‘Comité d’Entreprise’)
composed of representatives elected from among the personnel. Two of these representatives are entitled to attend certain meetings
of the Board of Directors of the Company, but they do not have any voting rights.



59







Share Ownership



The following table
sets forth the share ownership of directors and executive officers as of the date indicated:



OWNERSHIP OF SHARES
AS OF MARCH 31, 2014



|Name       |  |  | SharesOwned |         |  | %
    ofOrdinarySharesOutstanding |  |      | Warrants |  |  | Number
    ofOptions |        |  | ExercisePrice inEuros€ |         |         | ExercisePrice inUSD (1)$ |  |       | Expiration |  |  | FreeShareAwards |       |  | Total |                                                         |                                                        | Total% | 
|---------- |  |  | ----------- | ------- |  | --------------------------------- |  | ---- | -------- |  |  | -------------------- | ------ |  | ---------------------- | ------- | ------- | ------------------------ |  | ----- | ---------- |  |  | --------------- | ----- |  | ----- | ------------------------------------------------------- | ------------------------------------------------------ | ------ | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         |         |                          |  |       |            |  |  |                 |       |  |       |                                                         |                                                        |        | 
|Willard    |  |  |             | 449,998 |  |                                   |  | 1.18 | %        |  |  |                      |        |  |                        | 150,000 |         |                          |  | 14.81 |            |  |  | 19.70           |       |  |       | December
                                         2014  |                                                        |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         | 100,000 |                          |  |       | 16.23      |  |  |                 | 19.35 |  |       |                                                         | December
                                         2015 |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         | 100,000 |                          |  |       | 25.39      |  |  |                 | 33.46 |  |       |                                                         | December
                                         2016 |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         | 75,000  |                          |  |       | 4.03       |  |  |                 | 5.17  |  |       |                                                         | December
                                         2018 |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         | 100,000 |                          |  |       | 5.06       |  |  |                 | 7.46  |  |       |                                                         | December
                                         2019 |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         | 100,000 |                          |  |       | 5.29       |  |  |                 | 7.01  |  |       |                                                         | December
                                         2020 |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         | 100,000 |                          |  |       | 3.28       |  |  |                 | 4.39  |  |       |                                                         | December
                                         2021 |        | 
|Bréchignac |  |  |             | 1       |  |                                   |  | 0.00 | %        |  |  |                      |        |  |                        |         |         |                          |  |       |            |  |  |                 |       |  |       |                                                         |                                                        |        | 
|Cerutti    |  |  |             | 1       |  |                                   |  | 0.00 | %        |  |  | 50,000               |        |  |                        |         |         |                          |  | 3.54  |            |  |  | 5.04            |       |  |       | June
                                         2015      |                                                        |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      | 45,000 |  |                        |         |         |                          |  |       | 4.58       |  |  |                 | 6.14  |  |       |                                                         | June
                                         2017     |        | 
|Fildes     |  |  |             | 1       |  |                                   |  | 0.00 | %        |  |  | 50,000               |        |  |                        |         |         |                          |  | 5.44  |            |  |  | 6.68            |       |  |       | June
                                         2014      |                                                        |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      | 50,000 |  |                        |         |         |                          |  |       | 3.54       |  |  |                 | 5.04  |  |       |                                                         | June
                                         2015     |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      | 45,000 |  |                        |         |         |                          |  |       | 4.58       |  |  |                 | 6.14  |  |       |                                                         | June
                                         2017     |        | 
|Stapleton  |  |  |             | 303,251 |  |                                   |  | 0.79 | %        |  |  | 50,000               |        |  |                        |         |         |                          |  | 3.54  |            |  |  | 5.04            |       |  |       | June
                                         2015      |                                                        |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      | 45,000 |  |                        |         |         |                          |  |       | 4.58       |  |  |                 | 6.14  |  |       |                                                         | June
                                         2017     |        | 
|Vannier    |  |  |             | 1       |  |                                   |  | 0.00 | %        |  |  | 45,000               |        |  |                        |         |         |                          |  | 4.58  |            |  |  | 6.14            |       |  |       | June
                                         2017      |                                                        |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         |         |                          |  |       |            |  |  |                 |       |  |       |                                                         |                                                        |        | 
|Anderson   |  |  |             | 26,000  |  |                                   |  | 0.07 | %        |  |  |                      |        |  |                        | 275,000 |         |                          |  | 5.25  |            |  |  | 6.93            |       |  |       | March
                                         2022     |                                                        |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         | 80,500  |                          |  |       | 3.00       |  |  |                 | 4.07  |  |       |                                                         | February
                                         2023 |        | 
|Crouzet    |  |  |             | 44,560  |  |                                   |  | 0.12 | %        |  |  |                      |        |  |                        | 49,990  |         |                          |  | 12.86 |            |  |  | 15.83           |       |  |       | September
                                         2015 |                                                        |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         | 5,000   |                          |  |       | 16.23      |  |  |                 | 19.35 |  |       |                                                         | December
                                         2015 |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         | 3,750   |                          |  |       | 25.39      |  |  |                 | 33.46 |  |       |                                                         | December
                                         2016 |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         | 10,000  |                          |  |       | 5.06       |  |  |                 | 7.46  |  |       |                                                         | December
                                         2019 |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         | 5,000   |                          |  |       | 3.28       |  |  |                 | 4.39  |  |       |                                                         | December
                                         2021 |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         | 10,000  |                          |  |       | 3.00       |  |  |                 | 4.07  |  |       |                                                         | February
                                         2023 |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         | 20,000  |                          |  |       | 5.35       |  |  |                 | 7.36  |  |       |                                                         | December
                                         2023 |        | 
|Kalita     |  |  |             | 29,500  |  |                                   |  | 0.08 | %        |  |  |                      |        |  |                        | 50,000  |         |                          |  | 16.23 |            |  |  | 19.35           |       |  |       | December
                                         2015  |                                                        |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         | 6,500   |                          |  |       | 25.39      |  |  |                 | 33.46 |  |       |                                                         | December
                                         2016 |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         | 5,000   |                          |  |       | 5.06       |  |  |                 | 7.46  |  |       |                                                         | December
                                         2019 |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         | 5,000   |                          |  |       | 5.29       |  |  |                 | 7.01  |  |       |                                                         | December
                                         2020 |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         | 5,000   |                          |  |       | 3.28       |  |  |                 | 4.39  |  |       |                                                         | December
                                         2021 |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         | 5,000   |                          |  |       | 3.00       |  |  |                 | 4.07  |  |       |                                                         | February
                                         2023 |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         | 6,000   |                          |  |       | 5.35       |  |  |                 | 7.36  |  |       |                                                         | December
                                         2023 |        | 
|Lisi       |  |  |             | 117,000 |  |                                   |  |      |          |  |  |                      |        |  |                        | 275,000 |         |                          |  | 4.09  |            |  |  | 5.01            |       |  |       | July
                                         2022      |                                                        |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         | 25,000  |                          |  |       | 3.00       |  |  |                 | 4.07  |  |       |                                                         | February
                                         2023 |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         | 95,000  |                          |  |       | 5.35       |  |  |                 | 7.36  |  |       |                                                         | December
                                         2023 |        | 
|Stetsko    |  |  |             | 20,000  |  |                                   |  | 0.05 | %        |  |  |                      |        |  |                        | 100,000 |         |                          |  | 3.00  |            |  |  | 4.07            |       |  |       | February
                                         2023  |                                                        |        | 
|           |  |  |             |         |  |                                   |  |      |          |  |  |                      |        |  |                        |         | 80,000  |                          |  |       | 5.35       |  |  |                 | 7.36  |  |       |                                                         | December
                                         2023 |        | 
|Thompson   |  |  |             | -       |  |                                   |  |      |          |  |  |                      |        |  |                        | 100,000 |         |                          |  | 5.35  |            |  |  | 7.36            |       |  |       | December
                                         2023  |                                                        |        | 



(1) Historical value
at date of grant



60







ITEM 7. Major Shareholders
and Related Party Transactions



Major Shareholders



The following table
sets forth as of March 31, 2014, the percentage of Ordinary Shares owned by Deerfield Capital Management L.P. and Broadfin Capital
LLC., the persons each known to beneficially own more than 5% of the Company’s Ordinary Shares. The table set forth below
is based on information contained in Schedule 13/Ds or 13/Gs on file with the SEC as of March 31, 2014. Percentages are calculated
based on 38,267,550 total shares, which was the total number of shares outstanding as of March 31, 2014.



|Identity of Person or Group |  | Amount of Ordinary
    Shares Owned |           |     | Percentage of Class | 
|--------------------------- |  | ----------------------------------- | --------- | --- | ------------------- | 
|                            |  |                                     |           |     |                     | 
|Deerfield Capital L.P       |  |                                     | 4,333,475 | (1) |                     | 
|                            |  |                                     |           |     |                     | 
|Broadfin Capital LLC        |  |                                     | 3,767,911 |     |                     | 



|1) | Information
    as to the amount and nature of beneficial ownership was obtained from the Schedule 13G filed with the SEC on December 5, 2012
    by Deerfield Capital L.P. and its affiliates (“Deerfield”).  Deerfield shares beneficial ownership with
    Deerfield Special Situations Funds LP in respect of 532,712 Ordinary Shares, Deerfield Private Design Fund II LP in respect
    of 1,432,534 Ordinary Shares, Deerfield Private Design International II in respect of 1,641,574 Ordinary Shares, and Deerfield
    Management Company L.P. and Deerfield Special Situations Fund International Limited in respect of all 726,655 Ordinary Shares.  Such
    reported amount excludes warrants to purchase ADSs representing 3,300,000 ordinary shares of Flamel held by Breaking Stick
    Holdings, LLC (formerly Éclat Holdings), the manager of which is Deerfield Management Company, LP and of which Deerfield
    Private Design Fund II, L.P. and Deerfield Private Design International II, L.P. are members.  The address of Deerfield
    is 780 Third Avenue, 37th Floor, New York, New York 10017.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2) | Information as
    to the amount and nature of beneficial ownership was obtained from the Schedule 13G/A filed with the SEC on February 14, 2014
    by Broadfin Capital LLC (“Broadfin”).  As of the close of business on December 31, 2012, Broadfin beneficially
    owned 2,491,261 ADRs, (The address of Broadfin is 237 Park Avenue, Suite 900, New York, New York 10017.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             



The Company’s
major shareholders do not have different voting rights. To the best of our knowledge, Flamel Technologies is not directly or indirectly
owned or controlled by another corporation, by any government, or by any other natural or legal person. We are not aware of any
arrangement that may at a subsequent date result in a change of control. As of March 31, 2014, the Company has Ordinary shareholders
of record including the Bank of New York. Approximately 97.4% of the Company’s outstanding shares are represented by American
Depositary Shares (ADS). Approximately 2.07% of the Ordinary Shares are held in France. No record holder resides in France.



61







Significant changes
in the percentage ownership held of record by any of our major shareholders in the last three years, as reported to the SEC, were
as follows:



|Major
                                         Shareholder |  | Filing Date           |  | Ownership
 Percentage |      
|---------------------------------------------------------- |  | --------------------- |  | --------------------- | -----
|                                                           |  |                       |  |                       |      
|BVF, Inc.                                                  |  | February 10, 2010     |  |                       | 14.49
|BVF Partners L.P.                                          |  | February 11, 2011     |  |                       | 11.56
|                                                           |  | January 11, 2012      |  |                       | 7.84 
|                                                           |  | February, 14, 2013    |  |                       | 0.85 
|                                                           |  |                       |  |                       |      
|Broadfin Capital LLC                                       |  | September 28, 2012    |  |                       | 5.12 
|                                                           |  | February 18, 2013     |  |                       | 9.80 
|                                                           |  | June 13, 2013         |  |                       | 7.80 
|                                                           |  | February 14, 2014 [1] |  |                       | 9.85 
|Deerfield Capital L.P.                                     |  | August 31, 2011       |  |                       | 4.90 
|                                                           |  | December 5, 2011      |  |                       | 5.01 
|                                                           |  | January 4, 2012 [1]   |  |                       | 11.32
|                                                           |  |                       |  |                       |      
|O.S.S. Capital Management LP                               |  | February  22, 2010    |  |                       | 23.52
|Schafer Brothers LLC                                       |  | March 31, 2010        |  |                       | 13.1 
|Oscar S. Schafer                                           |  | February 14, 2011     |  |                       | 12.47
|                                                           |  | January 4, 2012       |  |                       | 0.0  
|                                                           |  |                       |  |                       |      
|Visium Asset Management L.P.                               |  | April 9, 2010         |  |                       | 7.58 
|                                                           |  | February 14, 2011     |  |                       | 7.09 
|                                                           |  | February 10, 2012     |  |                       | 7.74 
|                                                           |  | February 14, 2013     |  |                       | 0    



[1]
Percentages have been adjusted to reflect the capital raise completed in March, 2014.



Related Party
Transactions



In
March 2012, we acquired, through our wholly owned subsidiary Flamel US, all of the membership interests ofÉclat
fromÉclat Holdings, an affiliate of our largest shareholder
Deerfield Capital L.P., for consideration primarily consisting of a $12 million senior, secured six-year note that is guaranteed
by us and our subsidiaries and secured by the equity interests and assets of Éclat, two warrants to purchase a total of
3,300,000 ADSs of Flamel and 	commitments to make earnout payments of 20% of any gross profit generated by certain Éclat
launch products and 100% of the gross profit generated by our former product Hycet®, which we sold in 2013, up to a maximum
of $1 million. Upon closing of the acquisition, Mr. Anderson, the Chief Executive Officer of Éclat, was appointed Chief
Executive Officer of Flamel. Mr. Anderson retains a minority interest in Éclat Holdings, renamed Breaking Stick, and does
not have the ability to control this entity by virtue of his minority interest. The senior secured note was repaid in full in
March 2014 using the net proceeds from our public sale of ADSs.



On February 4, 2013,
we entered into a Facility Agreement (the “Deerfield Facility”), through Flamel US with Deerfield Private Design Fund
II, L.P. and Deerfield Private Design International II, L.P. (together, the “Deerfield Entities”) providing for debt
financing of $15 million by the Deerfield Entities (the “Loan”). The loan was repaid in full in March 2014 using the
net proceeds from our public sale of ADSs.



The Deerfield
Facility was subject to certain limitations, and allowed us to use the funds for working capital, including continued investment
in our research and development projects. Interest accrued at 12.5% per annum to be paid quarterly in arrears, commencing on April
1, 2013, and on the first business day of each July, October, January and April thereafter Pursuant to the Deerfield Facility,
we were required to pay the Deerfield Entities a fee of $112,500 for entering into the transaction and to reimburse the Deerfield
Entities for legal costs and expenses incurred in effecting the transaction.



The Deerfield Facility
agreement is attached hereto as Exhibit 4.7 and incorporated herein by this reference.



62







In conjunction with
our entry in the Deerfield Facility, Éclat entered into a Royalty Agreement with Horizon Santé FLML, Sarl and Deerfield
Private Design Fund II, L.P., both affiliates of the Deerfield Entities (together, “Deerfield PDF/Horizon”). The Royalty
Agreement provides for Éclat to pay Deerfield PDF/Horizon 1.75% of the net sales price of the products sold by us and any
of our affiliates until December 31, 2024, with royalty payments accruing daily and paid in arrears for each calendar quarter
during the term of the Royalty Agreement. The Royalty Agreement requires Éclat to take all commercially reasonable efforts
to obtain the necessary regulatory approvals to sell the products in the United States and to market the Products after receiving
such approvals.



The Royalty agreement
is attached hereto as Exhibit 4.8 and incorporated herein by this reference.



We have also entered
into a Security Agreement dated February 4, 2013 with Deerfield PDF/Horizon, whereby Deerfield PDF/Horizon was granted a security
interest in the intellectual property and regulatory rights related to the products to secure the obligations of Éclat
and Flamel US, including the full and prompt payment of royalties to Deerfield PDF/Horizon under the Royalty Agreement.



The Security Agreement
is is attached hereto as Exhibit 4.8 and incorporated herein by this reference.



We have also entered
into two pledge agreements on certain receivables and equipment we own. These agreements are required to be recorded under French
law at the request of Deerfield.



As of December 3,
2013, we and certain of our U.S. subsidiaries entered into a Facility Agreement (the “Broadfin Facility”) with Broadfin
Healthcare Master Fund, Ltd. (“Broadfin”) providing for loans by Broadfin in an aggregate amount not to exceed $15.0
million. The loans under the Facility were secured by a first priority security interest in intellectual property associated with
our Medusa technology and a junior lien on substantially all of the assets of the borrowers, which were previously pledged in
connection with the Deerfield Facility, the Royalty Agreement and the notes issued in connection with the Éclat acquisition.
In addition, we have agreed to grant a junior lien on certain equipment located in France, if such equipment is pledged under
the Deerfield Facility and/or the Éclat note.



Under the terms of
the Broadfin Facility, upon closing Broadfin made an initial loan of $5.0 million and we had the ability to request, at any time
prior to August 15, 2014, up to two additional loans in the amount of $5.0 million each, with funding subject to certain specified
conditions. Loans under the Facility were scheduled to mature upon the earlier to occur of (i) January 31, 2017 and (ii) the repayment
in full of all outstanding amounts under the Deerfield Facility, but in no event prior to November 15, 2015. We had the ability
to prepay the outstanding loans under the Broadfin Facility at any time, without prepayment penalty and the full $5.0 million
outstanding was subsequently repaid using a portion of the net proceeds from our public sale of ADSs in March 2014. Prior to repayment,
interest accrued on the loan under the Broadfin Facility at a rate of 12.5% per annum, payable quarterly in arrears, commencing
on January 1, 2014.



In connection with
entering into the Broadfin Facility, we also entered into a Royalty Agreement with Broadfin, dated as of December 3, 2013 (the
“Broadfin Royalty Agreement”). Pursuant to the Broadfin Royalty Agreement, we are required to pay a royalty of 0.834%
on the net sales of certain products sold by Éclat Pharmaceuticals, LLC and any of its affiliates until December 31, 2024.



Concurrent with entering
into the Braodfin Facility, we also amended the terms of the Deerfield Facility and the agreement governing the Éclat notes
to, among other things, permit the indebtedness and liens under the Braodfin Facility and to grant a junior lien to the respective
lenders on the Medusa Technology.



The Broadfin Facility
and the Broadfin Royalty Agreement are attached hereto as Exhibits [4.10] and [4.11], respectively



Interests of Experts
and Counsel



Not applicable



63







ITEM 8. Financial
Information



Financial Statements



The financial statements
contained in this Annual Report begin on page F-1.



Legal Proceedings



While we may be engaged
in various claims and legal proceedings in the ordinary course of business, we are not involved (whether as a defendant or otherwise)
in and we have no knowledge of any threat of, any litigation, arbitration or administrative or other proceeding that management
believes will have a material adverse effect on our consolidated financial position or results of operations.



On November 9, 2007
a putative class action was filed in the United States District Court for the Southern District of New York against the Company
and certain of its current and former officers entitled Billhofer v. Flamel Technologies, et al. By Order dated March 8, 2013,
the Court granted the Company’s motion to dismiss and the action was dismissed with prejudice and costs. The complaint purported
to allege claims arising under the Securities Exchange Act of 1934 based on certain public statements by the Company concerning,
among other things, a clinical trial involving Coreg CR and seeks the award of damages in an unspecified amount. By Order dated
February 11, 2008, the Court appointed a lead plaintiff and lead counsel in the action. On March 27, 2008, the lead plaintiff
filed an amended complaint that continued to name the Company and two previously named officers as defendants and asserted the
same claims based on the same events as alleged in the initial complaint. On May 12, 2008, the Company filed a motion to dismiss
the action, which the Court denied by Order dated October 1, 2009.  On April 29, 2010, the lead plaintiff moved
to withdraw and substitute another individual as lead plaintiff and to amend the Case Management Order.  On June 22, 2010,
the lead plaintiff voluntarily agreed to dismiss the action against one of the previously named officers. On September 20, 2010,
the Court granted the lead plaintiff’s withdraw and substitution motion and the parties proceeded to engage in fact discovery.
On March 6, 2012, the Court issued its opinion granting the lead plaintiff’s motion for class certification, which was originally
filed in October 2010 and opposed by the Company. On July 30, 2012, the Court issued an opinion denying the lead plaintiff’s
motion, filed on December 15, 2011, to further amend his complaint, which motion sought to substantially revise plaintiff’s
asserted basis for contending that the defendants should be found liable for the statements at issue.  In its opinion, the
Court held that the proposed amended complaint failed to properly plead a viable claim.



In May 2011, we announced
the filing of a lawsuit in the U.S. District Court for the District of Columbia against Lupin for infringement of our US Patent
No. 6,022,562, which is held by the Company and associated with Coreg CR. The lawsuit was dismissed in favor of a lawsuit involving
the same parties for infringement of the same patent that was lodged in the U.S. District Court for the District of Maryland in
May 2011. GSK is a third party defendant in the Maryland lawsuit. The lawsuit is based on the Abbreviated New Drug Application
(ANDA) filed by Lupin seeking permission to manufacture and market a generic version of Coreg CR before the expiration of the
patent. In August 2012, the Company concluded a settlement agreement with Lupin and the parties filed a joint stipulation of dismissal
on September 11, 2012.



In September 2011,
Flamel filed a lawsuit in the U.S. District Court for the District of Maryland against Anchen Pharmaceuticals, Inc., for infringement
of the same patent. The lawsuit is based on the ANDA filed by Anchen seeking permission to manufacture and market a generic version
of Coreg CR before the expiration of the patent. In May 2012, the Company concluded an agreement whereby Anchen agreed to pay
the sum of $400,000 in settlement of the claim.



Dividend Policy



The Company has never
declared or paid a cash dividend on any of its capital stock and does not anticipate declaring cash dividends in the foreseeable
future.



Significant Changes



In March 2012, the
Company acquired all of the membership interests of Éclat, a St. Louis-based specialty pharmaceutical company focused on
the development, approval and commercialization of niche branded and generic pharmaceutical products. For more information about
this transaction, see ‘Item 10. Additional Information – Material Contracts’. In March the Company closed
an offering whereby a total of 12.4 million ADSs, representing Company’s ordinary shares, were sold in an underwritten public
offering resulting in net proceeds (after commissions) of $113.6 million.



64







ITEM 9. The Offer
and Listing



The principal trading
market for the Company’s securities in ADSs is the NASDAQ Global Market. Each ADS represents one Share, nominal value 0.122
Euros. Each ADS is evidenced by an ADR. The Bank of New York is the Depositary for the ADRs. As of December 31, 2013, there were
24,499,792 ADSs outstanding in the United States and there were 30 holders of ADSs on record. As of December 31, 2013, there
were 25,612,550 Shares outstanding. As a result of the public offering completed in March 2014, the number of ADSs and shares
outstanding was significantly increased to 37,259,367 ADSs and 38,267,550 shares as of March 31, 2014.



The following table
shows the high and low closing sales prices of the ADSs on the NASDAQ Market for the periods indicated.



|     |  | Price Per ADS (U.S.$) |     
|---- |  | --------------------- | ----
|Year |  | High                  |     
|     |  |                       |     
|2009 |  |                       | 9.67
|2010 |  |                       | 9.60
|2011 |  |                       | 6.97
|2012 |  |                       | 7.67
|2013 |  |                       | 8.21



|                  |  | Price Per ADS (U.S.$) |      
|----------------- |  | --------------------- | -----
|Quarter Ended     |  | High                  |      
|1st Quarter, 2011 |  |                       | 6.97 
|2nd Quarter, 2011 |  |                       | 6.63 
|3rd Quarter, 2011 |  |                       | 5.44 
|4th Quarter, 2011 |  |                       | 5.26 
|1st Quarter, 2012 |  |                       | 7.67 
|2nd Quarter, 2012 |  |                       | 5.65 
|3rd Quarter, 2012 |  |                       | 5.50 
|4th Quarter, 2012 |  |                       | 4.25 
|1st Quarter, 2013 |  |                       | 4.59 
|2nd Quarter, 2013 |  |                       | 6.28 
|3rd Quarter, 2013 |  |                       | 6.66 
|4th Quarter, 2013 |  |                       | 8.21 
|1st Quarter, 2014 |  |                       | 14.70



|                  |  | Price Per ADS (U.S.$) |      
|----------------- |  | --------------------- | -----
|Month Ended       |  | High                  |      
|October 31, 2013  |  |                       | 7.56 
|November 30, 2013 |  |                       | 7.34 
|December 31, 2013 |  |                       | 8.21 
|January 31, 2014  |  |                       | 11.00
|February 28, 2014 |  |                       | 10.80
|March 31, 2014    |  |                       | 14.70



65







ITEM 10. Additional
Information



Memorandum and
Articles of Association



For a general description
of these documents, see ‘Description of Share Capital’ in the Company’s registration statement on Form F-1,
as filed with the U.S. Securities and Exchange Commission on April 19, 1996, registration number 333-03854, which is incorporated
by reference. There have been no changes to these documents. No more than a third of the Directors may be over the age of seventy.



