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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-K



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

For the fiscal year ended December 31, 2006

OR



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

For the transition period
from            to

Commission File Number 000-51768



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VALERA PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in Its
Charter)



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|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                      |  | 13-4119931                         
|(State or Other Jurisdiction ofIncorporation or Organization) |  | (I.R.S. EmployerIdentification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|7 Clarke DriveCranbury, New Jersey       |  | 08512     
|(Address of Principal Executive Offices) |  | (Zip Code)

Registrants Telephone Number, Including Area Code: (609) 235-3000



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Securities registered pursuant
to Section 12(b) of the Act: Common stock $0.001 par value

Securities registered pursuant to Section 12(g) of the Act:
None

(Title of class)



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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes ̈No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.    Yes ̈No  x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ̈

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes ̈No  x

As of June 30, 2006, the aggregate market
value of voting stock held by non-affiliates of the registrant, based upon the closing sales price for the registrants common stock, as reported in The NASDAQ Global Market System was approximately $61.8 million.

As of February 16, 2007, there were 14,937,225 shares of registrants common stock, $0.001 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Documents
Incorporated by Reference: None



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Valera Pharmaceuticals, Inc.

Annual Report on Form 10-K

for the fiscal year ended December 31, 2006

Table of Contents



|           |  |                                                                                                              |  |     
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|           |  |                                                                                                              |  | Page
|           |  | Part I                                                                                                       |  |     
|           |  |                                                                                                             
|Item 1.    |  | Business                                                                                                     |  | 4   
|           |  | Overview                                                                                                     |  | 4   
|           |  | Material Agreements                                                                                          |  | 14  
|           |  | Competition                                                                                                  |  | 23  
|           |  | Regulatory Matters                                                                                           |  | 23  
|           |  | Employees                                                                                                    |  | 27  
|           |  | Available Information                                                                                        |  | 27  
|Item 1A.   |  | Risk Factors                                                                                                 |  | 28  
|Item 1B.   |  | Unresolved Staff Comments                                                                                    |  | 43  
|Item 2.    |  | Properties                                                                                                   |  | 43  
|Item 3.    |  | Legal Proceedings                                                                                            |  | 43  
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                          |  | 43  
|           |  |                                                                                                             
|           |  | Part II                                                                                                      |  |     
|           |  |                                                                                                             
|Item 5.    |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 43  
|Item 6.    |  | Selected Financial Data                                                                                      |  | 47  
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 48  
|Item 7A.   |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 59  
|Item 8.    |  | Financial Statements and Supplementary Data                                                                  |  | 60  
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 83  
|Item 9A.   |  | Controls and Procedures                                                                                      |  | 83  
|Item 9B.   |  | Other Information                                                                                            |  | 83  
|           |  |                                                                                                             
|           |  | Part III                                                                                                     |  |     
|           |  |                                                                                                             
|Item 10.   |  | Directors and Executive Officers of the Registrant                                                           |  | 83  
|Item 11.   |  | Executive Compensation                                                                                       |  | 88  
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 103 
|Item 13.   |  | Certain Relationships and Related Transactions                                                               |  | 106 
|Item 14.   |  | Principal Accountant Fees and Services                                                                       |  | 106 
|           |  |                                                                                                             
|           |  | Part IV                                                                                                      |  |     
|           |  |                                                                                                             
|Item 15.   |  | Exhibits and Financial Statement Schedules                                                                   |  | 107 
|Signatures |  | 110                                                                                                         



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Part I

Forward-Looking Statements

We have included, and from time to time may make in our public filings, press releases or other
public statements, certain statements, including (without limitation) those under Managements Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 (MD&A), and
Quantitative and Qualitative Disclosures about Market Risk in Part II, Item 7A, that may constitute forward-looking statements. In addition, our management may make forward-looking statements to analysts, investors, representatives
of the media and others. These forward-looking statements are not historical facts and represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and beyond our control.

The nature of our business makes predicting the future trends of our revenues, expenses and net income difficult. The risks and uncertainties involved in
our businesses could affect the matters referred to in such statements and it is possible that our actual results may differ from the anticipated results indicated in these forward looking statements. Important factors that could cause actual
results to differ from those in the forward-looking statements include (without limitation):



| |  |  | changes in reimbursement policies and/or rates for Vantas and any future products;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | the actions and initiatives of current and potential competitors;
| | - |  | -----------------------------------------------------------------



| |  |  | the impact of current, pending and future legislation, regulation and legal actions in the United States and worldwide affecting the pharmaceutical and healthcare
industries;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to manufacture our Vantas product;
| | - |  | ----------------------------------------------



| |  |  | our ability to develop products, receive regulatory approvals, manufacture and market our products;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | the outcome of our proposed merger with Indevus Pharmaceuticals, Inc.; and
| | - |  | --------------------------------------------------------------------------



| |  |  | other risks and uncertainties detailed under Risk Factors in Part I, Item 1A, Competition and Regulation in Part I,
Item 1 and elsewhere throughout this report.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

Accordingly, you are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any forward-looking statements to reflect the impact of circumstances or events that arise after the dates
they are made, whether as a result of new information, future events or otherwise except as required by applicable law. You should, however, consult further disclosures we may make in future filings of its Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments thereto.



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|Item 1. | Business
|------- | --------

Overview

Valera Pharmaceuticals is a specialty pharmaceutical company concentrating on the development,
acquisition and commercialization of products for the treatment of urological and endocrine conditions, diseases and disorders, including products that utilize our proprietary drug delivery technology. Our first product, Vantas, was approved by the
U.S. Food and Drug Administration, or FDA in October 2004. Vantas is a 12-month implant indicated for the palliative treatment of advanced prostate cancer. Vantas slows prostate tumor growth by delivering histrelin, a luteinizing hormone-releasing
hormone agonist, or LHRH agonist. We began marketing Vantas in the United States in November 2004 utilizing our own sales force. In December 2006, we entered into a co-promotion agreement with Indevus Pharmaceuticals and in January 2007, pursuant to
the co-promotion arrangement, we began to jointly promote Vantas with Indevus with an aggregate sales force of approximately 105 individuals that are currently calling on urologists in the United States that account for the majority of LHRH agonist
product sales. In addition to Vantas, we are developing a pipeline of product candidates for indications that include central precocious puberty, acromegaly, opioid addiction, interstitial cystitis, nocturnal enuresis and bladder cancer.

Total U.S. sales of LHRH agonist products for the palliative treatment of prostate cancer were approximately $850 million in 2006 based on our
estimates and IMS Health Incorporated data, with the leading products being three- and four-month injection formulations. We believe that total U.S. sales of LHRH agonist products declined by approximately 5% in 2006, primarily as a result of lower
prices due to changes in Medicare reimbursement rates. We believe that Vantas has a competitive advantage over other products because it delivers an even, controlled dose of LHRH agonist over a 12-month period, and is the only product indicated for
the palliative treatment of advanced prostate cancer that delivers histrelin, the most potent LHRH agonist available on the market.

Vantas
is a hydrogel implant based on our patented Hydron Technology, which is a drug delivery system that allows us to control the amount and timing of the release of drugs into the body for up to 12 months. Several of our product candidates utilize our
Hydron Technology delivery system. The hydrogel implant is a soft and flexible implant containing no moving parts. We intend to leverage our specialized sales force to market certain of our product candidates, if approved, since the indications of
these product candidates are treated by many of the same physicians we are calling on for Vantas.

In December 2006, we entered into a
merger agreement with Indevus Pharmaceuticals pursuant to which Indevus will acquire us in a tax-free stock-for-stock merger transaction. Pursuant to the Merger Agreement, upon the closing of the merger, each outstanding share of our common stock
(other than shares held by us or Indevus or any stockholders who properly exercise dissenters rights under Delaware law), will automatically be converted into the right to receive a number of shares of Indevus common stock equal to $7.75
divided by the volume weighted average of the closing prices of Indevus common stock during the 25 trading days ending on the fifth trading day prior to the date of our stockholders meeting to consider the merger, or the Indevus Common Stock
Value. The exchange ratio is subject to a ollar such that if the Indevus Common Stock Value falls outside of the collar the exchange ratio will become fixed. If the Indevus Common Stock Value is greater than $8.05, then the exchange ratio will be
0.9626, and if it is less than $6.59, then the exchange ratio will be 1.1766. Cash will be paid in lieu of fractional shares.

In addition,
each share of our common stock will be converted into three contingent stock rights, or CSRs, relating to three of our product candidates. One CSR will be convertible into $1.00 of Indevus common stock upon FDA approval of Supprelin-LA, provided
sufficient quantities of Supprelin-LA are then available, one CSR will be convertible into $1.00 of Indevus common stock upon FDA approval of our biodegradable ureteral stent and one CSR will be convertible into $1.50 of Indevus common stock upon
FDA approval of our octreotide implant. The amount of Indevus common stock into which the CSRs will convert will be determined by a formula based on the average stock price of Indevus prior to achievement of the applicable milestones. The CSRs will
convert into Indevus common stock only if the applicable milestones are achieved within three years of the closing of the merger in the case of Supprelin-LA and within five years of the closing of the merger in the case of our biodegradable ureteral
stent and our octreotide implant.

As previously noted, we entered into a co-promotion agreement with Indevus pursuant to which
Indevus sales force will co-promote Vantas in the United States. Under the terms of the agreement, we will be required to make royalty payments to Indevus of 13.5% on sales of Vantas up to a specified unit level, which will increase to 30% for
sales above the specified level. Indevus will also receive royalties of 35% for sales of Vantas to specified specialty pharmacy accounts. The co-promotion began in January 2007.



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Our Competitive Strengths

We believe that our key competitive strengths that allow us to compete effectively in the urology and endocrinology markets include;



| |  |  | Technology. We believe that Hydron Technology offers significant advantages over existing drug delivery systems. Implants using Hydron Technology can be
adapted to deliver many kinds of drugs over an extended period of time. In addition, our implants are soft and flexible, enhancing patient comfort. Further, because we own the manufacturing know-how to develop products utilizing Hydron Technology,
we are able to control and maximize the potential commercial uses of this technology.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Development Capability. As demonstrated by Vantas, we have succeeded in developing a product by successfully taking it through the regulatory process to
market in the United States in less than a year from the submission of a new drug application without utilizing an accelerated approval process. However, we may not be able to obtain FDA approval for our product candidates as quickly as we did for
Vantas. We expect to continue to utilize this capability to efficiently develop future products.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Manufacturing Ability. We manufacture Vantas and our product candidates utilizing our Hydron Technology, a patented and proprietary process. In addition, we
have developed proprietary equipment and scalable manufacturing methods to achieve cost-effective commercial production. Further, because we control the manufacture of Vantas and our product candidates that use Hydron Technology, we can ensure high
quality and fully realize any manufacturing cost efficiencies.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Sales and Marketing. We and our co-marketing partner, Indevus Pharmaceuticals, are currently calling on urologists that account for the majority of LHRH
agonist product sales in the United States. By adjusting our current sales force structure slightly, we will be able to call on physicians in additional specialty areas, such as pediatric endocrinology. These therapeutic areas are attractive because
they can be effectively targeted with a small, focused sales force. We also believe that the direct physician distribution channel of Vantas may present a barrier to the future entry of competition from generic products because generic drug
companies do not typically have field sales forces. Outside the United States, we have partnered with companies with a local presence and distribution channels in the urology market for distribution of Vantas.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Product Development

The following table summarizes
certain information regarding Vantas and our product candidates:



|                          |  |                                                     |  |                        |  |                      |  |                                                               
|------------------------- |  | --------------------------------------------------- |  | ---------------------- |  | -------------------- |  | --------------------------------------------------------------
|Product                   |  | Indication                                          |  | Therapeutic Area       |  | Delivery Method      |  | Status                                                        
|Vantas                    |  | Prostate Cancer                                     |  | Urology                |  | Implant              |  | United States Commercial Sales; Approved in Denmark and Canada
|                          |  |                                                     |  |                       
|Supprelin ®-LA            |  | Central Precocious Puberty (early onset of puberty) |  | Endocrinology          |  | Implant              |  | New Drug Application Filed                                    
|                          |  |                                                     |  |                       
|VP003 (Octreotide)        |  | Acromegaly (giantism)                               |  | Endocrinology          |  | Implant              |  | Phases I/II                                                   
|                          |  |                                                     |  |                       
|VP004 (Naltrexone)        |  | Addiction Disorders                                 |  | Central Nervous System |  | Implant              |  | Phase I/II                                                    
|                          |  |                                                     |  |                       
|VP005 (Anti-inflammatory) |  | Interstitial Cystitis (bladder inflammation)        |  | Urology                |  | Bladder Instillation |  | Pre-clinical                                                  
|                          |  |                                                     |  |                       
|VP006 (Peptide)           |  | Nocturnal Enuresis (bed wetting)                    |  | Urology                |  | Oral Tablet          |  | Phase I                                                       
|                          |  |                                                     |  |                       
|Valstar ® (Valrubicin)    |  | Bladder Cancer                                      |  | Urology                |  | Bladder Instillation |  | New Drug Application Approved                                 
|                          |  |                                                     |  |                       
|Endoureteral Stent        |  | Maintenance of Ureteral Patency                     |  | Urology                |  | Insertion            |  | Pivotal Animal Study                                          



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Vantas

Vantas is a soft and flexible 12-month hydrogel implant based on our patented Hydron Technology indicated for the palliative treatment of advanced prostate cancer that delivers histrelin, a luteinizing
hormone-releasing hormone agonist, or LHRH agonist, over a 12-month period for the palliative treatment of advanced prostate cancer. We began marketing Vantas in the United States in November 2004 utilizing our own sales force. In December 2006, we
entered into a co-promotion agreement with Indevus Pharmaceuticals and in January 2007, pursuant to the co-promotion agreement, we began to jointly promote Vantas with Indevus with an aggregate sales force of approximately 105 individuals that are
currently calling on urologists in the United States that account for the majority of LHRH agonist product sales. In November 2005, we announced that we received approval to market Vantas in Denmark and in July 2006, we submitted an application for
regulatory approval in Germany, Ireland, Italy, Spain and the United Kingdom. In July 2006, we announced a partnership with Spepharm to market Vantas in Denmark and throughout Europe. We have completed the primary stage of the Mutual Recognition
Procedure (MRP) process which concluded with a non-approvable status and referral to the Co-ordination Group for Mutual Recognition and Decentralized Procedure-Human, CMD(h). The CMD(h) arbitration failed to reach a consensus on approval and the
procedure has been further referred to the Committee for Medicinal Products for Human Use (CHMP) at the European Agency for the Evaluation of Medicinal Products (EMEA). This final CHMP arbitration process will include all twenty-seven countries in
the European Union where a majority rule will apply. In March 2006, we announced that Paladin Labs, our marketing partner in Canada, received approval from Health Canada to market Vantas in Canada. Subsequently, Paladin Labs submitted an application
for reimbursement to the Canadian Common Drug Review (CDR) and the Conseil du Médicament du Québec and this documentation is under review. As of December 31, 2006, in conjunction with BioPro Pharmaceutical Inc., our marketing
partner for most countries in Asia, Vantas was submitted for regulatory approval in Thailand, Singapore, Malaysia, Taiwan, Korea Hong Kong and China.

The current standard of care for the palliative treatment of prostate cancer is LHRH agonist therapy. An agonist is a chemical substance capable of activating a receptor to induce a full or partial pharmacological
response. LHRH agonist therapies for advanced prostate cancer are designed to suppress the production of testosterone because testosterone promotes and accelerates the growth of tumors associated with prostate cancer. Histrelin, a powerful inhibitor
of testosterone production, is the most potent LHRH agonist available.

The most common dosage forms for the administration of LHRH
agonists for the palliative treatment of prostate cancer involve three- and four-month injection formulations such as Lupron and Eligard, which deliver leuprolide, Trelstar, which delivers triptorelin, and Zoladex, a biodegradable rod, which
delivers goserelin. Another product is Viadur, a rigid metal implant that releases leuprolide over a 12-month period. We believe that Vantas is a more comfortable and convenient alternative to competing products because it eliminates the requirement
of multiple physician visits and repeated injections and is smaller, softer and more flexible than other implants. Implantation, however, may be less well-received by some patients than injection therapy. In addition, in our Phase III clinical trial
for Vantas, 100% of the evaluable patients achieved chemical castration at week four and testosterone suppression was maintained throughout the 52-week study period for 99% of the patients. Based on these data, we believe Vantas is a highly
effective product for the palliative treatment of advanced prostate cancer. During the Phase III clinical trial, side effects included hot flashes, fatigue and implant site reactions, such as swelling and redness.

Prostate cancer is the most common cancer for men other than skin cancers and the second leading cause of cancer death in men. According to the American
Cancer Society, every year approximately 220,000 men are diagnosed with prostate cancer and approximately 27,000 die from this disease. The National Cancer Institutes SEER Program and the National Oncology Database each project that this
patient group will grow at an annual rate of 2% to 3% per year through 2008 and beyond.

Along with our co-marketing partner, Indevus
Pharmaceuticals, we are currently selling and marketing Vantas to the urologists that account for the majority of LHRH agonist product sales in the United States. Our product specialists utilize various promotional materials when making clinical
presentations, including instructional videos on proper implantation technique. In remote areas where our product specialists cannot make personal visits, we conduct direct mail programs to selected physicians. Additionally, we support our sales
efforts by employing a wide range of marketing programs to promote Vantas, including journal advertising, industry publications, medical educational conferences and internet initiatives.



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Supprelin-LA

Supprelin-LA is an implant utilizing our Hydron Technology to deliver histrelin over a 12-month period for the treatment of central precocious puberty, or CPP. The incidence of this condition is estimated to be
between one in 5,000 to 10,000 children. This yields a potential population of up to approximately 12,000 children in the United States with this condition who are treatable. CPP is the early onset of puberty in young children, resulting in the
development of secondary sexual characteristics and short stature, if left untreated. The development of these secondary sexual characteristics is due to an increase in the secretion of sex hormones, the cause of which is unknown. The standard of
care of CPP involves the use of LHRH agonists to suppress the secretion of sex hormones in order to delay the onset of puberty.

One
therapy currently marketed to treat CPP is Lupron Depot-PED, which is manufactured and marketed by TAP Pharmaceutical Products, Inc. According to IMS Health market data, sales of Lupron Depot-PED generated revenues of approximately $80 million in
the United States in 2006. The average monthly cost of Lupron Depot-PED is in excess of $1,000 per month. CPP treatment using Lupron Depot-PED consists of intramuscular injections of leuprolide every four weeks to hormonally suppress these children.
Our research indicates that, in many cases, hormonal suppression may not be achieved by a four-week injection schedule, and leuprolide needs to be administered more frequently. Supprelin-LA delivers histrelin, which has ten times the relative
potency of leuprolide, and which was previously approved for this condition as a daily injection for children. Supprelin-LA is formulated to release a higher daily dose of histrelin than Vantas because children with CPP need higher doses of LHRH
agonist to achieve hormonal suppression. If approved, Supprelin-LA would provide hormonal suppression over a 12-month period. We believe Supprelin-LA would have a competitive advantage over Lupron Depot-PED because it eliminates the monthly
injections given to these children with a once yearly implant and offers increased convenience and reduced costs by eliminating the need for monthly physician visits. Depending on the age of diagnosis, typical therapy may last three to five years.

In a survey conducted by D2 Market Research on our behalf at the 2004 Pediatric Academic Society conference, over 50% of the pediatric
endocrinologists who completed a self-administered questionnaire indicated they would be likely to use a one-year implant like Supprelin-LA. There are approximately 700 pediatric endocrinologists in the United States, and most of them are located in
the same major metropolitan areas as the urologists we are currently calling on for Vantas. We intend to market Supprelin-LA, if approved, by primarily leveraging our existing sales force.

In June 2006, we submitted a New Drug Application (NDA) to the FDA for Supprelin-LA. The Phase III study of Supprelin-LA is the basis of the NDA
submission. The study was a multi-center, open-label Phase III study which involved 36 patients ranging in age from four to eleven years. Sixteen children had received GnRH therapy prior to enrollment while the remaining twenty were naïve to
treatment. The subcutaneous implant was inserted into the inner aspect of the upper arm. The primary endpoints, which were hormonal suppression below pubertal levels and continued suppression upon challenge with gonadotropin-releasing hormone, were
met. All patients were analyzed for efficacy and safety. In September 2006, we received notice from the FDA, that they had accepted our submission of our NDA for Supprelin-LA and accordingly, under the Prescription Drug User Fee Act (PDUFA)
guidelines, the FDA is expected to complete its review and act upon this NDA submission by the PDUFA date of May 3, 2007. We also announced in September 2006, our Supprelin-LA manufacturing facilities in Cranbury, New Jersey successfully passed
a recent FDA pre-approval inspection. Pursuant to our co-promotion agreement with Indevus, we have the option to elect to enter into negotiations with Indevus to grant Indevus a co-exclusive right to co-promote Supprelin-LA.

VP003 (Octreotide)

VP003 is
an implant utilizing Hydron Technology to deliver octreotide over a six-month period for the treatment of acromegaly, or giantism. We believe there are approximately 1,000 new acromegalic patients per year and 16,000 total patients in the United
States. Acromegaly is a chronic hormonal disorder that occurs when a pituitary tumor produces excess growth hormone, or GH. It most commonly affects middle-aged adults, and if untreated, causes enlargement of certain bones, cartilage, muscles,
organs and other tissue, leading to serious illness and potential premature death.

Octreotide is a treatment used to substantially reduce
GH levels and insulin-like growth factor levels, or IGF-1 levels, in patients with acromegaly. Octreotide is also approved to treat the symptoms associated with metastatic carcinoid tumors and vasoactive intestinal peptide secreting adenomas, which
are gastrointestinal tumors. Octreotide is currently being marketed by Novartis as Sandostatin injections in several strengths in both daily and monthly formulations.



7



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We estimate the U.S. acromegalic market to be approximately $200 million annually, consisting mostly of
monthly injections of octreotide. We believe there is a market for a longer-acting octreotide formulation such as VP003 in order to reduce the number of physician visits for injections of octreotide. In addition, since there are a limited number of
endocrinologists dispensing octreotide and patients are dispersed throughout the country, we believe patient compliance would also be significantly improved by longer-acting treatment with VP003.

Research conducted by Verispan Market Research on our behalf shows that a longer-acting octreotide product would be favorably received in the
endocrinology market. The endocrinologists interviewed by Verispan cited the poor compliance of acromegalics who are required to visit a doctor every month to get injections for a disease in which patients rarely notice the changes being caused by
the condition. Another reason cited for poor compliance was the long distances many patients have to travel for treatment because of the limited number of physicians willing to administer the monthly formulation of Sandostatin due to the complexity
of the technique involved.

There are approximately 4,400 endocrinologists practicing in the United States, and most of them are located in
the same metropolitan areas where we are marketing Vantas to urologists. We intend to market VP003 by creating an endocrine sales force or by partnering with a company that has an existing endocrine sales force.

In 2004, we initiated and completed a Phase I/II pharmacokinetic clinical trial with eleven acromegalic patients to evaluate the release characteristics
of VP003 and examine safety and efficacy parameters. The endpoints achieved in this clinical trial were the reductions in GH and IGF-1 levels in the blood in these patients. During the Phase I/II clinical trial, side effects included diarrhea, low
blood sugar and implant site reactions. In August 2006, the FDA requested an additional Phase I/II pharmacokinetic (PK) study for the Octreotide implant. In September 2006, we submitted an Investigational New Drug Application (IND) with the FDA for
the Octreotide implant. The application contained our proposed six-month Phase I/II PK study in thirty patients. In January 2007, we commenced the study and data is expected to be provided to the FDA for review in June 2007. We anticipate commencing
a Phase III study in the second half of 2007.

VP004 (Naltrexone)

VP004 is an implant utilizing our Hydron Technology to deliver naltrexone for the treatment of opioid addiction over a three to six-month period. The
National Institute on Drug Abuse estimates that there are approximately one million heroin addicts in the United States of which only 25% seek treatment. Naltrexone is an opiate antagonist currently approved as an oral daily formulation in the
United States for the treatment of opiate dependence. Naltrexone competitively binds at the opiate receptor sites in the brain, thereby blocking the euphoric effects of opiates such as heroin.

Although naltrexone is effective, the addict population is typically non-compliant. We believe that this creates an attractive opportunity for VP004
because it provides controlled release of naltrexone over a six-month period. There are over 200 registered addiction medicine specialists practicing in the United States. Further, a significant number of primary care providers treat opioid addicts.
In addition to opioid addiction, naltrexone is also currently approved in the United States for the treatment of alcoholism.

In May 2006,
we submitted an Investigational New Drug Application (IND) for VP004 to the FDA and that filing has been accepted by the agency. In November 2006, we finalized all administrative arrangements with Johns Hopkins and commenced clinical studies for
VP004. The three month Phase I/II study involves an open label study of the naltrexone implant in approximately a dozen healthy volunteers with a history of opioid abuse. A primary objective of the study is to investigate several dosing regimens for
the extent of opiate blockade following morphine challenges. The lead investigator is the pioneering addiction researcher and renowned authority on naltrexone, Donald Jasinski, M.D., Professor of Medicine, Chief Center for Chemical Dependence, Johns
Hopkins Bayview Medical Center. The data related to the study is expected to be provided to the FDA for review in the third quarter of 2007. We expect to commence a Phase III clinical trial in the first half of 2008.

VP005 (Anti-inflammatory)

VP005 is a proprietary polymer solution instillation for the treatment of symptoms associated with interstitial cystitis, a chronic inflammatory condition of the bladder. Interstitial cystitis, or IC, affects approximately one million
people in the United States. IC is characterized by frequent urination and pain above the pubic region. The cause of IC is unknown but is believed to involve inflammation of the lining of the bladder.



8



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We believe that IC is a disease that has been poorly served by the pharmaceutical industry. Elmiron is
the only product currently approved for the relief of bladder pain or discomfort associated with IC. Elmiron is marketed by Bayer HealthCare LLC and is an oral formulation containing 100 milligrams of pentosan polysulfate sodium, a semi-synthetic
molecule that is taken three times a day. According to IMS Health market data, sales of Elmiron generated revenues in excess of $100 million in the United States in 2004. Our discussions with urologists indicate that Elmiron is only occasionally
effective and that many patients require instillation therapy, a more invasive form of treatment utilizing a catheter to fill up the bladder with various solutions. Instillation therapy has been shown to abate the symptoms of IC in some patients.
VP005 is an instillation therapy that forms a temporary coating on the internal lining of the bladder and facilitates the slow, controlled release of the drug in VP005 into the bladder. We may license the drug delivery technology used in VP005 and
apply for patent protection for this application of that technology.

VP005 has been successful in animal models in treating what we
believe to be the major contributing factor in producing the painful symptoms of IC. We have drafted a Phase I/II protocol to evaluate VP005 in humans. In March 2005, we met with a panel of IC experts from the United States to help refine the
protocol. We are currently evaluating the development and commercialization strategy for VP005.

VP006 (rapid dissolve desmopressin)

VP006 is a proprietary modified release oral formulation of desmopressin for the treatment of nocturnal enuresis, commonly referred
to as bed-wetting. Nocturnal enuresis affects approximately five to seven million children in the Unites States.

We believe that nocturnal
enuresis has been poorly served by the pharmaceutical industry. DDAVP, Tofranil and several generics are the products currently approved for the management of nocturnal enuresis. The most common pharmaceutical treatment is DDAVP, which is
manufactured and marketed by Sanofi-Aventis.

According to IMS, sales of DDAVP for 2004 were approximately $220 million. It is available as
an oral tablet or a nasal spray containing 0.1-0.2 milligrams of desmopressin acetate, an antidiuretic hormone affecting renal water conservation. We believe that the rapidly dissolving formulation of desmopressin would be preferred by children and
their parents because young children can have difficulty swallowing solid tablets.

VP006 has been evaluated in bio-availability studies
and, while not bioequivalent to the reference drug product, VP006 has shown a similar pharmacodynamic response. We are presently exploring the regulatory pathway for the approval of VP006 as well as evaluating the commercialization strategy for this
product.

Valstar ® (Valrubicin)

In March 2006, we
completed the acquisition of certain assets from Anthra Pharmaceuticals, Inc. associated with its valrubicin business in the United States and Canada for the purchase price of $600,000 plus future royalties of up to 13.5% of net sales depending upon
the products formulation, indication and market share plus certain milestone payments based upon achieving certain sales levels. The valrubicin product we acquired, formerly marketed in the United States under the trademark Valstar, is a
bladder instillation approved to treat bladder cancer that is no longer responsive to conventional treatment such as surgery and/or topical drug application. This product was previously administered and billed as an office procedure, and
predominantly covered under Medicare reimbursement. The product is not covered by any patents and its orphan drug status has expired.

According to the National Institutes of Health data, bladder cancer has a prevalence of approximately 500,000 patients in the United States. Market research conducted by Verispan on our behalf and performed at the May 2002 American Urology
Association meeting found that approximately 31% of bladder cancer patients are treated with BCG (Bacillus Calmette-Guerin), the most common form of topical treatment. The research further shows that about 17% of the BCG patients become
unresponsive, or refractory, to treatment each year and must now either have a cystectomy, the medical term for bladder removal, or stand the chance of disease progression. Urologists surveyed in the study further stated that 69% of these refractory
patients go on to have their bladder removed, resulting in a patient population of approximately 8,200 with this type of cancer who could be candidates for valrubicin.



9



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Anthras product was withdrawn from the market in 2002 due to a manufacturing problem and a lack of
resources to address the problem. We believe that we have identified the cause of the manufacturing problem and that we will be able to correct it. In January 2006, the FDA agreed to our plan to reintroduce the product in the United States. We have
engaged a third party manufacturer to produce the finished version of Valstar. This manufacturer produced a pilot batch of Valstar, for confirmation of product stability, and in the second quarter of 2007 will initiate validation batches for
eventual release and sale. We expect to launch the product in the second or third quarter of 2007 depending on the regulatory approval to re-launch the product in the United States.

Endoureteral Stent

On
November 8, 2006, we announced that we completed proof-of-concept studies on a flexible, biodegradable polymer-based ureteral stent. Ureteral stents are plastic tubes inserted into the ureter to allow urine to drain from the kidney to the
bladder when the flow of urine may be obstructed due to a number of conditions, including kidney stones and inflammation. Current available ureteral stents require physician intervention for removal from the body. A biodegradable ureteral stent
could be naturally voided by the body, a potentially important advantage over existing stents. In February 2007, we announced that we have initiated a porcine model study to establish safety and effectiveness necessary to support the submission of a
510k device application for the polymer-based flexible biodegradable ureteral stent. This study will involve 30 pigs with a primary end point being the dissolution and natural excretion of the stent within several weeks. Depending on the outcome of
the porcine model study, we believe the 510k submission could occur by the end of 2007.

In connection with the Revised Research and
Development Proposal dated April 27, 2005, between us and Poly-Med, Inc. and the Advanced Development and Pilot Production Outline issued by us and Poly-Med on March 24, 2006 and revised on April 10, 2006, relating to the development
of an biodegradable endoureteral stent, on December 4, 2006, we entered into a Letter Agreement with Poly-Med, pursuant to which we agreed to engage in exclusive negotiations to enter into an agreement (the License and Supply
Agreement) providing us with an exclusive license to use and sell the endoureteral stent in exchange for certain royalty payments. The License and Supply Agreement will also set forth the terms under which Poly-Med will manufacture and supply
us with the endoureteral stent. The exclusivity period contemplated by the Letter Agreement expires June 30, 2007.

Research and
Development Expenditures

Research and development expense for the years ended December 31, 2006, 2005 and 2004 was $7.6
million, $5.9 million and $6.4 million, respectively.

Our Drug Delivery System

Human implantable drug delivery is a relatively new therapeutic drug delivery approach in which drugs are administered directly into the circulatory
system through a biocompatible, non-toxic device. We believe this type of drug delivery is suitable for certain drugs that are not amenable to oral delivery, such as therapeutic peptides that are destroyed in the gastro-intestinal (GI) tract, or
drugs poorly absorbed by the GI tract or destroyed in the liver. In such cases, increasing the dosage of these drugs to increase absorption may result in harmful side effects. As a result, we believe that implantable drug delivery systems may
provide safer and more effective administration of therapy by delivering the drug directly to the bloodstream at even, controlled rates.

Hydron Technology, our proprietary drug delivery technology, is the basis of our patented hydrogel implant, which is inserted under a patients skin. This technology, which evolved from similar technology used in soft contact lenses,
is flexible and can be adapted to deliver many types of drugs. Currently, we only have FDA approval for Vantas. We will need to obtain approval for each product we develop, including products using our Hydron Technology. Our implant is designed to
allow release of drugs continuously, at even, controlled rates for up to a 12-month period. We believe that such predictable release over a period of 12 months has not been achieved by most other drug delivery systems, including sustained release
injections, bioerodible implants and transdermal devices. In addition, implants utilizing our Hydron Technology are smaller, softer and more flexible than other implants and eliminate the requirement of multiple physician visits and repeated
injections.

Utilizing our Hydron Technology, we are able to manufacture implants to the exact chemical and physical specifications
required by the particular drugs to be released. By modifying the geometric characteristics (wall thickness, diameter and length) and the polymer make-up of the implants, we can vary the release rates of a broad spectrum of drugs according to the
therapeutic levels required for a particular indication. Once filled with an active ingredient, sealed and sterilized, the implant is inserted into a patient in a minor outpatient procedure generally performed in a physicians office. The
procedure to insert the implant takes approximately



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seven to ten minutes. First, the insertion site is swabbed with an antiseptic. Next, the physician injects an anesthetic immediately under the skin in the
upper arm along the path where the implant is to be inserted. Then the physician makes a small incision and inserts the implant using an insertion tool. The tool is then retracted, leaving the implant under the skin. The incision is then closed with
adhesive tape and a bandage is applied for one day. Lastly, the patient is given home care instructions and sent home. The physician can easily remove the implant from the body in a similar procedure. The procedure used for Vantas is very similar to
the procedure that we intend to use for our Supprelin-LA product; however, in our clinical trials for our Supprelin-LA product we evidenced physicians using conscious sedation and general anesthesia on some occasions.

We believe that the advantages of our Hydron Technology include:



| |  |  | Increased Patient Compliance. Our Hydron Technology releases drugs for up to a 12-month period. As a result, the need for multiple physician visits and the
inconvenience associated with frequent injections are eliminated, reducing the risk that a patient will miss a treatment.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Adaptability. Our Hydron Technology can be adapted to deliver many types of drugs. In addition, it provides a controlled and even drug release over a period
of time that can result in increased efficacy and safety. Currently, we only have FDA approval for Vantas. We will need to obtain approval for each additional product we develop including products using our Hydron Technology.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Decreased Cost. As a result of the reduced number of patient visits to doctors offices, the overall costs associated with such visits, including
scheduling, office visit and reimbursement claim costs, are significantly lowered. In addition, the use of our Hydron Technology lessens the administrative burden on private insurance and Medicare by reducing the number of reimbursement claims
processed per year.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Finally, since Vantas is based on our Hydron Technology, we believe that the regulatory approval of
Vantas may be helpful in obtaining approval of our product candidates that utilize this technology.

Our Hydron Technology is limited by
the amount of drug which can be loaded into an implant due to its small size, the inability of the technology to deliver drugs that are water insoluble, the inability to deliver molecules with a large molecular weight and the need for a minor
surgical procedure to insert and remove the implant.

Our Business Strategy

In addition to increasing sales of our approved product, Vantas, and subject to our proposed merger with Indevus Pharmaceuticals, our goal is to develop,
acquire and commercialize products for the treatment of urological and endocrine conditions, diseases and disorders. To achieve this goal, our strategy includes the following key elements:



| |  |  | Continue to Focus on Urological and Endocrine Conditions, Diseases and Disorders. We intend to continue to focus on the development, acquisition and
commercialization of products for the treatment of urological and endocrine conditions, diseases and disorders. Our aim is to build our urological and endocrine product portfolio and opportunistically acquire or in-license later-stage urological and
endocrine products that are currently on the market or require minimal development expenditures, or have some patent protection or potential for market exclusivity or product differentiation. We intend to collaborate with major and specialty
pharmaceutical companies to develop and commercialize products that are outside of our core urology and endocrinology focus.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Develop Proprietary Pharmaceutical Portfolio. We are building a product portfolio based on our Hydron Technology. We have demonstrated the utility of our
Hydron Technology through Vantas, and we believe that we can utilize this technology to bring additional products to market. We intend to apply our Hydron Technology to the delivery of drugs with established safety and efficacy profiles to reduce
product development risk and speed time to market.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | License our implant technology. We have built, and continue to build, a portfolio of intellectual property around our implant technology. We intend to make
our proprietary technology available for licensing to third parties. We may enter into license agreements or collaborative research and development agreements with third parties to develop implant based therapeutics containing new chemical
compounds.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Develop or Acquire New Drug Delivery Technologies. In addition to our Hydron Technology, we intend to continue to evaluate other drug delivery technologies
as candidates for in-license, acquisition and development, including various implantable technologies and other drug delivery systems. We believe that, by devoting our resources to continued development of new drug delivery technologies, we can
develop a broader base that will enable us to deliver a greater variety of drugs than would be possible using a single drug delivery technology.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Leverage Sales and Marketing Expertise. We will continue to expand our commercialization efforts by leveraging our existing sales and marketing expertise to
market new products as they are approved.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Partner Outside the United States to Reach New Geographic Markets. To reach markets outside the United States, we have pursued a licensing strategy, whereby
we have partnered with companies with a local presence and distribution channels in the urology and endocrinology markets for distribution of our products. We may retain full or co-marketing rights, however, on a select territory-by-territory basis
to further leverage our sales and marketing expertise.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Sales, Marketing and Distribution

As of January 15, 2007, between us and our co-marketing partner, Indevus Pharmaceuticals, we have 105 product specialists promoting Vantas. Our
product specialists have a substantial number of years of pharmaceutical sales experience and the majority of our sales force has sold other LHRH agonist products prior to joining us. Each product specialist is responsible for marketing Vantas to
physicians in an assigned geographic territory. At present, we are calling on the urologists that account for the majority of LHRH agonist products in the United States. We continue to analyze physician prescribing habits so that we can direct our
product specialists to physicians who maintain the largest prostate cancer practices. By adjusting our current sales force structure slightly, we will be able to call on our current physician base and on physicians in additional specialty areas,
such as pediatric endocrinology. Further, we believe that the direct physician distribution channel of Vantas may present a barrier to the future entry of competition from generic products because generic drug companies do not typically have a field
sales force.

Our product specialists utilize various promotional materials when making clinical presentations, including, instructional
videos on proper implantation technique. In remote areas where our product specialists cannot productively make personal visits, we conduct direct mail programs. We also supply physicians, health plan administrators and specialty pharmacies with a
pharmaco-economic model to demonstrate the cost effectiveness of Vantas compared to other LHRH agonist products due to decreased utilization of staff time for repeated injections and one reimbursement claim per patient per year as opposed to three
or four.

Additionally, we support our sales efforts by employing a wide range of marketing programs to promote Vantas, including journal
advertising, industry publications, medical educational conferences and internet initiatives. We hold meetings in major cities where a Vantas clinical investigator presents data about Vantas, relates his own impressions and demonstrates proper
implantation technique. In addition, our product specialists utilize local thought leaders as peer influence speakers in their specific markets.

In addition to product specialists, we utilize the services of Besse Medical, an authorized specialty distributor of Vantas. Besse Medical is responsible for services customarily provided by a wholesale distributor, including the stocking,
packing and shipping of our products and is paid a distribution service fee based on the purchases of Vantas made through Besse Medical. We have also contracted with specialty pharmacies such as Medmark, CuraScript, BioScrip, Caremark and Aetna
Specialty to sell our Vantas product through their organizations.

Outside the United States, we have primarily pursued a licensing
strategy, whereby we have partnered with companies with a local presence and distribution channels in the urology or other market for distribution of Vantas or other products we may offer. We may retain co-marketing rights, however, on a select
territory-by-territory, basis. For example, we have executed an agreement with Paladin Labs, Inc., a Canadian company, under which it will distribute Vantas in Canada, and have signed similar agreements with each of Key Oncologics (Pty) Ltd., a
South African company, BioPro Pharmaceutical, Inc., an organization specializing in marketing oncology drugs in the pan-Asian region, Teva-Tuteur, an organization specializing in marketing oncology drugs in Argentina and Spepharm Holding B.V., an
organization specializing in urology products in the European Union, Switzerland and Norway. We are actively seeking relationships or distribution arrangements with additional GPOs, specialty pharmacies and other companies.

Reimbursement

Advanced prostate cancer is generally
treated by urologists in their offices. LHRH agonist products are usually sold directly from the pharmaceutical manufacturer to the physician and are administered in the office through injections or a 12-month implant. Once a



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physician acquires and administers the LHRH agonist product, the physician files a claim with Medicare or the patients private insurance for
reimbursement.

Approximately 70% of patients diagnosed with prostate cancer and receiving LHRH agonist therapy are over the age of 65 and
therefore covered by Medicare. In light of this, we have retained a group of Medicare experts to monitor pricing of LHRH agonist products and the Medicare reimbursement environment.

Our business is affected by physician utilization, pricing pressure from our competition and Medicare or third party reimbursement, as well as other
factors which may cause variances in our revenue. Our sales of Vantas from launch in November 2004 through June 30, 2005 were supported, in part, by favorable reimbursement rates, which decreased beginning in the third quarter of 2005. Our
initial favorable reimbursement rates were due to the fact that Vantas was a new product that did not yet have an established average selling price, or ASP, in connection with Medicare reimbursement. As a result, Vantas was reimbursed at wholesale
acquisition price, which is typically higher than ASP. Vantas received an established ASP effective July 2005, which resulted in lower reimbursement rates and a corresponding lower sales price to our customers. Our historical quarterly net average
selling prices to our customers are:



|                            |  |                          |      
|--------------------------- |  | ------------------------ | -----
|For the three months ended: |  | Net AverageSelling Price
|December 31, 2004           |  | $                        | 2,520
|March 31, 2005              |  | $                        | 2,628
|June 30, 2005               |  | $                        | 2,586
|September 30, 2005          |  | $                        | 2,099
|December 31, 2005           |  | $                        | 1,801
|March 31, 2006              |  | $                        | 1,620
|June 30, 2006               |  | $                        | 1,562
|September 30, 2006          |  | $                        | 1,478
|December 31, 2006           |  | $                        | 1,370

We expect future Medicare reimbursement levels to continue to decline for Vantas, which will have
an adverse effect on our net product sales. Reimbursement levels are currently set by the twenty-three Medicare carriers in the United States which, in the aggregate, cover all fifty states. Certain Medicare carriers have a policy which sets the
reimbursement rate for Vantas based on our ASP. Other Medicare carriers have a policy that applies the least costly alternative, or LCA, methodology to Vantas. LCA is a payment methodology that allows Medicare carriers to pay the same reimbursement
for drugs that have been determined by Medicare to be medically equivalent. Vantas is currently the least costly alternative in the class of LHRH drugs. Further, certain Medicare carriers have a policy which segregates twelve-month
products from other dosages, including one, three, four and six month injectable products, and reimburses at different rates for these two groups of products, sometimes referred to as a split policy. Finally, there are certain Medicare carriers
which state they have a policy which reimburses on an ASP or LCA methodology, but which we believe make payments based upon a split policy.

We are devoting internal and external resources to determine the impact and fairness of these various policies. In the states where certain Medicare carriers have adopted a split policy, whether in writing or in practice, we are at an
economic disadvantage to the injectable products which are reimbursed at higher annual rates. We are challenging the basis for these reimbursement policies with the Medicare carriers. We will deploy our sales resources in markets where we can sell
our products on an even par with the other products in the class. Nevertheless, we expect our net product sales to continue to decline in the foreseeable future as a result of the declining reimbursement rates for Vantas.

We are also pursuing a sales strategy in which we will attempt to sell a greater percentage of Vantas to non-Medicare customers. Non-Medicare customers
typically pay a greater amount for Vantas than Medicare customers. Thus, selling a greater percentage of Vantas to non-Medicare customers may alleviate the downward pressure on our net average selling price from the Medicare customers.

Intellectual Property

Our success will depend in
large part on our ability to maintain a proprietary position in our products and product candidates through patents, trade secrets and FDA exclusivity. We rely upon patents, trade secrets, know-how and continuing technological innovation to develop
and maintain our competitive position. We plan to aggressively protect and defend our proprietary position.



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As of December 2006, we owned three issued United States patents and 24 issued foreign patents relating
to our Hydron Technology. We own three pending foreign patent applications relating to our Hydron Technology. Our patents and patent applications cover a variety of novel pharmaceutical formulations, methods of use, and processes to manufacture
hydrogel polymers and implants incorporating active agents. Within the Hydron Technology patent portfolio, we own two issued United States patents and 23 issued foreign patents relating to Vantas.

The following table sets forth information related to United States and foreign patents and patent applications owned by us:



|                                                           |  |                                                                                                              |  |               |  |                            |  |                         
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ------------- |  | -------------------------- |  | ------------------------
|Technology Family                                          |  | Brief Description of Coverage                                                                                |  | No. ofPatents |  | No. of PendingApplications |  | Date of Grant/Expiration
|Water-Swellable Hydrophilic Articles                       |  | Method of preparing a hydrophilic plastic cartridge                                                          |  | 15            |  | 0                          |  | 1994/2011               
|                                                           |  |                                                                                                              |  |              
|Homogenous Hydrogel Copolymers                             |  | Method of preparing homogeneous copolymers having a predetermined equilibrium water content value            |  | 10            |  | 0                          |  | 1993/2010               
|                                                           |  |                                                                                                              |  |              
|Hydrogel Composition                                       |  | Method of preparing homogenous porous hydrogel                                                               |  | 2             |  | 3                          |  | 2002/2020               
|                                                           |  |                                                                                                              |  |              
|Implanting Device                                          |  | Device for inserting implantable objects under the skin                                                      |  | 0             |  | 17                         |  | Not Applicable/2023     
|                                                           |  |                                                                                                              |  |              
|Implanting Device Design                                   |  | Design for an implanting Device                                                                              |  | 5             |  | 0                          |  | 2004/2017               
|                                                           |  |                                                                                                              |  |              
|Compositions and Treatments for Central Precocious Puberty |  | Controlled delivery of gonadotropin-release hormone agonists for the treatment of central precocious puberty |  | 0             |  | 3                          |  | Not Applicable/2025     
|                                                           |  |                                                                                                              |  |              
|Polyurethane Implant Formulations                          |  | Polyurethane implant formulations and methods of preparing                                                   |  | 0             |  | 8                          |  | Not Applicable/2024     
|                                                           |  |                                                                                                              |  |              
|Total                                                      |  |                                                                                                              |  | 32            |  | 31                         |  |                         

As noted in the chart above, we have filed a United States and two foreign patent applications
covering pharmaceutical formulations, processes and methods of use relating to Supprelin-LA. In addition, as of December 2006, we owned five other issued patents and have approximately 25 other patent applications pending worldwide relating to other
areas, including implanting devices and designs thereof and polyurethane based implants.

Our commercial success will depend in part on
obtaining this patent protection. Other intellectual property and know-how, including the Hydron Technology, that we have produced and own, are safeguarded through copyrights, trademarks, trade secret protections and contractual safeguards such as
confidentiality and proprietary information agreements. The development of our technology and many of our processes are dependent upon the knowledge, experience and skills of key scientific and technical personnel. To protect our rights to this
proprietary information and technology, which are not patentable, we require all employees, consultants and advisors to enter into confidentiality agreements that prohibit the disclosure of confidential information to anyone outside our Company. As
a matter of Company policy, all scientific employees are hired to invent and all have executed agreements that recognize this policy and generally require disclosure and assignment to us of ideas, developments, discoveries and inventions
made by employees. However, these agreements may not effectively prevent disclosure of our confidential information or provide meaningful protection for our confidential information if there is unauthorized use or disclosure.

Material Agreements

We are a party to certain material agreements including:



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GP Strategies Corporation

In June 2000, we entered into a contribution agreement with GP Strategies Corporation, our former parent. Under this contribution agreement, GP Strategies
contributed, assigned, transferred and conveyed to us the assets of GP Strategies drug delivery business, including all intellectual property and certain agreements with Hydron Technologies, Inc., formerly known as Dento-Med Industries, Inc.,
The Population Council, Inc., and Shire US, Inc., successor to Roberts Laboratories Inc.

We assumed all assets, liabilities and
obligations of GP Strategies relating or arising from the operation of the drug delivery business and the assets.

Hydron
Technologies, Inc.

In November 1989, GP Strategies Corporation, which was then known as National Patent Development Corporation,
entered into an agreement with Dento-Med Industries, Inc., now known as Hydron Technologies. Under the contribution agreement in June 2000 between us and GP Strategies, GP Strategies transferred its rights and obligations under the agreement with
Hydron Technologies to us.

Under the agreement, Hydron Technologies was granted an exclusive, worldwide license, with the right to grant
sublicenses, in and to presently owned or subsequently issued patents and the Hydron trademark, to manufacture, market or use products composed of the Hydron polymer or produced with the use of the Hydron polymer in certain consumer and oral health
fields, excluding prescription and non-prescription drugs. The agreement purports to continue indefinitely, unless terminated earlier by the parties. We have the exclusive right to manufacture, sell or distribute any prescription drug or medical
device as defined under the Federal Food, Drug and Cosmetic Act made with the Hydron polymer, however, we will not have the right to sell or distribute any Hydron polymer product in the oral health field, except for prescription drug products for
lip sores and oral ulcers. We also have the exclusive right to manufacture, sell or distribute certain other excepted Hydron products from Hydron Technologies license. Neither party is prohibited from manufacturing, exploiting, using or
transferring the rights to any new non-prescription drug product containing the Hydron polymer, subject to certain exceptions, for limited exclusivity periods.

