Exhibit 99.2
 
 
 - 1 -




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##### 



DOW PHARMACEUTICAL SCIENCES, INC.
 CONSOLIDATED BALANCE SHEETS  SEPTEMBER 30, 2008 (UNAUDITED) and DECEMBER 31, 2007  (In Thousands)
 2008
    
    
    2007(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    4,164
    
    
    $
    4,905Short-term investments
    
    
    10,534
    
    
    
    22,219Accounts receivable  net of allowance for doubtful accounts of $72 in 2008 and $133 in 2007
    
    
    2,355
    
    
    
    3,498Royalties receivable
    
    
    3,056
    
    
    
    7,208Income tax receivable
    
    
    
    
    
    
    150Unbilled revenue and deferred costs  net of allowance for doubtful accounts of $86 in 2008 $115 in 2007
    
    
    2,826
    
    
    
    6,067Prepaid expenses and other assets
    
    
    1,089
    
    
    
    1,109Total current assets
    
    
    24,024
    
    
    
    45,156LONG-TERM ASSETS:Long-term investments
    
    
    4,747
    
    
    
    4,930Property and equipment  net
    
    
    3,480
    
    
    
    3,030Goodwill
    
    
    1,719
    
    
    
    1,719Deferred costs and other assets
    
    
    1,455
    
    
    
    1,197Total long-term assets
    
    
    11,401
    
    
    
    10,876TOTAL
    
    $
    35,425
    
    
    $
    56,032LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS DEFICITCURRENT LIABILITIES:Accounts payable
    
    $
    884
    
    
    $
    1,118Accrued liabilities
    
    
    8,487
    
    
    
    7,752Accrued special class A payables
    
    
    685
    
    
    
    16,651Notes payable
    
    
    59
    
    
    
    79Deferred revenue
    
    
    5,185
    
    
    
    6,696Total current liabilities
    
    
    15,300
    
    
    
    32,296LONG-TERM LIABILITIES:Notes payable
    
    
    161
    
    
    
    231Deferred revenue
    
    
    6,045
    
    
    
    3,362Accrued special class A payables
    
    
    
    
    
    
    Total long-term liabilities
    
    
    6,206
    
    
    
    3,593Total current and long-term liabilities
    
    
    21,506
    
    
    
    35,889REDEEMABLE CONVERTIBLE PREFERRED STOCK  Series A, $0.001 par value 
authorized, 7,400,000 shares; issued and outstanding, 7,399,996 shares in 2008 and 2007, respectively
(liquidation value was $37,000,000 in 2008 and 2007, respectively)
    
    
    37,078
    
    
    
    36,957STOCKHOLDERS EQUITY (DEFICIT):Class A common stock, $0.001 par value  authorized, 7,200,000 shares; issued and outstanding,
5,069,184 and 4,967,486 shares in 2008 and 2007, respectively
    
    
    5
    
    
    
    5Class B common stock, $0.001 par value  authorized, 20,000,000 shares; issued and outstanding, 11,639
and 10,650 shares in 2008 and 2007, respectivelyAccumulated other comprehensive income
    
    
    143
    
    
    
    209Accumulated loss
    
    
    (23,307
    )
    
    
    (17,028
    )Total stockholders deficit
    
    
    (23,159
    )
    
    
    (16,814
    )TOTAL
    
    $
    35,425
    
    
    $
    56,032
  - 2 -




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##### 



DOW PHARMACEUTICAL SCIENCES, INC.
 UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 and 2007
(In Thousands)
 2008
    
    
    2007REVENUES:Contractual revenues
    
    $
    16,891
    
    
    $
    15,742Reimbursed costs
    
    
    11,344
    
    
    
    3,851Collaborative revenues and royalties
    
    
    10,101
    
    
    
    9,443Other
    
    
    441
    
    
    
    649Total revenues
    
    
    38,777
    
    
    
    29,685OPERATING COSTS AND EXPENSES:Cost of revenue
    
    
    9,575
    
    
    
    8,562Reimbursed costs
    
    
    10,739
    
    
    
    3,738Research and development
    
    
    16,423
    
    
    
    17,022Selling, general, and administrative
    
    
    7,225
    
    
    
    5,427Total operating costs and expenses
    
    
    43,962
    
    
    