Ownership of Shares
by Non-European Union Persons



A ‘declaration
administrative’ or administrative declaration is required in The Republic of France to be filed with the French Ministry
of the Economy, Finance and the Budget at the time of the acquisition of a controlling interest in Flamel by any non-EU resident
or group of non-EU residents acting in concert or by any EU resident controlled by a non-EU resident. With respect to the acquisition
(by a EU resident or a non-EU resident) of a controlling interest in a company that could affect ‘public health,’
the administrative declaration is replaced by a procedure that requires prior declaration of the acquisition to the French Ministry
of Economy, Finance and the Budget with the ability for such Ministry to oppose the investment during a one-month period. As it
is a pharmaceutical company, the acquisition of a controlling interest in Flamel could be deemed to affect ‘public health.’



Under existing administrative
rulings, ownership of 20% or more of a listed company’s share capital is regarded as a controlling interest, but a lower
percentage may be held to be a controlling interest in certain circumstances (such as when the shareholder has the ability to
elect members of the board of directors). No administrative declaration is required where an EU resident or group of EU residents
acts in concert to acquire a controlling interest in Flamel provided that the acquiring party or parties satisfy the requirements
of EU residency.



Under French law,
there is no limitation on the right of non-resident or foreign shareholders to vote securities of a French company.



Material Contracts



We have entered
into certain material contracts in connection with the Éclat acquisition and other debt financing. See ‘Item 7:
Major Shareholders and Related Party Transactions’. The following is a summary of the material terms of these contracts
that is qualified in its entirety by reference to the actual documents attached as exhibits to this Annual Report on Form 20-F
and for those incorporated by reference herein:



Note Agreement
and Note



Under the terms of
a Note Agreement among Flamel, Flamel US and Éclat Holdings dated March 13, 2012, Flamel US issued a $12 million senior
note to Éclat Holdings that was guaranteed by Flamel and its subsidiaries and secured by the membership interests and assets
of Éclat. The note was payable over six years only if certain contingencies are satisfied. The note accrued interest at
an annual rate of 7.5%, payable in kind, until one Éclat launch product is approved by the FDA. After FDA approval of one
Éclat launch product is obtained, any interest previously capitalized was payable in cash no later than nine months following
FDA approval, and any future interest was payable in cash when due. The note was repaid in full in March 2014.



Warrants to
Purchase ADSs

In addition to the
note, Flamel also issued to Éclat Holdings, two six-year warrants to purchase an aggregate of 3,300,000 ADSs, each representing
one ordinary share, of Flamel. One warrant is exercisable for 2,200,000 ADSs at an exercise price of $7.44 per ADS, and the other
warrant is exercisable for 1,100,000 ADSs at an exercise price of $11.00 per ADS. In June 2012, shareholder approval was obtained
for issuance of the warrants. In connection with the issuance of the warrants, Flamel entered into a registration rights agreement
with Éclat Holdings dated March 13, 2012, pursuant to which Flamel filed, on September 18, 2012, a registration statement
with the SEC covering the resale of the ADSs issuable upon exercise of the warrants.



66







Deerfield Facility
Agreement



The Deerfield
Facility was effective as of December 31, 2012, and allowed Flamel to use the funds for working capital, including continued investment
in its research and development projects. The aggregate principal amount of the Loan was required to be repaid over four years
as follows: 10% on July 1, 2014, and 20%, 30% and 40% on the second, third, and fourth anniversary, respectively, of the original
disbursement date of the Loan. Notwithstanding the foregoing, the entire principal amount of the Loan could be repaid in whole
or in part on any interest payment date occurring after December 31, 2013. Interest accrued at 12.5% per annum to be paid quarterly
in arrears, commencing on April 1, 2013, and on the first business day of each July, October, January and April thereafter. All
amounts under the Deerfield Facility were repaid in full in March 2014.



Deerfield Royalty
Agreement



The Royalty Agreement,
dated December 31, 2012, provides for Éclat to pay Deerfield PDF/Horizon 1.75% of the net sales price of the Products sold
by Flamel and any of its affiliates until December 31, 2024, with royalty payments accruing daily and paid in arrears for each
calendar quarter during the term of the Royalty Agreement. The Royalty Agreement requires Éclat to take all commercially
reasonable efforts to obtain the necessary regulatory approvals to sell the Products in the United States and to market the Products
after receiving such approvals.



Broadfin Facility
and Royalty Agreement



The Broadfin Facility
was effective as of December 3, 2013 and allowed Flamel to use the funds for working capital, including continued investment in
its research and development projects. Under the terms of the Broadfin Facility, upon closing Broadfin made an initial loan of
$5.0 million and we had the ability to request, at any time prior to August 15, 2014, up to two additional loans in the amount
of $5.0 million each, with funding subject to certain specified conditions. Loans under the Facility were scheduled to mature
upon the earlier to occur of (i) January 31, 2017 and (ii) the repayment in full of all outstanding amounts under the Deerfield
Facility, but in no event prior to November 15, 2015. We had the ability to prepay the outstanding loans under the Broadfin Facility
at any time, without prepayment penalty and the full $5.0 million outstanding was subsequently repaid in March 2014. Prior to
repayment, interest accrued on the loan under the Broadfin Facility at a rate of 12.5% per annum, payable quarterly in arrears,
commencing on January 1, 2014.



In connection
with entering into the Broadfin Facility, we also entered into the Broadfin Royalty Agreement. Pursuant to the Broadfin Royalty
Agreement, we are required to pay a royalty of 0.834% on the net sales of certain products sold by Éclat Pharmaceuticals,
LLC and any of its affiliates until December 31, 2024.



Exchange Controls



The payment of any
dividends to foreign shareholders must be effected through an authorized intermediary bank. All registered banks and credit establishments
in the Republic of France are authorized intermediaries. Under current French exchange control regulations, there are no limitations
on the amount of cash payments that may be remitted by Flamel to residents of the United States. Laws and regulations concerning
foreign exchange controls do require, however, that all payments or transfers of funds made by a French resident to a non-resident
be handled by an authorized intermediary bank.



Taxation



The following is a
discussion of French and U.S. federal income tax consequences of owning and disposing of Flamel Ordinary Shares or Flamel ADSs.
This description is only relevant to holders of Flamel Ordinary Shares or Flamel ADSs who are not residents of France and do not
hold their shares in connection with a permanent establishment or a fixed base in France through which the holders carry on a
business or perform personal services.



This description may
not address all aspects of French tax laws that may be relevant in light of the particular circumstances of individual holders
of Flamel Ordinary Shares or Flamel ADSs. It is based on the applicable tax laws, regulations and judicial decisions as of the
date of this annual report, and on the Convention between the United States of America and the Republic of France for the Avoidance
of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital dated as of August 31, 1994
entered into force on December 30, 1995, and the 2004 and 2009 Protocols amending the Treaty, all of which are subject to change,
possibly with retroactive effect, or different interpretations. This discussion refers to the treaty between the United
States and France described above, and the two Protocols together as the ‘Treaty’.



The following discussion
should be considered only as a summary and does not purport to be a complete analysis of all potential tax effects of the purchase
or ownership of the Flamel Ordinary Shares or Flamel ADSs. This summary does not address all potential tax implications that may
be relevant as a holder, in light of particular circumstances.



67







Tax Consequences
to Non-U.S. Holders





The following
discussion applies to holders of Flamel Ordinary Shares that are not ‘U.S. Holders,’ as defined below. Holders of
Flamel Ordinary Shares should consult their tax advisor concerning the French tax consequences.



Taxation on
Sale or Disposal of Flamel Ordinary Shares



Generally, a holder
of Flamel Ordinary Shares will not be subject to any French income tax or capital gains tax when the holder sells or disposes
of Flamel Ordinary Shares if all of the following cumulative conditions apply:



| | · | the
                                         holder is not a French resident for French tax purposes;
| | - | -----------------------------------------------------------------------------------------------------



| | · | the
                                         holder has held not more than 25% of Flamel’s dividend rights, known as droits
                                         aux bénéfices sociaux, at any time during the preceding five years,
                                         either directly or indirectly;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | the
                                         holder is not a resident of a non-cooperative jurisdiction as defined below; and
| | - | -----------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | Flamel
                                         is not considered as a real estate company.
| | - | -------------------------------------------------------------------------------------------



If a double tax treaty
between France and the countryof residence of a holder of Flamel Ordinary Shares contains more favorable provisions, a
holder may not be subject to any French income tax or capital gains tax when the holder sells or disposes of any Flamel Ordinary
Shares, even if one or all of the above statements does not apply to the holder.



Subject to various
conditions, foreign states, international organizations and a number of foreign public bodies are not considered as French residents
for these purposes.



As from January 1,
2012, transfers of a listed company's shares are subject to French registration or transfer taxes when they are documented by
a written deed, irrespective of whether that deed is executed in France or outside of France. A tax credit will be available (up
to the extent of the transfer taxes triggered in France) in order to shelter the foreign transfer tax liability (if registration
is also required under foreign law). From January 1, 2012 to July 31, 2012, the following rates apply to the transfer of listed
company shares: (i) 3% for the portion of the value below €200,000; (ii) 0.5% for the portion of the value between €200,000
and €500,000,000 and; (iii) 0.25% for the portion of the value above €500,000,000. As from August 1, 2012, a unique
0.10% tax rate will apply to the transfer of listed company's shares.



Taxation of
Dividends



In France, companies
may only pay dividends out of income remaining after tax has been paid.



French companies must,
in principle, deduct a 30% withholding tax from dividends paid to non-residents. As from January 1, 2008, the rate of this withholding
tax has been reduced to 21% for dividends paid to EU, Norway Iceland and Liechtenstein residents individuals.



In addition, anti-avoidance
rules regarding transactions concluded with non-cooperative jurisdictionsprovide that dividends distributed to non-cooperative
jurisdictions residents as of March 1, 2010, as per the criteria defined by the French tax code, would be subject to a 55% withholding
tax.



The following countries
were considered by the French tax authorities as non-cooperative jurisdictions in 2012:



|Botswana | Guatemala            | Montserrat | Niue       
|-------- | -------------------- | ---------- | -----------
|Brunei   | Marshall
    Islands | Nauru      | Philippines



Under most double
tax treaties between France and other countries, the rate of this withholding tax may be reduced or eliminated in some circumstances.
Generally, if dividends are subject to a French withholding tax, a holder who is a non-French resident is subsequently entitled
to a tax credit in that holder’s country of residence for the amount of tax actually withheld.



However, France has
entered into tax treaties with various countries under which qualifying residents are entitled to obtain from the French tax authorities
a reduction (generally to 15% or 5%) or an elimination of the French withholding tax.



68







If these arrangements
apply to a shareholder, Flamel will withhold tax from the dividend at the lower rate, provided that the shareholder has established,
before the date of payment of the dividend, that the shareholder is entitled to the lower rate and has complied with the filing
formalities. Otherwise, Flamel must withhold tax at the full rate of 30% (for other than European Union, Iceland, Norway or Liechtenstein
residents individuals) or 21% (for European Union, Iceland, Liechtenstein or Norway residents individuals), and the shareholder
may subsequently claim the excess tax paid.



Estate and Gift
Tax



France imposes estate
and gift tax on shares of a French company that are acquired by inheritance or gift, this tax applying without regards to the
residence of the transferor. However, France has entered into estate and gift tax treaties with certain countries pursuant to
which, provided that certain conditions are met, residents of the treaty country may be exempt from such tax or obtain a tax credit.



Non-residents should
consult their own tax advisors regarding whether French estate and gift tax would apply to them and whether they might be able
to claim an exemption or tax credit pursuant to an applicable tax treaty.



Wealth Tax



French individual
residents are taxable on their worldwide assets. Non-resident individuals may be subject to French wealth tax (impôt
de solidarité sur la fortune) only on their assets which are located in France. However, financial investments made
by non-resident individuals, other than in real estate companies, are exempt from wealth taxes as long as the individuals own
less than 10% of the French company’s capital stock, either directly or indirectly, provided that their shares do not enable
them to exercise influence on the French company.



Even if these conditions
are not satisfied, a non-French resident holder may be exempt from French wealth tax if such holder is entitled to more favourable
provisions pursuant to a double tax treaty between France and the holder’s country of residence.



Tax Consequences
to U.S. Holders



The following is
a discussion of the U.S. federal income tax consequences of the ownership and disposition of Flamel Ordinary Shares or Flamel
ADSs by a U.S. Holder. For purposes of this discussion a “U.S. Holder” is a beneficial owner of the Flamel Ordinary
Shares or Flamel ADSs who is (i) an individual citizen or resident of the United States; (ii) a corporation created or organized
in the United States or under the laws of the United States or any political subdivision thereof; (iii) an estate whose income
is includible in gross income for United States federal income tax purposes regardless of its source; or (iv) a trust whose administration
is subject to the primary supervision of a United States court and over which one or more United States persons have the authority
to control all substantial decisions of the trust. This discussion does not apply to a U.S. Holder who is also a resident of France
for French tax purposes.



If an entity that
is treated as a partnership for United States federal income tax purposes holds Flamel Ordinary Shares or Flamel ADSs, the tax
treatment of a partner of such partnership will generally depend on the status of the partner and upon the activities and organization
of the partnership. If you are a partner of such a partnership you are urged to consult your tax advisor.



This summary is
based in part upon the representations of the custodian and the assumption that each obligation in the Depositary Agreement with
the Bank of New York relating to our ADSs and any related agreement will be performed in accordance with its terms.



The following is a
general summary of the principal tax effects on U.S. Holders for purposes of U.S. federal income tax and French tax, if all of
the following four points apply:



| | · | the
                                         U.S. Holder owns, directly, indirectly, or constructively, less than 10% of Flamel’s
                                         share capital;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         U.S. Holder is entitled to the benefits of the Treaty (including under the ‘limitations
                                         on benefits article of the Treaty);
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         U.S. Holder holds Flamel Shares as capital assets; and
| | - | ---------------------------------------------------------------------------------------------------



69







| | · | the
                                         U.S. Holder’s functional currency is the U.S. dollar.
| | - | --------------------------------------------------------------------------------------------------



For purposes of the
Treaty and the U.S. Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), Holders of Flamel ADSs
will be treated as the owner of the Flamel Ordinary Shares represented by such ADSs.



Special rules may
apply to United States expatriates, insurance companies, pass-through entities and investors in such entities, tax-exempt organizations,
financial institutions, persons subject to the alternative minimum tax, securities broker-dealers, persons who use the mark-to-market
method of accounting for their securities holdings, and persons holding their Flamel Ordinary Shares or Flamel ADSs as part of
a conversion or other integrated transaction, among others. Special rules relevant to those holders are not discussed in herein.



Holders of Flamel
Ordinary Shares or Flamel ADSs should consult their own tax advisers as to the particular tax consequences to them of owning Flamel
Ordinary Shares or Flamel ADSs, including their eligibility for benefits under the Treaty, the applicability and effect of U.S.
federal, state, local, non-U.S. and other tax laws and any possible changes in tax law.



Taxation of
Dividends



Withholding
Tax



Dividends paid to
non-residents by French companies are subject to a 30% French withholding tax. Under the Treaty, this withholding tax is reduced
to 15% if a U.S. Holder’s ownership of Flamel Shares is not effectively connected with a permanent establishment or a fixed
base that the U.S. Holder has in France.



Dividends paid to
a U.S. Holder by French companies are immediately subject to a reduced rate of 15%, provided that such U.S. Holder establishes
before the date of payment that he is a U.S. resident under the Treaty by completing and providing the depositary with a simplified
certificate (the “Certificate”) in accordance with the French tax guidelines (4 J–1-05 released on February
25, 2005). In order to establish U.S. residency for this Certificate, the U.S. resident should submit a Form 8802 (Application
for United States Residency Certification) for certification from the U.S. Internal Revenue Service (“IRS”).
The Form 8802 is used to request Form 6166, a letter of U.S. residency certification for purposes of claiming benefits under an
income tax treaty. The application for the Form 8802 requires a non-refundable user fee of $85 USD and should be submitted by
mail with the application at least 45 days prior to the date the certification is needed.



Dividends paid to
a U.S. Holder that has not filed the Certificate before the dividend payment date will be subject to French withholding tax at
the rate of 30%. The tax withheld in excess of 15% can be reclaimed, provided that such U.S. Holder duly completes and provides
the French tax authorities with the relevant form described in the tax guidelines mentioned above (the “Form”)
before December 31 of the second calendar year following the year during which the dividend is paid. U.S. Pension Funds (as defined
by Sections 401(a), 401(b), 403(b) and 457 of the Internal Revenue Code) and other Tax-Exempt Entities (as defined by Section
501(c) 3) of the Internal Revenue Code) are subject to the same general filing requirements as other U.S. Holders except that
they may be required to supply additional documentation evidencing their entitlement to these benefits.



The Certificate and
the Form, together with instructions, will be provided by the depositary to all U.S. Holders registered with the depositary. The
depositary will arrange for the filing with the French Tax authorities of all Certificates properly completed and executed by
U.S. Holders of Shares and returned to the depositary in sufficient time that they may be filed with French Tax authorities before
the distribution so as to obtain an immediate reduced withholding tax rate.



70







U.S. Federal
Income Tax



For U.S. federal
income tax purposes, subject to the rules discussed below under the section titled “PFIC Status,” the gross amount
of a dividend paid by Flamel, including any French tax withheld, will be included in each U.S. Holder’s gross income as
dividend income when payment is received by them (or the custodian, if the U.S. Holder owns Flamel ADSs), to the extent they are
paid or deemed paid out of Flamel’s current or accumulated earnings and profits as calculated for U.S. federal income tax
purposes.



Dividends paid by
Flamel will not give rise to any dividends received deduction.  They will generally constitute foreign source “passive”
income for “foreign tax credit” purposes.  For certain recipients, dividends will constitute foreign source “general”
income for foreign tax credit purposes



Under current U.S.
federal tax law, as a general matter, amounts distributed as dividends by Flamel with respect to Flamel Ordinary Shares or Flamel
ADSs paid in taxable years beginning before January 1, 2013 will be eligible to be treated as “qualified dividend income”
that is subject to a U.S. federal income tax at a maximum rate of 15% provided both that certain minimum holding period and other
requirements are met (i.e. Flamel meets the requirements of a “qualified foreign corporation” under the US federal
income tax rules)and that Flamel is not treated as a PFIC (as defined below under the section titled “PFIC Status”).



For U.S. federal income
tax purposes, the amount of any dividend paid in Euros, including any French withholding taxes, will be equal to the U.S. dollar
value of the Euro on the date the dividend is included in income, regardless of whether the payment is in fact converted into
U.S. dollars. A U.S. Holder will generally be required to recognize foreign currency gain or loss when the U.S. Holder sells or
disposes of the Euros. A U.S. Holder may also be required to recognize foreign currency gain or loss if that U.S. Holder receives
a refund under the Treaty of tax withheld in excess of the Treaty rate. This foreign currency gain or loss will generally be U.S.
source ordinary income or loss.



To the extent that
any dividends paid exceed Flamel’s current and accumulated earnings and profits as calculated for U.S. federal income tax
purposes, the distribution generally will be treated as follows:



| | · | First,
                                         as a tax-free return of capital, to be applied against and reduce in the adjusted basis
                                         of a U.S. Holder’s Flamel Ordinary Shares or Flamel ADSs. Accordingly, this adjustment
                                         will increase the amount of gain, or decrease the amount of loss, which a U.S. Holder
                                         will recognize if such U.S. Holder later disposes of those Flamel Ordinary Shares or
                                         Flamel ADSs, as the case may be.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Second,
                                         the balance of the dividend in excess of the adjusted basis will be taxed as capital
                                         gain recognized on a sale or exchange.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



French withholding
tax (which, as described above), is imposed on at a rate of 15% under the Treaty generally is treated for U.S. federal income
tax purposes as payment of a foreign income tax.  A U.S. Holder may take this amount as a credit or deduction against the
U.S. Holder’s U.S. federal income tax liability.  The foreign tax credit is subject to various conditions and limitations,
including minimum holding period requirements.  Special rules apply in determining the foreign tax credit limitation with
respect to dividends that are subject to the maximum 15% tax rate applicable to qualified dividend income.



To the extent a
refund of French tax withheld with respect to dividends is available under the Treaty or otherwise under French law, the amount
of tax withheld that is refundable will not be eligible for credit against your U.S. federal income tax liability.



Taxation of
Capital Gains



French Tax.A U.S. Holder who is a resident of the United States for purposes of the Treaty will not be subject to French tax on any
capital gain if such U.S. Holder sells or exchanges its Flamel Ordinary Shares or Flamel ADSs, unless the U.S. Holder has a permanent
establishment or fixed base in France and the Flamel Ordinary Shares or Flamel ADSs the U.S. Holder sold or exchanged were attributable
to that permanent establishment or fixed base. Special rules apply to individuals who are residents of more than one country.



U.S. Income
Tax.In general, for U.S. federal income tax purposes, a U.S. Holder will recognize capital gain or loss if the U.S. Holder
sells or exchanges its Flamel Ordinary Shares or Flamel ADSs. Any such gain or loss generally will be U.S. source gain or loss.
If a U.S. Holder is an individual, any capital gain will generally be subject to U.S. federal income tax at preferential rates
if the U.S. Holder meets applicable minimum holding period requirements.



71







PFIC Status.
Flamel believes that it will not be treated as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes,
for the current taxable year or for future taxable years. However, an actual determination of PFIC status is factual and cannot
be made until the close of the applicable taxable year. Flamel will be a PFIC for any taxable year in which either:



| | · | 75%
                                         or more of its gross income is passive income; or
| | - | ----------------------------------------------------------------------------------------------

| | · | its
                                         assets which produce passive income or which are held for the production of passive income
                                         amount to at least 50% of the value of its total assets on average.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If Flamel were to
be treated as a PFIC, the tax consequences applicable to distributions on Flamel Ordinary Shares and Flamel ADSs, and any gains
a U.S. Holder realizes when the U.S. Holder disposes of such Flamel Ordinary Shares or Flamel ADSs, may be less favorable to the
U.S. Holder. In addition, a U.S. Holder would be required to file Form 8621 with respect to its interest in Flamel. Each U.S.
Holder should consult its own tax advisors regarding the PFIC rules and their effect on the U.S. Holder if they purchase Flamel
Ordinary Shares or Flamel ADSs.



French Estate
and Gift Taxes



Under ‘The Convention
Between the United States of America and the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Estates, Inheritance and Gifts of November 24, 1978,’ if a U.S. Holder transfers their
Flamel Shares by gift, or if they are transferred by reason of the U.S. Holder’s death, that transfer will only be subject
to French gift or inheritance tax if one of the following applies:



| | · | the
                                         U.S. Holder is domiciled in France at the time of making the gift, or at the time of
                                         the U.S. Holder’s death; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the
                                         U.S. Holder used the Flamel Ordinary Shares or Flamel ADSs in conducting a business through
                                         a permanent establishment or fixed base in France, or the U.S. Holder held the Flamel
                                         Ordinary Shares or Flamel ADSs for that use.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



French Wealth
Tax



The French wealth
tax does not generally apply to Flamel Ordinary Shares or Flamel ADSs if the U.S. Holder is treated as a ‘resident’
of the United States for purposes of the Treaty. and if the U.S. Holder does not own a substantial interest (participation
substantielle) in Flamel. Pursuant to article 23 §2 of the Treaty, “an individual is considered to have a substantial
interest if he or she owns, alone or with related persons, directly or indirectly, shares, rights, or interests the total of which
gives right to at least 25% of the corporate earnings”.



Expansion of
U.S. Medicare Tax



The U.S. Health Care
and Reconciliation Act of 2010 requires that, in certain circumstances, certain U.S. Shareholders that are individuals, estates,
and trusts pay a 3.8% tax on "net investment income," which includes, among other things, dividends on and gains from
the sale or other disposition of stock, effective for taxable years beginning after December 31, 2012. Prospective investors should
consult their own tax advisors regarding this new legislation.