In the event we withdraw from the business of manufacturing the Hydron polymer, we will assign all of our right and interest in the Hydron trademark to Hydron Technologies. Upon request from Hydron Technologies, we
may provide certain research services, including limited use of our facilities, for Hydron Technologies research activities, for which we will be reimbursed a specified amount. In addition, subject to certain conditions and exceptions, Hydron
Technologies has the right to purchase from us and we are obligated to supply to Hydron Technologies certain types of Hydron polymers.

Subject to certain exceptions (including Vantas and Supprelin-LA), each party will pay to the other a 5% royalty on net sales for Hydron polymer products marketed by us or Hydron Technology, as applicable, or a third party. Our Naltrexone
and Octreotide implants would be subject to the 5% royalty to be paid to Hydron Technology. Subject to certain excepted Hydron polymer products, in the event either party sells any non-prescription Hydron polymer drug products itself, such party
will pay a 5% royalty fee on net sales, including research payments, to the other party. Subject to certain Hydron polymer excepted products, if either party sells non-prescription drug products to a third party and receives up-front license fees,
royalties or similar payments, such party will pay a 25% royalty on such payments to the other.

The Population Council

In September 1990, GP Strategies Corporation, which was then known as National Patent Development Corporation entered, into a joint
development agreement with The Population Council regarding the development of hydrogel implants containing LHRH. Under the contribution agreement entered into in June 2000 between us and GP Strategies, GP Strategies transferred its rights and
obligations under the agreement with The Population Council to us.

By amendment to the agreement dated October 1, 1997, the Joint
Development Agreement was terminated in its entirety and superseded by the terms and conditions of the amendment. Under the amendment, The Population Council concluded all ongoing prostate cancer clinical studies and provided us with all data and
records relating to those trials to enable us to advance the clinical trials and seek regulatory approval to commercially develop and market any polymer implant containing any LHRH analog or any polymer implant containing any other active agent,
other than an LHRH analog. We can enter into licensing and marketing agreements for the commercial development of those implants without the consent of The Population Council. The term of the agreement is the shorter of twenty-five years from the
date of the amendment or until the date on which The Population Council



15



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receives approximately $40 million in payments from us. Either party may terminate the agreement if the other party becomes insolvent or is involved in
bankruptcy proceedings or if, after receiving written notice the other party is in default of a material term or such default has not been cured within thirty days of the notice.

By a further amendment to the agreement dated August 2004, The Population Council is entitled to 30% of certain revenues received by us from the
licensing of Vantas or any other polymer implant containing an LHRH analog and 5% of certain revenues received by us from the licensing of any other polymer implant to the extent those revenues are related to the use or sale of implants in all areas
other than the European Union and certain Southeast Asian countries. We are required to pay to The Population Council 3% of our net sales of Vantas and any polymer implant containing an LHRH analog and 0.5% of our net sales of any other polymer
implant. The Population Council is also entitled to 4% of any licensees net sales of Vantas and any other polymer implant containing an LHRH analog within the European Union and certain Southeast Asian countries and 0.667% of any
licensees net sales for any other polymer implant within the European Union and certain Southeast Asian countries. In addition, we are required to establish a patient assistance program within one year after the first commercial sale of Vantas
in the United States and maintain the program for a period ending on the earlier of ten years after establishment of the program or the cessation of the marketing of Vantas.

Shire Pharmaceuticals Group plc

In March 1998, GP Strategies entered into a license agreement and a related manufacturing and supply agreement with Roberts Laboratories Inc. under which Roberts was responsible for conducting Phase III clinical trials, managing the
regulatory approval process and marketing the product now known as Vantas. When Roberts was acquired by Shire Pharmaceuticals Group in December 1999, Shire took over the development of Vantas. In December 2001, we entered into a termination, license
back and option agreement with Shire US, a subsidiary of Shire Pharmaceuticals Group, which terminated and released all claims of the parties under the previous license and manufacturing agreements. Under this agreement, Shire transferred to us all
on-going activities under the development program for Vantas, including all data, know-how and other information with respect to Vantas generated in connection with the development program, and granted us an exclusive license to such data, know-how
and information for the development, manufacture, use, supply and sale of Vantas in the designated territory, including, but not limited to, the United States, Canada, and various European and other countries. In December 2006, we agreed to amend
the definition of territories within the termination, license back and option agreement with Shire US to include the Republic of Ireland.

The term of the license continues for ten years from the date of the first commercial sale of Vantas. Thereafter, we will have a fully paid up license in the designated territory with respect to all data, know-how and other information
related to Vantas generated under Shires previous development program for Vantas.

We are required to pay Shire 2% of net sales of
Vantas in the designated territory. However, for the purposes of this agreement, net sales are reduced by the amount of any royalty payments we make to The Population Council with respect to sales of Vantas. If we sublicense Vantas to another entity
in the designated territory, we will pay Shire fees of 20% of royalty income and 20% of any milestone payments we receive, up to a maximum of $5 million, relating to any sublicensing of Vantas. Royalty income does not include amounts paid to The
Population Council with respect to sales of Vantas by a sub-licensee. However, the $5 million cap on our royaltys payments with respect to milestone payments is only applicable if we are entitled to receive at least 10% of net sales under the
sublicense agreement.

We also granted Shire an exclusive, irrevocable option, on a country-by-country basis in the designated territory,
to exclusively market and distribute Vantas in each country of the designated territory, other than in the United States. This option, with respect to each country, will expire on the earlier of the date we enter into a sublicense agreement for that
particular country or 180 days following the date of regulatory approval in that particular country for Vantas. We may market Vantas in any country at the expiration of the option with respect to that country. If Shire exercises the option with
respect to a particular country, we will supply Vantas at the cost of manufacture. Shire will pay us 13.5% of its net sales within the option territory. Each marketing and distribution arrangement requested by Shire under its option will have a term
of 10 years. Shire has not exercised its right to market Vantas in any of the countries that we have entered into a sublicense agreement or received regulatory approval. Either party may terminate if either party becomes insolvent or there is a
material breach of the agreement.



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Paladin Labs, Inc.

In October 2002, we entered into a license and distribution agreement with Paladin Labs under which we granted Paladin Labs an exclusive, royalty bearing
license under our intellectual property, including our patents, trademarks and know-how, to seek regulatory approval for the marketing, distribution and sale in Canada and its territories of (i) Vantas for the treatment of prostate cancer and
(ii) any other Hydron histrelin implant, which is, or may be, developed by us for other indications, such as Supprelin-LA, our histrelin implant for CPP. Paladin Labs is obligated to use commercially reasonable efforts to apply for and maintain
regulatory approval for Vantas and any other Hydron histrelin implant and to sell, market and distribute those implants in Canada and its territories. The initial term of the agreement is for fifteen years from March 2006, the date on which
regulatory approval for Vantas in Canada was obtained, and will automatically renew for subsequent three year terms, unless terminated earlier. Either party may terminate the agreement if the other party becomes insolvent or is involved in
bankruptcy proceedings, or if, after receiving written notice the other party commits a material breach that has not been cured within thirty days of the notice or the other party is unable to fully perform its obligations as a result of a force
majored event. We also granted Paladin Labs an exclusive license to use the trademarks owned by us, including all trademarks and trade names approved by us, in connection with the marketing, distribution and sale of Vantas or any other Hydron
histrelin implant in the designated territory. We have given Paladin Labs the exclusive right, but not the obligation, to conduct Phase IV clinical trials relating to the use of Vantas for the treatment of prostate cancer in the designated
territory. If Paladin Labs does not conduct such trials within one year of our request to do so, we will have the right to conduct such Phase IV clinical trials on our own.

We have the sole right and responsibility for the manufacturing, assembling, packaging and labeling of Vantas or any other Hydron histrelin implant in
such quantities required for Paladin Labs demand forecast and we must use all reasonable efforts to supply those products. In addition, Paladin granted us a non-exclusive license to use its trademarks on labeling of Vantas or any other Hydron
histrelin implant. We have agreed not to supply Vantas or any other Hydron histrelin implant for distribution or sale in Canada and its territories for use in any indication to any other party except Paladin Labs. Paladin Labs will pay us a flat
transfer fee of $190 per unit and a royalty of 8% of its net sales of Vantas or any other Hydron histrelin implant.

Under the terms of the
agreement, we and Paladin have agreed not to develop, market, distribute or sell in Canada or its territories any products that contain the same active ingredient as that which is contained in Vantas, or any products similar to or competitive with
Vantas or any other Hydron histrelin implant approved in Canada during the term of the agreement and for a period of three years following the expiration or termination of the agreement; provided that we are permitted to make, market, distribute and
sell Vantas in the designated territory for all indications following the expiration or termination of the agreement.

Key Oncologics
(Pty) Ltd.

In September 2003, we entered into a license and distribution agreement with Key Oncologics, under which we appointed
Key Oncologics as the exclusive agent to apply for regulatory approval for and distribute Vantas in South Africa and its territories for use in the treatment of prostate cancer. The initial term of the agreement is for five years after the date on
which regulatory approval for Vantas for the treatment of prostate cancer is obtained in South Africa, subject to automatic one-year renewal periods unless terminated earlier. Either party may terminate the agreement if the other party becomes
insolvent or is involved in bankruptcy proceedings, or if, after receiving written notice, the other party commits a material breach that has not been cured within thirty days of the notice or the other party is unable to fully perform its
obligations as a result of a force majeure event. Key Oncologics may terminate the agreement if regulatory approval of Vantas for the treatment of prostate cancer is finally denied by South Africas regulatory authority. Terminations with
respect to one or more, but not all forms or dosages, will only apply to the affected forms or dosages. Key Oncologics is obligated to use commercially reasonable efforts to apply for and maintain regulatory approval in South Africa for Vantas for
use in the treatment of prostate cancer. Key Oncologics is required to use its best efforts to market, distribute and sell Vantas in South Africa.

We agreed to supply Vantas, as well as containers for and components of Vantas, to Key Oncologics exclusively in South Africa. We are obligated to supply Key Oncologics with all data and information in our possession or control as is
necessary for the purpose of obtaining regulatory approval of Vantas for use in the treatment of prostate cancer in South Africa. We gave Key Oncologics the exclusive right, but not the obligation, to conduct Phase IV clinical trials relating to the
use of Vantas for the treatment of prostate cancer in the designated territory. If Key Oncologics does not conduct such trials within one year of our request to do so, we will have the right to conduct such Phase IV clinical trials on our own. We
will receive a perpetual, fully-paid, royalty-free license to use any data developed by Key Oncologics in the Phase IV trials.



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Under the terms of the agreement, Key Oncologics has agreed not to develop, market, distribute or sell in
South Africa any products that contain the same active ingredient contained in Vantas, or any products similar to or competitive with Vantas that are used to treat prostate cancer during the term of the agreement and for a period of three years
following the expiration or termination of the agreement, except that Key Oncologics may market, distribute and sell a certain product under a previous third party license agreement.

We granted Key Oncologics an exclusive license to use our trademarks owned by us, including all trademarks and trade names approved by us, in connection
with the marketing, distribution and sale of Vantas in South Africa in connection with the treatment of prostate cancer. Key Oncologics has granted us a non-exclusive license to use Key Oncologics trademarks on labeling of Vantas. We have the
sole right and responsibility for manufacturing, assembling, packaging and labeling Vantas and we are required to supply Vantas in sufficient quantities to meet Key Oncologics demand forecast. We agreed not to supply Vantas for distribution or
sale in any of the designated countries for use in the treatment of prostate cancer to any other party except Key Oncologics. For a period of twelve months following the receipt of regulatory approval, Key Oncologics will pay us a flat transfer fee
of $250 per unit of Vantas, plus 10% of the net sales collected by Key Oncologics. After the end of the first twelve-month period, we will have the right to adjust the price per unit once per year, subject to certain exceptions.

BioPro Pharmaceutical, Inc.

In January 2005, we entered into an exclusive license and distribution agreement with BioPro. The initial term of the agreement is for ten years after the date on which the first regulatory approval allowing sales of Vantas to proceed in
any country of the designated territory is issued, unless terminated earlier and automatically renews for additional periods of one year unless notice of termination is given. Either party may terminate the agreement if the other party becomes
insolvent or is involved in bankruptcy proceedings, or if, after receiving written notice, the other party commits a material breach that has not been cured within thirty days of the notice or the other party is unable to fully perform its
obligations as a result of a force majeure event. Either party may terminate the agreement on a country-by-country basis if regulatory approval of Vantas for the treatment of prostate cancer is finally denied by the regulatory authority within that
country. Terminations with respect to one or more, but not all, forms, dosages, countries or indications will apply to the affected forms, dosages, countries or indications. Additionally, we may terminate the agreement if BioPro fails to achieve
minimum net sales and then fails to make minimum required payments to us, or we may terminate the agreement on a country-by-country basis and on an indications-by-indications basis if BioPro fails to file necessary marketing approval applications.

Under the agreement, BioPro will be the exclusive distributor of Vantas in the designated territory consisting of Brunei, Cambodia, China
(including Hong Kong), Laos, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam. BioPro is required to use commercially reasonable efforts to apply for and maintain regulatory approval for Vantas for
the treatment of prostate cancer in the designated territory. In connection with obtaining regulatory approval for Vantas, we are required to supply BioPro with all data and information in our possession or control as is necessary for that purpose.
We also granted BioPro an exclusive license to use the trademarks owned by us, including all trademarks and trade names approved by us, in connection with the marketing, distribution and sale of Vantas in the designated territory. We gave BioPro the
non-exclusive right, but not the obligation, to conduct Phase IV clinical trials relating to the use of Vantas for the palliative treatment of prostate cancer in each country of the designated territory. BioPro has applied for regulatory approval
for the commercialization of Vantas in Thailand, Singapore, Malaysia, Taiwan, Korea Hong Kong and China.

BioPro granted us the right to
use BioPros trademarks on labeling of Vantas. We have the sole right and responsibility to manufacture, assemble, package and label Vantas and are required to supply Vantas in quantities sufficient to meet BioPros demand forecast. We
have agreed not to supply Vantas for distribution or sale in any of the countries in the designated territory for use in any indication to any other party except BioPro. BioPro will pay us a flat transfer fee of $250 per unit and a royalty of 25% of
net sales of Vantas, in addition to various milestone payments. BioPro must pay us a minimum amount if it fails to achieve certain minimum net sales. In addition, BioPro is obligated to pay a royalty of 2% of net sales of Vantas directly to The
Population Council or a minimum payment if certain minimum net sales are not achieved. Twelve months following the first commercial sales of Vantas in the designated territory, we will have the right, subject to certain exceptions, to adjust the
price per unit once per year.

Affiliates of Sanders Morris Harris, Inc., of which James Gale, the Chairman of our board of directors, is a
managing director, own approximately 40% of BioPro. Affiliates of Sanders Morris Harris, Inc. own approximately 37% of the outstanding common stock of our Company.



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Alpex Pharma S.A.

In April 2005, we entered into a collaboration and development agreement with Alpex Pharma to research and develop a rapid dissolve desmopressin product.
Under the agreement, we have an exclusive, royalty-bearing license, based in part on Alpexs intellectual property, including the right to sublicense, to make, use, sell, and otherwise commercialize the rapid dissolve desmopressin product in
the United States, Canada, and Mexico. The agreement continues in effect until the expiration of all Alpex patents related to Alpexs platform technology that cover the rapid dissolve desmopressin product. Upon expiration of all Alpex patents
related to Alpexs platform technology that cover the rapid dissolve desmopressin product, we will have a fully paid-up, royalty-free, non-exclusive, irrevocable license, including the right to sublicense, to make, use, sell, and otherwise
commercialize the product in the United States, Canada and Mexico.

Under the agreement, Alpex is obligated to use commercially reasonable
efforts to diligently perform its obligations under the agreement, including developing the rapid dissolve desmopressin product. We are obligated to use commercially reasonable efforts to perform our obligations under the agreement, including to
obtain and maintain all regulatory approval for the rapid dissolve desmopressin product in the United States, Canada, and Mexico. If we do not file for regulatory approval in the United States within six months after satisfaction of certain product
success criteria, as agreed upon by us and Alpex, Alpex may elect to transform our license into a non-exclusive, royalty-free license. Alpex is required to make all intellectual property and technical information available to us as may reasonably be
necessary for regulatory approval. Alpex owns all intellectual property related to the platform technology, and will own any intellectual property developed pursuant to the collaboration that relates to the platform technology. We will own all
intellectual property related to the rapid dissolve desmopressin product in the United States, Canada and Mexico. Alpex will own all intellectual property related to the rapid dissolve desmopressin product outside of the United States, Canada and
Mexico.

We are obligated to use our commercially reasonable efforts to market, distribute and sell the rapid dissolve desmopressin product
in the United States, Canada and Mexico. Alpex has agreed not to, directly or indirectly develop, market, distribute or sell a product that contains desmopressin in the United States, Canada or Mexico. Alpex shall manufacture and supply sufficient
quantities of the rapid dissolve desmopressin product for clinical trials and commercial sale to meet our needs. Both parties must use best efforts to enter into such a manufacturing and supply agreement prior to the first commercial shipment of the
rapid dissolve desmopressin product.

We may terminate the agreement and obligations of the parties if we determine, in our sole
discretion, that the development and/or commercialization of the rapid dissolve desmopressin product has been impaired due to (i) difficulties in development or formulation; (ii) unfavorable action by the FDA; (iii) likelihood of
failure to obtain regulatory approval; (iv) concerns of possible third party infringement; and (v) unfavorable market conditions for the rapid dissolve desmopressin product. In the event we discontinue the development and/or
commercialization of the product, Alpex may continue or resume the development and/or commercialization of the rapid dissolve desmopressin product, provided that it reimburses us for at least a portion of our development costs, including any license
or milestone payments.

We are required to pay Alpex one-time milestone payments related to the development of the rapid dissolve
desmopressin product and lump-sum payments upon regulatory filing in the United States and upon approval in the United States. We are also required to pay Alpex a range of royalty payments based on net sales of the rapid dissolve desmopressin
product and a percentage of all sublicensing income. Our royalty payment obligations will expire twenty years from the date of the first commercial shipment of the rapid dissolve desmopressin product, and the license will become a royalty-free,
non-exclusive, perpetual, worldwide license to make, have made, use, import, export, sell, offer to sell and otherwise commercialize the rapid dissolve desmopressin product in the United States, Canada and Mexico.

James Gale, the Chairman of our board of directors, is also on the board of directors of Alpex. Affiliates of Sanders Morris Harris, Inc. of which
Mr. Gale is a managing director, own approximately 37% of the outstanding common stock of our Company and more than 90% of the outstanding capital stock of Alpex.

Teva-Tuteur

In December 2005, we entered into an exclusive distribution agreement with
Teva-Tuteur for distribution of Vantas in Argentina. The initial term of the agreement ends on the date that is ten years after the date on which the first regulatory approval allowing sales of Vantas to proceed in Argentina, is granted, unless
terminated earlier. The agreement automatically renews for additional periods of one year each unless notice of termination is given. Either party may terminate the agreement if the other party becomes insolvent or



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is involved in bankruptcy proceedings or if the other party fails to cure a material breach within a specified time period after receipt of notice or the
other party is unable to fully perform its obligations for one hundred-fifty days as a result of a force majeure event. Either party may terminate the agreement on an indication-by-indication basis if regulatory approval of Vantas for such
indication is finally denied by the regulatory authority within Argentina. Terminations with respect to one or more, but not all, forms, dosages or indications will apply to the affected forms, dosages or indications. Additionally, we may terminate
the agreement if Teva-Tuteur fails to purchase a specified number of units of Vantas in a calendar year. We may also terminate the agreement on an indications-by-indications basis if Teva-Tuteur fails to file necessary marketing approval
applications within the required time.

Under the agreement, Teva-Tuteur will be the exclusive distributor of Vantas in Argentina.
Teva-Tuteur is required to use commercially reasonable efforts to apply for and maintain regulatory approval for Vantas in Argentina for each indication for which we own or hold a regulatory approval anywhere in the world. In connection with
obtaining regulatory approval for Vantas, we are required to supply Teva-Tuteur with all data and information in our possession or control as is necessary for that purpose. We also granted Teva-Tuteur an exclusive license to use the trademarks owned
and approved by us, in connection with the marketing, distribution and sale of Vantas. We have given Teva-Tuteur the non-exclusive right, but not the obligation, to conduct Phase IV clinical trials relating to the use of Vantas in each approved
indication in Argentina.

Teva-Tuteur granted us the right to use Teva-Tuteurs trademarks on labeling of Vantas. We have the sole
right and responsibility to manufacture, assemble, package and label Vantas; provided that Teva-Tuteur is responsible for any and all Argentinean-specific labeling. We have agreed not to supply Vantas for distribution or sale for use in any
indications to any other party except Teva-Tuteur. Teva-Tuteur shall pay us a flat transfer fee per unit, which fee is subject to an index-based adjustment. Beginning in the first calendar year after the first commercial sale of Vantas in Argentina,
Teva-Tuteur must make certain minimum purchases during each calendar year unless it provides written notice one hundred and twenty (120) days prior to the end of any such calendar year, in which case Teva-Tuteur is relieved of the minimum
purchase requirement for such calendar year. If Teva-Tuteur provides such notice, we have the option to (i) convert the exclusive right granted to Teva-Tuteur into a non-exclusive right effective as early as the date of the receipt of such
written notice from Teva-Tuteur or (ii) terminate the agreement effective as early as the date of the receipt of such written notice from Teva-Tuteur.

Valstar ®
(Valrubicin)

In March 2006, we completed the acquisition of certain assets of Anthra associated with its valrubicin business in the
United States and Canada. Anthras valrubicin business involved the manufacture and sale of valrubicin for use in the treatment of bladder cancer. The product was distributed in the United States and Canada by third party partners of Anthra. In
the United States, the product was distributed under the trademark Valstar. The product is not covered by any patents and its orphan drug status has expired.

Anthras valrubicin product was taken off the market in 2002 due to a manufacturing problem and a lack of resources to address the problem. We have analyzed the manufacturing issues and believe that we have
determined the cause of, and a solution to, the problem. As such, we acquired certain assets of Anthra required for the manufacture, marketing and sale of valrubicin in the United States and Canada including the NDA filed with the FDA, the drug
master file, the Canadian regulatory submission and all data produced by or on behalf of Anthra in support of the NDA and other governmental approvals, or in any other scientific experiment or clinical trial relating to valrubicin.

The purchase price payable for the product consists of guaranteed payments, totaling approximately $0.6 million, revenue sharing payments of up to 13.5%
of our sales and receipt of license fees and additional payments based on our sales performance. Subject to certain exceptions, Anthras indemnification obligations survive for two years after closing and are funded by setoff against the
purchase price payable to Anthra under the agreement.

Plantex

On May 17, 2006, we entered into a supply agreement with Plantex USA Inc. whereby Plantex would supply us with the active pharmaceutical ingredient
N-Trifluroacetyl-adriamycin-14 valerate, otherwise known as Valrubicin (API), in connection with our anticipated launch of the product Valstar for the treatment of bladder cancer. Under the Agreement, we will only source API from Plantex
in connection with the development, manufacture or sale of, and securing regulatory approval for, Valstar in the United States, its territories and possessions, and Canada (the Territory). Subject to certain minimum purchase requirements
by us, Plantex will manufacture and supply all of our requirements for API for commercial sale of Valstar in the Territory. We are obligated to use commercially reasonable efforts to obtain regulatory approval in the Territory to manufacture the
finished product. Plantex will also be required to obtain and maintain all regulatory approvals necessary for its manufacturing obligations under the Agreement. It is



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intended that API supplied by Plantex will be shipped to another manufacturer for manufacturing, packaging and labeling of the finished product.

The Agreement will expire ten years after the date of the first commercial sale of Valstar by or on our behalf to an independent third party in the
Territory. The Agreement will automatically renew for successive two year periods unless either party provides the other with written notice of its intention not to extend the term of the Agreement at least twelve months before the expiration of the
initial term or any renewal term. In addition, the Agreement is subject to termination if: (i) a party commits a breach that has not been cured within thirty days of the notice in the case of a payment default or within ninety days notice in
all other cases; (ii) the parties mutually agree to terminate the Agreement; (iii) a party is unable to fully perform its obligations as a result of a force majeure event; (iv) a party becomes involved in bankruptcy proceedings, or
if, after receiving written notice; or (v) we fail to obtain regulatory approval of supplementary chemistry, manufacturing and control filings necessary for the launch of Valstar prior to June 30, 2007. Under the terms of the agreement,
beginning in the calendar year following the year in which we receive regulatory approval for Valstar in the United States, we will be required to purchase a minimum of $1,000,000 of Valrubicin each calendar year until the agreement expires.

Spepharm Holding B.V.

On July 17, 2006, we entered into an Investment and Shareholders Agreement in which we received a 19.9% ownership interest in a newly created Dutch company called Spepharm Holding B.V, or Spepharm, for a nominal amount of
approximately EUR 3,675 (approximately $4,500) and product distribution rights. The other investors in Spepharm include TVM Life Science Ventures VI L.P., TVM Life Science Ventures VI GmbH & Co. KG, Life Sciences Opportunities Fund
(Institutional) II, L.P., Life Sciences Opportunities Fund II, L.P. , ARCADE SARL, and Jean-François Labbé, or, collectively, the Investors. The shareholders agreement provides a provision for two subsequent capital increases if
additional funding is required by Spepharm. Upon the request and approval of the subsequent capital increase, we will have the option to purchase at a nominal value, 19.9% of the entire new shares being offered in the capital increase, thus giving
us the option to keep our 19.9% ownership interest in Spepharm. Spepharm and its European specialty pharmaceutical group of companies are focusing on becoming one of the leading suppliers of specialty urology and endocrinology products to the
European market place.

In addition to the 19.9% ownership in Spepharm, we entered into a License and Distribution Agreement with Spepharm.
Under the terms of the distribution agreement, we will give Spepharm the exclusive licensing and distribution rights to our products under the trademark Vantas and Supprelin-LA , which are referred to in the distribution agreement as the Products,
in the European Union as well as Norway and Switzerland for a period of ten years. We will supply Spepharm with the Products on an exclusive basis in the territory prior to regulatory approval and following receipt of regulatory approval, for
distribution and sale in the territory for the use in each indication, as that term is defined in the distribution agreement. Under the terms of the distribution agreement, we will assign to Spepharm all marketing approval applications and any
regulatory approval held by us with respect to the Products. Spepharm, at its own expense will be required to use commercially reasonable efforts to apply for and maintain regulatory approval for each Product in each country of the territory for use
in each indication. In connection with obtaining regulatory approval for the Products, we will be required to supply Spepharm with all data and information in its possession or control as is necessary for that purpose. We will also grant Spepharm an
exclusive license to use the trademarks owned by us, including all trademarks and trade names approved by us, in connection with the marketing, distribution and sale of each Product in the territory for each indication. we will give Spepharm the
non-exclusive right, but not the obligation, to conduct Phase IV clinical trials relating to the use of the Products in each indication in each country of the territory, but only with Valeras prior written consent. Spepharm will grant us the
right to use Spepharms trademarks on labeling of the Products. We will have the sole right and responsibility to manufacture, assemble, package and label the Products and will be required to supply the Products in quantities sufficient to meet
Spepharms forecast. For a period of five years from the date of the distribution agreement, Spepharm will be prohibited from directly or indirectly developing, marketing, distributing or selling in any country in the territory any Products,
any products similar to or competitive with any Product, or any products that are used in any Indication. Spepharm will pay us for our supply and Spepharms distribution of the Products under the distribution agreement an aggregate amount equal
to forty percent (40%) of Net Sales, which is referred to in the distribution agreement as the Royalty Amount, based on an established transfer price. In addition, within thirty (30) days following the end of each calendar quarter,
Spepharm will pay us an amount equal to the difference between (a) the aggregate Royalty Amount for such calendar quarter minus (b) the aggregate transfer prices paid by Spepharm during such calendar quarter. In addition, according to the
terms of the distribution agreement, Spepharm will be required to achieve certain Minimum Net Sales, as defined in the distribution agreement. If Spepharm fails to achieve the Minimum Net Sales in a given calendar year with respect to a Product,
then Spepharm will pay us an amount equal to (i) the difference between Minimum Net Sales for such Product for such calendar year minus the actual amount of Net Sales of the Product for such calendar year multiplied by (ii) forty percent
(40%), less the amount of the aggregate transfer prices paid by Spepharm during such calendar year to the extent such transfer prices have not been taken into account for the purposes of



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determining the Royalty Payment. Spepharm may notify us no later than forty-five (45) days after the completion of the calendar year that it will not
pay the amounts required by the Minimum Net Sales provision for the just completed calendar year, in which case, Spepharm shall be relieved from its obligation to pay the amount required. In such event, we will have the right either (i) to
convert all of the exclusive rights granted to Spepharm in the distribution agreement with respect to such Product into non-exclusive rights effective as of the date of Spepharms notice to us or such later date as we may specify or
(ii) to terminate the distribution agreement with respect to such Product effective as of the date of Spepharms notice to us or such later date as we may specify. If Spepharm does not send a notice permitted by the distribution agreement
or does so after the period specified in the distribution agreement, Spepharm will not be relieved of its obligations under the distribution agreement and failure to pay such obligation will be considered a Material Breach, as defined in the
distribution agreement.

In accordance with the shareholders agreement, David S. Tierney, M.D., our President and Chief Executive
Officer and Mr. James Gale, our chairman of the board of directors, will be appointed as members of Spepharms initial supervisory board. LSOFI and LOSF are funds managed by, and affiliates of, Sanders Morris Harris, Inc. , whose
affiliates own approximately 37% of the outstanding common stock of our Company. Mr. Gale is a Managing Director of SMH and the investment manager of such funds that hold shares of our Company and has sole voting and dispositive power over such
shares. SMH and TVM Capital, the manager of TVM LP and TVM KG, have committed approximately EUR 20,000,000 to the Spepharm venture.

Poly-Med

In connection with the Revised Research and Development Proposal dated April 27, 2005, between us and
Poly-Med, Inc. and the Advanced Development and Pilot Production Outline issued by us and Poly-Med on March 24, 2006 and revised on April 10, 2006, relating to the development of an biodegradable endoureteral stent, on December 4,
2006, we entered into a Letter Agreement with Poly-Med, pursuant to which we agreed to engage in exclusive negotiations to enter into a license and supply agreement providing us with an exclusive license to use and sell the endoureteral stent in
exchange for certain royalty payments. The license and supply agreement will also set forth the terms under which Poly-Med will manufacture and supply us with the endoureteral stent. The exclusivity period contemplated by the letter agreement
expires June 30, 2007.

Indevus Pharmaceuticals, Inc.

In December 2006, we entered into a merger agreement with Indevus Pharmaceuticals pursuant to which Indevus will acquire us in a tax-free stock-for-stock
merger transaction. Pursuant to the Merger Agreement, upon the closing of the merger, each outstanding share of our common stock (other than shares held by us or Indevus or any stockholders who properly exercise dissenters rights under
Delaware law), will automatically be converted into the right to receive a number of shares of Indevus common stock equal to $7.75 divided by the volume weighted average of the closing prices of Indevus common stock during the 25 trading days ending
on the fifth trading day prior to the date of our stockholders meeting to consider the merger, or the Indevus Common Stock Value. The exchange ratio is subject to a collar such that if the Indevus Common Stock Value falls outside of the collar
the exchange ratio will become fixed. If the Indevus Common Stock Value is greater than $8.05, then the exchange ratio will be 0.9626, and if it is less than $6.59, then the exchange ratio will be 1.1766. Cash will be paid in lieu of fractional
shares.

In addition, each share of our common stock will be converted into three contingent stock rights, or CSRs, relating to three of
our product candidates. One CSR will be convertible into $1.00 of Indevus common stock upon FDA approval of Supprelin-LA, provided sufficient quantities of Supprelin-LA are then available, one CSR will be convertible into $1.00 of Indevus common
stock upon FDA approval of our biodegradable ureteral stent and one CSR will be convertible into $1.50 of Indevus common stock upon FDA approval of our octreotide implant. The amount of Indevus common stock into which the CSRs will convert will be
determined by a formula based on the average stock price of Indevus prior to achievement of the applicable milestones. The CSRs will convert into Indevus common stock only if the applicable milestones are achieved within three years of the closing
of the merger in the case of Supprelin-LA and within five years of the closing of the merger in the case of our biodegradable ureteral stent and our octreotide implant.

In connection with the merger transaction, certain affiliated funds of Sanders Morris Harris, our largest shareholder, and one other large shareholder of ours, entered into voting agreements with Indevus in which they
have agreed to vote shares representing approximately 41% of our outstanding shares of common stock in favor of the merger. The merger has been approved by our board of directors, as well as Indevus board of directors. We anticipate the merger
will close at the end of April 2007. The merger is subject to certain customary closing conditions, including the approval of our stockholders and the approval of Indevus stockholders.



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Upon completion of the merger transaction and subject to the approval of the Indevus board of directors,
James C. Gale, chairman of our board of directors and chief investment officer of the Corporate Opportunities Funds and Life Sciences Opportunities Fund, affiliates of Sanders Morris Harris, is expected to join the Indevus board of directors.
Sanders Morris Harris is currently the largest shareholder of our Company. Additionally, Dr. David Tierney, our President and Chief Executive Officer, will provide consulting services during a transition period after the completion of the
merger transaction. Our facility in Cranbury, New Jersey, which contains significant manufacturing operations and research and development capabilities, will be maintained and become an integral part of Indevus operations.

Separately, in December 2006, we entered into a co-promotion agreement with Indevus pursuant to which Indevus sales force will co-promote Vantas in
the United States. Under the terms of the agreement, we are required to make royalty payments to Indevus of 13.5% on sales of Vantas up to a specified unit level, which will increase to 30% for sales above the specified level. Indevus will also
receive royalties of 35% for sales of Vantas to specified specialty pharmacy accounts. Additionally, the co-promotion agreement provides us with the option to elect to enter into negotiations with Indevus to grant Indevus a co-exclusive right to
co-promote Supprelin-LA. The co-promotion began in January 2007.

Competition

The biotechnology and pharmaceutical industries are very competitive. In particular, competition
for the development and marketing of urological and endocrine pharmaceutical products is intense and is expected to increase. Many of our competitors have substantially greater financial and other resources, larger research and development staffs
and more experience developing products, obtaining FDA and other regulatory approval of products and manufacturing and marketing products. We compete against all pharmaceutical companies that manufacture or market LHRH agonist products. In addition,
we compete against biotechnology companies, universities, government agencies, and other research institutions in the development of urological and endocrine products, technologies and processes that are, or in the future may be, the basis for
competitive commercial products.

In particular, we compete against the following LHRH agonist products for the palliative treatment of
advanced prostate cancer: TAP Pharmaceutical Products Lupron and Sanofi-Aventis Eligard, both multiple injection formulations that deliver leuprolide; Watson Pharmaceuticals Trelstar that delivers triptorelin; AstraZenecas
Zoladex, a biodegradable rod that delivers goserelin for up to three months; and Bayer Pharmaceuticals Viadur, a rigid metal implant that releases leuprolide over a 12-month period. With respect to our Supprelin-LA product in late-stage
development for the treatment of CPP, our competitor is TAP Pharmaceutical Products Lupron Depot-PED and with regard to VP003, our octreotide implant for acromegaly, our competitors include Novartis Sandostatin injections and Sandostatin
LAR Depots and Pfizers Somavert. We believe that our implantable products represent a more comfortable and convenient alternative to competing products because it eliminates the requirement of multiple physician visits and repeated injections,
and is smaller, softer and more flexible than other implants.

Regulatory Matters

General

The production, distribution and marketing of products employing our technology, and our research and development activities, are subject to extensive
governmental regulation in the United States and in other countries. In the United States, our product candidates are regulated as drugs, and are subject to the Federal Food, Drug and Cosmetic Act, the Public Health Service Act and the regulations
promulgated under these statutes, as well as to other federal, state and local statutes and regulations. These laws govern the clinical and non-clinical testing, manufacture, safety, effectiveness, approval, labeling, distribution, import, export,
storage, record keeping, reporting, advertising and promotion of our products. Product development and approval within this regulatory framework, if successful, will take many years and involve the expenditure of substantial resources. Violation of
regulatory requirements at any stage may result in various adverse consequences, including FDAs delay in approving or refusal to approve a product. Violations of regulatory requirements also may result in enforcement actions including
withdrawal of approval, labeling restrictions, seizure of products, fines, injunctions and civil or criminal penalties.

Research,
Development and Product Approval Process

The research, development and approval process in the United States is intensive and
rigorous, and generally takes many years. The typical process required by the FDA before a therapeutic drug may be marketed in the United States includes:



| |  |  | pre-clinical laboratory and animal tests and analysis;
| | - |  | ------------------------------------------------------



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| |  |  | submission to the FDA of an application for an investigational new drug application, which must become effective before human clinical trials may commence;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | preliminary human clinical studies to evaluate the drug and its manner of use;
| | - |  | ------------------------------------------------------------------------------



| |  |  | adequate and well-controlled human clinical trials to establish whether the drug is safe and effective for its intended uses;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | FDA review of whether the facility in which the drug is manufactured, processed, packed or held meets standards designed to assure the products continued
quality; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | submission and approval of an appropriate product application to the FDA, and approval of the application by the FDA.
| | - |  | ---------------------------------------------------------------------------------------------------------------------

During pre-clinical testing, studies are performed with respect to the chemical and physical properties of candidate formulations. Biological testing is
typically done in animal models to demonstrate the activity of the compound against the targeted disease or condition and to assess the apparent effects of the new product candidate on various organ systems, as well as its relative therapeutic
effectiveness and safety. An investigational new drug application must be submitted to the FDA and become effective before studies in humans may commence.

In the United States, clinical trial programs in humans generally follow a three-phase process:



| |  |  | Phase I studies are typically conducted in small numbers of healthy volunteers or, on occasion, in patients afflicted with the target disease, to determine the
metabolic and pharmacological action of the product candidate in humans, the side effects associated with increasing doses, and, if possible, to gain early evidence of effectiveness.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Phase II studies are generally conducted in larger groups of patients having the target disease or condition in order to validate the clinical endpoint and to
obtain preliminary data on both the effectiveness of the product candidate and optimal dosage. This phase also helps determine further the safety profile of the product candidate.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Phase III large-scale clinical trials are generally conducted in hundreds of patients having the target disease or condition to provide sufficient data for the
statistical proof of effectiveness and safety of the product candidate.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In the case of products for cancer and certain
other life-threatening diseases, however, the initial Phase I testing may be done in patients with the disease rather than in healthy volunteers. Because these patients are already afflicted with the target disease or condition, it is possible that
such studies will provide results traditionally obtained in Phase II studies. These studies are often referred to as Phase I/II studies. Even if patients are used in initial human testing in a Phase I/II study, the sponsor is still
responsible for obtaining all the data usually obtained in both Phase I and Phase II studies.

United States law requires that studies
conducted to support approval for product marketing be adequate and well controlled. In general, this means that either a placebo or a product already approved for the treatment of the disease or condition under study must be used as a
reference control. Studies must also be conducted in compliance with the FDAs good clinical practice regulations.

The clinical trial
process can take up to ten years or more to complete, and the data may not be collected in compliance with good clinical practice regulations, demonstrate that the product is safe or effective, or be sufficient to support FDA approval of the product
candidate. The FDA may place clinical trials on hold at any point in this process if, among other reasons, it concludes that clinical subjects are being exposed to an unacceptable health risk. Trials may also be terminated by institutional review
boards, which must review and approve all research involving human subjects. Side effects or adverse events that are reported during clinical trials can delay, impede or prevent marketing authorization. Similarly, adverse events that are reported
after marketing authorization can result in additional limitations being placed on a products use and, potentially, withdrawal of the product from the market. Any adverse event, either before or after marketing authorization, can result in
liability claims against us.

During the course of, and following the completion of clinical trials, the data are analyzed to determine
whether the trials successfully demonstrated safety and effectiveness and whether a product approval application may be submitted. In the United States, if the product is regulated as a drug, a new drug application must be submitted and approved
before commercial marketing may begin. The FDA Center for Drug Evaluation and Research, known as CDER, has responsibility for the review and approval of drugs. The new drug application must include a substantial amount of data and other information
concerning the safety and effectiveness of the



24



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compound from laboratory, animal and clinical testing, as well as data and information on manufacturing, product stability and proposed product labeling.

Each domestic and foreign biopharmaceutical manufacturing establishment, including any contract manufacturers we may decide to use must be
listed in the new drug application and must be registered with the FDA. The application will not be approved until the FDA conducts a manufacturing inspection, approves the applicable manufacturing process for the drug product and determines that
the facility is in compliance with the FDAs current good manufacturing practice requirements. If the manufacturing facilities and processes fail to pass the FDA inspection, we will not receive approval to market these products.

Under the Prescription Drug User Fee Act, the FDA receives fees for reviewing a new drug application and supplements thereto, as well as annual fees for
both commercial manufacturing establishments and approved products. These fees can be significant. The new drug application review fee alone can exceed $0.9 million, although certain deferrals, waivers and reductions may be available.

Under applicable laws and FDA regulations, each new drug application submitted for FDA approval is usually reviewed for administrative
completeness and reviewability within 45 to 60 days following submission of the application. If deemed complete, the FDA will file the new drug application, thereby triggering substantive review of the application. The FDA can refuse to
file any new drug application that it deems incomplete or not properly reviewable. If the FDA refuses to file an application, the FDA will retain 25% percent of the user fee as a penalty. The FDA has established performance goals for the review of
new drug applications  six months for priority applications and ten months for regular applications. However, the FDA is not legally required to complete its review within these periods and these performance goals may change over time.
Moreover, the outcome of the review, even if generally favorable, typically is not an actual approval but an action letter that describes additional work that must be done before the application can be approved. The FDAs review of
an application may involve review and recommendations by an independent FDA advisory committee. Even if the FDA approves a product, it may limit the approved therapeutic uses for the product as described in the product labeling, require that warning
statements be included in the product labeling, require that additional studies be conducted following approval as a condition of the approval or otherwise limit the scope of any approval.

Significant legal and regulatory requirements also apply after FDA approval to market under a new drug application. These include, among other things,
requirements related to adverse events and other reporting, product advertising and promotion and ongoing adherence to current good manufacturing practices, as well as the need to submit appropriate new or supplemental applications and obtain FDA
approval for certain changes to the approved product, product labeling or manufacturing process. The FDA also enforces the requirements of the Prescription Drug Marketing Act, which, among other things, imposes various requirements in connection
with the distribution of product samples to physicians.

Overall research, development and approval times depend on a number of factors,
including the period of review at the FDA, the number of questions posed by the FDA during review, how long it takes to respond to the FDA questions, the severity of life-threatening nature of the disease in question, the availability of alternative
treatments, the availability of clinical investigators and eligible patients, the rate of enrollment of patients in clinical trials and the risks and benefits demonstrated in the clinical trials.

Drugs for Serious or Life-threatening Illnesses

The Federal Food, Drug and Cosmetic Act and FDA regulations provide certain mechanisms for the accelerated Fast Track approval of products intended to treat serious or life-threatening illnesses which have
been studied for safety and effectiveness and which demonstrate the potential to address unmet medical needs. The procedures permit early consultation and commitment from the FDA regarding the pre-clinical and clinical studies necessary to gain
marketing approval. Provisions of this regulatory framework also permit, in certain cases, new drug applications to be approved on the basis of valid surrogate markers of product effectiveness, thus accelerating the normal approval process. We have
not applied for fast track status for any of our current product candidates. However, certain product candidates employing our Hydron Technology might qualify for this accelerated regulatory procedure. However, the FDA may not agree, and even if the
FDA agrees that these products qualify for accelerated approval procedures, the FDA may deny approval of our drugs or may require that additional studies be required before approval. The FDA may also require us to perform post-approval, or Phase IV,
studies as a condition of such early approval. In addition, the FDA may impose restrictions on distribution and promotion in connection with any accelerated approval and may withdraw approval if post-approval studies do not confirm the intended
clinical benefit or safety of the product candidates.



25



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Other United States Regulatory Requirements

In the United States, the research, manufacturing, distribution, sale and promotion of drugs may also be subject to regulation by various federal, state
and local authorities including the Centers for Medicare and Medicaid Services (formerly the Health Care Financing Administration), the United States Department of Health and Human Services and state and local governments. For example, sales,
marketing and scientific and educational grant programs must comply with the Medicare-Medicaid Anti-Fraud and Abuse Act, and False Claims Act and similar state laws. Pricing and rebate programs must comply with the Medicaid rebate requirements of
the Omnibus Budget Reconciliation Act of 1990. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of these activities are also
potentially subject to federal and state consumer protection and unfair competition laws.

Moreover, we are now, and may become, subject to
additional federal state and local laws, regulations and policies relating to safe working conditions, laboratory practices, and experimental use of animals, and the use, storage, handling, transportation and disposal of human tissue, waste and
hazardous substances, including radioactive and toxic materials and infectious disease agents used in conjunction with our research work.

European Union Regulatory Requirements

Our ability to market our products outside the United States will be
contingent upon receiving marketing authorizations from the appropriate regulatory authorities and compliance with applicable post-approval regulatory requirements. Although the specific requirements and restrictions vary from country to country, as
a general matter, foreign regulatory systems include risks similar to those associated with FDA regulation, described above.

Under the
European Union regulatory systems, marketing authorizations may be submitted either under a centralized or decentralized procedure. Under the centralized procedure, a single application to the European Medicines Agency, known as the EMEA, leads to
an approval granted by the European Commission which permits the marketing of the product throughout the European Union. We assume that the centralized procedure will apply to our products that are developed by means of a biotechnology process. The
decentralized procedure provides for mutual recognition of nationally approved decisions and is used for products that do not qualify under the centralized procedure. Under the decentralized procedure, the holders of a national marketing
authorization may submit further applications to the competent authorities of the remaining member states, which will then be requested to recognize the original authorization based upon an assessment report prepared by the original authorizing
competent authority. The recognition process should take no longer than 90 days, but if one member state makes an objection, which under the legislation can only be based on a possible risk to human health, we have the option to withdraw the
application from that country or take the application to arbitration by the Committee for Proprietary Medicinal Products, known as CPMP, of the EMEA. If a referral for arbitration is made, the procedure is suspended, and in the intervening time, the
only European Union country in which the product can be marketed will be the country where the original authorization has been granted, even if all the other designated countries are ready to recognize the product. The opinion of the CPMP, which is
binding, could support or reject the objection or alternatively could reach a compromise position acceptable to all European Union countries concerned. Arbitration can be avoided if the application is withdrawn in the objecting country, but once the
application has been referred to arbitration, it cannot be withdrawn. The arbitration procedure may take an additional year before a final decision is reached and may require the delivery of additional data.

As with FDA approval, we may not be able to secure regulatory approvals in certain European countries in a timely manner, if at all. Additionally, as in
the United States, post-approval regulatory requirements, such as those regarding product manufacturers, marketing or distribution, would apply to any product that is approved in Europe, and failure to comply with such obligations could have a
material adverse effect on our ability to successfully commercialize any product.

There has recently been introduced in Europe new
legislation designed to harmonize the regulation of clinical trials across the European Union, and that legislation is currently being implemented on a country-by-country basis. In addition, new proposals are under advanced consideration which, if
brought into law, will effect substantial and material changes in the regulation of medicinal products in Europe. Accordingly, in seeking approval for our products in Europe we face a marked degree of chance and uncertainty both in the regulation of
clinical trials and in respect of marketing authorizations.



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We received regulatory approval to commercialize Vantas in Denmark in November 2005. In July 2006, we
submitted an application for regulatory approval for Vantas in Germany, Ireland, Italy, Spain and the United Kingdom. We have completed the primary stage of the Mutual Recognition Procedure (MRP) process which concluded with a non-approvable status
and referral to the Co-ordination Group for Mutual Recognition and Decentralized Procedure-Human, CMD(h). The CMD(h) arbitration failed to reach a consensus on approval and the procedure has been further referred to the Committee for Medicinal
Products for Human Use (CHMP) at the European Agency for the Evaluation of Medicinal Products (EMEA). This final CHMP arbitration process will include all twenty-seven countries in the European Union where a majority rule will apply.

Other Foreign Regulatory Requirements

We and our collaborative partners are subject to widely varying foreign regulations, which may be quite different from those of the FDA, governing clinical trials, product registration and approval and pharmaceutical sales. Whether or not
FDA approval has been obtained, we must obtain a separate approval for a product by the comparable regulatory authorities of foreign countries prior to the commencement of product marketing in these countries. In certain countries, regulatory
authorities also establish pricing and reimbursement criteria. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. In addition, under current United States law, there are
significant restrictions on the export of products not approved by the FDA, depending on the country involved and the status of the product in that country.

Employees

As of December 31, 2006, we had 101 full-time employees, consisting of 37 individuals in sales
and marketing, 20 individuals in manufacturing and distribution, 14 individuals in quality assurance and quality control, 16 individuals in research and development, and 14 individuals in management and administration. From time to time, we also
employ independent contractors or consultants to support our clinical and regulatory efforts. None of our employees are represented by a collective bargaining unit and we have never experienced a work stoppage. We believe that our relations with our
employees are good.

