##### 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: September 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
    
    13-4119931(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)7 Clarke DriveCranbury, New Jersey
    
    08512(Address of principal executive offices)
    
    (Zip Code)
 (609) 235-3000
  Yes þ   No o
  o o 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 September 30, 2006 (unaudited) and December 31, 2005
    
    
    4Statements of Operations (unaudited) for the three and nine months ended September 30, 2006 and 2005
    
    
    5Statement of Stockholders Equity (Deficit) (unaudited) for the nine months ended September 30, 2006
    
    
    6Statements of Cash Flows (unaudited) for the nine months ended September 30, 2006 and 2005
    
    
    7Notes to Financial Statements
    
    
    8-20Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20-28Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    28Part II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    29Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    29Item 3. Defaults Upon Senior Securities
    
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29Item 5. Other Information
    
    
    29Item 6. Exhibits
    
    
    29SIGNATURES
    
    
    30Exhibit IndexEX-10.1: Investment and Shareholders Agreement Spepharm Holding B.V.
    
    
    31-51EX-10.2: License and Distribution Agreement between Valera Pharmaceuticals, Inc. and Spepharm Holding B.V.
    
    
    52-69EX-31.1: Certifications
    
    
    70EX-31.2: Certifications
    
    
    71EX-32:    Certifications
    
    
    72INVESTMENT AND SHAREHOLDERS AGREEMENTLICENSE AND DISTRIBUTION AGREEMENTCERTIFICATION OF CEO PURSUANT TO SECTION 302CERTIFICATION OF CFO PURSUANT TO SECTION 302CERTIFICATION OF CEO & 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 United States 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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VALERA PHARMACEUTICALS, INC
 
 BALANCE SHEETS
 (in thousands, except par value)
 September 30,
    
    
    December 31,2006
    
    
    2005(UnauditedASSETSCurrent assets:Cash and cash equivalents
    
    $
    15,891
    
    
    $
    2,340Investments held-to-maturity
    
    
    2,982
    
    
    
    Accounts receivable, net of allowances of $318 at September 30, 2006 and $385 at December 31, 2005
    
    
    2,311
    
    
    
    4,488Inventories, net
    
    
    5,569
    
    
    
    3,191Prepaid expenses and other current assets
    
    
    841
    
    
    
    726Total current assets
    
    
    27,594
    
    
    
    10,745Property, plant and equipment, net of accumulated depreciation of $1,788 at September 30, 2006 and
$1,374 at December 31, 2005
    
    
    7,513
    
    
    
    4,194Deferred offering costs
    
    
    
    
    
    
    1,378Intangible assets, net of accumulated amortization of $52 at September 30, 2006
    
    
    473
    
    
    
    Other non current assets
    
    
    169
    
    
    
    215Total assets
    
    $
    35,749
    
    
    $
    16,532LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    3,233
    
    
    $
    1,421Accrued liabilities
    
    
    2,314
    
    
    
    4,607Note payable
    
    
    
    
    
    
    1,525Deferred revenue  current
    
    
    
    
    
    
    329Capital lease obligations  current
    
    
    11
    
    
    
    18Total current liabilities
    
    
    5,558
    
    
    
    7,900Capital lease obligations  long term
    
    
    15
    
    
    
    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 September 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 September 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 September 30, 2006 and December 31, 2005,
respectively
    
    
    
    
    
    
    11,239Shareholders equity (deficit):Common stock, $0.001 par value; 30,000 authorized, 14,935 and 1,667 issued and outstanding at
September 30, 2006 and December 31, 2005, respectively
    
    
    15
    
    
    
    2Additional paid-in-capital
    
    
    79,060
    
    
    
    8,696Deferred stock-based compensation
    
    
    
    
    
    
    (630
    )Accumulated deficit
    
    
    (49,199
    )
    
    
    (39,661
    )Total shareholders equity (deficit)
    
    
    29,876
    
    
    
    (31,593
    )Total liabilities and shareholders equity (deficit)
    
    $
    35,749
    
    
    $
    16,532
  4




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VALERA PHARMACEUTICALS, INC
 
 STATEMENTS OF OPERATIONS
 (in thousands, except per share amounts)
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net product
sales
    
    $
    2,909
    
    
    $
    3,668
    
    
    $
    14,649
    
    
    $
    21,633Licensing
revenue
    
    
    104
    
    
    
    10
    
    
    
    116
    
    
    
    26Total net
revenue
    
    
    3,013
    
    
    
    3,678
    
    
    