United States
Information Reporting and Backup Withholding



Dividend payments
made by us (Flamel) to a U.S. Holder in respect of Flamel Ordinary Shares or Flamel ADSs and proceeds from the sale or disposal
of a U.S. Holder’s Flamel Ordinary Shares or Flamel ADSs may be subject to information reporting to the Internal Revenue
Service.



U.S. federal backup
withholding generally is a withholding tax (currently imposed at a rate of 28%) on some payments to persons that fail to furnish
required information. Backup withholding will not apply to a U.S. Holder who furnishes a correct taxpayer identification number
or certificate of foreign status and makes any other required certification, or who is otherwise exempt from backup withholding.
Any U.S. persons required to establish their exempt status generally must file Internal Revenue Service Form W-9, entitled Request
for Taxpayer Identification Number and Certification. Amounts withheld as backup withholding may be credited against a U.S. Holder’s
U.S. federal income tax liability. A U.S. Holder generally may obtain a refund of any excess amounts withheld under the backup
withholding rules by filing the appropriate claim for refund with the Internal Revenue Service and furnishing any required information
within the appropriate amount of time.



72







Recently Enacted
Legislation Related to Disclosure of Information with Respect to Foreign Financial Assets



Recently enacted legislation
in the U.S. requires a U.S. Holder that holds an interest in “specified foreign financial assets” to disclose information
to the IRS related to these holdings. These new disclosure requirements are effective for taxable years beginning after March
18, 2010, and apply for any year in which the aggregate value of all such holdings is greater than $50,000. For these purposes,
“specified foreign financial assets” may include (i) depository or custodial account maintained by foreign financial
institutions and foreign investment vehicles, (ii) interests in, or securities issued by, non-U.S. persons, and (iii) other financial
instruments or contracts held for investment where the issuer or counterparty is a non-U.S. person. In addition, a U.S. Holder
may be required to furnish information to avoid a presumption that the aggregate value of the U.S. Holder’s holdings of
specified foreign financial assets is in excess of $50,000. A U.S. Holder who fails to comply with these requirements may be subject
to penalties. Investors should consult their own tax advisors regarding the effect of this legislation in their particular circumstances.



Documents on Display



Flamel is subject
to the informational requirements of the Securities Exchange Act of 1934, as amended, and, in accordance with those requirements,
files reports and other information with the U.S. Securities and Exchange Commission. Copies of reports and other information,
when so filed, may be inspected free of charge and may be obtained at prescribed rates at the public reference facility maintained
by the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. You may also access documents filed with the SEC at its website www.sec.gov. Certain of the reports
that the Company files with the Commission may be available from time to time on the Company’s internet website, at www.flamel.com.
Flamel is not incorporating the contents of its or the SEC’s websites or the website of any other person into this document.



ITEM 11. Quantitative
and Qualitative Disclosures About Market Risk



The Company conducts
a portion of its business transactions in U.S. dollars. For the year ended December 31, 2013 revenues denominated in U.S. dollars
represented 46% of total revenues. As a result, the Company’s financial results could be significantly affected by the fluctuation
of the Euro relative to the U.S. dollar. Specifically, 34.6% of the Company’s cash and cash equivalents, totalling $2.3
million as of December 31, 2013, and all of the Company’s marketable securities, totalling $0.4 million, as of December
31, 2013, are denominated in Euros, as are the vast majority of the Company’s expenses. If the dollar were to strengthen
by 10% versus the Euro, there would be a corresponding negative effect on these items of $0.2 million in our balance sheet. Conversely,
if the dollar were to weaken by 10% versus the Euro, there would be a positive effect on these items of $0.3 million in our balance
sheet. See ‘Item 5. Operating and Financial Review and Prospects - Overview.’



We believe the Company
is not exposed to interest rate risk.



ITEM 12. Description
of Securities Other Than Equity Securities



ITEM 12.A Debt
Securities



Not applicable.



ITEM 12.B Warrants
and Rights



Not applicable.



ITEM 12.C Other
Securities



Not applicable.



ITEM 12.D American
Depositary Shares



Charges of Depositary



73







The Company will pay
fees, reasonable expenses and out-of-pocket charges of the depositary and those of any registrar only in accordance with agreements
in writing entered into between the Depositary and the Company from time to time. The following charges may be incurred by holders
depositing or withdrawing shares or by any party surrendering receipts or to whom receipts are issued (including, without limitation,
issuance pursuant to a stock dividend or stock split declared by the Company or an exchange of stock regarding the receipts or
deposited securities or a distribution of receipts pursuant to the terms of the deposit agreement):



|Amount: |  | For:                                                                                                                                                                                             
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.      |  | $5.00 (or less) per 100 ADSs
    (or portion of 100 ADSs)                                                                                                                                        
|        |  |                                                                                                                                                                                                  
|2.      |  | $0.05 (or less) per ADS                                                                                                                                                                          
|        |  |                                                                                                                                                                                                  
|3.      |  | A fee equivalent to the fee that would be
    payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs                                    
|        |  |                                                                                                                                                                                                  
|4.      |  | $1.50 or less per certificate                                                                                                                                                                    
|        |  |                                                                                                                                                                                                  
|5.      |  | $0.05 (or less) per ADS per calendar year                                                                                                                                                        
|        |  |                                                                                                                                                                                                  
|6.      |  | Registration or transfer fees                                                                                                                                                                    
|        |  |                                                                                                                                                                                                  
|7.      |  | Expenses of the Depositary                                                                                                                                                                       
|        |  |                                                                                                                                                                                                  
|8.      |  | Taxes and other governmental charges the
    Depositary or the Custodian has to pay on any ADR or share underlying an ADR, for example, stock transfer taxes, stamp duty
    or withholding taxes
|        |  |                                                                                                                                                                                                  
|9.      |  | Expenses of the Depositary in converting
    foreign currency to U.S. dollars                                                                                                                    
|        |  |                                                                                                                                                                                                  
|10.     |  | Any charges incurred by the Depositary or
    its agents for servicing the deposited securities.                                                                                                 



74







PART
II



ITEM 13. Defaults,
Dividend Arrearages and Delinquencies



There has not been
any material default with respect to any indebtedness of the Company.



ITEM 14. Material
Modifications to the Rights of Security Holders and Use of Proceeds



Not applicable.



ITEM 15. Controls
and Procedures



Disclosure Controls
and Procedures



The Company’s
Chief Executive Officer and Principal Financial Officer have evaluated the effectiveness of the Company’s disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of December
31, 2013. Based on this evaluation, the Chief Executive Officer and Principal Financial Officer of the Company concluded that
the Company’s disclosure controls and procedures were effective as of December 31, 2013.



Changes in Internal
Control over Financial Reporting



There have been no
changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal year
ended December 31, 2012 that has materially affected, or is reasonable likely to materially affect, the Company’s internal
control over financial reporting.



Management’s
Annual Report on Internal Control over Financial Reporting



The management of
the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) of the Company.



The internal control
over financial reporting at the Company was designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted
in the United States of America. Internal control over financial reporting includes those policies and procedures that:





| | · | pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the
United States of America;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | provide reasonable assurance that receipts and expenditures
of the Company are being made only in accordance with authorization of management and directors of the Company; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated
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 policies or procedures may deteriorate.



The Company’s
management assessed the effectiveness of the company’s internal control over financial reporting as of December 31,
2013. Management based this assessment on criteria for effective internal control over financial reporting described in “Internal
Control – Integrated Framework (1992)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management determined that, as of December 31, 2013, the Company maintained effective internal
control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of the Board of Directors.



75







Attestation report
of registered public accounting firm



The effectiveness of the Company’s internal control over financial reporting has been audited by
PricewaterhouseCoopers Audit, an independent registered public accounting firm, as stated in their report on the Company’s
internal control over reporting as of December 31, 2013, which is included herein.
 See report of PricewaterhouseCoopers Audit, an independent registered public accounting firm, included within the financial
statements on page F-2.



ITEM 16. [Reserved]



ITEM 16A. Audit
Committee Financial Expert



The Board has determined
that Elie Vannier and Guillaume Cerutti are ‘audit committee financial experts,’ as defined by the rules of the SEC.
Messrs Vannier and Cerutti are ‘independent’ as defined by the NASDAQ Marketplace Rules.



ITEM 16B. Code
of Ethics



The Board adopted
a written Code of Ethics that applies to the Chief Executive Officer, Chief Operating Officer and senior financial officers. The
principles set forth in our Code of Ethics are intended to promote the honest and ethical conduct of our principal executive officer,
the principal financial officer, the principal accounting officer or controller, or persons performing similar functions. The
Code of Ethics was filed as Exhibit 11.1 to our annual report on Form 20-F for the year ended December 31, 2003, on April 26,
2004.



ITEM 16C. Principal
Accountant Fees and Services





The following is a
summary of the fees billed to Flamel by PricewaterhouseCoopers Audit for professional services rendered for the fiscal years ended
December 31, 2013 and 2012:



|Fee Category       |  | Fiscal 2013 Fees
    (Euros) |         |  | Fiscal 2012 Fees
    (Euros) | 
|------------------ |  | ---------------------------- | ------- |  | ---------------------------- | 
|Audit Fees         |  |                              | 263,000 |  |                              | 
|Audit-Related Fees |  |                              | 8,500   |  |                              | 
|Tax Fees           |  |                              |         |  |                              | 
|All Other Fees     |  |                              |         |  |                              | 
|Total Fees         |  |                              | 271,500 |  |                              | 



All fees were billed
in Euros. Using the average exchange rate of 1.3282 U.S dollars per Euro for 2013, and 1.2856 U.S dollars per Euro for 2012 audit
fees equaled $360,606 for Fiscal 2013 and $391,979 for Fiscal 2012.



Audit Fees.Consists of fees billed for professional services rendered for the audit of the Company’s consolidated financial
statements, review of the interim consolidated financial statements included in quarterly reports and review of internal controls
over Financial Reporting.



Audit-Related
Fees.Consists of fees billed for assurance and related services by the principal accountant that are reasonably related
to the performance of the audit or review of Flamel’s consolidated financial statements.



Tax Fees.Consists
of fees billed for professional services for tax compliance, tax advice and tax planning.



76







All Other Fees. There were no fees billed for professional services in fiscal years 2013 and 2012 that are not included in one of the
above categories.



Audit Committee’s
Pre-Approval Policies and Procedures



Our Audit Committee
nominates and engages our independent auditors to audit our financial statements. See also ‘Item 6. Directors, Senior
Management and Employees – Board Practices – Committees of the Board of Directors.’ In 2005, our Audit Committee
adopted a revised policy requiring management to obtain the Committee’s approval before engaging our independent auditors
to provide any other audit or permitted non-audit services to us or our subsidiaries. Pursuant to this policy, which is designed
to assure that such engagements do not impair the independence of our auditors, the Audit Committee annually pre-approves, in
accordance with an audit plan, specific audit and non-audit services in the categories Audit Service, Audit-Related Services,
Tax Consulting Services, and Other Services that may be performed by our auditors. All of the fees to the principal accountants
were approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X in 2005. Our Principal
Financial Officer reviews all individual management requests to engage our auditors as a service provider in accordance with this
policy and, if the requested services are permitted pursuant to the audit plan approved by the Audit Committee and are less than
€10,000, approves the request accordingly. In the event of a request for services pursuant to the audit plan in excess of
€10,000 and less than €20,000, the Chairman of the Audit Committee approves the request. Any services in excess of €20,000
are to be pre-approved by the Audit Committee. We inform the Audit Committee about all approvals made by the Principal Financial
Officer or Chairman of the Audit Committee at the following Audit Committee meeting. The chairman of our Audit Committee is not
permitted to approve any engagement of our auditors if the services to be performed either fall into a category of services that
are not permitted by applicable law or the services would be inconsistent with maintaining the auditors’ independence.



ITEM 16D. Exemptions
from the Listing Standards for Audit Committees



Not applicable.



ITEM 16E. Purchases
of Equity Securities by the Issuer and Affiliated Purchasers



Not applicable.



ITEM 16F. Change
in Registrant’s Certifying Accountant



Not applicable.



ITEM 16G. Corporate
Governance



Flamel was incorporated
under the laws of France with securities listed on the Nasdaq Global Market, a regulated public market in the U.S. Our corporate
governance framework reflects the mandatory provisions of French law and may differ in certain respects described below from the
practices followed by U.S. companies listed on the Nasdaq Global Market.



The Company is exempt
from NASDAQ’s quorum requirements applicable to meetings of shareholders. In keeping with French law and generally accepted
business practices in France, the presence in person or by proxy of shareholders having not less than 20% (in case of an ordinary
general meeting or an extraordinary general meeting deciding upon any capital increase by capitalization of reserves) or 25% (in
the case of an extraordinary general meeting) of the Shares is necessary for a quorum. If a quorum is not present at any meeting,
the meeting is adjourned. Upon recommencement of an adjourned meeting, there is no quorum requirement in the case of an ordinary
general meeting or an extraordinary general meeting deciding upon any capital increase by capitalization of reserves. The presence
in person or by proxy of shareholders having not less than 20% of the Shares is necessary for a quorum in the case of any other
type of extraordinary general meeting.



The Company also has
been granted an exemption from NASDAQ Marketplace Rule 5620(b). The French Commercial Code does not require that we solicit or
provide proxy statements for meetings of shareholders. In accordance with the French Commercial Code and our statuts, we inform
shareholders of all meetings in a public notice, which notice states the requirements for admission to the meeting. Meeting the
Nasdaq requirement to solicit proxies and provide proxy statements for shareholder meetings would be contrary to accepted business
practice in France.



77







French corporate law
provides that the Board of Directors must vote to authorize certain related party transactions that could create conflicts of
interest between Flamel on the one hand and its directors, chief executive officer or shareholders owning more than 10% of the
voting rights on the other hand for such transactions to be legally binding and must have such transactions documented, audited
and approved by the shareholders at each ordinary shareholders’ meeting approving the annual French statutory accounts of
the Company.  If the shareholders do not approve such related party transactions, the transactions remain legally binding,
provided that they are not fraudulent and consequently declared null and void by competent courts.



Under French law,
the committees of our Board of Directors are advisory only, and where the Nasdaq requirements would vest certain decision-making
powers with specific committees by delegation (e.g., nominating or audit committees), our Board of Directors remains under French
law the only competent body to take such decisions, albeit taking into account the recommendation of the relevant committees.
Additionally, under French corporate law, it is the shareholder meeting of the Company that is competent to appoint our auditors
upon the proposal of our Board of Directors.



In addition to the
oversight role of our Compensation Committee for questions of management compensation including by way of equity, under French
law any option plans or other share capital increases, whether for the benefit of top management or employees, may only be adopted
by the Board of Directors pursuant to and within the limits of a shareholder resolution approving the related capital increase
and delegating to the Board the authority to implement such operations.



As a ‘foreign
private issuer’ under the U.S. securities laws, our Chief Executive Officer and our Principal Financial Officer issue the
certifications required by §302 and §906 of the Sarbanes Oxley Act of 2002 on an annual basis (with the filing of our
annual report on Form 20-F) rather than on a quarterly basis as would be the case of a U.S. corporation filing quarterly reports
on Form 10-Q.



ITEM 16H. Mine
Safety Disclosure



Not applicable



78







PART
III



ITEM 17. Financial
Statements



Not applicable. See
‘Item 18. Financial Statements.’



ITEM 18. Financial
Statements





The following financial
statements, together with the reports of Independent registered public accounting firm thereon, are filed as part of this Annual
Report:



|Report of independent registered public accounting firm                                                  | F-2
|-------------------------------------------------------------------------------------------------------- | ---
|Consolidated Balance Sheets as of December 31, 2012 and 2013                                             | F-3
|Consolidated Statement of Operations for the Years Ended December 31, 2011,
    2012 and 2013            | F-4
|Consolidated Statement of Comprehensive Income for the Years Ended December
    31, 2011, 2012 and 2013  | F-5
|Consolidated Statements of Shareholders’ Equity for the Years Ended
    December 31, 2011, 2012 and 2013 | F-6
|Consolidated Statements of Cash Flows for the Years Ended December 31,  2011,
    2012 and 2013          | F-7
|Notes to Consolidated Financial Statements                                                               | F-8





See pages F-1 through
F-41.



The registrant undertakes
to provide to each shareholder requesting the same a copy of each exhibit referred to herein upon payment of a reasonable fee
limited to the registrant’s reasonable expenses in furnishing such exhibit.



ITEM 19. Exhibits



EXHIBIT INDEX





|Exhibit |  |                                                                                                                                                                                                                                                       
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number  |  | Description                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                       
|1.1     |  | Revised Statutsor bylaws of the Company (Filed
    herewith)                                                                                                                                                                                          
|2.1     |  | Amended and Restated Deposit Agreement among Flamel,
    The Bank of New York, as Depositary, and holders from time to time of American Depositary Shares issued thereunder (including
    as an exhibit the form of American Depositary Receipt)  (2)
|4.1*    |  | Note Agreement among Flamel Technologies S.A., Flamel
    US Holdings, Inc. and Éclat Holdings, LLC, dated March 13, 2012 (3)                                                                                                                         
|4.2     |  | Guaranty of Note made by Flamel Technologies S.A. in
    favor of Éclat Holdings, LLC, dated March 13, 2012 (3)                                                                                                                                       
|4.3     |  | Warrant to purchase 2,200,000 American Depositary Shares,
    each representing one Ordinary Share of Flamel Technologies S.A. (3)                                                                                                                    
|4.4     |  | Warrant to purchase 1,100,000 American Depositary Shares,
    each representing one Ordinary Share of Flamel Technologies S.A. (3)                                                                                                                    
|4.5     |  | Registration Rights Agreement between Flamel Technologies
    S.A. and Éclat Holdings, LLC, dated March 13, 2012 (3)                                                                                                                                  
|4.6     |  | Facility Agreement among Flamel US Holdings, Deerfield
    Private Design Fund II, L.P. and Deerfield Private Design International II, L.P dated December 31, 2012 (1)                                                                                
|4.7*    |  | Royalty Agreement among Eclat Pharmaceuticals LLC,
    Horizon Santé FLML, Sarl and Deerfield Private Design Fund II, L.P dated December 31, 2012 (1)                                                                                                 
|4.8*    |  | Security Agreement between Éclat Pharamaceuticals,
    LLC and Deerfield Private Design Fund II, L.P. and Horizon Santé FLML, Sarl, dated February 4, 2013 (1)                                                                                        
|4.9     |  | Broadfin Facility Agreement, effective as of December
    3, 2013 (filed herewith)                                                                                                                                                                    
|4.10*   |  | Broadfin Royalty Agreement, dated as of December 3,
    2013 (filed herewith)                                                                                                                                                                         
|8.1     |  | List of Subsidiaries (Filed herewith)                                                                                                                                                                                                                 
|11.1    |  | Code of Ethics for CEO (Directeur Général),
    Delegated Managing Directors (Directeurs Généraux Délégués) and Senior Financial
    Officers  (4)                                                                                                    
|12.1    |  | Certification of the Chief Executive Officer pursuant
    to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
    2002 (Filed herewith)                                       





79







|12.2 |  | Certification of the Principal Financial
    Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002 (Filed herewith)
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|13.1 |  | Certification of the Chief Executive Officer pursuant
    to USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished herewith)                                           
|13.2 |  | Certification of the Principal Financial Officer pursuant
    to USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished herewith)                                       
|23.1 |  | Consent of PricewaterhouseCoopers Audit (Filed herewith)                                                                                                                                                           










(1) Incorporated by
reference to the Company’s Annual Report on Form 20-F for the year ended December 31, 2012, filed on April 30, 2013.

(2) Incorporated by
reference to the Company’s registration statement on Form F-6 filed February 12, 2014, as amended (No. 333-193892).

(3) Incorporated by
reference to the Company’s Current Report on Form 6-K, filed March 21, 2012.

(4) Incorporated by
reference to the Company’s Annual Report on Form 20-F for the year ended December 31, 2003, filed on April 26, 2004.



*Confidential treatment
has been requested for the redacted portions of this agreement. A complete copy of the agreement, including the redacted portions,
has been filed separately with the Securities and Exchange Commission.



80







|                                                                                                     | Page
|---------------------------------------------------------------------------------------------------- | ----
|                                                                                                     |     
|Report of Independent Registered Public Accounting Firm, PricewaterhouseCoopers Audit                | F-2 
|                                                                                                     |     
|Consolidated Balance Sheets as of December 31, 2012 and 2013                                         | F-3 
|Consolidated Statements of Operations for the Years Ended December 31, 2011, 2012 and 2013           | F-4 
|Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2011, 2012 and 2013 | F-5 
|Consolidated Statements of Shareholders’ Equity for the years Ended December 31, 2011, 2012 and 2013 | F-6 
|Consolidated Statements of Cash flows for the Years Ended December 31, 2011, 2012 and 2013           | F-7 
|Notes to Consolidated Financial Statements                                                           | F-8 



F-1







REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of
Directors and Shareholders

Flamel Technologies
SA

Vénissieux



In our opinion, the
accompanying consolidated balance sheets and the related consolidated statements of operations, of comprehensive income, of shareholders’
equity and of cash flows present fairly, in all material respects, the financial position of Flamel Technologies SA and its subsidiaries
at December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2013 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, 2013, based on criteria established in Internal Control - Integrated Framework 1992 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 Management's Report on Internal Control over Financial Reporting, appearing on page 75 of
the 2013 Annual Report to Shareholders. 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.



Lyon, France, April
30, 2014



PricewaterhouseCoopers
Audit



/s/ Nicolas Brunetaud

Represented by

Nicolas Brunetaud



F-2









FLAMEL TECHNOLOGIES S.A.



CONSOLIDATED BALANCE SHEETS

(Amounts in thousands of dollars except
share data)



|                                                                                                                                                                                   |  |      |                                                  |  | December 31, |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------------------------------------------------ |  | ------------ | -
|                                                                                                                                                                                   |  | Note |                                                  |  | 2012         |  
|ASSETS                                                                                                                                                                             |  |      |                                                  |  |              |  
|Current assets:                                                                                                                                                                    |  |      |                                                  |  |              |  
|Cash and cash equivalents                                                                                                                                                          |  |      | 7                                                |  |              | $
|Marketable securities                                                                                                                                                              |  |      | 8                                                |  |              |  
|Accounts receivable (net of allowance of $137, $139
    and $ 144 at December 31, 2011, 2012 and 2013 respectively)                                                                |  |      |                                                  |  |              |  
|Inventory                                                                                                                                                                          |  |      | 9                                                |  |              |  
|Research and development tax credit receivable current portion                                                                                                                     |  |      | 20                                               |  |              |  
|Prepaid expenses and other current assets                                                                                                                                          |  |      | 10                                               |  |              |  
|Total current assets                                                                                                                                                               |  |      |                                                  |  |              |  
|                                                                                                                                                                                   |  |      |                                                  |  |              |  
|Goodwill                                                                                                                                                                           |  |      | 12                                               |  |              |  
|Property and equipment, net                                                                                                                                                        |  |      | 11                                               |  |              |  
|Intangible assets, net                                                                                                                                                             |  |      | 12                                               |  |              |  
|Other assets:                                                                                                                                                                      |  |      |                                                  |  |              |  
|Research and development tax credit receivable less
    current portion                                                                                                            |  |      | 20                                               |  |              |  
|Other long-term assets                                                                                                                                                             |  |      |                                                  |  |              |  
|Total assets                                                                                                                                                                       |  |      |                                                  |  |              | $
|                                                                                                                                                                                   |  |      |                                                  |  |              |  
|LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                               |  |      |                                                  |  |              |  
|                                                                                                                                                                                   |  |      |                                                  |  |              |  
|Current liabilities:                                                                                                                                                               |  |      |                                                  |  |              |  
|Current portion of long-term debt                                                                                                                                                  |  |      | 16 - 25                                          |  |              |  
|Current portion of capital lease obligations                                                                                                                                       |  |      | 17                                               |  |              |  
|Accounts payable                                                                                                                                                                   |  |      |                                                  |  |              |  
|Current portion of deferred revenue                                                                                                                                                |  |      | 15                                               |  |              |  
|Advances from customers                                                                                                                                                            |  |      |                                                  |  |              |  
|Accrued expenses                                                                                                                                                                   |  |      | 13                                               |  |              |  
|Other current liabilities                                                                                                                                                          |  |      | 14                                               |  |              |  
|Total current liabilities                                                                                                                                                          |  |      |                                                  |  |              |  
|                                                                                                                                                                                   |  |      |                                                  |  |              |  
|Long-term debt, less current portion                                                                                                                                               |  |      | 16 - 25                                          |  |              |  
|Capital lease obligations, less current portion                                                                                                                                    |  |      | 17                                               |  |              |  
|Deferred revenue, less current portion                                                                                                                                             |  |      | 15                                               |  |              |  
|Deferred tax liabilities                                                                                                                                                           |  |      | 20                                               |  |              |  
|Other long-term liabilities                                                                                                                                                        |  |      | 14
                                         - 21 |  |              |  
|Total long-term liabilities                                                                                                                                                        |  |      |                                                  |  |              |  
|                                                                                                                                                                                   |  |      |                                                  |  |              |  
|Commitments and contingencies:                                                                                                                                                     |  |      |                                                  |  |              |  
|                                                                                                                                                                                   |  |      |                                                  |  |              |  
|Shareholders' equity  :                                                                                                                                                            |  |      |                                                  |  |              |  
|Ordinary shares: 25,415,400 issued and outstanding
    at December 31, 2012 and  25,612,550 at December 31, 2013 (shares authorised 34,379,690) at nominal value of 0.122
    euro |  |      | 19                                               |  |              |  
|Additional paid-in capital                                                                                                                                                         |  |      |                                                  |  |              |  
|Accumulated deficit                                                                                                                                                                |  |      |                                                  |  |              |  
|Accumulated other comprehensive income                                                                                                                                             |  |      |                                                  |  |              |  
|                                                                                                                                                                                   |  |      |                                                  |  |              |  
|Total shareholders' equity                                                                                                                                                         |  |      |                                                  |  |              |  
|Total liabilities and shareholders'
    equity                                                                                                                                     |  |      |                                                  |  |              | $





The accompanying notes
are an integral part of the consolidated financial statements



F-3







FLAMEL TECHNOLOGIES S.A.



CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands of dollars except
share data)





|                                                               |  | Year ended December 31, |            
|-------------------------------------------------------------- |  | ----------------------- | -----------
|                                                               |  | Note                    |            
|Revenue:                                                       |  |                         |            
|License and research revenue                                   |  |                         | 4          
|Product sales and services                                     |  |                         | 3          
|Other revenues                                                 |  |                         |            
|Total revenue                                                  |  |                         |            
|Costs and expenses:                                            |  |                         |            
|Cost of products and services sold                             |  |                         |            
|Research and development                                       |  |                         | 5          
|Selling, general and administrative                            |  |                         |            
|Remeasurement of acquisition liabilities                       |  |                         | 2 - 16 - 25
|Impairment of assets                                           |  |                         | 2          
|Total                                                          |  |                         |            
|                                                               |  |                         |            
|Income  (loss) from operations                                 |  |                         |            
|                                                               |  |                         |            
|Interest expense                                               |  |                         | 16 - 25    
|Interest expense on the debt related to the royalty agreement  |  |                         | 16 - 25    
|Interest income                                                |  |                         |            
|Foreign exchange gain (loss)                                   |  |                         |            
|Other income                                                   |  |                         |            
|                                                               |  |                         |            
|Income (loss) before income taxes                              |  |                         |            
|Income tax                                                     |  |                         | 20         
|Net income (loss)                                              |  |                         |            
|Earnings (loss) per share                                      |  |                         |            
|Basic earnings (loss) per share                                |  |                         | 18         
|Diluted earnings (loss) per share                              |  |                         |            
|                                                               |  |                         |            
|Weighted average number of shares outstanding (in thousands) : |  |                         |            
|                                                               |  |                         |            
|Basic                                                          |  |                         |            
|Diluted                                                        |  |                         |            







The accompanying notes
are an integral part of the consolidated financial statements



F-4









Flamel
Technologies S.A.



Consolidated
STATEMENTs OF COMPREHENSIVE INCOME

(Amounts in thousands
of dollars except share data)



|                                              |  | Year Ended December 31, |       
|--------------------------------------------- |  | ----------------------- | ------
|                                              |  | 2011                    |       
|                                              |  | (In thousands)          |       
|Net loss                                      |  | $                       | (8,774
|Other comprehensive income (loss):            |  |                         |       
|Net foreign currency translation gain (loss)  |  |                         | (816  
|                                              |  |                         |       
|Other comprehensive income (loss), net of tax |  |                         | (816  
|Comprehensive loss                            |  | $                       | (9,590





The accompanying notes
are an integral part of the consolidated financial statements



F-5







Flamel
Technologies S.A.



Consolidated
Statements of shareholders equity

(Amounts in thousands
of dollars except share data)



|                                                                          |  |                     |            |  |         |   |       | Additional  |  |   |             |   |  | Accumulated  Other
     Comprehen- |          |   |        |  
|------------------------------------------------------------------------- |  | ------------------- | ---------- |  | ------- | - | ----- | ----------- |  | - | ----------- | - |  | ---------------------------------- | -------- | - | ------ | -
|                                                                          |  | Ordinary
    Shares |            |  | Paid-in |   |       | Accumulated |  |   | sive Income |   |  | Shareholders'                      |         
|                                                                          |  | Shares              |            |  | Amount  |   |       | Capital     |  |   | Deficit     |   |  | (Loss)                             |          |   | Equity |  
|Balance
    at January 1, 2011                                            |  |                     | 24,645,650 |  |         | $ | 3,589 |             |  | $ | 202,462     |   |  | $                                  | (180,619 | ) |        | $
|Subscription  of warrants                                                 |  |                     |            |  |         |   |       |             |  |   | 200         |   |  |                                    |          |   |        |  
|Issuance of ordinary shares on exercise of stock
    -options             |  |                     | 44,200     |  |         |   | 8     |             |  |   | 88          |   |  |                                    |          |   |        |  
|Issuance of ordinary shares on vesting of free
    shares                 |  |                     | 272,400    |  |         |   | 44    |             |  |   | (44         | ) |  |                                    |          |   |        |  
|Stock-based compensation expense                                          |  |                     |            |  |         |   |       |             |  |   | 2,783       |   |  |                                    |          |   |        |  
|Net loss                                                                  |  |                     |            |  |         |   |       |             |  |   |             |   |  |                                    | (8,774   | ) |        |  
|Other comprehensive income
    (loss)                                     |  |                     |            |  |         |   |       |             |  |   |             |   |  |                                    |          |   |        |  
|Balance
    at December 31, 2011                                          |  |                     | 24,962,250 |  |         | $ | 3,641 |             |  | $ | 205,489     |   |  | $                                  | (189,393 | ) |        | $
|Subscription  of warrants                                                 |  |                     |            |  |         |   |       |             |  |   | 5           |   |  |                                    |          |   |        |  
|Issuance of ordinary shares on exercise of stock
    -options             |  |                     | 195,000    |  |         |   | 31    |             |  |   | 570         |   |  |                                    |          |   |        |  
|Issuance of ordinary shares on vesting of free
    shares                 |  |                     | 258,150    |  |         |   | 42    |             |  |   | (42         | ) |  |                                    |          |   |        |  
|Stock-based compensation expense                                          |  |                     |            |  |         |   |       |             |  |   | 3,136       |   |  |                                    |          |   |        |  
|Net loss                                                                  |  |                     |            |  |         |   |       |             |  |   |             |   |  |                                    | (3,228   | ) |        |  
|Other comprehensive income
    (loss)                                     |  |                     |            |  |         |   |       |             |  |   |             |   |  |                                    |          |   |        |  
|Comprehensive
    loss                                                    |  |                     |            |  |         |   |       |             |  |   |             |   |  |                                    |          |   |        |  
|Balance
    at December 31, 2012                                          |  |                     | 25,415,400 |  |         | $ | 3,714 |             |  | $ | 209,158     |   |  | $                                  | (192,621 | ) |        | $
|Subscription  of warrants                                                 |  |                     |            |  |         |   |       |             |  |   | (27         | ) |  |                                    |          |   |        |  
|Issuance of ordinary shares on exercise of stock
    -options or warrants |  |                     | 50,000     |  |         |   | 8     |             |  |   | 391         |   |  |                                    |          |   |        |  
|Issuance of ordinary shares on vesting of free
    shares                 |  |                     | 147,150    |  |         |   | 24    |             |  |   | (24         | ) |  |                                    |          |   |        |  
|Stock-based compensation expense                                          |  |                     |            |  |         |   |       |             |  |   | 1,975       |   |  |                                    |          |   |        |  
|Net loss                                                                  |  |                     |            |  |         |   |       |             |  |   |             |   |  |                                    | (42,925  | ) |        |  
|Other comprehensive income
    (loss)                                     |  |                     |            |  |         |   |       |             |  |   |             |   |  |                                    |          |   |        |  
|Comprehensive
    loss                                                    |  |                     |            |  |         |   |       |             |  |   |             |   |  |                                    |          |   |        |  
|Balance
    at December 31, 2013                                          |  |                     | 25,612,550 |  |         | $ | 3,746 |             |  | $ | 211,473     |   |  | $                                  | (235,546 | ) |        | $





The accompanying notes
are an integral part of the consolidated financial statements



F-6







Flamel
Technologies S.A.



Consolidated
Statements of Cash flows

(Amounts in thousands
of dollars except share data)



|                                                                                                   |  | Year ended December 31, |        
|-------------------------------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                                                   |  | 2011                    |        
|                                                                                                   |  |                         |        
|Cash flows from operating activities:                                                              |  |                         |        
|Net income (loss)                                                                                  |  | $                       | (8,774 
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                         |        
|Depreciation of property and equipment                                                             |  |                         | 3,346  
|Loss (gain)  on disposal of property and equipment                                                 |  |                         | (11    
|Gains on sales of marketable securities                                                            |  |                         | (41    
|Grants recognized in other income  and income from operations                                      |  |                         | (3,227 
|Remeasurement of acquisition liabilities (Note 25)                                                 |  |                         | -      
|Interest expense on debt related to the royalty agreements (Note 25)                               |  |                         |        
|Impairment of assets                                                                               |  |                         | -      
|Calculated interest on amortized method (Note 25)                                                  |  |                         |        
|Change in deferred tax                                                                             |  |                         | -      
|Stock compensation expense                                                                         |  |                         | 2,779  
|Increase (decrease) in cash from:                                                                  |  |                         |        
|Accounts receivable                                                                                |  |                         | (464   
|Inventory                                                                                          |  |                         | (917   
|Prepaid expenses and other current assets                                                          |  |                         | 856    
|Research and development tax credit receivable                                                     |  |                         | (3,938 
|Accounts payable                                                                                   |  |                         | (825   
|Deferred revenue                                                                                   |  |                         | 856    
|Accrued expenses                                                                                   |  |                         | (491   
|Other current liabilities                                                                          |  |                         | 399    
|Other long-term assets and liabilities                                                             |  |                         | 129    
|Net cash used in operating activities                                                              |  |                         | (10,323
|                                                                                                   |  |                         |        
|Cash flows from investing activities:                                                              |  |                         |        
|Purchases of property and equipment                                                                |  |                         | (1,903 
|Proceeds from disposal of property and equipment                                                   |  |                         | 185    
|Proceeds from sales of marketable securities                                                       |  |                         | 26,382 
|Purchase of marketable securities                                                                  |  |                         | (25,015
|Cash transferred on acquisition                                                                    |  |                         |        
|Net cash provided by (used in) investing activities                                                |  |                         | (351   
|                                                                                                   |  |                         |        
|Cash flows from financing activities:                                                              |  |                         |        
|Reimbursment of loans or conditional grants                                                        |  |                         | (1,910 
|Proceeds from loans or conditional grants (Note 25)                                                |  |                         | 7,855  
|Principal payments on capital lease obligations                                                    |  |                         | (96    
|Earn-out payment for acquisition (Note 25)                                                         |  |                         | -      
|Cash proceeds from issuance of ordinary shares and warrants                                        |  |                         | 296    
|Net cash provided by financing activities                                                          |  |                         | 6,145  
|                                                                                                   |  |                         |        
|Effect of exchange rate changes on cash and cash equivalents                                       |  |                         | (199   
|                                                                                                   |  |                         |        
|Net increase (decrease) in cash and cash equivalents                                               |  |                         | (4,728 
|Cash and cash equivalents, beginning of year                                                       |  |                         | 8,184  
|Cash and cash equivalents, end of year                                                             |  | $                       | 3,456  
|                                                                                                   |  |                         |        
|Supplemental disclosures of cash flow information:                                                 |  |                         |        
|Income tax paid                                                                                    |  |                         | -      
|Interest paid                                                                                      |  |                         | 73     
|The supplemental schedule of non cash investing and financing activities is as follows             |  |                         |        
|Capital lease obligations incurred                                                                 |  |                         | 220    
|Fair value of assets acquired at acquisition date:                                                 |  |                         | -      
|Liabilities assumed at acquisition date:                                                           |  |                         | -      





The accompanying notes
are an integral part of the consolidated financial statements



F-7







FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS





1. Nature of business
and summary of significant accounting policies:



| | 1.1. | Nature of business:
| | ---- | -------------------



Flamel Technologies,
S.A. (the "Company") is organized as a société anonyme, a form ofcorporation under the laws
of The Republic of France. The Company was founded in 1990. The Company is a specialty pharmaceutical company with a long history
of drug delivery expertise. The Company operates primarily in France and has commercial and marketing capabilities in the US.



| | 1.2. | Management estimates
| | ---- | --------------------



The accompanying
consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP).



The preparation
of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period. Significant estimates reflected in the consolidated
financial statements include, but are not limited to, purchase price allocation of its acquisitions, remeasurement of liabilities
accounted at fair value, the recoverability of the carrying amount and estimated useful lives of long-lived assets, in progress
R&D and goodwill, share-based compensation expenses, evaluation of long term personnel compensation, calculation of R&D
tax credit, and valuation allowance of deferred tax assets. Management makes these estimates using the best information available
at the time the estimates are made; however, actual results could differ from those estimates.



| | 1.3. | Going concern
| | ---- | -------------



Management
believes that the equity financing that generated $113.6 million in net proceeds in March 2014, is sufficient for the company to
continue as a going concern for at least the next twelve months.



| | 1.4. | Principles of consolidation
| | ---- | ---------------------------



The
accompanying consolidated financial statements include the Company and its wholly-owned subsidiaries in the United States. All
inter-company accounts and transactions have been eliminated. The list of the subsidiaries is detailed in Exhibit 8.1.



| | 1.5. | Translation of financial statements of foreign entities and foreign currency transactions:
| | ---- | ------------------------------------------------------------------------------------------



The reporting
currency of the Company and its wholly-owned subsidiary is the U.S. dollar as permitted by the SEC for a foreign private issuer
(S-X Rule 3-20(a)). All assets and liabilities in the balance sheets of the Company, whose functional currency is the Euro, except
those of the U.S. subsidiaries whose functional currency is the U.S. dollar, are translated into U.S. dollar equivalents at exchange
rates as follows: (1) asset and liability accounts at year-end rates, (2) income statement accounts at weighted average exchange
rates for the year, and (3) shareholders' equity accounts at historical rates. Corresponding translation gains or losses are recorded
in shareholders' equity.



Transaction
gains and losses are reflected in the statement of operations.



The Company
has not undertaken hedging transactions to cover its currency translation exposure.



| | 1.6. | Revenue recognition
| | ---- | -------------------



Revenue
includes upfront licensing fees, milestone payments for R&D achievements, compensation for the execution of research &
development activities and product sales.



Where
agreements have more than one deliverable, a determination is made as to whether the license and R&D elements should be recognized
separately or combined into a single unit of account in accordance with ASU 2009-13, Revenue with Multiple Deliverables.



F-8







FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



The
Company uses a multiple attribution model, referred to as the milestone-based method:



| | - | As milestones relate to discrete development steps (i.e. can
be used by the co-development partners to decide whether to continue the development under the agreement), the Company views that
milestone events have substance and represent the achievement of defined goals worthy of the payments. Therefore, milestone payments
based on performance are recognized when the performance criteria are met and there are no further performance obligations.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | Non-refundable technology access fees received from collaboration
agreements that require the Company's continuing involvement in the form of development efforts are recognized as revenue ratably
over the development period.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | Research and development work is compensated at a non-refundable
hourly rate for a projected number of hours. Revenue on such agreements is recognized proportionally to the actual number of hours
worked compared to the latest estimated total hours.. Costs incurred under these contracts are considered costs in the period incurred.
Payments received in advance of performance are recorded as deferred revenue and recognized in revenue as services are rendered.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Revenue is
generally realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, the seller’s price to the buyer is fixed or determinable, and collectability is reasonably assured. The
Company records revenue from product sales when title and risk of ownership have been transferred to the customer, which is typically
upon delivery to the customer. As is customary in the pharmaceutical industry, the Company’s gross product sales are subject
to a variety of deductions in arriving at reported net product sales. When the Company recognizes revenue from the sale of its
products, an estimate of provision for sales return and allowances is recorded which reduces product sales. These adjustments include
estimates for product returns, chargebacks, payment discounts and other sales allowances and rebates. The return allowance, when
estimable, is based on an analysis of the historical returns of the product or similar products.



For new product
launches the Company recognizes revenue based on net product sales of wholesalers to their customers, until sufficient data is
available to determine product acceptance in the marketplace such that product returns may be estimated based on historical data
and there is evidence of reorders and consideration is made of wholesaler inventory levels.  Net product sales of wholesalers
to their customers are determined using sales data from an independent, renowned wholesaler inventory tracking service.  Net
sales of wholesalers to their customers are calculated by deducting estimates for returns for wholesaler customers, chargebacks,
payment discounts and other sales or discounts offered from the applicable gross sales value. When the Company has the ability
to estimate product returns from wholesalers, product sales are recognized upon shipment, net of discounts, returns and allowances.
  Estimates for product returns are adjusted periodically based upon historical rates of returns, inventory levels in the
distribution channel and other related factors.



The Company
launched Bloxiverz® in July of 2013 and determined that market acceptance of the product had not occurred given the absence
of wholesaler reorders and insufficient data to determine product returns.  For the twelve months ended December 31, 2013,
the criteria for recognizing the revenue were not met and the Company deferred $1.1M of revenue as of December 31, 2013.



The Company
receives royalty revenues under a license agreement with a third party that sells products based on technology developed by the
Company. There are no future performance obligations on the part of the Company under this license agreement. The license agreements
provide for the payment of royalties to the Company based on sales of the licensed product. The Company records these revenues
based on actual sales that occurred during the relevant period and classified these revenues in ‘Other Revenues’.



The Company
signs feasibility study agreements. Revenue is recognized over the term of the agreement as services are performed.



| | 1.7. | Governmental Grants:
| | ---- | --------------------



The Company
receives financial support for various research or investment projects from governmental agencies.



The Company
recognizes conditional grants related to specific development projects conditioned on completion of investment program and ongoing
employment at the facilities as an offset to operating expenses once all conditions stated in the grant have been met.



F-9







FLAMEL TECHNOLOGIES
S.A.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS



The Company
recognizes unconditional grants for research and development (R&D) projects requiring the collaboration of both private and
public research partners as an offset to R&D expense on a pro-rata basis over the duration of the program.



The Company
receives funds to finance R&D projects. These funds are repayable on commercial success of the project. In the absence of commercial
success, the Company is released of its obligation to repay the funds and as such the funds are recognized in the Income Statement
as ‘Other Income’. The absence of commercial success must be formally confirmed by the granting authority. Should the
Company wish to discontinue the research and development to which the funding is associated, the granting authorities must be informed.



| | 1.8. | Research and development costs:
| | ---- | -------------------------------



Research and
development (R&D) expenses comprise the following types of costs incurred in performing R&D activities: salaries, allocated
overhead and occupancy costs, clinical trial and related clinical or development manufacturing costs, contract and other outside
service fees, filing fees and regulatory support. Research and development expenditures are charged to operations as incurred.



The Company
does not disclose research development costs per partner funded contract and does not believe such disclosure would be material
to investors.



| | 1.9. | Concentration of credit risk:
| | ---- | -----------------------------



The Company's
cash and cash equivalents are mainly deposited with HSBC, Crédit Agricole, Commerce Bank and Citibank.



The marketable
securities issued by Crédit Agricole have strong credit ratings (rated “A” by Standard and Poor).



The Company’s
revenues are derived mainly from product sales and services, collaborative research and development contracts and supply agreements
with pharmaceutical companies based in Europe and the United States. All significant customers are discussed in Note 4.



The Company
performs ongoing credit evaluations of its customers and maintains provisions for potential credit losses as considered necessary.
The Company generally does not require collateral. Historically, the Company has not experienced significant credit losses on its
customer accounts. The allowance for doubtful accounts was $137,000, $139,000 and $145,000 at December 31, 2011, 2012 and 2013,
respectively.



| | 1.10. | Earnings per share:
| | ----- | -------------------



Basic earnings
(loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding
for the period. Diluted earnings per share reflects potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the
earnings of the Company. The dilutive effects of the Company’s common stock options and warrants is determined using the
treasury stock method to measure the number of shares that are assumed to have been repurchased using the average market price
during the period, which is converted from U.S. dollars at the average exchange rate for the period. Such securities are not considered
in computing diluted loss per share as their effects would be anti-dilutive.



| | 1.11. | Cash and cash equivalents:
| | ----- | --------------------------



Cash and cash
equivalents consist of cash on hand, cash on deposit and fixed term deposit being highly liquid investments with a maturity of
three months or less at the date of purchase.



| | 1.12. | Marketable securities:
| | ----- | ----------------------



Marketable
securities consist of highly liquid investments in money market mutual funds. Marketable securities are classified as available-for-sale
securities in accordance with ASC 320-10, "Accounting for Certain Investments in Debt and Equity Securities" These investments
are recorded at fair value, which is based on quoted market prices. Accordingly, unrealized gains and losses are included in accumulated
other comprehensive income until realized.



F-10







FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



| | 1.13. | Accounts Receivable:
| | ----- | --------------------



Accounts
receivable are stated at amounts invoiced net of allowances for doubtful accounts.The Company makes judgments as to its
ability to collect outstanding receivables and provides allowances for the portion of receivables deemed uncollectible. Provision
is made based upon a specific review of all significant outstanding invoices.



| | 1.14. | Inventories:
| | ----- | ------------



Inventories
consist of raw materials and finished products, which are stated at cost determined under the first-in, first-out ("FIFO")
method. Raw materials used in the production of pre-clinical and clinical products are expensed as research and development costs
when consumed. The Company establishes reserves for inventory estimated to be obsolete, unmarketable or slow-moving on a case by
case basis.



| | 1.15. | Property and equipment:
| | ----- | -----------------------



Property
and equipment is stated at historical cost less accumulated depreciation. Depreciation and amortization are computed using the
straight-line method over the following estimated useful lives:



|Land and buildings               |  |  | 20 years    | 
|-------------------------------- |  |  | ----------- | 
|Laboratory equipment             |  |  | 4 - 8 years | 
|Office and computer equipment    |  |  | 3 years     | 
|Furniture, fixtures and fittings |  |  | 5-10 years  | 



Assets
under capital leases are amortized over the economic lives of the assets. Amortization of the carrying value of assets under capital
leases is included in depreciation expense.



| | 1.16. | Goodwill and intangible assets
| | ----- | ------------------------------



Goodwill
represents the excess of purchase price over the fair value of identifiable net assets of businesses acquired. Goodwill is not
amortized, but instead tested annually for impairment or more frequently when events or change in circumstances indicate that the
assets might be impaired by comparing the carrying value to the fair value of the reporting units to which it is assigned. Under
ASC 350, “Goodwill and other intangible assets”, the impairment test is performed in two steps. The first step compares
the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit is less
than its carrying amount, a second step is performed to measure the amount of impairment loss. The second step allocates the fair
value of the reporting unit to the Company’s tangible and intangible assets and liabilities. This derives an implied fair
value for the reporting unit’s goodwill. If the carrying amount of the reporting units goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized equal to that excess. For the purpose of any impairment test, the Company
relies upon projections of future undiscounted cash flows and takes into account assumptions regarding the evolution of the market
and its ability to successfully develop and commercialize its products.



Changes
in market conditions could have a major impact on the valuation of these assets and could result in additional impairment losses.



Intangible
assets consist primarily of purchased licenses and in progress R&D recognized as part of the Eclat acquisition purchase price
allocation. Acquired IPR&D has an indefinite life and is not amortized until completion and development of the project, at
which time the IPR&D becomes an amortizable asset. If the related project is not completed in a timely manner or the project
is terminated or abandoned, we may have an impairment related to the IPR&D, calculated as the excess of the asset’s carrying
value over its fair value.