Available Information

Valera Pharmaceuticals files annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission (the SEC). You may read and copy any document we file with the SEC at the SECs public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at
1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including Valera
Pharmaceuticals) file electronically with the SEC. Valera Pharmaceuticals electronic SEC filings are available to the public at the SECs internet site,www.sec.gov.

Valera Pharmaceuticals internet site is www.valerapharma.com. You can access Valera Pharmaceuticals Investor Relations webpage through
our internet site, by clicking on the Corporate Information link to the heading Investors. You can also access our Investor Relations webpage directly at www.valerapharma.com/investors.asp. Valera Pharmaceuticals makes
available free of charge, on or through our Investor Relations webpage, its proxy statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to
the Securities Exchange Act of 1934, as amended (the Exchange Act), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Valera Pharmaceuticals also makes available, through our
Investor Relations webpage, via a link to the SECs internet site, statements of beneficial ownership of Valera Pharmaceuticals equity securities filed by its directors, officers, 10% or greater shareholders and others under
Section 16 of the Exchange Act.

Valera Pharmaceuticals has a webpage with its Corporate Code of Business Conduct and Ethics and
certain Corporate Governance information. You can access this information on Valera Pharmaceuticals webpage through our internet site, by clicking on the Corporate Information link to the heading Investors. You can also
access our Investor Relations webpage directly at www.valerapharma.com/investors.asp. We will post any amendments to the Code of Business Conduct and Ethics, and any waivers that are required to be disclosed by the rules of either the SEC or
The NASDAQ Global Market, on our internet site.

You can request a copy of these documents, excluding exhibits, at no cost, by contacting
Investor Relations, 7 Clarke Drive, Cranbury, NJ 08512 or (609-235-3000). The information on Valera Pharmaceuticals internet site is not incorporated by reference into this report.



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|Item 1A. | Risk Factors
|-------- | ------------

You should carefully consider the risk factors described below and all
other information contained in this Form 10-K, including our historical financial statements and related notes and schedule, before you decide to invest in our common stock. If any of the following risk factors actually occur, our business,
financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose part or all of your investment.

In addition, you should carefully consider the risk factors relating to the proposed merger between us and Indevus that are described in the Joint
Proxy Statement/Prospectus filed by Indevus Pharmaceuticals with the SEC on January 29, 2007.

Risks Related to Our Business

We are largely dependent on the success of Vantas, our first product to be approved for commercial sale by the FDA, and we cannot be certain that we
will be able to successfully expand the commercialization of Vantas.

We have invested and will invest a significant portion of our
time and resources in the commercialization of Vantas, which was approved for commercial use by the FDA in October 2004. The commercial success of Vantas is dependent on many factors, including building and maintaining a focused sales force,
effectively managing our co-promotion relationship with Indevus Pharmaceuticals, generating commercial sales, gaining acceptance of Vantas by patients and the medical community, and obtaining reimbursement from third party payors. All of our net
product sales to date have been generated solely from sales of Vantas. Until our product candidates are approved for commercial use, our most significant source of revenue will be sales of Vantas. If we are unable to successfully expand the
commercialization of Vantas, we may be required to cease or reduce our commercial and manufacturing operations.

We have a history of
operating losses and may not achieve or sustain profitability.

The extent of our future operating losses or profits is highly
uncertain, and we may not achieve or sustain profitability. Our product development and clinical activities will require significant continuing expenditures. Vantas is our only product that has been approved for commercial use by the FDA and that
may generate any significant revenues. From our inception through December 31, 2006 we have incurred annual operating losses, and as of December 31, 2006, we had an accumulated deficit of approximately $53.6 million. The majority of the
deficit is attributable to research and development expenditures of $33.2 million, primarily for Vantas and Supprelin-LA. We may incur additional operating losses, as we continue our product development and clinical research, and acquire or
in-license other pharmaceutical products. Although we expect our net product sales, together with borrowings under our line of credit and the proceeds from our initial public offering, to fund these expenses, we may not generate sufficient revenue
from sales of Vantas to meet all of our expenses.

We are dependent on single suppliers for certain services and raw materials,
including histrelin, that are necessary for the manufacture of our products. If any of these suppliers fail or are unable to perform in a timely and satisfactory manner, we may be unable to manufacture Vantas or some of our product candidates, which
could delay sales of Vantas and hinder research and development of our product candidates.

We currently rely on single suppliers
for histrelin, the active ingredient in Vantas and Supprelin-LA, for valrubicin, the active ingredient in Valstar, for our implantation devices and for sterilization services for our implants, including Vantas. We currently have no written
agreements with certain of these suppliers. Although we have identified alternate sources for certain raw materials and services, these raw materials and services may not be immediately available to us. Further, even if these alternative raw
materials are immediately available, they must first meet our internal specifications. Consequently, if any of our suppliers are unable or unwilling to supply us with these raw materials in sufficient quantities with the correct specifications, or
provide services on commercially acceptable terms, we may not be able to manufacture Vantas or our product candidates in a timely manner or at all, which could delay the production or sale of Vantas and hinder the research and development of some of
our product candidates. Our inability to obtain these raw materials and services for the manufacture of our implants may force us to cease or reduce operations.



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We have previously experienced disruptions in our manufacturing of Vantas due to issues caused by
our supply of histrelin, the active ingredient in Vantas, including a manufacturing disruption during the second and third quarters of 2005 that caused a material decrease in our sales for the third quarter of 2005 and may have an adverse impact on
our sales of Vantas in the future and may have resulted in fewer re-implantations in 2006. Further interruptions in our manufacturing process for Vantas or our product candidates may have an adverse impact on our sales of Vantas and the development
of our product candidates in the future.

We have experienced two separate disruptions in our manufacturing of Vantas due to issues
caused by our supply of histrelin, the active ingredient in Vantas. In the fourth quarter of 2004, we experienced difficulties processing histrelin in its raw, powder form. These difficulties delayed the manufacturing of Vantas for several weeks as
our supplier reformulated the histrelin. In the second and third quarters of 2005, we experienced an issue with the histrelin used to produce five lots of Vantas. This issue, which was caused by the method by which our supplier formulated the
histrelin, ultimately resulted in these five lots not meeting certain quality control specifications and caused a delay in production of approximately six weeks. We have resolved each of these issues and have developed additional specifications with
our supplier of histrelin in an effort to ensure a more consistent supply of histrelin that meets our needs. However, the disruption we experienced in the second and third quarters of 2005 directly impacted our supply of Vantas in the third quarter
of 2005 by limiting the amount of finished product available for sale in the quarter to three lots, or approximately 2,400 units. Our third quarter sales were 1,747 units, which was less than our sales in the first and second quarters of 2005, in
which we sold 2,925 units and 3,974 units, respectively.

The interruption in our supply of Vantas in the second and third quarters of 2005
may have an adverse effect on our ability to sell Vantas in the future. In fact, sales of Vantas were lower in the third quarter of 2006 as compared to the other quarters of 2006, in part because of the disruption experienced in 2005 and the
resulting lack of implanted patients that returned for a re-implant in 2006. The lack of supply during that period may continue to have an adverse impact on our future sales because physicians may have elected to use alternative treatments during
this time frame or may, as a result of this interruption, permanently switch to another product. Additionally, in the future, we may experience other disruptions in our manufacturing process for Vantas or our product candidates. Any disruptions we
may experience may adversely impact sales of Vantas or the development of our product candidates.

The successful commercialization
of Vantas and any other products we develop will depend on obtaining reimbursement at adequate levels from private health insurers and Medicare/Medicaid for patient use of these products. We expect the reimbursement levels for Vantas to continue to
decline, which will have an adverse effect on our net product sales.

Sales of pharmaceutical products largely depend on the
reimbursement of patients medical expenses by government healthcare programs, such as Medicare and Medicaid, and private health insurers. These third party payors control healthcare costs by limiting both coverage and the level of
reimbursement for healthcare products. Third party payors are increasingly challenging the price and examining the cost effectiveness of medical products and services and altering reimbursement levels. The levels at which government authorities and
private health insurers reimburse physicians or patients for the price they pay for Vantas and other products we may develop could affect the extent to which we are able to commercialize these products.

Vantas is currently eligible for insurance reimbursement coverage. Sales of Vantas in the first half of 2005 were supported, in part, by favorable
Medicare reimbursement rates, which decreased at the beginning of the third quarter of 2005. The favorable reimbursement rates we experienced in the first half of 2005 were due to the fact that Vantas was a new product that did not yet have an
established average selling price, or ASP. As a result, Vantas was reimbursed at wholesale acquisition price, which is typically higher than ASP. Vantas received an established ASP effective July 2005, which has resulted in declining reimbursement
rates for Vantas.

We expect future Medicare reimbursement levels to continue to decline, which will have an adverse effect on our net
product sales. Reimbursement levels are currently set by the twenty three Medicare carriers in the United States which, in the aggregate, cover all fifty states. Certain Medicare carriers have a policy which sets the reimbursement rate for Vantas
based on our ASP. Other Medicare carriers have a policy that applies the least costly alternative, or LCA, methodology to Vantas. LCA is a payment methodology that allows Medicare carriers to pay the same reimbursement for drugs that have been
determined by Medicare to be medically equivalent. Vantas is currently the least costly alternative in the class of LHRH drugs. Further, certain Medicare carriers have a policy which segregates twelve-month products from all other
dosages, including one, three, four and six month injectable products, and reimburses at different rates for these two groups of products, or a split policy. Finally, there are some Medicare carriers which state they have a policy which reimburses
on an ASP or LCA methodology, but which we believe make payments based upon a split policy.



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We are devoting internal and external resources to determine the impact and fairness of these various
policies. In the states where certain Medicare carriers have adopted a split policy, in writing or in practice, we are at an economic disadvantage to the injectable products which are reimbursed at higher annual rates. While we are challenging the
basis for these reimbursement policies with the Medicare carriers, there is no guarantee that our challenge will be successful.

Significant uncertainty generally exists as to the reimbursement status of newly approved healthcare products. Our ability to achieve acceptable levels of reimbursement for product candidates will affect our ability to successfully
commercialize, and attract collaborative partners to invest in the development of, our product candidates. Reimbursement may not be available for Vantas or any other products that we develop and reimbursement or coverage levels may reduce the demand
for, or the price of, Vantas or any other products that we may develop. If we cannot maintain coverage for Vantas and obtain adequate reimbursement for other products we develop, the market for those products may be limited.

In both the United States and certain foreign jurisdictions, there have been a number of legislative and regulatory proposals in recent years to change
the healthcare system in ways that could impact our ability to profitably sell Vantas and any other products that we develop. These proposals include prescription drug benefit proposals for Medicare beneficiaries and measures that would limit or
prohibit payments for certain medical treatments or subject the pricing of drugs to government control. Legislation creating a prescription drug benefit and making certain changes in Medicaid reimbursement has been enacted by Congress and signed by
the President. Additionally, Medicare regulations implementing the prescription drug benefit became effective as of January 1, 2006. These and other regulatory and legislative changes or proposals may affect our ability to raise capital, obtain
additional collaborators and market Vantas and any other products that we may develop. In addition, in many foreign countries, particularly Canada and the countries of the European Union, the pricing of prescription drugs is subject to government
control. If our products are or become subject to government regulation that limits or prohibits payment for our products, or that subject the price of our products to governmental control, our ability to sell Vantas and other products we develop in
commercially acceptable quantities at profitable prices may be harmed.

As a manufacturer of our products, we are subject to
regulatory requirements. If we do not comply with such requirements, the development and sales of our products and our financial performance may be materially harmed.

Pharmaceutical products are required to be manufactured under regulations known as current good manufacturing practice, or cGMP. Before commercializing a
new product, manufacturers must demonstrate compliance with the applicable cGMP regulations, which include quality control and quality assurance requirements, as well as the maintenance of extensive records and documentation. Manufacturing
facilities are subject to ongoing periodic inspection by the FDA and corresponding foreign and state authorities, including unannounced inspections, and must be licensed before they can be used in commercial manufacturing for products generated
through the use of their technology. In addition, cGMP requirements are constantly evolving, and new or different requirements may apply in the future. After regulatory approvals are obtained, the subsequent discovery of previously unknown problems
or the failure to maintain compliance with existing or new regulatory requirements may result in restrictions on the marketing of a product, withdrawal of the product from the market, seizures, the shutdown of manufacturing facilities, injunctions,
monetary fines and civil or criminal sanctions.

We may also encounter problems with the following:



| |  |  | production yields;
| | - |  | ------------------



| |  |  | raw materials;
| | - |  | --------------



| |  |  | shortages of qualified personnel;
| | - |  | ---------------------------------



| |  |  | compliance with FDA regulations, including the demonstration of purity and potency;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | changes in FDA requirements;
| | - |  | ----------------------------



| |  |  | controlling production costs; and
| | - |  | ---------------------------------



| |  |  | development of advanced manufacturing techniques and process controls.
| | - |  | ----------------------------------------------------------------------



30



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In addition, we are required to register our manufacturing facilities with the FDA and other regulatory
authorities. The facilities are subject to inspections confirming compliance with cGMP or other regulations. If we fail to maintain regulatory compliance, the FDA can impose regulatory sanctions including, among other things, refusal to approve a
pending application for a new drug product, or revocation of pre-existing approval for a product, such as Vantas, which would eliminate our sole source of revenue.

We may not be able to manufacture the Valstar® (valrubicin) product or realize a return on our investment in this product candidate.

We
have acquired from Anthra Pharmaceuticals, Inc. certain assets associated with its valrubicin product for the treatment of bladder cancer, including the NDA filed with the FDA and the right to sell the product in the United States and Canada. This
product was withdrawn from the market in 2002 due to a manufacturing problem. We may not realize a return on our investment in such assets due to risks related to the lack of intellectual property protection and potential manufacturing difficulties.
Even though the FDA has agreed to our reintroduction plan, there is no assurance that the FDA will ultimately approve the re-launch of Valstar or we will be able to successfully implement the re-introduction plan. Further, we will not have exclusive
rights with respect to the sale of the valrubicin product, because the product is not covered by any patents or orphan drug exclusivity. As a result, competitors may compete with us by, among other things, introducing a generic version of the
product or a similar product that contains the active ingredient, valrubicin.

Although we believe that we have identified the cause of the
previous manufacturing problem and that we will be able to correct it, there can be no assurance that we will be able to correct the problem or that there will not be manufacturing problems in the future. Even if we establish an acceptable
manufacturing protocol, our third-party manufacturers may be unable to manufacture the product in sufficient quantities with the correct specifications or in compliance with cGMP or other applicable regulatory requirements. As a result of these
risks, we may be unable to realize a return on our investment in this product.

We have limited sales, marketing and distribution
experience and may be unable to successfully commercialize our products.

We have limited experience in marketing, selling, and
distributing our products in the United States and abroad. To achieve commercial success, we must build on our current marketing and sales force or contract with other parties, including collaborators, to perform these services for us. In fact, in
December 2006 we entered into a co-promotion agreement with Indevus Pharmaceuticals under which Indevus will co-promote Vantas in the United States. Any revenues that we may receive from this co-promotion or other arrangements will depend on the
efforts of Indevus Pharmaceuticals or other third parties which may not be successful and are only partially within our control. We will be competing with companies that have experienced and well-funded marketing and sales operations. Many of our
competitors have been marketing their products for many years longer than we have been marketing Vantas. The failure to adequately sell and distribute Vantas or our product candidates, if approved, could impair our net product sales, cash flows from
operations and our cash position.

We may not be able to obtain additional capital that may be necessary for growth and market
penetration or to continue our operations.

We believe that the net proceeds we received from our initial public offering, together
with cash generated from future sales of Vantas, and our line of credit will be sufficient to meet our projected operating requirements for at least the next 12 months. However, we may need to raise additional funds through public or private debt or
equity financings in order to acquire new products or product candidates, significantly expand our sales and marketing capabilities, expand our manufacturing capacity, develop product candidates, obtain FDA approval of our product candidates and
continue our commercial growth. Any additional equity financings may be on terms that are dilutive or potentially dilutive to our stockholders. Any debt financing we enter into may involve incurring significant interest expense and include covenants
that restrict our operations. If we raise additional funds through collaborations and licensing arrangements, it may be necessary to relinquish some rights to our technologies, product candidates or products, or grant licenses on terms that are not
favorable to us. Our ability to raise additional funds will depend on financial, economic and market conditions and other factors, many of which are beyond our control. We may not be able to obtain financing on terms acceptable to us or at all. If
financing is insufficient or unavailable, we will have to modify our growth and marketing strategies and scale back operations by delaying, reducing the scope of, or eliminating one or more of our planned development, commercialization or expansion
activities. This may negatively affect our ability to expand our commercialization of Vantas and develop and bring new products to market, which could have a material adverse effect on our business, financial condition and results of operations.

Our future capital requirements may be significantly greater than we expect and depend on many factors, including:



31



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| |  |  | costs associated with conducting pre-clinical and clinical testing;
| | - |  | -------------------------------------------------------------------



| |  |  | costs associated with commercializing Vantas and other products we may develop, including expanding sales and marketing functions; for example, in connection with
Supprelin-LA, we expect to increase our sales force;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | costs of establishing arrangements for manufacturing;
| | - |  | -----------------------------------------------------



| |  |  | costs of acquiring new pharmaceutical products and drug delivery systems;
| | - |  | -------------------------------------------------------------------------



| |  |  | payments required under our current and any future license agreements and collaborations; for example, we are required to make certain royalty and co-promotion
payments, which are tied to sales of Vantas;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | costs, timing and outcome of regulatory reviews;
| | - |  | ------------------------------------------------



| |  |  | costs of obtaining, maintaining and defending patents on proprietary technology; and
| | - |  | ------------------------------------------------------------------------------------



| |  |  | costs of increased general and administrative expenses.
| | - |  | -------------------------------------------------------

As of December 31, 2006, the cumulative amount of royalty expense incurred by us as a result of sales of Vantas was approximately $2.5 million.

If products utilizing our technology fail to gain market acceptance, we may be unable to generate significant revenue.

Even if clinical trials demonstrate the safety and efficacy of products developed utilizing our technology and all regulatory approvals are obtained, such
products may not gain market acceptance among physicians, patients, third party payors or the medical community. The current method of administration for our product candidates in late-stage development is implantation, which may be less well
received by some patients than injection therapy. The degree of market acceptance of any product employing our technology will depend on a number of factors, including:



| |  |  | establishment and demonstration of clinical efficacy and safety;
| | - |  | ----------------------------------------------------------------



| |  |  | cost-effectiveness;
| | - |  | -------------------



| |  |  | adequate reimbursement by third parties;
| | - |  | ----------------------------------------



| |  |  | relative convenience and ease of administration;
| | - |  | ------------------------------------------------



| |  |  | timing of market introduction of competitive products;
| | - |  | ------------------------------------------------------



| |  |  | alternative treatment methods, for example, injections and oral formulations; and
| | - |  | ---------------------------------------------------------------------------------



| |  |  | marketing and distribution support.
| | - |  | -----------------------------------

If our products do not achieve significant market acceptance, we may be unable to generate significant revenue, which could have a material adverse effect on our business, cash flows and results of operations.

Our failure to recruit, retain, and motivate qualified management and scientific personnel could adversely affect us.

We have a small number of employees and are dependent on certain executive officers and scientific personnel, including David S. Tierney, M.D., our
President and Chief Executive Officer, Petr F. Kuzma, Vice President of Research and Development, Matthew L. Rue, III, Vice President of Marketing and Commercial Development, and Kevin Pelin, Vice President of Manufacturing Operations. The loss of
the services of any member of our senior management, scientific or technical staff may significantly delay or prevent the achievement of drug development and other business objectives, and could have a material adverse effect on our business,
financial condition and results of operations. We may not be able to recruit and retain qualified personnel in the future due to intense competition for personnel among pharmaceutical businesses, and our failure to do so could delay or curtail our
product development



32



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efforts, impair our ability to execute our business strategy and adversely affect us. We have not purchased any key man life insurance for any of our
employees.

We also utilize consultants and advisors to assist us with research and development. All of our consultants and advisors are
either self-employed or employed by other organizations, and they may have conflicts of interest or other commitments, such as consulting or advisory contracts with other organizations, that may affect their ability to contribute to us, which could
have a material adverse effect on our business, financial condition and results of operations.

We face substantial competition and
our competitors may discover, develop or commercialize products similar to ours before or more successfully than we do.

The
biotechnology and pharmaceutical industries are very competitive. We compete against all pharmaceutical companies that manufacture or market LHRH agonist products. We also compete against biotechnology companies, universities, government agencies,
and other research institutions in the development of urological and endocrine products, technologies and processes that are, or in the future may be, the basis for competitive commercial products.

In particular, we compete against the following LHRH agonist products for the palliative treatment of advanced prostate cancer: TAP Pharmaceutical
Products Lupron and Sanofi-Aventis Eligard, both multiple injection formulations that deliver leuprolide; Watson Pharmaceuticals Trelstar, a multiple injection formulation that delivers triptorelin; AstraZenecas Zoladex, a
biodegradable rod that delivers goserelin for up to three months; and Bayer Pharmaceuticals Viadur, a rigid metal implant that releases leuprolide over a 12-month period. With respect to our Supprelin-LA product in late-stage development for
the treatment of CPP, our competitor is TAP Pharmaceutical Products Lupron Depot-PED and with regard to VP003, our octreotide implant for acromegaly, our competitors include Novartis Sandostatin injections and Sandostatin LAR Depots and
Pfizers Somavert.

Many of our competitors have substantially greater financial and other resources, larger research and development
staffs and more experience developing products, obtaining FDA and other regulatory approvals and manufacturing and marketing products.In addition, many of our competitors devote significant resources to challenging the marketing policies of
other developers of pharmaceutical products. Consequently, competition for the development and marketing of urological and endocrine pharmaceutical products is intense and is expected to increase. For example, in the past we have received
communications from Bayer Pharmaceuticals regarding our sales and marketing techniques for Vantas. Our practice has been to review these communications with counsel to determine whether any remedial or corrective action needs to be made. These
communications have not resulted in any notice of violations or other action by any government authority or agency.

Our competitors may
discover, develop or commercialize products similar to ours before or more successfully than we do and may compete with us in establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies and
technology licenses complementary to our programs or advantageous to our business. In addition, there may be product candidates of which we are not aware at an earlier stage of development that may compete with our product candidates. If any of them
are successfully developed and approved, they could compete directly with our product candidates. This could result in reduced sales and pricing pressure on any similar products that we develop, which in turn would reduce our ability to generate
revenue and could have a material adverse effect on our net product sales, gross margin and cash flows from operations.

Our sales of
Vantas and any other products we may develop could suffer from competition by generic products.

Although we have proprietary
protection for Vantas and other products we are developing, we could face competition from generic substitutes of these products if generics are developed by other companies and approved by the FDA. Because generic manufacturers are not exposed to
development risks for such generic substitutes, these manufacturers can capture market share by selling generic products at lower prices, which can reduce the market share held by the original product. Competition from the sale of generic products
may cause a decrease in our selling price or units sold, and could have a material adverse effect on our net product sales, gross margin and cash flows from operations.

We face a risk of product liability claims and may not be able to obtain adequate insurance.

Our business exposes us to potential liability risks that may arise from the clinical testing of our product candidates and the manufacture and sale of Vantas and other products that we may develop. Plaintiffs have received substantial
damage awards in some jurisdictions against pharmaceutical companies based upon claims for injuries allegedly caused by the use of their products. Such liability claims may be expensive to defend and may result in large judgments against us.
Although we have liability insurance with a



33



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coverage limit of $10 million, our insurance may not reimburse us, or this coverage may not be sufficient to cover claims that may be made against us. In
addition, if we are no longer able to maintain this coverage or have to obtain additional coverage, we may not be able to obtain liability insurance on acceptable terms or at all. Whether or not we are ultimately successful in any product liability
litigation, such litigation could consume substantial amounts of our financial and managerial resources and could result in:



| |  |  | significant awards against us;
| | - |  | ------------------------------



| |  |  | substantial litigation costs;
| | - |  | -----------------------------



| |  |  | recall of the product;
| | - |  | ----------------------



| |  |  | injury to our reputation; and
| | - |  | -----------------------------



| |  |  | withdrawal of clinical trial participants;
| | - |  | ------------------------------------------

all of
which could have a material adverse effect on our business, financial condition and results of operations.

The approved drugs used
in Vantas and our product candidates, as well as the implant itself, may cause side effects and we may not be able to achieve an acceptable level of side effect risks, compared to the potential therapeutic benefits, for our product candidates.

The active compound in Vantas and each of our product candidates has been approved by the FDA for the treatment of the conditions,
diseases and disorders that we are seeking to treat. Each of these compounds, as well as the implant itself and other delivery methods, is associated with certain side effects. Although we have not experienced any difficulties with the side effects
profile of Vantas, the implant or our product candidates to date, the side effects of the approved drugs in our product candidates may be acceptable when a drug is used in its approved dosage to achieve a therapeutic benefit for its currently
approved indications, but the side effect risk compared to the therapeutic benefit may not be acceptable when used for the intended indications for the product candidate. Side effects of the approved drugs, the implant or the combination of these
elements, could prevent successful development and commercialization of some or all of our product candidates.

Further, the development of
a product candidate could be adversely affected by safety or efficacy issues that subsequently arise regarding use of the approved drug, similar drugs or the implant or other delivery methods. We could be forced to abandon a product candidate or an
approved product, such as Vantas, due to adverse side effects from long-term or other use of the implant or other delivery methods or the active pharmaceutical ingredients in the product candidate or product.

Risks Related to Clinical Trials and Other Regulatory Matters

If our clinical trials are unsuccessful or significantly delayed, or if we do not complete our clinical trials, we may not be able to commercialize our product candidates.

We must provide the FDA and similar foreign regulatory authorities with pre-clinical and clinical data to demonstrate that our product candidates are safe
and effective for each indication before they can be approved for commercialization. The pre-clinical testing and clinical trials of any product candidates that we develop must comply with the regulations of numerous federal, state and local
government authorities in the United States, principally the FDA, and by similar agencies in other countries. Clinical development is a long, expensive and uncertain process and is subject to delays. We may encounter delays or rejections for various
reasons, including our inability to enroll enough patients to complete our clinical trials.

We have various products at various stages of
development. It may take several years to complete the testing of a product candidate, and failure can occur at any stage of development, for many reasons, including:



| |  |  | interim results of pre-clinical or clinical studies do not necessarily predict their final results, and acceptable results in early studies might not be seen in
later studies;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | product candidates that appear promising at early stages of development may ultimately fail because the products may be ineffective, may be less effective than
competitors products or may cause harmful side effects;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | any pre-clinical or clinical test may fail to produce results satisfactory to the FDA or foreign regulatory authorities;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | pre-clinical or clinical data can be interpreted in different ways, which could delay, limit or prevent regulatory approval;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | negative or inconclusive results from a pre-clinical study or clinical trial or adverse medical events during a clinical trial could cause a pre-clinical study or
clinical trial to be repeated or a program to be terminated, even if other studies or trials relating to the program are successful;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the FDA can place a clinical hold on a trial if, among other reasons, it finds that patients enrolled in the trial are or would be exposed to an unreasonable and
significant risk of illness or injury;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may encounter delays or rejections based on changes in regulatory agency policies during the period in which we are developing a product candidate or the period
required for review of any application for regulatory agency approval;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our clinical trials may not demonstrate the safety and efficacy of any product candidates or result in marketable products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | the FDA may change its approval policies or adopt new regulations that may negatively affect or delay our ability to bring a product candidate to market; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a product candidate may not be approved for all the indications which we request.
| | - |  | ---------------------------------------------------------------------------------

The development and approval process may take many years, require substantial resources and may never lead to the approval of a product. With the
exception of Vantas, we do not have, and may never obtain, the regulatory approvals we need to market our product candidates. Our failure to obtain, or delays in obtaining, regulatory approvals would have a material adverse effect on our business,
financial condition and results of operations.

Product candidates are subject to extensive and rigorous government regulation by
the FDA, other regulatory agencies, and their respective foreign equivalents. The FDA regulates the research, development, pre-clinical and clinical testing, manufacture, safety, effectiveness, record keeping, reporting, labeling, storage, approval,
advertising, promotion, sale, distribution, import and export of pharmaceutical products. Any of our products marketed abroad will also be subject to extensive regulation by foreign governments, whether or not we have obtained FDA approval for a
given product and its uses.

Government regulation substantially increases the cost of researching, developing, manufacturing and selling
pharmaceutical products. The regulatory review and approval process, which includes pre-clinical testing and clinical trials of each product candidate, is lengthy, expensive and uncertain. We must obtain regulatory approval for each product we
intend to market, and the manufacturing facilities used for the products must be inspected and meet legal requirements. Securing regulatory approval requires the submission of extensive pre-clinical and clinical data and other supporting information
for each proposed therapeutic indication in order to establish the products safety, efficacy, potency and purity for each intended use. Moreover, approval policies or regulations may change. We will not be able to commercialize our product
candidates until we obtain FDA approval in the United States or approval by comparable authorities in other countries. The development and approval process takes many years, requires substantial resources and may never lead to the approval of a
product. In October 2004, we received FDA approval for the commercial sale of Vantas in the United States. In November 2005, we received approval to market Vantas in Denmark. In March 2006, we received approval to market Vantas in Canada. Failure to
obtain, or delays in obtaining, regulatory approvals may:



| |  |  | adversely affect the commercialization of any products that we develop;
| | - |  | -----------------------------------------------------------------------



| |  |  | impose additional costs on us;
| | - |  | ------------------------------



| |  |  | diminish any competitive advantages that we may attain; and
| | - |  | -----------------------------------------------------------



| |  |  | adversely affect our receipt of revenues or royalties.
| | - |  | ------------------------------------------------------



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Even if we receive regulatory approval for our product candidates, our approval may be limited and,
we will be subject to significant ongoing regulatory obligations and oversight.

Even if we are able to obtain regulatory approval
for a particular product, the approval may limit the indicated uses for the product, may otherwise limit our sales practices and our ability to promote, sell and distribute the product, may require that we conduct costly post-marketing surveillance
and may require that we conduct ongoing post-marketing studies. Material changes to an approved product, such as manufacturing changes or revised labeling, may require further regulatory review and approval. Once obtained, any approvals may be
withdrawn for a number of reasons, including the later discovery of previously unknown problems with the product. If we or our contract manufacturers fail to comply with applicable regulatory requirements at any stage during the regulatory process,
such noncompliance could result in:



| |  |  | refusals or delays in the approval of applications or supplements to approved applications;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | refusal of a regulatory authority, including the FDA, to review pending market approval applications or supplements to approved applications;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | warning letters;
| | - |  | ----------------



| |  |  | fines;
| | - |  | ------



| |  |  | import or export restrictions;
| | - |  | ------------------------------



| |  |  | product recalls or seizures;
| | - |  | ----------------------------



| |  |  | injunctions;
| | - |  | ------------



| |  |  | total or partial suspension of clinical trials or production;
| | - |  | -------------------------------------------------------------



| |  |  | civil penalties;
| | - |  | ----------------



| |  |  | withdrawals of previously approved marketing applications or licenses;
| | - |  | ----------------------------------------------------------------------



| |  |  | recommendations by the FDA or other regulatory authorities against entering into governmental contracts with us; or
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | criminal prosecutions.
| | - |  | ----------------------

The
regulatory approval process outside the United States varies depending on foreign regulatory requirements, and failure to obtain regulatory approval in foreign jurisdictions would prevent the marketing of our products in those jurisdictions.

We intend to also market our products outside of the United States. For example, we have executed agreements to license Vantas in
Canada, Europe, South Africa, Asia and Argentina. To market our products in the European Union and many other foreign jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. Approval
of a product by the comparable regulatory authorities of foreign countries must still be obtained prior to manufacturing or marketing that product in those countries. The approval procedure varies among countries and can involve additional testing,
and the time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process includes all of the risks associated with obtaining FDA approval set forth above, and approval by the FDA does not
ensure approval by the regulatory authorities of any other country, nor does the approval by foreign regulatory authorities in one country ensure approval by regulatory authorities in other foreign countries or the FDA. We may not be able to file
for regulatory approvals and may not receive necessary approvals to commercialize our products in any foreign market. If we fail to comply with these regulatory requirements or obtain and maintain required approvals, our target market will be
reduced and our ability to generate revenue from abroad will be adversely affected.



36



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We rely on third parties to conduct certain of the clinical trials for our product candidates, and
if they do not perform their obligations to us, we may not be able to obtain regulatory approvals for our product candidates.

We
design the clinical trials for our product candidates, but we rely on academic institutions, corporate partners, contract research organizations and other third parties to assist us in managing, monitoring and otherwise carrying out these trials.
Accordingly, we may have less control over the timing and other aspects of these clinical trials than if we conducted them entirely on our own. Although we rely on these third parties to manage the data from these clinical trials, we are responsible
for confirming that each of our clinical trials is conducted in accordance with its general investigational plan and protocol. Moreover, FDA and foreign regulatory agencies require us to comply with regulations and standards, commonly referred to as
good clinical practice, for conducting, recording and reporting the results of clinical trials to assure that the data and results are credible and accurate and that the trial participants are adequately protected. Our reliance on third parties does
not relieve us of these responsibilities and requirements, and we may fail to obtain regulatory approval for our product candidates, if these requirements are not met.

Risks Related to Intellectual Property

Our success depends on the protection of our
intellectual property rights, and our failure to secure these rights would materially harm our business.

We will be able to protect
our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. We protect our proprietary position by filing
United States and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. We may not be able to obtain patent protection for our pending patent
applications, those we may file in the future, or those we may license from third parties. Moreover, patents issued or that may be issued or licensed may not be enforceable or valid or may expire prior to the commercialization of our product
candidates. The patent position of a pharmaceutical company involves complex legal and factual questions and, therefore, enforceability or validity cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or
circumvented. Thus, any patents that we own or license from third parties may not provide sufficient protection against our competitors. Also, patent rights may not provide us with proprietary protection or competitive advantages against competitors
with similar technology. Further, the laws of foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States.

If we are unable to protect the confidentiality of our proprietary information and know-how, our competitive position would be impaired and our business could be adversely affected.

In addition to patent protection, we also rely on the protection of trade secrets, know-how and confidential and proprietary information. To maintain the
confidentiality of trade secrets and proprietary information, we have entered into confidentiality agreements with our employees, consultants and collaborators upon the commencement of their relationships with us. These agreements require that all
confidential information developed by the individual or made known to the individual by us during the course of the individuals relationship with us be kept confidential and not disclosed to third parties. Our agreements with employees also
provide that inventions conceived by the individual in the course of rendering services to us shall be our exclusive property. However, we may not obtain these agreements in all circumstances, and individuals with whom we have these agreements may
not comply with the terms of these agreements. In the event of unauthorized use or disclosure of their trade secrets or proprietary information, these agreements, even if obtained, may not provide meaningful protection for our trade secrets or other
confidential information. Further, to the extent that our employees, consultants or contractors use technology or know-how owned by others in their work for us, disputes may arise as to the rights in related inventions.

Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information. The disclosure of our trade secrets would
impair our competitive position and could harm our business.

Our commercial success depends significantly on our ability to operate
without infringing the patents and other proprietary rights of third parties.

Others may obtain patents that could limit our
ability to use, import, manufacture, market or sell products or impair our competitive position. No patent can protect its holder from a claim of infringement of another patent. Therefore, our patent position cannot and does not provide any
assurance that the commercialization of our products would not infringe the patent rights of another. In the event our technologies infringe or violate the proprietary rights of third parties, we may be prevented from pursuing the



37



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development, manufacturing or commercialization of our products that utilize such technologies. While we know of no actual or threatened claim of
infringement that would be material to us, there can be no assurance that such a claim will not be asserted. If such a claim is asserted, the resolution of the claim may not permit us to continue marketing the relevant product, such as Vantas, on
commercially reasonable terms, if at all.

Protecting our intellectual property is expensive and time consuming and could harm our
business.

Third parties may challenge the validity of our patents and other intellectual property rights, resulting in costly
litigation or other time-consuming and expensive proceedings, which could deprive us of valuable rights. If we become involved in any intellectual property litigation, interference or other judicial or administrative proceedings, we will incur
substantial expenses and the diversion of financial resources and technical and management personnel. An adverse determination may subject us to significant liabilities or require us to seek licenses that may not be available from third parties on
commercially favorable terms, if at all. Further, if such claims are proven valid, through litigation or otherwise, we may be required to pay substantial financial damages, which can be tripled if the infringement is deemed willful, or be required
to discontinue or significantly delay development, marketing, selling and licensing of the affected products and intellectual property rights. In addition, an adverse determination in a proceeding involving our owned or licensed intellectual
property may allow entry of generic substitutes for our products.

Risks Related to Our Common Stock

The trading price of the shares of our common stock could be highly volatile.

The trading price of the shares of our common stock could be highly volatile in response to various factors, many of which are beyond our control,
including:



| |  |  | developments concerning Vantas or any of our product candidates;
| | - |  | ----------------------------------------------------------------



| |  |  | announcements of technological innovations by us or our competitors;
| | - |  | --------------------------------------------------------------------



| |  |  | new products introduced or announced by us or our competitors;
| | - |  | --------------------------------------------------------------



| |  |  | changes in reimbursement levels;
| | - |  | --------------------------------



| |  |  | changes in financial estimates by securities analysts;
| | - |  | ------------------------------------------------------



| |  |  | actual or anticipated variations in operating results;
| | - |  | ------------------------------------------------------



| |  |  | expiration or termination of licenses, research contracts or other collaboration agreements;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | conditions or trends in the regulatory climate and the biotechnology and pharmaceutical industries;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | intellectual property, product liability or other litigation against us;
| | - |  | ------------------------------------------------------------------------



| |  |  | our failure to consummate the proposed merger with Indevus Pharmaceuticals;
| | - |  | ---------------------------------------------------------------------------



| |  |  | changes in the market valuations of similar companies; and
| | - |  | ----------------------------------------------------------



| |  |  | sales of shares of our common stock, particularly sales by our officers, directors and significant stockholders.
| | - |  | ----------------------------------------------------------------------------------------------------------------

In addition, equity markets in general, and the market for biotechnology and life sciences companies in particular, have experienced substantial price
and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies traded in those markets. In addition, changes in economic conditions in the United States, Europe or globally, could impact upon our
ability to grow profitably. Adverse economic changes are outside our control and may result in material adverse impacts on our business or results. These broad market and industry factors may materially affect the market price of the shares,
regardless of our development and operating performance. In the past, following periods of volatility in the market price of a companys securities, securities class-action litigation has often been instituted against that company. Such
litigation, if instituted



38



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against us could cause us to incur substantial costs and divert managements attention and resources, which could have a material adverse effect on our
business, financial condition and results of operations.

The ownership interests of our officers, directors and largest stockholders
could conflict with the interests of our other stockholders.

Our directors, executive officers and holders of 5% or more of our
outstanding common stock beneficially own approximately 58% of our common stock as of December 31, 2006. As a result, these stockholders, acting together, are able to significantly influence all matters requiring approval by our stockholders,
including the election of directors and approval of mergers or other significant corporate transactions. For example, in connection with our proposed merger with Indevus, certain affiliated funds of Sanders Morris Harris, our largest stockholder,
and one other large stockholder of ours, entered into voting agreements with Indevus in which they have agreed to vote shares representing approximately 41% of our outstanding shares of common stock in favor of the merger. The interests of this
group of stockholders may not always coincide with our interests or the interests of other stockholders.

Our use of our initial
public offering proceeds may not yield a favorable return on your investment.

We have used a portion of the net proceeds from our
initial public offering to expand our sales and marketing capabilities, fund our research and development activities, expand our manufacturing capabilities, and for general corporate purposes, including the potential acquisition or in-license of
additional urological and endocrine products. We have used a portion of the net proceeds from our initial public offering to repay amounts outstanding under our line of credit. In addition, we may use a portion of the net proceeds to acquire
businesses, products or technologies that are complementary to our current or future business and product lines. Our management has broad discretion over how these proceeds are used and could spend the proceeds in ways with which you may not agree.
We also plan to invest the proceeds from our initial public offering. However, the proceeds may not be invested effectively or in a manner that yields a favorable or any return, and consequently, this could result in financial losses that could have
a material adverse effect on our business, cause the price of our common stock to decline and/or delay the development of our product candidates.

Our common stock has been publicly traded for a short time and an active trading market may not be sustained.

Although we are currently listed for trading on The NASDAQ Global Market, an active trading market for our common stock may not be sustained. An inactive market may impair your ability to sell shares of our common stock at the time you wish
to sell them or at a price that you consider reasonable. Furthermore, an inactive market may impair our ability to raise capital by selling additional shares and may impair our ability to acquire other businesses, products and technologies by using
our shares as consideration.

Delaware law and our amended and restated certificate of incorporation and amended and restated bylaws
contain provisions that could delay and discourage takeover attempts that stockholders may consider favorable.

Certain provisions
of our amended and restated certificate of incorporation, or certificate of incorporation, and amended and restated bylaws, or bylaws, and applicable provisions of Delaware corporate law may make it more difficult for or prevent a third party from
acquiring control of us or changing our board of directors and management. These provisions include:



| |  |  | the ability of our board of directors to issue preferred stock with voting or other rights or preferences;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | limitations on the ability of stockholders to amend our charter documents, including stockholder supermajority voting requirements;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | the inability of stockholders to act by written consent or to call special meetings;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | a classified board of directors with staggered three-year terms;
| | - |  | ----------------------------------------------------------------



| |  |  | requirements that special meetings of our stockholders may only be called by the chairman of our board of directors, our president, or upon a resolution adopted by,
or an affirmative vote of, a majority of our board of directors; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | advance notice procedures our stockholders must comply with in order to nominate candidates for election to our board of directors or to place stockholders
proposals on the agenda for consideration at meetings of stockholders.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



39



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We will also be afforded the protections of Section 203 of the Delaware General Corporation Law,
which will prevent us from engaging in a business combination with a person who acquires at least 15% of our common stock for a period of three years from the date such person acquired such common stock, unless board or stockholder approval were
obtained. Because our board of directors approved the Indevus merger and the agreements executed in connection with the merger, Section 203 will not apply to the merger if it is approved and becomes effective.

Any delay or prevention of a change of control transaction or changes in our board of directors or management could deter potential acquirers or prevent
the completion of a transaction in which our stockholders could receive a substantial premium over the then current market price for their shares.

Future sales of our common stock may depress our stock price.

Persons who were our stockholders prior to the sale of
shares in our initial public offering continue to hold a substantial number of shares of our common stock that they will be able to sell in the public market in the near future. Significant portions of these shares are held by a small number of
stockholders. Sales by our current stockholders of a substantial number of shares, or the expectation that such sales may occur, could significantly reduce the market price of our common stock. Moreover, the holders of approximately 9,406,271 shares
of our common stock as of January 1, 2007, will have rights, subject to certain conditions, to require us to file registration statements to permit the resale of their shares in the public market or to include their shares in registration
statements that we may file for ourselves or other stockholders.

Our quarterly financial results are likely to fluctuate
significantly because our sales prospects are uncertain and, as a result, our stock price may decline.

Our quarterly operating
results are difficult to predict and may fluctuate significantly from period to period. For example, as described above, less favorable reimbursement rates of Vantas became effective at the beginning of the third quarter of 2005, as the basis for
determining reimbursement rates switched from wholesale acquisition cost to the typically lower ASP. In addition, as described above, we anticipate that the number of states that provide reimbursement for Vantas under the Medicare program using the
LCA methodology will increase in future quarters, leading to a decline in our sales price for Vantas. The level of our revenues and results of operations at any given time will be based primarily on the following factors:



| |  |  | the effectiveness of our co-promotion relationship with Indevus;
| | - |  | ----------------------------------------------------------------



| |  |  | success of the commercialization of Vantas and any other product candidates that may be approved;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | our ability to license our implant technology
| | - |  | ---------------------------------------------



| |  |  | changes in our ability to obtain FDA approval for our product candidates;
| | - |  | -------------------------------------------------------------------------



| |  |  | results of our clinical trials;
| | - |  | -------------------------------



| |  |  | timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | regulatory approvals and legislative changes affecting the products we may offer or those of our competitors;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | our ability to establish, grow and maintain a productive sales force;
| | - |  | ---------------------------------------------------------------------



| |  |  | demand and pricing of Vantas and other products we may offer;
| | - |  | -------------------------------------------------------------



| |  |  | physician and patient acceptance of Vantas and other products we may offer;
| | - |  | ---------------------------------------------------------------------------



| |  |  | levels of third-party reimbursement for Vantas and other products we may offer;
| | - |  | -------------------------------------------------------------------------------



| |  |  | interruption in the manufacturing or distribution of Vantas and other products we may offer; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | the effect of competing technological and market developments.
| | - |  | --------------------------------------------------------------



40



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It will be difficult for us to forecast demand for Vantas and our product candidates that may be approved
with any degree of certainty, and therefore, our sales prospects are uncertain. In addition, we will be increasing our operating expenses as we expand our commercial capabilities. Accordingly, we may experience significant, unanticipated quarterly
losses. Because of these factors, our operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors, which could cause our stock price to decline significantly.

Risks Related to Our Potential Merger with Indevus Pharmaceuticals

The merger is subject to conditions to closing that could result in the merger being delayed or not consummated, which could negatively impact our stock price and future business and operations.

The merger is subject to conditions to closing as set forth in the merger agreement, including obtaining the requisite stockholder
approvals of Indevus and us and regulatory approvals of the transaction. If any of the conditions to the merger are not satisfied or, where permissible, not waived, the merger will not be consummated. Failure to consummate the merger could
negatively impact our stock price, future business and operations, and financial condition. Any delay in the consummation of the merger or any uncertainty about the consummation of the merger may adversely affect the future businesses, growth,
revenue and results of operations of either or both of the companies or the combined company.

Failure to complete the merger could
negatively impact the market price of our common stock and the future business and financial results of our Company.

If the merger
is not completed for any reason, our ongoing business may be adversely affected and will be subject to a number of risks, including:



| |  |  | we might have to pay Indevus a termination fee of $5.0 million, or we might be required to reimburse Indevus for up to $3.0 million of expenses relating to the
merger, such as legal, accounting, financial advisory and printing fees;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the inability to pursue other beneficial opportunities as a result of the focus of our management on the merger, without realizing any of the anticipated benefits
of completing the merger;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the market price of our common stock might decline to the extent that the current market price reflects a market assumption that the merger will be completed; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our unreimbursed costs incurred related to the merger, such as legal, accounting, financial advisory and printing fees, must be paid even if the merger is not
completed.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If the merger agreement is terminated and our board of directors seeks another merger or business
combination, our stockholders cannot be certain that we will be able to find a party willing to pay an equivalent or more attractive price than the price Indevus has agreed to pay in the merger.

We will incur substantial expenses whether or not the merger is completed.

We will incur substantial expenses related to the merger whether or not the merger is completed. These expenses would include legal, accounting, financial
advisory and printing fees. As of December 31, 2006, we have incurred approximately $0.8 million related to the merger transaction. Moreover, in the event the merger agreement is terminated, we may, under certain circumstances, be required to
pay Indevus a $5.0 million termination fee or reimburse out-of-pocket expenses of up to $3.0 million. Also, should the merger agreement be terminated due to a willful breach of the merger agreement by us, we could owe significant damages to
Indevus.

Employee uncertainty related to the merger could harm the combined company resulting from the merger. Current and prospective
employees may experience uncertainty about their future as employees of the combined company resulting from the merger until strategies with regard to our current employees are announced or, if the merger fails to be consummated our on-going
operations, or executed. This may adversely affect our ability to attract and retain, and may affect the performance during the transition period of, key management, sales, marketing and technical personnel.

Some of our executive officers and directors have conflicts of interest or additional interests that might have influenced them to support and approve
the merger.



41



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Our executive officers and directors might have been influenced to support and approve the merger because
of arrangements that provide them with interests in the merger that are different from, or in addition to, the interests of our stockholders in the merger, including the following



| |  |  | severance benefits to certain of our executive officers pursuant to existing employment agreements;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | share issuances to our executive officers and directors in consideration of the cancellation of all options to purchase our common stock in connection with the
merger;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | employment agreements expected to be entered into between Indevus and certain of our officers, and, in the case of James C. Gale, the chairman of our board of
directors, an expected membership on Indevus board of directors;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | rights to continued director and executive officer indemnification and insurance coverage by Indevus after the merger for acts or omissions occurring before the
merger; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | registration rights covering the shares of Indevus common stock acquired by SMH (and affiliated entities; James C. Gale, the chairman of our board of directors, is
the chief investment officer of those SMH affiliated entities) in connection with the merger for resale under the Securities Act on a Registration Statement on Form S-3 to be filed by Indevus within 30 days following the effective time of the
merger.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The merger agreement limits our ability to pursue alternative business combinations.

Certain no shop provisions included in the merger agreement make it difficult for us to sell our business to a party other than Indevus.
These provisions include the general prohibition on our soliciting any acquisition proposal or offer for a competing transaction, a requirement that we pay a termination fee of $5.0 million if the merger agreement is terminated in specified
circumstances and a requirement that we reimburse Indevus fees and expenses of up to $3.0 million if the merger agreement is terminated in specified circumstances. These provisions might discourage a third party with an interest in acquiring
all of or a significant part of us from considering or proposing an acquisition, including a proposal that might be more advantageous to our stockholders when compared to the terms and conditions of the proposed merger with Indevus. Furthermore, the
termination fee may result in a potential competing acquirer proposing to pay a lower per share price to acquire us than it might otherwise have proposed to pay to our stockholders.



