**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
 
  **FORM
        10-Q**
 
  
 x  **QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934**
 
 **For
        the quarterly period ended September 30, 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 000-31719**
 
 
 **POZEN
        Inc.**
 **(Exact
        name of registrant as specified in its charter)**
 
 
 **Delaware**
              **62-1657552****(State
                  or other jurisdiction of**
                
                **incorporation
                  or organization)**
              **(I.R.S.
                  Employer**
                
                **Identification
                  No.)**
 
 **1414
        Raleigh Road**
 **Suite
        400**
 **Chapel
        Hill, North Carolina 27517**
 **(Address
        of principal executive offices, including zip code)**
 
 **(919)
        913-1030**
 **(Registrant’s
        telephone number, including area code)**
 
  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. x Yes  ̈ No
 
 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 Securities Exchange
        Act of 1934. (Check one):
  ̈ Large
        Accelerated Filer x Accelerated Filer  ̈ Non-Accelerated Filer
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act):  ̈ Yes x No
 
 The
        number of shares outstanding of the registrant’s common stock as of October 27,
        2006 was 29,353,082.
 
 
  **POZEN
        Inc.**
 **(A
        Development Stage Company)**
 **FORM
        10-Q**
 
 For
        the
        Nine Months Ended September 30, 2006
 
 **INDEX**
 
 **Page**PART
                  I.
              FINANCIAL
                  INFORMATIONItem
                  1.
              Financial
                  Statements
                  (unaudited)Balance
                  Sheets as of September 30, 2006 and December
                  31, 2005
              1Statements
                  of Operations for the Three and Nine
                  Months Ended September 30, 2006 and 2005 and Period From Inception
                  (September 26, 1996) Through September 30, 2006
              2Statements
                  of Cash Flows for the Nine Months
                  Ended September 30, 2006 and 2005 and Period From Inception (September
                  26,
                  1996) Through September 30, 2006
              3Notes
                  to Financial Statements
              4Item
                  2.
              Management’s
                  Discussion and Analysis of
                  Financial Condition and Results of Operations
              11Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              26Item
                  4.
              Controls
                  and Procedures
              26PART II.
              OTHER
                  INFORMATIONItem
                  1.
              Legal
                  Proceedings
              26Item
                  1A.
              Risk
                  Factors
              27Item 6.
              Exhibits
              40Signature
                  and Certifications
              41Exhibit
                  Page
              42
 
  -
            i
            -
 Index
  **PART
        I. FINANCIAL INFORMATION**
 
 **Item
        1. Financial Statements**
 
 **POZEN
        Inc.**
 **(A
        Development Stage Company)**
 **BALANCE
        SHEETS**
 **(Unaudited)**
 
 **September
                  30,**
                **2006**
              
              **December
                  31,**
                **2005****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              33,163,589
              
              $
              27,467,789Short-term
                  investments
              
              
              33,451,348
              
              
              18,370,701Accounts
                  receivable
              
              
              1,567,819
              
              
              —Prepaid
                  expenses and other current assets
              
              
              118,227
              
              
              613,682Total
                  current assets
              
              
              68,300,983
              
              
              46,452,172Property
                  and equipment, net of accumulated depreciation
              
              
              205,738
              
              
              234,839Total
                  assets
              
              $
              68,506,721
              
              $
              46,687,011**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              510,438
              
              $
              1,443,676Accrued
                  compensation
              
              
              1,125,847
              
              
              2,591,633Accrued
                  expenses
              
              
              1,196,140
              
              
              1,201,023Deferred
                  revenue
              
              
              14,571,200
              
              
              6,552,000Total
                  current liabilities
              
              
              17,403,625
              
              
              11,788,332Long-term
                  liabilities:Deferred
                  revenue
              
              
              28,000,000
              
              
              1,000,000Total
                  liabilities
              
              
              45,403,625
              
              
              12,788,332Preferred
                  stock, $0.001 par value; 10,000,000 shares authorized, issuable
                  in series,
                  of which 90,000
                shares
                  are designated Series A Junior Participating Preferred Stock, none
                  outstanding
              
              
              —
              
              
              —Common
                  stock, $0.001 par value, 90,000,000 shares authorized; 29,330,721
                  and
                  29,002,306 shares
                issued
                  and outstanding at September 30, 2006 and December 31, 2005,
                  respectively
              
