##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended: June 30, 2006
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 Commission File Number: 000-51768
 VALERA PHARMACEUTICALS, Inc.
  Delaware
(State or other jurisdiction
of incorporation or organization)
    
    13-4119931
(I.R.S. Employer
Identification No.)7 Clarke Drive
Cranbury, New Jersey
(Address of principal executive offices)
    
    08512
(Zip Code)
 (609) 235-3000
  Yes þ No o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
  Yes o No þ




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##### 



TABLE OF CONTENTS
 Index
 Page No.Cautionary Statement Regarding Forward Looking Information
    
    
    3Part I  FINANCIAL INFORMATIONItem 1. Financial Statements and NotesBalance Sheets as of June 30, 2006 (unaudited) and December 31, 2005
    
    
    4Statements of Operations (unaudited) for the three and six months ended June 30, 2006 and 2005
    
    
    5Statement of Stockholders Equity (Deficit) (unaudited) for the six months ended June 30, 2006
    
    
    6Statements of Cash Flows (unaudited) for the six months ended June 30, 2006 and 2005
    
    
    7Notes to Financial Statements
    
    
    8-20Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20-29Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    30Part II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    30-31Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    31Item 3. Defaults Upon Senior Securities
    
    
    31Item 4. Submission of Matters to a Vote of Security Holders
    
    
    31Item 5. Other Information
    
    
    31Item 6. Exhibits
    
    
    31SIGNATURES
    
    
    32Exhibit IndexEX-10.1: Supply Agreement by and between Valera Pharmaceuticals, Inc. and Plantex USA Inc
    
    
    33-51EX-31.1: Certifications
    
    
    52EX-31.2: Certifications
    
    
    53EX-32: Certifications
    
    
    54Supply Agreement by and between Valera Pharmaceuticals, Inc. and Plantex USA Inc.Certification of Chief Executive OffficerCertification of Chief Financial OffficerCertification of CEO and CFO Pursuant to Section 906
  2




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##### Table of Contents



Cautionary Statement Regarding Forward-Looking Statements
   
    
    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 U.S. and worldwide affecting the pharmaceutical and healthcare industries;
    
    our ability to manufacture our Vantas product; and
    
    our ability to develop products, receive regulatory approvals, and market our products.
  3




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##### Table of Contents



VALERA PHARMACEUTICALS, INC
 
 BALANCE SHEETS
(in thousands, except par value)
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    18,149
    
    
    $
    2,340Investments held-to-maturity
    
    
    5,925
    
    
    
    Accounts receivable, net of allowances of $500 at June 30, 2006 and $385 at December 31,
2005
    
    
    4,490
    
    
    
    4,488Inventories, net
    
    
    4,306
    
    
    
    3,191Prepaid expenses and other current assets
    
    
    1,172
    
    
    
    726Total current assets
    
    
    34,042
    
    
    
    10,745Property, plant and equipment, net of accumulated depreciation of $1,640 at June 30, 2006 and
$1,374 at December 31, 2005
    
    
    6,570
    
    
    
    4,194Deferred offering costs
    
    
    
    
    
    
    1,378Deferred financing costs
    
    
    90
    
    
    
    124Security deposits
    
    
    91
    
    
    
    91Intangible assets, net of accumulated amortization of $26 at June 30, 2006
    
    
    499
    
    
    
    Total assets
    
    $
    41,292
    
    
    $
    16,532LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    3,399
    
    
    $
    1,421Accrued liabilities
    
    
    3,286
    
    
    
    4,607Note payable
    
    
    
    
    
    
    1,525Deferred revenue  current
    
    
    
    
    
    
    329Capital lease obligations  current
    
    
    17
    
    
    
    18Total current liabilities
    
    
    6,702
    
    
    
    7,900Other non current liabilities
    
    
    150
    
    
    
    Capital lease obligations  long term
    
    
    18
    
    
    
    Deferred revenue long term
    
    
    300
    
    
    
    300Commitments and contingent liabilitiesSeries 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 June 30, 2006 and December 31, 2005,
respectively
    
    
    
    
    
    
    13,604Series 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 June 30, 2006 and December 31, 2005
respectively
    
    
    
    
    
    
    15,082Series 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 June 30, 2006 and December 31, 2005,
respectively
    
    
    
    
    
