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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q



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

For the Quarterly Period Ended March 31, 2003

Commission file number: 0-27406

CONNETICS CORPORATION

(Exact name of registrant as specified in its charter)


|                                |  |                       
|------------------------------- |  | ----------------------
|Delaware                        |  | 94-3173928            
|(State or other jurisdiction of |  | (IRS Employer         
|incorporation or organization)  |  | Identification Number)

3290 West Bayshore Road
Palo Alto, California 94303(Address of principal executive offices)

Registrants telephone number, including area code: (650) 843-2800

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 at least the past 90 days. Yes 
[X]  No  [   ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes  [X]  No  [   ]

As of
May 9, 2003, 31,511,948 shares of the Registrants common
stock were outstanding, at $0.001 par value.



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TABLE OF CONTENTS



|                              |                                                                                               |                                                 |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS          
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                              | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION   
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|                              |                                                                                               | (a) Exhibits.                                  
|                              |                                                                                               | (b) Reports on Form 8-K.                       
|SIGNATURE                    
|INDEX TO EXHIBITS            
|EXHIBIT 10.1                 
|EXHIBIT 99.1                 
|EXHIBIT 99.2                 



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CONNETICS CORPORATION

TABLE OF CONTENTS

|        |  |                                                                                                    |  |     
|------- |  | -------------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                                    |  | Page
|        |  |                                                                                                    |  |     
|        |  | PART I FINANCIAL INFORMATION                                                                       |  |     
|Item 1. |  | Condensed Consolidated Financial Statements                                                        |  | 1   
|        |  | Condensed Consolidated Balance Sheets at March 31, 2003 and December 31, 2002                      |  | 1   
|        |  | Condensed Consolidated Statements of Operations for the three months ended March 31,
2003 and 2002 |  | 2   
|        |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31,
2003 and 2002 |  | 3   
|        |  | Notes to Condensed Consolidated Financial Statements                                               |  | 4   
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  | 10  
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risks                                        |  | 15  
|Item 4. |  | Controls and Procedures                                                                            |  | 15  
|        |  | PART II OTHER INFORMATION                                                                          |  |     
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                   |  | 15  
|        |  | (a) Exhibits                                                                                       |  | 15  
|        |  | (b) Reports on Form 8-K                                                                            |  | 15  

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PART I. FINANCIAL INFORMATION




Item 1.Financial Statements

CONNETICS CORPORATION




CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

|                                           |                                        |                            |        |           |        |              |        |          |        | 
|------------------------------------------ | -------------------------------------- | -------------------------- | ------ | --------- | ------ | ------------ | ------ | -------- | ------ | 
|                                           |                                        |                            |        | March 31, |        | December 31,
|                                           |                                        |                            |        | 2003      |        | 2002        
|                                           |                                        |                            |        |           |        |             
|ASSETS                                     |                                        |                            |        |           |        |              |        |         
|Current assets:                            |                                        |                            |        |           |        |              |        |         
|                                           | Cash and cash equivalents              |                            | $      | 9,057     |        |              | $      | 8,624    |       
|                                           | Short-term investments                 |                            |        | 19,416    |        |              |        | 24,440   |       
|                                           | Restricted cash                        |                            |        | 411       |        |              |        | 424      |       
|                                           | Accounts receivable, net               |                            |        | 2,331     |        |              |        | 4,308    |       
|                                           | Prepaid and other current assets       |                            |        | 1,468     |        |              |        | 1,803    |       
|                                           |                                        |                            |        |           |        |              |        |         
|                                           |                                        | Total current assets       |        |           | 32,683 |              |        |          | 39,599 | 
|Property and equipment, net                |                                        |                            | 5,754  |           |        |              | 5,860  |         
|Restricted cash                            |                                        |                            |       |           |        |              | 300    |         
|Deposits and other assets                  |                                        |                            | 750    |           |        |              | 848    |         
|Goodwill                                   |                                        |                            | 6,271  |           |        |              | 6,271  |         
|Other intangible assets, net               |                                        |                            | 6,474  |           |        |              | 6,675  |         
|                                           |                                        |                            |        |           |        |              |        |         
|Total assets                               |                                        | $                          | 51,932 |           |        | $            | 59,553 |         
|                                           |                                        |                            |        |           |        |              |        |          |       
|LIABILITIES AND STOCKHOLDERS EQUITY       |                                        |                            |        |           |        |              |        |         
|Current liabilities:                       |                                        |                            |        |           |        |              |        |         
|                                           | Accounts payable                       |                            | $      | 5,408     |        |              | $      | 7,760    |       
|                                           | Accrued clinical trial costs           |                            |        | 2,051     |        |              |        | 1,223    |       
|                                           | Accrued payroll and related expenses   |                            |        | 1,830     |        |              |        | 2,942    |       
|                                           | Accrued process development expenses   |                            |        | 607       |        |              |        | 633      |       
|                                           | Other accrued liabilities              |                            |        | 940       |        |              |        | 1,493    |       
|                                           | Current portion of deferred revenue    |                            |        | 332       |        |              |        | 363      |       
|                                           |                                        |                            |        |           |        |              |        |         
|                                           |                                        | Total current liabilities  |        |           | 11,168 |              |        |          | 14,414 | 
|Deferred revenue, net of current portion   |                                        |                            | 363    |           |        |              | 396    |         
|Stockholders equity:                      |                                        |                            |        |           |        |              |        |         
|                                           | Preferred stock                        |                            |        |          |        |              |        |         |       
|                                           | Common stock                           |                            |        | 31        |        |              |        | 31       |       
|                                           | Additional paid-in capital             |                            |        | 170,990   |        |              |        | 169,769  |       
|                                           | Deferred compensation                  |                            |        | (44       | )      |              |        | (48      | )     
|                                           | Accumulated deficit                    |                            |        | (131,469  | )      |              |        | (126,088 | )     
|                                           | Accumulated other comprehensive income |                            |        | 893       |        |              |        | 1,079    |       
|                                           |                                        |                            |        |           |        |              |        |         
|                                           |                                        | Total stockholders equity |        |           | 40,401 |              |        |          | 44,743 | 
|                                           |                                        |                            |        |           |        |              |        |         
|Total liabilities and stockholders equity |                                        | $                          | 51,932 |           |        | $            | 59,553 |         
|                                           |                                        |                            |        |           |        |              |        |          |       

See accompanying notes to
condensed consolidated financial statements.