42



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|Item 1B. | Unresolved Staff Comments
|-------- | -------------------------

Not applicable



|Item 2. | Properties
|------- | ----------

We maintain our headquarters and manufacturing facility in Cranbury, New
Jersey in two leased facilities consisting of a total of 51,046 square feet. The following table sets forth more information regarding our facilities.



|                            |  |             |  |                                          |  |                 
|--------------------------- |  | ----------- |  | ---------------------------------------- |  | ----------------
|Address                     |  | Square Feet |  | Function                                 |  | Lease Expiration
|7 Clarke Drive Cranbury, NJ |  | 21,274      |  | Research and Development; Administration |  | 2015            
|8 Clarke Drive Cranbury, NJ |  | 29,772      |  | Manufacturing                            |  | 2015            

Our manufacturing facility is subject to periodic inspections by the FDA and other federal and
state regulatory agencies and is subject to cGMP regulations. Despite the relative complexity and length of our manufacturing process, we believe that our existing manufacturing facilities are capable of producing commercial quantities of our
implants. In order to achieve cost-effective production, we have developed proprietary equipment and scalable commercial manufacturing methods that we use in our production line.

In May 2005, we began a construction project at our headquarters to increase the size of our manufacturing facility. As of January 2007, construction is
substantially complete and the new manufacturing space is being prepared for use. We believe that our current manufacturing facilities, as supplemented by the recently completed manufacturing space will provide sufficient capacity to meet our
current needs and support the introduction of new products over the next several years. We are currently investigating the sub-lease of our facilities at 7 Clarke Drive in Cranbury, New Jersey. If we can successfully obtain a subtenant, we will move
all of our operations into our existing facilities at 8 Clarke Drive in Cranbury, New Jersey.



|Item 3. | Legal Proceedings
|------- | -----------------

We are not subject to any pending or, to our knowledge, threatened
material litigation.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

There were no matters submitted
to a vote of our security holders in the fourth quarter of 2006.

PART II



|Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|------- | ------------------------------------------------------------------------------------------------------------

Our common stock is quoted on The NASDAQ Global Market under the symbol VLRX. We began trading on The NASDAQ Global Market on February 3, 2006. Prior to that time there had been no market for our
common stock. The following table sets forth the high and low sales prices per share for our common stock for the periods indicated, as reported by The NASDAQ Global Market.



|                                            |  |      |       |     |   |     
|------------------------------------------- |  | ---- | ----- | --- | - | ----
|Year Ended December 31, 2006:               |  | High |       | Low
|First Quarter (commencing February 3, 2006) |  | $    | 12.00 |     | $ | 7.75
|Second Quarter                              |  | $    | 10.40 |     | $ | 7.52
|Third Quarter                               |  | $    | 8.54  |     | $ | 5.50
|Fourth Quarter                              |  | $    | 8.42  |     | $ | 4.49

Holders of record

As of February 16, 2007, there were approximately 16 holders of record of our common stock. Because many of such shares are held by brokers and other institutions on behalf of stockholders, we are unable to
estimate the total number of stockholders represented by these record holders.



43



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Dividends

We have not declared or paid any dividends on our common stock since our inception and do not anticipate paying any dividends on our common stock in the foreseeable future. We currently intend to retain future earnings, if any, to fund the
development and expansion of our business and do not anticipate paying cash dividends on our common stock in the foreseeable future. Under our credit agreement with Merrill Lynch Capital, we agreed to not declare or pay any cash dividends. Any
future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in future financing instruments and other
factors our board of directors deems relevant.

Recent Sales of Unregistered Securities

Since our inception, we have issued the following securities that were not registered under the Securities Act of 1933, as amended, or the Securities Act.
The option, share and price numbers below give effect, where applicable to the one-for-six reverse stock split of our common stock, which was completed prior to the closing of our initial public offering:

Since our inception until our initial public offering, we issued an aggregate of 1,667,082 shares of common stock, par value $0.001 per share, of which
1,666,666 shares were issued to MXL Industries in June 2000 as a result of our spinout from GP Strategies Corporation and 417 shares were issued in October 2005 and 250 shares were issued in February 2006 as a result of the exercise of options.

Since our inception, we also issued an aggregate of 40,669,000 shares of preferred stock, par value of $0.001 per share. These shares
included 7,000,000 shares of series A convertible preferred stock issued in January 2002 at $1.00 per share for gross proceeds of $7 million, 22,069,000 shares of series B convertible preferred stock issued between May 2003 and June 2004, at a
purchase price per share of $0.725, for gross proceeds of $16 million, and 11,600,000 shares of series C convertible preferred stock issued in August 2004 at a purchase price per share of $1.00, for gross proceeds of $11 million. In connection with
our IPO, all shares of preferred stock were converted into common stock at pre-determined rates and were subject to the one-for-six reverse split.

Stock Option Grants.

The following stock option grants were issued prior to the filing of a registration statement on Form
S-8 filed with the Securities and Exchange Commission on March 22, 2006.

(1) In October 2002, we issued to
certain of our employees and directors options to purchase an aggregate of 286,750 shares of our common stock at an exercise price of $1.00 per share. The exercise price was lowered to $3.00 per share in December 2003.

(2) In December 2003, we issued to certain of our employees, directors and consultants options to purchase an aggregate of
489,275 shares of our common stock at an exercise price of $3.00 per share.

(3) In June 2004, we issued
to one of our employees options to purchase an aggregate of 833 shares of our common stock at an exercise price of $3.00 per share.

(4) In July 2004, we issued to certain of our employees options to purchase an aggregate of 99,167 shares of our common stock at an exercise price of $3.00 per share.

(5) In August 2004, we issued to certain of our employees options to purchase an aggregate of 17,500 shares of our common
stock at an exercise price of $3.00 per share.

(6) In September 2004, we issued to certain of our employees
options to purchase an aggregate of 4,167 shares of our common stock at an exercise price of $3.00 per share.

(7) In October 2004, we issued to certain of our employees, directors and a consultant options to purchase an aggregate of 232,167 shares of our common stock at an exercise price of $3.00 per share.



44



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(8) In January 2005, we issued to certain of our employees and a consultant
options to purchase an aggregate of 5,333 shares of our common stock at an exercise price of $6.00 per share.

(9) In February 2005, we issued to certain of our employees options to purchase an aggregate of 9,167 shares of our common stock at an exercise price of $6.00 per share.

(10) In June 2005, we issued to certain of our employees and consultants options to purchase an aggregate of 143,583 shares
of our common stock at an exercise price of $12.00 per share.

(11) In September 2005, we issued to certain of our
employees options to purchase an aggregate of 4,333 shares of our common stock at an exercise price of $12.00 per share.

(12) In December 2005, we issued to certain of our employees options to purchase an aggregate of 31,167 shares of our common stock at an exercise price of $12.00 per share.

(13) In January 2006, we authorized the grant to all of our employees of options to purchase an aggregate of 210,000 shares of our
common stock at an exercise price per share equal to the initial public offering price of the shares offered in our initial public offering.

(14) In March 2006, we issued to certain of our employees options to purchase an aggregate of 11,600 shares of our common stock at exercise prices that ranged from $9.84 to $11.39 per share.

No underwriters were involved in the foregoing sales of securities. The securities described in this Item 5 were issued to United States investors
in reliance upon the exemption from the registration requirements of the Securities Act, as set forth in Section 4(2) under the Securities Act and Rule 506 of Regulation D promulgated thereunder relative to sales by an issuer not involving any
public offering, to the extent an exemption from such registration was required. All purchasers of shares of our convertible preferred stock described above represented to us in connection with their purchase that they were accredited investors and
were acquiring the shares for investment and not distribution, that they could bear the risks of the investment and could hold the securities for an indefinite period of time. The purchasers received written disclosures that the securities had not
been registered under the Securities Act and that any resale must be made pursuant to a registration or an available exemption from such registration.

Use of Proceeds from Sales of Registered Securities

On February 7, 2006, we closed the sale of 3,862,500 shares of our
common stock in our initial public offering. The Registration Statement on Form S-1 (Reg. No. 333-123288) (the Registration Statement) we filed to register our common stock in the initial public offering was declared effective by
the Securities and Exchange Commission on February 1, 2006. The initial public offering commenced as of February 1, 2006 and did not terminate before any securities were sold. The initial public offering was completed and all shares were
sold at an initial price per share of $9.00. The aggregate purchase price of the common stock registered in the initial public offering was $34.8 million.

The managing underwriters for the initial public offering were UBS Investment Bank, Banc of America Securities LLC, First Albany Capital and Fortis Securities LLC. We incurred expenses in connection with the initial
public offering of approximately $4.5 million, which consisted of direct payments of: (i) $1.9 million in legal, accounting and printing fees; (ii) $2.4 million in underwriters discounts, fees and commissions; and (iii) $0.2
million in miscellaneous expenses.

After deducting expenses of the initial public offering, we received net offering proceeds of
approximately $30.3 million. We used $1.5 million of the proceeds to repay borrowings we had under our line of credit. We intend to use these remaining proceeds to advance our product candidates through preclinical and clinical trials, for
commercialization of our products, for general corporate purposes including acquisition or in-licensing of products or product candidates, and for working capital. We regularly assess the specific uses and allocations for these funds.



45



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Equity Compensation Plan Information as of December 31, 2006

The following table sets forth information as of the end of the Companys 2006 fiscal year with respect to compensation plans under which the Company
is authorized to issue shares.



|                                                              |  |                                                                    |  |                                                            |      |                                                                                                                                 |        
|------------------------------------------------------------- |  | ------------------------------------------------------------------ |  | ---------------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------------------------------------------- | -------
|Plan Category                                                 |  | Number of Shares to be Issued Upon Exercise of Outstanding Options |  | Weighted-Average Exercise Price of Outstanding Options ($) |      | Number of Shares Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities in 1(st) Column)
|Equity compensation plan approved by security holders(1)      |  | 1,498,163                                                          |  | $                                                          | 5.29 |                                                                                                                                 | 283,408
|Equity compensation plans not approved by security holders(2) |  |                                                                   |  |                                                            |     |                                                                                                                                 |       
|                                                              |  |                                                                    |  |                                                            |      |                                                                                                                                 |        
|Total                                                         |  | 1,498,163                                                          |  | $                                                          | 5.29 |                                                                                                                                 | 283,408
|                                                              |  |                                                                    |  |                                                            |      |                                                                                                                                 |        

---

|(1) | 2003 Equity Incentive Plan.
|--- | ---------------------------

|(2) | The Company does not maintain any equity compensation plans that have not been approved by its stockholders.
|--- | ------------------------------------------------------------------------------------------------------------

In September 2002, we adopted our Equity Incentive Plan, which was approved by our stockholders in May 2003. Our Equity Plan provides for the award of:



| |  |  | restricted shares of our common stock;
| | - |  | --------------------------------------



| |  |  | incentive stock options;
| | - |  | ------------------------



| |  |  | non-qualified stock options; or
| | - |  | -------------------------------



| |  |  | any combination of the foregoing.
| | - |  | ---------------------------------

Grants of restricted shares and non-qualified stock options can be made to our employees, directors, consultants, and other individuals who perform services for us. Grants of incentive stock options may only be made to our employees. The
principal features of our Equity Incentive Plan are summarized below, but the summary is qualified in its entirety by reference to our Equity Incentive Plan, which was filed as exhibit 10.14 to the Registration Statement in connection with our
initial public offering.

Number of shares of our common stock available under our Equity Plan

We have reserved a total of 1,833,333 shares of our common stock for issuance pursuant to our Equity Plan. Shares subject to forfeited, cancelled, or
expired awards and shares received in satisfaction of the exercise price of an option become available for grant again under our Equity Plan. In addition, shares withheld in payment of any exercise price or in satisfaction of any withholding
obligation arising in connection with an award granted under our Equity Plan become available for grant again under our Equity Plan. In connection with recapitalizations, stock splits, combinations, stock dividends, and other events affecting our
common stock, our Compensation Committee may make adjustments or equitable substitutions it deems appropriate in its sole discretion to the maximum number, type and issuer of the securities reserved for issuance under the Equity Plan, to the maximum
number, type and issuer of shares of our common stock subject to outstanding options, to the exercise price of the options and to the number, type and issuer of restricted shares.

Administration of our Equity Plan

The Compensation Committee administers our Equity Plan under authority granted to it by our board of directors in accordance with the terms of our Equity Plan. To administer our Equity Plan, the Compensation Committee must consist of at
least two members of our board of directors, each of whom is a non-employee director for purposes of Rule 16b-3 under the Securities Exchange Act of 1934, or the Exchange Act and, with respect to awards that are intended to constitute
performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, an outside director for the purposes of Section 162(m). The Compensation



46



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Committee, among other things, interprets our Equity Plan, selects award recipients, determines the type of awards to be granted to such recipients and
determines the number of shares subject to each award and the terms and conditions thereof. The Compensation Committee may also determine if or when the exercise price of an option may be paid in the form of shares of our common stock and the extent
to which shares or other amounts payable with respect to an award can be deferred by the participant. Our board of directors may amend or modify our Equity Plan at any time. In addition, our board of directors is also authorized to adopt, alter and
repeal any rules relating to the administration of our Equity Plan and to rescind the authority of the Compensation Committee and thereafter directly administer our Equity Plan. However, subject to certain exceptions, no amendment or modification
will impair the rights and obligations of a participant with respect to an award unless the participant consents to that amendment or modification.

Our Equity Plan will continue in effect until terminated by us in accordance with its terms, although incentive stock options may not be granted more than 10 years after the adoption of our Equity Plan.



|Item 6. | Selected Financial Data
|------- | -----------------------

The following tables set forth our selected historical financial data as
of December 31, 2006, 2005 and 2004 and for the years ended December 31, 2006, 2005 and 2004, which have been derived from our audited financial statements, included elsewhere in this Form 10-K. The selected historical financial data as of
December 31, 2003 and 2002 and for the years ended December 31, 2003 and 2002 have been derived from our audited financial statements, which are not included in this Form 10-K. It is important that you read this information together with
Managements Discussion and Analysis of Financial Condition and Results of Operations, Risk Factors and our financial statements and related notes and schedule to these financial statements beginning on page 61 of this
Form 10-K. The historical results presented below are not necessarily indicative of the results to be expected in any future period.



|                                                                         |  |                                          |         |   |      |   |        |      |  |   |         |   |  |      |        |   |  |   |        |  
|------------------------------------------------------------------------ |  | ---------------------------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------- | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                         |  | Year Ended December 31,                  |        
|                                                                         |  | 2006                                     |         |   | 2005 |   |        | 2004 |  |   | 2003    |   |  | 2002 |       
|                                                                         |  | (in thousands, except per share amounts) |        
|Net product sales                                                        |  | $                                        | 17,845  |   |      | $ | 26,798 |      |  | $ | 5,511   |   |  | $    | 7      |   |  | $ | 15     |  
|Licensing revenue                                                        |  |                                          | 121     |   |      |   | 34     |      |  |   | 135     |   |  |      |       |   |  |   |       |  
|                                                                         |  |                                          |         |   |      |   |        |      |  |   |         |   |  |      |        |   |  |   |        |  
|Total net revenue                                                        |  |                                          | 17,966  |   |      |   | 26,832 |      |  |   | 5,646   |   |  |      | 7      |   |  |   | 15     |  
|Operating costs and expenses                                             |  |                                          |         |   |      |   |        |      |  |   |         |   |  |      |        |   |  |   |        |  
|Cost of product sales                                                    |  |                                          | 5,107   |   |      |   | 5,966  |      |  |   | 608     |   |  |      |       |   |  |   |       |  
|Research and development                                                 |  |                                          | 7,574   |   |      |   | 5,930  |      |  |   | 6,376   |   |  |      | 5,230  |   |  |   | 4,320  |  
|Selling and marketing                                                    |  |                                          | 12,139  |   |      |   | 10,754 |      |  |   | 5,025   |   |  |      | 509    |   |  |   | 270    |  
|General and administrative                                               |  |                                          | 8,154   |   |      |   | 5,500  |      |  |   | 5,897   |   |  |      | 1,838  |   |  |   | 1,324  |  
|Amortization of intangible assets                                        |  |                                          | 79      |   |      |   |       |      |  |   |        |   |  |      |       |   |  |   |       |  
|                                                                         |  |                                          |         |   |      |   |        |      |  |   |         |   |  |      |        |   |  |   |        |  
|Total operating expenses                                                 |  |                                          | 33,053  |   |      |   | 28,150 |      |  |   | 17,906  |   |  |      | 7,577  |   |  |   | 5,914  |  
|                                                                         |  |                                          |         |   |      |   |        |      |  |   |         |   |  |      |        |   |  |   |        |  
|Loss from operations                                                     |  |                                          | (15,087 | ) |      |   | (1,318 | )    |  |   | (12,260 | ) |  |      | (7,570 | ) |  |   | (5,899 | )
|Net interest income (expense), net                                       |  |                                          | 941     |   |      |   | 49     |      |  |   | (6      | ) |  |      | 13     |   |  |   | 16     |  
|                                                                         |  |                                          |         |   |      |   |        |      |  |   |         |   |  |      |        |   |  |   |        |  
|Loss before income taxes                                                 |  |                                          | (14,146 | ) |      |   | (1,269 | )    |  |   | (12,266 | ) |  |      | (7,557 | ) |  |   | (5,883 | )
|Provision for (benefit from) income taxes                                |  |                                          | (207    | ) |      |   | 75     |      |  |   | (243    | ) |  |      |       |   |  |   |       |  
|                                                                         |  |                                          |         |   |      |   |        |      |  |   |         |   |  |      |        |   |  |   |        |  
|Net loss                                                                 |  |                                          | (13,939 | ) |      |   | (1,344 | )    |  |   | (12,023 | ) |  |      | (7,557 | ) |  |   | (5,883 | )
|Deemed dividend                                                          |  |                                          |        |   |      |   |       |      |  |   | (5,861  | ) |  |      | (1,139 | ) |  |   |       |  
|                                                                         |  |                                          |         |   |      |   |        |      |  |   |         |   |  |      |        |   |  |   |        |  
|Net loss attributable to common stockholders                             |  | $                                        | (13,939 | ) |      | $ | (1,344 | )    |  | $ | (17,884 | ) |  | $    | (8,696 | ) |  | $ | (5,883 | )
|                                                                         |  |                                          |         |   |      |   |        |      |  |   |         |   |  |      |        |   |  |   |        |  
|Basic and diluted net loss attributable to common stockholders per share |  | $                                        | (1.03   | ) |      | $ | (0.81  | )    |  | $ | (10.73  | ) |  | $    | (5.22  | ) |  | $ | (3.53  | )
|                                                                         |  |                                          |         |   |      |   |        |      |  |   |         |   |  |      |        |   |  |   |        |  
|Weighted average shares outstandingbasic and diluted                    |  |                                          | 13,580  |   |      |   | 1,667  |      |  |   | 1,667   |   |  |      | 1,667  |   |  |   | 1,667  |  
|                                                                         |  |                                          |         |   |      |   |        |      |  |   |         |   |  |      |        |   |  |   |        |  



|                                     |  |                    |        |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|------------------------------------ |  | ------------------ | ------ | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------ | -
|                                     |  | As of December 31, |       
|                                     |  | 2006               |        | 2005 |   |         | 2004 |  |   | 2003    |   |  | 2002 |        
|                                     |  | (in thousands)     |       
|Balance Sheet Data:                  |  |                    |        |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Cash and cash equivalents            |  | $                  | 14,069 |      | $ | 2,340   |      |  | $ | 5,053   |   |  | $    | 5,241   |   |  | $ | 641    |  
|Working capital                      |  |                    | 17,597 |      |   | 2,845   |      |  |   | 8,306   |   |  |      | 4,585   |   |  |   | (404   | )
|Total assets                         |  |                    | 31,965 |      |   | 16,532  |      |  |   | 13,667  |   |  |      | 6,665   |   |  |   | 1,296  |  
|Long-term liabilities                |  |                    | 313    |      |   | 300     |      |  |   | 17      |   |  |      | 33      |   |  |   | 67     |  
|Convertible preferred stock          |  |                    |       |      |   | 39,925  |      |  |   | 39,925  |   |  |      | 20,469  |   |  |   | 6,604  |  
|Total stockholders equity (deficit) |  |                    | 25,731 |      |   | (31,593 | )    |  |   | (29,887 | ) |  |      | (15,158 | ) |  |   | (6,465 | )



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|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The following discussion and analysis should be read in conjunction with our financial statements and the related notes and schedule thereto appearing elsewhere in this Form 10-K. This discussion and analysis may contain forward-looking
statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially as a result of various factors, including those set forth under Risk Factors or elsewhere in this Form 10-K.
In addition, in evaluating these statements, you should note that if the proposed merger agreement and the merger between us and Indevus Pharmaceuticals are approved, it is possible that certain matters discussed below which concern future
periods will be affected in ways that may not be currently known to us.

Overview

We are a specialty pharmaceutical company concentrating on the development, acquisition and commercialization of products for the treatment of urological
and endocrine conditions, diseases and disorders, including products that utilize our proprietary drug delivery technology. Our first product, Vantas, was approved by the FDA in October 2004. Vantas is a 12-month hydrogel implant based on our
patented Hydron Technology indicated for the palliative treatment of advanced prostate cancer that delivers histrelin, a luteinizing hormone-releasing hormone agonist, or LHRH agonist. We began marketing Vantas in the United States in November 2004
utilizing our own sales force. In December 2006, we entered into a co-promotion agreement with Indevus Pharmaceuticals and in January 2007, pursuant to the co-promotion arrangement, we began to jointly promote Vantas with Indevus with an aggregate
sales force of approximately 105 individuals that are currently calling on urologists in the United States that account for the majority of LHRH agonist product sales. Total U.S. sales of LHRH agonist products for the palliative treatment of
prostate cancer were approximately $850 million in 2006 based on our estimates and IMS Health Incorporated data, with the leading products being the three and four-month injection formulations. We believe that total U.S. sales of LHRH agonist
products declined by 5% in 2006, primarily as a result of lower prices due to changes in Medicare reimbursement rates. We expect future reimbursement levels to continue to decline, which will have an adverse effect on our net product sales. We
believe that Vantas has a competitive advantage over other LHRH agonist products because it delivers an even, controlled dose of a LHRH agonist over a 12-month period, and is the only product indicated for the palliative treatment of advanced
prostate cancer that delivers histrelin, the most potent LHRH agonist available.

We plan to seek marketing approvals for Vantas in various
countries throughout the world. In November 2005, we announced that we received approval to market Vantas in Denmark and in July 2006, we submitted an application for regulatory approval in Germany, Ireland, Italy, Spain and the United Kingdom. In
July 2006, we announced a partnership with Spepharm to market Vantas in Denmark and throughout Europe. We have completed the primary stage of the Mutual Recognition Procedure (MRP) process which concluded with a non-approvable status and referral to
the Co-ordination Group for Mutual Recognition and Decentralized Procedure-Human, CMD(h). The CMD(h) arbitration failed to reach a consensus on approval and the procedure has been further referred to the Committee for Medicinal Products for Human
Use (CHMP) at the European Agency for the Evaluation of Medicinal Products (EMEA). This final CHMP arbitration process will include all twenty-seven countries in the European Union where a majority rule will apply. In March 2006, we announced that
Paladin Labs, our marketing partner in Canada, received approval from Health Canada to market our Vantas product in Canada. Subsequently, Paladin Labs submitted an application for reimbursement to the Canadian Common Drug Review (CDR) and the
Conseil du Médicament du Québec and this documentation is under review. As of December 31, 2006, in conjunction with BioPro Pharmaceutical Inc., our marketing partner for most countries in Asia, Vantas was submitted for regulatory
approval in Thailand, Singapore, Malaysia, Taiwan, Korea Hong Kong and China.

In March 2006, we acquired Valstar a product for the
treatment of bladder cancer that is no longer responsive to conventional treatment such as surgery or topical drug application. We expect to launch this product in the second or third quarter of 2007.

In June 2006, we submitted a New Drug Application (NDA) to the United States Food and Drug Administration for Supprelin-LA, a twelve-month implant for
the treatment of central precocious puberty. In September 2006, we announced that the FDA had accepted the submission of our NDA for Supprelin-LA. Accordingly, under the Prescription Drug User Fee Act (PDUFA) guidelines, the FDA is expected to
complete its review and act upon this NDA submission by the PDUFA required date of May 3, 2007. We also announced that our Supprelin-LA manufacturing facilities in Cranbury, New Jersey successfully passed a recent FDA pre-approval inspection.
In November 2005, the FDA granted Supprelin-LA orphan drug designation which provides seven years marketing exclusivity from date of marketing approval as well as certain economic benefits and tax credits.

In addition to Supprelin-LA, Valstar and Vantas, we are developing a pipeline of proprietary product candidates for indications that include acromegaly,
opioid addiction, interstitial cystitis and nocturnal enuresis. Several of our product candidates also utilize our



48



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Hydron Technology delivery system. We intend to leverage our existing specialized sales force to market certain of our product candidates, if approved, since
the indications of these product candidates are treated by many of the same physicians we are calling on for Vantas.

In May 2006, we
submitted an Investigational New Drug Application (IND) for our VP004 (naltrexone implant) to the FDA and that filing has been accepted by the agency. In November 2006, we finalized all administrative arrangements with Johns Hopkins necessary to
begin clinical studies for VP004. The three month Phase I/II study will involve an open label study of the naltrexone implant in approximately a dozen health volunteers with a history of opioid abuse. A primary objective of the study is to
investigate several dosing regimens for the extent of opiate blockade following morphine challenges. The lead investigator is the pioneering addiction researcher and renowned authority on naltrexone, Donald Jasinski, M.D., Professor of Medicine,
Chief Center for Chemical Dependence, Johns Hopkins Bayview Medical Center. The study began in November 2006 and data related to the study is expected to be provided to the FDA for review in the third quarter of 2007. We expect to commence a Phase
III clinical trial in the first half of 2008.

On November 8, 2006, we announced that we completed proof-of-concept studies on a
flexible, biodegradable polymer-based ureteral stent. Ureteral stents are plastic tubes inserted into the ureter to allow urine to drain from the kidney to the bladder when the flow of urine may be obstructed due to a number of conditions, including
kidney stones and inflammation. Current available ureteral stents require physician intervention for removal from the body. A biodegradable ureteral stent could be naturally voided by the body, a potentially important advantage over existing stents.
In February 2007, we announced that we have initiated a porcine model study to establish safety and effectiveness necessary to support the submission of a 510k device application for the polymer-based flexible biodegradable ureteral stent. This
study will involve 30 pigs with a primary end point being the dissolution and natural excretion of the stent within several weeks. Depending on the outcome of the study, the 510k submission could occur by the end of 2007.

In December 2006, we entered into a merger agreement with Indevus Pharmaceuticals pursuant to which Indevus will acquire us in a tax-free stock-for-stock
merger transaction. Pursuant to the Merger Agreement, upon the closing of the merger, each outstanding share of our common stock (other than shares held by us or Indevus or any stockholders who properly exercise dissenters rights under
Delaware law), will automatically be converted into the right to receive a number of shares of Indevus common stock equal to $7.75 divided by the volume weighted average of the closing prices of Indevus common stock during the 25 trading days ending
on the fifth trading day prior to the date of our stockholders meeting to consider the merger, or the Indevus Common Stock Value. The exchange ratio is subject to a collar such that if the Indevus Common Stock Value falls outside of the collar
the exchange ratio will become fixed. If the Indevus Common Stock Value is greater than $8.05, then the exchange ratio will be 0.9626, and if it is less than $6.59, then the exchange ratio will be 1.1766. Cash will be paid in lieu of fractional
shares.

In addition, each share of our common stock will be converted into three contingent stock rights, or CSRs, relating to three of
our product candidates. One CSR will be convertible into $1.00 of Indevus common stock upon FDA approval of Supprelin-LA, provided sufficient quantities of Supprelin-LA are then available, one CSR will be convertible into $1.00 of Indevus common
stock upon FDA approval of our biodegradable ureteral stent and one CSR will be convertible into $1.50 of Indevus common stock upon FDA approval of our octreotide implant. The amount of Indevus common stock into which the CSRs will convert will be
determined by a formula based on the average stock price of Indevus prior to achievement of the applicable milestones. The CSRs will convert into Indevus common stock only if the applicable milestones are achieved within three years of the closing
of the merger in the case of Supprelin-LA and within five years of the closing of the merger in the case of our biodegradable ureteral stent and our octreotide implant.

In connection with the merger transaction, certain affiliated funds of Sanders Morris Harris, our largest stockholder, and one other large stockholder of ours, entered into voting agreements with Indevus in which they
have agreed to vote shares representing approximately 41% of our outstanding shares of our common stock in favor of the merger. The merger has been approved by our boards of directors, as well as Indevus board of directors. We anticipate that
the merger will close at the end of April 2007. The merger is subject to certain customary closing conditions, including the approval of our stockholders and the approval of Indevuss stockholders.

Upon completion of the merger transaction and subject to the approval of the Indevus board of directors, James C. Gale, chairman of our board of
directors and chief investment officer of the Corporate Opportunities Funds and Life Sciences Opportunities Fund, affiliates of Sanders Morris Harris, is expected to join the Indevus board of directors. Sanders Morris Harris is currently the largest
shareholder of our Company. Additionally, Dr. David Tierney, our President and Chief Executive Officer, will provide consulting services during a transition period after the completion of the merger transaction. Our facility in Cranbury, New
Jersey, which contains significant manufacturing operations and research and development capabilities, will be maintained and become an integral part of Indevus operations.



49



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If the merger is not completed for any reason, our ongoing business may be adversely affected and will be
subject to a number of risks, including:



| |  |  | we might have to pay Indevus a termination fee of $5.0 million, or we might be required to reimburse Indevus for up to $3.0 million of expenses relating to the
merger, such as legal, accounting, financial advisory and printing fees;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the inability to pursue other beneficial opportunities as a result of the focus of our management on the merger, without realizing any of the anticipated benefits
of completing the merger;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the market price of our common stock might decline to the extent that the current market price reflects a market assumption that the merger will be completed; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our unreimbursed costs incurred related to the merger, such as legal, accounting, financial advisory and printing fees, must be paid even if the merger is not
completed.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If the merger agreement is terminated and our board of directors seeks another merger or business
combination, our stockholders cannot be certain that we will be able to find a party willing to pay an equivalent or more attractive price than the price Indevus has agreed to pay in the merger.

We will incur substantial expenses related to the merger whether or not the merger is completed. These expenses would include legal, accounting,
financial advisory and printing fees. As of December 31, 2006, we have incurred approximately $0.8 million related to the merger transaction. Moreover, in the event the merger agreement is terminated, we may, under certain circumstances, be
required to pay Indevus a $5.0 million termination fee or reimburse out-of-pocket expenses of up to $3.0 million. Also, should the merger agreement be terminated due to a willful breach of the merger agreement by us, we could owe significant
damages to Indevus.

Separately, in December 2006, we entered into a co-promotion agreement with Indevus pursuant to which Indevus
sales force will co-promote Vantas in the United States. Under the terms of the agreement, we will be required to make royalty payments to Indevus of 13.5% on sales of Vantas up to a specified unit level, which will increase to 30% for sales above
the specified level. Indevus will also receive royalties of 35% for sales of Vantas to specified specialty pharmacy accounts. Additionally, the co-promotion agreement provides us with the option to elect to enter into negotiations with Indevus to
grant Indevus a co-exclusive right to co-promote Supprelin-LA. The co-promotion began in January 2007.

We expect to continue to spend
significant amounts on the development and commercialization of our product candidates. While we will be focusing on the clinical development of our later stage product candidates in the near term, we expect to increase our spending on earlier stage
clinical candidates as well. We also aim to build our urological and endocrine product portfolio and opportunistically acquire or in-license later-stage urological and endocrine products that are currently on the market or require minimal
development expenditures, or have some patent protection or potential for market exclusivity or product differentiation. Further, we intend to collaborate with major and specialty pharmaceutical companies to develop and commercialize products that
are outside of our core urology and endocrinology focus. Accordingly, we will need to generate significant revenues or else need additional financing to fund these efforts.

Drug development in the United States and most countries throughout the world is a multi-stage process controlled by the FDA and similar regulatory
authorities in foreign countries. In the United States, the FDA approval process for a new drug involves completion of pre-clinical studies and the submission of the results of these studies to the FDA, together with proposed clinical protocols,
manufacturing information, analytical data and other information in an investigational new drug application, which must become effective before human clinical trials may begin. Clinical development typically involves three phases of study: Phase I,
II and III. The most significant expenses associated with clinical development are the Phase III clinical trials as they tend to be the longest and largest studies conducted during the drug development stage. In responding to a new drug application,
the FDA may refuse to accept the application, or if accepted for filing, the FDA may grant marketing approval, request additional information or deny the application if it determines that the application does not provide an adequate basis for
approval. In order to commence clinical trials or marketing of a product outside the United States, we must obtain approval of the applicable foreign regulatory authorities. Although governed by the laws and regulations of the applicable country,
clinical trials conducted outside the United States typically are administered in a similar three-phase sequential process.

The successful
development of our product candidates is highly uncertain. We cannot reasonably estimate or know the nature, timing and estimated expenses of the efforts necessary to complete the development of, or the period in which material net cash



50



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inflows are expected to commence from any of our product candidates due to the numerous risks and uncertainties associated with developing drugs, including
the uncertainty of:



| |  |  | the scope, rate of progress and expense of our clinical trials and other research and development activities;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | future clinical trial results;
| | - |  | ------------------------------



| |  |  | the expense of clinical trials for additional indications;
| | - |  | ----------------------------------------------------------



| |  |  | the terms and timing of any collaborative, licensing and other arrangements that we may establish;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | the expense and timing of regulatory approvals;
| | - |  | -----------------------------------------------



| |  |  | the expense of establishing clinical and commercial supplies of our product candidates and any
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | products that we may develop;
| | - |  | -----------------------------



| |  |  | the effect of competing technological and market developments; and
| | - |  | ------------------------------------------------------------------



| |  |  | the expense of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.
| | - |  | ---------------------------------------------------------------------------------------------------------------------

Research and development expenses consist primarily of costs incurred for clinical trials and manufacturing development costs related to our clinical
product candidates, personnel and related costs related to our research and product development activities and outside professional fees related to clinical development and regulatory matters. We do not disclose estimated research and development
costs for product candidates that are not yet in Phase III clinical trials.

Basis of Presentation

Product Sales and Costs

We
generate revenues from sales of Vantas, our first commercialized product. We began commercial sales of Vantas in the United States in November 2004. Prior to June 2006, all sales were in the United States. In June 2006, we made our first
international shipment of Vantas to Paladin Labs in Canada. In the United States, we distribute Vantas directly to physicians, or through Besse Medical Distribution Company, or Besse Medical, which is a subsidiary of AmerisourceBergen Corporation.

Our business is affected by physician utilization, pricing pressure from our competition and Medicare or third party reimbursement, as
well as other factors which may cause variances in our revenue. Our sales of Vantas from launch in November 2004 through June 30, 2005 were supported, in part, by favorable Medicare reimbursement rates, which decreased beginning in the third
quarter of 2005. Our initial favorable reimbursement rates were due to the fact that Vantas was a new product that did not yet have an established average selling price or ASP, in connection with Medicare reimbursement. As a result, Vantas was
reimbursed at wholesale acquisition price, which is typically higher than ASP. Vantas received an established ASP effective July 2005, which resulted in lower reimbursement rates and a corresponding lower sales price to our customers. Our historical
quarterly net average selling prices to our customers are:



|                            |  |                           |      
|--------------------------- |  | ------------------------- | -----
|For the three months ended: |  | Net Average Selling Price
|December 31, 2004           |  | $                         | 2,520
|March 31, 2005              |  | $                         | 2,628
|June 30, 2005               |  | $                         | 2,586
|September 30, 2005          |  | $                         | 2,099
|December 31, 2005           |  | $                         | 1,801
|March 31, 2006              |  | $                         | 1,620
|June 30, 2006               |  | $                         | 1,562
|September 30, 2006          |  | $                         | 1,478
|December 31, 2006           |  | $                         | 1,370

We expect future Medicare reimbursement levels to continue to decline for Vantas, which will have
an adverse effect on our net product sales. Reimbursement levels are currently set by the twenty-three Medicare carriers in the United States which, in the aggregate, cover all fifty states. Certain Medicare carriers have a policy which sets the
reimbursement rate for Vantas based on our ASP. Other Medicare carriers have a policy that applies the least costly alternative, or LCA, methodology to Vantas. LCA is a payment methodology that allows Medicare carriers to pay the same reimbursement
for drugs that have been determined by Medicare to be medically equivalent. Vantas is currently the least costly alternative in the class of LHRH drugs. Further, certain Medicare carriers have a policy which segregates twelve-month
products from all other dosages, including one, three, four and six month injectable products, and reimburses at different rates for these two groups of products, sometimes referred to as a split policy. Finally,



51



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there are certain Medicare carriers which state they have a policy which reimburses on an ASP or LCA methodology, but which we believe make payments based
upon a split policy.

We are devoting internal and external resources to determine the impact and fairness of these various policies. In
the states where certain Medicare carriers have adopted a split policy, in writing or in practice, we are at an economic disadvantage to the injectable products which are reimbursed at higher annual rates. We are challenging the basis for these
reimbursement policies with the Medicare carriers. We will deploy our sales resources in markets where we can sell our products on an even par with the other products in the class. Nevertheless, we expect our net product sales to continue to decline
in the foreseeable future as a result of the declining reimbursement rates for Vantas.

We are also pursuing a sales strategy in which we
will attempt to sell a greater percentage of Vantas to non-Medicare customers. Non-Medicare customers typically pay a greater amount for Vantas than Medicare customers. Thus, selling a greater percentage of Vantas to non-Medicare customers may
alleviate the downward pressure on our net average selling price from the Medicare customers.

Our cost of product sales are all related to
the production of Vantas and represent the cost of materials, overhead associated with the manufacture of Vantas, direct labor, distribution charges and royalties. For a complete description of our royalty agreements please review the Material
Agreements section of Item 1 of this Annual Report on Form 10-K. Prior to approval of Vantas in October 2004, we expensed all of our manufacturing costs as research and development.

Research and Development Expenses

Our research and development expenses consist of costs incurred for company-sponsored and collaborative research and development activities. These expenses consist primarily of direct and research-related allocated overhead expenses such as
facilities costs, salaries and benefits and material supply costs. We do not track or report our research and development expenses on a project basis as we do not have the internal resources or systems to do so.

Selling and Marketing Expenses

Selling and marketing expenses consist primarily of sales and marketing personnel compensation, sales force incentive compensation, travel, tradeshows, promotional materials and programs, advertising and healthcare provider education
materials and events.

General and Administrative Expenses

Our general and administrative expenses consist primarily of personnel expenses for accounting, human resources, outside consulting, information
technology and corporate administration functions. Other costs include administrative facility costs, regulatory fees, and professional fees for legal and accounting services.

Amortization of Intangible Assets

The amortization of intangible assets relates to the acquisition of the product rights associated with the product known as Valstar (valrubicin) in the United States and Valtaxin in Canada. The Company is amortizing the product rights over
5 years using the straight-line method.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenue and expenses during the reporting periods. We continually evaluate our judgments, estimates and assumptions. We base our
estimates on the terms of underlying agreements, the expected course of development, historical experience and other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying value of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates
under different assumptions or conditions. The list below is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically



52



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dictated by GAAP. There are also areas in which our managements judgment in selecting any available alternative would not produce a materially
different result.

Revenue Recognition

Our revenue recognition policies are in accordance with Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements (SAB
104), and SFAS No. 48, Revenue Recognition When Right of Return Exists (SFAS 48), which provides guidance on revenue recognition in financial statements, and is based on the interpretations and practices developed
by the Securities and Exchange Commission. SFAS 48 and SAB 104 require that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered;
(3) the sellers price to the buyer is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on managements judgments regarding the fixed nature of the
fee charged for services rendered and products delivered and the collectibility of those fees. Should changes in conditions cause management to determine that these criteria are not met for certain future transactions, revenue recognition for those
transactions will be delayed and our revenue could be adversely affected.

Allowances have been recorded for any potential returns or
adjustments in accordance with our policies. We historically have recorded allowances based upon a percentage of gross sales. We distribute our product directly to physicians or through our distributor, Besse Medical. The majority of our sales are
made directly to physicians by our product specialists. We believe that physicians typically order product on an as needed basis, and, therefore, typically maintain inventory of our product only to cover their immediate and short-term future
requirements. In addition, our product specialists routinely confirm product utilization and inventory levels, if any, as part of their normal sales calls with physicians. We continue to monitor our distribution channels in order to assess the
adequacy of our allowances. We do not believe that it is reasonably likely that a material change will occur in the allowance as of December 31, 2006.

Pre-clinical Study and Clinical Trial Expenses

Research and development expenditures are
charged to operations as incurred. Our expenses related to clinical trials are based on actual and estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and clinical research organizations
that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Generally, these agreements set forth the scope of
work to be performed at a fixed fee or unit price. Payments under the contracts depend on factors such as the successful enrollment of patients or the completion of clinical trial milestones. Expenses related to clinical trials generally are accrued
based on contracted amounts applied to the level of patient enrollment and activity according to the protocol. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our
estimates accordingly on a prospective basis.

Stock-Based Compensation

We adopted SFAS No. 123(R), Shared-Based Payment on January 1, 2006. SFAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Under SFAS 123(R), the options we granted in prior years as a non-public
company (prior to the initial filing of our Registration Statement in March 2005) that were valued using the minimum value method, will not be expensed in 2006 or future periods. Options granted as a non-public company and accounted for using the
intrinsic value method (cheap stock), will continue to be expensed over the vesting period. We adopted the prospective transition method for these options. Options granted as a public company are expensed under the modified prospective method.

SFAS No. 123(R) does not change the accounting guidance for how we account for options issued to non employees. We account for
options issued to non-employees under SFAS No. 123 and EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. As such,
the value of such options is periodically re-measured and income or expense is recognized during their vesting terms.



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Results of Operations

Comparison of the Years Ended December 31, 2006 and 2005

Net Product Sales.Net
product sales for the years ended December 31, 2006 and 2005 were approximately $17.8 million and $26.8 million, respectively. The 33% decrease in net product sales was primarily due to lower net average selling prices due to decreased Medicare
reimbursement rates for our Vantas product as well as increased competition around pricing in the class of LHRH drugs. For the year ended December 31, 2006, we sold 11,663 units of Vantas in the United States at a net average selling price of
$1,526 per unit as compared to 11,514 units at a net average selling price of $2,327 for the year ended December 31, 2005. As a result of pre-launch shipments of Vantas for Canada, we sold 169 units of Vantas to Paladin Labs, our marketing
partner in Canada. Thus, worldwide unit sales of Vantas increased by 3%, or 318 units, for the year ended December 31, 2006, as compared to the year ended December 31, 2005.

Vantas is currently eligible for insurance reimbursement coverage. Sales of Vantas in the year ended December 31, 2005 were supported, in part by
favorable Medicare reimbursement rates, due to the fact Vantas was a new product that did not yet have an established average selling price, or ASP, and it was reimbursed at wholesale acquisition price, which is typically higher than ASP. Effective
July 2005, Vantas received an established ASP, which resulted in a lower reimbursement rate.

We expect future Medicare reimbursement
levels to continue to decline for Vantas, which will have an adverse effect on our net product sales. Reimbursement levels are currently set by the twenty-three Medicare carriers in the United States which, in the aggregate, cover all fifty states.
Certain Medicare carriers have a policy which sets the reimbursement rate for Vantas based on our ASP. Other Medicare carriers have a policy that applies the least costly alternative, or LCA, methodology to Vantas. LCA is a payment methodology that
allows Medicare carriers to pay the same reimbursement for drugs that have been determined by Medicare to be medically equivalent. Vantas is currently the least costly alternative in the class of LHRH drugs. Further, certain Medicare
carriers have a policy which segregates twelve-month products from all other dosages, including one, three, four and six month injectable products, and reimburses at different rates for these two groups of products, or a split policy. Finally, there
are some Medicare carriers which state they have a policy which reimburses on an ASP or LCA methodology, but which we believe make payments based upon a split policy.

We are devoting internal and external resources to determine the impact and fairness of these various policies. In the states where certain Medicare carriers have adopted a split policy, in writing or in practice, we
are at an economic disadvantage to the injectable products which are reimbursed at higher annual rates. We are challenging the basis for these reimbursement policies with the Medicare carriers. We will deploy our sales resources in markets where we
can sell our products on an even par with the other products in the class.

We are also pursuing a sales strategy in which we will attempt
to sell a greater percentage of Vantas to non-Medicare customers. Non-Medicare customers typically pay a greater amount for Vantas than Medicare customers. Thus, selling a greater percentage of Vantas to non-Medicare customers may alleviate the
downward pressure on our net average selling price from the Medicare customers. In addition, we continue to review a number of strategic options to broaden the penetration of Vantas into the LHRH market. In December 2006, we entered into a
co-promotion agreement with Indevus under which Indevus sales force will co-promote Vantas in the United States. Terms of the agreement provide Indevus with royalties of 13.5% on sales of Vantas up to a specified unit level and increases to
30% above the specified level. For sales of Vantas to specified specialty pharmacy accounts, Indevus will receive royalties of 35%. The co-promotion began in January 2007.

Licensing Revenue.For the years ended December 31, 2006 and 2005, we recorded licensing revenues of approximately $121,000 and $34,000,
respectively. In September 2006, we received $100,000 from BioPro for licensing revenue related to the submission of Vantas for regulatory approval in Taiwan. This payment is in accordance with the exclusive license and distribution agreement with
BioPro to sell Vantas in various countries in Asia. The remaining $21,000 of licensing revenue during the year ended December 31, 2006 was from Hydron Technologies. The entire $34,000 in licensing revenue during the year ended December 31,
2005 was from Hydron Technologies. We receive licensing revenue from Hydron Technologies for products marketed or sold by Hydron Technologies that utilize our patented Hydron polymer technology.

Cost of Product Sales. Our cost of product sales for the years ended December 31, 2006 and 2005 was approximately $5.1 million and $6.0
million, respectively. Gross margins as a percentage of net product sales for the years ended December 31, 2006 and 2005 were 71% and 78%, respectively. The decrease in gross margin percentage was primarily due to a decrease in the net average
selling



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prices which was slightly offset by an inventory reserve charge recorded in prior year. During the year ended December 31, 2005, a $1.0 million
inventory reserve was recorded for certain products that failed to meet our quality control specifications. Lower expected net average selling prices as a result of decreased Medicare reimbursement rates for our Vantas product as well as higher
manufacturing overhead will have a negative impact on our gross margins going forward. We expect the gross margin percentage to be in the mid sixty percent range in 2007.

Research and Development Expense. Research and development expense for the years ended December 31, 2006 and 2005 was approximately $7.6 million and $5.9 million, respectively. The 28% increase was
primarily due to expenses related to development of Valstar, Supprelin-LA, Octreotide, Naltrexone, and the ureteral stent Expenses related to clinical trials and research projects pursuant to contracts with research institutions and clinical
research organizations represented 47% of our total research and development expense for the year ended December 31, 2006 compared to 45% of our research and development expense for the year ended December 31, 2005. Internal research and
development expense was approximately 53% and 55% of our total research and development expense for the years ended December 31, 2006 and 2005, respectively. We expect to continue to spend significant amounts, including clinical trial costs, on
the development of our product candidates. In August 2006, the FDA requested an additional Phase I/II study for our Octreotide implant which is expected to cost approximately $0.9 million. We expect to commence a Phase III trial for the Octreotide
implant in the second half of 2007. The Octreotide Phase III trial is expected to last approximately eighteen months and is expected to cost approximately $6.0 million to $7.0 million.

Selling and Marketing Expense. Selling and marketing expense for the years ended December 31, 2006 and 2005 was approximately $12.1 million
and $10.8 million, respectively. The 13% increase was primarily attributable to an increase in salaries of approximately $0.5 million, stock based compensation expense of approximately $0.1 million, employee benefits of approximately $0.2 million,
and travel of approximately $0.3 million related to an increase in the number of employees dedicated to our sales and marketing efforts. We increased our selling and marketing organization by six individuals on average from 2005 to 2006. We expect
our selling and marketing expenses to increase in the future as a result of the co-promotion arrangement with Indevus Pharmaceuticals which commenced in January 2007. As a result of the co-promotion arrangement, 105 individuals from both companies
are currently calling on urologists and promoting Vantas. The increased selling and marketing efforts will yield additional co-promotion marketing and material costs as well as co-promotion fees that will be due to Indevus Pharmaceuticals.

General Administrative Expense. General administrative expense for the years ended December 31, 2006 and 2005 was
approximately $8.2 million and $5.5 million, respectively. The 48% increase was primarily due to an increase in non-cash stock based compensation expense of approximately $1.0 million, $0.5 million in directors and officers liability insurance
expense, $0.2 million in rent, $0.2 million in director fees, and $0.8 million of professional fees related to the potential merger transaction with Indevus Pharmaceuticals.

Amortization of Intangible Assets. Amortization expense for the year ended December 31, 2006 was approximately $79,000. The amortization of
intangible assets relates to product rights associated with the product known as Valstar (valrubicin) in the United States and Valtaxin in Canada, which the Company acquired in March of 2006. As such, there was no amortization expense for the year
ended December 31, 2005.

Net Interest Income. Net interest income was approximately $941,000 and $49,000 for the years ended
December 31, 2006 and 2005, respectively. The increase was primarily due to the increased cash and investments balance resulting from the proceeds of the initial public offering of our common stock in February 2006.