    
    11,239Shareholders equity (deficit):Common stock, $0.001 par value; 30,000 authorized, 14,888 and 1,667 issued and outstanding at
June 30, 2006 and December 31, 2005, respectively
    
    
    15
    
    
    
    2Additional paid-in-capital
    
    
    78,622
    
    
    
    8,696Deferred stock-based compensation
    
    
    
    
    
    
    (630
    )Accumulated deficit
    
    
    (44,515
    )
    
    
    (39,661
    )Total shareholders equity (deficit)
    
    
    34,122
    
    
    
    (31,593
    )Total liabilities and shareholders equity (deficit)
    
    $
    41,292
    
    
    $
    16,532
  4




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VALERA PHARMACEUTICALS, INC
 
 STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net product
sales
    
    $
    6,215
    
    
    $
    10,279
    
    
    $
    11,740
    
    
    $
    17,965Licensing
revenue
    
    
    5
    
    
    
    7
    
    
    
    12
    
    
    
    16Total net
revenue
    
    
    6,220
    
    
    
    10,286
    
    
    
    11,752
    
    
    
    17,981Operating costs and expenses:Cost of product
sales
    
    
    1,653
    
    
    
    2,951
    
    
    
    3,114
    
    
    
    3,974Research and
development
    
    
    1,817
    
    
    
    1,861
    
    
    
    3,834
    
    
    
    2,921Selling and
marketing
    
    
    3,770
    
    
    
    2,820
    
    
    
    6,479
    
    
    
    5,321General and
administrative
    
    
    1,980
    
    
    
    1,145
    
    
    
    3,611
    
    
    
    2,533Amortization of
intangible
assets
    
    
    26
    
    
    
    
    
    
    
    26
    
    
    
    Total operating costs and
expenses
    
    
    9,246
    
    
    
    8,777
    
    
    
    17,064
    
    
    
    14,749(Loss) income from
operations
    
    
    (3,026
    )
    
    
    1,509
    
    
    
    (5,312
    )
    
    
    3,232Interest
income
    
    
    294
    
    
    
    14
    
    
    
    505
    
    
    
    29Interest
expense
    
    
    
    
    
    
    (1
    )
    
    
    (27
    )
    
    
    (2
    )(Loss) income before income
taxes
    
    
    (2,732
    )
    
    
    1,522
    
    
    
    (4,834
    )
    
    
    3,259Provision for income
taxes
    
    
    10
    
    
    
    140
    
    
    
    20
    
    
    
    300Net (loss) income
    
    $
    (2,742
    )
    
    $
    1,382
    
    
    $
    (4,854
    )
    
    $
    2,959Basic net (loss) income per
share
    
    $
    (0.18
    )
    
    $
    0.83
    
    
    $
    (0.39
    )
    
    $
    1.78Diluted net (loss) income
per
share
    
    $
    (0.18
    )
    
    $
    0.12
    
    
    $
    (0.39
    )
    
    $
    0.26Basic weighted average
number of shares
outstanding
    
    
    14,886
    
    
    
    1,667
    
    
    
    12,290
    
    
    
    1,667Diluted weighted average
number of shares
outstanding
    
    
    14,886
    
    
    
    11,366
    
    
    
    12,290
    
    
    
    11,192
  5




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VALERA PHARMACEUTICALS, INC
 
 STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
For the Six Months Ended June 30, 2006
(in thousands)
 Additional
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Deferred
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Par Value
    
    
    Capital
    
    
    Compensation
    
    
    Deficit
    
    
    Equity (Deficit)Balances at December 31, 2005
    
    
    1,667
    
    
    $
    2
    
    
    $
    8,696
    
    
    $
    (630
    )
    
    $
    (39,661
    )
    
    $
    (31,593
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,854
    )
    
    
    (4,854
    )Issuance of common stock from
initial public offering
    
    
    3,863
    
    
    
    4
    
    
    
    30,201
    
    
    
    
    
    
    
    
    
    
    
    30,205Conversion of preferred stock
into common stock
    
    
    9,356
    
    
    
    9
    
    
    
    39,916
    
    
    
    
    
    
    
    
    
    
    
    39,925Exercise of stock options
    
    
    2
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    10Elimination of deferred
compensation related to adoption
of FAS 123(R)
    
    
    
    
    