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CONNETICS CORPORATION




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

|                                                          |                                     |                |        |                    |        |      |        |        |        | 
|--------------------------------------------------------- | ----------------------------------- | -------------- | ------ | ------------------ | ------ | ---- | ------ | ------ | ------ | 
|                                                          |                                     |                |        | Three Months Ended
|                                                          |                                     |                |        | March 31,         
|                                                          |                                     |                |        |                   
|                                                          |                                     |                |        | 2003               |        | 2002
|                                                          |                                     |                |        |                    |        |     
|Revenues:                                                 |                                     |                |        |                    |        |      |        |       
|                                                          | Product                             |                | $      | 14,311             |        |      | $      | 10,140 |       
|                                                          | Royalty                             |                |        | 936                |        |      |        | 649    |       
|                                                          | License, contract and other         |                |        | 64                 |        |      |        | 742    |       
|                                                          |                                     |                |        |                    |        |      |        |       
|                                                          |                                     | Total revenues |        |                    | 15,311 |      |        |        | 11,531 | 
|                                                          |                                     |                |        |                    |        |      |        |       
|Operating costs and expenses:                             |                                     |                |        |                    |        |      |        |       
|                                                          | Cost of product revenues            |                |        | 1,072              |        |      |        | 675    |       
|                                                          | Research and development            |                |        | 8,617              |        |      |        | 5,040  |       
|                                                          | Selling, general and administrative |                |        | 11,104             |        |      |        | 9,581  |       
|                                                          |                                     |                |        |                    |        |      |        |       
|                                                          | Total operating costs and expenses  |                |        | 20,793             |        |      |        | 15,296 |       
|                                                          |                                     |                |        |                    |        |      |        |       
|Loss from operations                                      |                                     |                | (5,482 | )                  |        |      | (3,765 | )     
|Interest
and other income                                 |                                     |                | 179    |                    |        |      | 357    |       
|Gain on sale of investment                                |                                     |                |       |                    |        |      | 18     |       
|Interest expense                                          |                                     |                | (1     | )                  |        |      | (2     | )     
|                                                          |                                     |                |        |                    |        |      |        |       
|Loss before income taxes                                  |                                     |                | (5,304 | )                  |        |      | (3,392 | )     
|Income tax benefit (expense)                              |                                     |                | (77    | )                  |        |      | 224    |       
|                                                          |                                     |                |        |                    |        |      |        |       
|Net loss                                                  |                                     | $              | (5,381 | )                  |        | $    | (3,168 | )     
|                                                          |                                     |                |        |                    |        |      |        |        |       
|Basic and diluted loss per share                          |                                     | $              | (0.17  | )                  |        | $    | (0.10  | )     
|                                                          |                                     |                |        |                    |        |      |        |        |       
|Shares
used to calculate basic and diluted loss per share |                                     |                | 31,286 |                    |        |      | 30,496 |       
|                                                          |                                     |                |        |                    |        |      |        |       

See accompanying notes to
condensed consolidated financial statements.

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CONNETICS CORPORATION




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

|                                      |                                                                             |                                            |   |                    |        |      |   |         |        |  
|------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------ | - | ------------------ | ------ | ---- | - | ------- | ------ | -
|                                      |                                                                             |                                            |   | Three Months Ended
|                                      |                                                                             |                                            |   | March 31,         
|                                      |                                                                             |                                            |   |                   
|                                      |                                                                             |                                            |   | 2003               |        | 2002
|                                      |                                                                             |                                            |   |                    |        |     
|Cash flows from operating activities: |                                                                             |                                            |   |                    |        |      |   |        
|                                      | Net loss                                                                    |                                            | $ | (5,381             | )      |      | $ | (3,168  | )     
|                                      | Adjustments to reconcile net loss to net cash used in operating activities: |                                            |   |                    |        |      |   |         |       
|                                      |                                                                             | Depreciation                               |   |                    | 389    |      |   |         | 316    |  
|                                      |                                                                             | Amortization of intangible assets          |   |                    | 201    |      |   |         | 205    |  
|                                      |                                                                             | Gain on sale of investment                 |   |                    |       |      |   |         | (18    | )
|                                      |                                                                             | Stock compensation expense                 |   |                    | 4      |      |   |         | 8      |  
|                                      |                                                                             | Stock issued pursuant to license agreement |   |                    |       |      |   |         | 12     |  
|                                      | Changes in assets and liabilities:                                          |                                            |   |                    |        |      |   |         |       
|                                      |                                                                             | Accounts receivable, net                   |   |                    | 1,983  |      |   |         | (29    | )
|                                      |                                                                             | Other assets                               |   |                    | 434    |      |   |         | (166   | )
|                                      |                                                                             | Accounts payable                           |   |                    | (2,415 | )    |   |         | (52    | )
|                                      |                                                                             | Accrued and other current liabilities      |   |                    | (858   | )    |   |         | (1,660 | )
|                                      |                                                                             | Deferred revenue                           |   |                    | (64    | )    |   |         | (159   | )
|                                      |                                                                             |                                            |   |                    |        |      |   |        
|                                      | Net cash used in operating activities                                       |                                            |   | (5,707             | )      |      |   | (4,711  | )     
|                                      |                                                                             |                                            |   |                    |        |      |   |        
|Cash flows from investing activities: |                                                                             |                                            |   |                    |        |      |   |        
|                                      | Purchases of short-term investments                                         |                                            |   | (4,878             | )      |      |   | (10,527 | )     
|                                      | Sales and maturities of short-term investments                              |                                            |   | 9,677              |        |      |   | 15,052  |       
|                                      | Purchases of property and equipment                                         |                                            |   | (231               | )      |      |   | (982    | )     
|                                      |                                                                             |                                            |   |                    |        |      |   |        
|                                      | Net cash provided by investing activities                                   |                                            |   | 4,568              |        |      |   | 3,543   |       
|                                      |                                                                             |                                            |   |                    |        |      |   |        
|Cash flows from financing activities: |                                                                             |                                            |   |                    |        |      |   |        
|                                      | Restricted cash                                                             |                                            |   | 313                |        |      |   | 821     |       
|                                      | Payment of notes payable                                                    |                                            |   |                   |        |      |   | (23     | )     
|                                      | Proceeds from issuance of common stock, net of issuance costs               |                                            |   | 1,221              |        |      |   | 1,867   |       
|                                      |                                                                             |                                            |   |                    |        |      |   |        
|                                      | Net cash provided by financing activities                                   |                                            |   | 1,534              |        |      |   | 2,665   |       
|                                      |                                                                             |                                            |   |                    |        |      |   |        
|                                      | Effect of foreign currency exchange rates on cash and cash equivalents      |                                            |   | 38                 |        |      |   | 56      |       
|                                      |                                                                             |                                            |   |                    |        |      |   |        
|                                      | Net change in cash and cash equivalents                                     |                                            |   | 433                |        |      |   | 1,553   |       
|                                      | Cash
and cash equivalents at beginning of period                            |                                            |   | 8,624              |        |      |   | 3,603   |       
|                                      |                                                                             |                                            |   |                    |        |      |   |        
|                                      | Cash
and cash equivalents at end of period                                  |                                            | $ | 9,057              |        |      | $ | 5,156   |       
|                                      |                                                                             |                                            |   |                    |        |      |   |         |       