Our policy
defines IPR&D as the value assigned to those projects for which the related products have not received regulatory approval
and have no alternative future use. Determining the portion of the purchase price allocated to IPR&D requires us to make significant
estimates. The amount of the purchase price allocated to IPR&D is determined by estimating the future cash flows of each project
or technology and discounting the net cash flows back to their present values. The discount rate used is determined at the time
of measurement in accordance with accepted valuation methods. These methodologies include consideration of the risk of the project
not achieving commercial feasibility.



F-11







FLAMEL TECHNOLOGIES
S.A.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS



At the
time of acquisition, we expect that all acquired IPR&D will reach technological feasibility, but there can be no assurance
that the commercial viability of these products will actually be achieved. The risks associated with achieving commercialization
include, but are not limited to, delay or failure to obtain required market clearances.



| | 1.17. | Impairment of Long-Lived Assets:
| | ----- | --------------------------------



The Company
reviews the carrying value of its long-lived assets, including fixed assets and intangible assets, for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Recoverability of long-lived
assets is assessed by a comparison of the carrying amount of the asset (or the group of assets, including the asset in question,
that represents the lowest level of separately-identifiable cash flows) to the total estimated undiscounted future cash flows expected
to be generated by the asset or group of assets. If the future net undiscounted cash flows is less than the carrying amount of
the asset or group of assets, the asset or group of assets is considered impaired and an expense is recognized equal to the amount
required to reduce the carrying amount of the asset or group of assets to its then fair value. Fair value is determined by discounting
the cash flows expected to be generated by the asset, when the quoted market prices are not available for the long-lived assets.
Estimated future cash flows are based on management assumptions and are subject to risk and uncertainty.



| | 1.18. | Income taxes:
| | ----- | -------------



The Company
accounts for income taxes in accordance with ASC 740. Under ASC 740, deferred tax assets are determined based on the difference
between the financial reporting and tax basis of assets and liabilities, applying enacted statutory tax rates in effect for the
year in which the tax differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in the tax laws and rates on the date of enactment.



| | 1.19. | Research credit tax
| | ----- | -------------------



The Company
is eligible to receive a French research tax credit that is calculated based on a percentage of eligible research and development
costs. The tax credit can be refundable in cash and is not contingent on future taxable income. As such, the Company considers
the research credit tax as a grant, offsetting operating expenses.



| | 1.20. | Employee stock options and warrants:
| | ----- | ------------------------------------



The Company
accounts for Stock based compensation based on grant-date fair value estimated in accordance with ASC 718.



The Company
estimated the fair value of stock options and warrants using a Black-Scholes option-pricing valuation model (“Black-Scholes
model”).



The Company
uses a simplified method to estimate the maturity. The Company considered historical data was insufficient and irrelevant relative
to the grant of stock-options and warrants to a limited population and the simplified method was used to determine the expected
term for stock-options and warrants granted.



The Company
recognizes compensation cost, net of an estimated forfeiture rate, using the accelerated method over the requisite service period
of the award.





| | 1.21 | Long-Term Debt
| | ---- | --------------



The Long Term debt associated
with the acquisition liabilities arising from the acquisition of Eclat Pharmaceuticals are accounted at fair-value (see note
2 –Business Combinations and note 16 Long-Term Debt). Changes in fair value are recorded in the income statement in operating
expenses as remeasurement of acquisition liabilities.



The long-term debt associated
with the Deerfied Facility and Broadfin Facility agreements are accounted for at amortized cost. The Company elected the fair value
option for the measurement of the long-term liability associated with the Deerfield and Broadfin Royalty agreements (see note
16 Long-Term Debt). Changes in fair value are recorded in the income statement in interest expense on the debt related to the
royalty agreement.





| | 1.22 | Recent Accounting Pronouncements
| | ---- | --------------------------------



In February 2013, the
FASB issued ASU No. 2013-02, “Comprehensive Income” (“ASU 2013-02”). ASU 2013-02 requires new disclosures
related to amounts reclassified out of accumulated other comprehensive income (“AOCI”) by component, as well as disclosures
related to reclassifications from AOCI to net income. These disclosures may be presented on the face of the consolidated financial
statements or in the notes thereto. ASU 2013-02 is effective for reporting periods beginning after December 15, 2012. The adoption
of ASU 2013-02 had no effect on the consolidated financial position, results of operations or cash flows of the Company.



F-12







FLAMEL TECHNOLOGIES
S.A.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS



In July 2013,
the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11,
“Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit
Carryforward Exists” (“ASU 2013-11”). ASU No. 2013-11 provides explicit guidance on the financial statement presentation
of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.
ASU 2013-11 is effective for fiscal years and interim periods within those years, beginning after December 15, 2013. The Company
does not expect the provisions of ASU 2013-11 to have a material effect on the consolidated financial position, results of operations
or cash flows of the Company.



| | 2. | Business combinations
| | -- | ---------------------



Effective
March 13, 2012, Flamel acquired, through its wholly owned subsidiary Flamel US Holdings, Inc., or Flamel US, all of the membership
interests of Éclat Pharmaceuticals, LLC, or Éclat Pharmaceuticals, from Éclat Holdings, LLC, or Éclat
Holdings, an affiliate of Flamel’s largest shareholder Deerfield Capital L.P. Éclat Pharmaceuticals is a specialty
pharmaceuticals business focused on the development, approval and commercialization of niche brands and generic pharmaceutical
products. In exchange for all of the issued and outstanding membership interests of Éclat Pharmaceuticals, Flamel US provided
consideration consisting of:



| | - | a $12 million senior, secured six-year note that is guaranteed by the Company and its subsidiaries
and secured by the equity interests and assets of Éclat;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | two warrants to purchase a total of 3,300,000 American Depositary Shares, each representing one
ordinary share of Flamel (“ADSs”); and
| | - | --------------------------------------------------------------------------------------------------------------------------------------

| | - | a commitment to make earn out payments of 20% of any gross profit generated by certain Éclat
Pharmaceuticals launch products
| | - | ----------------------------------------------------------------------------------------------------------------------------

| | - | a commitment to pay 100% of any gross profit generated by Hycet® up to a maximum of $1 million.
| | - | -----------------------------------------------------------------------------------------------



The Purchase
Agreement also contains certain representations and warranties, covenants, indemnification and other customary provisions.



Flamel US
issued the note pursuant to a Note Agreement among Flamel, Flamel US and Éclat Holdings dated March 13, 2012. The note is
payable over six years only if certain contingencies are satisfied, namely that: (a) two or more Éclat Pharmaceuticals launch
products are approved by the FDA, or (b) one Éclat Pharmaceuticals launch product is approved by the FDA and has generated
$40 million or more in cumulative net sales. These contingencies are referred to as thresholds. If either Threshold is satisfied,
Flamel US will pay 25% of the original principal amount due under the note on each of the third, fourth, fifth and sixth anniversaries
of the date of the note. The note accrues interest at an annual rate of 7.5% (calculated on the basis of the actual number of days
elapsed in each month) and is payable quarterly in arrears commencing on July 2, 2012 and on the first business day of each October,
January, April and July thereafter; provided, however, that if on any such interest payment date, at least one Éclat Pharmaceuticals
launch product has not been approved by the FDA, the interest payable on such date will not be payable, but will be added on such
date to the outstanding principal amount of the note. Flamel must pay any interest so accrued no later than nine months after such
FDA approval and, upon such payment; such outstanding principal amount of the note will be reduced by the amount thereof.



In addition
to the note, two six year warrants were issued to purchase an aggregate of 3,300,000 ADSs, each representing one ordinary share,
of Flamel. One warrant is exercisable for 2,200,000 ADSs at an exercise price of $7.44 per ADS, and the other warrant is exercisable
for 1,100,000 ADSs at an exercise price of $11.00 per ADS. The warrants provide that they may only be exercised for six years following
the approval, for the purposes of French law, by the holders of a majority of Flamel’s ordinary shares, of the authorization
and issuance of the warrants and the ordinary shares underlying the warrants and the waiver of all preferential subscription rights
of holders of ordinary shares (and ADSs) with respect to the warrant and the underlying shares.  On June 22, 2012, the authorization
and issuance and waiver were approved by the holders of the requisite number of ordinary shares



F-13







FLAMEL TECHNOLOGIES
S.A.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS



The acquisition-date
fair value of the consideration transferred totaled $50,927,000 which consisted of the following:



|(Amounts in thousands of USD) |  |   |        | 
|----------------------------- |  | - | ------ | 
|Note                          |  | $ | 5,625  | 
|Warrants                      |  |   | 12,065 | 
|Deferred consideration        |  |   | 33,237 | 
|Total acquisition liabilities |  | $ | 50,927 | 



The fair value
of the note was estimated using a probability-weighted discounted cash flow model. This fair value measurement is based on significant
inputs not observable in the market and thus represents a level 3 measurement as defined in ASC 820. The key assumptions are as
follows: 20% discount rate, 72% probability of success.



The fair value
of the warrants was determined by using a Black-Scholes option pricing model with the following assumptions:



|Share price             |  | $ | 7.29      |  
|----------------------- |  | - | --------- | -
|Risk-free interest rate |  |   | 2.00      | %
|Dividend yield          |  |   | -         |  
|Expected volatility     |  |   | 56.26     | %
|Expected term           |  |   | 6.0 years |  



The deferred
consideration fair value was estimated by using a discounted cash flow model based on probability adjusted annual gross profit
of each of the Éclat Pharmaceuticals products. A discount rate of 20% has been used, except for Hycet for which a discount
rate of 13% has been retained.



The transaction
was accounted for as a business combination under the acquisition method of accounting. Accordingly, the tangible assets and identifiable
intangible assets acquired and liabilities assumed were recorded at fair value, with the remaining purchase price recorded as goodwill.



The following
table summarizes the final fair values of the assets acquired and liabilities assumed at the acquisition date.



At March 13,
2012 (amounts in thousands of USD)



|Cash and cash equivalent                  |  | $ | 1,771   |  
|----------------------------------------- |  | - | ------- | -
|Account receivables                       |  |   | 210     |  
|Inventories                               |  |   | 38      |  
|Prepaid expenses and other current assets |  |   | 430     |  
|Property and equipment, net               |  |   | 57      |  
|Intangible assets                         |  |   | 49,282  |  
|Goodwill                                  |  |   | 18,491  |  
|Total identifiable assets acquired        |  |   | 70,279  |  
|                                          |  |   |         |  
|Current liabilities                       |  |   | (459    | )
|Deferred Tax Liabilities                  |  |   | (18,887 | )
|Long term liabilities                     |  |   | (6      | )
|Total liabilities assumed                 |  |   | (19,352 | )
|Net identifiable assets acquired          |  | $ | 70,279  |  
|Net assets acquired                       |  | $ | 50,927  |  



F-14







FLAMEL TECHNOLOGIES
S.A.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS



Of the $49,282,000
of acquired intangible assets, $47,309,000 was allocated to in-process research and development (IPR&D) assets that were recognized
at fair value on the acquisition date. The fair value was determined using an income approach, including a discount rate of 20%,
applied to probability adjusted after-tax cash flows. The estimated costs to complete the IPR&D projects represents management’s
best estimate of expected costs, but are subject to change based on additional information received as development activities advance.
The remaining useful life has been estimated to be four years once the products in question have been approved. The remaining $1,973,000
was allocated to the acquired product license for Hycet® (3-year useful economic life). In November 2013, the Company disposed
of the product license for Hycet generating a gain on sale of $0.1 million.



The deferred
tax liability of $18.9 million relates to temporary differences associated primarily with the IPR&D, which are not deductible
for tax purposes. Deferred taxes have been calculated at the statutory rate of 40%.



The difference
between the purchase price and the fair value of the assets acquired and liabilities assumed of $18.5 million was allocated to
goodwill. This goodwill is attributable to the remaining product opportunities identified by the acquired entity at the date of
acquisition, but for which limited development had occurred and the regulatory approval process had not commenced. None of the
goodwill is expected to be deductible for income tax purposes.



The Company
recognized $635,000 of acquisition related costs that were expensed and included in SG&A expenses.



The amounts
of revenues and earnings of Éclat Pharmaceuticals included in the Company’s consolidated income statement from the
acquisition date to the period ending December 31, 2012 (in thousands) are as follows:



|                  |  | Revenue and earnings included in the  consolidated income statement from March 13, 2012 to December 31, 2012 |       
|----------------- |  | ------------------------------------------------------------------------------------------------------------ | ------
|Revenues          |  | $                                                                                                            | 560   
|                  |  |                                                                                                              |       
|Net Income/(Loss) |  | $                                                                                                            | (5,301



The following
supplemental pro forma information presents Flamel’s financial results for the twelve month period as if the acquisition
of Éclat Pharmaceuticals had occurred on January 1, 2011 (in thousands):



|                  |  | Twelve months ended December 31, |        
|----------------- |  | -------------------------------- | -------
|                  |  | 2011                             |        
|                  |  | (unaudited)                      |        
|Revenues          |  | $                                | 33,209 
|                  |  |                                  |        
|Net Income/(Loss) |  | $                                | (13,624



The above
unaudited pro forma information was determined based on the historical US GAAP results of Flamel and Éclat Pharmaceuticals.
The unaudited pro forma consolidated results are not necessarily indicative of what the Company’s consolidated results of
operations actually would have been if the acquisition was completed on January 1, 2011. The unaudited pro forma consolidated net
income primarily reflects adjustment of:



| | i. | Elimination of $0.6 million of transaction costs, which are directly attributable to the transaction,
for Flamel for the period ended December 31, 2012, and integration of these costs as if they were expensed in the period ended
December 31, 2011.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ii. | Adjustment to record the estimated amortization expense for intangible asset. The amortization
expense was calculated using estimated useful life of three years for the Hycet product license acquired by Éclat Pharmaceuticals
in July 2011, with an estimated value of $2.0 million, considering the acquisition would have been completed on January 1, 2011.
The amortization for period ended December 31, 2011 amounts to $660,000.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-15







FLAMEL TECHNOLOGIES
S.A.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS



| | iii. | An adjustment to record the estimated increase in amortization expense for intangible assets for
the period prior to the acquisition (from January 1, 2012 to March 13, 2012). The incremental expense for the three months was
$25,000.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Net loss for
the twelve month period ended December 31, 2012 includes income of $14.4 million of which $18.8 million represents remeasurement
of the fair value of the acquisition liabilities and $4.3 million of expenses net of tax in connection with the impairment of certain
assets acquired. Net loss for the twelve month period ended December 31, 2013 includes expenses of $28.1 million related to the
remeasurement of the fair value of the acquisition liabilities. The Company’s result of operations in future periods will
be affected by the movements in the fair value of the acquisition liabilities which are remeasured at each balance sheet date.
Changes in fair value will be recognized in operating income. Changes in assumptions or other variants used to calculate the fair
value of acquisition liabilities, such as, but not limited to, the Company’s share price, volatility of the share price,
discount rates, probability assessment of success in completing development and commercializing acquired products, market share,
market size and selling prices negotiated for each product will have an effect on the fair value of the acquisition liabilities.
Future non-discounted probability adjusted deferred consideration payments, as of December 31, 2013, are expected to amount to
$57.9 million.



As of December
31, 2012 and 2013, the Company conducted impairment tests of the IPR&D and recognized an expense of $7,170,000 in the year
ended December 31, 2012, based on the management’s best estimates of the present value of future cash flows compiled on a
project by project and product by product basis (see note 12 Goodwill and intangible assets). The impairment of these assets
resulted from new facts and circumstances that occurred post acquisition regarding the potential competitive landscape of one of
the products in the portfolio.



3. Subcontracting
agreement:



In October,
2011, the Company signed a new supply agreement with GSK for the production of Coreg CR microparticles. Under the agreement, the
Company is entitled to guaranteed minimum payments to supply Coreg CR microparticles over a period of five years. No earlier than
January 1, 2013, GSK may terminate the agreement at their sole discretion by giving six months written notice. Pursuant to the
agreement, the Company received a payment of € 1,300,000 ($1,835,000) during the third quarter of 2011 and a further €1,300,000
($1,752,000) payment in the fourth quarter of 2011, as well as a higher margin on all product produced by Flamel for GSK since
January 1, 2011. For the year 2011, the Company recognized as revenues from product sales a total amount of $13,395,000 of which
$2,711,000 relates to the €2,600,000 received in the third quarter and the fourth quarter 2011. For 2012, the Company recognized
as revenues from product sales a total amount of $9,097,000 of which $852,000 relates to the €2,600,000 received in 2011.
For 2013, the Company recognized as revenues from product sales a total amount of $7,969,000.



4. License,
research and consulting agreements:



GlaxoSmithKline
(GSK)



In March 2003,
Flamel Technologies and SB Pharma Puerto Rico Inc, an affiliate of GSK entered into a license agreement whereby the Company agreed
to license its controlled-release Micropump® in order to develop a new formulation for carvedilol, which is marketed by GSK
as Coreg.



In 2011, the
Company recognized $8,210,000 of royalties on Coreg sales.



In 2012, the
Company recognized $6,870,000 of royalties on Coreg sales.



In 2013, the
company recognized $6,807,000 of royalties on Coreg sales



In December
2004, Flamel and GSK (GSK) entered into a four year supply agreement whereby Flamel agreed to supply GSK with commercial supplies
of product. The provisions of the agreement include payments to Flamel of $20,717,000 to support the costs and capital expenditure
relative to the creation of a manufacturing area for the production of commercial supply of the product. The capital expenditures
consist of both buildings and fixtures, and production equipment. Flamel will have immediate title to buildings and fixtures; however
title to production equipment remains with GSK for the duration of the supply agreement.



F-16







FLAMEL TECHNOLOGIES
S.A.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS



If the Company
breaches the supply agreement through gross negligence, GSK can choose to terminate the supply agreement. The likely occurrence
of this event is deemed remote given the Company’s ability to perform under supply arrangements based on its historical experience.
In the event of a breach and a decision to terminate the agreement, all payments received become repayable to GSK and Flamel will
receive immediate title to all production equipment.



Upon cessation
of the supply agreement, in the normal course of business, GSK will pass title to all production equipment to Flamel without cost
of any kind.



A total of
$8,188,000 has been incurred on the acquisition of buildings and fixtures and a total of $11,138,000 has been incurred on behalf
of GSK for the purchase of production equipment and associated costs. As of December 31, 2013, the funds received from GSK to finance
the acquisition of assets owned by Flamel are classified in other current liabilities for $331,000 and in other long term liabilities
for $3,357,000. The liability is amortized on a pro-rata basis over the expected life of the related assets and reflected as an
offset of the depreciation of the related assets.



In July 2006,
Flamel and GSK entered into a further agreement as a supplement to the original supply agreement whereby GSK partly sponsored the
extension of the then existing facilities at Pessac from two lines to three. GSK has exclusive use of part of this equipment, in
for the production of Coreg CR microparticles. The total funding provided by GSK amounted to $8.1 million to finance the acquisition
of equipments, buildings and fixtures. The Company received all installments due under the agreement by December 31, 2007. As of
December 31, 2013 the funds received from GSK to finance the extension were classified in other current liabilities for $348,000
and long term liabilities for $2,596,000. The liability is amortized on a pro-rata basis over the expected life of the assets and
proportionally based on funding received compared with the total value of the related assets. This amortization is reflected as
an offset of the depreciation of the related assets (see Note 13).



In October,
2011, the Company signed a new supply agreement with GSK for the production of Coreg CR microparticles; the Company is the sole
supplier of Coreg CR microparticles for GSK. Under the agreement, the Company will receive guaranteed minimum payments to supply
Coreg CR microparticles over a period of over a minimum period of five years.



No earlier
than January 1, 2013, GSK may terminate the agreement at their sole discretion by giving six months written notice. See
Note 3. Subcontracting Agreement.



Wyeth Pharmaceuticals



On September
12, 2007 the Company entered into a development and license agreement with Wyeth Pharmaceuticals, (‘Wyeth’) now part
of Pfizer Inc., whereby the Company agreed to license its Medusa technology for the development and licensing of a marketed protein.
The Company received an upfront fee and may receive development fees, milestones and royalties on the product. On September 2,
2008 Wyeth confirmed their intention to pursue the development and license agreement triggering a $500,000 payment. On November
4, 2009 Wyeth exercised the option for the licensing of Flamel technology and paid $1,000,000.



In 2011, the
Company recognized research and development revenues of $75,000. The Company also recognized $665,000 of amortization of up-front
payment and option payment, of which $425,000 relates to accelerated amortization due to termination.



In March 2012
the Company announced that the arrangement with Wyeth Pharmaceuticals was discontinued.



Merck Serono,
a division of Merck KGaA



On December
20, 2007 Flamel Technologies entered into a relationship with Merck Serono, a division of Merck KGaA, to investigate the applicability
of Flamel's Medusa technology for the extended release of a therapeutic protein of Merck Serono's portfolio.



In consideration
of the agreement signed in 2007, Merck Serono made an upfront payment of $2.7 million for investigating the therapeutic protein,
which has been amortized over the initial feasibility period. In February 2009 Merck Serono exercised the option to license our
technology triggering a payment of $ 6,500,000 (€5,000,000). Under the terms of the agreement, the Company is eligible to
receive up to €41 million ($53 million) in milestone payments upon certain agreed-upon development events.



F-17







FLAMEL TECHNOLOGIES
S.A.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS



In 2011, the
Company recognized research and development revenues of $2,398,000. The Company also recognized $1,391,000 of amortization of the
initial up-front and option payments.



On November
2, 2012, Flamel received notice from Merck Serono to terminate for convenience the development and license agreement, effective
January 31, 2013. For the year 2012, the Company recognized $2,745,000 of amortization of the initial up-front and option payments,
of which $1,426,000 relates to accelerated amortization due to termination.



Baxter
Healthcare Inc.



On June 19,
2009 the Company entered into agreement with Baxter Healthcare Inc., to formulate controlled release applications of blood clotting
factor replacement therapies using Flamel’s Medusa® technology. In consideration of this agreement the Company
received an access fee of $3,600,000 (€2,500,000).



In 2011, the
Company recognized license revenues of $871,000 as amortization of the initial up-front fee. In October 2011 the Company announced
that the agreement had been terminated.



Eagle Pharmaceuticals
Inc



On October
12, 2011 the Company entered into a license and development agreement with Eagle Pharmaceuticals for the development of a Medusa-based
hydrogel depot formulation of the small molecule antibiotic, tigecycline. In consideration of this agreement, the Company recognized
research and development revenues of $345,000. Milestone payments amounting to $1.2 million (€0.9 million) will be received
upon achievement of certain development and commercial events.



In 2012, the
Company recognized research and development revenues of $659,000. The Company also recognized $43,000 of amortization of the initial
up-front fee.



In 2013, the
Company recognized research and development revenues of $31,600 as amortization of the initial up-front fee



Pfizer
Inc



The company
entered into research collaboration with Pfizer Inc. to assess the applicability of the Medusa platform to certain molecules in
development. Under this collaboration, the Company recognized research and development revenues of $18,000 in 2011. In March 2012
the Company announced that the collaboration with Pfizer had been discontinued.



Corning



In December
1998, the Company signed a long-term research and product development agreement with Corning France and Corning Incorporated. Pursuant
to the terms of this agreement, Flamel receives royalties on the sales of Corning products that utilize Flamel’s innovations.



The Company
recognized royalties on Corning’s sales of $372,000 in 2011, $152,000 in 2012 and $111,000 in 2013. On February 12, 2014
the Company signed an amendment effectively terminating the research and product development agreement and received a payment of
$280,000 excluding sales taxes.







F-18







FLAMEL TECHNOLOGIES
S.A.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS



Others



The Company
recognized license and research and development revenues with undisclosed partners for an amount of $4,808,000 in 2011,$5,877,000
in 2012 and $6,525,000 in 2013.



5. Research and
Development expenses



Total research
and development expenditures can be disaggregated in the following significant type of expenses ($USD in millions):



|                                  |  | 2011 |      |   | 2012 |  |      | 2013 | 
|--------------------------------- |  | ---- | ---- | - | ---- |  | ---- | ---- | 
|Research and Development Expenses |  |      | 33.7 |   |      |  | 32.7 |      | 
|R&D Tax Credit                    |  |      | (6.0 | ) |      |  | (6.5 | )    | 
|Grants                            |  |      | (1.7 | ) |      |  | (0.1 | )    | 
|Total                             |  |      | 25.1 |   |      |  | 26.1 |      | 



As of December
31, 2012 the Company recognized to the income statement unconditional grants for a total of $103,000. No unconditional grants have
been recognized to the income statement in 2013.