    
    
    
    
    
    (630
    )
    
    
    630
    
    
    
    
    
    
    
    Expense related to options
granted to non-employees
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Compensation expense related to
employee stock options
    
    
    
    
    
    
    
    
    
    
    424
    
    
    
    
    
    
    
    
    
    
    
    424Balances at June 30, 2006
    
    
    14,888
    
    
    $
    15
    
    
    $
    78,622
    
    
    $
    
    
    
    $
    (44,515
    )
    
    $
    34,122
  6




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##### Table of Contents



VALERA PHARMACEUTICALS, INC
 
 STATEMENTS OF CASH FLOWS
(in thousands)
 Six Months EndedJune 30,2006
    
    
    2005Operating activitiesNet (loss) income
    
    $
    (4,854
    )
    
    $
    2,959Adjustments to reconcile net (loss) income to net cash used in operating activitiesDepreciation and amortization
    
    
    292
    
    
    
    199Amortization of deferred financing fees
    
    
    34
    
    
    
    Allowances for accounts receivable
    
    
    193
    
    
    
    227Expense related to options granted to non-employees
    
    
    5
    
    
    
    58Stock based compensation
    
    
    424
    
    
    
    (182
    )Changes in assets and liabilities which provided (used) cashAccounts receivable
    
    
    (195
    )
    
    
    (5,110
    )Inventories
    
    
    (1,115
    )
    
    
    (708
    )Restricted cash
    
    
    
    
    
    
    100Prepaid expenses and other current assets
    
    
    (446
    )
    
    
    (403
    )Security deposits
    
    
    
    
    
    
    (62
    )Accounts payable
    
    
    1,978
    
    
    
    (59
    )Accrued liabilities
    
    
    (1,321
    )
    
    
    2,893Other non-current liabilities
    
    
    150
    
    
    
    Deferred revenue
    
    
    (329
    )
    
    
    300Net cash (used in) provided by operating activities
    
    
    (5,184
    )
    
    
    212Investing ActivitiesCapital expenditures
    
    
    (2,614
    )
    
    
    (1,471
    )Purchase of product rights
    
    
    (525
    )
    
    
    Purchase of investments held-to-maturity
    
    
    (5,925
    )
    
    
    Net cash used in investing activities
    
    
    (9,064
    )
    
    
    (1,471
    )Financing ActivitiesNet proceeds from issuance of common stock
    
    
    31,593
    
    
    
    Payment of capital lease obligations
    
    
    (11
    )
    
    
    (11
    )Payment of notes payable
    
    
    (1,525
    )
    
    
    Deferred offering costs
    
    
    
    
    
    
    (1,000
    )Net cash provided by (used in) financing activities
    
    
    30,057
    
    
    
    (1,011
    )Net increase (decrease) in cash and cash equivalents
    
    
    15,809
    
    
    
    (2,270
    )Cash and cash equivalents at beginning of period
    
    
    2,340
    
    
    
    5,053Cash and cash equivalents at end of period
    
    $
    18,149
    
    
    $
    2,783Schedule of noncash investing and financing activities:Conversion of preferred stock into common stock
    
    $
    39,925
    
    
    $
    Acquisition of an asset through a capital lease
    
    $
    28
    
    
    $
    
  7




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##### Table of Contents



VALERA PHARMACEUTICALS, INC
 
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED
 Note 1. Organization and Description of Business
   Recent Developments
   Annual Retainer:
 Board and Committee Meeting Attendance Fees
    8




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##### Table of Contents



VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
   ®
  Note 2. Summary of Significant Accounting Policies
 Basis of Presentation
 Summary of Significant
Accounting Policies,
  Use of Accounting Estimates
  9




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##### Table of Contents



VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
 Cash and Cash Equivalents
  Investments
  Allowances for Accounts Receivable
  Inventory
   Property, Plant and Equipment
  Deferred Offering and Financing Costs
  10




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##### Table of Contents



VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
 Net Product Sales
  Revenue Recognition
   For the six months ended June 30, 2006
    
    Distributors
    
    
    Physicians
    
    
    Total(In thousands)Allowance balance at December 31, 2005
    
    $
    19
    
    
    $
    320
    
    
    $
    339Provision related to sales for Fiscal 2006
    
    
    
    
    
    
    745
    
    
    