See accompanying notes to
condensed consolidated financial statements.

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1. Basis of Presentation and Policies

We have prepared the accompanying unaudited condensed consolidated
financial statements of Connetics Corporation (Connetics) in accordance with
accounting principles generally accepted in the United States for interim
financial information and pursuant to the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, the financial statements do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. We believe that we have included
all adjustments, consisting of normal recurring adjustments, considered
necessary for a fair presentation.

Operating results for the three months ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2003. For a better understanding of Connetics and its financial
statements, we recommend reading these unaudited, condensed, consolidated
financial statements and notes in conjunction with the audited
consolidated financial
statements and notes to those financial statements for the year ending December
31, 2002, which are included in our Annual Report on Form 10-K/A as filed with
the Securities and Exchange Commission.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
Connetics Corporation, Connetics Holdings Pty Ltd., and Connetics Australia Pty
Ltd. (formerly Soltec Research Pty Ltd.). All intercompany accounts and
transactions have been eliminated in consolidation. We have reclassified
certain prior year balances to conform to the current years presentation.

Use of Estimates

To prepare financial statements in conformity with accounting principles
generally accepted in the United States management must make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates based
upon future events.

Revenue Recognition

Product Sales.We recognize revenue from product sales when there is
persuasive evidence that an arrangement exists, when title has passed, the
price is fixed and determinable, and collection of the resulting receivable is
reasonably assured. We recognize product revenue net of estimated allowances
for discounts, rebates, returns and chargebacks. We are obligated to accept
from customers the return of pharmaceuticals that have reached their expiration
date. We authorize returns for damaged products and exchanges for expired
products in accordance with our return goods policy and procedures, and we
establish reserves for such amounts at the time of sale. To date we have not
experienced significant returns of damaged or expired product. Product
shipping and handling costs are included in cost of product revenues.

Royalty Revenue.Royalties from licensees are based on third-party sales.
We recognize royalties in the quarter in which the royalty payment is either
received from the licensee or may be reasonably estimated, which is typically
one quarter following the related sale by the licensee.

Contract Revenue.We record contract revenue for research and
development, or R&D, as it is earned based on the performance requirements of
the contract. We recognize non-refundable contract fees for which no further
performance obligations exist, and for which Connetics has no continuing
involvement, on the earlier of when the payments are received or when
collection is assured.

We recognize revenue from non-refundable upfront license fees ratably over
the period in which we have continuing development obligations when, at the
time the agreement is executed, there remains significant risk due to the
incomplete state of the products development. Revenue associated with
substantial at risk performance

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milestones, as defined in the respective
agreements, is recognized based upon the achievement of the milestones. We
recognize revenue under R&D cost reimbursement contracts as the related costs
are incurred. Advance payments that we receive in excess of amounts earned are
classified as deferred revenue until they are earned.

Cash Equivalents and Short-term Investments

Cash and cash equivalents consist of cash on deposit with banks and money
market instruments with original maturities of 90 days or less at the date of
purchase. Investments with maturities beyond three months at the date of
acquisition and that mature within one year from the balance sheet date are
considered to be short-term investments. Short-term investments are classified
as available for sale at the time of purchase and are carried at fair value,
and we report unrealized gains and losses as a separate component of
stockholders equity. The cost of securities sold is determined on the
specific identification method.

Cash equivalents and investments are financial instruments that
potentially subject us to concentration of risk to the extent recorded on the
balance sheet. We believe we have established guidelines for investment of our
excess cash with respect to diversification and maturities that maintain safety
and liquidity. We invest our excess cash in debt instruments of the U.S.
Government and its agencies and high-quality corporate issuers, and, by policy,
restrict our exposure to any single corporate issuer by imposing concentration
limits. To minimize the exposure due to adverse shifts in interest rates, we
maintain investments at an average maturity of generally less than one year.

Foreign Currency

Connetics Australias functional currency is the Australian dollar. We
translate Connetics Australias local currency balance sheet into U.S. dollars
using the exchange rates in effect at the balance sheet date; for revenue and
expense accounts we use a weighted average exchange rate during the period.
Foreign currency translation adjustments are recorded in comprehensive income
(loss). Net gains and losses resulting from foreign exchange transactions are
included in the consolidated statement of operations and were immaterial for
all periods presented.

Income Taxes

We account for income taxes using the asset and liability method. Under
this method, we recognize deferred tax assets and liabilities for the future
tax consequences attributable to differences between (1) the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, and (2) operating loss and tax credit carryforwards. We
measure deferred tax assets and liabilities using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. We establish a valuation for the net
deferred tax assets when realization is uncertain.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation.
We calculate depreciation using the straight-line method over the estimated
useful lives of the assets, generally three to five years. Leasehold
improvements and assets acquired under capital lease arrangements are amortized
over the shorter of the estimated useful lives of the assets or the lease term.

Goodwill, Purchased Intangibles
and Impairment of Long Lived Assets

We record goodwill in a business combination when the purchase price of
the net tangible and intangible assets we acquire exceeds their fair value.
Under Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill
and Other Intangible Assets, effective January 1, 2002, we are not required to
amortize goodwill and intangible assets with indefinite lives, but are required
to periodically review these assets for impairment. Intangible assets
determined to have definite lives are amortized over their useful lives. We
amortize other intangible assets that meet the criteria for separate
recognition from goodwill over their useful lives of ten years.