    14,765
    
    
    
    21,659Operating costs and expenses:Cost of product
sales
    
    
    883
    
    
    
    809
    
    
    
    3,997
    
    
    
    4,783Research and
development
    
    
    1,880
    
    
    
    1,490
    
    
    
    5,714
    
    
    
    4,411Selling and
marketing
    
    
    3,226
    
    
    
    2,911
    
    
    
    9,705
    
    
    
    8,232General and
administrative
    
    
    1,987
    
    
    
    1,595
    
    
    
    5,598
    
    
    
    4,128Amortization of
intangible
assets
    
    
    26
    
    
    
    
    
    
    
    52
    
    
    
    Total operating costs and
expenses
    
    
    8,002
    
    
    
    6,805
    
    
    
    25,066
    
    
    
    21,554(Loss) income from
operations
    
    
    (4,989
    )
    
    
    (3,127
    )
    
    
    (10,301
    )
    
    
    105Interest
income
    
    
    269
    
    
    
    20
    
    
    
    774
    
    
    
    49Interest
expense
    
    
    
    
    
    
    (1
    )
    
    
    (27
    )
    
    
    (3
    )(Loss) income before income
taxes
    
    
    (4,720
    )
    
    
    (3,108
    )
    
    
    (9,554
    )
    
    
    151Benefit from income
taxes
    
    
    (36
    )
    
    
    (300
    )
    
    
    (16
    )
    
    
    Net (loss) income
    
    $
    (4,684
    )
    
    $
    (2,808
    )
    
    $
    (9,538
    )
    
    $
    151Basic net (loss) income per
share
    
    $
    (0.31
    )
    
    $
    (1.68
    )
    
    $
    (0.73
    )
    
    $
    0.09Diluted net (loss) income
per
share
    
    $
    (0.31
    )
    
    $
    (1.68
    )
    
    $
    (0.73
    )
    
    $
    0.01Basic weighted average
number of shares
outstanding
    
    
    14,906
    
    
    
    1,667
    
    
    
    13,123
    
    
    
    1,667Diluted weighted average
number of shares
outstanding
    
    
    14,906
    
    
    
    1,667
    
    
    
    13,123
    
    
    
    11,358
  5




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VALERA PHARMACEUTICALS, INC
 
 STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
 For the Nine Months Ended September 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,538
    )
    
    
    (9,538
    )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
    
    
    49
    
    
    
    
    
    
    
    151
    
    
    
    
    
    
    
    
    
    
    
    151Elimination of deferred
compensation related to adoption
of FAS 123(R)
    
    
    
    
    
    
    
    
    
    
    (630
    )
    
    
    630
    
    
    
    
    
    
    
    Expense related to options
granted to non-employees
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )Compensation expense related to
employee stock options
    
    
    
    
    
    
    
    
    
    
    727
    
    
    
    
    
    
    
    
    
    
    
    727Balances at September 30, 2006
    
    
    14,935
    
    
    $
    15
    
    
    $
    79,060
    
    
    $
    
    
    
    $
    (49,199
    )
    
    $
    29,876
  6




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##### Table of Contents



VALERA PHARMACEUTICALS, INC
 
 STATEMENTS OF CASH FLOWS
 (in thousands)
  Nine Months EndedSeptember 30,2006
    
    
    2005Operating activitiesNet (loss) income
    
    $
    (9,538
    )
    
    $
    151Adjustments to reconcile net (loss) income to net cash used in operating activitiesDepreciation and amortization
    
    
    466
    
    
    
    352Amortization of deferred financing fees
    
    
    51
    
    
    
    Allowances for accounts receivable
    
    
    40
    
    
    
    206Expense related to options granted to non-employees
    
    
    (1
    )
    
    
    72Stock based compensation
    
    
    727
    
    
    
    (56
    )Changes in assets and liabilities which provided (used) cashAccounts receivable
    
    
    2,137
    
    
    
    (859
    )Inventories
    
    
    (2,378
    )
    
    
    (1,564
    )Restricted cash
    
    
    
    
    
    
    100Prepaid expenses and other current assets
    
    
    (115
    )
    
    
    (403
    )Security
deposits
    
    
    
    
    
    
    (46
    )Accounts payable
    
    
    1,812
    
    
    
    (458
    )Accrued liabilities
    
    
    (2,293
    )
    
    
    2,712Deferred revenue
    
    
    (329
    )
    
    
    300Net cash (used in) provided by operating activities
    
    
    (9,421
    )
    
