Exhibit 99.1
 Dow Pharmaceutical Sciences, Inc.




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Deloitte & Touche LLP
   INDEPENDENT AUDITORS REPORT
 
    
  Member of Deloitte Touche Tohmastu




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DOW PHARMACEUTICAL SCIENCES, INC.
 CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2007
(In thousands)
 ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    4,905Short-term investments
    
    
    22,219Accounts receivable  net of
allowance for doubtful
accounts of $133
    
    
    3,498Royalties receivable
    
    
    7,208Income tax receivable
    
    
    150Unbilled revenue and deferred costs  net of allowance for
doubtful accounts of $115
    
    
    6,067Prepaid expenses and other
assets
    
    
    1,109Total current assets
    
    
    45,156LONG-TERM ASSETS:Long-term investments
    
    
    4,930Property and equipment  net
    
    
    3,030Goodwill
    
    
    1,719Deferred costs and other assets
    
    
    1,197Total long-term assets
    
    
    10,876TOTAL
    
    $
    56,032LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK, AND STOCKHOLDERS
DEFICITCURRENT LIABILITIES:Accounts payable
    
    $
    1,118Accrued liabilities
    
    
    7,752Accrued Special Class A
payables
    
    
    16,651Notes payable
    
    
    79Deferred revenue
    
    
    6,696Total current liabilities
    
    
    32,296LONG-TERM LIABILITIES:Notes payable
    
    
    231Deferred revenue
    
    
    3,362Total long-term liabilities
    
    
    3,593Total current and
long-term liabilities
    
    
    35,889REDEEMABLE CONVERTIBLE PREFERRED STOCK  Series A, $0.001 par value 
authorized, 7,400,000 shares;
issued and outstanding,
7,399,996 shares (liquidation
value was $37,000,000)
    
    
    36,957STOCKHOLDERS EQUITY (DEFICIT):Class A common stock, $0.001 par value  authorized, 7,200,000 shares;
issued and outstanding, 4,967,486 shares
    
    
    5Class B common stock, $0.001 par value  authorized, 20,000,000 shares;
issued and outstanding, 10,650 sharesAccumulated other
comprehensive income
    
    
    209Accumulated loss
    
    
    (17,028
    )Total stockholders deficit
    
    
    (16,814
    )TOTAL
    
    $
    56,032
  - 2 -




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DOW PHARMACEUTICAL SCIENCES, INC.
 CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2007
(In thousands)
 REVENUES:Contractual revenues
    
    $
    21,538Reimbursed costs
    
    
    6,680Collaborative revenues and royalties
    
    
    15,389Other
    
    
    966Total revenues
    
    
    44,573OPERATING COSTS AND EXPENSES:Cost of revenue
    
    
    11,485Reimbursed costs
    
    
    6,502Research and development
    
    
    23,396Selling, general, and administrative
    
    
    8,083Total operating costs and expenses
    
    
    49,466OPERATING LOSS
    
    
    (4,893
    )OTHER INCOME:Investment and other income  net
    
    
    1,772Interest income
    
    
    191Interest expense
    
    
    (189
    )Total other income
    
    
    1,774LOSS BEFORE INCOME TAX EXPENSE
    
    
    (3,119
    )INCOME TAX EXPENSE
    
    
    1,668NET LOSS
    
    
    (4,787
    )ACCRETION OF REDEMPTION VALUE ON REDEEMABLE
CONVERTIBLE PREFERRED STOCK
    
    
    (161
    )REDEEMABLE CONVERTIBLE PREFERRED STOCK DIVIDEND
    
    
    (1,985
    )SPECIAL CLASS A COMMON STOCK DIVIDEND
    
    
    (5,995
    )NET LOSS AVAILABLE TO CLASS A AND B COMMON STOCKHOLDERS
    
    $
    (12,928
    )
  - 3 -




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DOW PHARMACEUTICAL SCIENCES, INC.
 CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT
YEAR ENDED DECEMBER 31, 2007
(In thousands, except share amounts)
 AccumulatedClass A
    