    745Returns and adjustments related sales in
Fiscal 2004
    
    
    
    
    
    
    (19
    )
    
    
    (19
    )Returns and adjustments related sales in
Fiscal 2005
    
    
    
    
    
    
    (349
    )
    
    
    (349
    )Returns and adjustments related sales in
Fiscal 2006
    
    
    
    
    
    
    (441
    )
    
    
    (441
    )Allowance balance at June 30, 2006
    
    $
    19
    
    
    $
    256
    
    
    $
    275
 For the six months ended June 30, 2005
    
    Distributors
    
    
    Physicians
    
    
    Total(In thousands)Allowance balance at December 31, 2004
    
    $
    28
    
    
    $
    316
    
    
    $
    344Provision related to sales for Fiscal 2005
    
    
    
    
    
    
    1,368
    
    
    
    1,368Returns and adjustments related sales in
Fiscal 2004
    
    
    
    
    
    
    (207
    )
    
    
    (207
    )Returns and adjustments related sales in
Fiscal 2005
    
    
    
    
    
    
    (688
    )
    
    
    (688
    )Allowance balance at June 30, 2005
    
    $
    28
    
    
    $
    789
    
    
    $
    817
 Customer Sales  Urologists
  11




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##### Table of Contents



VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
 Customer Sales  Distributors Sales
  Royalties
  Shipping and Handling Costs
  Research and Development
  Pre-clinical Study and Clinical Trial Expenses
  Advertising Costs
  Intangible Assets
  12




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##### Table of Contents



VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
 Stock-Based Compensation
   Deferred Compensation
  Income Taxes
 Accounting for Income Taxes
 Long-lived Assets
  Concentration Risks
    Fair Value of Financial Instruments
  13




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##### Table of Contents



VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
 Note 3. Investments
   June 30, 2006Held-to-Maturity(in thousands)Gross
    
    GrossAmortized
    
    Unrecognized
    
    Unrecognized
    
    FairDescription of Securities
    
    Cost
    
    Gains
    
    Losses
    
    ValueU.S. government and agencies securities
    
    $
    5,925
    
    
    $
    2
    
    
    $
    (2
    )
    
    $
    5,925
  June 30, 2006Held-to-Maturity(in thousands)Maturity
    
    Amortized
    
    
    FairCost
    
    
    ValueDue in one year or less
    
    $
    5,925
    
    
    $
    5,925Due after one year through five years
    
    
    
    
    
    
    Due after five years through ten years
    
    
    
    
    
    
    Due after ten years
    
    
    
    
    
    
    $
    5,925
    
    
    $
    5,925
  As of June 30, 2006  (in thousands)
 Less than 12 months
    
    
    12 months or longer
    
    
    TotalNumberDescription
    
    of
    
    
    Fair
    
    
    Unrecognized
    
    
    Fair
    
    
    Unrecognized
    
    
    Fair
    
    
    Unrecognizedof Securities
    
    Securities
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    LossU.S. government and agencies securities
    
    
    1
    
    
    $
    2,945
    
    
    $
    (2
    )
    
    
    
    
    
    
    
    
    
    $
    2,945
    
    
    $
    (2
    )Total temporarily impaired investments
securities
    
    
    1
    
    
    $
    2,945
    
    
    $
    (2
    )
    
    
    
    
    
    
    
    
    
    $
    2,945
    
    
    $
    (2
    )
  14




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##### Table of Contents



VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
 Note 4. Inventory
  June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)(in thousands)Raw materials
    
    $
    650
    
    
    $
    463Work-in-process
    
    
    3,454
    
    
    
    2,426Finished goods
    
    
    202
    
    
    
    302$
    4,306
    
    
    $
    3,191
  Note 5. Property, Plant and Equipment
  June 30,
    
    
    December 31,Useful Lives
    
    
    2006
    
    
    2005(unaudited)(in thousands)Laboratory equipment
    
    5 years
    
    $
    1,632
    
    
    $
    1,531Furniture and Fixtures
    
    7 years
    
    
    160
    
    
    
    161Office equipment
    
    5 years
    
    
    136
    
    
    
    108Computer equipment
    
    3 years
    
    
    467
    
    
    
    417Computer software
    
    3 years
    
    
    291
    
    
    
    200Construction in process
    
    
    