Income Taxes. Income tax benefit for the year ended December 31, 2006 was approximately $207,000. As a result of the loss of approximately
$14.1 million for the year ended December 31, 2006, as well as the previous net operating losses since our inception, we did not record any federal provision for income taxes during the year ended December 31, 2006. We did record a
provision of approximately $21,000 during the period for state taxes subject to alternative minimum tax. The provision was offset by approximately $35,000 of tax benefits recorded as a result of the finalizing and filing of our 2005 federal and
state tax returns. In addition, in 2006, the New Jersey Economic Development Authority approved the Companys application to sell New Jersey State income tax benefits under the New Jersey Technology Tax Transfer Program (the
Program). During the fourth quarter of 2006, the Company recognized approximately $193,000 from the sale of the State of New Jersey income tax benefits. The Program requires that the Company maintain certain employment levels in New
Jersey and that the proceeds from the sale of the tax benefits be spent in New Jersey. We have incurred net operating losses since inception. However, in 2005 we generated taxable income as a result of certain temporary and permanent differences
between book income and taxable income. As a result we recorded an alternative minimum tax provision of $20,000 for federal purposes and $55,000 for state taxes. Our deferred tax assets primarily consist of net



55



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operating loss carry forwards and research and development tax credits. We have recorded a valuation allowance for the full amount of our deferred tax asset,
as the realization of the deferred tax asset is uncertain.

Comparison of the Years Ended December 31, 2005 and 2004

Net Product Sales. Net product sales for the year ended December 31, 2005 were $26.8 million, during which period we
sold 11,514 units of Vantas at a net average selling price per unit of $2,327. Net product sales for the year ended December 31, 2004 were $5.5 million during which period we sold 2,187 units of Vantas at a net average selling price per unit of
$2,520. The increase in net product sales of $21.3 million, or 386%, was primarily due to the fact we launched Vantas, our only commercialized product, in November 2004 and as a result, we had only two months of sales in 2004.

Our net average selling price to our customers was $2,604 for the six months ended June 30, 2005. The net average selling price declined to $2,099
during the three months ended September 30, 2005 and further declined to $1,801 per unit during the three months ended December 31, 2005.

In the second and third quarters of 2005, we experienced a disruption in our manufacturing of Vantas due to issues caused by our supply of histrelin as described in Risk FactorsRisks Related to Our Business. This
manufacturing disruption which occurred in May and June of 2005 limited the amount of finished product available for sale in the third quarter of 2005 to three lots, or approximately 2,400 units. The issue was resolved in June and we released
approved finished product in August. Our third quarter sales of 1,747 units were less than our sales in the first and second quarters of 2005, in which we sold 2,925 units and 3,974 units, respectively. As a result of this decrease in sales, we had
a net loss in the third quarter of 2005. Our production of Vantas in the fourth quarter of 2005 was sufficient to meet demand as well as to continue to build quantities of finished goods inventory.

Licensing Revenue. During the year ended December 31, 2005, we recorded $34,000 in licensing revenue from Hydron Technologies under a
licensing arrangement. In addition, in January 2005 we received $300,000 from BioPro, our distribution partner for certain countries in Asia. The BioPro payment is reflected as deferred revenue on the December 31, 2005 balance sheet. We will
recognize this payment ratably over a ten-year period once Vantas is approved in the licensed territory. In 2004, back fees of $135,000 were paid, as an agreement with Hydron Technologies to terminate the cross licensing agreement could not be
reached.

Cost of Product Sales. Our cost of product sales for the year ended December 31, 2005 was $6.0 million resulting in a
gross margin of 78%. In 2004, cost of product sales was $0.6 million and the gross margin percentage was 89% due to higher selling prices and lower costs on a per unit level. The 2004 gross margin percentage includes the benefit of the sale of units
that were partially manufactured prior to FDA approval and, as such, were previously partially expensed. As discussed previously, during the second quarter of 2005, due to an issue regarding our supply of histrelin, the active ingredient in Vantas,
several lots of Vantas that we produced did not meet our quality control specifications. Specifically, we acquired a supply of histrelin in January 2005 from our single-source supplier and we used that histrelin during February, March and April in
the production of Vantas. In May and June of 2005, we discovered that the histrelin had lower than normal solubility. This caused the lots made with that histrelin to fail to meet our quality control specifications and, as a result, those lots were
not available for sale. This resulted in the write-off of five lots of Vantas in May and June of 2005 which had an unfavorable impact of approximately $1 million. The issue was resolved in June and we released approved finished product in August. We
expect the gross margin percentage to decrease in future periods as we expect our net average selling price of Vantas to decrease as a result of declining reimbursement rates.

The cost of product sales calculation includes royalty expense of $1.3 million and $0.3 million for the years ended December 31, 2005 and 2004,
respectively. Freight and distribution expense is also included in the cost of product sales for all periods presented.

Research and
Development Expense. Research and development expense for the years ended December 31, 2005 and 2004 was $5.9 million and $6.4 million, respectively. Expenses related to clinical trials pursuant to contracts with research institutions and
clinical research organizations represented 46% of our total research and development expense for the year ended December 31, 2005 and 23% of our research and development expense for the year ended December 31, 2004. The overall decrease
in research and development expense in 2005 was attributable to lower stock compensation expense and lower material costs as all costs associated with producing Vantas were carried in inventory and expensed to cost of product sales as Vantas was
sold.



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Selling and Marketing Expense. Selling and marketing expense for the years ended December 31,
2005 and 2004 was $10.8 million and $5.0 million, respectively. The increase in the 2005 period over the 2004 period was predominantly the result of an increase in payroll and the related expenses of adding employees to our sales force as well as
increased promotional costs resulting from a full year of Vantas promotions. Our commercial organization consisted of 41 individuals at December 31, 2005.

General and Administrative Expense. General and administrative expense was $5.5 million for the year ended December 31, 2005, and $5.9 million for the year ended December 31, 2004. The decrease from
2004 to 2005 was attributable to a decrease in stock-based compensation. For the years ended December 31, 2005 and 2004, general and administrative expense included a stock-based compensation charge of ($0.3) million and $2.3 million,
respectively. Without stock-based compensation expense, general and administrative expenses increased by approximately $2.2 million from 2004 to 2005 because of hiring of additional personnel, increased regulatory fees, increased legal fees
associated with pursuing and maintaining patent protection for our product candidates and other corporate matters, increased accounting fees relative to the increased size of our business and the scope of the audit, bad debt expense and other
professional services required to support the hiring of personnel.

Net Interest Income (Expense). Net interest income (expense) was
$49,000 for the year ended December 31, 2005 and ($6,000) for the year ended December 31, 2004. The variance was primarily attributable to slightly greater cash balances, improved cash management and less borrowing under capital leases.

Income Taxes. We have incurred net operating losses since inception. However, in 2005 we generated taxable income as a result of
certain temporary and permanent differences between book income and taxable income. As a result we recorded an alternative minimum tax provision of $20,000 for federal purposes and $55,000 for state taxes.

Our deferred tax assets primarily consist of net operating loss carryforwards and research and development tax credits. We have recorded a valuation
allowance for the full amount of our deferred tax asset, as the realization of the deferred tax asset is uncertain. As of December 31, 2005, we had federal net operating loss carryforwards of approximately $19.4 million. These federal loss
carryforwards will begin expiring in 2022 for federal purposes. Annual limitations may result in the expiration of net operating loss and credit carryforwards before they are used. Under the provisions of the Internal Revenue Code, substantial
changes in our ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset taxable income.

Liquidity and Capital Resources

As of December 31, 2006, cash and cash equivalents were approximately $14.1 million,
as compared to $2.3 million at December 31, 2005. The net increases were primarily due to the proceeds we received from the initial public offering of our common stock.

Net cash used in operating activities was approximately $13.7 million for the year ended December 31, 2006. The net cash used in operating
activities was attributable to a net loss of approximately $13.9 million, as adjusted for the effect of non-cash items of $2.6 million and changes in operating assets and liabilities of approximately $2.4 million. The changes in operating assets and
liabilities consisted of cash inflows from the decrease in accounts receivable and increase in accounts payable, which were more than offset by the building of inventory, increase in prepaid expenses, and decreases in accrued expenses and deferred
liabilities.

Net cash used in investing activities was approximately $4.8 million for the year ended December 31, 2006. The net cash
used in investing was attributable to capital expenditures of approximately $4.2 million related to the construction project to expand our manufacturing capabilities, plus equipment for the increase in production levels. We expect to spend an
additional $0.1 million in the first half of 2007 on the expansion project. In addition, we purchased the product rights associated with Valstar for approximately $0.6 million. We purchased and sold approximately $6.0 million in investments
consisting of U.S government and agency securities.

Net cash provided by financing activities was approximately $30.2 million for the year
ended December 31, 2006. As a result of our initial public offering in February 2006, we generated approximately $31.6 million of proceeds net of underwriter fees from the issuance of our common stock and approximately $100,000 from the
issuance of stock as a result of stock option exercises. We paid approximately $1.3 million in offering fees during 2005, resulting in total net proceeds from the initial public offering of $30.3 million. Subsequent to the initial public offering of
our common stock, we repaid in full the approximately $1.5 million outstanding amount under our line of credit with Merrill Lynch.



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We expect our cash requirements to continue to increase in the foreseeable future as we continue to
sponsor additional clinical trials, seek regulatory approvals, and develop, manufacture and market our current product candidates. As we continue to expand our commercial organization, expand our research and development efforts and pursue
additional opportunities, we anticipate significant cash requirements for the hiring of personnel, capital expenditures and investment in additional internal systems and infrastructure. The amount and timing of cash requirements will depend on
market acceptance of our lead product, Vantas, as well as regulatory approval and market acceptance of our product candidates, if any. The resources we devote to researching, developing, formulating, manufacturing, commercializing and supporting our
product candidates, and our ability to enter into third-party collaborations will also affect our cash requirements.

We believe that our
existing cash, cash generated from future sales of Vantas and our other product candidates, if approved, and our line of credit will be sufficient to fund our operations for at least the next 12 months. Until we can generate significant cash from
our operations, we expect to continue to fund our operations with existing cash resources that were primarily generated from the proceeds of prior offerings of our equity securities. In addition, we may receive revenue from our sublicense
agreements.

We may finance future cash needs through strategic collaboration agreements, the sale of equity securities or additional debt
financing. We may not be successful in obtaining collaboration agreements, additional debt or equity financing or in receiving milestone or royalty payments under those agreements. In addition, we cannot be sure that in the future our existing cash
resources will be adequate or that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or our stockholders. Insufficient funds may require us to delay, scale back or eliminate
some or all of our research or development programs or delay the launch of our product candidates.

Contractual Obligations and Commitments

The following table summarizes our long-term annual contractual obligations as of December 31, 2006 (in thousands):



|                          |  |                 |        |      |   |       |  |      |       |      |   |       |  |            |       |  |   |       |  |   |      
|------------------------- |  | --------------- | ------ | ---- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | ---------- | ----- |  | - | ----- |  | - | -----
|                          |  | Payments Due in
|Contractual Obligations   |  | Total           |        | 2007 |   | 2008  |  | 2009 |       | 2010 |   | 2011  |  | After 2011
|Operating leases          |  | $               | 11,658 |      | $ | 1,319 |  | $    | 1,319 |      | $ | 1,315 |  | $          | 1,399 |  | $ | 1,484 |  | $ | 4,822
|Capital lease obligations |  |                 | 23     |      |   | 10    |  |      | 10    |      |   | 3     |  |            |      |  |   |      |  |   |     
|Accrued royalties(1)      |  |                 | 251    |      |   | 251   |  |      |      |      |   |      |  |            |      |  |   |      |  |   |     
|                          |  |                 |        |      |   |       |  |      |       |      |   |       |  |            |       |  |   |       |  |   |      
|                          |  | $               | 11,932 |      | $ | 1,580 |  | $    | 1,329 |      | $ | 1,318 |  | $          | 1,399 |  | $ | 1,484 |  | $ | 4,822
|                          |  |                 |        |      |   |       |  |      |       |      |   |       |  |            |       |  |   |       |  |   |      

---

|(1) | Royalty payments have only been determined for 2007 based upon 2006 sales. Future royalties have not been estimated as they are based on future sales levels.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

Note: Under the terms of the Plantex agreement, beginning in the calendar year following the year in which we receive
regulatory approval for Valstar in the United States, we will be required to purchase a minimum of $1,000,000 of Valrubicin each calendar year until the agreement expires. This is not reflected in the above table, since we have not received
regulatory approval to re-launch Valstar in the United States as of December 31, 2006.

Off-balance Sheet Arrangements

As of December 31, 2006, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to
as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading
activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Recent Accounting Pronouncements

In July 2006, the
FASB issued FIN 48 Accounting for Uncertainty in Income Taxes which clarifies the accounting for uncertainty in income taxes recognized in an entitys financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes.FIN 48 requires an entity to recognize the benefit of tax positions only when it is more likely than not, based on the positions technical merits, that the position would be sustained upon
examination by the respective taxing authorities. The tax benefit is measured as the largest benefit that is more than fifty-percent likely of being realized upon final settlement with the respective taxing



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authorities. FIN 48 is effective for fiscal years beginning after December 15, 2006. FIN 48 is not expected to have a material effect on the results of
operations or financial position of the Company.

In September 2006, the FASB issued Statement of Accounting Standards No. 157
(SFAS 157), Fair Value Measurements, which defines fair value, establishes guidelines for measurements but eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective
for fiscal years beginning after November 15, 2007. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year. The Company is evaluating the impact of SFAS
157, but does not expect the adoption of SFAS 157 to have a material impact on the Companys financial position, results of operations or cash flows.



|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk
|-------- | ----------------------------------------------------------

To date, all of our sales have been
denominated in United States dollars, although we do conduct some clinical and safety studies with vendors located outside the United States. All of these expenses are paid in U.S. dollars. If the exchange rate undergoes a change of 10%, we do not
believe that it would have a material impact on our results of operations or cash flows. Accordingly, we believe that there is no material exposure to risk from changes in foreign currency exchange rates.

We hold no derivative financial instruments and do not currently engage in hedging activities.

Our exposure to interest rate risk is related to the investment of our excess cash into highly liquid financial investments with original maturities of
three months or less. We invest in money market funds in accordance with our investment policy. The primary objectives of our investment policy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. Our
investment policy specifies credit quality standards for our investments. Due to the short term nature of our investments, we have assessed that there is no material exposure to interest rate risk arising from them.



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|Item 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------

INDEX TO FINANCIAL STATEMENTS



|                                                                                                  |  |   
|------------------------------------------------------------------------------------------------- |  | --
|Report of Independent Registered Public Accounting Firm                                           |  | 61
|Balance Sheets as of December 31, 2006 and 2005                                                   |  | 62
|Statements of Operations for the years ended December 31, 2006, 2005 and 2004                     |  | 63
|Statements of Shareholders Equity (Deficit) for the years ended December 31, 2006, 2005 and 2004 |  | 64
|Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004                     |  | 65
|Notes to Financial Statements                                                                     |  | 66
|Financial Statement Schedule (Schedule II)                                                        |  | 82



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VALERA PHARMACEUTICALS, INC.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and
Shareholders

Valera Pharmaceuticals, Inc.

We have audited
the accompanying balance sheets of Valera Pharmaceuticals, Inc. as of December 31, 2006 and 2005, and the related statements of operations, shareholders equity (deficit), and cash flows for each of the three years in the period ended
December 31, 2006. Our audits also included the financial statement schedule listed in the index as Item 15(b). These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Valera
Pharmaceuticals, Inc. at December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with United States generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 2 to the financial statements, in 2006 the Company adopted SFAS No. 123(R), Share-Based Payment.



|                     
|---------------------
|/s/ Ernst & Young LLP
|MetroPark, New Jersey
|February 16, 2007    



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VALERA PHARMACEUTICALS, INC.

BALANCE SHEETS

(in thousands, except par value)



|                                                                                                                                                                                                     |  |              |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                                                     |  | December 31, |        
|                                                                                                                                                                                                     |  | 2006         |         |   | 2005 |  
|ASSETS                                                                                                                                                                                               |  |              |         |   |      |   |         |  
|Current assets:                                                                                                                                                                                      |  |              |         |   |      |   |         |  
|Cash and cash equivalents                                                                                                                                                                            |  | $            | 14,069  |   |      | $ | 2,340   |  
|Accounts receivable, net of allowances of $257 and $385 at December 31, 2006 and 2005, respectively                                                                                                  |  |              | 2,661   |   |      |   | 4,488   |  
|Inventories, net                                                                                                                                                                                     |  |              | 5,911   |   |      |   | 3,191   |  
|Prepaid and other current assets                                                                                                                                                                     |  |              | 877     |   |      |   | 726     |  
|                                                                                                                                                                                                     |  |              |         |   |      |   |         |  
|Total current assets                                                                                                                                                                                 |  |              | 23,518  |   |      |   | 10,745  |  
|Property, plant and equipment, net                                                                                                                                                                   |  |              | 7,849   |   |      |   | 4,194   |  
|Deferred offering costs                                                                                                                                                                              |  |              |        |   |      |   | 1,378   |  
|Intangible assets, net of accumulated amortization of $79 at December 31, 2006                                                                                                                       |  |              | 446     |   |      |   |        |  
|Other non-current assets                                                                                                                                                                             |  |              | 152     |   |      |   | 215     |  
|                                                                                                                                                                                                     |  |              |         |   |      |   |         |  
|Total assets                                                                                                                                                                                         |  | $            | 31,965  |   |      | $ | 16,532  |  
|                                                                                                                                                                                                     |  |              |         |   |      |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                                                                                                                                                       |  |              |         |   |      |   |         |  
|Current liabilities:                                                                                                                                                                                 |  |              |         |   |      |   |         |  
|Accounts payable                                                                                                                                                                                     |  | $            | 2,594   |   |      | $ | 1,421   |  
|Accrued liabilities                                                                                                                                                                                  |  |              | 3,318   |   |      |   | 4,607   |  
|Note payable                                                                                                                                                                                         |  |              |        |   |      |   | 1,525   |  
|Deferred revenuecurrent                                                                                                                                                                             |  |              |        |   |      |   | 329     |  
|Capital lease obligationscurrent                                                                                                                                                                    |  |              | 9       |   |      |   | 18      |  
|                                                                                                                                                                                                     |  |              |         |   |      |   |         |  
|Total current liabilities                                                                                                                                                                            |  |              | 5,921   |   |      |   | 7,900   |  
|                                                                                                                                                                                                     |  |             
|Capital lease obligationslong term                                                                                                                                                                  |  |              | 13      |   |      |   |        |  
|Deferred revenuelong term                                                                                                                                                                           |  |              | 300     |   |      |   | 300     |  
|                                                                                                                                                                                                     |  |             
|Commitments and contingent liabilities                                                                                                                                                               |  |              |         |   |      |   |         |  
|                                                                                                                                                                                                     |  |             
|Series A 6% Cumulative Convertible Preferred Stock, $0.001 par value; 0 and 7,000 shares issued and outstanding; liquidation
preference$0 and $7,598 at December 31, 2006 and 2005, respectively    |  |              |        |   |      |   | 13,604  |  
|Series B 10% Cumulative Convertible Preferred Stock, $0.001 par value; 0 and 22,069 shares issued and outstanding; liquidation
preference$0 and $20,221 at December 31, 2006 and 2005, respectively |  |              |        |   |      |   | 15,082  |  
|Series C 6% Cumulative Convertible Preferred Stock, $0.001 par value; 0 and 11,600 shares issued and outstanding; liquidation
preference$0 and $12,590 at December 31, 2006 and 2005, respectively  |  |              |        |   |      |   | 11,239  |  
|Shareholders equity (deficit):                                                                                                                                                                      |  |              |         |   |      |   |         |  
|Common stock, $0.001 par value; 30,000 shares authorized, 14,937 and 1,667 shares issued and outstanding at December 31, 2006 and 2005,
respectively                                                 |  |              | 15      |   |      |   | 2       |  
|Additional paid-in capital                                                                                                                                                                           |  |              | 79,316  |   |      |   | 8,696   |  
|Deferred stock-based compensation                                                                                                                                                                    |  |              |        |   |      |   | (630    | )
|Accumulated deficit                                                                                                                                                                                  |  |              | (53,600 | ) |      |   | (39,661 | )
|                                                                                                                                                                                                     |  |              |         |   |      |   |         |  
|Total shareholders equity (deficit)                                                                                                                                                                 |  |              | 25,731  |   |      |   | (31,593 | )
|                                                                                                                                                                                                     |  |              |         |   |      |   |         |  
|Total liabilities and shareholders equity (deficit)                                                                                                                                                 |  | $            | 31,965  |   |      | $ | 16,532  |  
|                                                                                                                                                                                                     |  |              |         |   |      |   |         |  

The accompanying notes to the financial statements are an integral part of these statements.



62



---

VALERA PHARMACEUTICALS, INC.

STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)



|                                                                |  |                         |         |   |      |   |        |      |  |   |         |  
|--------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                |  | Year Ended December 31, |        
|                                                                |  | 2006                    |         |   | 2005 |   |        | 2004 | 
|Net product sales                                               |  | $                       | 17,845  |   |      | $ | 26,798 |      |  | $ | 5,511   |  
|Licensing revenue                                               |  |                         | 121     |   |      |   | 34     |      |  |   | 135     |  
|                                                                |  |                         |         |   |      |   |        |      |  |   |         |  
|Total net revenue                                               |  |                         | 17,966  |   |      |   | 26,832 |      |  |   | 5,646   |  
|                                                                |  |                         |        
|Operating costs and expenses:                                   |  |                         |         |   |      |   |        |      |  |   |         |  
|Cost of product sales                                           |  |                         | 5,107   |   |      |   | 5,966  |      |  |   | 608     |  
|Research and development                                        |  |                         | 7,574   |   |      |   | 5,930  |      |  |   | 6,376   |  
|Selling and marketing                                           |  |                         | 12,139  |   |      |   | 10,754 |      |  |   | 5,025   |  
|General and administrative                                      |  |                         | 8,154   |   |      |   | 5,500  |      |  |   | 5,897   |  
|Amortization of intangible assets                               |  |                         | 79      |   |      |   |       |      |  |   |        |  
|                                                                |  |                         |         |   |      |   |        |      |  |   |         |  
|Total operating expenses                                        |  |                         | 33,053  |   |      |   | 28,150 |      |  |   | 17,906  |  
|                                                                |  |                         |         |   |      |   |        |      |  |   |         |  
|Loss from operations                                            |  |                         | (15,087 | ) |      |   | (1,318 | )    |  |   | (12,260 | )
|                                                                |  |                         |        
|Interest income                                                 |  |                         | 967     |   |      |   | 70     |      |  |   | 65      |  
|Interest expense                                                |  |                         | (26     | ) |      |   | (21    | )    |  |   | (71     | )
|                                                                |  |                         |         |   |      |   |        |      |  |   |         |  
|Loss before income taxes                                        |  |                         | (14,146 | ) |      |   | (1,269 | )    |  |   | (12,266 | )
|                                                                |  |                         |        
|(Benefit from) provision for income taxes                       |  |                         | (207    | ) |      |   | 75     |      |  |   | (243    | )
|                                                                |  |                         |         |   |      |   |        |      |  |   |         |  
|Net loss                                                        |  |                         | (13,939 | ) |      |   | (1,344 | )    |  |   | (12,023 | )
|                                                                |  |                         |        
|Deemed dividend                                                 |  |                         |        |   |      |   |       |      |  |   | (5,861  | )
|                                                                |  |                         |         |   |      |   |        |      |  |   |         |  
|Net loss attributable to common shareholders                    |  | $                       | (13,939 | ) |      | $ | (1,344 | )    |  | $ | (17,884 | )
|                                                                |  |                         |         |   |      |   |        |      |  |   |         |  
|Basic and diluted net loss per share                            |  | $                       | (1.03   | ) |      | $ | (0.81  | )    |  | $ | (10.73  | )
|                                                                |  |                         |         |   |      |   |        |      |  |   |         |  
|Basic and diluted weighted average number of shares outstanding |  |                         | 13,580  |   |      |   | 1,667  |      |  |   | 1,667   |  
|                                                                |  |                         |         |   |      |   |        |      |  |   |         |  

The accompanying notes to the financial statements are an integral part of these statements.



63



---

VALERA PHARMACEUTICALS, INC.

STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)

For the Years Ended
December 31, 2004, 2005 and 2006

(in thousands)



|                                                                        |  |              |  |                           |    |  |              |        |   |             |   |        |                    |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------- |  | ------------ |  | ------------------------- | -- |  | ------------ | ------ | - | ----------- | - | ------ | ------------------ |  | - | ------- | - |  | - | ------- | -
|                                                                        |  | Common Stock |  | Additional Paid-inCapital |    |  | Deferred     |        |   | Accumulated |   |        | TotalShareholders | 
|                                                                        |  | Shares       |  | Par Value                 |    |  | Compensation |        |   | Deficit     |   |        | Equity (Deficit)   | 
|Balance at December 31, 2003                                            |  | 1,667        |  | $                         | 2  |  | $            | 5,273  |   |             |   |        |                    |  | $ | (20,433 | ) |  | $ | (15,158 | )
|Deferred compensation related to stock options, net of cancellations    |  |              |  |                           |    |  |              | 4,637  |   |             | $ | (4,637 | )                  |  |   |         |   |  |   |        |  
|Amortization of deferred stock-based compensation                       |  |              |  |                           |    |  |              |        |   |             |   | 3,104  |                    |  |   |         |   |  |   | 3,104   |  
|Expense related to options granted to non-employees                     |  |              |  |                           |    |  |              | 51     |   |             |   |        |                    |  |   |         |   |  |   | 51      |  
|Deemed dividend                                                         |  |              |  |                           |    |  |              |        |   |             |   |        |                    |  |   | (5,861  | ) |  |   | (5,861  | )
|Net loss                                                                |  |              |  |                           |    |  |              |        |   |             |   |        |                    |  |   | (12,023 | ) |  |   | (12,023 | )
|                                                                        |  |              |  |                           |    |  |              |        |   |             |   |        |                    |  |   |         |   |  |   |         |  
|Balance at December 31, 2004                                            |  | 1,667        |  |                           | 2  |  |              | 9,961  |   |             |   | (1,533 | )                  |  |   | (38,317 | ) |  |   | (29,887 | )
|Exercise of stock options                                               |  |              |  |                           |    |  |              | 1      |   |             |   |        |                    |  |   |         |   |  |   | 1       |  
|Deferred compensation related to stock options, net of cancellations    |  |              |  |                           |    |  |              | (1,430 | ) |             |   | 1,430  |                    |  |   |         |   |  |   |        |  
|Amortization of deferred stock based compensation                       |  |              |  |                           |    |  |              |        |   |             |   | (527   | )                  |  |   |         |   |  |   | (527    | )
|Expense related to options granted to non-employees                     |  |              |  |                           |    |  |              | 164    |   |             |   |        |                    |  |   |         |   |  |   | 164     |  
|Net loss                                                                |  |              |  |                           |    |  |              |        |   |             |   |        |                    |  |   | (1,344  | ) |  |   | (1,344  | )
|                                                                        |  |              |  |                           |    |  |              |        |   |             |   |        |                    |  |   |         |   |  |   |         |  
|Balance December 31, 2005                                               |  | 1,667        |  |                           | 2  |  |              | 8,696  |   |             |   | (630   | )                  |  |   | (39,661 | ) |  |   | (31,593 | )
|Issuance of common stock from initial public offering                   |  | 3,863        |  |                           | 4  |  |              | 30,201 |   |             |   |        |                    |  |   |         |   |  |   | 30,205  |  
|Conversion of preferred stock into common stock                         |  | 9,356        |  |                           | 9  |  |              | 39,916 |   |             |   |        |                    |  |   |         |   |  |   | 39,925  |  
|Exercise of stock options                                               |  | 51           |  |                           |    |  |              | 157    |   |             |   |        |                    |  |   |         |   |  |   | 157     |  
|Elimination of deferred compensation related to adoption of FAS 123(R ) |  |              |  |                           |    |  |              | (630   | ) |             |   | 630    |                    |  |   |         |   |  |   |        |  
|Expense related to options granted to non-employees                     |  |              |  |                           |    |  |              | 8      |   |             |   |        |                    |  |   |         |   |  |   | 8       |  
|Compensation expense related to employee stock options                  |  |              |  |                           |    |  |              | 968    |   |             |   |        |                    |  |   |         |   |  |   | 968     |  
|Net loss                                                                |  |              |  |                           |    |  |              |        |   |             |   |        |                    |  |   | (13,939 | ) |  |   | (13,939 | )
|                                                                        |  |              |  |                           |    |  |              |        |   |             |   |        |                    |  |   |         |   |  |   |         |  
|Balance at December 31, 2006                                            |  | 14,937       |  | $                         | 15 |  | $            | 79,316 |   |             | $ |       |                    |  | $ | (53,600 | ) |  | $ | 25,731  |  
|                                                                        |  |              |  |                           |    |  |              |        |   |             |   |        |                    |  |   |         |   |  |   |         |  

The accompanying notes to the financial statements are an integral part of these statements.



64



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VALERA PHARMACEUTICALS, INC.

STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                                 |  |                         |         |   |      |   |        |      |  |   |         |  
|------------------------------------------------------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                                                 |  | Year Ended December 31, |        
|                                                                                                 |  | 2006                    |         |   | 2005 |   |        | 2004 | 
|Operating activities                                                                             |  |                         |         |   |      |   |        |      |  |   |         |  
|Net loss                                                                                         |  | $                       | (13,939 | ) |      | $ | (1,344 | )    |  | $ | (12,023 | )
|Adjustments to reconcile net loss to net cash (used in) provided by operating activities:        |  |                         |         |   |      |   |        |      |  |   |         |  
|Depreciation and amortization                                                                    |  |                         | 673     |   |      |   | 502    |      |  |   | 257     |  
|Amortization of deferred financing costs                                                         |  |                         | 68      |   |      |   | 11     |      |  |   |        |  
|Allowances for accounts receivable                                                               |  |                         | 840     |   |      |   | 294    |      |  |   | 91      |  
|Expense related to options granted to non-employees                                              |  |                         | 8       |   |      |   | 164    |      |  |   | 51      |  
|Stock-based compensation                                                                         |  |                         | 968     |   |      |   | (527   | )    |  |   | 3,104   |  
|Change in assets and liabilities:                                                                |  |                         |         |   |      |   |        |      |  |   |         |  
|Accounts receivable                                                                              |  |                         | 987     |   |      |   | 476    |      |  |   | (5,006  | )
|Other accounts receivable                                                                        |  |                         |        |   |      |   |       |      |  |   | 574     |  
|Inventories                                                                                      |  |                         | (2,720  | ) |      |   | (1,826 | )    |  |   | (1,365  | )
|Restricted cash                                                                                  |  |                         |        |   |      |   | 100    |      |  |   | (100    | )
|Prepaid and other current assets                                                                 |  |                         | (151    | ) |      |   | (584   | )    |  |   | (50     | )
|Security deposits                                                                                |  |                         |        |   |      |   | (46    | )    |  |   | 362     |  
|Accounts payable                                                                                 |  |                         | 1,173   |   |      |   | (621   | )    |  |   | 856     |  
|Accrued liabilities                                                                              |  |                         | (1,289  | ) |      |   | 3,055  |      |  |   | 1,107   |  
|Deferred revenue                                                                                 |  |                         | (329    | ) |      |   | 629    |      |  |   |        |  
|                                                                                                 |  |                         |         |   |      |   |        |      |  |   |         |  
|Net cash (used in) provided by operating activities                                              |  |                         | (13,711 | ) |      |   | 283    |      |  |   | (12,142 | )
|Investing activities                                                                             |  |                         |         |   |      |   |        |      |  |   |         |  
|Capital expenditures                                                                             |  |                         | (4,221  | ) |      |   | (2,992 | )    |  |   | (1,610  | )
|Purchase of product rights                                                                       |  |                         | (525    | ) |      |   |       |      |  |   |        |  
|Purchase of investment in Spepharm                                                               |  |                         | (5      | ) |      |   |       |      |  |   |        |  
|Purchases of investments held-to-maturity                                                        |  |                         | (6,000  | ) |      |   |       |      |  |   |        |  
|Proceeds from the sale of investments held-to-maturity                                           |  |                         | 6,000   |   |      |   |       |      |  |   |        |  
|                                                                                                 |  |                         |         |   |      |   |        |      |  |   |         |  
|Net cash used in investing activities                                                            |  |                         | (4,751  | ) |      |   | (2,992 | )    |  |   | (1,610  | )
|Financing activities                                                                             |  |                         |         |   |      |   |        |      |  |   |         |  
|Net proceeds from issuance of common stock                                                       |  |                         | 31,740  |   |      |   | 1      |      |  |   |        |  
|Payment of capital lease obligations                                                             |  |                         | (24     | ) |      |   | (17    | )    |  |   | (31     | )
|Proceeds from note payable                                                                       |  |                         |        |   |      |   | 1,525  |      |  |   |        |  
|Payment of notes payable                                                                         |  |                         | (1,525  | ) |      |   |       |      |  |   |        |  
|Deferred offering costs                                                                          |  |                         |        |   |      |   | (1,378 | )    |  |   |        |  
|Deferred financing costs                                                                         |  |                         |        |   |      |   | (135   | )    |  |   |        |  
|Proceeds from officer loan                                                                       |  |                         |        |   |      |   |       |      |  |   | 200     |  
|Repayment of officer loan                                                                        |  |                         |        |   |      |   |       |      |  |   | (200    | )
|Net proceeds from issuance of convertible preferred stock                                        |  |                         |        |   |      |   |       |      |  |   | 13,595  |  
|                                                                                                 |  |                         |         |   |      |   |        |      |  |   |         |  
|Net cash provided by (used in) financing activities                                              |  |                         | 30,191  |   |      |   | (4     | )    |  |   | 13,564  |  
|                                                                                                 |  |                         |         |   |      |   |        |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                             |  |                         | 11,729  |   |      |   | (2,713 | )    |  |   | (188    | )
|Cash and cash equivalents at beginning of period                                                 |  |                         | 2,340   |   |      |   | 5,053  |      |  |   | 5,241   |  
|                                                                                                 |  |                         |         |   |      |   |        |      |  |   |         |  
|Cash and cash equivalents at end of period                                                       |  | $                       | 14,069  |   |      | $ | 2,340  |      |  | $ | 5,053   |  
|                                                                                                 |  |                         |         |   |      |   |        |      |  |   |         |  
|Supplemental Disclosure of Cash Flow Information and Non-Cash Investing and Financing Activities |  |                         |         |   |      |   |        |      |  |   |         |  
|Cash paid for interest                                                                           |  | $                       | 26      |   |      | $ | 20     |      |  | $ | 65      |  
|Cash paid for income taxes                                                                       |  | $                       | 95      |   |      | $ | 11     |      |  |   |        |  
|Deemed dividends on preferred stock                                                              |  |                         |        |   |      |   |       |      |  | $ | 5,861   |  
|Conversion of preferred stock into common stock                                                  |  | $                       | 39,925  |   |      |   |       |      |  |   |        |  
|Acquisition of an asset through a capital lease                                                  |  | $                       | 28      |   |      |   |       |      |  |   |        |  

The accompanying notes to the financial statements are an integral part of these statements.



65



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VALERA PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS

Note 1. Organization and Description of Business

Nature of Operations

Valera Pharmaceuticals, Inc. (Valera or the Company), is a specialty pharmaceutical company focused on the development, acquisition and commercialization of products for the treatment of urological and endocrine
conditions, diseases and disorders, including products that utilize its Hydron implant proprietary technology. The Companys headquarters and manufacturing operations are located in Cranbury, New Jersey. Valera was incorporated in the state of
Delaware on May 30, 2000.

On February 7, 2006, the Company closed its initial public offering. The Company issued 3,862,500
shares at $9.00 per share resulting in net proceeds of $30.3 million after underwriters discounts and offering expenses. As a result of the initial public offering, all shares of the Companys preferred stock converted into 9,355,714
shares of common stock. Thus, immediately following the offering the Company had 14,885,296 common shares outstanding. In February 2006, the Company paid in full its note payable to Merrill Lynch in the amount of $1.5 million.

In December 2006, we entered into a merger agreement with Indevus Pharmaceuticals pursuant to which Indevus will acquire us in a tax-free stock-for-stock
merger transaction. Pursuant to the Merger Agreement, upon the closing of the merger, each outstanding share of our common stock (other than shares held by us or Indevus or any stockholders who properly exercise dissenters rights under
Delaware law), will automatically be converted into the right to receive a number of shares of Indevus common stock equal to $7.75 divided by the volume weighted average of the closing prices of Indevus common stock during the 25 trading days ending
on the fifth trading day prior to the date of our stockholders meeting to consider the merger, or the Indevus Common Stock Value. The exchange ratio is subject to a collar such that if the Indevus Common Stock Value falls outside of the collar
the exchange ratio will become fixed. If the Indevus Common Stock Value is greater than $8.05, then the exchange ratio will be 0.9626, and if it is less than $6.59, then the exchange ratio will be 1.1766. Cash will be paid in lieu of fractional

In addition, each share of the Companys common stock will be converted into three contingent stock rights, or CSRs, relating to
three of the Companys product candidates. One CSR will be convertible into $1.00 of Indevus common stock upon FDA approval of Supprelin-LA, provided sufficient quantities of Supprelin-LA are then available, one CSR will be convertible into
$1.00 of Indevus common stock upon FDA approval of the Companys biodegradable ureteral stent and one CSR will be convertible into $1.50 of Indevus common stock upon FDA approval of the Companys octreotide implant. The amount of Indevus
common stock into which the CSRs will convert will be determined by a formula based on the average stock price of Indevus prior to achievement of the applicable milestones. The CSRs will convert into Indevus common stock only if the applicable
milestones are achieved within three years of the closing of the merger in the case of Supprelin-LA and within five years of the closing of the merger in the case of the Companys biodegradable ureteral stent and octreotide implant. If the
merger is not completed for any reason, the Company might have to pay Indevus a termination fee of $5.0 million or the Company might be required to reimburse Indevus for up to $3.0 million of expenses related to the merger, such as legal,
accounting, financial advisory and printing fees.

Separately, the Company entered into a co-promotion agreement with Indevus pursuant to
which Indevus sales force will co-promote Vantas in the United States. Under the terms of the agreement, the Company will be required to make royalty payments to Indevus of 13.5% on sales of Vantas up to a specified unit level, which will
increase to 30% for sales above the specified level. Indevus will also receive royalties of 35% for sales of Vantas to specified specialty pharmacy accounts. The co-promotion began in January 2007.

Reverse Stock Split

On
January 27, 2006, the Company effected a one-for-six reverse stock split. In connection with the reverse stock split, every outstanding six shares of the Companys common stock were replaced with one share of the Companys common
stock. All references to common stock, common shares outstanding, average number of common shares outstanding and per share amounts in these consolidated financial statements and notes to consolidated financial statements prior to the effective date
of the reverse stock split have been restated to reflect the one-for-six reverse stock split on a retroactive basis. Effective upon consummation of the initial public offering, the Company reduced the number of common shares authorized for issuance
to 30,000,000 and the number of preferred shares authorized for issuance to 5,000,000.



66



---

VALERA PHARMACEUTICALS, INC

NOTES TO FINANCIAL STATEMENTS(Continued)



Note 2. Basis of Presentation and Significant Accounting Policies

Use of estimates

The
preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

Reclassifications

Certain reclassifications have been made to the prior periods financial information to conform to the December 31, 2006 presentation. Deferred
financing costs and security deposits in the prior year presentation have been combined into the other non current assets category in the current presentation.

Cash and Cash Equivalents

The Company considers all highly liquid instruments purchased with
a maturity of three months or less to be cash and cash equivalents. At December 31, 2006 and 2005, the Company had substantially all of its cash and cash equivalents deposited with two financial institutions.

Investments Held-to-Maturity

During fiscal 2006, the Company purchased investments in certain debt securities that were classified as investments held-to-maturity in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Investments held-to-maturity are recorded on the balance sheet at cost. Realized gains and losses on sales of investments are determined using the specific identification method. As of December 31, 2006, all investments in
certain debt securities that were purchased during the year, matured and were sold. The total amount of investments purchased and sold during fiscal year 2006 was $6,000,000. No realized gains or loss were recognized on the transactions.

Allowances for Accounts Receivable

The Company maintains allowances for accounts receivable, which include an allowance for doubtful accounts related to the estimated losses that may result from the inability of its customers to make required payments. This allowance is
determined based upon historical experience and any specific customer collection issues that have been identified. The Company began selling its first product on November 8, 2004 and has not experienced significant credit losses related to an
individual customer or groups of customers in any particular industry or geographic area. Also included in the allowances for accounts receivable is an allowance for early payment discounts.

Inventory

The Company values
its inventory at the lower of cost (determined by the first-in, first-out method) or market. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on estimated forecasts
of product demand and production requirements. The Companys estimate of future product demand may prove to be inaccurate, in which case it may have understated or overstated the provision required for excess and obsolete inventory. In the
future, if the Companys inventory is determined to be overvalued, the Company would be required to recognize such costs in costs of product sales at the time of such determination. Likewise, if the inventory is determined to be undervalued,
the Company may have recognized excess cost of product sales in previous periods and would be required to recognize such additional operating income at the time of sale.



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NOTES TO FINANCIAL STATEMENTS(Continued)



Property, Plant and Equipment

Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method
over the estimated useful lives of the respective assets, generally three to seven years. Leasehold improvements and capitalized leases are recorded at the fair market value at the inception of the leases and are amortized over the shorter period of
their estimated useful life or the lease ranging from five to ten years. Amortization of assets recorded under capital leases is included in depreciation and amortization expense.

Deferred Offering and Financing Costs

Costs incurred in relation to the Companys initial public offering were deferred as of December 31, 2005 and were recognized and netted against gross proceeds raised in the offering that was completed in February 2006. Costs
incurred in relation to the Companys line of credit were deferred and are being amortized over the two-year term of the loan and are included in other non current assets.

Investment  Spepharm

On
July 17, 2006, the Company entered into an Investment and Shareholders Agreement in which the Company received a 19.9% ownership interest in a newly created Dutch company called Spepharm Holding B.V. (Spepharm) for a nominal
amount of approximately $5,000. Spepharm and its European specialty pharmaceutical group of companies are focusing on becoming one of the leading suppliers of specialty urology and endocrinology products to the European market place. In accordance
with APB 18 The Equity Method of Accounting for Investment in Common Stock and FIN 35 Criteria for Applying the Equity Method of Accounting for Investment in Common Stock the Company has recorded the investment as a long term
investment and is applying the cost method for the accounting of the investment. Under the cost method, the investment is recorded at its original cost. It continues to be carried and reported at cost until it is either partially or entirely
disposed, or until some fundamental change in conditions makes it clear that the value originally assigned can no longer be justified. The investment is included in other non current assets.

Net Product Sales

Net product
sales are presented net of estimated returns and price adjustments, prompt pay discounts, group purchasing fees and credit card fees.

Revenue Recognition

The Companys revenue recognition policies are in accordance with Securities and Exchange
Commission Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition in Financial Statements (SAB 104), and SFAS No. 48, Revenue Recognition When Right of Return Exists (SFAS
48), which provides guidance on revenue recognition in financial statements, and is based on the interpretations and practices developed by the Securities and Exchange Commission. SFAS 48 and SAB 104 require that four basic criteria must be
met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the sellers price to the buyer is fixed and determinable; and (4) collectibility is
reasonably assured. Determination of criteria (3) and (4) are based on managements judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectibility of those fees. Should
changes in conditions cause management to determine that these criteria are not met for certain future transactions, revenue recognition for those transactions will be delayed and the Companys revenue could be adversely affected.

Allowances have been recorded for any potential returns or adjustments in accordance with the Companys policy. Returns are allowed for damaged
or outdated goods. As of December 31, 2006, we had a reserve of approximately $143,000 for returns and adjustments, of which $143,000 related to sales made in 2006. As of December 31, 2006 and 2005, there was approximately $40,000 and
$300,000 of retail value of Vantas, respectively, at distributors.



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VALERA PHARMACEUTICALS, INC

NOTES TO FINANCIAL STATEMENTS(Continued)



|                                                  |  |                |     |   |            |   |        |       |  |   |        |  
|------------------------------------------------- |  | -------------- | --- | - | ---------- | - | ------ | ----- |  | - | ------ | -
|                                                  |  | Distributors   |     |   | Physicians |   |        | Total | 
|                                                  |  | (In thousands) |    
|Balance at 12/31/2004                             |  | $              | 28  |   |            | $ | 316    |       |  | $ | 344    |  
|Provision related to sales made in current period |  |                | 20  |   |            |   | 2,175  |       |  |   | 2,195  |  
|Provision related to sales made in prior periods  |  |                |    |   |            |   |       |       |  |   |       |  
|Returns and adjustments                           |  |                | (29 | ) |            |   | (2,171 | )     |  |   | (2,200 | )
|                                                  |  |                |     |   |            |   |        |       |  |   |        |  
|Balance at 12/31/2005                             |  |                | 19  |   |            |   | 320    |       |  |   | 339    |  
|Provision related to sales made in current period |  |                | 19  |   |            |   | 1,006  |       |  |   | 1,025  |  
|Provision related to sales made in prior periods  |  |                |    |   |            |   | 58     |       |  |   | 58     |  
|Returns and adjustments                           |  |                | (34 | ) |            |   | (1,245 | )     |  |   | (1,279 | )
|                                                  |  |                |     |   |            |   |        |       |  |   |        |  
|Balance at 12/31/2006                             |  | $              | 4   |   |            | $ | 139    |       |  | $ | 143    |  
|                                                  |  |                |     |   |            |   |        |       |  |   |        |  

Customer SalesUrologists

The Companys revenue from product sales is recognized when there is persuasive evidence an arrangement exists, the price is fixed in accordance with
the Companys Customer Price List and/or approved exception pricing, or determinable from executed contracts, delivery to the customer has occurred and collectibility is reasonably assured. The Company uses contracts, purchase orders, sales
orders directly taken by product specialists and sales order confirmations to determine the existence of an arrangement. Title to the product is taken upon delivery of the product, at which time risk of loss shifts to the customer. Billing does not
take place until the day after shipment has occurred. The Company uses shipping documents and, the Company is provided with third party proof of delivery to verify delivery to its customers.

Customer SalesDistributor Sales

With respect to sales to distributors, revenue is recognized upon shipment, as the title, risks and rewards of ownership of the products pass to the distributors and the selling price of the Companys product is fixed and determinable
at that point, as long as the Company believes the product will be sold by the distributor within one to three months from the shipment of the product by the Company to the distributor. If the Company believes the product will not be resold within
three months, revenue will be deferred until the product is sold and the product held by the distributor will be classified as an asset on the Companys financial statements until it is sold by the distributor. As of December 31, 2006 and
2005, the Company deferred approximately $0 and $329,000 of revenue, respectively, and recorded $0 and $44,000 of inventory on consignment, respectively. The 2005 amounts related to product sold to distributors in the fourth quarter of 2005 that
were not resold by distributors in accordance with the Companys policy. Payment is due based upon the agreed terms of the contract. The distributor is responsible for selling and distributing the product to its customer base and the rights for
return are restricted to the Companys published return policy in effect for all customers.

Royalties

Licensing revenue from royalty arrangements are recorded on a cash basis due to the uncertainties regarding calculations, timing and collections. Royalty
expense is recorded as the corresponding revenue is recognized. Royalty expense is included in cost of product sales in the statement of operations.

Shipping and Handling Costs

Shipping and handling costs incurred for inventory purchases and
product shipments are included within cost of product sales in the statements of operations.

Research and Development

Costs incurred in connection with research and development activities are expensed as incurred. These costs consist of direct and
indirect costs associated with specific projects as well as fees paid to various entities that perform research for the Company. Research and development expenditures are charged to operations as incurred. Our expenses related to clinical trials are
based on actual and estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and clinical research organizations that conduct and manage clinical trials on our behalf. The financial terms of
these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Generally, these agreements set forth the



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VALERA PHARMACEUTICALS, INC

NOTES TO FINANCIAL STATEMENTS(Continued)



scope of work to be performed at a fixed fee or unit price. Payments under the contracts depend on factors such as the successful enrollment of patients or
the completion of clinical trial milestones. Expenses related to clinical trials generally are accrued based on contracted amounts applied to the level of patient enrollment and activity according to the protocol. If timelines or contracts are
modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates accordingly on a prospective basis.

Advertising Costs

The Company charges advertising costs to selling and marketing expense as
incurred. Advertising expense was approximately $1.2 million, $1.0 million and $1.3 million for the years ended December 31, 2006, 2005 and 2004, respectively

Intangible Assets

On March 31, 2006, the Company completed its acquisition of the
product rights associated with the product known as Valstar (valrubicin) in the United States and Valtaxin in Canada. As of December 31, 2006, the Company has an intangible asset of approximately $446,000 associated with such product rights.
The intangible asset was recorded at its original cost of $525,000, less accumulated amortization of approximately $79,000 as of December 31, 2006. Intangible assets are stated at cost, less accumulated amortization, and are amortized over
their estimated useful lives using the straight-line method. The Company estimates that the useful life of the Valstar product rights is 5 years. The Company periodically reviews the original estimated useful lives of long-lived assets and their
carrying amounts and makes adjustments when appropriate if there are any indications of impairment.