    
    Class B
    
    
    
    
    
    
    Other
    
    
    Total
    
    
    TotalCommon Stock
    
    
    Common Stock
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Stockholders'
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Loss
    
    
    Income (Loss)
    
    
    Deficit
    
    
    LossBALANCE  December 31, 2006
    
    
    4,835,361
    
    
    $
    5
    
    
    
    10,650
    
    
    $
    
    
    
    $
    (4,415
    )
    
    $
    (106
    )
    
    $
    (4,516
    )Issuance of nonqualified stock options for
nonqualified service
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    36Exercise of stock options
    
    
    132,125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62
    
    
    
    
    
    
    
    62Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    217
    
    
    
    
    
    
    
    217Special Class A common stock dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,995
    )
    
    
    
    
    
    
    (5,995
    )Preferred stock dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,985
    )
    
    
    
    
    
    
    (1,985
    )Net unrealized gains on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47
    
    
    
    47
    
    
    $
    47Accretion of redeemable convertible
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (161
    )
    
    
    
    
    
    
    (161
    )Accumulated translation income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    268
    
    
    
    268
    
    
    
    268Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,787
    )
    
    
    
    
    
    
    (4,787
    )
    
    
    (4,787
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (4,472
    )BALANCE  December 31, 2007
    
    
    4,967,486
    
    
    $
    5
    
    
    
    10,650
    
    
    $
    
    
    
    $
    (17,028
    )
    
    $
    209
    
    
    $
    (16,814
    )
  - 4 -




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DOW PHARMACEUTICAL SCIENCES, INC.
 CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2007
(In thousands, except share amounts)
 CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (4,787
    )Reconciliation of net loss to net cash used in operating activities:Special Class A common stock compensation expense
    
    
    1,499Depreciation and amortization
    
    
    634Provision for doubtful accounts
    
    
    96Stock-based compensation expense
    
    
    217Issuance of nonqualified stock options
    
    
    36Deferred income taxes
    
    
    1,372Changes in assets and liabilities:Accounts and royalties receivables
    
    
    (4,705
    )Unbilled revenue and deferred costs
    
    
    (2,095
    )Prepaid expenses and other assets
    
    
    (37
    )Income taxes
    
    
    410Accounts payable
    
    
    (268
    )Deferred revenue
    
    
    1,450Accrued liabilities
    
    
    1,665Net cash used in operating activities
    
    
    (4,513
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of investments
    
    
    (67,014
    )Sales of investments
    
    
    75,797Purchases of property and equipment
    
    
    (1,400
    )Net cash provided by investing activities
    
    
    7,383CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from exercise of stock option
    
    
    62Payment of ESOP payable
    
    
    (73
    )Payment of shareholder loanNet proceeds of Series A preferred stock issuanceNet cash used in financing activities
    
    
    (11
    )EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
    
    
    268NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    3,127CASH AND CASH EQUIVALENTS  Beginning of year
    
    
    1,778CASH AND CASH EQUIVALENTS  End of year
    
    $
    4,905SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid for income taxes
    
    $
    53Accrued special Class A common stock dividends
    
    $
    5,995Accretion of redeemable convertible preferred stock
    
    $
    161Accrued preferred stock dividends payable
    
    $
    1,985
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DOW PHARMACEUTICAL SCIENCES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2007
 1.
    