    34,749OPERATING LOSS
    
    
    (5,185
    )
    
    
    (5,064
    )OTHER INCOME:Other income  net
    
    
    1,008
    
    
    
    1,375Interest income
    
    
    150
    
    
    
    138Interest expense
    
    
    (160
    )
    
    
    (145
    )Total other income
    
    
    998
    
    
    
    1,368LOSS BEFORE INCOME TAX EXPENSE (BENEFIT)
    
    
    (4,187
    )
    
    
    (3,695
    )INCOME TAX EXPENSE
    
    
    3,888
    
    
    
    1,710NET LOSS
    
    
    (8,075
    )
    
    
    (5,405
    )ACCRETION OF REDEMPTION VALUE ON REDEEMABLE
CONVERTIBLE PREFERRED STOCK
    
    
    (121
    )
    
    
    (121
    )REDEEMABLE CONVERTIBLE PREFERRED STOCK DIVIDEND
    
    
    (1,553
    )
    
    
    (1,476
    )SPECIAL CLASS A COMMON STOCK DIVIDEND
    
    
    (562
    )
    
    
    (2,120
    )NET LOSS AVAILABLE TO CLASS A AND B COMMON STOCKHOLDERS
    
    $
    (10,311
    )
    
    $
    (9,122
    )
  - 3 -




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##### 



DOW PHARMACEUTICAL SCIENCES, INC.
 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS  The Nine Months Ended September 30, 2008 and 2007
 (In Thousands)
 2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    
    ($8,075
    )
    
    
    ($5,405
    )Reconciliation of net income (loss) to net cash provided by
(used in) operating activities:Special Class A common stock compensation expense
    
    
    685
    
    
    
    2,718Depreciation and amortization
    
    
    587
    
    
    
    476Provision for bad debts
    
    
    (91
    )
    
    
    49Stock-based compensation expense
    
    
    195
    
    
    
    205Issuance of nonqualified stock options
    
    
    (61
    )
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    1,203
    
    
    
    (3,079
    )Royalties receivable
    
    
    4,152
    
    
    
    104Unbilled revenue
    
    
    3,270
    
    
    
    (17
    )Prepaid expenses and other assets
    
    
    20
    
    
    
    (681
    )Income taxes
    
    
    1,802
    
    
    
    (1,597
    )Accounts payable
    
    
    (234
    )
    
    
    (284
    )Deferred revenue
    
    
    1,171
    
    
    
    2,262Accrued liabilities
    
    
    812
    
    
    
    1,066Deferred costs and other assets
    
    
    (272
    )
    
    
    (103
    )Net cash provided by (used in) operating activities
    
    
    5,164
    
    
    
    (4,286
    )CASH FLOWS FROM INVESTING ACTIVITIES:Net sales of investments
    
    
    11,861
    
    
    
    5,785Purchases of property and equipment
    
    
    (1,023
    )
    
    
    (685
    )Net cash used in investing activities
    
    
    10,838
    
    
    
    5,100CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from exercise of stock option
    
    
    60
    
    
    
    14SCAP payout
    
    
    (16,651
    )
    
    
    Payment of ESOP payable
    
    
    (90
    )
    
    
    (73
    )Net cash provided by financing activities
    
    
    (16,681
    )
    
    
    (59
    )EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
    
    
    (62
    )
    
    
    (180
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    ($741
    )
    
    $
    575CASH AND CASH EQUIVALENTS  Beginning of year
    
    
    4,905
    
    
    
    1,778CASH AND CASH EQUIVALENTS  End current period
    
    
    4,164
    
    
    
    2,353NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (741
    )
    
    
    575
  - 4 -




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##### 



DOW PHARMACEUTICAL SCIENCES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (UNAUDITED)
 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 September 30, 2008, 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. bioskin 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 September 30, 2008 and
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
September 30, 2008 and 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 (loss) in the consolidated statements of stockholders equity.
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 September 30, 2008 and 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 as of September 30, 2008 or December 31,
2007.Deferred Costs Deferred costs represent costs that were incurred but have not yet been
billed to clients as well as costs related to revenues that have been billed to clients, but
the revenues are deferred.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 as of September 30, 2008 or December 31,
2007.
 - 6 -