Stock-Based Compensation

The Company adopted SFAS No. 123(R), Shared-Based Payment on January 1, 2006. SFAS 123(R) requires all
share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Under SFAS 123(R), the options the Company granted
in prior years as a non-public company (prior to the initial filing of its Registration Statement in March 2005) that were valued using the minimum value method, were not expensed in 2006 and will not be expensed in future periods. Options granted
as a non-public company and accounted for using the intrinsic value method (cheap stock), will continue to be expensed over the vesting period. The Company adopted the prospective transition method for these options. Options granted as a public
company are expensed under the modified prospective method.

SFAS No. 123(R) does not change the accounting guidance for how the
Company accounts for options issued to non employees. The Company accounts for options issued to non-employees under SFAS No. 123 and EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services. As such, the value of such options is periodically re-measured and income or expense is recognized during their vesting terms.

Deferred Stock Compensation

At December 31, 2005, the Company had deferred stock compensation of approximately $630,000. In accordance with the adoption of FAS 123(R), all deferred compensation related to employee stock options has been eliminated. As of
December 31, 2006, the deferred compensation balance was $0.

Income Taxes

The Company utilizes the asset and liability method specified by Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting
for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be
in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.



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VALERA PHARMACEUTICALS, INC

NOTES TO FINANCIAL STATEMENTS(Continued)



Long-lived Assets

The Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets can be recovered through
undiscounted future operating cash flows. If impairment is indicated, the Company measures the amount of such impairment by comparing the fair value to the carrying value. There have been no indicators of impairment through December 31, 2006.

Concentration Risks

The financial instrument that potentially subjects the Company to concentration of credit risk is cash. The Company places its cash with high-credit quality financial institutions. Concentrations of credit risk, with respect to this
financial instrument, exist to the extent of amounts presented in the financial statements.

In 2006, 2005 and 2004, the Company generated
all of its product sales from Vantas. In addition, for the years ended December 31, 2006 2005 and 2004, one customer accounted for 6%, 6% and 9%, respectively, of the Companys net unit sales and 5%, 0% and 11.6% of its outstanding
receivables at December 31, 2006, 2005 and 2004, respectively.

The Company is dependent on single suppliers for certain raw
materials, including histrelin, the active pharmaceutical ingredient in Vantas and Supprelin-LA, and valrubicin, the active pharmaceutical ingredient in Valstar. The Company does not have an agreement with the supplier of histrelin.

Fair Value of Financial Instruments

The carrying amounts of the Companys financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair values.

Preferred Stock Dividends

The
Company records deemed dividends when modifications to its preferred stock are required in accordance with EITF 98-5 and EITF 00-27. Such modifications occurred in 2004 resulting in deemed dividends of approximately $5.9 million. There were no
modifications for the years ended December 31, 2006 and 2005, respectively.

Recent Accounting Pronouncements

In July 2006, the FASB issued FIN 48 Accounting for Uncertainty in Income Taxes which clarifies the accounting for uncertainty in
income taxes recognized in an entitys financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.FIN 48 requires an entity to recognize the benefit of tax positions only when it is more
likely than not, based on the positions technical merits, that the position would be sustained upon examination by the respective taxing authorities. The tax benefit is measured as the largest benefit that is more than fifty-percent likely of
being realized upon final settlement with the respective taxing authorities. FIN 48 is effective for fiscal years beginning after December 15, 2006. FIN 48 is not expected to have a material effect on the results of operations or financial
position of the Company.

In September 2006, the FASB issued Statement of Accounting Standards No. 157 (SFAS 157),
Fair Value Measurements, which defines fair value, establishes guidelines for measurements but eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year. The Company is evaluating the impact of SFAS 157, but does not
expect the adoption of SFAS 157 to have a material impact on the Companys financial position, results of operations or cash flows.

Note 3.
Inventory

Inventories consist of the following:



|                |  |                |       |      |   |      
|--------------- |  | -------------- | ----- | ---- | - | -----
|                |  | December 31,  
|                |  | 2006           |       | 2005
|                |  | (In thousands)
|Raw Materials   |  | $              | 583   |      | $ | 463  
|Work in process |  |                | 4,411 |      |   | 2,426
|Finished goods  |  |                | 917   |      |   | 302  
|                |  |                |       |      |   |      
|                |  | $              | 5,911 |      | $ | 3,191
|                |  |                |       |      |   |      

The preceding amounts are net of inventory reserves of approximately $1.2 million at
December 31, 2006 and 2005, respectively, for certain products that failed to meet the Companys quality control specifications.



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VALERA PHARMACEUTICALS, INC

NOTES TO FINANCIAL STATEMENTS(Continued)



Note 4. Property, Plant and Equipment

Property, plant and equipment consists of the following:



|                                               |  |                |  |      |        |   |      |   |        |  
|---------------------------------------------- |  | -------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                               |  | December 31,   | 
|                                               |  | Useful Lives   |  | 2006 |        |   | 2005 |  
|                                               |  | (In thousands) | 
|Laboratory equipment                           |  | 5 years        |  | $    | 1,942  |   |      | $ | 1,531  |  
|Furniture and fixtures                         |  | 7 years        |  |      | 437    |   |      |   | 161    |  
|Office equipment                               |  | 5 years        |  |      | 145    |   |      |   | 108    |  
|Computer equipment                             |  | 3 years        |  |      | 483    |   |      |   | 417    |  
|Computer software                              |  | 3 years        |  |      | 301    |   |      |   | 200    |  
|Construction in process                        |  |                |  |      | 3,536  |   |      |   | 2,526  |  
|Leasehold improvements                         |  | 1-10 years     |  |      | 2,973  |   |      |   | 625    |  
|                                               |  |                |  |      |        |   |      |   |        |  
|                                               |  |                |  |      | 9,817  |   |      |   | 5,568  |  
|Less accumulated depreciation and amortization |  |                |  |      | (1,968 | ) |      |   | (1,374 | )
|                                               |  |                |  |      |        |   |      |   |        |  
|Property, plant and equipment, net             |  |                |  | $    | 7,849  |   |      | $ | 4,194  |  
|                                               |  |                |  |      |        |   |      |   |        |  

Depreciation and amortization expense for property, plant and equipment was approximately
$594,000, $502,000, and $257,000, for the years ended December 31, 2006, 2005 and 2004, respectively. There were fixed assets totaling approximately $95,000 and $68,000 at December 31, 2006 and 2005, respectively, subject to capital lease
obligations with accumulated amortization of approximately $71,000 and $54,000 as of December 31, 2006 and 2005, respectively.

Note 5. Accrued
Liabilities

Accrued liabilities consist of the following:



|                                          |  |                |       |      |   |      
|----------------------------------------- |  | -------------- | ----- | ---- | - | -----
|                                          |  | December 31,  
|                                          |  | 2006           |       | 2005
|                                          |  | (In thousands)
|Accrued compensation, bonus and benefits  |  | $              | 587   |      | $ | 587  
|Accrued clinical fees                     |  |                | 532   |      |   | 312  
|Accrued financial advisory fees           |  |                | 500   |      |   |     
|Accrued other                             |  |                | 435   |      |   | 236  
|Accrued legal fees                        |  |                | 358   |      |   | 769  
|Accrued royalties                         |  |                | 238   |      |   | 396  
|Accrued commissions                       |  |                | 231   |      |   | 451  
|Accrued auditing fees                     |  |                | 182   |      |   | 251  
|Accrual for sales returns and adjustments |  |                | 143   |      |   | 339  
|Accrued marketing expenses                |  |                | 108   |      |   | 316  
|Accrued income taxes                      |  |                | 4     |      |   | 75   
|Accrued distributor chargebacks           |  |                |      |      |   | 621  
|Accrued printing fees                     |  |                |      |      |   | 254  
|                                          |  |                |       |      |   |      
|                                          |  | $              | 3,318 |      | $ | 4,607
|                                          |  |                |       |      |   |      

Note 6. Capital Lease Obligations

The minimum future lease payments related to capital leases at December 31, 2006 are as follows (in thousands):



|                                           |  |   |   
|------------------------------------------ |  | - | --
|2007                                       |  | $ | 10
|2008                                       |  |   | 10
|2009                                       |  |   | 3 
|                                           |  |   |   
|Total minimum lease payments               |  |   | 23
|Less amount representing interest payments |  |   | 1 
|                                           |  |   |   
|Present value of minimum lease payments    |  | $ | 22
|                                           |  |   |   



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VALERA PHARMACEUTICALS, INC

NOTES TO FINANCIAL STATEMENTS(Continued)



Note 7. Credit Line Agreement

In October 2005, the Company entered into a two-year, $7,500,000 line of credit with Merrill Lynch Capital. Under the line of credit, the amount the Company may borrow at any given time is dependent upon its accounts
receivable balance and related aging of such accounts. In June 2006, the line of credit was amended for interest, covenant and operational terms. Borrowings under the amended line of credit bear an initial interest rate at the sum of the one-month
LIBOR rate plus 3.25% (8.58% at December 31, 2006). The Company is subject to certain covenants under the credit agreement. In connection with the credit agreement, the Company pledged all of its assets, with the exception of intellectual
property, to Merrill Lynch. As of December 31, 2006 and 2005, the Company had $0 and approximately $1.5 million outstanding under the line of credit. The interest rate on the outstanding balance was 8.14% at December 31, 2005. In February
2006, the Company used a portion of the net proceeds from its initial public offering to repay amounts outstanding under the line of credit.

Note 8.
Commitments

The Company leases its facilities and certain equipment under non-cancellable operating lease agreements. The minimum
future lease payments under these leases are as follows (in thousands):



|                         |  |   |       
|------------------------ |  | - | ------
|Year ending December 31: |  |   |       
|2007                     |  | $ | 1,319 
|2008                     |  |   | 1,319 
|2009                     |  |   | 1,315 
|2010                     |  |   | 1,399 
|2011                     |  |   | 1,484 
|Thereafter               |  |   | 4,822 
|                         |  |   |       
|                         |  | $ | 11,658
|                         |  |   |       

Total rent expense was approximately $1.6 million, $1.4 million, and $0.7 million, for the years
ended December 31, 2006, 2005 and 2004, respectively. The Companys building lease expires March 31, 2015, and the equipment lease expires February 2009. The Companys building lease includes escalation clauses that go into
effect in 2009 and 2010, which will result in greater rent payments from 2009 to 2015. The Company records rent expense on a straight-line basis over the term of the lease. The Company has two 5-year renewal options under its building lease.

The Company is a party to certain agreements that require the Company to pay royalties to third parties based on certain net product
sales. For the years ended December 31, 2006, 2005 and 2004, the Company incurred royalty expense of approximately $0.9 million, $1.3 million and $0.3 million, respectively. Future royalties are dependent on future sales levels.

Purchase Commitments

On May 17, 2006, the Company entered into a supply agreement with Plantex USA Inc. whereby Plantex would supply the Company with the active pharmaceutical ingredient (API) N-Trifluroacetyl-adriamycin-14 valerate, otherwise
known as Valrubicin, in connection with the Companys anticipated launch of the product Valstar for the treatment of bladder cancer. Under the agreement, the Company will only source API from Plantex in connection with the development,
manufacture or sale of, and securing regulatory approval for, Valstar in the United States, its territories and possessions, and Canada (the Territory). Plantex will manufacture and supply all of the Companys requirements for API
for commercial sale of Valstar in the Territory. Under the terms of the agreement, beginning in the calendar year following the year in which the Company receives regulatory approval to re-launch Valstar in the United States, the Company will be
required to purchase a minimum of $1.0 million of Valrubicin each calendar year until the agreement expires. The agreement will expire ten years after the date of the first commercial sale of Valstar.



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VALERA PHARMACEUTICALS, INC

NOTES TO FINANCIAL STATEMENTS(Continued)



Note 9. Capitalization

Reverse Stock Split

On January 27, 2006, the Company effected a one-for-six reverse
stock split. In connection with the reverse stock split, every outstanding six shares of the Companys common stock were replaced with one share of the Companys common stock. All references to common stock, common shares outstanding,
average number of common shares outstanding and per share amounts in these financial statements and notes to financial statements prior to the effective date of the reverse stock split have been restated to reflect the one-for-six reverse stock
split on a retroactive basis. Effective upon consummation of the initial public offering, the Company reduced the number of common shares authorized for issuance to 30,000,000.

Common Stock

The Company had
14,936,641 and 1,667,082 shares of common stock outstanding at December 31, 2006 and 2005, respectively. The Company is authorized to issue 30,000,000 shares of common stock with a par value of $0.001 per share. Each holder of common stock is
entitled to one vote of each share of common stock held of record on all matters on which stockholders generally are entitled to vote.

In
February 2006, the Company closed its initial public offering in which it issued 3,862,500 shares of its common stock at $9.00 per share. In conjunction with this offering all of the Companys preferred stock converted into 9,355,714 shares of
common stock. As a result, the Company had 14,885,296 shares of common stock outstanding after the closing its initial public offering. During the twelve months ended December 31, 2006, 51,345 shares of common stock were issued as a result of
stock option exercises.

Holders of shares of the Companys common stock are entitled to one vote for each share held of record on all
matters to be voted on by stockholders. There is no cumulative voting with respect to the election of directors. The holders of the Companys common stock are entitled to receive dividends when, as and if declared by the board of directors out
of funds legally available therefore subject to the rights of any class of stock having a preference as to dividends. Under the Companys credit agreement with Merrill Lynch Capital, the Company agreed to not declare or pay any cash dividends.

In the event of a liquidation, dissolution or winding up of us, the holders of the Companys common stock are entitled to share
ratably in all assets remaining available for distribution to them after payment of liabilities and after provision has been made for each class of stock, if any, having preference over the common stock. Holders of common stock have no conversion,
preemptive or other subscription rights, and there are no redemption provisions applicable to the common stock. The rights, preferences and privileges of holders of common stock are subject to and may be affected by, the rights of the holders of any
shares of preferred stock that we may designate and issue in the future.

Convertible Preferred Stock

All of the Companys outstanding preferred stock was converted into common stock in conjunction with the initial public offering. In February 2006,
the Company filed an amended and restated Certificate of Incorporation that removed the designations, rights and preferences of the convertible preferred stock. Effective upon consummation of the initial public offering, the Company reduced the
number of the number of preferred shares authorized for issuance to 5,000,000.

Note 10. Stock-Based Compensation

In September 2002, the Company adopted the Valera Pharmaceuticals Equity Incentive Plan, which provides for the granting of nonqualified and incentive
stock options, as defined by the Internal Revenue Code, to key employees of the Company at prices not less than the fair market value at the date of grant for incentive stock options granted. The option price for each share of common stock for
non-qualified options is determined by the board of directors and may be more or less than the fair market value of a share of common stock. The options granted by the Company generally have a life of ten years and vest over a period as determined
by the board of directors, which is typically four years.



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VALERA PHARMACEUTICALS, INC

NOTES TO FINANCIAL STATEMENTS(Continued)



The Company adopted SFAS No. 123(R), Shared-Based Payment on January 1,
2006. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Under SFAS 123(R),
the options the Company granted in prior years as a non-public company (prior to the initial filing of its Registration Statement in March 2005) that were valued using the minimum value method, were not expensed in 2006 or will not be expensed in
future periods. Options granted as a non-public company and accounted for using the intrinsic value method (cheap stock), will continue to be expensed over the vesting period. The Company adopted the prospective transition method for these options.
Options granted as a public company are expensed under the modified prospective method.

SFAS No. 123(R) does not change the
accounting guidance for how the Company accounts for options issued to non employees. The Company accounts for options issued to non-employees under SFAS No. 123 and EITF Issue No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. As such, the value of such options is periodically re-measured and income or expense is recognized during their vesting terms.

Under the modified-prospective-transition method, under SFAS No. 123(R), the Company is required to record compensation expense for all awards
granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding as of the beginning of the period of adoption. The Company measured stock-based compensation using the Black Scholes option pricing
model.

The following ranges of assumptions were used to compute employee stock-based compensation:



|                                             |  |   |               |  
|-------------------------------------------- |  | - | ------------- | -
|Risk- free interest rate                     |  |   | 3.90% - 5.01  | %
|Expected volatility                          |  |   | 61.1% - 66.15 | %
|Expected dividend yield                      |  |   | 0.0           | %
|Expected life (in years)                     |  |   | 6.25          |  
|Forfeiture rate                              |  |   | 0% -13        | %
|Weighted average fair value at date of grant |  | $ | 6.10          |  

Expected volatility is based upon an appropriate peer group within the Companys industry
sector. The expected life of the awards represents the period of time that options granted are expected to be outstanding.

At December 31,
2006, the Company changed its estimated employee forfeiture rate from 4% to 13% as a result of greater than expected actual stock option forfeitures during 2006. The Company used the most up-to-date historical information to estimate forfeitures in
the valuation model. As a result of the change in the forfeiture rate, the Company recorded approximately $72,000 of income and decreased the loss per share, basic and diluted by $0.01 as a result of the revised cumulative stock based compensation
adjustment.

The risk-free rate for periods within the expected life of the option is based on implied yields on U.S. Government Issues in
effect at the time of grant. Compensation cost is recognized using a straight-line method over the vesting or service period and net of estimated forfeitures.

The following table presents all employee stock based compensation costs recognized in the Companys statements of operations:



|                                                               |  |                         |     |      |   |      |      |  |   |      
|-------------------------------------------------------------- |  | ----------------------- | --- | ---- | - | ---- | ---- |  | - | -----
|                                                               |  | Year Ended December 31,
|                                                               |  | 2006                    |     | 2005 |   |      | 2004
|                                                               |  | (in thousands)         
|Employee Stock-Based Compensation under Intrinsic Value Method |  | $                       | 192 |      | $ | (527 | )    |  | $ | 3,104
|Employee Stock-Based Compensation under Fair Value Method      |  |                         | 776 |      |   |     |      |  |   |     
|                                                               |  |                         |     |      |   |      |      |  |   |      
|Total Employee Stock-Based Compensation                        |  | $                       | 968 |      | $ | (527 | )    |  | $ | 3,104
|                                                               |  |                         |     |      |   |      |      |  |   |      



75



---

VALERA PHARMACEUTICALS, INC

NOTES TO FINANCIAL STATEMENTS(Continued)



In 2005, as a result of the Companys marked to market of previous re-priced options, the
Company had to reverse previous recorded stock-based compensation.

The incremental employee stock-based compensation recognized in
connection with the adoption of FAS 123(R) increased the pre-tax and after-tax loss for the year ended December 31, 2006, by approximately $776,000, and increased the loss per share, basic and diluted by $(0.06).

The following table illustrates the pro-forma effect on net income per share if the Company recorded compensation expense based on the fair value method
for all employee stock-based compensation awards:



|                                                                                                                |  |                         |        |   |      |   |         |  
|--------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------- | -
|                                                                                                                |  | Year Ended December 31, |       
|                                                                                                                |  | 2005                    |        |   | 2004 |  
|                                                                                                                |  | (in thousands)          |       
|Net loss attributable to common stock holdersas reported                                                       |  | $                       | (1,344 | ) |      | $ | (17,884 | )
|Add: non-cash employee compensation as reported                                                                 |  |                         | (527   | ) |      |   | 3,104   |  
|Deduct: total employee stock-based compensation expense determined under fair value based method for all awards |  |                         | (750   | ) |      |   | (302    | )
|                                                                                                                |  |                         |        |   |      |   |         |  
|Net income to common stockholderspro-forma                                                                     |  | $                       | (2,621 | ) |      | $ | (15,082 | )
|                                                                                                                |  |                         |        |   |      |   |         |  
|Basic and diluted net loss per shareas reported                                                                |  | $                       | (0.81  | ) |      | $ | (10.73  | )
|Basic and diluted net loss per sharepro-forma                                                                  |  | $                       | (1.57  | ) |      | $ | (9.05   | )

The fair value of the options was estimated at the date of grant using the minimum value pricing
model with the following assumptions:



|                          |  |                         |   |  |            |   |  |      |  
|------------------------- |  | ----------------------- | - |  | ---------- | - |  | ---- | -
|                          |  | Year Ended December 31, |  
|                          |  | 2005                    |   |  |            |  
|                          |  | Public                  |   |  | Non-Public |   |  | 2004 |  
|Risk-free interest rate   |  | 4.27                    | % |  | 3.90       | % |  | 4.24 | %
|Dividend yield            |  | 0                       | % |  | 0          | % |  | 0    | %
|Volatility                |  | 61                      | % |  | 0          | % |  | 0    | %
|Expected lives (in years) |  | 6.3                     |   |  | 4.0        |   |  | 4.0  |  

The following table summarizes option activity for the Companys common stock for the years
ended December 31, 2004, 2005, and 2006.



|                                 |  |                      |   |  |                                 |       |                          |   |                                  |  |    
|-------------------------------- |  | -------------------- | - |  | ------------------------------- | ----- | ------------------------ | - | -------------------------------- |  | ---
|                                 |  | Common Stock Options |   |  | Weighted-Average Exercise Price |       | AggregateIntrinsic Value |   | Weighted AverageContractual Life
|                                 |  | (in thousands)      
|Outstanding at December 31, 2003 |  | 772,193              |   |  | $                               | 3.00  |                          |   |                                  |  |    
|Granted                          |  | 353,832              |   |  | $                               | 3.00  |                          |   |                                  |  |    
|Exercised                        |  |                     |   |  |                                 |       |                          |   |                                  |  |    
|Forfeited                        |  | (6,600               | ) |  | $                               | 3.00  |                          |   |                                  |  |    
|                                 |  |                      |   |  |                                 |       |                          |   |                                  |  |    
|Outstanding at December 31, 2004 |  | 1,119,425            |   |  | $                               | 3.00  |                          |   |                                  |  |    
|Granted                          |  | 193,594              |   |  | $                               | 11.55 |                          |   |                                  |  |    
|Exercised                        |  | (417                 | ) |  | $                               | 3.00  |                          |   |                                  |  |    
|Forfeited                        |  | (46,753              | ) |  | $                               | 4.45  |                          |   |                                  |  |    
|                                 |  |                      |   |  |                                 |       |                          |   |                                  |  |    
|Outstanding at December 31, 2005 |  | 1,265,849            |   |  | $                               | 4.25  |                          |   |                                  |  |    
|Granted                          |  | 390,200              |   |  | $                               | 8.74  |                          |   |                                  |  |    
|Exercised                        |  | (51,345              | ) |  | $                               | 3.05  |                          |   |                                  |  |    
|Forfeited                        |  | (106,541             | ) |  | $                               | 6.73  |                          |   |                                  |  |    
|                                 |  |                      |   |  |                                 |       |                          |   |                                  |  |    
|Outstanding at December 31, 2006 |  | 1,498,163            |   |  | $                               | 5.29  |                          | $ | 607                              |  | 7.6
|                                 |  |                      |   |  |                                 |       |                          |   |                                  |  |    
|Exercisable at December 31, 2006 |  | 791,730              |   |  | $                               | 3.51  |                          | $ | 279                              |  | 6.9
|                                 |  |                      |   |  |                                 |       |                          |   |                                  |  |    



76



---

VALERA PHARMACEUTICALS, INC

NOTES TO FINANCIAL STATEMENTS(Continued)



The total intrinsic value of the options exercised during the year ended December 31, 2006 was
$125,131. The Company received approximately $157,000 of cash from stock option exercises during the year ended December 31, 2006. As of December 31, 2006, there was approximately $2.4 million of total employee unrecognized compensation
cost related to non-vested stock-based compensation awards granted under the Plan. That cost is expected to be recognized over a weighted average period of three years.

For the years ended December 31, 2004, 2005 and 2006 the Company granted a total of 5,000, 10,833 and 0 options, respectively, to certain consultants. The Company has accounted for non-employee options in
accordance with EITF 96-18 and, accordingly, recorded non-cash expense of approximately $51,000, 164,000 and $8,000 for the years ended December 31, 2004, 2005 and 2006 respectively.

During the twelve month period ended December 31, 2006, the Company granted stock options with exercise prices as follows:



|                                 |  |                          |  |                                |      |                                      |   |                                          |  |  
|-------------------------------- |  | ------------------------ |  | ------------------------------ | ---- | ------------------------------------ | - | ---------------------------------------- |  | -
|Grants Made During Quarter Ended |  | Number ofOptions Granted |  | Weighted AverageExercise Price |      | Weighted AverageFair Value per Share |   | Weighted AverageIntrinsic Valueper Share
|March 31, 2006                   |  | 220,600                  |  | $                              | 9.08 |                                      | $ | 5.57                                     |  | 
|June 30, 2006                    |  | 122,100                  |  | $                              | 8.96 |                                      | $ | 5.87                                     |  | 
|September 30, 2006               |  | 7,500                    |  | $                              | 7.36 |                                      | $ | 4.79                                     |  | 
|December 31, 2006                |  | 40,000                   |  | $                              | 6.45 |                                      | $ | 4.71                                     |  | 
|                                 |  |                          |  |                                |      |                                      |   |                                          |  |  
|Total                            |  | 390,200                  |  | $                              | 8.74 |                                      | $ | 5.56                                     |  | 
|                                 |  |                          |  |                                |      |                                      |   |                                          |  |  

During the twelve month period ended December 31, 2005, the Company granted stock options
with exercise prices as follows:



|                                 |  |                          |  |                                |       |                                      |   |                                          |  |   |      
|-------------------------------- |  | ------------------------ |  | ------------------------------ | ----- | ------------------------------------ | - | ---------------------------------------- |  | - | -----
|Grants Made During Quarter Ended |  | Number ofOptions Granted |  | Weighted AverageExercise Price |       | Weighted AverageFair Value per Share |   | Weighted AverageIntrinsic Valueper Share
|March 31, 2005                   |  | 14,499                   |  | $                              | 6.00  |                                      | $ | 16.20                                    |  | $ | 10.20
|June 30, 2005                    |  | 143,594                  |  | $                              | 12.00 |                                      | $ | 12.00                                    |  |   |     
|September 30, 2005               |  | 4,334                    |  | $                              | 12.00 |                                      | $ | 12.00                                    |  |   |     
|December 31, 2005                |  | 31,167                   |  | $                              | 12.00 |                                      | $ | 12.00                                    |  |   |     
|                                 |  |                          |  |                                |       |                                      |   |                                          |  |   |      
|Total                            |  | 193,594                  |  | $                              | 11.55 |                                      | $ | 12.31                                    |  |   |     
|                                 |  |                          |  |                                |       |                                      |   |                                          |  |   |      

During the twelve month period ended December 31, 2004, the Company granted stock options
with exercise prices as follows:



|                                 |  |                          |  |                                |      |                                      |   |                                          |  |   |      
|-------------------------------- |  | ------------------------ |  | ------------------------------ | ---- | ------------------------------------ | - | ---------------------------------------- |  | - | -----
|Grants Made During Quarter Ended |  | Number ofOptions Granted |  | Weighted AverageExercise Price |      | Weighted AverageFair Value per Share |   | Weighted AverageIntrinsic Valueper Share
|March 31, 2004                   |  |                         |  |                                |     |                                      |   |                                         |  |   |     
|June 30, 2004                    |  | 833                      |  | $                              | 3.00 |                                      | $ | 4.80                                     |  | $ | 1.80 
|September 30, 2004               |  | 329,666                  |  | $                              | 3.00 |                                      | $ | 5.40                                     |  | $ | 2.40 
|December 31, 2004                |  | 23,333                   |  | $                              | 3.00 |                                      | $ | 16.20                                    |  | $ | 13.20
|                                 |  |                          |  |                                |      |                                      |   |                                          |  |   |      
|Total                            |  | 353,832                  |  | $                              | 3.00 |                                      | $ | 6.11                                     |  |   |     
|                                 |  |                          |  |                                |      |                                      |   |                                          |  |   |      



77



---

VALERA PHARMACEUTICALS, INC

NOTES TO FINANCIAL STATEMENTS(Continued)



The following table summarizes information about stock options outstanding and exercisable at
December 31, 2006:



|                        |  |             |  |                           |  |                                |       |             |         |                                |   |      
|----------------------- |  | ----------- |  | ------------------------- |  | ------------------------------ | ----- | ----------- | ------- | ------------------------------ | - | -----
|                        |  | Outstanding |  |                          
|                        |  |             |  | Weighted Average          |  |                                |       | Exercisable
|Range of Exercise Price |  | Number      |  | RemainingContractual Life |  | Weighted AverageExercise Price |       | Number      |         | Weighted AverageExercise Price
|$3.00                   |  | 981,331     |  | 6.8 years                 |  | $                              | 3.00  |             | 745,393 |                                | $ | 3.00 
|$5.96-$8.85             |  | 166,666     |  | 9.4 years                 |  | $                              | 8.05  |             | 2,294   |                                | $ | 6.00 
|$9.00-$12.00            |  | 350,166     |  | 8.9 years                 |  | $                              | 10.38 |             | 44,043  |                                | $ | 12.00
|                        |  |             |  |                           |  |                                |       |             |         |                                |   |      
|$3.00-$12.00            |  | 1,498,163   |  | 7.6 years                 |  | $                              | 5.29  |             | 791,730 |                                | $ | 3.51 
|                        |  |             |  |                           |  |                                |       |             |         |                                |   |      

The following table summarizes information about stock options exercisable:



|                                |  |              |         |      |   |         |  |   |        
|------------------------------- |  | ------------ | ------- | ---- | - | ------- |  | - | -------
|                                |  | December 31,
|                                |  | 2006         |         | 2005 |   | 2004   
|Exercisable Stock Options       |  |              | 791,730 |      |   | 605,032 |  |   | 334,164
|Weighted Average Exercise Price |  | $            | 3.51    |      | $ | 3.11    |  | $ | 3.00   

As of December 31, 2006, the Company had a total of 1,833,333 shares of its common stock for
issuance pursuant to its Equity Plan. This included 1,498,163 of stock options outstanding, 51,762 of previously exercised stock options and 283,408 of stock options available for grant.

Note 11. Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting and the amount used for income tax purposes. The Companys deferred tax assets relate primarily to net operating loss carryforwards, research and development tax
credits, and non-cash stock-based compensation. At December 31, 2006 and 2005, a valuation allowance was recorded to fully offset the net deferred tax asset. The change in the valuation allowance for the years ended December 31, 2006 and
2005 was approximately $3.9 million and $4.9 million, respectively. Significant components of the Companys deferred tax assets were as follows:



|                                            |  |                |         |   |      |   |         |  
|------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                            |  | December 31,   |        
|                                            |  | 2006           |         |   | 2005 |  
|                                            |  | (in thousands) |        
|Deferred tax assets:                        |  |                |         |   |      |   |         |  
|Net operating loss carryforwards            |  | $              | 12,593  |   |      | $ | 7,770   |  
|Research and development credits            |  |                | 1,604   |   |      |   | 1,423   |  
|Stock-based compensation                    |  |                |        |   |      |   | 904     |  
|Amortization of stock-based compensation    |  |                | 192     |   |      |   | 126     |  
|Non-employee stock compensation             |  |                | 90      |   |      |   | 87      |  
|Other                                       |  |                | 811     |   |      |   | 1,049   |  
|                                            |  |                |         |   |      |   |         |  
|Total gross deferred tax assets             |  |                | 15,290  |   |      |   | 11,359  |  
|Deferred tax liabilities:                   |  |                |         |   |      |   |         |  
|Depreciation and amortization               |  |                | 197     |   |      |   | 134     |  
|                                            |  |                |         |   |      |   |         |  
|Total gross deferred tax liabilities        |  |                | 197     |   |      |   | 134     |  
|Valuation allowance for deferred tax assets |  |                | (15,093 | ) |      |   | (11,225 | )
|                                            |  |                |         |   |      |   |         |  
|Net deferred tax assets                     |  | $              |        |   |      | $ |        |  
|                                            |  |                |         |   |      |   |         |  



78



---

VALERA PHARMACEUTICALS, INC

NOTES TO FINANCIAL STATEMENTS(Continued)



As of December 31, 2006, the Company had federal net operating loss carryforwards of
approximately $32.5 million. The net operating loss carryforwards will expire at various dates beginning in 2022, if not utilized. The Company had research and development tax credit carry forwards at December 31, 2006, of approximately $1.6
million, which will begin to expire in 2022. If an ownership change, as defined under Internal Revenue Code Section 382, occurs the use of these carry forwards may be subject to limitation.

(Benefit from) provision for income tax consists of:



|        |  |                           |      |   |      |   |      |  |   |      |  
|------- |  | ------------------------- | ---- | - | ---- | - | ---- |  | - | ---- | -
|        |  | For the Year December 31, |     
|        |  | 2006                      |      |   | 2005 |   | 2004 | 
|        |  | (in thousands)            |     
|Federal |  | $                         |     |   |      | $ | 20   |  | $ |     |  
|State   |  |                           | (207 | ) |      |   | 55   |  |   | (243 | )
|        |  |                           |      |   |      |   |      |  |   |      |  
|Total   |  | $                         | (207 | ) |      | $ | 75   |  | $ | (243 | )
|        |  |                           |      |   |      |   |      |  |   |      |  

In 2006, the New Jersey Economic Development Authority approved the Companys application to
sell New Jersey State income tax benefits under the New Jersey Technology Tax Transfer Program (the Program). During the fourth quarter of 2006, the Company recognized approximately $193,000 from the sale of the State of New Jersey
income tax benefits. The Program requires that the Company maintain certain employment levels in New Jersey and that the proceeds from the sale of the tax benefits be spent in New Jersey. The Company participated in this program in 2004 as well.
During the fourth quarter of 2004, the Company recognized $243,000 from the sale of State of New Jersey income tax benefits.

The Company
has incurred net operating losses since inception. However, in 2005 the Company generated taxable income as a result of certain temporary and permanent differences between book income and taxable income. As a result, the Company recorded an
alternative minimum tax provision of $20,000 for federal purposes and $55,000 for state purposes.

A reconciliation of the statutory tax
rates and the effective tax rates for the periods ended:



|                                                          |  |              |    |  |      |    |  |      |   
|--------------------------------------------------------- |  | ------------ | -- |  | ---- | -- |  | ---- | --
|                                                          |  | December 31, |   
|                                                          |  | 2006         |    |  | 2005 |    |  | 2004 |   
|Statutory rate                                            |  | (34          | )% |  | (34  | )% |  | (34  | )%
|State and local income taxes (net of federal tax benefit) |  | (1           | )  |  | (3   | )  |  | (6   | ) 
|Research and development tax credits                      |  | (1           | )  |  | (11  | )  |  | (2   | ) 
|Alternative minimum tax                                   |  |             |    |  | 2    |    |  |     |   
|Other permanent items                                     |  | 3            |    |  | 6    |    |  |     |   
|Other                                                     |  | 4            |    |  |     |    |  |     |   
|Change in valuation allowance                             |  | 28           |    |  | 46   |    |  | 42   |   
|                                                          |  |              |    |  |      |    |  |      |   
|                                                          |  | (1           | )% |  | 6    | %  |  | 0    | % 
|                                                          |  |              |    |  |      |    |  |      |   



79



---

VALERA PHARMACEUTICALS, INC

NOTES TO FINANCIAL STATEMENTS(Continued)



Note 12. Net Loss Per Share

The Company computes its basic net loss per share by dividing net loss by the weighted-average number of shares of common stock outstanding. Diluted net loss per share of common stock (Diluted EPS) is
computed by dividing net loss by the weighted-average number of shares of common stock and dilutive common equivalent shares then outstanding as long as such impact would not be anti-dilutive. All of the common stock equivalent shares for the years
ended December 31, 2006, 2005 and 2004 have been excluded from the computation of diluted net loss per share as their effect would be anti-dilutive.



|                                     |  |                         |        |      |                     |        |                     |   |        |                     |  |                     |  |   |                     |   |  |      
|------------------------------------ |  | ----------------------- | ------ | ---- | ------------------- | ------ | ------------------- | - | ------ | ------------------- |  | ------------------- |  | - | ------------------- | - |  | -----
|                                     |  | Year Ended December 31, |        |      |                     |        |                    
|                                     |  | 2006                    |        | 2005 |                     | 2004  
|                                     |  | Net loss(Numerator)     |        |      | Shares(Denominator) |        | Net loss(Numerator) |   |        | Shares(Denominator) |  | Net loss(Numerator) |  |   | Shares(Denominator)
|Basic net loss                       |  | $                       | 13,939 |      |                     | 13,580 |                     | $ | (1,344 | )                   |  | 1,667               |  | $ | (12,023             | ) |  | 1,667
|Deemed dividend                      |  |                         |       |      |                     |       |                     |   |       |                     |  |                    |  |   | (5,681              | ) |  |     
|                                     |  |                         |        |      |                     |        |                     |   |        |                     |  |                     |  |   |                     |   |  |      
|Basic net loss per share factors     |  | $                       | 13,939 |      |                     | 13,580 |                     | $ | (1,344 | )                   |  | 1,667               |  | $ | (17,884             | ) |  | 1,667
|                                     |  |                         |        |      |                     |       
|Effect of preferred stock conversion |  |                         |       |      |                     |       |                     |   |       |                     |  |                    |  |   |                    |   |  |     
|Effect of dilutive stock options     |  |                         |       |      |                     |       |                     |   |       |                     |  |                    |  |   |                    |   |  |     
|                                     |  |                         |        |      |                     |        |                     |   |        |                     |  |                     |  |   |                     |   |  |      
|Diluted net loss per share factors   |  | $                       | 13,939 |      |                     | 13,580 |                     | $ | (1,344 | )                   |  | 1,667               |  | $ | (17,884             | ) |  | 1,667
|                                     |  |                         |        |      |                     |        |                     |   |        |                     |  |                     |  |   |                     |   |  |      
|Basic and diluted net loss per share |  | $                       | (1.03  | )    |                     |        |                     | $ | (0.81  | )                   |  |                     |  | $ | (10.73              | ) |  |      

Note 13. Related Party Transactions

In June 2004, David S. Tierney, the Companys President and CEO, loaned the Company $200,000 at prime plus 1% above the UBS Margin Interest Rate. The
loan was repaid in November 2004. Interest in the amount of $2,000 is included in interest expense for 2004.

In August 2004, in connection
with the sale of the Companys Series C Convertible Preferred Stock, the Company paid Sanders Morris Harris, Inc. a fee of $280,000 for its services as placement agent. James C. Gale, the Chairman of the Companys board of directors, is a
managing director of Sanders Morris Harris, Inc.

Sanders Morris Harris, Inc. and its affiliates own approximately 40% of the outstanding
equity of BioPro Pharmaceutical, Inc. and over 90% of the outstanding equity of Alpex Pharma S.A., two companies with which the Company has agreements to distribute, develop and market its Vantas product. The Company received payments of
approximately $100,000 and $300,000 during the years ended December 31, 2006 and 2005, respectively from BioPro. The Company made payments of approximately $145,000 and $400,000 during the years ended December 31, 2006 and 2005,
respectively to Alpex.

On July 17, 2006, the Company entered into the Shareholders Agreement pursuant to which the Company
received a 19.9% ownership in a newly created Dutch company called Spepharm Holding B.V. In accordance with the Shareholders Agreement, David S. Tierney, M.D., Valeras President and Chief Executive Officer and Mr. James Gale, the
Companys chairman of the board of directors, were appointed as members of Spepharms initial supervisory board. Additional investors in Spepharm include Life Sciences Opportunities Fund (Institutional) II, L.P and Life Sciences
Opportunities Fund II, L.P. Both funds are funds managed by, and affiliates of, SMH, whose affiliates own approximately 37% of the outstanding common stock of the Company. Mr. Gale is a Managing Director of SMH and the investment manager of
such funds that hold shares of Valera and has sole voting and dispositive power over such shares. SMH, along with a third party unaffiliated with the Company, have committed EUR 20,000,000 to the Spepharm venture.



80



---

VALERA PHARMACEUTICALS, INC

NOTES TO FINANCIAL STATEMENTS(Continued)



On September 27, 2006, we entered into a License and Distribution Agreement with Spepharm
Holding B.V. (Spepharm). Under the terms of the agreement, we will give Spepharm the exclusive licensing and distributing rights to our products under the trademark Vantas® and Supprelin-LA in the European Union as well as Norway and Switzerland for a period
of ten years, unless sooner terminated as provided by the agreement. Spepharm will pay us for our supply and Spepharms distribution of the products under the agreement an aggregate amount equal to forty percent (40%) of Net Sales
(the Royalty Amount) as defined by the agreement based on an established transfer price. In addition, following the end of each quarter, Spepharm will pay us an amount equal to the difference between (a) the aggregate Royalty Amount
for such calendar quarter minus (b) the aggregate transfer prices paid by Spepharm during such calendar quarter.

Note 14. Defined Contribution
Plan

The Company sponsors a 401(k) plan for eligible employees. The Companys contributions to the plan are discretionary and are
50% of the employees contribution, not to exceed 5% of total compensation. Under the plan, each employee is fully vested in his or her deferred salary contributions. The Companys contributions vest over a three year period. The total
Company 401(k) contributions amounted to approximately $239,000, $164,000 and $55,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

Note 15. Acquisition of Product

On March 31, 2006, the Company completed its acquisition of the product rights
associated with the product known as Valstar (valrubicin) in the United States and Valtaxin in Canada. As of December 31, 2006, the Company has an intangible asset of approximately $446,000 associated with such product rights. The intangible
asset was recorded at its original cost of $525,000, less accumulated amortization of approximately $79,000 as of December 31, 2006. Intangible assets are stated at cost, less accumulated amortization, and are amortized over their estimated
useful lives using the straight-line method. The Company estimates that the useful life of the Valstar product rights is five years. The Company periodically reviews the original estimated useful lives of long-lived assets and makes adjustments when
appropriate.

Note 16. Selected Quarterly Financial Data (Unaudited)



|                                                                        |  |                                          |        |   |          |   |        |               |  |   |              |   |  |   |        |  
|----------------------------------------------------------------------- |  | ---------------------------------------- | ------ | - | -------- | - | ------ | ------------- |  | - | ------------ | - |  | - | ------ | -
|                                                                        |  | Quarter Ended                            |       
|                                                                        |  | March 31,                                |        |   | June 30, |   |        | September 30, |  |   | December 31, |  
|                                                                        |  | (In thousands, except per share amounts) |       
|2006                                                                    |  |                                          |        |   |          |   |        |               |  |   |              |   |  |   |        |  
|Total net revenue                                                       |  | $                                        | 5,532  |   |          | $ | 6,220  |               |  | $ | 3,013        |   |  | $ | 3,201  |  
|Cost of product sales                                                   |  |                                          | 1,461  |   |          |   | 1,653  |               |  |   | 883          |   |  |   | 1,110  |  
|Total operating expenses                                                |  |                                          | 7,818  |   |          |   | 9,246  |               |  |   | 8,002        |   |  |   | 7,987  |  
|(Loss) from operations                                                  |  |                                          | (2,286 | ) |          |   | (3,026 | )             |  |   | (4,989       | ) |  |   | (4,786 | )
|Provision for (benefit) from income taxes                               |  |                                          | 10     |   |          |   | 10     |               |  |   | (36          | ) |  |   | (191   | )
|Net (loss) attributable to common shareholders                          |  |                                          | (2,112 | ) |          |   | (2,742 | )             |  |   | (4,684       | ) |  |   | (4,401 | )
|Basic net (loss) attributable to common shareholders per common share   |  | $                                        | (0.22  | ) |          | $ | (0.18  | )             |  | $ | (0.31        | ) |  | $ | (0.29  | )
|Diluted net (loss) attributable to common shareholders per common share |  | $                                        | (0.22  | ) |          | $ | (0.18  | )             |  | $ | (0.31        | ) |  | $ | (0.29  | )



|                                                                               |  |                                       |       |          |   |               |  |   |              |   |  |   |        |  
|------------------------------------------------------------------------------ |  | ------------------------------------- | ----- | -------- | - | ------------- |  | - | ------------ | - |  | - | ------ | -
|                                                                               |  | Quarter Ended                         |      
|                                                                               |  | March 31,                             |       | June 30, |   | September 30, |  |   | December 31, |  
|                                                                               |  | (In thousands, except per share data) |      
|2005                                                                           |  |                                       |       |          |   |               |  |   |              |   |  |   |        |  
|Total net revenue                                                              |  | $                                     | 7,695 |          | $ | 10,286        |  | $ | 3,678        |   |  | $ | 5,173  |  
|Cost of product sales                                                          |  |                                       | 1,023 |          |   | 2,951         |  |   | 809          |   |  |   | 1,183  |  
|Total operating expenses                                                       |  |                                       | 5,972 |          |   | 8,777         |  |   | 6,805        |   |  |   | 6,596  |  
|Income (loss) from operations                                                  |  |                                       | 1,723 |          |   | 1,509         |  |   | (3,127       | ) |  |   | (1,423 | )
|Provision (benefit)for income taxes                                            |  |                                       | 160   |          |   | 140           |  |   | (300         | ) |  |   | 75     |  
|Net income (loss) attributable to common shareholders                          |  |                                       | 1,577 |          |   | 1,382         |  |   | (2,808       | ) |  |   | (1,495 | )
|Basic net income (loss) attributable to common shareholders per common share   |  | $                                     | 0.95  |          | $ | 0.83          |  | $ | (1.68        | ) |  | $ | (0.90  | )
|Diluted net income (loss) attributable to common shareholders per common share |  | $                                     | 0.14  |          | $ | 0.12          |  | $ | (1.68        | ) |  | $ | (0.90  | )



81



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VALERA PHARMACEUTICALS, INC.

VALUATION AND QUALIFYING ACCOUNTS SCHEDULE

SCHEDULE II

(in thousands)



|                                                   |  |                                |        |                             |   |                           |  |            |     |                          |   |       |  |   |       
|-------------------------------------------------- |  | ------------------------------ | ------ | --------------------------- | - | ------------------------- |  | ---------- | --- | ------------------------ | - | ----- |  | - | ------
|                                                   |  | Balance at Beginning of Period |        | Charged to Costand Expenses |   | Charged to Other Accounts |  | Deductions |     | Balance at End of Period
|For the year ended December 31, 2006:              |  |                                |        |                             |   |                           |  |            |     |                          |   |       |  |   |       
|Allowance for Sales Returns and Adjustments        |  | $                              | 339    |                             |   | 1,083                     |  |            |     |                          |   | 1,279 |  |   | 143   
|For the year ended December 31, 2005:              |  |                                |        |                             |   |                           |  |            |     |                          |   |       |  |   |       
|Allowance for Sales Returns and Adjustments        |  | $                              | 344    |                             | $ | 2,195                     |  |            |    |                          | $ | 2,200 |  | $ | 339   
|For the year ended December 31, 2004:              |  |                                |        |                             |   |                           |  |            |     |                          |   |       |  |   |       
|Allowance for Sales Returns and Adjustments        |  |                                |        |                             |   | 398                       |  |            |    |                          |   | 54    |  |   | 344   
|For the year ended December 31, 2006:              |  |                                |        |                             |   |                           |  |            |     |                          |   |       |  |   |       
|Allowance for Doubtful Accounts and Cash Discounts |  | $                              | 385    |                             | $ | 840                       |  |            |    |                          | $ | 968   |  | $ | 257   
|For the year ended December 31, 2005:              |  |                                |        |                             |   |                           |  |            |     |                          |   |       |  |   |       
|Allowance for Doubtful Accounts and Cash Discounts |  | $                              | 91     |                             | $ | 557                       |  |            |    |                          | $ | 263   |  | $ | 385   
|For the year ended December 31, 2004:              |  |                                |        |                             |   |                           |  |            |     |                          |   |       |  |   |       
|Allowance for Doubtful Accounts and Cash Discounts |  |                                |       |                             |   | 91                        |  |            |    |                          |   |      |  |   | 91    
|For the year ended December 31, 2006:              |  |                                |        |                             |   |                           |  |            |     |                          |   |       |  |   |       
|Tax Valuation Allowance                            |  | $                              | 11,225 |                             |   | 3,868                     |  |            |     |                          |   |       |  |   | 15,093
|For the year ended December 31, 2005:              |  |                                |        |                             |   |                           |  |            |     |                          |   |       |  |   |       
|Tax Valuation Allowance                            |  | $                              | 10,646 |                             | $ | 579                       |  |            |    |                          |   |      |  | $ | 11,225
|For the year ended December 31, 2004:              |  |                                |        |                             |   |                           |  |            |     |                          |   |       |  |   |       
|Tax Valuation Allowance                            |  |                                | 5,733  |                             |   | 4,913                     |  |            |    |                          |   |      |  |   | 10,646
|For the year ended December 31, 2006:              |  |                                |        |                             |   |                           |  |            |     |                          |   |       |  |   |       
|Inventory Valuation Reserve                        |  | $                              | 1,198  |                             |   | 140                       |  |            |     |                          |   | 160   |  |   | 1,178 
|For the year ended December 31, 2005:              |  |                                |        |                             |   |                           |  |            |     |                          |   |       |  |   |       
|Inventory Valuation Reserve                        |  | $                              | 91     |                             | $ | 1,083                     |  | $          | 138 |                          | $ | 114   |  | $ | 1,198 
|For the year ended December 31, 2004:              |  |                                |        |                             |   |                           |  |            |     |                          |   |       |  |   |       
|Inventory Valuation Reserve                        |  |                                |       |                             |   | 91                        |  |            |    |                          |   |      |  |   | 91    



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|Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
|------- | -------------------------------------------------------------------------------------

None



|Item 9A. | Controls and Procedures
|-------- | -----------------------

Under the supervision and with the participation of our
management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2006 and, based on that
evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective. Disclosure controls and procedures are our controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the Securities Exchange Act), is recorded, processed, summarized and reported, within the
time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in
the reports that we file under the Securities Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required
disclosure.