              
              29,323
              
              
              29,002Additional
                  paid-in capital
              
              
              154,526,122
              
              
              146,399,373Accumulated
                  other comprehensive income (loss)
              
              
              566
              
              
              (8,551
              )Deficit
                  accumulated during the development stage
              
              
              (131,452,915
              )
              
              (112,521,145
              )Total
                  stockholders’ equity
              
              
              23,103,096
              
              
              33,898,679Total
                  liabilities and stockholders’ equity
              
              $
              68,506,721
              
              $
              46,687,011
 
 *See
        accompanying Notes to Financial Statements.*
  -
            1
            -
 Index
  **POZEN
        Inc.**
 **(A
        Development Stage Company)**
 **STATEMENTS
        OF OPERATIONS**
 **(Unaudited)**
 
 **Three
                  Months Ended September 30,**
              
              **Nine
                  Months Ended September 30,**
              
              **Period
                  From**
                **Inception**
                **(September
                  26,**
                **1996)
                  Through**
                **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**
              
              **2006****Revenue**
              
              $
              3,424,819
              
              $
              2,399,000
              
              $
              6,548,619
              
              $
              6,410,374
              
              $
              62,000,901**Operating
                  expenses:**General
                  and administrative
              
              
              3,662,984
              
              
              2,473,439
              
              
              10,393,998
              
              
              7,198,656
              
              
              60,466,949Research
                  and development
              
              
              4,275,168
              
              
              4,900,642
              
              
              16,422,811
              
              
              14,231,894
              
              
              142,432,011Total
                  operating expenses
              
              
              7,938,152
              
              
              7,374,081
              
              
              26,816,809
              
              
              21,430,550
              
              
              202,898,960**Other
                  income:**Interest
                  and other income
              
              
              447,127
              
              
              289,303
              
              
              1,336,420
              
              
              846,507
              
              
              10,379,622**Net
                  loss**
              
              
              (4,066,206
              )
              
              (4,685,778
              )
              
              (18,931,770
              )
              
              (14,173,669
              )
              
              (130,518,437
              )Non-cash
                  preferred stock charge
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              27,617,105Preferred
                  stock dividends
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              934,478Net
                  loss attributable to common stockholders
              
              $
              (4,066,206
              )
              $
              (4,685,778
              )
              $
              (18,931,770
              )
              $
              (14,173,669
              )
              $
              (159,070,020
              )Basic
                  net loss per common share
              
              $
              (0.14
              )
              $
              (0.16
              )
              $
              (0.65
              )
              $
              (0.49
              )Shares
                  used in computingbasic
                  net lossper
                  common share
              
              
              29,240,696
              
              
              28,929,503
              
              
              29,173,200
              
              
              28,919,245Diluted
                  net loss per common share
              
              $
              (0.14
              )
              $
              (0.16
              )
              $
              (0.65
              )
              $
              (0.49
              )Shares
                  used in computingdiluted
                  net lossper
                  common share
              
              
              29,240,696
              
              
              28,929,503
              
              
              29,173,200
              
              
              28,919,245
 
 *See
        accompanying Notes to Financial Statements.*
  -
            2
            -
 Index
  **POZEN
        Inc.**
 **(A
        Development Stage Company)**
 **STATEMENTS
        OF CASH FLOWS**
 **(Unaudited)**
 
 **Nine
                  Months Ended September 30,**
              
              **Period
                  from****Inception**
                **(September
                  26,****1996)**
                **Through****September
                  30,****2006****2006**
              
              **2005****Operating
                  activities:**Net
                  loss
              
              $
              (18,931,770
              )
              $
              (14,173,669
              )
              $
              (130,518,437
              )Adjustments
                  to reconcile net loss to net cash provided by (used in) operating
                  activities:Depreciation
              
              
              70,282
              
              
              121,304
              
              
              911,700Write-down
                  of
                  impaired asset
              
              
              —
              
              
              69,272
              
              
              155,576Gain
                  on
                  sale of investments
              
              
              —
              
              
              224,058
              
              
              —Bond
                  premium amortization
              
              
              (636,165
              )
              
              (386,047
              )
              