6. Stock based
compensation:



6.1 ASC
718



The Company
applies the provisions of ASC 718 in accounting for its stock based compensation. The fair value of each option and warrant granted
during the year is estimated on the date of grant using the Black-Scholes option pricing model. Option valuation models require
the input of subjective assumptions and these assumptions can vary over time. The weighted-average assumptions on grants made in
each of the following years were:



|                                       |  | Year Ended December
    31 |      
|-------------------------------------- |  | -------------------------- | -----
|                                       |  | 2011                       |      
|Weighted-average expected life (years) |  | $                          | 4.00 
|Expected volatility rate               |  |                            | 63.60
|Expected dividend yield                |  |                            | -    
|Risk-free interest rate                |  |                            | 0.83 
|Forfeiture rate                        |  |                            | -    



We base our
determination of expected volatility predominantly on the implied volatility of our traded options with consideration of our historical
volatilities. Given the limited historical data and the grant of stock options and warrants to a limited population, the simplified
method has been used to calculate the expected life.



Stock based
compensation expense recognized was as follows:



As of December
31, 2013, the projected compensation expense related to non vested options or warrants amounted to $4,090,000 and are expected
to be recognized over a weighted average period of 2.13 years.



|(In thousands of U.S dollars except per share  data) |  | Options |      |  | Free of charge share awards |  |       | Warrants |  |  | Total | 
|---------------------------------------------------- |  | ------- | ---- |  | --------------------------- |  | ----- | -------- |  |  | ----- | 
|                                                     |  | 2011    |      |  | 2012                        |  |       | 2013     |  |  | 2011  | 
|Research and development                             |  |         | 332  |  |                             |  | 419   |          |  |  | 398   | 
|Cost of goods sold                                   |  |         | 3    |  |                             |  | 2     |          |  |  | 1     | 
|Selling, general and administrative                  |  |         | 461  |  |                             |  | 1,280 |          |  |  | 903   | 
|                                                     |  |         |      |  |                             |  |       |          |  |  |       | 
|Total stock-based compensation expense               |  |         | 796  |  |                             |  | 1,701 |          |  |  | 1,302 | 
|                                                     |  |         |      |  |                             |  |       |          |  |  |       | 
|Effect on earnings per share                         |  |         |      |  |                             |  |       |          |  |  |       | 
|Basic                                                |  |         | 0.03 |  |                             |  | 0.07  |          |  |  | 0.05  | 
|                                                     |  |         |      |  |                             |  |       |          |  |  |       | 
|Diluted                                              |  |         | 0.03 |  |                             |  | 0.07  |          |  |  | 0.05  | 



F-19







FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



6.2
 Warrants



The summary
of warrants activity is as follows:



|                             |  | Warrants
Outstanding |           |  | Weighted Average 
Exercise Price in 
U.S dollars [1] |   |       | Weighted Average 
Exercise Price in 
Euros | 
|---------------------------- |  | -------------------- | --------- |  | ---------------------------------------------------- | - | ----- | ------------------------------------------ | 
|Balance at January 1, 2011   |  |                      | 750,000   |  |                                                      | $ | 7.82  |                                            | 
|Warrants granted             |  |                      | 300,000   |  |                                                      | $ | 5.03  |                                            | 
|Warrants cancelled           |  |                      | 150,000   |  |                                                      | $ | 6.94  |                                            | 
|Balance at December 31, 2011 |  |                      | 900,000   |  |                                                      | $ | 6.89  |                                            | 
|Warrants granted             |  |                      | 3,300,000 |  |                                                      | $ | 8.63  |                                            | 
|Warrants reintegrated        |  |                      | 100,000   |  |                                                      | $ | 6.65  |                                            | 
|Warrants cancelled           |  |                      | 200,000   |  |                                                      | $ | 10.20 |                                            | 
|Balance at December 31, 2012 |  |                      | 4,100,000 |  |                                                      | $ | 8.12  |                                            | 
|Warrants granted             |  |                      | 200,000   |  |                                                      | $ | 6.14  |                                            | 
|Warrants exercised           |  |                      | 50,000    |  |                                                      | $ | 6.29  |                                            | 
|Warrants cancelled           |  |                      | 200,000   |  |                                                      | $ | 6.29  |                                            | 
|Balance at December 31, 2013 |  |                      | 4,050,000 |  |                                                      | $ | 8.14  |                                            | 



[1] Historical exchange
rate at date of grant



50,000 warrants
were exercised in 2013 and no warrants were exercised in 2011 and 2012.



Exercise prices
and intrinsic value for warrants outstanding as of December 31, 2013 were as follows:





|                                    |  | Warrants Outstanding |           |  | Warrants Exercisable                            | 
|----------------------------------- |  | -------------------- | --------- |  | ----------------------------------------------- | 
|Range of  exercise prices  in euros |  | Number of  shares    |           |  | Weighted  average  remaining  contractual  life | 
|                                    |  |                      |           |  |                                                 | 
|0  to 4.58                          |  |                      | 500,000   |  |                                                 | 
|5.44 to  to 6.57                    |  |                      | 2,450,000 |  |                                                 | 
|6.58 to 8.52                        |  |                      | 1,100,000 |  |                                                 | 
|                                    |  |                      | 4,050,000 |  |                                                 | 





The total
fair value of warrants vested during 2011 amounted to €257,000or $358,000 (average exchange rate of the year).



The total
fair value of warrants vested during 2012 amounted to €271,000or $348,000 (average exchange rate of the year).



No warrants
were vested during 2013.



Intrinsic
value represents the variance between the share price and the exercise price. As of December 31, 2013 the aggregate intrinsic value
of warrants outstanding amounted to €1,342,000 or $1,867,000 (historical exchange rate at date of grant).



F-20







FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



6.3 Stock
Options



The activity
under the option plans is as follows:



|                             |  | Shares Available for  Grant |           |   | Options Granted  and Outstanding |  |           | Weighted Average  Exercise Price in  U.S dollars[1] |  |   | Weighted Average  Exercise Price in  Euros | 
|---------------------------- |  | --------------------------- | --------- | - | -------------------------------- |  | --------- | --------------------------------------------------- |  | - | ------------------------------------------ | 
|Balance at January 1, 2011   |  |                             | 475,000   |   |                                  |  | 3,098,490 |                                                     |  | $ | 14.69                                      | 
|Options authorized           |  |                             |           |   |                                  |  | -         |                                                     |  |   | -                                          | 
|Granted                      |  |                             | (200,000  | ) |                                  |  | 200,000   |                                                     |  | $ | 4.39                                       | 
|Exercised                    |  |                             | -         |   |                                  |  | (44,200   | )                                                   |  | $ | 1.48                                       | 
|Forfeited                    |  |                             | -         |   |                                  |  | (113,300  | )                                                   |  | $ | 8.93                                       | 
|Balance at December 31, 2011 |  |                             | 275,000   |   |                                  |  | 3,140,990 |                                                     |  | $ | 14.65                                      | 
|Options authorized           |  |                             | 1,000,000 |   |                                  |  | -         |                                                     |  |   | -                                          | 
|Granted                      |  |                             | (550,000  | ) |                                  |  | 550,000   |                                                     |  | $ | 5.97                                       | 
|Exercised                    |  |                             | -         |   |                                  |  | (195,000  | )                                                   |  | $ | 2.04                                       | 
|Forfeited                    |  |                             | 10,000    |   |                                  |  | (223,500  | )                                                   |  | $ | 16.88                                      | 
|Balance at December 31, 2012 |  |                             | 735,000   |   |                                  |  | 3,272,490 |                                                     |  | $ | 13.79                                      | 
|Options authorized           |  |                             | 600,000   |   |                                  |  | -         |                                                     |  |   | -                                          | 
|Cancelled                    |  |                             | (10,000   | ) |                                  |  | -         |                                                     |  |   | -                                          | 
|Granted                      |  |                             | (710,000  | ) |                                  |  | 710,000   |                                                     |  | $ | 5.97                                       | 
|Forfeited                    |  |                             | 13,000    |   |                                  |  | (647,500  | )                                                   |  | $ | 15.29                                      | 
|Balance at December 31, 2013 |  |                             | 628,000   |   |                                  |  | 3,334,990 |                                                     |  | $ | 11.84                                      | 



[1]Historicalexchange rate at date of grant



The total
intrinsic value of options exercised during 2011 amounted to €111,000 or $149,000 (historical exchange rate at date of exercise).



The total
intrinsic value of options exercised during 2012 amounted to €735,000 or $973,000 (historical exchange rate at date of exercise).



No options
were exercised during 2013.



Stock options
outstanding at December 31, 2013, which expire from 2014 to 2023, had exercise prices ranging from €3.00 to € 25.39.
The weighted average remaining contractual life of all options is 3.80 years. As of December 31, 2013, there were 3,334,990 outstanding
options at a weighted average exercise price of €9.17, of which 2,217,990 were exercisable at a weighted average price of
€11.59. Exercise prices and intrinsic value for options outstanding as of December 31, 2013 were as follows:



|                                    |  | Stock Options Outstanding |           |  | Stock Options Exercisable                       | 
|----------------------------------- |  | ------------------------- | --------- |  | ----------------------------------------------- | 
|Range of  exercise prices  in euros |  | Number of  shares         |           |  | Weighted  average  remaining  contractual  life | 
|                                    |  |                           |           |  |                                                 | 
|0  to 3.28                          |  |                           | 482,000   |  |                                                 | 
|4.03 to 5.44                        |  |                           | 1,585,000 |  |                                                 | 
|6.40 to 12.02                       |  |                           | 63,500    |  |                                                 | 
|12.86 to 16.23                      |  |                           | 898,990   |  |                                                 | 
|19.2 to 25.39                       |  |                           | 305,500   |  |                                                 | 
|                                    |  |                           |           |  |                                                 | 
|                                    |  |                           | 3,334,990 |  |                                                 | 



F-21







FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



The total
fair value of options vested during 2011 amounted to €473,000 or $659,000 (average exchange rate of the year).



The total
fair value of options vested during 2012 amounted to €846,000 or $1,088,000 (average exchange rate of the year).



The total
fair value of options vested during 2013 amounted to €999,000 or $1,327,000 (average exchange rate of the year).



The aggregate
intrinsic value of options outstanding amounted to €2,729,000 or $3,531,000 (historical exchange rate at date of grant). The
aggregate intrinsic value of options exercisable amounted to €1,070,000 or $1,385,000 (historical exchange rate at date of
grant).



6.4 Free
share award



The activity
under the free share award plans is as follows:



|                             |  | Free of Charge  Share Award  Available for Grant |          |   | Free of Charge  Share Award  Granted and  Outstanding |  |          | Weighted Average  Fair Value at grant  date in U.S  dollars[1] |  |   | Weighted Average  Fair Value at grant  date in Euros | 
|---------------------------- |  | ------------------------------------------------ | -------- | - | ----------------------------------------------------- |  | -------- | -------------------------------------------------------------- |  | - | ---------------------------------------------------- | 
|Balance at January 1, 2011   |  |                                                  | 18,150   |   |                                                       |  | 522,500  |                                                                |  | $ | 7.25                                                 | 
|Options authorized           |  |                                                  | 200,000  |   |                                                       |  | -        |                                                                |  |   | -                                                    | 
|Granted                      |  |                                                  | (200,000 | ) |                                                       |  | 200,000  |                                                                |  | $ | 4.39                                                 | 
|Exercised                    |  |                                                  | -        |   |                                                       |  | (272,400 | )                                                              |  | $ | 7.47                                                 | 
|Forfeited                    |  |                                                  | 8,450    |   |                                                       |  | (8,450   | )                                                              |  | $ | 7.22                                                 | 
|Cancelled                    |  |                                                  | 1,000    |   |                                                       |  | (1,000   | )                                                              |  | $ | 7.45                                                 | 
|Balance at December 31, 2011 |  |                                                  | 26,600   |   |                                                       |  | 440,650  |                                                                |  | $ | 5.81                                                 | 
|Options authorized           |  |                                                  | 200,000  |   |                                                       |  | -        |                                                                |  |   | -                                                    | 
|Granted                      |  |                                                  | (189,700 | ) |                                                       |  | 189,700  |                                                                |  | $ | 3.07                                                 | 
|Exercised                    |  |                                                  | -        |   |                                                       |  | (258,150 | )                                                              |  | $ | 6.52                                                 | 
|Forfeited                    |  |                                                  | 21,550   |   |                                                       |  | (21,550  | )                                                              |  | $ | 5.79                                                 | 
|Balance at December 31, 2012 |  |                                                  | 58,450   |   |                                                       |  | 350,650  |                                                                |  | $ | 3.81                                                 | 
|Options authorized           |  |                                                  | 200,000  |   |                                                       |  | -        |                                                                |  |   | -                                                    | 
|Granted                      |  |                                                  | (192,500 | ) |                                                       |  | 192,500  |                                                                |  | $ | 7.36                                                 | 
|Exercised                    |  |                                                  | -        |   |                                                       |  | (137,150 | )                                                              |  | $ | 4.39                                                 | 
|Forfeited                    |  |                                                  | 20,600   |   |                                                       |  | (38,400  | )                                                              |  | $ | 5.10                                                 | 
|Balance at December 31, 2013 |  |                                                  | 86,550   |   |                                                       |  | 367,600  |                                                                |  | $ | 5.32                                                 | 



[1] Historical exchange
rate at date of grant



As of December
31, 2011 the total fair value (or intrinsic value) of Free Share Award outstanding amounted to €1,774,000 or $2,296,000 (historical
exchange rate at date of grant).



As of December
31, 2012 the total fair value (or intrinsic value) of Free Share Award outstanding amounted to €1,009,000 or $1,336,000 (historical
exchange rate at date of grant).



As of December
31, 2013 the total fair value (or intrinsic value) of Free Share Award outstanding amounted to €1,446,000 or $1,954,000 (historical
exchange rate at date of grant).



F-22







FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS





7. Cash and Cash
Equivalents:



Cash consists
of cash on deposit and fixed term investments held in several major banks, and cash on hand. The components of cash and cash equivalents
were as follows:



|                                |  | December 31, |      
|------------------------------- |  | ------------ | -----
|(In
thousands of U.S. dollars)  |  | 2012         |      
|                                |  |              |      
|HSBC                            |  | $            | 880  
|Credit Agricole                 |  |              | 641  
|Commerce Bank                   |  |              | 1,057
|Citibank                        |  |              | 159  
|Other                           |  |              | 5    
|Total cash and cash equivalents |  | $            | 2,742



8. Marketable
securities:



Marketable
securities are classified as available-for-sale securities and are recorded at fair market value. Unrealized gains and losses are
recorded as other comprehensive income in shareholder’s equity, net of income tax effects.



For the year
ended December 31, 2011, 2012 and 2013 marketable securities amounted respectively to $21,036,000, $6,413,000 and $401,000.



As of December
31, 2011, 2012 and December 31, 2013 there were no unrealized gains or losses.



|(in thousands of U.S dollars) |  | Fair value |       |  | Value at  cost |  |     | Unrealized Gains | 
|----------------------------- |  | ---------- | ----- |  | -------------- |  | --- | ---------------- | 
|                              |  | 2012       |       |  | 2013           |  |     | 2012             | 
|Credit Agricole securities    |  |            | 6,413 |  |                |  | 401 |                  | 
|HSBC securities               |  |            | -     |  |                |  | -   |                  | 
|Total                         |  |            | 6,413 |  |                |  | 401 |                  | 



Gross realized
gains on sales of these available-for-sale securities amounted to $41,000, $6,000 and $0 for the years ended December 31, 2011,
2012 and 2013 respectively.



|(in thousands of U.S dollars) |  | Proceeds from sales |        |  | Purchase of securities |  |       | Gross gains
(Losses) | 
|----------------------------- |  | ------------------- | ------ |  | ---------------------- |  | ----- | -------------------- | 
|                              |  | 2012                |        |  | 2013                   |  |       | 2012                 | 
|Credit Agricole securities    |  |                     | 15,143 |  |                        |  | 7,152 |                      | 
|HSBC securities               |  |                     | 3,216  |  |                        |  | -     |                      | 
|Total                         |  |                     | 18,359 |  |                        |  | 7,152 |                      | 



9. Inventory:



The components
of inventories were as follows:



|                               |  | December 31, |      
|------------------------------ |  | ------------ | -----
|(In thousands of U.S. dollars) |  | 2012         |      
|                               |  |              |      
|Raw materials                  |  |              | 894  
|Finished goods                 |  |              | 626  
|                               |  |              |      
|Inventories, net               |  |              | 1,520



F-23







FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



10.
Prepaid expenses and other current assets:



The components
of prepaid expenses and other current assets were as follows:



|                                                |  | December 31, |      
|----------------------------------------------- |  | ------------ | -----
|(In thousands of U.S. dollars)                  |  | 2012         |      
|                                                |  |              |      
|Valued-added tax recoverable                    |  |              | 1,013
|Prepaid expenses                                |  |              | 906  
|Advance to suppliers                            |  |              | 324  
|Other currents assets                           |  |              | -    
|Grants recoverable                              |  |              | 71   
|Total Prepaid expenses and other current assets |  |              | 2,314



11.
Property and Equipment:



The components
of property and equipment were as follows:



|                                               |  | December 31, |        
|---------------------------------------------- |  | ------------ | -------
|(In thousands of U.S. dollars)                 |  | 2012         |        
|                                               |  |              |        
|Land and buildings                             |  |              | 10,332 
|Laboratory equipment                           |  |              | 29,314 
|Office and computer equipment                  |  |              | 5,135  
|Furniture, fixtures and fittings               |  |              | 20,697 
|Construction in progress                       |  |              | -      
|Total property and equipment                   |  |              | 65,478 
|Less accumulated depreciation and amortization |  |              | (47,240
|Property and equipment, net                    |  |              | 18,238 



Depreciation
expense related to property and equipment amounted to $3,346,000, $3,183,000 and $3,062,000 for the years ended December 31, 2011,
2012 and 2013, respectively.



Property and
Equipment include costs of $509,000, $507,000 and $391,000 at December 31, 2011, 2012 and 2013 respectively that are related to
capitalized lease assets. Accumulated amortization of these leased assets was approximately $173,000, $211,000 and $142,000 at
December 31, 2011, 2012 and 2013 respectively. Depreciation expense on assets held under capital leases is included in total depreciation
expense for the years ended December 31, 2011, 2012 and 2013 and amounted to $56,000, $44,000 and $49,000 respectively.



12.
Goodwill and intangible assets



|                                   |  | December
    31,           |       
|---------------------------------- |  | -------------------------- | ------
|                                   |  | 2012                       |       
|(In thousands
    of U.S. dollars) |  | Gross carrying 
    amount |       
|Goodwill                           |  | $                          | 544   
|Goodwill Eclat acquisition         |  |                            | 18,491
|Total Goodwill                     |  | $                          | 19,035
|In-progess R&D                     |  |                            | 47,309
|License                            |  |                            | 1,973 
|Total Intangible assets            |  | $                          | 49,282



See note
2 – Business combinations.



F-24











FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS





13. Accrued Expenses



Accrued expenses consist
mainly of expenses related to paid vacations, compensatory leaves with related social charges.



Accrued expenses comprises
of the following:



|                               |  | December 31, |      
|------------------------------ |  | ------------ | -----
|(In thousands of U.S. dollars) |  | 2012         |      
|                               |  |              |      
|Accrued compensation           |  |              | 1,671
|Accrued social charges         |  |              | 3,193
|Accrued Interest               |  |              | -    
|Other                          |  |              | 149  
|Total accrued expenses         |  |              | 5,013



14. Other current
and Long Term liabilities:



14.1. Other current
liabilities:



Other current liabilities
comprise the following:



|                                              |  | December 31, |      
|--------------------------------------------- |  | ------------ | -----
|(In thousands of U.S. dollars)                |  | 2012         |      
|                                              |  |              |      
|R&D credit tax financing short term           |  |              | -    
|Funding from partner GSK short term           |  |              | 669  
|Employee service award provision short term   |  |              | 263  
|Provision for retirement indemnity short term |  |              | -    
|Other                                         |  |              | -    
|Valued-added tax payable                      |  |              | 201  
|Total Other current liabilities               |  |              | 1,133



In 2011, the Company
obtained an advance from OSEO, a governmental agency supporting innovation, for $6,813,000 (€5,164,000) secured against the
research tax credits due to the company by the tax authorities for expenditure incurred in 2010. The interest rate applied is the
monthly average of the Euro Interbank Offered Rate (EURIBOR) plus 0.9%. In 2012 the operation was renewed with the same conditions
and secured against the research credit tax from 2011. The Company received an amount of $5,848,000 (€4,432,000). As of December
31, 2012 the total funding was classified as a long term liability for an amount of $12,661,000. As of December 31, 2013 the total
funding amounted to $13,234,000 of which $7,121,000 was classified as short term liability and $6,113,000 was classified as a long
term liability (see note 14.2).



In connection with the
2004 supply agreement with GSK (see Note 4), the Company received funds to finance facilities related assets. A total of $8,188,000
has been spent on the acquisition of buildings and fixtures and a total of $11,138,000 has been spent on behalf of GSK for the
purchase of production equipment. As of December 31, 2013 the funds received from GSK to finance the acquisition of assets owned
by Flamel are classified as a current liability for $331,000 and as a long term liability for $3,357,000. In July 2006, Flamel
and GSK entered into a side agreement to the original agreement whereby GSK partially sponsored the extension of the Micropump
development facility (see Note 4). This facility was completed in March 2008. As of December 31, 2007, the Company had received
all installments from GSK for financing of this project. The total installments amounted to $8,097,000. As of December 31, 2013,
the funds received from GSK are classified as a current liability for $348,000 and as a long term liability for $2,596,000 (see
Note 14.2).



The liability is amortized
on a pro-rata basis over the expected life of the related assets and reflected as an offset of the depreciation of the related
assets (see Note 4).



The Service award provision
is accrued over the respective service period (5, 10, 15 and 20 years) using actuarial assumptions and calculations as for the
lump sum retirement indemnity (see Note 21). In October 2013, the Company terminated payment of the service award with an effective
date of June 30, 2014 and as such, reversed the long term provision in operating expenses.



F-25







FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



For the year ended December
31, 2012 the provision amounted to $3,031,000 of which $263,000 is short term. For the year ended December 31, 2013 the total provision
amounted to $285,000 and is classified as short term.



14.2. Other long
term liabilities



Other long term liabilities
are composed of the following:



|                                                 |  | December 31, |       
|------------------------------------------------ |  | ------------ | ------
|(In thousands of U.S. dollars)                   |  | 2012         |       
|                                                 |  |              |       
|Funding from partner GSK long term               |  |              | 6,345 
|R&D credit tax financing long term               |  |              | 12,661
|Provision for retirement indemnity (see note 21) |  |              | 2,875 
|Employee service award provision long term       |  |              | 2,768 
|Other                                            |  |              | 31    
|Total Other long term liabilities                |  |              | 24,680



Funding from GSK long
term amounted to $3,357,000 in connection with the supply agreement signed in December 2004 and relates to the acquisition of buildings
and fixtures and $2,596,000 in connection with the side agreement to the original agreement, signed in July 2006 (see Note 14.1).



As of December 31, 2013
the total financing of the R&D tax credit amounted to $13,234,000 of which $6,113,000 was classified as a long term liability
(see Note 14.1).



15.  Deferred
Revenue:



Current portion of deferred
revenue comprises of upfront licensing fees which are recognized over the development period
of the contract and revenue on shipments of Bloxiverz.



For
the year ended December 31, 2012 deferred revenues amounted to $795,000 and $1,264,000 for the year ended December 31, 2013.



In
2012, these deferred revenues result from the upfront license fees received from undisclosed partners. In 2013, these deferred
revenues result from the upfront license fees received from undisclosed partners for $189,000 and the deferral of revenue on shipments
of Bloxiverz® for $1,075,000, a product which was launched in July 2013. As of December 31, 2013, the criteria for recognizing
the revenue have not been met, accordingly all revenues on shipments of the product in 2013 have been deferred.