    ORGANIZATIONDescription of Business Dow Pharmaceutical Sciences, Inc. (the Company) was incorporated
in California in 1988 and was reincorporated in Delaware on June 15, 2005. The Company
provides pharmaceutical product development services, primarily for dermatological and other
topical products, to the biopharmaceutical industry. Services include formulation and process
development, analytical chemistry and methods development, skin biology laboratory testing,
clinical product manufacturing, clinical labeling and distribution, clinical consulting and
research services, regulatory consulting and submission preparation, and regulatory compliance
consulting and quality assurance services. The Company also acquires and develops selected
topical (primarily dermatological) products and technologies for license to others, as well as
for its own portfolio. The Companys primary operating laboratories, clinical trial sites, and
administrative offices are in California. The Company primarily generates its revenue in the
United States.Dermal Laboratories, Inc., a Delaware company, and Anza BioMedical Consulting, a California
company, are wholly owned subsidiaries of the Company. As of December 31, 2007, these
subsidiaries were inactive.On December 22, 2004, the Company acquired BioSkin Institut für Dermatologische Forschung und
Entwicklung GmbH (bioskin) with clinical trial sites in Hamburg and Berlin, Germany (see
Note 4). In January 2005, bioskin acquired BioSkin Germany GmbH (bioskin Germany), an
inactive company, primarily to obtain full rights to the bioskin name. The Company is in the
process of dissolving bioskin Germany.2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESPrinciples of Consolidation The consolidated financial statements include the accounts of
the Company and all of its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.Significant Estimates The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets,
liabilities, and disclosures 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. Actual results could differ from these estimates. The Companys significant
accounting estimates include the valuation of accounts receivable, valuation of investments,
realization of deferred tax assets, estimates related to the valuation of intangible assets,
the assumptions used in the calculation of stock compensation and the related valuation of the
common stock, the recognition of revenue related to development contracts, and estimates
related to the common stock dividends and payments.Cash Equivalents The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. At December 31, 2007, the
Companys cash and cash equivalents consist primarily of cash on deposit with major banks and
money market accounts with investment managers.
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Investments The Company classified all of its investments as available-for-sale at December
31, 2007. While the Company may hold debt securities to maturity, the Company has classified
all debt securities as available-for-sale, as the sale of such securities may be required
prior to maturity to implement managements strategies. The carrying value of all securities
is adjusted to fair value, with unrealized gains and losses, being excluded from earnings and
reported, net of tax, as a separate component of accumulated other comprehensive income in the
consolidated statement of stockholders deficit. Cost is based on the specific-identification
method for purposes of computing realized gains or losses.The Company periodically evaluates available-for-sale investments to determine whether
declines in fair market value below amortized cost are other-than-temporary. Upon
determination that the market value of investments is other-than-temporarily impaired,
adjustments are made to revalue the investments at the current market value. No investments
were determined to be other-than-temporarily impaired at December 31, 2007.Unbilled Revenue Unbilled revenue represents fees for services that have been rendered by
the Company, but have not yet been billed to clients.Royalties Receivable Royalties receivable represents fees for royalties earned, but not yet
received from clients.Property and Equipment Property and equipment are stated at cost, less accumulated
depreciation. Depreciation and amortization are computed on a straight-line basis over the
useful lives of each asset class ranging from three to seven years. Leasehold improvements are
amortized using the straight-line method over the useful lives or lease term, whichever is
shorter.Internal Use Software The Company accounts for internal-use software in accordance with the
provisions of Statement of Position No. 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, which requires certain direct and interest costs that
are incurred during the application stage of development to be capitalized and amortized over
the useful life of the software.Goodwill The excess of the purchase price of a business acquired over the fair value of net
tangible assets, identifiable intangible assets, and acquired in-process research and
development costs at the date of the acquisition has been assigned to goodwill. In accordance
with Financial Accounting Standards Board (FASB) Statement No. 142, Goodwill and Other
Intangible Assets, goodwill is evaluated for impairment on an annual basis or more frequently
if events or changes in circumstances indicate that goodwill might be impaired. No impairment
to the carrying value of goodwill was identified in 2007.Deferred Costs Deferred costs represent costs that were incurred by the Company for contract
services that have not yet been completed or billed to clients. Deferred costs also include
costs related to revenues that have been billed to clients, but the revenues are deferred and
included in current and long-term liabilities in the consolidated balance sheet in accordance
with the Companys revenue recognition policies.Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of The Company
evaluates its long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying value of such assets or intangibles may not be recoverable. Assets
that are to be disposed of that have uncertainty as to future realization
are carried at the lower of the carrying amount or fair value, less costs to sell. No
impairments to the carrying value of long-lived assets were identified in 2007.
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Concentrations of Risk Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents, investments,
accounts and royalties receivables.Cash and cash equivalents and investments are placed with highly rated major financial
institutions. The Companys accounts and royalties receivables are primarily for amounts due
from pharmaceutical and biotechnology companies. In 2007, no company accounted for more than
11% of contractual service revenue. Certain companies provide retainers (advances), which are