    
    507Investing ActivitiesCapital expenditures
    
    
    (3,705
    )
    
    
    (1,722
    )Purchase of product rights
    
    
    (525
    )
    
    
    Purchase of investment in Spepharm
    
    
    (5
    )
    
    
    Purchase of investments held-to-maturity
    
    
    (5,982
    )
    
    
    Proceeds from the sale of investment held-to-maturity
    
    
    3,000
    
    
    
    Net cash used in investing activities
    
    
    (7,217
    )
    
    
    (1,722
    )Financing ActivitiesNet proceeds from issuance of common stock
    
    
    31,734
    
    
    
    1Payment of capital lease obligations
    
    
    (20
    )
    
    
    (13
    )Payment of notes payable
    
    
    (1,525
    )
    
    
    Deferred financing costs
    
    
    
    
    
    
    (75
    )Deferred offering costs
    
    
    
    
    
    
    (1,182
    )Net cash provided by (used in) financing activities
    
    
    30,189
    
    
    
    (1,269
    )Net increase (decrease) in cash and cash equivalents
    
    
    13,551
    
    
    
    (2,484
    )Cash and cash equivalents at beginning of period
    
    
    2,340
    
    
    
    5,053Cash and cash equivalents at end of period
    
    $
    15,891
    
    
    $
    2,569Schedule 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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VALERA PHARMACEUTICALS, INC
 
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED
 Note 1. Organization and Description of Business
  Recent Developments
   Note 2. Summary of Significant Accounting Policies
 Basis of Presentation
 Summary of Significant
Accounting Policies,
  Reclassifications
  8




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VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
 Use of Accounting Estimates
  Cash and Cash Equivalents
  Investments Held-to-Maturity
  Allowances for Accounts Receivable
  Inventory
  
 Property, Plant and Equipment
  9




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VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
 Deferred Offering and Financing Costs
  Investment  Spepharm
  Net Product Sales
  Revenue Recognition
   Distributors
    
    
    Physicians
    
    
    TotalFor the nine months ended September 30, 2006
    
    
    
    
    
    (In thousands)Allowance balance at December 31, 2005
    
    $
    19
    
    
    $
    320
    
    
    $
    339Provision related to sales for Fiscal 2006
    
    
    15
    
    
    
    954
    
    
    
    969Returns and adjustments related sales in Fiscal 2004
    
    
    
    
    
    
    (50
    )
    
    
    (50
    )Returns and adjustments related sales in Fiscal 2005
    
    
    (1
    )
    
    
    (325
    )
    
    
    (326
    )Returns and adjustments related sales in Fiscal 2006
    
    
    (11
    )
    
    
    (707
    )
    
    
    (718
    )Allowance balance at September 30, 2006
    
    $
    22
    
    
    $
    192
    
    
    $
    214
 10




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##### Table of Contents



VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
 Distributors
    
    
    Physicians
    
    
    TotalFor the nine months ended September 30, 2005
    
    
    
    
    
    (In thousands)Allowance balance at December 31, 2004
    
    $
    28
    
    
    $
    316
    
    
    $
    344Provision related to sales for Fiscal 2005
    
    
    
    
    
    
    1,784
    
    
    
    1,784Returns and adjustments related sales in Fiscal 2004
    
    
    
    
    
    
    (288
    )
    
    
    (288
    )Returns and adjustments related sales in Fiscal 2005
    
    
    (4
    )
    
    
    (1,089
    )
    
    
    (1,093
    )Allowance balance at September 30, 2005
    
    $
    24
    
    
    $
    723
    
    
    $
    747
 Customer Sales  Urologists
  Customer Sales  Distributors Sales
  Royalties
  Shipping and Handling Costs
  Research and Development
  Pre-clinical Study and Clinical Trial Expenses
  11




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##### Table of Contents



VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
  Advertising Costs
  Intangible Assets
  Stock-Based Compensation
 Shared-Based Payment
  Deferred Compensation
  Income Taxes
 Accounting for Income Taxes
 Long-lived Assets
  12




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##### Table of Contents



VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
 Concentration Risks
    Fair Value of Financial Instruments
  Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes.
 Fair Value Measurements
 Note 3. Investments
 Accounting for
Certain Investments in Debt and Equity Securities
 13




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VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
  September 30, 2006Held-to-Maturity(in thousands)Gross
    