    
    
    
    4,896
    
    
    
    2,526Leasehold improvements
    
    1-10 years
    
    
    628
    
    
    
    6258,210
    
    
    
    5,568Less accumulated depreciation and amortization
    
    
    
    
    
    
    (1,640
    )
    
    
    (1,374
    )Property, plant and equipment, net
    
    
    
    
    
    $
    6,570
    
    
    $
    4,194
   Note 6. Deferred Offering and Financing Costs
   15




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##### Table of Contents



VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
 Note 7. Credit Line Agreement (Note Payable)
  Note 8. Capitalization
 Common Stock
   Convertible Preferred Stock
  Note 9. Stock-Based Compensation
    16




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##### Table of Contents



VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
  Risk free interest rate
    
    
    3.90%  5.01
    %Expected volatility
    
    
    61.1%  66.15
    %Expected dividend yield
    
    
    0.0
    %Expected life (in years)
    
    
    6.25Forfeiture rate
    
    
    0%  4.0
    %Weighted average fair value at date of grant
    
    $
    6.22
    Three Months Ended June 30,
    
    Six Months Ended June 30,(in thousands)
    
    (in thousands)2006
    
    2005
    
    2006
    
    2005Method used to
account for
employee
stock-based
compensation
    
    Fair Value
    
    Intrinsic
    
    Fair Value
    
    IntrinsicEmployee
Stock-based
compensation under
SFAS No. 123
(R)
    
    $
    250
    
    
    $
    (417
    )
    
    $
    424
    
    
    $
    (182
    )
   Three Months
    
    
    Six Months EndedEnded June 30, 2005
    
    
    June 30, 2005(in thousands, except per
    
    
    (in thousands, except pershare amounts)
    
    
    except per shareNet income to common stock holders  as reported
    
    $
    1,382
    
    
    $
    2,959Add: non-cash employee compensation as reported
    
    
    (417
    )
    
    
    (182
    )Deduct: total employee stock-based compensation
expense determined under fair value based method for
all awards
    
    
    (158
    )
    
    
    (309
    )Net income to common stockholders  pro-forma
    
    $
    807
    
    
    $
    2,468Basic income per share  as reported
    
    $
    0.83
    
    
    $
    1.78Basic income per share  pro-forma
    
    $
    0.48
    
    
    $
    1.48Diluted income per share  as reported
    
    $
    0.12
    
    
    $
    0.26Diluted income per share  pro-forma
    
    $
    0.07
    
    
    $
    0.22
 17




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VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
  Weighted
    
    
    
    
    
    
    WeightedCommon
    
    
    Average
    
    
    Aggregate
    
    
    AverageStock
    
    
    Exercise
    
    
    Intrinsic Value
    
    
    ContractualOptions
    
    
    Price
    
    
    (in thousands)
    
    
    LifeOutstanding at December 31, 2005
    
    
    1,265,849
    
    
    $
    4.25Granted
    
    
    342,700
    
    
    $
    9.04Exercised
    
    
    (2,584
    )
    
    $
    4.02Forfeited
    
    
    (26,918
    )
    
    $
    8.39Outstanding at June 30, 2006
    
    
    1,579,047
    
    
    $
    5.22
    
    
    $
    819
    
    
    
    8.0Exercisable at June 30, 2006
    
    
    636,698
    
    
    $
    3.56
    
    
    $
    199
    
    
    
    7.5
    Weighted AverageNumber of
    
    Weighted Average
    
    Weighted Average
    
    Intrinsic ValueGrants Made During Quarter Ended
    
    Options Granted
    
    Exercise Price
    
    Fair Value per Share
    
    per ShareJune 30, 2006
    
    
    122,100
    
    
    $
    8.96
    
    
    $
    5.87
    
    
    
    June 30, 2005
    
    
    143,594
    
    
    $
    12.00
    
    
    $
    12.00
    
    
    
    
 Note 10. Income Taxes
  Note 11. Net Income (Loss) Per Share
  18




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VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
  Three Months Ended June 30,2006
    
    
    2005Net (loss)
    
    
    Shares
    
    
    Net income
    
    
    Shares(Numerator)
    
    
    (Denominator)
    
    
    (Numerator)
    
    
    (Denominator)(in thousands, except per share amounts)Basic net (loss) income per share factors
    