recorded as deferred revenue in the consolidated balance sheet, for work to be performed which
reduces the Companys overall credit risk. The Company performs ongoing credit evaluations of
each companys financial condition and, generally, does not require collateral. The Company
maintains reserves for potential credit losses. Credit losses, in the aggregate, have
historically not been significant.Comprehensive Loss The Company reports comprehensive loss, by major component and as a
single total, in the consolidated statement of stockholders deficit. Comprehensive loss
includes all changes in equity from non-owner sources. The Companys accumulated other
comprehensive loss consists of unrealized gains and losses on investments available-for-sale
and foreign currency translation adjustments.Advertising Expenses The Company expenses the cost of advertising, including promotional
expenses, to operations as incurred. Advertising expense for the year ended December 31, 2007,
was approximately $430,000.Research and Development Research and development costs are charged to operations as
incurred in accordance with FASB Statement No. 2, Accounting for Research and Development
Costs.Income Taxes Income taxes are accounted for using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities, net of valuation allowances,
for the expected future tax consequences that are more likely than not to be realized of
temporary differences between the consolidated financial statement carrying amounts and the
tax basis of assets and liabilities. A valuation allowance is established when necessary to
reduce deferred tax assets to amounts expected to be realized. The amount of the valuation
allowance is based on the Companys best estimate of the recoverability of its deferred tax
assets.Revenue Recognition Contractual revenues are recognized when services are provided,
collection is probable, and the fee is fixed and determinable. For time and materials
contracts, the Company recognizes revenue when materials are consumed or billable hours are
incurred, multiplied by the applicable billing rates.In connection with complex product development programs or multisite clinical trials, the
Company pays fees to subcontractors, investigators, and test subjects and incurs other costs,
such as couriers, printing, and advertising. The Companys clients reimburse the Company for
these costs, which often include a handling fee that is negotiated with the client. Pursuant
to Emerging Issues Task Force Issue No. 99-19, Reporting Revenue Gross as a Principal versus
Net as an Agent, the Company acts as a principal in providing such contract services to its
clients. Accordingly, the Company recognizes all such costs and the related handling fees as
reimbursed costs in total revenues, and the related costs as reimbursed costs in total
operating costs and expenses, in the consolidated statement of operations of the Company.
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License fees, milestone fees, and royalty revenues are classified as collaborative revenues
and royalties in the consolidated statement of operations. License fees are generally payments
for the initial license of and access to the Companys technology. These fees are recognized
as revenue upon delivery of the technology where the Companys continued performance or future
research and development services are not required. Payments received related to substantive,
at-risk milestones are recognized upon achievement of the scientific or regulatory event
specified in the underlying agreement. The Company also earns royalties for certain technology
or product rights, which are recognized when the amount is known.Amounts collected in excess of revenue recognized under the Companys revenue recognition
policy are recorded as deferred revenue in short and long term liabilities in the consolidated
balance sheet. Retainers, which are typically held for the duration of a project and are
credited against the final payment, and project payments (including initial payments and
progress payments that are not based on percentage of completion) that are cumulatively of
greater value than the revenue earned to date on the project are primary components of
deferred revenue.Under certain license agreements, the Company has combined intellectual property from others
outside the Company with its own intellectual property. Royalties earned under these
agreements are distributed based on terms of the agreements between the Company and others
outside the Company. The Company records royalty income received, net of the amounts
distributed, as royalties in total revenue in the consolidated statement of operations.Foreign Currency Transactions and Translation Assets and liabilities of foreign operations,
where the functional currency is the local currency, are translated into U.S. dollars at the
rate of exchange at each reporting date. Income and expenses are translated at the average
rates of exchange prevailing during the month in which a transaction occurs. Gains or losses
from translating foreign currency financial statements are recorded in other comprehensive
income (loss). Foreign currency gains were $268,000 for the year ended December 31, 2007.Stock Compensation On January 1, 2006, the Company adopted FASB Statement No. 123 (revised
2004), Share-Based Payment, which requires the measurement and recognition of compensation
expense for all share-based payment awards made to employees and
directors, including employee stock options based on estimated fair values. Prior to adoption
of FASB Statement No. 123(R), the Company accounted for stock-based awards to employees using
the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and other interpretations. Stock-based awards to
nonemployees were accounted for in accordance with FASB Statement No. 123, Accounting for
Stock-Based Compensation.The Company adopted FASB Statement No. 123(R) using the prospective transition method, which
requires the Company to continue to apply the minimum value method of measuring equity share
options and similar instruments under the provisions of APB Opinion No. 25 and its related
interpretive guidance to equity share options and similar instruments issued prior to January
1, 2006, and to apply the provisions of FASB Statement No. 123(R) prospectively to new awards
and to awards modified, repurchased, or canceled after January 1, 2006.FASB Statement No. 123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the portion of the
award that is ultimately expected to vest is recognized as expense over the requisite service
periods in the Companys consolidated statement of operations. In 2007, the Company recorded
total compensation expense of
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Recently Issued Accounting Standards Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109
 Fair Value Measurements
 The Fair Value Option for Financial Assets and Financial Liabilities 
Including an amendment of FASB Statement No. 115
 - 10 -