We adopted SFAS 142 effective January 1, 2002. In conjunction with the
implementation of SFAS 142 we performed an impairment test of goodwill as of
January 1, 2002, which did not result in an impairment charge at transition.
SFAS 142 also requires that we test goodwill for impairment on an annual basis
or more frequently if

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indicators of potential impairment exist. We performed
the annual test as of October 1, 2002, which did not result in an impairment
charge. We will perform this test on October 1 of each year or more frequently
if indicators of potential impairment exist.

We periodically perform reviews to determine if the carrying value of
long-term assets, including goodwill (purchased intangibles, property and
equipment), is impaired. The reviews look for the existence of facts
or
circumstances, either internal or external, which indicate that the carrying
value of the asset cannot be recovered. No such impairment has been indicated
to date. If in the future we determine the existence of impairment
indicators, we would use undiscounted cash flows to initially determine whether
impairment should be recognized. If necessary, we would perform a subsequent
calculation to measure the amount of impairment loss based on the excess of the
carrying value over the fair value of the impaired assets. If quoted market
prices for the assets are not available, we would calculate the fair value
using the present value of estimated expected future cash flows or other
appropriate valuation methodologies. The cash flow calculation would be based
on managements best estimates, using appropriate assumption and projections at
the time.

Stock-Based Compensation

We use the intrinsic-value method of accounting for stock-based awards
granted to employees, as allowed under Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations. Accordingly, we do not recognize any compensation in our
financial statements in connection with stock options granted to employees with
exercise prices not less than fair value. We also do not record any
compensation expense in connection with our Employee Stock Purchase Plan as
long as the purchase price is not less than 85% of the fair market value at the
beginning or end of each offering period, whichever is lower.

For options granted to non-employees, we have determined compensation
expense in accordance with SFAS No. 123 and Emerging Issues Task Force No.
96-18, as the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measured. We
periodically re-measure the compensation expense for options granted to
non-employees as the underlying options vest.

Although SFAS 123 allows us to continue to follow the present APB 25
guidelines, we are required to disclose pro formanet income (loss) and basic
and diluted earnings per share as if the fair value based method had been
applied to all awards.

|                                                                                                                                          |                                       |      |                    |       |   |   |        |       |  
|----------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ---- | ------------------ | ----- | - | - | ------ | ----- | -
|                                                                                                                                          |                                       |      | Three Months Ended
|                                                                                                                                          |                                       |      | March 31,         
|                                                                                                                                          |                                       |      |                   
|(in
thousands except per share amounts):                                                                                                  |                                       | 2003 |                    | 2002 
|                                                                                                                                          |                                       |      |                    |      
|Net loss, as reported                                                                                                                     |                                       | $    | (5,381             | )     |   | $ | (3,168 | )    
|Add: Stock based compensation
expense, included in reported net loss,
net of related tax effect                                          |                                       |      | 4                  |       |   |   | 8      |      
|                                                                                                                                          |                                       |      |                    |       |   |   |        |      
|Deduct: Total stock-based employee
compensation expense determined under
the fair value method for all awards,
net of related tax effects |                                       |      | (1,749             | )     |   |   | (1,192 | )    
|                                                                                                                                          |                                       |      |                    |       |   |   |        |      
|Pro forma net loss                                                                                                                        |                                       | $    | (7,126             | )     |   | $ | (4,352 | )    
|                                                                                                                                          |                                       |      |                    |       |   |   |        |      
|Earnings per share:                                                                                                                       |                                       |      |                    |       |   |   |        |      
|                                                                                                                                          | Basic and diluted loss   as reported |      | $                  | (0.17 | ) |   | $      | (0.10 | )
|                                                                                                                                          | Basic and diluted loss  pro forma    |      | $                  | (0.23 | ) |   | $      | (0.14 | )
|                                                                                                                                          |                                       |      |                    |       |   |   |        |      

For purposes of this analysis, we estimate the fair value of each option
grant on the date of grant using the Black-Scholes option-pricing model. The
weighted average assumptions used in the model were as follows:

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|                          |  |                    |      |                      |  |      |      |      |  |  |      |   |  |  |      |  
|------------------------- |  | ------------------ | ---- | -------------------- |  | ---- | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|                          |  | Stock Option Plans |      | Stock
Purchase Plans
|                          |  |                    |      |                     
|                          |  | Three Months Ended |      | Three Months Ended  
|                          |  | March 31,          |      | March 31,           
|                          |  |                    |      |                     
|                          |  | 2003               |      | 2002                 |  | 2003 |      | 2002
|                          |  |                    |      |                      |  |      |      |     
|Expected stock volatility |  |                    | 64.0 | %                    |  |      | 70.0 | %    |  |  | 66.0 | % |  |  | 83.0 | %
|Risk-free interest rate   |  |                    | 6.25 | %                    |  |      | 5.63 | %    |  |  | 4.97 | % |  |  | 5.98 | %
|Expected life (in years)  |  |                    | 4.24 |                      |  |      | 3.77 |      |  |  | 1.31 |   |  |  | 1.36 |  
|Expected dividend yield   |  |                    | 0.0  | %                    |  |      | 0.0  | %    |  |  | 0.0  | % |  |  | 0.0  | %

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because our stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, we do not
believe that the existing models necessarily provide a reliable single measure
of the fair value of our options.

The effects on pro formadisclosures of applying SFAS 123 are not likely
to be representative of the effects on reported results of future periods.

Recent Accounting Pronouncements

SFAS 146. In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, Accounting for Costs Associated with Exit and Disposal
Activities (SFAS 146). This statement revises the accounting for exit and
disposal activities under Emerging Issues Task Force Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity. Specifically, SFAS 146 requires that companies record the costs
to exit an activity or dispose of long-lived assets when those costs are
incurred. SFAS 146 requires that the measurement of the liability be at fair
value. The provisions of SFAS 146 are effective prospectively for exit or
disposal activities initiated after December 31, 2002. Adoption of SFAS 146
did not have a significant impact on our financial statements.

FIN 45. In November 2002, the FASB issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (FIN 45).
FIN 45 requires
that upon issuance of a guarantee, the guarantor must recognize a liability for
the fair value of the obligation it assumes under that guarantee. FIN 45 is
effective on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of FIN 45 did not have a significant impact on our
financial statements.