    $
    (2,742
    )
    
    
    14,886
    
    
    $
    1,382
    
    
    
    1,667Effect of preferred stock conversion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,832Effect of dilutive stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    867Diluted net (loss) income per share factors
    
    $
    (2,742
    )
    
    
    14,886
    
    
    $
    1,382
    
    
    
    11,366Basic net (loss) income per share
    
    $
    (0.18
    )
    
    
    
    
    
    $
    0.83Diluted net (loss) income per share
    
    $
    (0.18
    )
    
    
    
    
    
    $
    0.12
 Six Months Ended June 30,2006
    
    
    2005Net (loss)
    
    
    Shares
    
    
    Net income
    
    
    Shares(Numerator)
    
    
    (Denominator)
    
    
    (Numerator)
    
    
    (Denominator)(in thousands, except per share amounts)Basic net (loss) income per share factors
    
    $
    (4,854
    )
    
    
    12,290
    
    
    $
    2,959
    
    
    
    1,667Effect of preferred stock conversion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,660Effect of dilutive stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    865Diluted net (loss) income per share factors
    
    $
    (4,854
    )
    
    
    12,290
    
    
    $
    2,959
    
    
    
    11,192Basic net (loss) income per share
    
    $
    (0.39
    )
    
    
    
    
    
    $
    1.78Diluted net (loss) income per share
    
    $
    (0.39
    )
    
    
    
    
    
    $
    0.26
 Note 12. Related Party Transactions
   19




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VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
 Note 13. Acquisition of Product
  Note 14. Purchase Commitments
  
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 Introduction
  Overview
  20




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##### Table of Contents




    
    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.
 21




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##### Table of Contents



Recent Events
   Annual Retainer:
 Board and Committee Meeting Attendance Fees
      22




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##### Table of Contents



®
  Product Sales and Costs
   For the three months ended:
    
    Net Average Selling PriceDecember 31, 2004
    
    $
    2,520March 31, 2005
    
    $
    2,628June 30, 2005
    
    $
    2,586September 30, 2005
    
    $
    2,099December 31, 2005
    
    $
    1,801March 31, 2006
    
    $
    1,620June 30, 2006
    
    $
    1,562
   23




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##### Table of Contents



Research and Development Expenses
  Selling and Marketing Expenses
  General and Administrative Expenses
  Amortization of Intangible Assets
  Critical Accounting Policies
   Revenue Recognition
  24




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##### Table of Contents



Pre-clinical Study and Clinical Trial Expenses
  Stock-Based Compensation
   Results of Operations
 Three months ended June 30, 2006 compared with three months ended June 30, 2005
 Net Product Sales.
  25




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##### Table of Contents



Licensing Revenue.
 Cost of Product Sales
 Research and Development Expense
 Selling and Marketing Expense
 General Administrative Expense
 26




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Amortization of Intangible Assets.
 Net Interest Income
 Income Taxes
 Six months ended June 30, 2006 compared with six months ended June 30, 2005
 Net Product Sales.
     Licensing Revenue.
 Cost of Product Sales
 27




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Research and Development Expense
 Selling and Marketing Expense
 General Administrative Expense
 Amortization of Intangible Assets.
 Net Interest Income
 Income Taxes
 Liquidity and Capital Resources
    28




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Contractual Obligations and Commitments
 Purchase Commitments
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
    29




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##### Table of Contents



Item 4. Controls and Procedures
    
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  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 decline, which
will have an adverse effect on our net product sales.
    30




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits and Reports on Form 8-K
  10.1
    
    Supply Agreement by and between Valera Pharmaceuticals, Inc. and Plantex USA Inc.*
    33-5131.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    5231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    5332
    
    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    54
 
 *
    
    Portions omitted pursuant to a request for confidential treatment under Rule 24b-2 of the
Securities Exchange Act of 1934, as amended. 31




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SIGNATURES
  VALERA PHARMACEUTICALS, INCDated: August 9, 2006
    By:
    /s/     David S. Tierney, M.D.David S. Tierney, M.D.President, Chief Executive Officer and Director
(Principal Executive Officer)Dated: August 9, 2006
    By:
    /s/     Andrew T. DrechslerAndrew T. DrechslerChief Financial Officer
(Principal Financial and Accounting Officer) 32