F-26







FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



16. Long-term
Debt:



Long-term debt comprises:



|                                                   |  | December 31, |       
|-------------------------------------------------- |  | ------------ | ------
|(In thousands of U.S. dollars)                     |  | 2012         |       
|                                                   |  |              |       
|Oseo ANVAR loans (a)                               |  |              | 2,751 
|French Ministry of Research (b)                    |  |              | 1,945 
|Acquisition liability contingent consideration (c) |  |              | 24,063
|Acquisition liability note (c)                     |  |              | 5,713 
|Acquisition liability warrant consideration (c)    |  |              | 2,157 
|Deerfield Facility agreement (d)                   |  |              | -     
|Deerfield Royalty agreement (d)                    |  |              | -     
|Broadfin Facility agreement (e)                    |  |              |       
|Broadfin Royalty agreement (e)                     |  |              | -     
|Total                                              |  |              | 36,629
|Current portion                                    |  |              | 3,351 
|Long-term portion                                  |  |              | 33,278



(a) OSEO Anvar is an
agency of the French government that provides financing to French companies for research and development. At December 31, 2012
and 2013, the Company had outstanding loans from Anvar of $2,751,000and $2,553,000, respectively for various programs. These loans
do not bear interest and are repayable only in the event the research project is technically or commercially successful. Repayment
is scheduled to occur from 2013 through 2019.



(b) In 2002, the Company
received a loan of $464,000 from the French Ministry of Research on a research project (the “Proteozome” project) related
to the development of new Medusa applications. Pursuant to the agreement, the Company is granted a loan equal to 50% of the total
expenses incurred on this project over a three-year period beginning on January 2, 2002. The remainder of the advance of $1,707,000
was received in 2005. This loan is due for repayment in 2014. The loan is non-interest bearing and is repayable only in the event
the research project is technically or commercially successful.



(c) The Acquisition liability
relates to the acquisition by the Company through its wholly owned subsidiary Flamel US Holdings, Inc., or Flamel US, all of the
membership interests of Éclat Pharmaceuticals, LLC (see note 2 Business combinations). In exchange for all
of the issued and outstanding membership interests of Éclat Pharmaceuticals, Flamel US provided consideration consisting
of:



| | · | a $12 million senior, secured six-year note that is guaranteed by the Company and its subsidiaries
and secured by the equity interests and assets of Éclat;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | two warrants to purchase a total of 3,300,000 American Depositary Shares, each representing one
ordinary share of Flamel (“ADSs”); and
| | - | --------------------------------------------------------------------------------------------------------------------------------------

| | · | a commitment to make earn out payments of 20% of any gross profit generated by certain Éclat
Pharmaceuticals launch products and to pay 100% of any gross profit generated by Hycet® up to a maximum of $1 million. The
Purchase Agreement also contains certain representations and warranties, covenants, indemnification and other customary provisions.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of December 31, 2013,
the fair value of the note was estimated using a probability-weighted discounted cash flow model. This fair value measurement is
based on significant inputs not observable in the market and thus represents a level 3 measurement as defined in ASC 820. The key
assumptions are as follows: 20% discount rate, 100% probability of success. The note has no early redemption premium.



F-27







FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



The fair value of the
warrants was determined by using a Black-Scholes option pricing model with the following assumptions for each of the years indicated:



|                        |  | 2012 |           |   | 2013 |  
|----------------------- |  | ---- | --------- | - | ---- | -
|Share price             |  | $    | 3.03      |   |      | $
|Risk-free interest rate |  |      | 0.77      | % |      |  
|Dividend yield          |  |      | -         |   |      |  
|Expected volatility     |  |      | 53.75     | % |      |  
|Expected term           |  |      | 5.2 years |   |      |  



Pursuant to guidance
of ASC 815-40-15-7(i), the Company determined that the Warrants issued in March 2012 as consideration for the acquisition of Éclat
could not be considered as being indexed to the Company’s own stock, on the basis that the exercise price for the warrants
is determined in U.S. dollars, although the functional currency of the Company is the Euro. The Company determined that these warrants
should be accounted as a debt instrument.



As of December 31, 2013,
the deferred consideration fair value was estimated by using a discounted cash flow model based on probability adjusted annual
gross profit of each of the Éclat Pharmaceuticals products. A discount rate of 20% has been used.



See also Note 22 –
Fair Value of Financial Instruments.



(d) On February 4, 2013
the Company concluded a $15 million debt financing transaction (Facility Agreement) with Deerfield Management, a current shareholder.
Subject to certain limitations, the Company may use the funds for working capital, including continued investment in its research
and development projects.



Consideration received
was as follows:



| | · | $12.4 million for a Facility agreement of a nominal value of $15 million, including a premium on
reimbursement of $2.6 million. The principal amount of the Loan must be repaid over four years as follows: 10% on July 1, 2014,
and 20%, 30% and 40% on the second, third, and fourth anniversary, respectively, of the original disbursement date of the Loan.
Notwithstanding the foregoing, the entire principal amount of the Loan may be repaid in whole or in part on any interest payment
date occurring after December 31, 2013. Interest is payable quarterly, on the first business day of each January, April, July and
October.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | $2.6 million for a Royalty agreement whereby, the Company’s wholly owned subsidiary Éclat
subject to required regulatory approvals and launch of product, is to pay a 1.75% Royalty of the net sales of certain products
sold by Éclat and any of its affiliates until December 31, 2024.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The facility agreement
is accounted for at amortized cost using an effective rate of 23%. The Company elected the fair value option for the measurement
of the royalty liability.



The facility and royalty
agreements are secured by the intellectual property and regulatory rights related to certain ‘Éclat’ Products
and certain receivables and the Company has agreed to pledge certain physical assets.



As of December 31, 2013,
the fair value of the Royalty was estimated using a probability-weighted discounted cash flow model based on probability adjusted
projected annual net sales of each of the products which may be approved and sold by Éclat Pharmaceuticals. This fair value
measurement is based on significant inputs not observable in the market and thus represents a level 3 measurement as defined in
ASC 820. The discount rate used is 20%.



See also Note 22 –
Fair Value of Financial Instruments.



(e) On December 3, 2013
the Company concluded with Broadfin Healthcare Master Fund, a current shareholder, a $15 million debt financing transaction (Facility
Agreement) divided in 3 tranche of $5 million each, Under the terms of the Facility, upon closing Broadfin made an initial loan
of $5.0 million and the Borrowers may request, at any time prior to August 15, 2014, up to two additional loans in the amount of
$5.0 million each, with funding subject to certain specified conditions. Subject to certain limitations, the Company may use the
funds for working capital, including continued investment in its research and development projects



F-28







FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



Consideration received
was as follows:



| | · | $2.8 million for a Facility agreement of a nominal value of $5 million, The principal amount of
the Loan must be repaid over three years as follows: 100% on January 1, 2017. Notwithstanding the foregoing, the entire principal
amount of the Loan may be repaid in whole or in part on any interest payment date occurring after December 31, 2013. Interest is
payable quarterly, on the first business day of each January, April, July and October.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | $2.2 million for a Royalty agreement whereby, the Company’s wholly owned subsidiary Éclat
subject to required regulatory approvals and launch of product, is to pay a 0.834% Royalty of the net sales of certain products
sold by Éclat and any of its affiliates until December 31, 2024. The amount of the royalty payable under the Royalty Agreement
will increase by 0.583% for each additional loan made under the Facility, if any, up to a maximum royalty amount of 2.0%.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The facility agreement
is accounted for at amortized cost using an effective rate of 41%. The Company elected the fair value option for the measurement
of the royalty liability.



The facility and royalty
agreements are secured by intellectual property associated with the Company's Medusa technology and a junior lien on substantially
all of the assets of the Borrowers, which were previously pledged in connection with the Deerfield facility, royalty and acquisition
liabilities.



Concurrent with entering
into the Facility, the Acquisition liability note was amended to eliminate, effective as of December 31, 2014, the thresholds that
must be reached before repayment of the note is required.



As of December 31, 2013,
the fair value of the Royalty was estimated using a probability-weighted discounted cash flow model based on probability adjusted
projected annual net sales of each of the products which may be approved and sold by Éclat Pharmaceuticals. This fair value
measurement is based on significant inputs not observable in the market and thus represents a level 3 measurement as defined in
ASC 820. The discount rate used is 20%.



Total future payments
on long-term debt for the next five years ending December 31 (assuming the underlying projects are commercially or technically
successful for governmental research loans) are as follows:



|(In thousands of U.S. dollars) |  | December 31, |        
|------------------------------ |  | ------------ | -------
|                               |  |              |        
|2014                           |  |              | 20,286 
|2015                           |  |              | 27,802 
|2016                           |  |              | 24,541 
|2017                           |  |              | 21,340 
|2018                           |  |              | 7,307  
|                               |  |              |        
|                               |  |              | 101,276



17. Capital lease
obligations:



The Company leases certain
of its equipment under capital leases. Each lease contract generally has a term of four years with a purchase option. No specific
restrictions or guarantee provisions are included in the arrangement.



F-29







FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



Future payments on capital
leases for the years ending December 31 are as follows:



|(In thousands of U.S. dollars)     |  | December 31, |    
|---------------------------------- |  | ------------ | ---
|                                   |  |              |    
|2014                               |  |              | 91 
|2015                               |  |              | 89 
|2016                               |  |              | 14 
|Total                              |  |              | 194
|Less amounts representing interest |  |              | (6 
|Future payments on capital leases  |  |              | 188
|Less current portion               |  |              | 85 
|Long  term portion                 |  |              | 103



Interest paid in the years
ended December 31, 2011, 2012 and 2013 was approximately $20,000, $14,000 and $9,700 respectively.



18. Earnings Per Share:



The following
is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations:



|                                                                                                       |  | Year ended December 31, |           
|------------------------------------------------------------------------------------------------------ |  | ----------------------- | ----------
|(In thousands, except per share amounts)                                                               |  | 2011                    |           
|                                                                                                       |  |                         |           
|Numerator:                                                                                             |  |                         |           
|                                                                                                       |  |                         |           
|Net income (loss)                                                                                      |  | $                       | (8,774    
|                                                                                                       |  |                         |           
|Denominator:                                                                                           |  |                         |           
|Weighted average shares outstanding used for basic earnings (loss) per share .                         |  |                         | 24,668,579
|Effect of dilutive securities:                                                                         |  |                         |           
|Stock-options and warrants                                                                             |  |                         | -         
|Weighted average shares outstanding and dilutive securities used for diluted earnings (loss) per share |  |                         | 24,668,579
|                                                                                                       |  |                         |           
|Basic earnings (loss) per share                                                                        |  | $                       | (0.36     
|Diluted earnings (loss) per share                                                                      |  | $                       | (0.36     



For the years ended December
31, 2011, 2012 and 2013, the effects of dilutive securities were excluded from the calculation of earnings per share as a net loss
was reported in these periods.



Options to purchase 7,384,990
shares of common stock at an average of €7.55 per share were outstanding during 2013. The options, which expire in December
2023, were still outstanding at the end of year 2013.



19. Shareholders’
Equity:



191. Preemptive subscription
rights:



Shareholders have preemptive
rights to subscribe for additional shares issued by the Company for cash on a pro rata basis when the Company makes a share offering.
Shareholders may waive such preemptive subscription rights at an extraordinary general meeting of shareholders under certain circumstances.
Preemptive subscription rights, if not previously waived, are transferable during the subscription period relating to a particular
offer of shares.



F-30







FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



19.2. Dividends:



Dividends may be distributed
from the statutory retained earnings, subject to the requirements of French law and the Company’s by-laws. The Company has
not distributed any dividends since its inception, as the result of an accumulated statutory deficit of approximately $168.5 million
at December 31, 2013. Dividend distributions, if any, will be made in euros. The Company has no plans to distribute dividends in
the foreseeable future.



19.3. Warrants:



The effects of applying
the fair value method provided in accordance with ASC 718 are shown in Note 6.



On June 24, 2009 the
Company authorized the Directors of the Company, to subscribe to 250,000 warrants for a subscription price of €0.74 per warrant
($1.03). Each warrant is exercisable to purchase one Share at a price of €4.50 ($6.29). These warrants are issued for a four-year
period and will vest over one year from the date of issuance. These warrants were subscribed in July 2009. As of December 31, 2013,
50,000 warrants were exercised and 200,000 warrants were cancelled.



On June 25, 2010 the
Company authorized the Directors of the Company, to subscribe to 250,000 warrants for a subscription price of €0.70 per warrant
($0.90). Each warrant is exercisable to purchase one Share at a price of €5.44 ($6.68). These warrants are issued for a four-year
period and will vest over one year from the date of issuance. These warrants were subscribed in July 2010.



On June 24, 2011 the
Company authorized the Directors of the Company, to subscribe to 350,000 warrants for a subscription price of €0.47 per warrant
($0.67). Each warrant is exercisable to purchase one Share at a price of €3.54 ($5.03). These warrants are issued for a four-year
period and will vest over one year from the date of issuance. 300,000 warrants were subscribed in July 2011.



On March 13, 2012, in
connection with the acquisition of Éclat Pharmaceutical, Flamel issued to Breaking Stick LLC (formerly Éclat Holdings
LLC), two six-year warrants to purchase an aggregate of 3,300,000 ADSs, each representing one ordinary share, of Flamel. One warrant
is exercisable for 2,200,000 ADSs at an exercise price of $7.44 per ADS, and the other warrant is exercisable for 1,100,000 ADSs
at an exercise price of $11.00 per ADS. Pursuant to the guidance of ASC 815-40-15-7 the Company determined that the warrants should
be accounted for as a liability (see note 16 Long Term Debt).



On June 20, 2013, the
Company authorized the Directors of the Company, to subscribe to 270,000 warrants for a subscription price of €0.43 per warrant
($0.57). These warrants are issued for a four-year period and will vest over one year from the date of issuance. Each warrant is
exercisable to purchase one Share at a price of €4.58 ($6.14). These warrants are issued for a four-year period and will vest
over one year from the date of issuance. 180,000 warrants were subscribed in July 2013.



On June 20, 2013, the
Company authorized the scientific advisory board members, excluding directors, to subscribe to 20,000 warrants for a subscription
price of €0.43 per warrant ($0.57) as an offset to receivables for services provided by members of the scientific advisory
board. These warrants are issued for a four-year period and will vest immediately. 20,000 warrants were subscribed in August 2013.



On exercise of warrants
by beneficiaries, the Company issues new shares.



19.4. Stock options:



The Company issued stock
options under plans approved by shareholders in 1990, 1993, 1996, 2000, 2001, 2003, 2004, 2005, 2007, 2010, 2012 and 2013. The
option terms provide for exercise within a maximum 10-year term as from the date of grant. Generally, each option vests no more
than four years from the date of grant.



In January 1997, the
French parliament adopted a law that requires French companies and beneficiaries to pay social contributions, which generally represent
45% of the taxable salary, on the difference between the exercise price of a stock option and the fair market value of the underlying
shares on the exercise date if the beneficiary sells the stock before a four-year period following the grant of the option (five
years for options granted before 2000). This law is consistent with personal income tax law that requires individuals to pay income
tax on the difference between the option exercise price and the fair value of the shares at the sale date if the shares are sold
within four years of the option grant. The law applies to all options exercised after January 1, 1997. The Company has instituted
an internal rule whereby, whilst remaining an employee of the Company, an individual may not sell the underlying share within four
years of the option being granted.



F-31







FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



In December 2007, the
French parliament adopted a law that requires French companies to pay an additional social security contribution of 10% for each
option granted, based on either the fair value of the option or 25% of share price at date of grant. This is applicable on all
options granted since October 16, 2007. In December 2010, the French parliament introduced a contribution rate of 14% depending
on the value of the grant. In July 2012 this rate was increased to 30%.



On exercise of stock
options by beneficiaries, the Company issues new shares.



19.5. Free Share Awards



On June 24, 2011, the
shareholders of the Company authorized the issuance of 200,000 new shares that the Board of Directors was authorized to award and
issue free of charge to officers and employees of the Company as compensation for services rendered. Under the terms of the awards
the shares are definitively owned by the beneficiaries two years following their allocation and the Company issues new shares.
The beneficiaries are required to retain the shares for two additional years.



On June 22, 2012, the
shareholders of the Company authorized the issuance of 200,000 new shares that the Board of Directors was authorized to award and
issue free of charge to officers and employees of the Company as compensation for services rendered. Under the terms of the awards
the shares are definitively owned by the beneficiaries two years following their allocation and the Company issues new shares.
The beneficiaries are required to retain the shares for two additional years.



On June 20, 2013, the
shareholders of the Company authorized the issuance of 200,000 new shares that the Board of Directors was authorized to award and
issue free of charge to officers and employees of the Company as compensation for services rendered. Under the terms of the awards
the shares are definitively owned by French tax resident beneficiaries two years and for US tax resident beneficiaries four years
after grant and the Company issues new shares. French tax resident beneficiaries are required to retain the shares for two additional
years after definitive acquisition.



In December 2007, the
French parliament adopted a law that requires French companies to pay an additional social contribution of 10% for each share granted,
based on the share price at date of grant. In December 2010, the French parliament introduced a contribution rate of 14% depending
of the value of the grant. In July 2012 the contribution rate was raised to 30%.



On December 10, 2008
the Company granted 210,000 free share awards to officers and employees. On December 10, 2010 the Company issued 200,050 new shares
related to this grant. On December 10, 2012 the Company issued 5,000 new shares related to this grant.



On December 11, 2009
the Company granted 295,000 free share awards to officers and employees. On December 11, 2011 the Company issued 267,400 new shares
related to this grant. On December 11, 2013, the Company issued 10 000 new shares related to this grant.



On December 6, 2010 the
Company granted 230,000 free shares awards to officers and employees. On December 6, 2012 the Company issued 208,150 new shares
related to this grant.



On December 7, 2011 the
Company granted 200,000 free shares to officers and employees. On December 31, 2012 the Company issued 45,000 new shares related
to this grant. On December 7, 2013 the Company issued 137,150 new shares related to this grant.



On December 10, 2012
the Company granted 189,700 free shares to officers and employees.



On December 12, 2013
the company granted 192,500 free shares to officers and employees.



19.6 Restricted Shares



On June 20, 2013, the
shareholders of the Company authorized the issuance of 200,000 new shares that the Board of Directors was authorized to award and
issue to any person or company who may sold or transfer to the Company asset(s), including any shares, representing immediately
or overtime, their ownership or voting rights in any commercial enterprise. No shares have been issued as a result of this authorization.



F-32







FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



19.7. Accumulated
other comprehensive income:



The components of accumulated
other comprehensive income is as follows:



|                               |  | December 31, |       
|------------------------------ |  | ------------ | ------
|(In thousands of U.S. dollars) |  |              | 2012  
|                               |  |              |       
|Foreign currency translation   |  |              | 10,253
|                               |  |              |       
|Total                          |  |              | 10,253



20. Income taxes:



Income (loss) before
income taxes comprises the following:



|                               |  | Year ended December 31, |       
|------------------------------ |  | ----------------------- | ------
|(in thousands of U.S. dollars) |  | 2011                    |       
|                               |  |                         |       
|France                         |  |                         | (8,582
|United States                  |  |                         | -     
|Total                          |  | $                       | (8,582



A reconciliation of income
tax benefit (provision) computed at the French statutory rate (33.33%) and the US statutory rate (40%) to the income tax benefit
is as follows:



|                                                                             |  | Year ended December 31, |       
|---------------------------------------------------------------------------- |  | ----------------------- | ------
|(in thousands of U.S. dollars)                                               |  | 2011                    |       
|                                                                             |  |                         |       
|Income tax benefit (provision) computed at the  statutory rate (US & France) |  |                         | 2,860 
|Deferred Tax Allowance                                                       |  |                         | (2,860
|Business Tax                                                                 |  |                         | (192  
|Non Taxable remeasurement of fair value accounting                           |  |                         | -     
|Temporary differences                                                        |  |                         | -     
|Total                                                                        |  | $                       | (192  



License fees, milestone
and royalties payments may be subject to a withholding tax depending on the tax rules of the country in which the licensee is located.
In December 2009, with effect from January 1, 2010 the French authorities abolished the previous business tax and introduced the
"Contribution Economique Territoriale" comprised of two components. One of these components is based upon a measure of
income and therefore results in income tax accounting. For the year ended December 31, 2011, 2012 and December 31, 2013 the amount
of this component was $192,000, $56,000 and $150,000 respectively.



F-33







FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS





Significant components
of the Company's deferred taxes consist of the following:



|                                                          |  |      |         |   | December 31, | 
|--------------------------------------------------------- |  | ---- | ------- | - | ------------ | 
|(In thousands of U.S. dollars)                            |  | 2011 |         |   | 2012         | 
|                                                          |  |      |         |   |              | 
|Deferred income tax assets:                               |  |      |         |   |              | 
|Net  taxable operating loss carry-forwards (not utilized) |  |      | 53,230  |   |              | 
|Other deferred income tax assets                          |  |      | 4,133   |   |              | 
|Valuation allowance  for french activities                |  |      | (57,105 | ) |              | 
|Net deferred income tax assets                            |  |      | 258     |   |              | 
|Deferred income tax liabilities                           |  |      | (258    | ) |              | 
|Deferred income taxes, net                                |  |      | -       |   |              | 



The Company has provided
valuation allowances covering 100% of net deferred tax assets generated from its activities in France due to the Company's history
of losses. The US operations have been in a loss position since its acquisition and deferred tax assets have been recognized on
these losses to the extent of the deferred tax liabilities.





As of December 31,
2013, the Company had $201,565,000 in French net operating losses carry-forwards which have no expiration date, but for which annual
utilization is limited to €1,000,000 plus 50% of any taxable income in excess of this threshold and $36,609,000 in US net
operating losses carry-forwards which expire from 2030 to 2032, for which utilization of pre-acquisition tax losses of $4,900,000
million is limited to $1,800,000 per year.



The increase in available
net operating losses carry-forwards in 2013 is due to a tax loss $35,222,000. The French government provides tax credits to companies
for spending on innovative research and development. These credits are recorded as an offset of research and development expenses
(see note 5) and are credited against income taxes payable in each of the four years after being incurred or, if not so utilized,
are recoverable in cash. As of December 31, 2013, Flamel had total research tax credits receivable of $20,550,000. In 2011, the
Company obtained an advance from OSEO, a governmental agency supporting innovation, secured against the Research tax credit generated
in fiscal year 2010. The Company renewed this financing operation in 2012 secured against the research tax credit generated for
fiscal year 2011 (see Note 14.1). Generally, if these credits are not applied against future income taxes, they will be received
as cash payments in the fourth year after the credit is earned. Since January 1, 2013 the Company meets the criteria for a small-medium
sized enterprise under French tax legislation, which allows the Company to receive immediate reimbursement of the Research tax
credit in the subsequent fiscal period.



The scheduled payments are
shown in the following table



|(In thousands of U.S. dollars) |  | December 31, |       
|------------------------------ |  | ------------ | ------
|2014                           |  |              | 14,139
|Total current portion          |  |              | 14,139
|2015                           |  |              | 6,411 
|2016                           |  |              | -     
|Total long term portion        |  |              | 6,411 
|Total                          |  |              | 20,550



21. Employee
Retirement plans:



In accordance with French
law, post-retirement benefits for most of the Company’s employees are sponsored by the relevant government agencies in France.
The Company’s liability with respect to these plans is generally limited to specific monthly payroll deductions. Consequently,
there is no additional liability in connection with these plans. Expenses recognized for these plans were $1,432,000 in 2011, $1,372,000
in 2012, and $1,120,000 in 2013.



French law requires the
Company to provide for the payment of a lump sum retirement indemnity to French employees based upon years of service and compensation
at retirement. Benefits do not vest prior to retirement. The Company’s benefit obligation was $2,106,000, $2,819,000 and
$3,988,000 as of December 31, 2011, 2012 and 2013, respectively. Any actuarial gains or losses are recognized in the income
statement in the period when they occur.



F-34









FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



In 2008, 2010
and 2013, the French Government reinforced legislation regarding an employer’s ability to make employees retire and the final
age for retirement. As such the retirement indemnity has been calculated on the assumption of voluntary retirement and the impact
on the benefit obligation was recognized as an actuarial loss.



The benefit
obligation is calculated as the present value of estimated future benefits to be paid, using the following assumptions:



|                             |  | 2011 |                                                         |   | 2012 |  |                                                         | 2013 | 
|---------------------------- |  | ---- | ------------------------------------------------------- | - | ---- |  | ------------------------------------------------------- | ---- | 
|Average increase of salaries |  |      | 3                                                       | % |      |  | 3                                                       | %    | 
|Discounted interest rate     |  |      | 4.5                                                     | % |      |  | 3                                                       | %    | 
|Turn over                    |  |      | actuarial standard and average of the last 5 years      |   |      |  | actuarial standard and average of the last 5 years      |      | 
|Age of retirement            |  |      | 60 to 65 years                                          |   |      |  | 60 to 65 years                                          |      | 
|                             |  |      | actuarial standard based on age and professional status |   |      |  | actuarial standard based on age and professional status |      | 



Changes in
the funded status of the benefit plans were as follows:



|                                         |  | December 31, |      
|---------------------------------------- |  | ------------ | -----
|In thousands of U.S. dollars             |  | 2012         |      
|                                         |  |              |      
|Benefit obligations at beginning of year |  |              | 2,106
|Service cost                             |  |              | 162  
|Interest cost                            |  |              | 91   
|Plan amendments                          |  |              | -    
|Benefits paids                           |  |              | (267 
|Actuarial loss (gain)                    |  |              | 723  
|Exchange rate changes                    |  |              | 4    
|Benefit obligations at end of year       |  |              | 2,819



The Company
does not have a funded benefit plan and the lump sum retirement indemnity is accrued on the balance sheet as a liability.