FIN 46.In January 2003, the FASB issued Interpretation 46,
Consolidation of Variable Interest Entities
(FIN 46). FIN 46 requires that
companies that control another entity through interests other than voting
interests should consolidate the controlled entity. FIN 46 applies to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. The
consolidation requirements apply to older entities in the first fiscal year or
interim period beginning after June 15, 2003. Certain disclosure requirements
apply to all financial statements issued after January 31, 2003, regardless of
when the variable interest entity was established. The adoption of FIN 46 is
not expected to have a significant impact on our financial position or results
of operations.

2. Net (Loss) Per Share

We compute basic net income (loss) per common share by dividing net income
(loss) applicable to common stockholders by the weighted average of common
shares outstanding during the period. We compute diluted net income (loss) per
share using the weighted average of all potential shares of common
stock outstanding
during the period. We excluded all stock options and warrants from the
calculation of diluted loss per common share for the three

7



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month periods ended
March 31, 2003 and 2002, because these securities were anti-dilutive
during these periods.

3. Comprehensive Loss

During the three months ended March 31, 2003, total comprehensive loss
amounted to $5.6 million, compared to a total comprehensive loss of $6.0
million for the comparable period in 2002. The components of comprehensive
loss for the three month periods ended March 31, 2003 and March 31, 2002 are as
follows (in thousands):

|                                                                                                             |  |                    |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------ | ---- |  | - | ------ | -
|                                                                                                             |  | Three months ended
|                                                                                                             |  | March 31,         
|                                                                                                             |  |                   
|                                                                                                             |  | 2003               |        | 2002
|                                                                                                             |  |                    |        |     
|Net loss                                                                                                     |  | $                  | (5,381 | )    |  | $ | (3,168 | )
|Foreign currency translation adjustment                                                                      |  |                    | 38     |      |  |   | 25     |  
|Change in unrealized gain (loss) on
securities, net of reclassification
adjustments for realized gain (loss) |  |                    | (224   | )    |  |   | (2,899 | )
|                                                                                                             |  |                    |        |      |  |   |        |  
|Comprehensive loss                                                                                           |  | $                  | (5,567 | )    |  | $ | (6,042 | )
|                                                                                                             |  |                    |        |      |  |   |        |  

4. Goodwill and Other Intangible Assets

There
were no changes in the carrying amount of goodwill during the three
months ended March 31, 2003.

The components of our other intangible assets at March 31, 2003, are as
follows (in thousands):

|                    |  |                |       |              |  |     |        |   |  |   |       | 
|------------------- |  | -------------- | ----- | ------------ |  | --- | ------ | - |  | - | ----- | 
|                    |  | Gross Carrying |       | Accumulated  |  |     |        |  
|                    |  | Amount         |       | Amortization |  | Net
|                    |  |                |       |              |  |    
|Existing technology |  | $              | 6,810 |              |  | $   | (1,333 | ) |  | $ | 5,477 | 
|Patents             |  |                | 1,310 |              |  |     | (313   | ) |  |   | 997   | 
|                    |  |                |       |              |  |     |        |   |  |   |       | 
|Total               |  | $              | 8,120 |              |  | $   | (1,646 | ) |  | $ | 6,474 | 
|                    |  |                |       |              |  |     |        |   |  |   |       | 

Amortization expense for our other intangible assets was $201,000 and
$205,000 for the three months ended March 31, 2003 and 2002, respectively.

The expected future amortization expense of our other intangible assets is
as follows (in thousands):

|                                                |  |                      |       | 
|----------------------------------------------- |  | -------------------- | ----- | 
|                                                |  | Amortization Expense
|                                                |  |                     
|For
the three month period ended March 31, 2003 |  | $                    | 201   | 
|Remaining nine months in 2003                   |  |                      | 604   | 
|                                                |  |                      |       | 
|Total for the year ending December 31, 2003     |  | $                    | 805   | 
|For the year ending December 31, 2004           |  | $                    | 805   | 
|For the year ending December 31, 2005           |  | $                    | 805   | 
|For the year ending December 31, 2006           |  | $                    | 805   | 
|For the year ending December 31, 2007           |  | $                    | 805   | 
|For the year ending December 31, 2008           |  | $                    | 805   | 
|Thereafter                                      |  | $                    | 1,845 | 

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5. License for Liquipatch

In
June 2001, we entered into a global licensing agreement with Novartis
Consumer Health SA for the Liquipatch drug-delivery system for use in
topical antifungal applications. The agreement gives Novartis the
exclusive, worldwide rights to use the Liquipatch technology in the
topical antifungal field. In March 2002, Novartis exercised its
then-existing option to expand the license agreement. Novartis will
be responsible for all development costs, and will be obligated to
pay license fees, milestone payments and royalties on future product
sales. We recognized contract revenue related
to this agreement of $3,000 and $580,000 in the quarters ended March 31, 2003
and 2002, respectively.

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Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis should be read in conjunction with the MD&A
included in our Annual Report on Form 10-K/A for the year ended December 31,
2002, and with the unaudited condensed consolidated financial statements and
notes to financial statements included in this Report. Our disclosure and
analysis in this Report, in other reports that we file with the Securities and
Exchange Commission, in our press releases and in public statements of our
officers contain forward-looking statements within the meaning of Section 27A
of the Securities Act, and Section 21E of the Securities Exchange Act.
Forward-looking statements give our current expectations or forecasts of future
events. You can identify these statements by the fact that they do not relate
strictly to historical or current events. They use words such as anticipate,
estimate, expect, will, may, intend, plan, believe and similar
expressions in connection with discussion of future operating or financial
performance. These include statements relating to future actions, prospective
products or product approvals, future performance or results of current and
anticipated products, sales efforts, expenses, the outcome of contingencies
such as legal proceedings, and financial results. Forward-looking statements
may turn out to be wrong. They can be affected by inaccurate assumptions or by
known or unknown risks and uncertainties. Many factors will be important in
determining future results. No forward-looking statement can be guaranteed,
and actual results may vary materially from those anticipated in any
forward-looking statement. Some of the factors that, in our view, could cause
actual results to differ are discussed under the caption Factors That May
Affect Future Results, Financial Condition and the Market Price of Securities
and in our Annual Report on Form 10-K/A. Our historical operating results are
not necessarily indicative of the results to be expected in any future period.

Overview

Our commercial business is focused on the dermatology marketplace, which
is characterized by a large patient population that is served by relatively
small, and therefore more accessible, groups of treating physicians. We
currently market two pharmaceutical products, OLUX® and Luxíq®. Both products
have clinically proven therapeutic advantages and we are providing quality
customer service to physicians through our experienced sales and marketing
professionals. In December 2002, we received approval from the FDA to sell
OLUX for the treatment of non-scalp psoriasis.