    GrossAmortized
    
    Unrecognized
    
    Unrecognized
    
    FairDescription of Securities
    
    Cost
    
    Gains
    
    Losses
    
    ValueU.S. government and agencies securities
    
    $
    2,982
    
    
    $
    2
    
    
    $
    
    
    
    $
    2,984
  September 30, 2006Held-to-Maturity(in thousands)Amortized
    
    
    FairMaturity
    
    Cost
    
    
    ValueDue in one year or less
    
    $
    2,982
    
    
    $
    2,984Due after one year through five years
    
    
    
    
    
    
    Due after five years through ten years
    
    
    
    
    
    
    Due after ten years
    
    
    
    
    
    
    $
    2,982
    
    
    $
    2,984
 Note 4. Inventory
  September 30,
    
    
    December 31,2006
    
    
    2005(unaudited)(in thousands)Raw materials
    
    $
    870
    
    
    $
    463Work-in-process
    
    
    4,004
    
    
    
    2,426Finished goods
    
    
    695
    
    
    
    302$
    5,569
    
    
    $
    3,191
  14




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VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
 Note 5. Property, Plant and Equipment
  September 30,
    
    
    December 31,Useful Lives
    
    
    2006
    
    
    2005(unaudited)(in thousands)Laboratory equipment
    
    5 years
    
    $
    1,794
    
    
    $
    1,531Furniture and Fixtures
    
    7 years
    
    
    185
    
    
    
    161Office equipment
    
    5 years
    
    
    136
    
    
    
    108Computer equipment
    
    3 years
    
    
    481
    
    
    
    417Computer software
    
    3 years
    
    
    301
    
    
    
    200Construction in process
    
    
    
    
    
    
    5,650
    
    
    
    2,526Leasehold improvements
    
    1-10 years
    
    
    754
    
    
    
    6259,301
    
    
    
    5,568Less accumulated depreciation and amortization
    
    
    
    
    
    
    (1,788
    )
    
    
    (1,374
    )Property, plant and equipment, net
    
    
    
    
    
    $
    7,513
    
    
    $
    4,194
   Note 6. Deferred Offering and Financing Costs
  Note 7. Credit Line Agreement (Note Payable)
  15




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VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
 Note 8. Capitalization
 Common Stock
   Convertible Preferred Stock
  Note 9. Stock-Based Compensation
 Shared-Based Payment
    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
    
    $
    6.20
   16




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VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
  Three Months Ended September 30,
    
    
    Nine Months Ended
September 30,(in thousands)
    
    
    (in thousands)2006
    
    
    2005
    
    
    2006
    
    
    2005Employee
stock-based compensation under intrinsic value method
    
    $
    42
    

    
    $
    127
    

    
    $
    151
    

    
    $
    (56
    )Employee
stock-based
compensation under fair value method
    
    
    261
    
    
    
    
    
    
    
    576
    
    
    
    Total
Employee stock-based compensation
    
    $
    303
    
    
    $
    127
    
    
    $
    727
    
    
    $
    (56
    )
    Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005(in thousands, except per
    
    
    (in thousands, except pershare amounts)
    
    
    share amounts)Net income to common stock holders  as reported
    
    $
    (2,808
    )
    
    $
    151Add: non-cash employee compensation as reported
    
    
    127
    
    
    
    (56
    )Deduct: total employee stock-based compensation
expense determined under fair value based method for
all awards
    
    
    (218
    )
    
    
    (527
    )Net income to common stockholders  pro-forma
    
    $
    (2,899
    )
    
    $
    (432
    )Basic income per share  as reported
    
    $
    (1.68
    )
    
    $
    0.09Basic income per share  pro-forma
    
    $
    (1.74
    )
    
    $
    (0.26
    )Diluted income per share  as reported
    
    $
    (1.68
    )
    
    $
    0.01Diluted income per share  pro-forma
    
    $
    (1.74
    )
    
    $
    (0.26
    )
  Weighted
    
    
    
    
    
    
    WeightedCommon
    
    
    Average
    
    
    Aggregate
    
    
    AverageStock
    
    
    Exercise
    
    
    Intrinsic Value
    
    
    ContractualOptions
    
    
    Price
    
    
    (in thousands)
    
    
    LifeOutstanding at December 31, 2005
    
    
    1,265,849
    
    
    $
    4.25Granted
    
    
    350,200
    
    
    $
    9.00Exercised
    
    
    (49,511
    )
    
    $
    3.05Forfeited
    
    
    (101,784
    )
    