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3.
    
    INVESTMENTSThe Companys investments at December 31, 2007, consisted of available-for-sale securities in
marketable debt securities, which are stated at cost or par value that approximated fair value
and consisted of the following (in thousands):
 Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair
    
    
    Short-
    
    
    Long-Cost
    
    
    Gains
    
    
    Losses
    
    
    Value
    
    
    Term
    
    
    TermCorporate notes
and bonds
    
    $
    15,602
    
    
    $
    25
    
    
    $
    
    
    
    $
    15,627
    
    
    $
    13,009
    
    
    $
    2,618U.S. Treasury and agency
    
    
    11,510
    
    
    
    12
    
    
    
    
    
    
    
    11,522
    
    
    
    9,210
    
    
    
    2,312Total
    
    $
    27,112
    
    
    $
    37
    
    
    $
    
    
    
    $
    27,149
    
    
    $
    22,219
    
    
    $
    4,930
  Amortized
    
    
    MarketCost
    
    
    ValueWithin one year
    
    $
    22,208
    
    
    $
    22,219Within one to three years
    
    
    4,904
    
    
    
    4,930Total
    
    $
    27,112
    
    
    $
    27,149
 The net unrealized gain on securities included in accumulated other comprehensive income of
$47,000 for 2007 related to the investments are primarily due to increases and decreases in
the fair value of debt securities as a result of changes in interest rates during fiscal 2007.
The Company reviewed its investment portfolio to identify and evaluate investments that have
indications of possible impairment. Factors considered in determining whether a loss is
temporary include the length of time and extent to which fair value has been less than the
cost basis, the financial condition and near-term prospects of the investee, credit quality,
and the Companys ability to hold the investment for a period of time sufficient to allow for
any anticipated recovery in market value. The Company reviewed its investment portfolio to
identify and evaluate investments at December 31, 2007, and concluded that the unrealized
losses at December 31, 2007, are temporary in nature.4.
    
    GOODWILLOn December 22, 2004, the Company acquired 100% of the outstanding stock of bioskin. This
acquisition was accounted for as a purchase, and was made to improve access to the European
market and to expand the Companys capabilities in clinical research. Goodwill was $1,719,000
at December 31, 2007.
 - 11 -




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5.
    