              (1,207,845
              )Noncash
                  compensation expense
              
              
              4,742,155
              
              
              1,046,974
              
              
              16,979,132Noncash
                  financing charge
              
              
              —
              
              
              —
              
              
              450,000Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (1,567,819
              )
              
              —
              
              
              (1,567,819
              )Prepaid
                  expenses, and other current assets
              
              
              495,455
              
              
              989,259
              
              
              (118,227
              )Accounts
                  payable and accrued expenses
              
              
              (1,042,211
              )
              
              (1,914,737
              )
              
              2,832,425Deferred
                  revenue
              
              
              35,019,200
              
              
              (6,656,070
              )
              
              42,571,200Net
                  cash provided by (used in) operating activities
              
              
              18,149,127
              
              
              (20,679,656
              )
              
              (69,512,295
              )**Investment
                  activities:**Purchase
                  of equipment
              
              
              (41,181
              )
              
              (37,626
              )
              
              (1,273,014
              )Purchase
                  of investments
              
              
              (46,735,365
              )
              
              (38,201,508
              )
              
              (93,742,938
              )Sale
                  of investments
              
              
              32,300,000
              
              
              18,575,942
              
              
              61,500,000Net
                  cash used in investing activities
              
              
              (14,476,546
              )
              
              (19,663,192
              )
              
              (33,515,952
              )**Financing
                  activities:**Proceeds
                  from issuance of preferred stock
              
              
              —
              
              
              —
              
              
              48,651,850Proceeds
                  from issuance of common stock
              
              
              2,023,219
              
              
              124,447
              
              
              83,697,971Proceeds
                  from notes payable
              
              
              —
              
              
              —
              
              
              3,000,000Proceeds
                  from stockholders’ receivables
              
              
              —
              
              
              —
              
              
              1,004,310Payment
                  of dividends
              
              
              —
              
              
              —
              
              
              (162,295
              )Net
                  cash provided by financing activities
              
              
              2,023,219
              
              
              124,447
              
              
              136,191,836Net
                  (decrease) increase in cash and cash equivalents
              
              
              5,695,800
              
              
              (40,218,401
              )
              
              33,163,589Cash
                  and cash equivalents at beginning of period
              
              
              27,467,789
              
              
              51,764,129
              
              
              —Cash
                  and cash equivalents at end of period
              
              $
              33,163,589
              
              $
              11,545,728
              
              $
              33,163,589**Supplemental
                  schedule of cash flow information:**Cash
                  paid for interest
              
              $
              —
              
              $
              —
              
              $
              191,348**Supplemental
                  schedule of noncash investing and financing
                  activities:**Conversion
                  of notes payable to preferred stock
              
              $
              —
              
              $
              —
              
              $
              3,000,000Preferred
                  stock dividend
              
              $
              —
              
              $
              —
              
              $
              772,183Forfeiture
                  of common stock options and warrants
              
              $
              —
              
              $
              —
              
              $
              314,379Conversion
                  of common stock warrants to common stock
              