In addition to revenue from product sales, we receive royalties on sales
of RID®, Actimmune® and Ridaura® in the U.S., and internationally on sales of
Banlice®, Milice®, Bettamousse®, and on a super-concentrated aerosol spray
licensed worldwide. We have licenses with Novartis and Pharmacia
Corporation, which have
the potential to bear royalties in the future depending on approval of their
products for sale.

During the first quarter of 2003, we had three product candidates in Phase
III clinical trials: Extina, a foam formulation of a 2% concentration of the
antifungal drug ketoconazole, for the treatment of seborrheic dermatitis;
Actiza, a formulation of 1% clindamycin in our proprietary foam delivery
system for the treatment of acne; and Velac ® Gel (a first-in-class combination
of 1% clindamycin and 0.025% tretinoin) for the treatment of acne. In February
2003, we piloted a promotional giveaway to dermatologists of Solux, a
sunscreen formulated in our proprietary foam delivery system. The goal of the
program is to introduce the foam delivery vehicle to a broad physician audience
during the second quarter of 2003.

Also during the first quarter of 2003, we continued to expand our
commitment to the training of new dermatologists. In March 2003, we launched
OPIS, a computer-based and personal digital assistant-based software program
designed specifically to help dermatology residents track surgical procedures.
We sponsored the development and launch of the pilot program for OPIS, which is
the first software program of its kind for dermatology residents.

Critical Accounting Policies

There
have been no material changes to our critical accounting policies,
which are included in our Form 10K/A for the year ended
December 31, 2002.

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Results of Operations

Revenues

|                                             |                                |                |                |        |                    |        |       |        |       |        | 
|-------------------------------------------- | ------------------------------ | -------------- | -------------- | ------ | ------------------ | ------ | ----- | ------ | ----- | ------ | 
|                                             |                                |                |                |        | Three Months Ended
|                                             |                                |                |                |        | March 31,         
|                                             |                                |                |                |        |                   
|                                             |                                |                |                |        | (In thousands)    
|                                             |                                |                |                |        | 2003               |        | 2002 
|                                             |                                |                |                |        |                    |        |      
|Revenues                                     |                                |                |                |        |                    |        |       |       
|                                             | Product:                       |                |                |        |                    |        |       |        |      
|                                             |                                | OLUX®          |                | $      | 9,875              |        |       | $      | 6,798 |       
|                                             |                                | Luxíq®         |                |        | 4,388              |        |       |        | 3,322 |       
|                                             |                                | Other          |                |        | 48                 |        |       |        | 20    |       
|                                             |                                |                |                |        |                    |        |       |       
|                                             | Total product revenues         |                |                | 14,311 |                    |        |       | 10,140 |      
|                                             | License, contract and royalty: |                |                |        |                    |        |       |        |      
|                                             |                                | Royalty        |                |        | 936                |        |       |        | 649   |       
|                                             |                                | Novartis       |                |        |                   |        |       |        | 580   |       
|                                             |                                | Pharmacia      |                |        | 31                 |        |       |        | 125   |       
|                                             |                                | Other contract |                |        | 33                 |        |       |        | 37    |       
|                                             |                                |                |                |        |                    |        |       |       
|Total license, contract and royalty revenues |                                |                | 1,000          |        |                    |        | 1,391 |       
|                                             |                                |                |                |        |                    |        |       |       
|                                             |                                |                | Total revenues |        | $                  | 15,311 |       |        | $     | 11,531 | 
|                                             |                                |                |                |        |                    |        |       |        |       |       

Our product revenues were $14.3 million for the quarter ended March 31,
2003, compared to $10.1 million for the three months ended March 31, 2002. The
increase in total product revenues for the three months ended March 31, 2003
compared to the same period in 2002 was due to continued sales growth in the
number of units of OLUX sold as well as the effects of a price increase
initiated in the fourth quarter of 2002.

Contract and royalty revenues were $1.0 million for the three months ended
March 31, 2003, compared to $1.4 million for the three months ended March 31,
2002. The decrease in contract and royalty revenue is primarily due to the
recognition of $580,000 of license revenue in 2002 related to the global
licensing agreement with Novartis for Liquipatch partially offset by
an increase
in royalty revenues of $220,000 related to sales of Actimmune and Ridaura.

We have an agreement with Prometheus Laboratories, Inc. pursuant to which
we receive a royalty on Prometheus annual sales of Ridaura in
excess of $4.0 million through March 2006. We recognized $133,000 of royalty revenue in the
first quarter 2003 and $0 in the first quarter of 2002 in conjunction with this
agreement.

We have an agreement with InterMune, Inc. (formerly InterMune
Pharmaceuticals, Inc.) pursuant to which we receive a royalty on InterMunes
sales of Actimmune in the United States. We recognized $92,000 of royalty
revenue for the three month period ended March 31, 2003 and $0 of royalty
revenue for the three month period ended March 31, 2002, in connection with
this agreement.

Cost of Product Revenues

Our cost of product revenues includes the third party costs of
manufacturing OLUX and Luxiq, royalty payments based on a percentage of our
product revenues, and product freight and distribution costs from Cardinal
Health Specialty Pharmaceutical Services (formerly CORD Logistics, Inc.), the
third party that handles all of our product distribution activities.
Currently, DPT, AccraPac Group, Inc., and InyX Pharma, Ltd. (formerly Miza
Pharmaceuticals) manufacture commercial supplies of OLUX and Luxiq. We
recorded costs of product revenues of $1.1 million for the three months ended
March 31, 2003, compared to $675,000 for the three months ended March 31, 2002.
The increase in the cost of product revenues in the three month
period ended March 31, 2003 compared to the same period in 2002 is directly
attributable to the increase in sales volume of our dermatology products.

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Research and Development

Research and development expenses include costs of personnel to support
our research and development activities, costs of preclinical studies, costs of
conducting our clinical trials, such as clinical investigator fees, monitoring
costs, data management and drug supply costs, external research programs, and
an allocation of facilities costs, salaries and benefits, and overhead costs
such as rent, supplies and utilities. Research and development expenses were
$8.6 million for the three month period ended March 31, 2003, compared to $5.0
million for the comparable period in 2002, primarily due to increased
clinical trial costs. During the first quarter of 2003,
we were conducting concurrent Phase III clinical trials for Velac, Actiza and
Extina. The Actiza and Velac trials are still ongoing as of March 31, 2003. The Extina
trial was completed during the first quarter of 2003. Subject to successful outcomes, we
anticipate submitting New Drug Applications, or NDAs, to the FDA for Extina in
mid-2003, Actiza in late 2003, and Velac in 2004.