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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 royalty receivables are primarily for amounts due
from pharmaceutical and biotechnology companies. As of September 30, 2008, no company
accounted for more than 15% of contractual service revenue. Certain companies provide
retainers (advances), which are recorded as deferred revenue in the consolidated balance
sheets, for work to be performed that 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 Income The Company reports comprehensive income, by major component and as a
single total, in the consolidated statements of stockholders equity. Comprehensive income
includes all changes in equity from non-owner sources. The Companys accumulated other
comprehensive income 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 nine months ended September
30, 2008 and 2007 was approximately $346,000 and $430,000, respectively.Research and Development Research and development costs are charged to operations as
incurred in accordance with SFAS 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 deferred tax assets, net
of 100% valuation allowance, was zero at September 30, 2008 and December 31, 2007,
respectively.Revenue Recognition Revenue is 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 the management of complex
product development programs or multi-site clinical trials, the Company pays fees to
subcontractors, investigators, and test subjects and incurs other costs for items such as
couriers, printing, and advertising. The Companys clients reimburse the Company for these
costs, which often includes 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 contract services to its clients,
and accordingly, all such costs and related handling fees incurred by the Company, which are
reimbursed by the client, are recognized as reimbursed out-of-pocket revenue.License fees, milestone fees, and royalty revenues are classified as collaborative research in
the consolidated statements 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.
 - 7 -




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##### 



Amounts collected in excess of revenue recognized under the Companys revenue recognition
policy are recorded as deferred revenue in the consolidated balance sheets. 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 its
partners with its own intellectual property. Royalties earned under these agreements are
distributed based on terms of the agreements between the Company and its partners. The
Company records royalty income received, net of the amounts distributed to its partners, as
collaborative research revenue in the consolidated statements 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. Foreign currency gains were $112,000 and $268,000 as of September 30, 2008 and
December 31, 2007, respectively.Stock Compensation On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
Share-Based Payments, 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 SFAS 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 non-employees were accounted for in accordance with SFAS No. 123, Accounting for
Stock-Based Compensation.The Company adopted SFAS 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 SFAS No. 123(R) prospectively to new awards and to
awards modified, repurchased, or canceled after January 1, 2006.SFAS 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 statements of operations. For the nine months ended September 30,
2008 and 2007, the Company recorded total compensation expense of $187,000 and $144,000,
respectively, which relates to awards granted after the date of adoption. At September 30,
2008 and December 31, 2007, unrecognized compensation expense related to the unvested portion
of stock options was $150,000 and $292,000 respectively, which is expected to be recognized
over a weighted-average period of four years.
 - 8 -




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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
 Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement)
 - 9 -




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##### 



3.
    
    INVESTMENTSThe Companys investments at September 30, 2008 and 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
    
    
    TermSeptember 30, 2008 (Unaudited)Corporate notes and bonds
    
    $
    11,417
    
    
    $
    
    
    
    $
    (19
    )
    
    $
    11,384
    
    
    $
    10,534
    
    
    $
    849U.S. Treasury and agency
    
    
    3,910
    
    
    
    
    
    
    
    (12
    )
    
    
    3,897
    
    
    
    
    
    
    
    3,898Total
    
    $
    15,327
    
    
    $
    
    
    
    $
    (31
    )
    
    $
    15,281
    
    
    $
    10,534
    
    
    $
    4,747December 31, 2007Corporate notes and bonds
    
    $
    15,602
    
    
    $
    25
    
    
    $
    
    
    
    $
    15,627
    
    
    $
    13,009
    
    
    $
    2,618U.S. Treasury and agency
    
    
    11,500
    
    
    
    12
    
    
    
    
    
    
    
    11,522
    
    
    
    9,210
    
    
    
    2,312Total
    
    $
    27,102
    
    
    $
    37
    
    
    $
    
    
    
    $
    27,149
    
    
    $
    22,219
    
    
    $
    4,930
  Amortized
    
    
    MarketCost
    
    
    ValueWithin one year
    
    $
    10,565
    
    
    $
    10,534Within one to three years
    
    
    4,762
    
    
    
    4,747Total
    
    $
    15,327
    
    
    $
    15,281
 The net unrealized gains (losses) on securities included in accumulated other comprehensive
income of $(31,000) and $47,000 as of September 30, 2008 and December 31, 2007 respectively,
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 the nine months ended
September 30, 2008 and the year ended December 31, 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 September 30, 2008 and December 31, 2007, and concluded
that the unrealized losses at September 30, 2008 and 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 made to improve access to the European market
and to expand the Companys capabilities in clinical research. Goodwill recognized in the
acquisition was $1,719,000 at September 30, 2008 and December 31, 2007, respectively.
 - 10 -




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##### 



5.
    