    $
    6.63Outstanding at September 30, 2006
    
    
    1,464,754
    
    
    $
    5.26
    
    
    $
    611
    
    
    
    7.8Exercisable at September 30, 2006
    
    
    617,146
    
    
    $
    3.59
    
    
    $
    155
    
    
    
    7.2
  17




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VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
   Weighted AverageNumber of
    
    Weighted Average
    
    Weighted Average
    
    Intrinsic ValueGrants Made During Quarter Ended
    
    Options Granted
    
    Exercise Price
    
    Fair Value per Share
    
    per ShareSeptember 30, 2006
    
    
    7,500
    
    
    $
    7.36
    
    
    $
    4.79
    
    
    September 30, 2005
    
    
    4,334
    
    
    $
    12.00
    
    
    $
    12.00
    
    
    
 Note 10. Income Taxes
  Note 11. Net Income (Loss) Per Share
  Three Months Ended September 30,2006
    
    
    2005Net (loss)
    
    
    Shares
    
    
    Net (loss)
    
    
    Shares(Numerator)
    
    
    (Denominator)
    
    
    (Numerator)
    
    
    (Denominator)(in thousands, except per share amounts)Basic net (loss) per share factors
    
    $
    (4,684
    )
    
    
    14,906
    
    
    $
    (2,808
    )
    
    
    1,667Effect of preferred stock conversion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Effect of dilutive stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted net (loss) per share factors
    
    $
    (4,684
    )
    
    
    14,906
    
    
    $
    (2,808
    )
    
    
    1,667Basic net (loss) per share
    
    $
    (0.31
    )
    
    
    
    
    
    $
    (1.68
    )Diluted net (loss) per share
    
    $
    (0.31
    )
    
    
    
    
    
    $
    (1.68
    )
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##### Table of Contents



VALERA PHARMACEUTICALS, INC
 NOTES TO FINANCIAL STATEMENTS  UNAUDITED (Continued)
 Nine Months Ended September 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
    
    $
    (9,538
    )
    
    
    13,123
    
    
    $
    151
    
    
    
    1,667Effect of preferred stock conversion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,834Effect of dilutive stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    857Diluted net (loss) income per share factors
    
    $
    (9,538
    )
    
    
    13,123
    
    
    $
    151
    
    
    
    11,358Basic net (loss) income per share
    
    $
    (0.73
    )
    
    
    
    
    
    $
    0.09Diluted net (loss) income per share
    
    $
    (0.73
    )
    
    
    
    
    
    $
    0.01
 Note 12. Related Party Transactions
   Note 13. Acquisition of Product
  Note 14. Purchase Commitments
  19




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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.
  Recent Events
 ® ®
 ® ®
 21




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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
    
    $
    1,562September 30, 2006
    
    $
    1,478
    22




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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
  23




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##### Table of Contents



Pre-clinical Study and Clinical Trial Expenses
  Stock-Based Compensation
 Shared-Based Payment
  Results of Operations
 Three months ended September 30, 2006 compared with three months ended September 30, 2005
 Net Product Sales.
  24




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##### Table of Contents



Licensing Revenue.
 Cost of Product Sales
 Research and Development Expense
 Selling and Marketing Expense
 General Administrative Expense
 Amortization of Intangible Assets.
 Net Interest Income
 Income Taxes
 25




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##### Table of Contents



Nine months ended September 30, 2006 compared with nine months ended September 30, 2005
 Net Product Sales.
     Licensing Revenue.
 Cost of Product Sales
 Research and Development Expense
 26




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##### Table of Contents



Selling and Marketing Expense
 General Administrative Expense
 Amortization of Intangible Assets.
 Net Interest Income
 Income Taxes
 Liquidity and Capital Resources
     27




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
 Item 4. Controls and Procedures
    28




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 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
    
    Investment and Shareholders Agreement Spepharm Holding B.V.
    
    
    31-5110.2
    
    License and Distribution Agreement between Valera Pharmaceuticals, Inc. and Spepharm Holding B.V.
    
    
    52-6931.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
    
    
    7031.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
    
    
    7132
    
    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
    
    
    72
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SIGNATURES
  VALERA PHARMACEUTICALS, INCDated: November 9, 2006
    
    By:
    
    /s/ David S. Tierney, M.D.David S. Tierney, M.D.President, Chief Executive Officer and Director(Principal Executive Officer)Dated: November 9, 2006By:
    
    /s/ Andrew T. DrechslerAndrew T. DrechslerChief Financial Officer(Principal Financial and Accounting Officer)
 30