In April 2003, we announced the outcome of a Phase III clinical trial
evaluating Extina, an investigational new drug formulation of 2% ketoconazole
in our proprietary foam delivery system, as a potential new treatment for
seborrheic dermatitis. The four-week, double-blinded active- and
placebo-controlled trial included 619 patients at 25 centers. The trial was
designed to demonstrate and the results demonstrated that Extina was
not inferior to Nizoral® (ketoconazole) 2% Cream as measured by
the primary endpoint of Investigators Static Global Assessment (ISGA).
The trial was also designed to compare Extina to placebo foam per the ISGA.
The result, although in favor of Extina, did not achieve statistical
significance. This was due to an unusually high placebo foam response at one
of the 25 sites. An analysis excluding the outlying site demonstrates
statistical significance.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $11.1 million for the
three months ended March 31, 2003, compared to $9.6 million for the comparable
quarter in 2002. The increase in expenses for the three month period ended
March 31, 2003 compared to the same period in 2002 was due to increased
employee-related costs attributable to increased headcount, as well
as increased
costs associated with our participation in industry trade shows.

Interest and other income (expense), net

Interest income was $126,000 for the first quarter of 2003, compared to
$279,000 for the comparable quarter in 2002. The decrease in interest income
in the first quarter of 2003 compared to the same period in 2002 was the result
of lower cash and investment balances, combined with a decrease in market
interest rates on investments.

Other income was $53,000 in the first quarter of 2003, compared to $78,000
for the first quarter of 2002. The decrease in other income during the
three month period ended March 31, 2003 compared to the same period in 2002 is
directly related to the decrease in income related to a facility sublease which ended
January 2003.

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Income Taxes

We recognized income tax expense of $77,000 for the three-month period
ended March 31, 2003 related to a foreign tax provision recorded by Connetics
Australia. We recognized a net income tax benefit of $224,000 for the three
month period ended March 31, 2002, that reflected U.S. tax benefit of $540,000
partially reduced by a foreign tax provision recorded by Connetics Australia of $316,000.
The U.S. tax benefit arose principally because of the provisions of the U.S.
Job Creation and Worker Assistance Act of 2002 enacted on March 9, 2002, which
allows taxpayers to carry back net operating losses generated in 2001 and 2002
to offset alternative minimum tax paid in the last five years.

Net Loss and Financial Outlook for 2003

We
have issued 2003 financial guidance that total revenues are expected
to be between $65.0 million and $68.0 million. We project
that combined sales, general and administrative, and
research and development expenses for 2003 will be between $67.0 million
and $69.0 million. We anticipate that we will achieve
profitability in the second half of 2003, driven by continued
positive prescription trends for our core commercial products.

Liquidity and Capital Resources

Sources and Use of Cash.We have financed our operations to date
primarily through proceeds from equity financings, sale of investments,
collaborative arrangements with corporate partners, bank loans, gross margins
and product revenues. At March 31, 2003, cash, cash equivalents and short-term
investments totaled $28.5 million compared to $33.1 million at December 31,
2002. Our cash balances are held in a variety of interest-bearing instruments
including high-grade corporate bonds, commercial paper, U.S. Government
agencies papers, and money market accounts.

Cash used in operating activities.Cash used in operations for the
quarter ended March 31, 2003 was $5.7 million compared to $4.7 million for the
three month period ended March 31, 2002. The increase in cash used in
operating activities during the first quarter of 2003 compared to the same
period in 2002 was due primarily to increased clinical trial activities.

Cash
flows from investing activities.Investing activities provided
$4.6 million and $3.6 million in cash for the three month periods
ended March 31, 2003 and 2002, respectively. During the first
quarter of 2002 we spent approximately $1.0 million related to
the construction of an aerosol filling line at DPTs plant on their
premises in Texas. This expenditure was not repeated in the three
month period ended March 31, 2003, which was the primary reason
for the increase in cash flows from investing activities compared to
the same period in 2002.

Cash flows from financing activities.Financing activities provided $1.5
million and $2.7 million for the three month periods ended
March 31, 2003 and 2002, respectively. Cash flows from financing
activities for the three month period ended March 31, 2003
compared to the same period in 2002 decreased due to the receipt of
$1.5 million in the first quarter of 2002 related to the
exercise of warrants that was not repeated in the first quarter of
2003. Additionally, $821,000 of previously restricted certificates of
deposit was released in the first quarter of 2002, which was not
repeated in the first quarter of 2003. The decrease in cash flows
from financing activities related to the events discussed above was
partially offset by an increase of approximately $900,000 related to
stock sale activity for the three month period ended March 31,
2003 compared to the same period in 2002.

Working Capital.Working capital decreased by $3.7 million to $21.5
million at March 31, 2003 from $25.2 million at December 31, 2002, as we used
cash in operations.

Contractual Obligations and Commercial Commitments.There have been no
material changes in our contractual obligations and commercial commitments
since December 31, 2002. Our commitments, including those disclosed in the
Annual Report on Form 10-K/A for the year ended December 31, 2002, consist
primarily of operating lease agreements for our facilities as well as minimum
purchase commitments under one of our contract manufacturing agreements.

Restricted Cash and Cash Equivalents.In the quarter ended March 31,
2003, $312,000 was released from previously restricted certificates of deposit
related to security for our facilities rent. As of March 31, 2003, $410,000 of
our total cash and cash equivalents balance was restricted cash, held in
various certificates of deposit, for specific purposes.

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We believe our existing cash, cash equivalents and short-term investments,
cash generated from product sales and collaborative arrangements with corporate
partners, will be sufficient to fund our operating expenses, debt obligations
and capital requirements through at least the next 12 months. Our future
capital uses and requirements depend on numerous factors, including the
progress of our research and development programs, the progress of clinical
testing, the time and costs involved in obtaining regulatory
approvals, the cost of filing, prosecuting, and enforcing patent claims and
other intellectual property rights, competing technological and market
developments, the level of product revenues, and the possible acquisition of
new products and technologies. A key element of our strategy is to
in-license or acquire additional marketed or late-stage development
products. A portion of the funds needed to acquire, develop and
market any new products may come from our existing cash, which will
result in fewer resources available to our current products and
clinical programs. We are currently evaluating a number of
business development opportunities, including the possibility of acquiring or
in-licensing other products. If we successfully reach agreements with third
parties, these transactions may require us to use some of our available cash,
or to raise additional cash by liquidating some of our investment portfolio
and/or raising additional funds through equity or debt financings in
connection with the transaction.