    PROPERTY AND EQUIPMENT  NETProperty and equipment  net at September 30, 2008 and December 31, 2007, consisted of the
following (in thousands):
 2008
    
    
    2007(Unaudited)Machinery and equipment
    
    $
    3,640
    
    
    $
    3,745Furniture and fixtures
    
    
    863
    
    
    
    884Computer and telecom equipment
    
    
    768
    
    
    
    729Computer software
    
    
    1,422
    
    
    
    1,273Leasehold improvements
    
    
    649
    
    
    
    521Total property and equipment
    
    
    7,342
    
    
    
    7,152Accumulated depreciation and amortization
    
    
    (3,862
    )
    
    
    (4,122
    )Property and equipment  net
    
    $
    3,480
    
    
    $
    3,030
 Depreciation and amortization expense related to property and equipment was $466,000 and
$428,000 for the nine months ended September 30, 2008 and 2007, respectively.
 6.
    
    ACCRUED LIABILITIESAccrued liabilities at September 30, 2008 and December 31, 2007, consisted of the following
(in thousands):
 2008
    
    
    2007(Unaudited)Payroll and other employee benefits
    
    $
    2,473
    
    
    $
    1,786Redeemable convertible preferred stock dividends
    
    
    4,502
    
    
    
    2,949Royalties payable to partners
    
    
    
    
    
    
    763Other accrued liabilities
    
    
    1,512
    
    
    
    2,254Total accrued liabilities
    
    $
    8,487
    
    
    $
    7,752
 7.
    
    LINES OF CREDITThe Companys subsidiary, bioskin, has two lines of credit with limits of approximately
$70,500 and $4,200 and interest rate of 13.3%, which are available until further notice. A
bank in Germany has guaranteed rental payments on the Berlin lease, which is approximately
$20,000. bioskin did not use this guarantee during the nine months ended September 30, 2008 or
the year ended December 31, 2007.
 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 $1,330,000 and $1,110,000 for the
nine months ended September 30, 2008 and 2007, respectively. There was no material changes to
the Companys non-cancelable operating lease commitments as of September 30, 2008.
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9.
    
    REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITYPreferred Stock On June 30, 2006, the Company raised gross proceeds of $15,000,000 from the
sale of 2,939,187 shares of Series A redeemable, convertible preferred stock (Series A
preferred stock). The Company also issued 83,108 shares of Series A preferred stock to a
consultant for services in connection with the June 2006 financing. The value of $424,000 for
the professional services was recorded as a cost of financing in 2006. The holders of the
Series A preferred stock have certain redemption rights. For the nine months ended September
30, 2008 and the year ended December 31, 2007, the Company accreted to the redemption value an
amount of $121,000 and $161,000, respectively.Issued preferred stock plus accretion at September 30, 2008 and December 31, 2007, is as
follows (in thousands):
 Shares
    
    Amount
    
    Accretion
    
    StockBalance  December 31, 2007
    
    
    7,399,996
    
    
    
    $36,620
    
    
    
    $337
    
    
    
    $36,957Balance  September 30, 2008
    
    
    7,399,996
    
    
    
    $36,957
    
    
    
    $458
    
    
    