              $
              —
              
              $
              —
              
              $
              1,080,001
 
 *See
        accompanying Notes to Financial Statements.*
  -
            3
            -
 Index
  **POZEN
        Inc.**
 **(A
        Development Stage Company)**
 **NOTES
        TO FINANCIAL STATEMENTS**
 **(Unaudited)**
   **1.
        Development Stage Company**
  POZEN
        Inc. (“POZEN” or the “Company”) was incorporated in the State of Delaware on
        September 25, 1996. The Company is a pharmaceutical company focused primarily
        on
        products for the treatment of acute and chronic pain and other pain-related
        conditions. The Company’s product development emphasis is on diseases with unmet
        medical needs where the Company can improve efficacy, safety and/or patient
        convenience. Since inception, the Company has focused its efforts primarily
        on
        the development or regulatory approval of pharmaceutical products for the
        treatment of migraine. The Company is also exploring the development of product
        candidates in other pain-related therapeutic areas. The Company intends to
        enter
        into collaboration agreements to commercialize its product candidates, and
        has
        entered into, and expects to continue to enter into such collaborations.
        The
        Company has not obtained regulatory approval to market any of its product
        candidates in the United States (U.S.). The United Kingdom's (UK) Medicines
        and
        Healthcare Products Regulatory Agency (MHRA) has issued a marketing
        authorization for the Company’s product candidate MT 100 for the acute treatment
        of migraine in the UK.
  Statement
        of Financial Accounting Standards Board (“SFAS”) No. 7, “Accounting and
        Reporting by Development Stage Enterprises,” states that an enterprise shall be
        considered to be in the development stage if either planned principal operations
        have not commenced or planned principal operations have commenced, but there
        has
        been no significant revenue therefrom. The Company will remain a development
        stage company until such time as significant revenues have been generated
        from
        the marketing and sale of the Company’s product candidates. As of September 30,
        2006, the Company had $33.2 million in cash and cash equivalents and $33.5
        million in short-term investments. If the Company’s operating expenses for 2006
        and 2007 remain at the level of its operating expenses in 2005, the Company
        believes it will have sufficient cash reserves to maintain that level of
        business activities throughout 2007, provided that certain development expenses
        are paid by AstraZeneca, as outlined in the Agreement. The Company’s expenses
        might increase in 2006 and 2007 if any regulatory agency requires the Company
        to
        conduct additional clinical trials, studies **** or
        investigations in connection with their consideration, or reconsideration,
        of
        the Company’s regulatory filings for any of its product candidates. The Company
        is not currently obligated to make any milestone payments to third parties
        and
        does not currently have any other required material payment obligations during
        that period. However, regulatory delays, such as the Company is currently
        experiencing related to the approvable letter the Company received from the
        U.S.
        Food and Drug Administration (FDA) in June 2006 related to the Company’s New
        Drug Application (NDA) for Trexima, or unforeseen developments in the
        development of the Company’s existing and future product candidates, may
        increase the Company’s cash requirements beyond its currently assumed
        needs.
  **2.
        Summary of Significant Accounting Policies**
  *Unaudited
        Interim Financial Statements* —The
        accompanying unaudited interim financial statements have been prepared in
        accordance with accounting principles generally accepted in the United States
        and applicable Securities and Exchange Commission (“SEC”) regulations for
        interim financial information. These financial statements are unaudited and,
        in
        the opinion of management, include all adjustments (consisting of normal
        recurring accruals) necessary to present fairly the balance sheets, statements
        of operations and statements of cash flows for the periods presented in
        accordance with accounting principles generally accepted in the United States.
        Certain information and footnote disclosures normally included in financial
        statements prepared in accordance with accounting principles generally accepted
        in the United States have been condensed or omitted pursuant to SEC rules
        and
        regulations. It is presumed that users of this interim financial information
        have read or have access to the audited financial statements and footnote
        disclosure for the preceding fiscal year contained in the Company’s Annual
        Report on Form 10-K, filed on March 8, 2006. Operating results for the interim
        periods presented are not necessarily indicative of the results that may
        be
        expected for the year ending December 31, 2006.
  *Revenue
        Recognition* —The
        Company’s licensing agreements have terms that include upfront payments upon
        contract signing, additional payments if and when certain milestones in the
        product’s development or commercialization are reached, and royalty payments
        based on future product sales. These agreements are accounted for in accordance
        with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition”, as amended by
        SAB 104, “Revenue Recognition” (“SAB 101”), and Emerging Issues Task Force 00-21
        (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables.” The
        non-refundable portion of upfront payments received under the Company’s existing
        agreements is deferred by the Company upon receipt and recognized on a
        straightline basis over the period ending on the anticipated date of regulatory
        approvals, as specified in the agreements relating to the product
        candidates , or
        the
        conclusion of any obligation on the part of the Company. For the Company’s
        current agreements, these periods are estimated to be as follows:
  -
            4
            -
 Index
  ·
            The