We currently have no commitments for any additional financings. If we
need to raise additional money to fund our operations, funding may not be
available to us on acceptable terms, or at all. If we were unable to raise
additional funds when needed, we might not be able to market our products as
planned or continue development of our other products, or we could be required
to delay, scale back or eliminate some or all of our research and development
programs.

Factors that May Affect Future Results, Financial Condition and the Market
Price of Securities

Please also read Item 1 in our 2002 Annual Report on Form 10-K/A where we have
described our business and the challenges and risks we may face in the future.

There are many factors that affect our business and results of operations,
some of which are beyond our control. In our Annual Report on Form 10-K/A for
the year ended December 31, 2002 we list some of the important factors that may
cause the actual results of our operations in future periods to differ
materially from the results currently expected or desired. Due to these
factors, we believe that quarter-to-quarter comparisons of our results of
operations are not a good indication of our future performance. The factors
discussed in our reports filed with the Securities and Exchange Commission,
including our Annual Report on form 10-K/A for the year ended December 31,
2002, in particular under the caption Factors That May Affect Future Results,
Financial Condition and the Market Price of Securities, should be carefully
considered when evaluating our business and prospects.

Our Business Strategy May Cause Fluctuating Operating Results

Our operating results and financial condition may fluctuate from quarter
to quarter and year to year depending upon the relative timing of events or
uncertainties that may arise. For example, the following events or occurrences
could cause fluctuations in our financial performance from period to period:



| |  |  | changes in the levels we spend to develop new product lines,                                                                                                  
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | changes in the amount we spend to promote our products,                                                                                                       
|
| |  |  | changes in treatment practices of physicians that currently prescribe our products,                                                                           
|
| |  |  | changes in reimbursement policies of health plans and other similar
health insurers, including changes that affect newly developed or newly
acquired products,
|
| |  |  | forward-buying patterns by wholesalers that may result in significant
quarterly swings in revenue reporting,                                                  
|
| |  |  | increases in the cost of raw materials used to manufacture our products,                                                                                      
|
| |  |  | the development of new competitive products by others,                                                                                                        

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| |  |  | the mix of products that we sell during any time period, and
| | - |  | ------------------------------------------------------------
|
| |  |  | our responses to price competition.                         




Item 3.Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the reported market risks or
foreign currency exchange risks since December 31, 2002.




Item 4.Controls and Procedures

Our management, under the supervision and with the participation of our
Chief Executive Officer and Chief Financial Officer, performed an evaluation of
the effectiveness of the design and operation of Connetics disclosure controls
and procedures. This evaluation was performed within 90 days before the filing
date of this quarterly report. Our disclosure controls and procedures are
designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms. Based on their evaluation, the CEO and CFO
concluded that our disclosure controls and procedures were effective in timely
alerting them to material information required to be included in our periodic
SEC reports. There have been no significant changes in our internal controls
or in other factors that could significantly affect internal controls since
their evaluation.




PART II. OTHER INFORMATION




Item 6.Exhibits and Reports on Form 8-K




|    |           |  |                                                                                                                        
|--- | --------- |  | -----------------------------------------------------------------------------------------------------------------------
|(a) | Exhibits.
|   
|    | 10.1      |  | Amended and Restated Manufacturing and Supply Agreement dated
April 24, 2003 between Connetics and AccraPac Group, Inc.
|    |           |  |                                                                                                                        
|    | 99.1      |  | Certification by Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.                    
|    |           |  |                                                                                                                        
|    | 99.2      |  | Certification by Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.                    






|(b) |  | Reports on Form 8-K. We filed the following Current Reports on Form 8-K
during the quarter ended March 31, 2003:
|--- |  | ----------------------------------------------------------------------------------------------------------------



| | (i)   |  | Current Report on Form 8-K dated February 20, 2003, filed
with the Securities and Exchange Commission on February 21, 2003,
under Item 5, Other Events.
| | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii)  |  | Current Report on Form 8-K dated March 3, 2003, filed with
the Securities and Exchange Commission on March 4, 2003, under Item
5, Other Events.        
|
| | (iii) |  | Current Report on Form 8-K dated March 7, 2003, filed with
the Securities and Exchange Commission on March 10, 2003, under Item
5, Other Events.       
|
| | (iv)  |  | Current Report on Form 8-K dated March 13, 2003, filed with
the Securities and Exchange Commission on March 17, 2003, under Item
5, Other Events.      

15



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##### Table of Contents






SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Connetics Corporation


By:
  
    /s/ John L. HigginsJohn L. HigginsExec. Vice President, Finance and
Corporate Development and Chief
Financial Officer


Date: May 14, 2003

16



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##### Table of Contents



CERTIFICATION BY CHIEF EXECUTIVE OFFICER

I, Thomas G. Wiggans, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Connetics Corporation;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):



| | a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.

Date:
May 14, 2003

/s/ Thomas G. Wiggans

Thomas G. Wiggans
President and Chief Executive Officer

17



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##### Table of Contents



CERTIFICATION BY CHIEF FINANCIAL OFFICER

I, John L. Higgins, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Connetics Corporation;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):



| | a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.

Date: May 14, 2003

/s/ John L. Higgins

John L. Higgins
Executive Vice President, Finance and Corporate Development
Chief Financial Officer

18



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##### Table of Contents






INDEX TO EXHIBITS

|        |  |                                                                                                                        
|------- |  | -----------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                        
|Number  |  | Description                                                                                                            
|        |  |                                                                                                                        
|10.1*   |  | Amended and Restated Manufacturing and Supply Agreement dated
April 24, 2003 between Connetics and AccraPac Group, Inc.
|        |  |                                                                                                                        
|99.1    |  | Certification by Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002                     
|        |  |                                                                                                                        
|99.2    |  | Certification by Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002                     



---

|* |  | We have omitted certain portions of this Exhibit and have requested
confidential treatment of such portions from the SEC.
|- |  | -------------------------------------------------------------------------------------------------------------------------