There were no changes in our internal control over financial reporting during the quarter ended December 31, 2006 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



|Item 9B. | Other Information
|-------- | -----------------

None

Part III



|Item 10. | Directors and Executive Officers of the Registrant
|-------- | --------------------------------------------------

The following sets forth
information for each of our directors and executive officers as of January 1, 2007.



|                       |  |     |  |                                                       
|---------------------- |  | --- |  | ------------------------------------------------------
|Name                   |  | Age |  | Position                                              
|David S. Tierney, M.D  |  | 43  |  | President, Chief Executive Officer and Director       
|Andrew T. Drechsler    |  | 35  |  | Chief Financial Officer and Secretary                 
|Petr F. Kuzma          |  | 63  |  | Vice President of Research and Development            
|Jeremy D. Middleton    |  | 45  |  | Vice President of Business Development                
|Matthew L. Rue, III    |  | 56  |  | Vice President of Marketing and Commercial Development
|James C. Gale          |  | 57  |  | Chairman of the Board of Directors                    
|David R. Dantzker, M.D |  | 63  |  | Director                                              
|Jerome Feldman         |  | 78  |  | Director                                              
|Hubert Huckel, M.D.    |  | 75  |  | Director                                              
|Jeffrey M. Krauss      |  | 50  |  | Director                                              
|Ogden R. Reid          |  | 81  |  | Director                                              
|Howard Silverman       |  | 71  |  | Director                                              
|John T. Spitznagel     |  | 65  |  | Director                                              

David S. Tierney, M.D.joined us in August 2000 as our President and Chief Executive
Officer. In December 2001, Dr. Tierney became a member of our board of directors. Prior to joining us, Dr. Tierney was president of Biovail Technologies, a division of Biovail Corporation, a Canadian drug delivery company, from January
2000 to August 2000. Prior to Biovail, Dr. Tierney spent three years at Roberts Pharmaceutical Corporation as senior vice president of drug development from March 1997 to January 2000. Prior to joining Roberts, Dr. Tierney spent eight
years at Elan Corporation, plc, a pharmaceutical company, in a variety of management positions. Dr. Tierney currently serves as a director on Catalyst Pharmaceutical Partners, a pharmaceutical company and Spepharm Holding B.V. a Dutch
pharmaceutical distributor company. In January 2007, Dr. Tierney was appointed to serve on the board of directors of NexMed, a specialty pharmaceutical company. Dr. Tierney received a medical degree from the Royal College of Surgeons in
Dublin, Ireland and was subsequently trained in internal medicine.



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Andrew T. Drechsler joined us in April 2005 as our Chief Financial Officer and Secretary. Prior to
joining us, from May 2001 to April 2005, Mr. Drechsler served as controller of i-STAT Corporation, a point of care diagnostics company and a division of Abbott Laboratories subsequent to its acquisition in January 2004. He also served as
controller for HydraWEB Technologies, a software development firm, from September 2000 to May 2001. From April 1997 to September 2000, Mr. Drechsler served in various senior financial positions at Biomatrix, a biotech company focused on the
orthopedic and ophthalmic markets until the company was acquired by Genzyme in 2000. From August 1994 to April 1997, Mr. Drechsler was a senior associate with the public accounting firm Coopers & Lybrand LLP. Mr. Drechsler
graduated magna cum laude from Villanova University with a B.S. in Accountancy. Mr. Drechsler obtained his qualification as a certified public accountant in the state of New Jersey.

Petr F. Kuzma is our Vice President of Research and Development. Mr. Kuzma has been with us since 1987 serving in various roles and became
Vice President of Research and Development in March 2000. Mr. Kuzma has over thirty years of experience in the polymer, medical device and pharmaceutical industries. He joined GP Strategies, our former parent and a global provider of training,
e-Learning solutions, management consulting, engineering and simulation services in 1975. During his tenure at GP Strategies, he held numerous research and development positions of increasing scope and responsibility with various divisions of GP
Strategies. Mr. Kuzma received a M.S. in chemical engineering from Slovak University of Technology in Slovakia, a B.S. in chemistry from St. Peters College, and a B.S. in chemical technology from the Institute of Industrial Chemistry in
the Czech Republic.

Jeremy D. Middletonis our Vice President of Business Development. Mr. Middleton joined us in May of 2006.
Prior to joining us, Mr. Middleton was Vice President, Commercial Development at Neose Technologies, a biopharmaceutical company focused on the development of proprietary therapeutic proteins. At Neose, he led the commercial development and
strategic planning groups and was responsible for key aspects of business development. Mr. Middleton began his pharmaceutical career in the United Kingdom with Boots Pharmaceuticals, a predecessor to BASF Pharma which has since been merged into
Abbott Laboratories. He held positions of increasing responsibility with the U.K., Australian and United States operating arms of Boots, including directing the United States business planning process for Synthroid® and Vicodin®. At BASF Pharma and Abbott, he was Global Product Director for Humira®, a treatment for rheumatoid arthritis.

Matthew L. Rue, IIIjoined us as our Vice President of Marketing and Commercial Development in January 2002. Mr. Rue served as a consultant
of ours from August 2000 to December 2001. Prior to joining us, Mr. Rue previously served as director of marketing, product manager, and consultant at Roberts Pharmaceuticals Corporation from 1996 to July 2000. Mr. Rues expertise is
in prescription marketing and product launches and he has launched or re-launched three prescription brands. Prior to joining Roberts, Mr. Rue served as an account supervisor at Cline, Davis & Mann, an advertising company, and was a
senior product manager at Reed & Carnick, a specialty pharmaceutical firm, where he developed and launched numerous over-the-counter and prescription pharmaceuticals. Mr. Rue received a B.F.A. in English from Emerson College.

James C. Galeis the Chairman of our board of directors and has served as a member of our board of directors since December 2001.
Mr. Gale is a managing director of Sanders Morris Harris, Inc., a national investment management and investment banking company and affiliate of several stockholders of ours, and is the managing partner of LOF Partners, an affiliate of Sanders
Morris Harris that manages several stockholders of ours and has served in this capacity since 1998. From 1992 to 1998, Mr. Gale was head of investment banking at Gruntal & Co., L.L.C., a large brokerage and investment banking company.
Prior to joining Gruntal, Mr. Gale originated and managed private equity investments for the Home Insurance Co., Gruntals parent, from 1989 to 1992. Mr. Gale also serves on the board of directors of Relm Wireless Corporation, as well
as several private companies.

David R. Dantzker, M.D.has served as a member of our board of directors since June 2003.
Dr. Dantzker has been a general partner at Wheatley MedTech Partners, L.P., a New York-based venture capital firm and one of our stockholders, since January 2001. He has served on the faculty and in leadership positions of four major
research-oriented medical schools and has authored or co-authored 130 research papers and five textbooks. He is an internationally recognized expert in the area of pulmonary medicine and critical care. Prior to serving with Wheatley Partners,
Dr. Dantzker served as chief executive officer of Redox Pharmaceuticals Corporation from November 2000 until October 2001. Dr. Dantzker served as President of Long Island Jewish Medical Center from July 1993 to October 1997 and President
of North ShoreLIJ Health System from October 1997 until May 2000. Dr. Dantzker is currently chairman of the board of directors of Versamed, Inc. and Oligomerix and a director of CNS, Visionsense, Ltd., Advanced Biohealing Inc. and Neuro
Hi-tech.

Jerome I. Feldmanhas served as a member of our board of directors since January 2005. Mr. Feldman is chairman of the
board of directors and chief executive officer of National Patent Development Corporation, the parent of one of our stockholders, MXL Industries, Inc., and a holding company with interests in optical plastics, paint and hardware distribution and
pharmaceuticals. Mr. Feldman was the founder of GP Strategies Corporation, and from 1959 to 2005 served as its chief executive officer. He has also served as chairman of the board of directors of GP Strategies Corporation from 1999 to 2005.
Mr. Feldman was president of GP Strategies from 1959 until 2001. Mr. Feldman is currently the Chairman of the Executive Committee of GP Strategies Corporation. He



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has been chairman of the board of directors of Five Star Products, Inc., a wholesale distributor of home decorating, hardware and finishing products, since
1994, a director of GSE Systems, Inc., a global provider of real-time simulation and training solutions, since 1994, and chairman of the board of directors of GSE since 1997. Mr. Feldman is also chairman of the New England Colleges Fund and a
former Trustee of Northern Westchester Hospital Center.

Hubert E. Huckel, M.D.has served as a member of our board of directors
since January 2002. From 1964 until his retirement in December 1992, Dr. Huckel served in various positions with the Hoechst Group, an agri-chemical company. At the time of his retirement, he was chairman of the board of Hoechst-Roussel
Pharmaceuticals, Inc., chairman and president of Hoechst-Roussel Agri-Vet Company and a member of the executive committee of Hoechst Celanese Corporation. Dr. Huckel currently serves as a director on the boards of Titan Pharmaceuticals, Inc.,
Thermogenesis Corporation, a biotechnology firm, Concordia Pharmaceuticals, Inc. and Catalyst Pharmaceutical Partners.

Jeffrey M.
Krausshas served as a member of our board of directors since August 2004. Mr. Krauss is also the Chairman of our Audit Committee. Mr. Krauss has been a managing member of Psilos Group Managers, LLC, a New York-based venture capital
firm specializing in healthcare investments since 2000. He is a managing member of the General Partner of Psilos Group Partners II, L.P., and one of our stockholders since August 2004. Prior to joining Psilos, Mr. Krauss spent ten years at
Nazem & Company as a General Partner of three venture capital funds that specialized in healthcare investments from 1990 to 2000. Prior to joining Nazem, Mr. Krauss was an attorney at the law firm of Simpson Thacher & Bartlett
LLP, where he specialized in private equity transactions. Mr. Krauss is currently a volunteer member of the Healthcare Sector Group of the New York City Investment Fund. Mr. Krauss is an attorney and also a certified public accountant.
Mr. Krauss currently serves as a director on the boards of Quovadx, Inc. and Tegal Corporation, as well as several private companies.

Ogden R. Reidhas served as a member of our board of directors since December 2001. Mr. Reid was formerly vice chairman of GTS Duratek, Inc. and is currently a director and the chairman of the audit committee of GP Strategies
Corporation. From 1953 to 1959, he was president and editor of both the New York Herald Tribune Inc. and the New York Herald Tribune S.A. As a member of the United States Congress from 1961 to 1974, he served on the Foreign Affairs, Education and
Labor, and Government Operations Committees. A candidate for Governor of New York in 1974, he later became Commissioner of the New York State Department of Environmental Conservation. He was also chairman of the executive committee for the Board of
MGM from 1956 to 1957. Mr. Reid is currently chairman of the Council of American Ambassadors.

Howard Silvermanhas served as a
member of our board of directors since December 2001. From 1974 to 1995, Mr. Silverman was chairman, president and chief executive officer of Gruntal and Company, a large brokerage and investment banking company. While at Gruntal,
Mr. Silverman served on numerous committees for the New York Stock Exchange. Mr. Silverman formerly served as a director on the boards of Getty Petroleum, Work Wear Corp., Inc., and Carteret Savings Bank. He has also served as a trustee of
Long Island University and Chemotherapy Foundation. Mr. Silverman currently serves as a charter member for the Financial Analysts Federation and The New York Society of Analysts.

John T. Spitznagelhas served as a member of our board of directors since December 2001. Since May 2005 Mr. Spitznagel has served as chairman
and chief executive officer of Esprit Pharma, Inc., a specialty pharmaceutical firm. From 2002 until March 2005, Mr. Spitznagel was the chairman and chief executive officer of ESP Pharmaceuticals, Inc. Previously, from 1996 to 1999,
Mr. Spitznagel served as president and chief executive officer of Roberts Pharmaceutical Corporation, a specialty pharmaceutical firm, which merged with Shire Pharmaceuticals Group plc in 1999. Prior to joining Roberts, Mr. Spitznagel was
president of Reed and Carnrick, a specialty pharmaceutical firm, from 1990 to 1995. Mr. Spitznagel is a director of Barbeau Pharma, Inc. and IRX Therapeutics, Inc. and a trustee of Rider University.

Board Composition

Our amended and restated
certificate of incorporation provides for a classified board of directors consisting of three staggered classes of directors, as nearly equal in number as possible. At each annual meeting of stockholders, a class of directors will be elected for a
three-year term to succeed the directors of the same class whose terms are then expiring. If the proposed merger with Indevus is not consummated, the terms of the directors will expire upon election and qualification of successor directors at the
annual meeting of stockholders to be held during the years 2007 for the Class I directors, 2008 for the Class II directors and 2009 for the Class III directors. Currently:



| |  |  | our Class I directors are Mr. Feldman, Dr. Huckel and Mr. Reid;
| | - |  | ---------------------------------------------------------------



| |  |  | our Class II directors are Dr. Dantzker, Mr. Gale and Mr. Silverman; and
| | - |  | ------------------------------------------------------------------------



| |  |  | our Class III directors are Mr. Krauss, Mr. Spitznagel and Dr. Tierney.
| | - |  | -----------------------------------------------------------------------



85



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The board and each committee of the board observe all criteria for independence established by The NASDAQ
Global Market, or Nasdaq, and other governing laws and regulations. No director will be deemed to be independent unless the board affirmatively determines that the director has no material relationship with us directly, or as an officer, stockholder
or partner of an organization that has a relationship with us.

Appointment of Directors

Pursuant to our second amended and restated investor rights agreement dated August 16, 2004, or investor rights agreements, the following persons
were elected to our board of directors: James C. Gale as representative of the Corporate Opportunities Fund, L.P., David R. Dantzker, M.D., as representative of Wheatley MedTech Partners L.P., Jeffrey M. Krauss as representative of Psilos Group
Managers, LLC, and Jerome Feldman as representative of MXL Industries, Inc. The rights to appoint directors under the investor rights agreement terminated upon the effective date of the registration statement pertaining to our initial public
offering. However, pursuant to our amended and restated certificate of incorporation, which became effective upon the completion of our initial public offering, we have a classified board and Messrs. Gale (Class II), Feldman (Class I), Krauss (Class
III) and Dr. Dantzker (Class II) will each continue to serve as a director for his respective term and until his respective successor is duly elected and qualified. The initial terms of the directors will expire upon election and qualification
of successor directors at the annual meeting of stockholders to be held during the years 2007 for the Class I directors, 2008 for the Class II directors and 2009 for the Class III directors.

Board Committees

The standing committees of our
board of directors consist of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. These committees are described below. Our board of directors may also establish various other committees to assist it in its
responsibilities.

Audit Committee

The
Audit Committee is primarily concerned with the accuracy and effectiveness of the audits of our financial statements by our independent auditors. Its duties include:



| |  |  | selecting independent auditors;
| | - |  | -------------------------------



| |  |  | reviewing the scope of the audit to be conducted by them and the results of their audit;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | approving non-audit services provided to us by the independent auditor;
| | - |  | -----------------------------------------------------------------------



| |  |  | reviewing the integrity, adequacy and effectiveness of our financial reporting process and internal controls; assessing our financial reporting practices, including
the disclosures in our annual and quarterly reports and the accounting standards and principles followed; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | conducting other reviews relating to compliance by our employees with our policies and applicable laws.
| | - |  | -------------------------------------------------------------------------------------------------------

Currently, the Audit Committee is comprised of Messrs. Krauss and Reid and Dr. Huckel, each of whom is independent as defined under Nasdaq rules.
Mr. Krauss currently serves as Chairman of the committee. The board of directors has determined that Mr. Krauss qualifies as audit committee financial expert as that term is defined under the rules of the Securities and
Exchange Commission, or SEC. The Audit Committee met six times during fiscal year 2006.

Compensation Committee

The Compensation Committees primary responsibility is to discharge our board of directors responsibilities relating to compensation of our
senior executives. Currently, the Compensation Committee is comprised of Messrs. Spitznagel and Silverman and Dr. Dantzker, each of whom is independent as defined under Nasdaq rules. Mr. Silverman currently serves as Chairman of the
committee. The Compensation Committee met three times during fiscal year 2006. The Compensation Committees duties and report on executive compensation is included in Item 11. Executive Compensation.

Nominating and Corporate Governance Committee

The
Nominating and Corporate Governance Committees responsibilities include the selection of potential candidates for our board of directors and the development and annual review of our governance principles. This committee also annually reviews
director compensation and benefits, and oversees the annual self-evaluations of our board of directors and its committees. It also makes recommendations to our board of directors concerning the structure and membership of the other board committees.



86



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The Nominating and Corporate Governance Committee is comprised of Messrs. Gale, Krauss and Feldman, each
of whom is independent as defined under Nasdaq rules. Mr. Gale currently serves as Chairman of the committee. The Nominating and Corporate Governance Committee met one time during fiscal year 2006.

Compensation Committee Interlocks and Insider Participation

None of the members of our Compensation Committee were at any time an officer or employee of ours. In addition, none of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one
or more executive officers serving as a member of our board of directors or Compensation Committee. Dr. Dantzker has voting control over 128,753 shares of common stock that are held by various funds of Wheatley Med Tech Partners L.P.
Mr. Silverman invested $126,846 in SMH Valera LLC, which purchased shares of our series C convertible preferred stock in 2004. In addition, Dr. Dantzker was elected a director as a representative of Wheatley Med Tech Partners, L.P. under
our second amended and restated investor rights agreement dated August 16, 2004. Their right to have a representative on our board of directors terminated in February 2006, when the registration statement for our initial public offering was
declared effective.

Code of Conduct

We have a Code of Business Conduct and Ethics, which is attached as an exhibit to this Annual Report on Form 10-K. We require all employees, officers and directors to adhere to this Code in addressing the legal and ethical issues
encountered in conducting their work. The Code of Business Conduct and Ethics requires that our employees, officers and directors avoid conflicts of interest, comply with all laws and other legal requirements, conduct business in an honest and
ethical manner, and otherwise act with integrity and in our best interest. Our Code of Business Conduct and Ethics is intended to comply with Item 406 of the SECs Regulation S-K and Nasdaq.

The Code of Business Conduct and Ethics includes procedures for reporting violations of the Code, which are applicable to all employees, officers and
directors. The Sarbanes-Oxley Act of 2002 requires companies to have procedures to receive, retain and treat complaints received regarding accounting, internal accounting controls or auditing matters and to allow for the confidential and anonymous
submission by employees of concerns regarding questionable accounting or auditing matters. The Code of Business Conduct and Ethics also includes these required procedures.

We have a webpage with our Corporate Code of Business Conduct and Ethics and certain Corporate Governance information. You can access this information on
our webpage through our internet site, www.valerapharma.com, by clicking on the Corporate Information link to the heading Investors. You can also access our Investor Relations webpage directly at
www.valerapharma.com/investors.asp. We will post any amendments to the Code of Business Conduct and Ethics, and any waivers that are required to be disclosed by the rules of either the SEC or Nasdaq,, on our internet site. You can request a copy of
our Code of Business Conduct and Ethics, at no cost, by contacting Investor Relations, 7 Clarke Drive, Cranbury, NJ 08512 or (609-235-3000).

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as
amended, requires that Each of our directors, certain of our officers and stockholders beneficially owning more than 10% of our common stock, file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and
furnish us with copies of all Section 16(a) forms which they file. To our knowledge, and based solely on a review of the copies of such reports furnished to us or written representations that no other reports were required, all fiscal year 2006
Section 16(a) filing requirements applicable to our directors, officers and stockholders beneficially owning more than 10% of our common stock were complied with, except that James C. Gale, Sanders Morris Harris, Inc. and certain funds
affiliated with Sanders Morris Harris, Inc. were late in jointly filing one form 4.



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|Item 11. | Executive Compensation
|-------- | ----------------------

Compensation Discussion and Analysis

Compensation Committee Membership and Organization

The Compensation Committee of the board of directors, or the Compensation Committee, has responsibility for establishing, implementing, and continually monitoring adherence with the Companys compensation philosophy. Its duties
include;



| |  |  | developing guidelines and reviewing the total compensation and performance of our executive officers;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | setting the total compensation of our chief executive officer, or CEO, and evaluating his performance based on corporate goals and objectives;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | making recommendations to the board of directors with respect to incentive and equity-based compensation plans, and programs in order to allow us to attract and
retain qualified personnel; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reviewing director compensation levels and practices, and recommending, from time to time, changes in such compensation levels and practices to the board of
directors.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Compensation Committee consists of no fewer than three members. All members of the Compensation Committee
must meet the independence requirements of the listing standards of NASDAQ and the non-employee director definition of Rule 16b-3 promulgated under Section 16 of the Exchange Act, and at least two members of the Committee must meet the outside
director definition of Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code. Currently, the Compensation Committee is comprised of Messrs. Spitznagel and Silverman and Dr. Dantzker. Mr. Silverman currently
serves as Chairman of the committee.

A copy of the Compensation Committees charter is available at:
http://www.valerapharma.com.The Compensation Committee reviews its charter annually.

The Compensation Committee meets at
scheduled times during the year and meets on an as-necessary interim basis. Additionally, the Compensation Committee considers and takes action by written consent. The Compensation Committee met three times during fiscal year 2006; two of which were
scheduled meetings and one of which was an interim meeting. The interim meeting was called to approve the grant of options to all employees as a result of our initial public offering, or IPO, in February 2006. Additionally, the Compensation
Committee acted by unanimous written consent on two occasions: once in October 2006 to approve an option grant to one of our vice presidents and once in December 2006 for the purpose of amending certain executive officers change in control
agreements and Dr. Tierneys employment agreement in order to provide for certain payments to be made upon the occurrence of a change in control rather than upon the termination of such officers employment within a certain period
following a change in control. These amendments were made pursuant to and in accordance with the rules governing non-qualified deferred compensation promulgated under Section 409A of the Code.

Compensation Philosophy and Objectives

The
Compensation Committees philosophy and objectives in setting compensation policies for executive officers is to align pay with performance, while at the same time providing fair, reasonable and competitive compensation that will allow us to
retain and attract superior executive talent. The Compensation Committee strongly believes that executive compensation should align executives interests with those of stockholders by rewarding achievement of specific annual, long-term, and
strategic goals by the Company, with the ultimate objective of improving stockholder value. To that end, the Compensation Committee believes executive compensation packages provided by the Company to its executive officers should include a mix of
both cash and equity-based compensation that reward performance as measured against established goals.

Role of Executive Officers in Compensation
Decisions

The Compensation Committee makes all compensation decisions for our executive officers and approves recommendations regarding
equity awards to all officers of the Company with the title of vice president and above. The executive officers establish targets and goals and present them to the Compensation Committee. The Compensation Committee reviews and approves the final
targets and maximum levels for each component of the financial objectives.



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Setting Executive Compensation

Based on the foregoing objectives, the Compensation Committee has structured the Companys annual and long-term incentive-based cash and non-cash executive compensation to motivate executives to achieve the
business goals set by the Company and reward the executives for achieving such goals. In furtherance of this, the Compensation Committee engaged a recognized external compensation consultant to conduct a review and evaluate the Companys
current compensation practices and its competitive position in the industry. We refer to this review as the Executive Compensation Review. The Executive Compensation Review provided the Compensation Committee with relevant market data and
alternatives to consider when making compensation decisions for our executive officers. As part of the Executive Compensation Review, companies with comparable revenue in the specialty pharmaceutical and biotechnology industries were selected to
create a custom peer group. The competitive market data for the study included a mix of two recognized external compensation survey sources, and was deemed to fairly represent the labor markets in which the Company competes for executive talent. The
market information served as one of the factors the Compensation Committee considered in determining the total compensation for our executive officers.

In addition to the information provided through the Executive Compensation Review, the Compensation Committee, together with our board of directors, also reviewed and evaluated our level of performance as well as the
performance of each of our executive officers, including Dr. Tierney, in order to determine current and future appropriate compensation levels.

Components of Executive Compensation for Fiscal Year 2006

For the fiscal year ended December 31, 2006, the principal
components of compensation for our executive officers were;



| |  |  | Base salary;
| | - |  | ------------



| |  |  | Annual non-equity incentive bonus;
| | - |  | ----------------------------------



| |  |  | Long-term equity incentives; and
| | - |  | --------------------------------



| |  |  | Other benefits
| | - |  | --------------

Mix of pay
components

Compensation of our executive officers is based on the pay-for-performance philosophy, which emphasizes performance
measures that correlate closely with total stockholder return. Given this, a significant portion of our executives annual and long-term compensation is at-risk. The percentage of compensation at risk increases as the level of position
increases. This provides additional upside potential and downside risk for senior positions, recognizing that these roles have greater influence on the performance of the Company.

Base salary

The Company
provides our executive officers and other employees with base salary to compensate them for services rendered during the fiscal year. The Compensation Committee intends to compensate our executive officers competitively within the industry. In
addition to conducting the Executive Compensation Review, the Compensation Committee considered the scope of and accountability associated with each executive officers position and such factors as the performance and experience of each
executive officer when setting base salary levels for fiscal year 2006. With respect to executive officers other than Dr. Tierney, who is discussed below, the Compensation Committee targeted base salaries to be competitive, benchmarking against
the 25th percentile of the industry. In some circumstances it is necessary to provide compensation above these levels; these circumstances include the need to retain key individuals, to recognize roles that were larger in scope or accountability
than standard market positions and/or to reward individual performance.

Salary levels are typically reviewed annually as part of our
performance review process as well as upon a promotion or other change in job responsibility.

Annual non-equity incentive bonus

Executive officers are eligible to participate in the Valera Incentive Program (the VIP). The VIP links cash incentives
to Company performance, based on short-term, operational measures that are deemed drivers of long-term success. The executive officers establish targets and goals for the Company and presents them to the Compensation Committee. The Compensation
Committee reviews and approves the final targets and maximum levels for each component of the bonus at the first Compensation



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Committee meeting held in the fiscal year. Payment of awards under the VIP is based on the achievement of such objectives for the current year. Upon
completion of the fiscal year, the Compensation Committee assesses the performance of the Company for each objective of the VIP, comparing actual fiscal year results to the pre-determined target and maximum levels for each objective and an overall
percentage amount for the objectives is calculated.

For fiscal year 2006, funding of the VIP was based on the achievement of annual sales
volume, annual spending by functional area, product development milestones and other operational milestones. The annual sales volume and annual spending by functional area goals were derived from our internal projections and business plan.

The formula for determining the bonus award under the VIP for 2006 was as follows:

Eligible Earnings × Individual Incentive Target × (weighted average of Business Performance x Individual Performance)
= Award

The Business Performance aspect of the VIP was structured such that 30% of the annual bonus opportunity was based on the
results for annual sales volume; 30% was based on annual spending by functional area; 30% was based on the product development milestones and 10% was based on the other operational milestones.

All of our executive officers, other than Dr. Tierney, were eligible for annual non-equity incentive target bonuses ranging from twenty-five to
thirty-five percent of their base salary, depending on their positions. Dr. Tierney was eligible for an annual non-equity incentive target bonus of fifty percent of his base salary. The bonus targets were set such that the total target cash
compensation (base salary plus on-target bonus amount) for each officer was competitive to peers in the industry, as set forth in the Executive Compensation Review.

Bonus funding results for fiscal 2006:

The total funding for the business performance aspect
of the VIP for 2006 was 50% of the target annual funding amount. The funding is summarized in the table below:



|                               |  |                             |  |                      |   |  |                      |  
|------------------------------ |  | --------------------------- |  | -------------------- | - |  | -------------------- | -
|Measure                        |  | Achievement                 |  | TargetAnnual Funding |   |  | ActualAnnual Funding |  
|Annual Sales Volume            |  | Not achieved                |  | 30                   | % |  | 0                    | %
|                               |  |                             | 
|Spending by Functional Area    |  | Achieved                    |  | 30                   | % |  | 33                   | %
|                               |  |                             | 
|Product Development Milestones |  | Certain milestones were met |  | 30                   | % |  | 12                   | %
|                               |  |                             | 
|Operational Milestones         |  | Certain milestones were met |  | 10                   | % |  | 5                    | %

The actual VIP awards earned by each executive officer for fiscal year 2006 is set forth in
Summary Compensation Table.

Discretionary bonus payments

From time to time, the Compensation Committee may, on limited occasion, provide one-time discretionary bonuses to certain executive officers in
recognition of a particular achievement or result that is not otherwise reflected in the VIP. No such discretionary awards were made in fiscal year 2006.

Long-term incentives

Options and restricted stock awards. The Compensation
Committee may provide our executive officers with long-term incentive awards through grants of stock options and restricted stock awards. Each of the equity incentive vehicles serves a particular purpose in supporting our long-term compensation
strategy. The Compensation Committee is responsible for determining who will receive awards, when awards will be granted, the exercise price of each stock option grant, and the number of shares of our common stock subject to each option or
restricted stock award. However, the Compensation Committee has delegated to our CEO the authority to grant options to employees below the level of vice president in an amount not to exceed 20,000 shares per grant. The Compensation Committee
considers grants of long-term incentive awards to executive officers each fiscal year.

Stock Options. Stock options enhance
the link between the creation of stockholder value and long-term executive incentive compensation. Stock options provide our executive officers with the opportunity to purchase and maintain an equity interest in the Company and to share in the
appreciation of the value of our common stock. Additionally, stock options maintain a competitive level of total compensation. The Compensation Committee believes that stock options are inherently performance-based and are a form of



90



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at-risk compensation, as the optionee does not receive any benefit unless our stock price rises after the date that the option is granted, thus providing
direct incentive for future performance. Stock option award levels are determined based on prevailing market practice and market data and vary among participants based on their positions within the Company.

The Companys stock options typically have annual vesting over a four-year period and a term of ten years, in order to encourage a long-term
perspective and to encourage key employees to remain with the Company. Vesting and exercise rights cease upon termination of employment. Prior to the exercise of an option, the holder has no rights as a stockholder with respect to the shares subject
to such option, including voting rights and the right to receive dividends or dividend equivalents.

Restricted Stock Awards
(RSAs). RSAs may be awarded for retention and succession planning purposes, and to assist the Company in granting market-competitive long-term incentive awards to its executives. RSAs may also be used in specific cases, such as in recruiting
an executive, to replace vested benefits and/or an equity position at a prior employer. To date, the Company has not issued any RSAs to any employee.

Factors used to determine the number of equity-based long-term incentive awards to be granted to executive officers and other employees and service providers each year include prevailing market practice, projected
business needs, the projected impact of stockholder dilution, and the impact of the implementation of SFAS No. 123R, which the Company adopted in the first quarter of 2006.

During fiscal year 2006, long-term incentive awards in the form of stock options were granted to our executive officers based on individual and corporate
performance, as determined by the Committee, as well as the recommendations set forth in the Executive Compensation Review.

In 2007, the
Compensation Committee will not grant any stock options or RSAs to our executive officers given our potential pending merger with Indevus Pharmaceuticals and the restrictions contained in the Merger Agreement entered into by the parties.

Other benefits

Our
executive officers participate in benefit programs that are substantially the same as all other eligible employees of the Company.

The
Companys Policies with Respect to the Granting of Stock Options

Only the Compensation Committee may approve stock option grants
to our executive officers. However, the Compensation Committee has delegated to our CEO the authority to grant options to employees below the level of vice president in an amount not to exceed 20,000 shares per grant. The board of directors
does not grant stock options, although the Compensation Committee regularly reports its activity, including the approval of grants, to the board of directors.

Timing of Grants. Stock options are generally granted at regularly scheduled, predetermined meetings of the Compensation Committee. On limited occasion, grants may occur during an interim meeting of
the Compensation Committee or upon unanimous written consent of the Compensation Committee, which occurs primarily for the purpose of approving a compensation package for newly hired or promoted executive. The CEO may make new hire and
promotion grants to employees which coincide with the date of hire or promotion.

Option Exercise Price. The exercise price of
a newly granted option is the closing price on NASDAQ on the date prior to the date of grant.

Chief Executive Officer Compensation for Fiscal Year 2006

Dr. Tierney entered into an Amended and Restated Executive Employment Agreement (the Employment Agreement) with the
Company on July 5, 2006 to remain as our President and Chief Executive Officer. Under the Employment Agreement, Dr. Tierney will continue to serve as the Companys President and Chief Executive Officer for the period commencing on
July 5, 2006 through July 5, 2009, after which the Employment Agreement shall automatically renew for additional one-year periods, unless sooner terminated. In addition, and for no additional consideration, Dr. Tierney will serve as a
member of the Companys Board of Directors to the extent elected by the Companys stockholders and consistent with the Companys by-laws as they may be amended from time-to-time.



91



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Accomplishments for fiscal 2006 under the leadership of Dr. Tierney include:



| |  |  | Completion of the Companys Initial Public Offering in February 2006;
| | - |  | ---------------------------------------------------------------------



| |  |  | Completion of the acquisition of the Valstar product in March 2006;
| | - |  | -------------------------------------------------------------------



| |  |  | Submission of the New Drug Application for Supprelin-LA in June 2006;
| | - |  | ---------------------------------------------------------------------



| |  |  | Completion of the expansion of manufacturing facilities;
| | - |  | --------------------------------------------------------



| |  |  | Commencement of clinical trials for the Naltrexone implant; and
| | - |  | ---------------------------------------------------------------



| |  |  | Negotiation of the merger agreement with Indevus Pharmaceuticals.
| | - |  | -----------------------------------------------------------------

Chief Executive Officer base salary

For Dr. Tierney, the Compensation Committee targeted
the twenty-fifth to fiftieth percentile of the base salary range for chief executive officers, as provided in the Executive Compensation Review, and established the base salary for Dr. Tierney at $350,000 for the period of July 1, 2006 to
June 30, 2007. In addition, Dr. Tierneys annual bonus potential under the VIP and his long-term compensation comprise a significant portion of his total potential compensation.

Chief Executive Officer annual bonus payment

Based on the fiscal year 2006 performance results described above, the non-equity incentive award earned by Dr. Tierney was $109,075 for fiscal year 2006. Dr. Tierney was eligible for an annual target bonus
of fifty percent of his base salary of $350,000, or $175,000. Dr. Tierneys target bonus was weighted seventy-five percent based on business performance and twenty-five percent based on individual performance. Dr. Tierney earned fifty
percent on the Companys performance aspect and one hundred percent on the individual performance aspect.

For fiscal year 2007,
Dr. Tierney is eligible for an annual target bonus of 50% of his $350,000 base salary, or $175,000. Dr. Tierneys annual bonus may range from zero to 1.6 times his target, or $280,000, depending on the Companys performance
against certain business criteria, as described more fully above in the discussion of our VIP.

Chief Executive Officer long-term
incentive award

Dr. Tierney received a stock option award during fiscal year 2006, as noted in the Grants of Plan Based
Awards table. The number of shares subject to the stock option award was determined by the Compensation Committee in its discretion based on our attainment of performance goals and accomplishments and Dr. Tierneys attainment of
individual goals and accomplishments.

In 2007, the Compensation Committee will not grant any stock options or RSAs to Dr. Tierney
given our potential pending merger with Indevus Pharmaceuticals and the restrictions contained in the merger agreement entered into by the parties.

Discussion of Tax and Accounting Implications

Deductibility of Executive Compensation

As part of its role, the Compensation Committee reviews and considers the deductibility of executive compensation under Section 162(m) of the Code
which precludes the Company from taking a tax deduction for individual compensation in excess of $1 million for our CEO and our four other highest-paid officers. This section also provides for certain exemptions to this limitation, specifically
compensation that is performance-based within the meaning of Section 162(m) of the Code.

The Compensation Committee, however,
reserves the right to award compensation to our executives in the future that may not qualify under Section 162(m) of the Code as deductible compensation. The Compensation Committee will, however, continue to consider all elements of the cost
to the Company of providing such compensation, including the potential impact of Section 162(m) of the Code.

Nonqualified Deferred
Compensation

On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law, changing the tax rules applicable to
nonqualified deferred compensation arrangements. While the final regulations have not become effective yet, the Company believes it is operating in good faith compliance with the statutory provisions which were effective January 1, 2005.



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Accounting for Stock-Based Compensation

Beginning on January 1, 2006, the Company began accounting for stock-based payments including its stock options and RSAs in accordance with the
requirements of FASB Statement 123(R).

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with
management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

Submitted by the Compensation Committee of the Board

Howard Silverman,
Chairman

David Dantzker, M.D.

John T. Spitznagel



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The following table summarizes the compensation earned for the fiscal year ended December 31, 2006,
by our Principal Executive Officer, Principal Financial Officer and the other four most highly paid executive officers whose total salary and bonus awards exceeded $100,000 for the year ended December 31, 2006. In this Annual Report on Form
10-K, we refer to these individuals as our named executive officers.

Summary Compensation Table



|                                                       |  |      |  |               |         |                     |   |                                             |  |                           |         |  |                       |        |     |  |   |        
|------------------------------------------------------ |  | ---- |  | ------------- | ------- | ------------------- | - | ------------------------------------------- |  | ------------------------- | ------- |  | --------------------- | ------ | --- |  | - | -------
|Name and Principal Position                            |  | Year |  | (1)Salary ($) |         | (2)OptionAwards ($) |   | (3)Non-EquityIncentive PlanCompensation ($) |  | All OtherCompensation ($) |         |  | TotalCompensation ($)
|David S. Tierney, M.D (10)                             |  | 2006 |  | $             | 337,500 |                     | $ | 97,924                                      |  | $                         | 109,075 |  | $                     | 7,800  | (4) |  | $ | 552,299
|President and Chief ExecutiveOfficer                   |  |      |  |               |         |                     |   |                                             |  |                           |         |  |                       |        |     |  |   |        
|(Principal Executive Officer)                          |  |      |  |               |         |                     |   |                                             |  |                           |         |  |                       |        |     |  |   |        
|                                                       |  |      |  |               |         |                    
|Andrew T. Drechsler                                    |  | 2006 |  | $             | 204,250 |                     | $ | 182,135                                     |  | $                         | 45,179  |  | $                     | 7,770  | (5) |  | $ | 439,334
|Chief Financial Officer                                |  |      |  |               |         |                     |   |                                             |  |                           |         |  |                       |        |     |  |   |        
|(Principal Financial Officer)                          |  |      |  |               |         |                     |   |                                             |  |                           |         |  |                       |        |     |  |   |        
|                                                       |  |      |  |               |         |                    
|Petr F. Kuzma                                          |  | 2006 |  | $             | 164,375 |                     | $ | 27,622                                      |  | $                         | 26,061  |  | $                     | 7,957  | (6) |  | $ | 226,015
|Vice President of Research and Development             |  |      |  |               |         |                     |   |                                             |  |                           |         |  |                       |        |     |  |   |        
|                                                       |  |      |  |               |         |                    
|Jeremy D. Middleton (11)                               |  | 2006 |  | $             | 119,480 |                     | $ | 35,277                                      |  | $                         | 26,190  |  | $                     | 1,758  | (7) |  | $ | 182,705
|Vice President of BusinessDevelopment                  |  |      |  |               |         |                     |   |                                             |  |                           |         |  |                       |        |     |  |   |        
|                                                       |  |      |  |               |         |                    
|Pete J. Perron (12)                                    |  | 2006 |  | $             | 102,917 |                     | $ | 44,215                                      |  |                           |        |  | $                     | 91,620 | (8) |  | $ | 238,752
|Vice President of Sales                                |  |      |  |               |         |                     |   |                                             |  |                           |         |  |                       |        |     |  |   |        
|                                                       |  |      |  |               |         |                    
|Matthew L. Rue, III                                    |  | 2006 |  | $             | 195,542 |                     | $ | 45,196                                      |  | $                         | 42,899  |  | $                     | 8,040  | (9) |  | $ | 291,677
|Vice President of Marketing And Commercial Development |  |      |  |               |         |                     |   |                                             |  |                           |         |  |                       |        |     |  |   |        

---

|(1) | Amount represents the base salary earned in the year stated.
|--- | ------------------------------------------------------------

|(2) | Amount represents the amount of compensation expense recognized under SFAS 123( R) for the year, disregarding any estimate of future forfeitures. See Note 10 of the financial
statements of this Annual Report regarding the assumptions underlying the valuation of equity awards.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Amount represents the Non-Equity Incentive awards earned in the year stated under the Valera Incentive Plan.
|--- | ------------------------------------------------------------------------------------------------------------

|(4) | Amount includes $7,500 of matching contributions made by Valera under its 401 (k) plan and $300 of life insurance premiums paid by Valera.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Amount includes $7,500 of matching contributions made by Valera under its 401 (k) plan and $270 of life insurance premiums paid by Valera.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Amount includes $5,977 of matching contributions made by Valera under its 401 (k) plan and $1,980 of life insurance premiums paid by Valera.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Amount includes $1,583 of matching contributions made by Valera under its 401 (k) plan and $175 of life insurance premiums paid by Valera.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Amount includes $87,083 in connection with severance related to termination of employment, $4,375 of matching contributions made by Valera under its 401 (k) plan and $162 of
life insurance premiums paid by Valera.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Amount includes $6,750 of matching contributions made by Valera under its 401 (k) plan and $1,290 of life insurance premiums paid by Valera.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Mr. Tierney entered into a new employment agreement with Valera in July of 2006, with an annual salary of $350,000.
|---- | -------------------------------------------------------------------------------------------------------------------

|(11) | Mr. Middleton joined Valera in May 2006 at an annual salary of $190,000.
|---- | ------------------------------------------------------------------------

|(12) | Mr. Perron left Valera in July 2006 at an annual salary of $190,000.
|---- | --------------------------------------------------------------------



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The following table summarizes the grants of plan based awards given to the named executives for fiscal
year 2006:

Grants of Plan-Based Awards



|                      |  |              |  |                                                               |   |                                                           |   |                                        |  |                                          |         |            |                                               |                    |                                  |                        |   |  |   |  |        |     |  |   |      |  |   |     
|--------------------- |  | ------------ |  | ------------------------------------------------------------- | - | --------------------------------------------------------- | - | -------------------------------------- |  | ---------------------------------------- | ------- | ---------- | --------------------------------------------- | ------------------ | -------------------------------- | ---------------------- | - |  | - |  | ------ | --- |  | - | ---- |  | - | ----
|Name                  |  | GrantDate    |  | Estimated Future Payoutsunder Non-Equity IncentivePlan Awards |   | Estimated Future Payoutsunder Equity IncentivePlan Awards |   | All OtherStockAwards:NumberofShares of |  | All OtherOptionAwards:NumberofSecurities |         |            | Exercise or BasePrice of
Option Awards ($/Sh) |                    | Fair Valueof Option Awards($/Sh)
|                      |  | Threshold($) |  | Target($)                                                     |   | Maximum($)                                                |   | Threshold(#)                           |  | Target(#)                                |         | Maximum($) |                                               | Stock or Units (#) |                                  | Underlying Options (#) |   |  |  
|David S. Tierney, M.D |  | 2/2/06       |  | $                                                             | 0 |                                                           | $ | 175,000                                |  | $                                        | 280,000 |            |                                              |                    |                                 |                        |  |  |  |  | 40,000 | (1) |  | $ | 9.00 |  | $ | 5.52
|                      |  |              |  |                                                               |   |                                                           |   |                                        |  |                                          |        
|Andrew T. Drechsler   |  | 2/2/06       |  | $                                                             | 0 |                                                           | $ | 72,485                                 |  | $                                        | 115,976 |            |                                              |                    |                                 |                        |  |  |  |  | 30,000 | (1) |  | $ | 9.00 |  | $ | 5.52
|                      |  |              |  |                                                               |   |                                                           |   |                                        |  |                                          |        
|Petr F. Kuzma         |  | 2/2/06       |  | $                                                             | 0 |                                                           | $ | 41,813                                 |  | $                                        | 66,900  |            |                                              |                    |                                 |                        |  |  |  |  | 10,000 | (1) |  | $ | 9.00 |  | $ | 5.52
|                      |  |              |  |                                                               |   |                                                           |   |                                        |  |                                          |        
|Jeremy D. Middleton   |  | 5/23/06      |  | $                                                             | 0 |                                                           | $ | 66,500                                 |  | $                                        | 106,400 |            |                                              |                    |                                 |                        |  |  |  |  | 40,000 | (1) |  | $ | 8.85 |  | $ | 5.80
|                      |  |              |  |                                                               |   |                                                           |   |                                        |  |                                          |        
|Pete J. Perron        |  | 2/2/06       |  |                                                               |  |                                                           |   |                                       |  |                                          |        |            |                                              |                    |                                 |                        |  |  |  |  | 20,000 | (2) |  | $ | 9.00 |  | $ | 5.52
|                      |  |              |  |                                                               |   |                                                           |   |                                        |  |                                          |        
|Matthew L. Rue, III   |  | 2/2/06       |  | $                                                             | 0 |                                                           | $ | 68,827                                 |  | $                                        | 110,124 |            |                                              |                    |                                 |                        |  |  |  |  | 20,000 | (1) |  | $ | 9.00 |  | $ | 5.52

---

|(1) | This option vests in four equal annual installments beginning on the first anniversary of the date of grant.
|--- | ------------------------------------------------------------------------------------------------------------

|(2) | Mr. Perron was granted 20,000 stock options at an exercise price of $9.00 per option with a fair value of $5.80 per option. These options were granted on February 2, 2006.
None of these stock options will vest due to the fact; Mr. Perron left the Company in July 2006.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Executive Officer Compensation
Arrangements

Employment Agreements

David S. Tierney, M.D., entered into an Amended and Restated Executive Employment Agreement with the Company to remain as our President and Chief Executive Officer on July 5, 2006. Pursuant to the terms of
Dr. Tierneys employment agreement, Dr. Tierney will continue to serve as our President and Chief Executive Officer for the period commencing on July 5, 2006 through July 5, 2009, after which his employment agreement will
automatically renew for additional one-year periods, unless sooner terminated. In addition, and for no additional consideration, Dr. Tierney will serve as a member of our board of directors to the extent elected by our stockholders and
consistent with our by-laws as they may be amended from time-to-time.

Dr. Tierneys employment agreement provides that
Dr. Tierney will be paid an annual base salary of $350,000 and will be eligible to participate in any annual bonus program established by our board of directors and benefit plans and programs that are generally available to our other employees.
Our board of directors (excluding Dr. Tierney if he is a director) will review Dr. Tierneys performance annually and make appropriate adjustments to Dr. Tierneys base salary.

In the event Dr. Tierneys employment is terminated as a result of his death or permanent disability, Dr. Tierney and/or his spouse or
dependents, as applicable, will receive 24 months in the case of death and 29 months in the case of permanent disability, of healthcare and dental insurance continuation at the Companys expense. In the event Dr. Tierneys employment
is terminated without cause or by him for good reason, Dr. Tierney will receive any earned and accrued but unpaid annual bonus and the continuation of his then current base salary until the last day of the 12-month period following the date of
such termination, provided, that if such termination occurs within 30 days prior to, or one year following, a change in control, Dr. Tierney will continue to receive his then current base salary for the 24-month period following the date of
such termination and will receive a bonus equal to two times the highest annual bonus received by him during our three most recently completed fiscal years, or a Change in Control Payment. All payments in connection with a change in control are
subject to reduction to the extent that the reduction would avoid the imposition of certain golden parachute excise taxes.



95



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In December of 2006, Dr. Tierney entered into a letter agreement with us which eliminated the
double trigger for payment of his Change of Control Payment. As such, Dr. Tierney will be entitled to receive the Change in Control Payment immediately upon a change in control and will not need to suffer a termination of employment
in the manner described above as an addition condition to payment. It is expected that the Change in Control Payment will be made to Dr. Tierney upon the closing of the merger with Indevus Pharmaceuticals.

In connection with the Employee Agreement, Dr. Tierney also entered into an employee confidentiality and non-competition agreement with us.

Our remaining executive officers are not parties to any employment agreement with the Company.

Change in Control Agreements

We entered into separate change in control agreements with each of Messrs. Kuzma, Middleton, and Rue. Under the agreements, if an executives employment is terminated by us without cause, or by the executive following a demotion,
relocation or certain other similar reasons, within the period that is between 30 days prior to, and one year following, the date we consummate a change in control (as defined in each of the agreements), then the executive will be
entitled to a severance payment, or Change in Control Payment, equal to the sum of his or her annual base salary and bonus amount. Bonus amount is defined in the agreements as the executives target annual bonus or, if
after the first anniversary of the date the agreement was entered into, the highest annual bonus received by the executive during the prior three years (or such lesser number of years the executive was employed by us). The agreements also provide
for payment of any unpaid bonus earned with respect to the year ended prior to the date the executives employment terminated and the waiver of any applicable COBRA premiums for the executive (and, if applicable, his or her spouse and
dependents) for a period of twelve months following termination of employment. Under the agreements, all payments to an executive in connection with a change in control are subject to reduction to the extent that the reduction would avoid the
imposition of certain golden parachute excise taxes. The payment of benefits is conditioned upon execution by the executive of a release and the executives are subject to confidentiality and proprietary information covenants following
cessation of employment.

We have also entered into a change of control agreement with Andrew Drechsler. Upon a change of control,
Mr. Drechsler will be entitled to a severance payment equal two times his then current base salary and will receive a bonus equal to the greater of two times his target bonus or two times the highest annual bonus received by him during the
Companys three most recently completed fiscal years. In addition, the Company will waive any applicable COBRA premiums for Mr. Drechsler (and, if applicable, his spouse and dependents) for a period of twenty four months following the
change of control.

In December of 2006, each of Messrs. Drechsler, Middleton and Rue entered into a letter agreement with us which
eliminated the double trigger for payment of their Change of Control Payment. As such, each will be entitled to receive the Change in Control Payment immediately upon a change in control and will not need to suffer a termination of
employment as an addition condition to payment. It is expected that the Change in Control Payment will be made to Messrs. Drechsler, Middleton and Rue upon the closing of the merger with Indevus Pharmaceuticals.