    PROPERTY AND EQUIPMENT  NETProperty and equipment  net at December 31, 2007, consisted of the following (in thousands):
 Machinery and equipment
    
    $
    3,745Furniture and fixtures
    
    
    884Computer and telecom equipment
    
    
    729Computer software
    
    
    1,273Leasehold improvements
    
    
    521Total property and equipment
    
    
    7,152Accumulated depreciation and amortization
    
    
    (4,122
    )Property and equipment  net
    
    $
    3,030
 Depreciation and amortization expense related to property and equipment was $591,000 in 2007.6.
    
    ACCRUED LIABILITIESAccrued liabilities at December 31, 2007, consisted of the following (in thousands):
 Payroll and other employee benefits
    
    $
    1,786Redeemable convertible preferred stock dividends
    
    
    2,949Royalties payable
    
    
    763Other accrued liabilities
    
    
    2,254Total accrued liabilities
    
    $
    7,752
 7.
    
    LINES OF CREDITThe Companys subsidiary bioskin has two line of credit facilities for borrowings of up to
$78,000 with interest rates equal to that of the banks rate of interest. There were no
borrowings under these facilities at December 31, 2007, and such facilities are available
until further notice.8.
    
    LEASE COMMITMENTSThe Company is obligated under non-cancelable operating leases expiring at various dates
through 2012 relating to its operating facilities and certain equipment. Rental expense for
all operating leases of the Company and its subsidiaries was $1,643,000 in 2007.
 - 12 -




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Years EndingDecember 312008
    
    $
    1,2552009
    
    
    6682010
    
    
    5682011
    
    
    3812012
    
    
    73Total
    
    $
    2,945
 9.
    
    INCOME TAXESIncome tax expense for the year ended December 31, 2007, consisted of the following (in
thousands):
 Current:Federal
    
    $
    306State
    
    
    (10
    )Total current
    
    
    296Deferred:Federal
    
    
    804State
    
    
    568Total deferred
    
    
    1,372Income tax expense
    
    $
    1,668
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Deferred tax assets:Net operating losses
    
    $
    1,348Accrued expenses
    
    
    358Research and development credit carryover
    
    
    2,384Compensation expense accrual
    
    
    1,423Deferred revenue benefit
    
    
    83Deferred state tax benefit
    
    
    15,597Valuation allowance
    
    
    (5,385
    )Total deferred tax assets
    
    
    212Deferred tax liabilities:Reduction in deferred state tax benefitAccrued liabilities and allowances
    
    
    (36
    )Depreciation and amortization
    
    
    (176
    )Total deferred tax liabilities
    
    
    (212
    )Net deferred tax assets
    
    $
    
 During the year ended December 31, 2007, the Company recorded a valuation allowance against
the deferred tax assets of the Company, as the Companys management determined that it is more
likely than not that these deferred tax assets will not be realized.For the year ended December 31, 2007, the Company recognized federal research and development
benefits of $940,000 and state research and development benefits of $988,000 representing the
primary differences between the U.S. statutory tax rate and the Companys effective tax rate.10.
    
    REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITYPreferred Stock The holders of the Series A redeemable, convertible preferred stock (Series
A Preferred Stock) have certain redemption rights. During the year ended December 31, 2007,
the Company accreted to the redemption value an amount of $161,000.Preferred stock accretion at December 31, 2007, is as follows (in thousands):
 TotalPreferred Stock
    
    
    
    
    
    
    PreferredShares
    
    
    Amount
    
    
    Accretion
    
    
    StockBalance  January 1, 2007
    
    
    7,399,996
    
    
    $
    36,620
    
    
    $
    176
    
    
    $
    36,796Accretion of redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    161
    
    
    
    161Balance  December 31, 2007
    
    
    7,399,996
    
    
    $
    36,620
    
    
    $
    337
    
    
    $
    36,957
 - 14 -




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##### 



Dividends
 Conversion Rights
  Mandatory Conversion
 Redemption Rights
 - 15 -




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##### 



Liquidation
   
    
    A merger, tender offer, reorganization, business combination, or other transaction (each, a
Consolidation)
    