    $37,078
 The significant terms of the Series A preferred stock are as follows:Dividends Beginning July 1, 2006, the holders of the Series A preferred stock shall be
entitled to receive, when and if declared by the Board of Directors, cash dividends on each
share of Series A preferred stock at the rate per annum of 5.1267% on $5.1035 per share (the
Series A Original Issue Price), subject to appropriate adjustments in the event of any stock
dividend, stock split, combination, or other similar recapitalization (the Accruing
Dividends) and Participating Dividends in the case when a dividend is payable on common
stock (other than the Special Class A Plan dividend Special Class A Dividend) or in which a
dividend is payable on any class or series other than common stock. Accruing Dividends and
Participating Dividends on each share of Series A preferred stock shall be cumulative, whether
or not declared, and will accrue based on the actual number of days elapsed and compound daily
from the date of issue of such shares. The Company accrued dividends payable of $4,502,000 and
$1,985,000 for the nine months ended September 30, 2008 and the year ended December 31, 2007,
respectively.Conversion Rights At any time that the valuation of the Company, excluding any debt
outstanding or accrued but unpaid Special Class A Dividends (the Enterprise Value), is less
than $337 million, each share of Series A preferred stock shall be convertible, at the option
of the stockholder, at any time and from time to time, and without the payment of additional
consideration by the holder, into the number of fully paid and nonassessable shares of Class B
common stock as is determined by dividing the Series A liquidation amount by the Series A
conversion price in effect at the time of conversion.At any time which the Enterprise Value of the Company is greater than $337 million, each share
of Series A preferred stock shall be convertible, at the option of the stockholder, at any time
and from time to time, and without the payment of additional consideration by the holder, into
the number of fully paid and non-assessable shares of Class B common stock as is determined by
dividing the Series A Original Issue Price by the Series A Conversion Price in effect at the
time of conversion. The Series A Conversion Price initially shall equal the Series A Original
Issue Price.
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Mandatory Conversion Upon the earliest of (i) a deemed liquidation event pursuant to which
the Enterprise Value of the Company implicit in the value of the transaction is greater than
$337 million, (ii) the closing of the sale of share of common stock to the public at a price
per share that is greater than 300% of the Series A Original Issue Price (subject to
appropriate adjustments for stock splits, dividends, combinations, or other similar
recapitalizations affecting such shares), in a firm commitment underwritten public offering
pursuant to an effective registration statement under the Securities Act of 1933, as amended,
resulting in at least $45 million of proceeds, net of underwriting discount and commissions, to
the Company, and (iii) a date specified by vote given at a meeting of the stockholders or
written consent of the holders of at least 76% of the then-outstanding shares of Series A
preferred stock (I) all outstanding shares of Series A preferred stock, together with all
Accruing Dividends accrued but unpaid, whether or not declared, and any other dividends
(including Participating Dividends) accrued but unpaid, whether or not declared, automatically
shall be converted into shares of Class B common stock, at the Series A Conversion Price then
in effect, and (II) such shares may not be reissued by the Company as shares of such series.Redemption Rights Upon not less than 90 days written notice to the Company, holders of
greater than 50% of the then-outstanding Series A preferred stock may demand (each holder a
Demanding Holder) that the Company redeem: (i) at any time during 2011, up to one-third of
the shares of Series A preferred stock held by each Demanding Holder; (ii) at any time during
2012, up to two-thirds of the shares of Series A preferred stock held by Demanding Holders,
less any share redeemed under (i); and (iii) at any time during 2013 and thereafter, up to all
of the shares of Series A preferred stock held by each Demanding Holder, less any shares
previously redeemed, at a price equal to the Series A Liquidation Amount. No redemption of any
shares of Series A preferred stock shall be made unless the holders of the Class A common stock
then-outstanding first or simultaneously receive a dividend of each outstanding share of Class
A common stock in an amount equal to or greater than any Special Class A Dividend accrued but
unpaid, whether or not declared.Liquidation Preferential payments to holders of Series A preferred stock and Class A common
stock shall be in the event of any voluntary or involuntary liquidation, dissolution, or
winding up of the Company (i) the holders of Series A preferred stock then-outstanding shall
have a right to receive dividends and the distributions of Company assets in an amount equal to
the Series A Original Issue Price, plus any Accruing Dividends accrued but unpaid, whether or
not declared, together with any other dividends (including Participating Dividends) accrued but
unpaid, whether or not declared, and (ii) the holders of shares of Class A common stock
then-outstanding shall have a right to receive dividends and distributions of Company assets in
an amount equal to the sum of the Special Class A Liquidation Payment and any accrued but
unpaid Special Class A Dividend before any other payments shall be made.If the remaining assets available for distribution to the stockholders are insufficient to pay
the holders of Series A preferred stock and Class A common stock the full amount to which they
are entitled, the holders of Series A preferred and Class A common stock will share ratably in
any distribution of the remaining assets available for distribution in proportion to the
respective amounts that would otherwise be payable on or with respect to such shares held by
them if all amounts payable were paid in full.Deemed liquidation events shall be a liquidation of the Company, unless the holders of
two-thirds of the shares of the Series A preferred stock elect otherwise by written notice
given to the Company at least 30 days prior to the effective date of any of the following
events:
 