The estimated amounts of any post-employment and change in control payments for our executive officers is provided below under Potential Payments
upon a Termination or Change in Control.



96



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The following table summarizes all outstanding equity awards for the named executives at
December 31, 2006:

Outstanding Equity Awards at Fiscal Year-End



|                      |  |                                                               |  |                                                                 |  |                                                                                         |  |                         |       |                      |          |                                                   |   |                                                             |   |                                                                                                   |   |                                                                                                                  |  
|--------------------- |  | ------------------------------------------------------------- |  | --------------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | ----------------------- | ----- | -------------------- | -------- | ------------------------------------------------- | - | ----------------------------------------------------------- | - | ------------------------------------------------------------------------------------------------- | - | ---------------------------------------------------------------------------------------------------------------- | -
|                      |  | Option Awards                                                 |  | Stock Awards                                                   
|Name                  |  | Number ofSecuritiesUnderlyingUnexercisedOptions(#)Exercisable |  | Number ofSecuritiesUnderlyingUnexercisedOptions(#)Unexercisable |  | Equity IncentivePlan Awards:Number ofSecuritiesUnderlyingUnexercisedUnearnedOptions
(#) |  | OptionExercisePrice ($) |       | OptionExpirationDate |          | Number ofShares orUnits ofStock HaveNotVested (#) |   | MarketValue ofShares or UnitsOf StockThat HaveNotVested ($) |   | Equity IncentivePlan AwardsNumber of:Unearned Shares,Units, or OtherRights ThatHave NotVested
(#) |   | Equity IncentivePlan Awards:Market or PayoutValue of UnearnedShares, Units orOther
RightsThat Have NotVested ($)
|David S. Tierney, M.D |  | 166,666                                                       |  |                                                                |  |                                                                                        |  | $                       | 3.00  |                      | 10/15/12 |                                                   |  |                                                             |  |                                                                                                   |  |                                                                                                                  | 
|                      |  | 162,501                                                       |  | 54,166                                                          |  |                                                                                        |  | $                       | 3.00  |                      | 12/1/13  |                                                   |  |                                                             |  |                                                                                                   |  |                                                                                                                  | 
|                      |  | 39,584                                                        |  | 39,583                                                          |  |                                                                                        |  | $                       | 3.00  |                      | 10/4/14  |                                                   |  |                                                             |  |                                                                                                   |  |                                                                                                                  | 
|                      |  |                                                              |  | 40,000                                                          |  |                                                                                        |  | $                       | 9.00  |                      | 2/2/16   |                                                   |  |                                                             |  |                                                                                                   |  |                                                                                                                  | 
|                      |  |                                                               |  |                                                                 |  |                                                                                         |  |                         |      
|Andrew T. Drechsler   |  | 19,793                                                        |  | 59,373                                                          |  |                                                                                         |  | $                       | 12.00 |                      | 6/27/15  |                                                   |  |                                                             |  |                                                                                                   |  |                                                                                                                  | 
|                      |  |                                                              |  | 30,000                                                          |  |                                                                                        |  | $                       | 9.00  |                      | 2/2/16   |                                                   |  |                                                             |  |                                                                                                   |  |                                                                                                                  | 
|                      |  |                                                               |  |                                                                 |  |                                                                                         |  |                         |      
|Petr F. Kuzma         |  | 16,667                                                        |  |                                                                |  |                                                                                        |  | $                       | 3.00  |                      | 10/15/12 |                                                   |  |                                                             |  |                                                                                                   |  |                                                                                                                  | 
|                      |  | 31,251                                                        |  | 10,416                                                          |  |                                                                                        |  | $                       | 3.00  |                      | 12/1/13  |                                                   |  |                                                             |  |                                                                                                   |  |                                                                                                                  | 
|                      |  | 12,500                                                        |  | 12,500                                                          |  |                                                                                        |  | $                       | 3.00  |                      | 10/4/14  |                                                   |  |                                                             |  |                                                                                                   |  |                                                                                                                  | 
|                      |  |                                                              |  | 10,000                                                          |  |                                                                                        |  | $                       | 9.00  |                      | 2/2/16   |                                                   |  |                                                             |  |                                                                                                   |  |                                                                                                                  | 
|                      |  |                                                               |  |                                                                 |  |                                                                                         |  |                         |      
|Jerry D. Middleton    |  |                                                              |  | 40,000                                                          |  |                                                                                        |  | $                       | 8.85  |                      | 5/23/16  |                                                   |  |                                                             |  |                                                                                                   |  |                                                                                                                  | 
|                      |  |                                                               |  |                                                                 |  |                                                                                         |  |                         |      
|Pete J. Perron        |  |                                                              |  |                                                                |  |                                                                                        |  |                         |      |                      |         |                                                   |  |                                                             |  |                                                                                                   |  |                                                                                                                  | 
|                      |  |                                                               |  |                                                                 |  |                                                                                         |  |                         |      
|Matthew L. Rue, III   |  | 50.000                                                        |  |                                                                |  |                                                                                        |  | $                       | 3.00  |                      | 10/15/12 |                                                   |  |                                                             |  |                                                                                                   |  |                                                                                                                  | 
|                      |  | 25,000                                                        |  | 8,333                                                           |  |                                                                                        |  | $                       | 3.00  |                      | 12/1/13  |                                                   |  |                                                             |  |                                                                                                   |  |                                                                                                                  | 
|                      |  | 16,667                                                        |  | 16,666                                                          |  |                                                                                        |  | $                       | 3.00  |                      | 10/4/14  |                                                   |  |                                                             |  |                                                                                                   |  |                                                                                                                  | 
|                      |  |                                                              |  | 20,000                                                          |  |                                                                                        |  | $                       | 9.00  |                      | 2/2/16   |                                                   |  |                                                             |  |                                                                                                   |  |                                                                                                                  | 

The following table summarizes all option exercises and stock vesting for the named executive
officers during the fiscal year 2006:

Option Exercises and Stock Vested



|                      |  |                                          |  |                               |         |                                         |   |                              |  
|--------------------- |  | ---------------------------------------- |  | ----------------------------- | ------- | --------------------------------------- | - | ---------------------------- | -
|                      |  | Option Awards                            |  | Stock Awards                 
|Name                  |  | Number of Shares AcquiredOn Exercise (#) |  | Value Realized onExercise ($) |         | Number of Shares AcquiredOn Vesting (#) |   | Value Realized onVesting ($)
|David S. Tierney, M.D |  |                                         |  |                               |        |                                         |  |                              | 
|                      |  |                                          |  |                              
|Andrew T. Drechsler   |  |                                         |  |                               |        |                                         |  |                              | 
|                      |  |                                          |  |                              
|Petr F. Kuzma         |  |                                         |  |                               |        |                                         |  |                              | 
|                      |  |                                          |  |                              
|Jerry D. Middleton    |  |                                         |  |                               |        |                                         |  |                              | 
|                      |  |                                          |  |                              
|Pete J. Perron        |  | 41,667                                   |  | $                             | 126,714 |                                         |  |                              | 
|                      |  |                                          |  |                              
|Matthew L. Rue, III   |  |                                         |  |                               |        |                                         |  |                              | 

Potential Payments upon Termination or Change in Control

Our executive officers are eligible to receive benefits under certain conditions in accordance with each executive officers employment and/or change
of control agreement with us. To determine the level of benefits provided under each of our executive officers severance agreements, data regarding peer practice, the circumstances of the situation, and impact on stockholders was considered.
In each instance, the severance benefit is constructed such that the benefit is discrete and capped under a one-time payment, limiting any potential on-going liability.

The tables below reflect the amount of compensation to each of the named executive officers of the Company in the event of termination of such executives employment. The amount of compensation payable to each
executive officer upon voluntary



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termination, involuntary not-for-cause termination, termination following a change of control and in the event of disability or death of the executive is
shown below. The amounts shown assume that such termination was effective as of December 31, 2006, and thus includes amounts earned through such time and are estimates of the amounts which would be paid out to the executives upon their
termination. The actual amounts to be paid out can only be determined at the time of such executives separation from us.

Potential Payments upon
Termination and Change in Control



|                                                                                                                            |  |                |         |                                                 |   |                                      |  |                          |  |                |         |  |   |        
|--------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | ----------------------------------------------- | - | ------------------------------------ |  | ------------------------ |  | -------------- | ------- |  | - | -------
|                                                                                                                            |  | Cash Severance |         | Continuation ofMedical Benefits
(present value) |   | Acceleration ofUnvested EquityAwards |  | Change in ControlPayment |  | Total Benefits
|David S. Tierney, M.D.                                                                                                      |  |                |         |                                                 |   |                                      |  |                          |  |                |         |  |   |        
|Death                                                                                                                       |  |                |         |                                                 | $ | 27,984                               |  |                          |  |                |         |  | $ | 27,984 
|Disability                                                                                                                  |  |                |         |                                                 | $ | 33,814                               |  |                          |  |                |         |  | $ | 33,814 
|Involuntary termination without cause or for good reason                                                                    |  | $              | 350,000 |                                                 |   |                                      |  |                          |  |                |         |  | $ | 350,000
|Involuntary termination without cause or for good reason within 30 days prior to or 12 months following a change in control |  |                |         |                                                 |   |                                      |  |                          |  | $              | 934,376 |  | $ | 934,376
|Change in Control                                                                                                           |  |                |         |                                                 |   |                                      |  |                          |  | $              | 934,376 |  | $ | 934,376
|Andrew T. Drechsler                                                                                                         |  |                |         |                                                 |   |                                      |  |                          |  |                |         |  |   |        
|Death                                                                                                                       |  |                |         |                                                 |   |                                      |  |                          |  |                |         |  |   |        
|Disability                                                                                                                  |  |                |         |                                                 |   |                                      |  |                          |  |                |         |  |   |        
|Involuntary termination without cause or for good reason                                                                    |  |                |         |                                                 |   |                                      |  |                          |  |                |         |  |   |        
|Involuntary termination without cause or for good reason within 30 days prior to or 12 months following a change in control |  |                |         |                                                 | $ | 28,000                               |  |                          |  | $              | 606,701 |  | $ | 634,701
|Change in Control                                                                                                           |  |                |         |                                                 | $ | 28,000                               |  |                          |  | $              | 606,701 |  | $ | 634,701
|Petr F. Kuzma                                                                                                               |  |                |         |                                                 |   |                                      |  |                          |  |                |         |  |   |        
|Death                                                                                                                       |  |                |         |                                                 |   |                                      |  |                          |  |                |         |  |   |        
|Disability                                                                                                                  |  |                |         |                                                 |   |                                      |  |                          |  |                |         |  |   |        
|Involuntary termination without cause or for good reason                                                                    |  |                |         |                                                 |   |                                      |  |                          |  |                |         |  |   |        
|Involuntary termination without cause or for good reason within 30 days prior to or 12 months following a change in control |  |                |         |                                                 | $ | 14,000                               |  |                          |  | $              | 209,591 |  | $ | 223,591
|Change in Control                                                                                                           |  |                |         |                                                 |   |                                      |  |                          |  |                |         |  |   |        
|Jeremy D. Middleton                                                                                                         |  |                |         |                                                 |   |                                      |  |                          |  |                |         |  |   |        
|Death                                                                                                                       |  |                |         |                                                 |   |                                      |  |                          |  |                |         |  |   |        
|Disability                                                                                                                  |  |                |         |                                                 |   |                                      |  |                          |  |                |         |  |   |        
|Involuntary termination without cause or for good reason                                                                    |  |                |         |                                                 |   |                                      |  |                          |  |                |         |  |   |        
|Involuntary termination without cause or for good reason within 30 days prior to or 12 months following a change in control |  |                |         |                                                 | $ | 14,000                               |  |                          |  | $              | 270,608 |  | $ | 284,608
|Change in Control                                                                                                           |  |                |         |                                                 | $ | 14,000                               |  |                          |  | $              | 270,608 |  | $ | 284,608
|Matthew L. Rue                                                                                                              |  |                |         |                                                 |   |                                      |  |                          |  |                |         |  |   |        
|Death                                                                                                                       |  |                |         |                                                 |   |                                      |  |                          |  |                |         |  |   |        
|Disability                                                                                                                  |  |                |         |                                                 |   |                                      |  |                          |  |                |         |  |   |        
|Involuntary termination without cause or for good reason                                                                    |  |                |         |                                                 |   |                                      |  |                          |  |                |         |  |   |        
|Involuntary termination without cause or for good reason within 30 days prior to or 12 months following a change in control |  |                |         |                                                 | $ | 14,000                               |  |                          |  | $              | 263,324 |  | $ | 277,324
|Change in Control                                                                                                           |  |                |         |                                                 | $ | 14,000                               |  |                          |  | $              | 263,324 |  | $ | 277,324



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Accrued Pay and Regular Retirement Benefit.

The amounts shown in the table above do not include payments and benefits to the extent they are provided on a non-discriminatory basis to salaried
employees generally upon termination of employment. These include:



| |  |  | Accrued salary and vacation pay;
| | - |  | --------------------------------



| |  |  | Earned and accrued but unpaid annual bonus; and
| | - |  | -----------------------------------------------



| |  |  | Distributions of plan balances under the Valera Pharmaceuticals, Inc. 401(k) plan.
| | - |  | ----------------------------------------------------------------------------------

Continuation of medical and welfare benefits

Represents the present value of the of continued coverage equivalent to the Companys current active employee medical insurance.

Payments made upon a change in control

These payments are described above under
Executive Officer Compensation Arrangement

Acceleration of unvested equity awards

Upon a change in control, any unvested stock options, restricted stock, or other equity awards may become immediately vested. The board of directors has
the discretion to accelerate the vesting of equity awards upon a change of control. The amounts in this column represent the excess (if any) between the closing price of our common stock as of December 31, 2006 and the exercise price of the
unvested options subject to the acceleration.

Valera Pharmaceuticals, Inc. Equity Incentive Plan

In September 2002, we adopted our Equity Incentive Plan or Equity Plan, which was approved by our stockholders in May 2003. Our Equity Plan provides for
the award of:



| |  |  | restricted shares of our common stock;
| | - |  | --------------------------------------



| |  |  | incentive stock options;
| | - |  | ------------------------



| |  |  | non-qualified stock options; or
| | - |  | -------------------------------



| |  |  | any combination of the foregoing.
| | - |  | ---------------------------------

Grants of restricted shares and non-qualified stock options can be made to our employees, directors, consultants, and other individuals who perform services for us. Grants of incentive stock options may only be made to our employees. The
principal features of our Equity Plan are summarized below, but the summary is qualified in its entirety by reference to our Equity Plan, which was filed as exhibit 10.14 to the Registration Statement in connection with our initial public offering.

Number of shares of our common stock available under our Equity Plan

We have reserved a total of 1,833,333 shares of our common stock for issuance pursuant to our Equity Plan. Shares subject to forfeited, cancelled, or
expired awards and shares received in satisfaction of the exercise price of an option become available for grant again under our Equity Plan. In addition, shares withheld in payment of any exercise price or in satisfaction of any withholding
obligation arising in connection with an award granted under our Equity Plan become available for grant again under our Equity Plan. In connection with recapitalizations, stock splits, combinations, stock dividends, and other events affecting our
common stock, the Compensation Committee may make adjustments or equitable substitutions it deems appropriate in its sole discretion to the maximum number, type and issuer of the securities reserved for issuance under the Equity Plan, to the maximum
number, type and issuer of shares of our common stock subject to outstanding options, to the exercise price of the options and to the number, type and issuer of restricted shares.



99



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Administration of our Equity Plan

Our Compensation Committee administers our Equity Plan under authority granted to it by our board of directors in accordance with the terms of our Equity
Plan. To administer our Equity Plan, our Compensation Committee must consist of at least two members of our board of directors, each of whom is a non-employee director for purposes of Rule 16b-3 under the Securities Exchange Act of 1934,
or the Exchange Act and, with respect to awards that are intended to constitute performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, an outside director for the purposes of Section 162(m).
Our Compensation Committee, among other things, interprets our Equity Plan, selects award recipients, determines the type of awards to be granted to such recipients and determines the number of shares subject to each award and the terms and
conditions thereof. Our Compensation Committee may also determine if or when the exercise price of an option may be paid in the form of shares of our common stock and the extent to which shares or other amounts payable with respect to an award can
be deferred by the participant. Our board of directors may amend or modify our Equity Plan at any time. In addition, our board of directors is also authorized to adopt, alter and repeal any rules relating to the administration of our Equity Plan and
to rescind the authority of the Compensation Committee and thereafter directly administer our Equity Plan. However, subject to certain exceptions, no amendment or modification will impair the rights and obligations of a participant with respect to
an award unless the participant consents to that amendment or modification.

Our Equity Plan will continue in effect until terminated by us
in accordance with its terms, although incentive stock options may not be granted more than 10 years after the adoption of our Equity Plan.

Restricted shares under our Equity Plan

Under the Equity Plan, we may issue restricted shares under a restricted
share agreement, the terms and conditions of which will be set forth by our Compensation Committee at the time of the grant. Restricted shares are shares of our common stock issued to a participant that may not be sold or otherwise transferred by
the participant until certain vesting conditions established by our Compensation Committee, in its discretion, at the time of grant (such as a specified period of continued employment or the fulfillment of specified individual or corporate
performance goals) are met or until such time as set by our Compensation Committee. Holders of the restricted shares will not have voting rights with respect to such restricted shares until the lapse of the transfer restrictions described above. If
a participants service with us terminates prior to the end of the transfer restrictions, all of that participants restricted shares which have not vested will be forfeited. Restricted shares may be sold under our Equity Plan (at their
full value or at a discount) or may be granted solely in consideration for services.

Upon or in anticipation of a change in control, our
Compensation Committee may, in its discretion:



| |  |  | cause restrictions on all outstanding shares of restricted stock to lapse;
| | - |  | --------------------------------------------------------------------------



| |  |  | cancel restricted stock in exchange for shares of restricted stock of a successor corporation; or
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | redeem restricted shares for cash or other substitute consideration.
| | - |  | --------------------------------------------------------------------

Stock options under our Equity Plan

Our Equity Plan permits the grant of incentive stock options and non-qualified stock options. The exercise price of any incentive stock options granted under our Equity Plan may not be less than 100% of the fair market value of our common
stock on the date of grant. In the case of any incentive stock option granted to a participant who owns at least 10% of the total combined voting power of all classes of our capital stock, our Equity Plan provides that the exercise price must be at
least 110% of the fair market value of our common stock on the date of the grant and the incentive stock option must expire on the fifth anniversary of the date of the grant. In addition, the aggregate fair market value of shares of our common stock
into which incentive stock options are exercisable, for the first time by a participant, in any calendar year may not exceed $100,000. Options granted under our Equity Plan may be exercised for cash and/or in exchange for previously acquired shares
of our common stock owned by the option holder having a combined value on the date of exercise equal to the option exercise price.



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Under our Equity Plan, each option will vest and be exercisable at such time and to such extent as
specified in the pertinent option agreement between us and the option recipient. However, no award will be exercisable with respect to any shares of our common stock more than 10 years after the date of such award. Unless otherwise specified by our
Compensation Committee with respect to a particular option, all options are non-transferable, except upon death. If a participants service with us terminates due to death or disability, any options held by the participant may be exercised
until (i) such time specified by the Compensation Committee, (ii) if not specified by the Compensation Committee, 12 months from termination of service, or (iii) if earlier than the foregoing, the expiration for the stated term of the
option. If a participants service with us is terminated for cause, any unexercised options will be automatically forfeited, and any shares of our common stock into which options are exercisable but for which certificates have not been issued,
will be automatically forfeited and any exercise price paid for such shares will be refunded. In addition, if a participants service with us is terminated for any other reason, any option held by the participant may be exercised until
(i) such time specified by the Compensation Committee, (ii) if not specified by the Compensation Committee, 90 days from termination of service, or (ii) if earlier than the foregoing, the expiration of the stated term of the option.

Upon our change in control, our Compensation Committee may:



| |  |  | cause outstanding options to become immediately and fully vested and exercisable;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | require that the grantees surrender their outstanding options in exchange for a payment by us of an amount equal to the amount by which the fair market value of the
shares of stock subject to the option exceeds the option exercise price; or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | cancel any outstanding option in exchange for an option to purchase common stock of any successor corporation.
| | - |  | --------------------------------------------------------------------------------------------------------------

Effective upon the pricing of our initial public offering in February 2006, we granted options to purchase shares of our common stock under our Equity
Plan to all of our employees. The exercise price of these options was $9.00, equal to the initial public offering price of the shares offered, and, subject to the terms and conditions of the Equity Plan, will fully vest on the fourth anniversary of
the grant date.

401(k) plan

We maintain a retirement plan for all employees who satisfy certain eligibility requirements, including requirements, including requirements relating to age and length of service. The retirement plan is intended to
qualify as a tax-qualified plan under Section 401 of the Internal Revenue Code. The retirement plan provides that each participant may contribute up to a statutory limit, which for most employees was $14,000 in 2005 and $15,000 in 2006 and will
be $15,500 in 2007. The Companys contributions to the plan are discretionary. In 2007, the Companys contributions to the plan are expected to match 50% of the employees contribution, with such amount not to exceed the lessor of 10%
of total compensation or $5,000. Under the plan, each employee is fully vested in his or her deferred salary contributions. The Companys contributions vest annually over a three year period. Employee contributions are held and invested by the
plans trustee at the direction of the employee. The retirement plan also permits us to make discretionary contributions and matching contributions, subject to established limits and vesting schedule. To date, we have not made any discretionary
contributions to the retirement and deferred savings plan on behalf of participating employees.

Other Compensation Plans

The Company does not offer a defined benefit plan or a nonqualified deferred compensation plan for any of its employees.



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Director Compensation

The following table summaries the director compensation earned during fiscal 2006:



|                            |  |                             |        |                  |   |                      |   |                                            |  |                                                                             |  |                            |  |           |  |   |       
|--------------------------- |  | --------------------------- | ------ | ---------------- | - | -------------------- | - | ------------------------------------------ |  | --------------------------------------------------------------------------- |  | -------------------------- |  | --------- |  | - | ------
|Director Compensation      
|Name                        |  | Fees Earned or Paid in Cash |        | Stock Awards ($) |   | Option Award ($) (9) |   | Non-Equity Incentive Plan Compensation ($) |  | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) |  | All Other Compensation ($) |  | Total ($)
|James C. Gale (1)           |  | $                           | 30,917 |                  |  |                      | $ | 7,116                                      |  |                                                                            |  |                           |  |          |  | $ | 38,033
|                            |  |                             |        |                  |   |                      |  
|David R. Dantzker, M.D. (2) |  | $                           | 23,667 |                  |  |                      | $ | 6,614                                      |  |                                                                            |  |                           |  |          |  | $ | 30,281
|                            |  |                             |        |                  |   |                      |  
|Jerome Feldman (3)          |  | $                           | 22,667 |                  |  |                      | $ | 6,614                                      |  |                                                                            |  |                           |  |          |  | $ | 29,281
|                            |  |                             |        |                  |   |                      |  
|Hubert Huckel, M.D. (4)     |  | $                           | 24,667 |                  |  |                      | $ | 6,614                                      |  |                                                                            |  |                           |  |          |  | $ | 31,281
|                            |  |                             |        |                  |   |                      |  
|Jeffrey Krauss (5)          |  | $                           | 32,042 |                  |  |                      | $ | 15,655                                     |  |                                                                            |  |                           |  |          |  | $ | 47,697
|                            |  |                             |        |                  |   |                      |  
|Ogden R. Reid (6)           |  | $                           | 23,167 |                  |  |                      | $ | 6,614                                      |  |                                                                            |  |                           |  |          |  | $ | 29,781
|                            |  |                             |        |                  |   |                      |  
|Howard Silverman (7)        |  | $                           | 28,667 |                  |  |                      | $ | 6,614                                      |  |                                                                            |  |                           |  |          |  | $ | 35,281
|                            |  |                             |        |                  |   |                      |  
|John T. Spitznagel (8)      |  | $                           | 21,667 |                  |  |                      | $ | 6,614                                      |  |                                                                            |  |                           |  |          |  | $ | 28,281

---

|(1) | Mr. Gale has a total of 20,883 of stock options outstanding as of December 31, 2006.
|--- | ------------------------------------------------------------------------------------

|(2) | Mr. Dantzker has a total of 22,500 of stock options outstanding as of December 31, 2006.
|--- | ----------------------------------------------------------------------------------------

|(3) | Mr.Feldman has a total of 15,000 of stock options outstanding as of December 31, 2006.
|--- | --------------------------------------------------------------------------------------

|(4) | Mr. Huckel has a total of 36,666 of stock options outstanding as of December 31, 2006.
|--- | --------------------------------------------------------------------------------------

|(5) | Mr. Krauss has a total of 22,500 of stock options outstanding as of December 31, 2006.
|--- | --------------------------------------------------------------------------------------

|(6) | Mr. Reid has a total of 22,500 of stock options outstanding as of December 31, 2006.
|--- | ------------------------------------------------------------------------------------

|(7) | Mr. Silverman has a total of 22,500 of stock options outstanding as of December 31, 2006.
|--- | -----------------------------------------------------------------------------------------

|(8) | Mr. Spitznagel has a total of 36,666 of stock options outstanding as of December 31, 2006.
|--- | ------------------------------------------------------------------------------------------

|(9) | Amount represents the amount of compensation expense recognized under SFAS 123( R) for the year, neglecting any forfeiture estimates.
|--- | -------------------------------------------------------------------------------------------------------------------------------------

Note: During the fiscal year 2006, each director was granted 7,500 stock options at an exercise price of $8.85 per option and a fair value of $5.80
per option.

On May 23, 2006, our board of directors approved a compensation plan for non-employee directors. Effective as of
February 2, 2006, the following compensation will be paid to each non-employee director (paid quarterly in arrears):

Annual Retainer:Each
non-employee director will receive an annual retainer of $16,000. The chairman of the board will receive an annual retainer of $9,000 in addition to the non-employee director annual retainer of $16,000 for a total of $25,000 annually. The chairman
of our Audit Committee will receive an annual retainer of $7,500 in addition to the non-employee director annual retainer of $16,000 for a total of $23,500 annually. The chairman of our Compensation Committee will receive an annual retainer of
$6,000 in addition to the non-employee director annual retainer of $16,000 for a total of $22,000 annually.

Board and Committee Meeting Attendance
Fees: Each non-employee director will receive compensation of $1,500 for each board meeting attended in person and $500 for each board meeting attended by telephone and $500 for each committee meeting whether attended in person or via telephone.

Appointment and Re-election. Each non-employee director will be entitled to receive stock option awards at the time of appointment or re-election
to the Board.



102



---

|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------

The following table sets forth information regarding the beneficial ownership of our common stock as of December 31, 2006, for the following individuals, entities or groups:



| |  |  | each person or entity who we know beneficially owns more than 5% of our outstanding common stock;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | each of the executive officers;
| | - |  | -------------------------------



| |  |  | each of our directors; and
| | - |  | --------------------------



| |  |  | all directors and executive officers as a group.
| | - |  | ------------------------------------------------

Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the shares. In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or will become exercisable within 60 days of December 31, 2006 are deemed outstanding and are included in the
number of shares beneficially owned and are also are shown separately in the column below entitled Options Exercisable within 60 Days of December 31, 2006, while the shares are not deemed outstanding for purposes of computing
percentage ownership of any other person. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock held by them.



103



---

Applicable percentage ownership in the following table is based on 14,936,641 shares of common stock
outstanding as of December 31, 2006. Unless otherwise indicated, the address for each stockholder listed in the table is c/o Valera Pharmaceuticals, Inc., 7 Clarke Drive, Cranbury, New Jersey 08512.



|                                                             |  |                                     |  |                                                         |  |             |  
|------------------------------------------------------------ |  | ----------------------------------- |  | ------------------------------------------------------- |  | ----------- | -
|                                                             |  | Number of Shares Beneficially Owned |  | Options Exercisable within 60 days of December 31,
2006 |  | Ownership % |  
|Five Percent Stockholders:                                   |  |                                     |  |                                                         |  |             |  
|                                                             |  |                                     | 
|Sanders Morris Harris, Inc. (1)                              |  | 5,455,605                           |  | 5,625                                                   |  | 36.5        | %
|                                                             |  |                                     | 
|MXL Industries, Inc. (2)                                     |  | 2,070,670                           |  |                                                        |  | 13.9        | %
|                                                             |  |                                     | 
|Accipiter Capital Management LLC (3)                         |  | 755,350                             |  |                                                        |  | 5.1         | %
|                                                             |  |                                     | 
|Directors and Named Executive Officers:                      |  |                                     |  |                                                         |  |             |  
|                                                             |  |                                     | 
|David S. Tierney, M.D.                                       |  | 385,251                             |  | 378,751                                                 |  | 2.5         | %
|                                                             |  |                                     | 
|Andrew T. Drechsler                                          |  | 28,893                              |  | 27,293                                                  |  | *           |  
|                                                             |  |                                     | 
|Petr F. Kuzma                                                |  | 64,018                              |  | 62,918                                                  |  | *           |  
|                                                             |  |                                     | 
|Jeremy D. Middleton                                          |  |                                    |  |                                                        |  | *           |  
|                                                             |  |                                     | 
|Matthew L. Rue, III                                          |  | 96,667                              |  | 96,667                                                  |  | *           |  
|                                                             |  |                                     | 
|James C. Gale (4)                                            |  | 5,459,772                           |  | 9,792                                                   |  | 36.5        | %
|                                                             |  |                                     | 
|David R. Dantzker, M.D.                                      |  | 140,003                             |  | 11,250                                                  |  | *           |  
|                                                             |  |                                     | 
|Jerome Feldman (5)                                           |  | 2,076,295                           |  | 5,625                                                   |  | 13.9        | %
|                                                             |  |                                     | 
|Hubert Huckel, M.D.                                          |  | 28,508                              |  | 25,208                                                  |  | *           |  
|                                                             |  |                                     | 
|Jeffrey M. Krauss (6)                                        |  | 735,537                             |  | 7,500                                                   |  | 4.9         | %
|                                                             |  |                                     | 
|Ogden R. Reid                                                |  | 12,917                              |  | 12,917                                                  |  | *           |  
|                                                             |  |                                     | 
|Howard Silverman                                             |  | 26,250                              |  | 11,250                                                  |  | *           |  
|                                                             |  |                                     | 
|John T. Spitznagel                                           |  | 25,208                              |  | 25,208                                                  |  | *           |  
|                                                             |  |                                     | 
|All Directors and Executive Officers as a Group (15 persons) |  | 9,095,987                           |  | 691,047                                                 |  | 58.2        | %

---

|* | Less than 1%
|- | ------------

|(1) | Represents shares held by SMH Hydro Med, LLC, SMH Hydro Med II, LLC, SMH Valera, LLC, Corporate Opportunities Fund, L.P., by Corporate Opportunities Fund
(Institutional), L.P., Life
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



104



---

| | Sciences Opportunities Fund, L.P., Life Sciences Opportunities Fund (Institutional), L.P., each an affiliate of Sanders Morris Harris, Inc., or SMH.
Mr. Gale has sole voting and dispositive power over the shares held by Sanders Morris Harris Inc. The address for Sanders Morris Harris, Inc. is 3100 JP Morgan Chase Tower, 600 Travis, Suite 3100, Houston, TX 77002.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | MXL Industries, Inc. is a wholly-owned subsidiary of National Patent Development Corporation, a publicly held corporation. Mr. Feldman is the chairman of the board of directors
and chief executive officer of National Patent Development Corporation. The address for MXL Industries, Inc. is 777 Westchester Avenue, Fourth Floor, White Plains, NY 10604.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes 262,036 shares held by Accipiter Life Sciences Fund, LP, 251,582 shares held by Accipiter Life Sciences Fund (Offshore), Ltd, 63,059 shares held by Accipiter Life Sciences
Fund II, LP, 115,136 shares held by Accipiter Life Sciences Fund II (Offshore), Ltd. And 63,537 shares held by Accipiter Life Sciences Fund II (QP), LP based on information filed jointly with the SEC on December 13, 2006 by Accipiter Life
Sciences Fund, LP (ALSF), Accipiter Life Sciences Fund (Offshore), Ltd. (Offshore), Accipiter Life Sciences Fund II, LP (ALSF II), Accipiter Life Sciences Fund II (Offshore), Ltd. (Offshore II), Accipiter Life Sciences Fund II (QP), LP (QP II),
Accipiter Capital Management LLC (Management), Candens Capital, LLC (Candens), and Gabe Hoffman. Gabe Hoffman is the managing member of Candens, which in turn is the general partner of ALSF, ALSF II and QP II and the managing member of Management,
which in turn is the investment manager of Offshore and Offshore II. The address for these persons is 399 Park Avenue, 38th Floor, New York, New York 10022.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes 5,455,605 shares held by Sanders Morris Harris Inc. described in footnote 1 above. The number of options exercisable within 60 days of January 1, 2007
includes 5,625 options held by affiliates of SMH. Mr. Gale is an affiliate of SMH and manages the funds described in footnote 1 above. Mr. Gale disclaims beneficial ownership of the 5,455,605 shares held by SMH except to the
extent of his pecuniary interest in the funds described in footnote 1 above.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes 2,070,670 shares held by MXL Industries, Inc. Mr. Feldman is the chairman of the board of directors and chief executive officer of National Patent Development
Corporation, the parent of MXL Industries, Inc. Mr. Feldman disclaims beneficial ownership of the 2,070,670 shares held by MXL Industries, Inc.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Includes 735,537 shares held by Psilos Group. Mr. Krauss is a managing director of Psilos Group. Mr. Krauss disclaims beneficial ownership of the 735,537 shares
held by Psilos Group, except to the extent of his pecuniary interest in the fund.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



105



---

|Item 13. | Certain Relationships and Related Transactions
|-------- | ----------------------------------------------

We have entered into certain
agreements or transactions with certain officers, directors and 5% stockholders during fiscal year 2006. These agreements or transactions are each summarized below. The following description is only a summary of what we believe are the material
provisions of the agreements.

Spepharm Holding B.V.

On July 17, 2006, we entered into the Shareholders Agreement pursuant to which we Company received a 19.9% ownership in a newly created Dutch company called Spepharm Holding B.V. In accordance with the
Shareholders Agreement, David S. Tierney, M.D., our President and Chief Executive Officer and Mr. James Gale, our chairman of the board of directors, were appointed as members of Spepharms initial supervisory board. Additional
investors in Spepharm include Life Sciences Opportunities Fund (Institutional) II, L.P and Life Sciences Opportunities Fund II, L.P. Both funds are funds managed by, and affiliates of, SMH, whose affiliates own approximately 37% of the our
outstanding common stock. Mr. Gale is a Managing Director of SMH and the investment manager of such funds that hold shares of our Company and has sole voting and dispositive power over such shares. SMH, along with a third party unaffiliated
with our Company, have committed EUR 20,000,000 to the Spepharm venture. In addition, on September 27, 2006, we entered into a License and Distribution Agreement with Spepharm Holding B.V. Under the terms of the agreement, we will give Spepharm
the exclusive licensing and distributing rights to our products under the trademarks Vantas and Supprelin®-LA in the European Union as well as Norway and Switzerland for a period of ten years, unless sooner terminated as provided by the agreement. Spepharm will pay us for our supply and
Spepharms distribution of the products under the agreement an aggregate amount equal to forty percent (40%) of Net Sales (the Royalty Amount) as defined by the agreement based on an established transfer price. In addition,
following the end of each quarter, Spepharm will pay us an amount equal to the difference between (a) the aggregate Royalty Amount for such calendar quarter minus (b) the aggregate transfer prices paid by Spepharm during such calendar
quarter.



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------

Fees for Ernst & Young LLP for the
years ended December 31, 2006 and 2005 (in thousands):



|                   |  |      |     |      |   |    
|------------------ |  | ---- | --- | ---- | - | ---
|                   |  | 2006 |     | 2005
|Audit Fees         |  | $    | 375 |      | $ | 566
|Audit-Related Fees |  |      | 4   |      |   |   
|All Other Fees     |  |      | 2   |      |   | 2  
|                   |  |      |     |      |   |    
|Total              |  | $    | 381 |      | $ | 568
|                   |  |      |     |      |   |    

Audit Fees consists of fees for the audit of our annual financial statements,
review of the financial statements and services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for those fiscal years. This category also includes advice on audit and
accounting matters that arose during, or as a result of, the audit or the review of interim financial statements and the preparation of an annual management letter on internal control matters. The 2005 fees include $371,000 related to
our initial public offering.

Audit-Related Fees consists of assurance and related services by Ernst & Young
LLP that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under Audit Fees. The 2006 fees of $4,000 relates to services related to our proposed merger transaction
with Indevus Pharmaceuticals, Inc.

All Other Fees for fiscal year 2006 and 2005 were related to accounting research
software.



106



---

Pre-approval Policy. The Audit Committee has established a policy governing our use of
Ernst & Young LLP for non-audit services. Under the policy, the Audit Committee is required to pre-approve all audit and non-audit services performed by the our independent auditors in order to ensure that the provision of such services
does not impair the auditors independence. The Audit Committee pre-approves certain Audit and Audit-Related Services, subject to certain fee levels. Any proposed services that are not a type of service that has been pre-approved or that exceed
pre-approval cost levels require specific approval by the Audit Committee in advance. The Audit Committee periodically revises the lists of pre-approved service types set forth in the policy as required. In fiscal years 2006 and 2005, all fees
identified above under the captions Audit Fees, Audit-Related Fees, Tax Fees and All Other Fees that were billed by Ernst & Young LLP were approved by the Audit Committee in accordance with
SEC requirements.

Part IV



|Item 15. | Exhibits and Financial Statement Schedules
|-------- | ------------------------------------------

(a) Exhibits.



|              |  |                                                                                                                                                               
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit                                                                                                                                                       
|2.1           |  | Agreement and Plan of Merger dated December 11, 2006 by and among Indevus Pharmaceuticals, Inc., Hayden Merger Sub, Inc. and Valera Pharmaceuticals, Inc. (11)
|              | 
|3.1           |  | Amended and Restated Certificate of Incorporation(2)                                                                                                          
|              | 
|3.2           |  | Amended and Restated Bylaws(2)                                                                                                                                
|              | 
|4.1           |  | Specimen Common Stock Certificate(2)                                                                                                                          
|              | 
|4.2           |  | Second Amended and Restated Investor Rights Agreement dated August 16, 2004(6)                                                                                
|              | 
|4.3           |  | Form of Incentive Stock Award Agreement(6)                                                                                                                    
|              | 
|4.4           |  | Form of Non-Qualified Stock Option Agreement(6)                                                                                                               
|              | 
|10.1          |  | Amended and Restated Executive Employment Agreement by and between Valera Pharmaceuticals, Inc. and David S. Tierney, M.D. dated July 5, 2006 (7)             
|              | 
|10.2          |  | License and Distribution Agreement between Hydro Med Sciences, Inc. and Paladin Labs, Inc. dated October 3, 2002(5)                                           
|              | 
|10.3          |  | Investment Agreement between Hydro Med Sciences, Inc. and Paladin Labs, Inc. dated October 3, 2002(5)                                                         
|              | 
|10.4          |  | License and Distribution Agreement between Valera Pharmaceuticals, Inc. and Key Oncologics dated September 17, 2003(5)                                        
|              | 
|10.5          |  | Termination Agreement, License Back and Option between Hydro Med Sciences, Inc. and Shire US Inc. dated December 21, 2001(6)                                  
|              | 
|10.6          |  | Termination of Agreement dated September 12, 1990 between National Patent Development Corporation and The Population Council, Inc. dated October 1, 1997(6)   
|              | 
|10.7          |  | Amendment to the Termination of the Joint Development Agreement between GP Strategies Corporation and The Population Council, Inc. dated November 29, 2001(6) 
|              | 
|10.8          |  | Amendment No. 2 to Termination Agreement between Valera Pharmaceuticals, Inc. and The Population Council, Inc. dated August 31, 2004(6)                       
|              | 
|10.9          |  | Lease Agreement between National Patent Development Corporation and Cedar Brook Corporate Center, L.P. dated October 6, 1997(6)                               
|              | 
|10.10         |  | Amendment to Lease between Valera Pharmaceuticals, Inc. and Cedar Brook Corporate Center, L.P. dated January 7, 2004(6)                                       
|              | 
|10.11         |  | Lease Agreement between Valera Pharmaceuticals, Inc. and Cedar Brook 7 Corporate Center, L.P. dated March 8, 2005(6)                                          
|              | 
|10.12         |  | Contribution Agreement between Hydro Med Sciences, Inc. and GP Strategies Corporation dated June 30, 2000(6)                                                  
|              | 
|10.13         |  | License and Distribution Agreement between Valera Pharmaceuticals, Inc. and BioPro Pharmaceutical, Inc. dated January 28, 2005(6)                             
|              | 
|10.14         |  | Valera Pharmaceuticals, Inc. 2002 Equity Incentive Plan(6)                                                                                                    
|              | 
|10.15         |  | Group Purchasing Agreement between Valera Pharmaceuticals, Inc. and International Physician Networks, LLC dated as of March 21, 2005**(5)                     



107



---

|      |  |                                                                                                                                                                                                             
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.16 |  | Group Purchasing Agreement between Valera Pharmaceuticals, Inc. and International Physician Networks, LLC (on behalf of United States Urology Practices) dated as of March 21,
2005**(5)                    
|      | 
|10.17 |  | Agreement between National Patent Development Corporation and Dento-Med Industries, Inc. dated November 30, 1989(6)                                                                                         
|      | 
|10.18 |  | Fee for Services Agreement between Valera Pharmaceuticals, Inc. and Besse Medical Supply dated as of March 21, 2005**(5)                                                                                    
|      | 
|10.19 |  | Collaboration and Development Agreement between Valera Pharmaceuticals, Inc. and Alpex Pharma S.A. dated April 6, 2005**(5)                                                                                 
|      | 
|10.20 |  | Form of Change in Control Agreement with Executive Officers(4)                                                                                                                                              
|      | 
|10.21 |  | Asset Purchase Agreement between Valera Pharmaceuticals, Inc. and Anthra Pharmaceuticals, Inc. dated as of September 28, 2005**(1)                                                                          
|      | 
|10.22 |  | Credit Agreement between Valera Pharmaceuticals, Inc. and Merrill Lynch Capital dated October 20, 2005(3)                                                                                                   
|      | 
|10.23 |  | Distribution Agreement between Valera Pharmaceuticals, Inc. and Teva-Tuteur dated December 9, 2005(3)                                                                                                       
|      | 
|10.24 |  | Supply Agreement by and between Valera Pharmaceuticals, Inc. and Plantex USA Inc.** (8)                                                                                                                     
|      | 
|10.25 |  | Investment and Shareholders Agreement with Spepharm Holding B.V. (9)                                                                                                                                       
|      | 
|10.26 |  | License and Distribution Agreement between Valera Pharmaceuticals, Inc. and Spepharm Holding B.V. (9)                                                                                                       
|      | 
|10.27 |  | Revised Research and Development Proposal dated April 27, 2005, between Valera Pharmaceuticals, Inc. and Poly-Med, Inc. (10)                                                                                
|      | 
|10.28 |  | Advanced Development and Pilot Production Outline issued by the Company and Poly-Med on March 24, 2006 and revised on April 10, 2006. (10)                                                                  
|      | 
|10.29 |  | Letter Agreement dated December 4, 2006, between Valera Pharmaceuticals, Inc. and Poly-Med, Inc. (10)                                                                                                       
|      | 
|10.30 |  | Form of Letter Agreement dated December 21, 2006 to Amend Change in Control Agreements by and between Valera Pharmaceuticals, Inc. and certain officers (12)                                                
|      | 
|10.31 |  | Letter Agreement dated December 21, 2006 to Amend Amended and Restated Executive Employment Agreement by and between Valera Pharmaceuticals, Inc. and David S. Tierney (12)                                 
|      | 
|10.32 |  | Co-Promotion and Marketing Services Agreement dated December 11, 2006 by and between Valera Pharmaceuticals, Inc. and Indevus Pharmaceuticals, Inc.**(13)                                                   
|      | 
|14.1  |  | Corporate Code of Business Conduct and Ethics*                                                                                                                                                              
|      | 
|21.1  |  | List of Subsidiary(4)                                                                                                                                                                                       
|      | 
|31.1  |  | Certificate of the Chief Executive Officer of Valera Pharmaceuticals, Inc. pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934*                                                            
|      | 
|31.2  |  | Certificate of the Chief Financial Officer of Valera Pharmaceuticals, Inc. pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934*                                                            
|      | 
|32    |  | Certificate of the Chief Executive Officer and the Chief Financial Officer of Valera Pharmaceuticals, Inc. pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 United
States § 1350*

---

|* | Filed herewith
|- | --------------

|** | Portions omitted pursuant to a request for confidential treatment under Rule 406.
|-- | ---------------------------------------------------------------------------------

|(1) | Filed as an Exhibit to Amendment No. 6 to Registration Statement on Form S-1 (File No. 333-123288) filed on January 30, 2006, and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Filed as an Exhibit to Amendment No. 5 to Registration Statement on Form S-1 (File No. 333-123288) filed on January 17, 2006, and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Filed as an Exhibit to Amendment No. 4 to Registration Statement on Form S-1 (File No. 333-123288) filed on December 9, 2005, and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



108



---

|(4) | Filed as an Exhibit to Amendment No. 3 to Registration Statement on Form S-1 (File No. 333-123288) filed on September 29, 2005, and incorporated herein by reference.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Filed as an Exhibit to Amendment No. 2 to Registration Statement on Form S-1 (File No. 333-123288) filed on April 20, 2005, and incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Filed as an Exhibit to Registration Statement on Form S-1 (File No. 333-123288) filed on March 14, 2005, and incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Filed as an Exhibit to Current Report on Form 8-K filed on July 10, 2006, and incorporated herein by reference.
|--- | ---------------------------------------------------------------------------------------------------------------

|(8) | Filed as an Exhibit to Quarterly Report on Form 10-Q filed on August 9, 2006, and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------

|(9) | Filed as an Exhibit to Quarterly Report on Form 10-Q filed on November 9, 2006, and incorporated herein by reference.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(10) | Filed as an Exhibit to Current Report on Form 8-K filed on December 11, 2006, and incorporated herein by reference.
|---- | -------------------------------------------------------------------------------------------------------------------

|(11) | Filed as an Exhibit to Current Report on Form 8-K filed on December 12, 2006, and incorporated herein by reference.
|---- | -------------------------------------------------------------------------------------------------------------------

|(12) | Filed as an Exhibit to Current Report on Form 8-K filed on December 27, 2006, and incorporated herein by reference.
|---- | -------------------------------------------------------------------------------------------------------------------

|(13) | Filed as an Exhibit to Current Report on Form 8-K/A filed on January 26, 2007, and incorporated herein by reference.
|---- | --------------------------------------------------------------------------------------------------------------------

(b) Financial Statement Schedules.

Financial statements and
schedule filed as a part of this Form 10-K are listed in the Index to Financial Statements on page 59. All other financial statement schedules are omitted because they are not applicable or not required, or because the required information is
included in the financial statements or notes thereto.



109



---

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on February 22, 2007.



VALERA PHARMACEUTICALS, INC.By:

/s/ ANDREW T. DRECHSLERName:

Andrew T. DrechslerTitle:

Chief Financial Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



|                           |  |                                                                                        |  |                  
|-------------------------- |  | -------------------------------------------------------------------------------------- |  | -----------------
|Signature                  |  | Title                                                                                  |  | Date             
|                           |  |                                                                                       
|/s/ DAVID S. TIERNEY, M.D. |  | President, Chief Executive Officer and Director (Principal Executive Officer)          |  | February 22, 2007
|David S. Tierney, M.D.     |  |                                                                                        | 
|                           |  |                                                                                       
|/s/ ANDREW T. DRECHSLER    |  | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |  | February 22, 2007
|Andrew T. Drechsler        |  |                                                                                        | 
|                           |  |                                                                                       
|/s/ JAMES C. GALE          |  | Chairman of the Board of Directors                                                     |  | February 22, 2007
|James C. Gale              |  |                                                                                        |  |                  
|                           |  |                                                                                       
|/s/ DAVID DANTZKER, M.D.   |  | Director                                                                               |  | February 22, 2007
|David Dantzker, M.D.       |  |                                                                                        |  |                  
|                           |  |                                                                                       
|/s/ JEROME FELDMAN         |  | Director                                                                               |  | February 22, 2007
|Jerome Feldman             |  |                                                                                        |  |                  
|                           |  |                                                                                       
|/s/ HUBERT HUCKEL, M.D.    |  | Director                                                                               |  | February 22, 2007
|Hubert Huckel, M.D.        |  |                                                                                        |  |                  
|                           |  |                                                                                       
|/s/ JEFFREY KRAUSS         |  | Director                                                                               |  | February 22, 2007
|Jeffrey Krauss             |  |                                                                                        |  |                  
|                           |  |                                                                                       
|/s/ OGDEN R. REID          |  | Director                                                                               |  | February 22, 2007
|Ogden R. Reid              |  |                                                                                        |  |                  
|                           |  |                                                                                       
|/s/ HOWARD SILVERMAN       |  | Director                                                                               |  | February 22, 2007
|Howard Silverman           |  |                                                                                        |  |                  
|                           |  |                                                                                       
|/s/ JOHN T. SPITZNAGEL     |  | Director                                                                               |  | February 22, 2007
|John T. Spitznagel         |  |                                                                                        |  |                  



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