    The sale, lease, exchange, exclusive license, transfer, or other disposition, in a single
transaction or series of related transactions, by the Company or any subsidiary of the Company
of all the assets of the Company and its subsidiaries taken as a whole except where such sale,
lease, exchange, exclusive license, transfer, or other disposition is to a wholly owned
subsidiary of the Company
 Voting Rights of Series A Preferred Stock
 Common Stock
  - 16 -




---



##### 



The Company recorded Special Class A Dividends of $7,494,000 during the year ended December
31, 2007. These amounts were allocated between compensation expense and common stock dividends
based on the amounts projected to be paid to vested stock option holders or to stockholders.
The portion anticipated to be paid out to vested stock option holders as compensation expense
was $1,499,000 in 2007 and has been reflected in the accompanying consolidated statement of
operations. The remaining $5,995,000 for 2007 has been reflected as a Special Class A Dividend
in the consolidated statement of operations, as the liquidation rights attached to these
dividends are similar to those attached to the preferred dividends.Special Class A Dividends accrued at December 31, 2007, were $16,651,000 and were accrued for
the Special Class A Dividend as a result of Excess Royalties revenue generated in 2007, 2006,
and 2005, respectively. In April and May 2008, the Company paid $16,651,000 to the holders of
Special Class A shares and option holders.11.
    
    STOCK OPTION PLANPursuant to the amended and restated Dow Pharmaceutical Sciences, Inc. Stock Plan (the Stock
Plan), the Company has reserved 1,200,000 shares of Class B common stock and
1,845,647 shares of Class A common stock for future issuance, at the discretion of the Board
of Directors, to officers, directors, employees, and consultants.Options for Class A common stock granted under the Stock Plan generally vest over five years.
No further Class A common stock options were granted after December 31, 2005. As of December
31, 2007, 245,740 shares of Class B common stock were available for future grant. Class B
common stock options will generally vest over four years. Both classes of stock options
typically expire 10 years from the date of grant.Additional information regarding the common stock options outstanding as of December 31, 2007,
consisted of the following:
 Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber
    
    
    Exercise
    
    
    Contractual
    
    
    Intrinsicof Shares
    
    
    Price
    
    
    Term (Years)
    
    
    ValueOutstanding  December 31, 2006
    
    
    2,043,662
    
    
    $
    0.89
    
    
    
    7.48Granted (weighted-average fair value
of $1.06)
    
    
    468,887
    
    
    
    2.13Exercised
    
    
    (132,125
    )
    
    
    0.47Canceled
    
    
    (78,849
    )
    
    
    1.28Outstanding  December 31, 2007
    
    
    2,301,575
    
    
    
    1.12
    
    
    
    7.16
    
    
    $
    4,782,383Vested or expected to
vest  December 31, 2007
    
    
    1,941,148
    
    
    
    0.75
    
    
    
    6.16
    
    
    $
    3,581,526Exercisable  December 31, 2007
    
    
    1,359,781
    
    
    
    0.75
    
    
    
    6.16
    
    
    $
    3,333,027
 - 17 -




---



##### 



Options Outstanding
    
    Options ExercisableWeighted-AverageRemaining
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Contractual
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    Number
    
    
    Life
    
    
    Exercise
    
    
    Number
    
    
    ExercisePrices
    
    
    of Shares
    
    
    (in Years)
    
    
    Price
    
    
    Exercisable
    
    
    Price$
    0.39
    
    
    
    351,646
    
    
    
    4.0
    
    
    $
    0.39
    
    
    
    351,646
    
    
    $
    0.390.54
    
    
    
    12,501
    
    
    
    5.1
    
    
    
    0.54
    
    
    
    12,501
    
    
    
    0.540.57
    
    
    
    273,925
    
    
    
    5.5
    
    
    
    0.57
    
    
    
    251,384
    
    
    
    0.570.61
    
    
    
    237,402
    
    
    
    6.7
    
    
    
    0.61
    
    
    
    171,121
    
    
    
    0.610.62
    
    
    
    482,491
    
    
    
    7.2
    
    
    
    0.62
    
    
    
    336,742
    
    
    