    
    A merger, tender offer, reorganization, business combination, or other transaction
(each, a Consolidation)
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
    
    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 The holders of outstanding shares of Series A
preferred stock are entitled to cast the number of votes agreed to the number of whole shares
of common stock into which the shares of Series A preferred stock held by the preferred
stockholders are convertible as of the record date for determining stockholders entitled to
vote on such matters.Common Stock The Company has two classes of common stock  Class A and Class B. The major
difference between the classes of common stock is the Special Class A Plan adopted by the Board
of Directors. Under defined circumstances, this plan entitles all holders of issued and
outstanding shares of the Companys Class A common stock to receive a Special Class A Dividend.
It also entitles all holders of vested stock options for the Companys Class A common stock
the right to receive a payment equal to the Special Class A Dividend.As defined in the Special Class A Plan, the Special Class A Dividend (including payments to
vested stock option holders) is defined as 95% of the Excess Royalties. Excess Royalties are
revenues, including milestone payments and royalties for specific products, that are greater
than a preset revenue threshold defined in the Special Class A Plan. In order to pay a Special
Class A Dividend in a given year, the cumulative revenues must be in excess of a cumulative
threshold for the plan since inception.The Company recorded Special Class A Dividends of $685,000 and $2,718,000 during the nine
months ended September 30, 2008 and 2007, respectively. 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 $123,000 and $598,000 in the nine
months ended September 30, 2008 and 2007, respectively, and has been reflected in the
accompanying statements of operations. The remaining $562,000 and $2,120,000 for the nine
months ended September 30, 2008 and 2007, respectively, has been reflected as a Special Class A
Dividend in the statements 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 September 30, 2008 and December 31, 2007, were $685,000
and $16,651,000, respectively. The dividends were accrued in accordance with the Special Class
A Plan as a result of Excess Royalties revenue generated in 2008, 2005 through 2007,
respectively. In April and May 2008, the Company paid $16,651,000 to the holders of Special
Class A shares and option holders.
 10.
    
    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 $340,000 for the nine
months ended September 30, 2008. The Company did not make any discretionary contributions for
the nine months ended September 30, 2008.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,
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2003. All eligible participants were immediately fully vested and the total Company shares
owned by the ESOP was 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 sheets as $59,000 and $78,704 in
current liabilities and $161,000 and $230,602 in long-term liabilities at September 30, 2008
and December 31, 2007, respectively. The remaining 183,557 shares are held by the Companys
stockholders.
 11.
    
    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.
 12.
    
    RELATED-PARTY TRANSACTIONSOther assets primarily consisted of a 5% interest in a limited liability company (LLC), in
which the Companys Founder and Chief Technical Officer 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 $44,000 and $36,000 from this investment for the nine
months ended September 30, 2008 and 2007, respectively, which has been recorded as other income
in the statements of operations. The Company also earned $57,000 and $61,000 from the same LLC
for the license of a patent and another royalty agreement for the nine months ended September
30, 2008 and 2007, respectively, which has been recorded as collaborative revenue in the
statements of operations.
 13.
    
    SUBSEQUENT EVENTSIn December 2008, the Company was acquired by Valeant Pharmaceuticals International (Valeant)
for an agreed price of $285 million, subject to certain closing adjustments, per the terms of
the Agreement and Plan of Merger dated December 9, 2008 (the Agreement). Valeant will fund
the initial payment of approximately $250 million upon closing. Pursuant to the terms of the
Agreement, Valeant will pay $35 million into an escrow account for the benefit of the Dow
securityholders by June 30, 2009. Valeant has granted a security interest in royalties they
will receive to the Dow securityholders until they satisfy their obligation to fund the $35
million escrow account. The terms of the agreement also require the payment of contingent
consideration based upon milestones achieved for various product development efforts.
  - 15 -