The future
expected benefits to be paid over the next five years and for the five years thereafter is as follows:



|Future expected payment of benefits: |  | Year Ending: |  |  |     |  |  | 
|------------------------------------ |  | ------------ |  |  | --- |  |  | 
|In thousands of U.S. dollars         |  |              |  |  |     |  |  | 
|                                     |  | 12/31/2014   |  |  | 61  |  |  | 
|                                     |  | 12/31/2015   |  |  | 202 |  |  | 
|                                     |  | 12/31/2016   |  |  | 234 |  |  | 
|                                     |  | 12/31/2017   |  |  | -   |  |  | 
|                                     |  | 12/31/2018   |  |  |     |  |  | 
|                                     |  | Next 5 Years |  |  | 530 |  |  | 



In the United
States, the Company previously sponsored a defined contribution retirement plan for certain employees located in the United States.
The contribution is the lesser of 25% of an employee’s wages or $49,000 in 2011 and 2012. The Company made and accrued contributions
of approximately $140,000 in 2012 and $55,000 in 2011.



F-35







FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



22. Fair
value of financial instruments:



At December
31, 2012 and 2013, the carrying values of financial instruments such as cash and cash equivalents, trade receivables and payables,
other receivables and accrued liabilities and the current portion of long-term debt approximated their market values, based on
the short-term maturities of these instruments.



As noted in
Note 8, the company calculates fair value for its marketable securities based on quoted market prices for identical assets and
liabilities which represents Level 1 of ASC 820-10 fair value hierarchy.



At December
31, 2012 and 2013 the fair value of long-term debt and long term receivables was comparable with their carrying values.



The following
table presents information about the Company securities based on quoted market prices for identical assets and liabilities for
2013 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.



|                                                       |  | Net Carrying Value 
    as of |        |  | Fair Value Measured and Recorded Using |  |       | Operational 
    Gain (losses) 
    recognized in |  |  | Financial Gain 
    (losses) 
    recognized in |  |  |          |       
|------------------------------------------------------ |  | ----------------------------- | ------ |  | -------------------------------------- |  | ----- | ------------------------------------------------- |  |  | ----------------------------------------------- |  |  | -------- | ------
|(in thousands)                                         |  | December 31,
    2013         |        |  | Level 1                                |  |       | Level 2                                           |  |  | Level 3                                         |  |  | earnings |       
|Assets                                                 |  |                               |        |  |                                        |  |       |                                                   |  |  |                                                 |  |  |          |       
|Cash and cash equivalent                               |  |                               | 6,636  |  |                                        |  | 6,636 |                                                   |  |  | -                                               |  |  |          | -     
|Marketable securities                                  |  |                               | 401    |  |                                        |  | 401   |                                                   |  |  | -                                               |  |  |          | -     
|                                                       |  |                               |        |  |                                        |  |       |                                                   |  |  |                                                 |  |  |          |       
|Liabilities                                            |  |                               |        |  |                                        |  |       |                                                   |  |  |                                                 |  |  |          |       
|Acquisition liability contingent consideration
    (a) |  |                               | 37,991 |  |                                        |  | -     |                                                   |  |  | -                                               |  |  |          | 37,991
|Acquisition liability note (b)                         |  |                               | 10,405 |  |                                        |  | -     |                                                   |  |  | -                                               |  |  |          | 10,405
|Acquisition liability warrant consideration (c)        |  |                               | 10,497 |  |                                        |  | -     |                                                   |  |  | -                                               |  |  |          | 10,497
|Deerfield Royalty Agreement (d)                        |  |                               | 4,590  |  |                                        |  |       |                                                   |  |  |                                                 |  |  |          | 4,590 
|Broadfin Royalty Agreement
    (e)                     |  |                               | 2,187  |  |                                        |  |       |                                                   |  |  |                                                 |  |  |          | 2,187 
|Total                                                  |  |                               |        |  |                                        |  |       |                                                   |  |  |                                                 |  |  |          |       





The following
table presents information about the Company securities based on quoted market prices for identical assets and liabilities for
2012 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.





|                                                       |  | Net Carrying Value as of |        |  | Fair Value Measured and Recorded Using |  |       | Operational Gain (losses)
    recognized | 
|------------------------------------------------------ |  | ------------------------ | ------ |  | -------------------------------------- |  | ----- | ---------------------------------------- | 
|                                                       |  | December 31, 2012        |        |  | Level 1                                |  |       | Level 2                                  | 
|Assets                                                 |  |                          |        |  |                                        |  |       |                                          | 
|Cash and cash equivalent                               |  |                          | 2,742  |  |                                        |  | 2,742 |                                          | 
|Marketable securities                                  |  |                          | 6,413  |  |                                        |  | 6,413 |                                          | 
|                                                       |  |                          |        |  |                                        |  |       |                                          | 
|Liabilities                                            |  |                          |        |  |                                        |  |       |                                          | 
|Acquisition liability contingent consideration
    (a) |  |                          | 24,063 |  |                                        |  | -     |                                          | 
|Acquisition liability note (b)                         |  |                          | 5,713  |  |                                        |  | -     |                                          | 
|Acquisition liability warrant
    consideration (c)    |  |                          | 2,157  |  |                                        |  | -     |                                          | 
|Total                                                  |  |                          |        |  |                                        |  |       |                                          | 





The fair value
of the financial instruments in connection with the acquisition of Éclat (see note 2 Business Combinations) are estimated
as follows:



(a) Acquisition
liability deferred consideration: the fair value is estimated using a discounted cash flow model based on probability adjusted
projected annual gross profit of each of the products which formed the project portfolio at the time of acquisition of Éclat
Pharmaceuticals (Note 16 Long Term Debt).



The fair value
of the deferred consideration will change over time in accordance with the changes in market conditions and thus business plan
projections as the relate to market size, market share, product pricing, competitive landscape, gross profit margins expected for
each of the products.



(b) Acquisition
liability Note: the Company uses a probability-weighted discounted cash flow model (see note 16 Long Term Debt).



(c) Acquisition
liability warrant consideration: the Company uses a Black-Scholes option pricing model. The fair value of the warrant consideration
will change over time depending on the volatility and share price at balance sheet date (see note 16 Long Term Debt).



(d) Deerfield
Royalty agreement: the fair value is estimated using a discounted cash flow model based on probability adjusted projected annual
net sales of each of the products which may be approved and sold by Éclat Pharmaceuticals (see Note 16 Long Term Debt).



(e) Broadfin
Royalty agreement: the fair value is estimated using a discounted cash flow model based on probability adjusted projected annual
net sales of each of the products which may be approved and sold by Éclat Pharmaceuticals (see Note 16 Long Term Debt).



F-36







FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



The following
tables provide a reconciliation of fair value for which the Company used Level 3 inputs:



|                                                                    |  | Acquisition |        
|------------------------------------------------------------------- |  | ----------- | -------
|                                                                    |  | Liabilities |        
|Liability recorded upon acquisition                                 |  | $           | (50,927
|Operational gain (loss) recognized in earnings for fiscal year 2012 |  | $           | 18,993 
|Net carrying value at January 1, 2013                               |  | $           | (31,934
|Operational gain (loss) recognized in earnings for fiscal year 2013 |  | $           | (28,135
|Payment deferred consideration (Hycet)                              |  | $           | 841    
|Payment interest on acquisition liability note                      |  | $           | 335    
|Net carrying value at December 31, 2013                             |  | $           | (58,893



|                                                              |  | Deerfield Royalty |        |   | Broadfin Royalty |  
|------------------------------------------------------------- |  | ----------------- | ------ | - | ---------------- | -
|                                                              |  | Agreement         |        |   | Agreement        |  
|Liability recorded upon execution of Agreeement               |  | $                 | (2,600 | ) |                  | $
|Interest expense recognized in earnings  for fiscal year 2013 |  | $                 | (1,990 | ) |                  |  
|Net carrying value at December 31, 2013                       |  | $                 | (4,590 | ) |                  | $



The acquisition
liabilities, consisting of the note, warrants and deferred consideration, and the Deerfield and Broadfin Royalty agreements all
of which are classified as long-term debt, are measured at fair value and the income or expense may change significantly as assumptions
regarding the valuations and probability of successful development and approval of products in development vary.



23. Commitments
and Contingencies:



23.1. Capital leases



The Company
currently has commitments regarding capital leases as described in Note 16.



23.2. Operating
leases



The Company
leases its facilities and certain equipment under non-cancelable operating leases, which expire through 2017. Future minimum lease
payments under operating leases due for the fiscal years ending December 31, 2013 are as follows:



|(In thousands of U.S. dollars) |  | December 31, |      
|------------------------------ |  | ------------ | -----
|2014                           |  |              | 846  
|2015                           |  |              | 596  
|2016                           |  |              | 120  
|2017                           |  |              | 18   
|TOTAL                          |  |              | 1,580



Rental expense
for the years ended December 31, 2011, 2012 and 2013 was approximately $1,124,000, $1,081,000 and $1,032,000, respectively.



23.3. Litigation



While we may
be engaged in various claims and legal proceedings in the ordinary course of business, we are not involved (whether as a defendant
or otherwise) in and we have no knowledge of any threat of, any litigation, arbitration or administrative or other proceeding that
management believes will have a material adverse effect on our consolidated financial position or results of operations.



F-37







FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



On November 9,
2007 a putative class action was filed in the United States District Court for the Southern District of New York against the Company
and certain of its current and former officers entitled Billhofer v. Flamel Technologies, et al. The complaint purports to allege
claims arising under the Securities Exchange Act of 1934 based on certain public statements by the Company concerning, among other
things, a clinical trial involving Coreg CR and seeks the award of damages in an unspecified amount. By Order dated February 11,
2008, the Court appointed a lead plaintiff and lead counsel in the action. On March 27, 2008, the lead plaintiff filed an amended
complaint that continued to name the Company and two previously named officers as defendants and asserted the same claims based
on the same events as alleged in the initial complaint. On May 12, 2008, the Company filed a motion to dismiss the action,
which the Court denied by Order dated October 1, 2009.  On April 29, 2010, the lead plaintiff moved to withdraw and substitute
another individual as lead plaintiff and to amend the Case Management Order.  On June 22, 2010, the lead plaintiff voluntarily
agreed to dismiss the action against one of the previously named officers. On September 20, 2010, the Court granted the lead plaintiff’s
withdraw and substitution motion and the parties proceeded to engage in fact discovery. On March 6, 2012, the Court issued its
opinion granting the lead plaintiff’s motion for class certification, which was originally filed in October 2010 and opposed
by the Company. On July 30, 2012, the Court issued an opinion denying the lead plaintiff’s motion, filed on December 15,
2011, to further amend his complaint, which motion sought to substantially revise plaintiff’s asserted basis for contending
that the defendants should be found liable for the statements at issue.  In its opinion, the Court held that the proposed
amended complaint failed to properly plead a viable claim.  By Order dated March 8, 2013, the Court granted the Company’s
motion to dismiss and the action was dismissed with prejudice and costs.



In May 2011,
we announced the filing of a lawsuit in the U.S. District Court for the District of Columbia against Lupin for infringement of
our US Patent No. 6,022,562, which is held by the Company and associated with Coreg CR. The lawsuit was dismissed in favor of a
lawsuit involving the same parties for infringement of the same patent that was lodged in the U.S. District Court for the District
of Maryland in May 2011. GSK is a third party defendant in the Maryland lawsuit. The lawsuit is based on the Abbreviated New Drug
Application (ANDA) filed by Lupin seeking permission to manufacture and market a generic version of Coreg CR before the expiration
of the patent. In August 2012, the Company concluded a settlement agreement with Lupin and the parties filed a joint stipulation
of dismissal on September 11, 2012.



In September
2011, Flamel filed a lawsuit in the U.S. District Court for the District of Maryland against Anchen Pharmaceuticals, Inc., for
infringement of the same patent. The lawsuit is based on the ANDA filed by Anchen seeking permission to manufacture and market
a generic version of Coreg CR before the expiration of the patent. In May 2012, the Company concluded an agreement whereby Anchen
agrees to pay the sum of $400,000 in settlement of the claim.



24. Industry
and geographic information:



The Company
operates in one segment, the development and commercialization of pharmaceutical products, including controlled-release therapeutic
products based on its proprietary polymer based technology.



Revenues from
GSK represented 67% of total revenues in 2011, 63% in 2012 and 66% in 2013.



Operations
outside of France consist principally of the operations of Éclat pharmaceuticals acquired in March 2012 which had sales
amounting to $560,000 in 2012 and $983,000 in 2013.



Revenues by geographic
location of customers are as follows:



|(in thousands of U.S. dollars) |  | As of December 31, |       
|------------------------------ |  | ------------------ | ------
|                               |  | 2011               |       
|Revenues                       |  |                    |       
|United Kingdom & Ireland       |  |                    | 17,619
|USA                            |  |                    | 3,694 
|France                         |  |                    | 1,763 
|Europe                         |  |                    | 9,524 
|Total Revenues                 |  |                    | 32,600



F-38







FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS



The following is a
summary of long-lived assets by geographic location:



|(in thousands of U.S. dollars) |  | As of December 31, |       
|------------------------------ |  | ------------------ | ------
|                               |  | 2012               |       
|                               |  |                    |       
|Long-lived assets:             |  |                    |       
|USA                            |  | $                  | 60,260
|France                         |  | $                  | 31,966
|Total long-lived assets        |  | $                  | 92,226



25. Related
Party Transactions





In March 2012,
we acquired, through our wholly owned subsidiary Flamel US Holdings, all of the membership interests of Éclat from Éclat
Holdings, an affiliate of Flamel’s largest shareholder Deerfield Capital L.P., see “note 2 - Business Combinations”.
The consideration consisted of a $12 million senior, secured six-year note that is guaranteed by us and our subsidiaries and secured
by the equity interests and assets of Éclat, two warrants to purchase a total of 3,300,000 ADSs of Flamel and 	commitments
to make earnout payments of 20% of any gross profit generated by certain Éclat launch products and 100% of the gross profit
generated by our former product Hycet®, up to a maximum of $1 million, which we have sold in 2013. The $12 million senior note
was repaid in full in March 2014 using the net proceeds from our public sale of ADSs. Upon closing of the acquisition, Mr. Anderson,
the Chief Executive Officer of Éclat, was appointed Chief Executive Officer of Flamel. Mr. Anderson retains a minority interest
in Éclat Holdings, (now renamed Breaking Stick Holdings, LLC), and does not have the ability to control this entity by virtue
of his minority interest.



On February
4, 2013, we entered into a Facility Agreement (the “Deerfield Facility”), through Flamel US with Deerfield Private
Design Fund II, L.P. and Deerfield Private Design International II, L.P. (together, the “Deerfield Entities”) providing
for debt financing of $15 million by the Deerfield Entities (the “Loan”). The loan was repaid in full in March 2014
using the net proceeds from our public sale of ADSs. The Deerfield Facility was subject to certain limitations, and allowed us
to use the funds for working capital, including continued investment in our research and development projects. In conjunction with
our entry in the Deerfield Facility, Éclat entered into a Royalty Agreement with Horizon Santé FLML, Sarl and Deerfield
Private Design Fund II, L.P., both affiliates of the Deerfield Entities (together, “Deerfield PDF/Horizon”). The Royalty
Agreement provides for Éclat to pay Deerfield PDF/Horizon 1.75% of the net sales price of the products sold by us and any
of our affiliates until December 31, 2024, with royalty payments accruing daily and paid in arrears for each calendar quarter during
the term of the Royalty Agreement. See also note 16 Long Term Debt.



We have also
entered into a Security Agreement dated February 4, 2013 with Deerfield PDF/Horizon, whereby Deerfield PDF/Horizon was granted
a security interest in the intellectual property and regulatory rights related to the products to secure the obligations of Éclat
and Flamel US, including the full and prompt payment of royalties to Deerfield PDF/Horizon under the Royalty Agreement.



We have also
entered into two pledge agreements on certain receivables and equipment we own. These agreements are required to be recorded under
French law at the request of Deerfield.



On December
3, 2013, we and certain of our U.S. subsidiaries entered into a Facility Agreement (the “Broadfin Facility”) with Broadfin
Healthcare Master Fund, Ltd. (“Broadfin”) providing for loans by Broadfin in an aggregate amount not to exceed $15.0
million. Under the terms of the Broadfin Facility, upon closing Broadfin made an initial loan of $5.0 million and we had the ability
to request, at any time prior to August 15, 2014, up to two additional loans in the amount of $5.0 million each, with funding subject
to certain specified conditions. The full $5.0 million outstanding was subsequently repaid using a portion of the net proceeds
from our public sale of ADSs in March 2014. In connection with entering into the Broadfin Facility, we also entered into a Royalty
Agreement with Broadfin, dated as of December 3, 2013 (the “Broadfin Royalty Agreement”). Pursuant to the Broadfin
Royalty Agreement, we are required to pay a royalty of 0.834% on the net sales of certain products sold by Éclat Pharmaceuticals,
LLC and any of its affiliates until December 31, 2024. See also note 16 Long-Term Debt.



The loans
under the Broadfin Facility were secured by a first priority security interest in intellectual property associated with our Medusa
technology and a junior lien on substantially all of the assets of the borrowers, which were previously pledged in connection with
the Deerfield Facility, the Royalty Agreement and the notes issued in connection with the Éclat acquisition. In addition,
we have agreed to grant a junior lien on certain equipment located in France, if such equipment is pledged under the Deerfield
Facility and/or the Éclat note.



F-39







FLAMEL TECHNOLOGIES
S.A.



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS





Concurrent
with entering into the Broadfin Facility, we also amended the terms of the Deerfield Facility and the agreement governing the Éclat
notes to, among other things, permit the indebtedness and liens under the Braodfin Facility and to grant a junior lien to the respective
lenders on the Medusa Technology.



26. Post
Balance Sheet Events



In March 2014,the Company entered into an underwriting agreement with JMP Securities LLC, relating to an underwritten public offering of
10,800,000 American Depositary Shares (the “ADSs”). The offering price to the public was $9.75 per ADS, and the Underwriting
Agreement included the payment of a commission of $0.585 per ADS. Under the terms of the Underwriting Agreement, the Company granted
the Underwriters a 30-day option to purchase up to an additional 1,600,000 ADSs at the same purchase price. The underwriters executed
the option on March 18, 2014 for all of the additional ADSs. Total net proceeds amounted to $113,646,000.





The Company repaid a
total of $32,000,000 of principal on outstanding debt on March 24, 2014 relating to the following (see note 16 Long Term Debt
and note 25 Related Party Transactions):



| | · | Acquisition liability note, $12 million in principal,
| | - | -----------------------------------------------------



| | · | Deerfield Facility Agreement, $15 million in principal
| | - | ------------------------------------------------------



| | · | Broadfin Facility Agreement, $5 million in principal
| | - | ----------------------------------------------------



The non-cash
expense that will be recognized related to the early reimbursement of the outstanding debt amounts to $3.0 million in operating
expenses and $4.7 million in interest expense.



Remaining
proceeds will be used to continue the development of the Company’s product pipeline, including possible clinical trials,
and for general corporate purposes.



On April 29, 2014 the Company announced the receipt of a complete response letter (CRL) from the FDA for
its second NDA application from the Éclat portfolio. A CRL is issued by the FDA when the review of the file is completed
and questions remain that precludes the approval of the NDA in its current form. In the CRL, the FDA noted that during a recent
inspection of the manufacturing facility of the active pharmaceutical ingredient’s (API) supplier, deficiencies were found.
Satisfactory resolution of these facility deficiencies is required before this application may be approved. There were no other
deficiencies in the CRL. Final agreement on the draft product labeling is also pending.



F-40







INCORPORATION BY REFERENCE



As provided by in the
Company’s Registration Statements on Form F-3, as filed with the Securities and Exchanges Commission on September 18, 2012
and February 12, 2014, each as subsequently amended, this report is being incorporated by reference into such registration statement.



SIGNATURES



The Registrant hereby
certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.



| | FLAMEL TECHNOLOGIES S.A.
| | ------------------------
| | (Registrant)            
| |                         
| | /s/ Michael S. Anderson 
| | Michael S. Anderson     
| | Chief Executive Officer 



Date: April 30, 2014











EXHIBIT INDEX



|Exhibit |  |                                                                                                                                                                                                                                               
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number  |  | Description                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                               
|1.1     |  | Revised Statutsor bylaws of the Company (Filed herewith)                                                                                                                                                                                      
|2.1     |  | Amended and Restated Deposit Agreement among Flamel, The Bank of New York, as Depositary, and holders from time to time of American Depositary Shares issued thereunder (including as an exhibit the form of American Depositary Receipt)  (2)
|4.1*    |  | Note Agreement among Flamel Technologies S.A., Flamel US Holdings, Inc. and Éclat Holdings, LLC, dated March 13, 2012 (3)                                                                                                                     
|4.2     |  | Guaranty of Note made by Flamel Technologies S.A. in favor of Éclat Holdings, LLC, dated March 13, 2012 (3)                                                                                                                                   
|4.3     |  | Warrant to purchase 2,200,000 American Depositary Shares, each representing one Ordinary Share of Flamel Technologies S.A. (3)                                                                                                                
|4.4     |  | Warrant to purchase 1,100,000 American Depositary Shares, each representing one Ordinary Share of Flamel Technologies S.A. (3)                                                                                                                
|4.5     |  | Registration Rights Agreement between Flamel Technologies S.A. and Éclat Holdings, LLC, dated March 13, 2012 (3)                                                                                                                              
|4.6     |  | Facility Agreement among Flamel US Holdings, Deerfield Private Design Fund II, L.P. and Deerfield Private Design International II, L.P dated December 31, 2012 (1)                                                                            
|4.7*    |  | Royalty Agreement among Eclat Pharmaceuticals LLC, Horizon Santé FLML, Sarl and Deerfield Private Design Fund II, L.P dated December 31, 2012 (1)                                                                                             
|4.8*    |  | Security Agreement between Éclat Pharamaceuticals, LLC and Deerfield Private Design Fund II, L.P. and Horizon Santé FLML, Sarl, dated February 4, 2013 (1)                                                                                    
|4.9     |  | Broadfin Facility Agreement, effective as of December 3, 2013 (filed herewith)                                                                                                                                                                
|4.10*   |  | Broadfin Royalty Agreement, dated as of December 3, 2013 (filed herewith)                                                                                                                                                                     
|8.1     |  | List of Subsidiaries (Filed herewith)                                                                                                                                                                                                         
|11.1    |  | Code of Ethics for CEO (Directeur Général), Delegated Managing Directors (Directeurs Généraux Délégués) and Senior Financial Officers  (4)                                                                                                    
|12.1    |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)                                       
|12.2    |  | Certification of the Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)                                   
|13.1    |  | Certification of the Chief Executive Officer pursuant to USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished herewith)                                                                          
|13.2    |  | Certification of the Principal Financial Officer pursuant to USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished herewith)                                                                      
|23.1    |  | Consent of PricewaterhouseCoopers Audit (Filed herewith)                                                                                                                                                                                      










(1) Incorporated by reference
to the Company’s Annual Report on Form 20-F for the year ended December 31, 2012, filed on April 30, 2013.

(2) Incorporated by reference
to the Company’s registration statement on Form F-6 filed February 12, 2014, as amended (No. 333-193892).

(3) Incorporated by reference
to the Company’s Current Report on Form 6-K, filed March 21, 2012.

(4) Incorporated by reference
to the Company’s Annual Report on Form 20-F for the year ended December 31, 2003, filed on April 26, 2004.



*Confidential treatment
has been requested for the redacted portions of this agreement. A complete copy of the agreement, including the redacted portions,
has been filed separately with the Securities and Exchange Commission



The registrant undertakes
to provide to each shareholder requesting the same a copy of each exhibit referred to herein upon payment of a reasonable fee limited
to the registrant’s reasonable expenses in furnishing such exhibit.