    0.621.75
    
    
    
    403,552
    
    
    
    8.2
    
    
    
    1.75
    
    
    
    205,580
    
    
    
    1.751.87
    
    
    
    79,158
    
    
    
    8.9
    
    
    
    1.87
    
    
    
    24,600
    
    
    
    1.871.93
    
    
    
    87,200
    
    
    
    9.2
    
    
    
    1.93
    
    
    
    2,600
    
    
    
    1.931.98
    
    
    
    100,150
    
    
    
    9.4
    
    
    
    1.98
    
    
    
    3,607
    
    
    
    1.982.04
    
    
    
    215,500
    
    
    
    9.6
    
    
    
    2.04
    
    
    
    
    
    
    
    2.043.07
    
    
    
    58,050
    
    
    
    9.9
    
    
    
    3.07
    
    
    
    
    
    
    
    3.072,301,575
    
    
    
    7.2
    
    
    
    1.12
    
    
    
    1,359,781
    
    
    
    0.75
  Expected life
    
    5 yearsExpected volatility
    
    50%52%Dividend yield
    
    NoneRisk-free interest rate
    
    2.6%4.75%
 The Company had outstanding non-qualified stock options that were granted to members of the
Board of Directors and a consultant to purchase a total of 129,022 shares of common stock at
December 31, 2007. There were no non-qualified stock options or qualified options granted at
below fair market value in 2007.12.
    
    EMPLOYEE BENEFIT PLANSQualified employees are eligible to participate in the Companys 401(k) tax-deferred qualified
retirement plan. Participants may contribute a portion of their eligible earnings up to a
maximum limit determined by the Internal Revenue Service to this plan. The Company may, at the
discretion of the Board of Directors and within certain limitations, make matching and
discretionary contributions. The Company made matching contributions of $421,000 in 2007. The
Company made discretionary contributions of $0 for 2007.
 - 18 -




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##### 



The Company established an Employee Stock Ownership Plan (ESOP) in 1998 to provide retirement
benefits for all eligible employees. The ESOP was terminated in May 2003 effective as of
January 1, 2003. All eligible participants were immediately fully vested and the total Company
shares owned by the ESOP were determined to be 609,859. In March 2005, the Company repurchased
218,460 shares at a fair market value of $0.62 per share during the first put option
opportunity and recorded a liability of $135,000 for the balance due to the ESOP participants
in the form of a note. The note bears an interest rate of 4.5% and is to be repaid over five
years, in five equal annual payments of principal plus accumulated interest at a 4.5% interest
rate, and is secured by fixed assets of the Company. In August 2005, 139,365 shares were sold
back to the Company at a fair market value of $5.10345 per share in August 2005 as part of the
Series A preferred stock financing.The remaining 252,034 shares were subject to a second put option requiring the Company to
repurchase the shares at the then-current fair value in May 2006. Of these, 68,477 shares were
put back to the Company at $5.10 per share in June 2006. The terms related to the
second put option are identical to the first put option above, except the note bears an
interest rate of 5.25%. The notes are shown on the consolidated balance sheet as $78,704 in
current liabilities and $230,602 in long-term liabilities at December 31, 2007. The remaining
183,557 shares are held by the Companys stockholders.13.
    
    LEGAL PROCEEDINGSThe Company is subject to various legal proceedings and claims which arise in the normal
course of business. The Company does not believe that any current litigation or claims will
have a material adverse effect on the Companys business or consolidated results of operations
or financial condition.14.
    
    RELATED-PARTY TRANSACTIONSOther assets primarily consist of a 5% interest in a limited liability company (LLC), in which
the Companys Founder has a significant ownership percentage. The LLCs underlying asset is a
product license to a third-party marketing company. The Company received income distributions
of $53,100 from this investment in 2007, which have been recorded as other income in the
consolidated statement of operations. The Company also earned $95,000 from the same LLC for
the license of a patent and another royalty agreement in 2007, which have been recorded as
royalties in total revenues in the consolidated statement of operations.
  - 19 -