                September 2006 $40.0 million licensing fee received from AstraZeneca
                AB
                (AstraZeneca) related to the August 2006 Collaboration and License
                Agreement with AstraZeneca has been deferred and will be amortized
                over 40
                months. The AstraZeneca licensing fee relates to the Company’s proprietary
                fixed dose combinations of the proton pump inhibitor (PPI) esomeprazole
                magnesium with the non-steroidal anti-inflammatory drug (NSAID) naproxen,
                in a single tablet.  ·
            The
                June 2003 initial licensing and patent-issuance milestone payments
                totaling $25.0 million for MT 400 received from GSK have been deferred
                and
                were originally being amortized over 42 months. During the third
                quarter
                of 2005 the amortization period was decreased to 39 months based
                upon the
                August 2005 submission to the FDA of the Trexima NDA which was earlier
                than anticipated. The decrease in the deferred period resulted in
                a
                $357,000 increase in amortization in future quarters as compared
                to the
                second quarter 2005 amortization. During the second quarter of 2006
                the
                remaining amortization period of 6 months was increased to 15 months
                based
                upon the June 2006 receipt of an approvable letter from the FDA related
                to
                the Trexima NDA and an estimated extension of 9 months, which represents
                what the Company believes to be the conclusion of any obligation
                on its
                part under the agreement. The increase in the deferred period resulted
                in
                a $1.3 million decrease in amortization in future quarters as compared
                to
                the first quarter 2006 amortization.  ·
            The
                September 2003 $1.0 licensing fee for MT 300 ($2.0 million non-refundable
                upfront licensing fee net of a potential termination fee of $1.0
                million)
                received from Valeant Pharmaceuticals North America (Valeant NA),
                a
                subsidiary of Valeant Pharmaceuticals International (formerly Xcel
                Pharmaceuticals Inc.), has been amortized over 32 months. As the
                result of
                the receipt in October 2003 of a not-approvable letter from the FDA
                relating to the NDA for MT 300, after three months of amortization,
                this
                estimated deferral period was increased from an original estimate
                of 20
                months to 32 months ending in April 2006, resulting in a $56,000
                decrease
                in future quarterly amortization from the prior quarterly amortization.  Milestone
        payments are recognized as revenue upon the achievement of specified milestones
        if (i) the milestone is substantive in nature and the achievement of the
        milestone was not reasonably assured at the inception of the agreement and
        (ii)
        the fees are non-refundable. Any milestone payments received prior to satisfying
        these revenue recognition criteria are recorded as deferred
        revenue.
  Additionally,
        the Company’s licensing agreements may include payment for services provided by
        the Company on an hourly rate and direct expense basis. The Company records
        such
        revenue in accordance with the agreements which would generally be based
        upon
        time spent and materials used on the project. In accordance with FASB Emerging
        Issues Task Force (EITF) pronouncement 99-19, under the AstraZeneca Agreement,
        the Company will recognize as revenue the direct costs and certain
        personnel-related expense incurred in performing additional development
        activities described within the AstraZeneca Agreement.
  Royalty
        revenue will be recognized when earned with respect to the manufacture, sale
        or
        use of the Company’s products or technology. For those arrangements where
        royalties are reasonably estimable, the Company will recognize revenue based
        on
        estimates of royalties earned during the applicable period and reflect in
        future
        revenue any differences between the estimated and actual royalties.
  *Investments* —Investments
        consist primarily of United States government and government agency obligations,
        and corporate fixed income securities. The Company invests in high-credit
        quality investments in accordance with its investment policy, which minimizes
        the possibility of loss. Under the Company’s investment policy, investments that
        have a maturity of greater than three months and less than one year are
        classified as short-term, are considered to be available-for-sale and are
        carried at fair value with unrealized gains and losses recognized in other
        comprehensive income (loss). Realized gains and losses are determined using
        the
        specific identification method and transactions are recorded on a settlement
        date basis. Generally, investments with maturities beyond twelve months are
        classified as long-term. Marketable and non-marketable equity investments
        are
        evaluated periodically for impairment. If it is determined that a decline
        of any
        investment is other than temporary, the investment would be written down
        to fair
        value and the write-down would be permanent. For the nine month periods ended
        September 30, 2005 and 2006, the Company had $0.4 million and $0.6 million
        of
        bond amortization and $(9,099) and $566 of unrealized gain (loss) on investments
        included in accumulated other comprehensive income (loss) for each period,
        respectively.
  *Accumulated
        Other Comprehensive Income (Loss)* —Accumulated
        other comprehensive income (loss) is comprised of unrealized gains and losses
        on
        marketable securities and is disclosed as a component of stockholders’ equity.
        The Company had $(9,099) and $566 of unrealized gain (loss) on its investments
        that are classified as accumulated other comprehensive income (loss) at
        September 30, 2005 and 2006, respectively.
  Comprehensive
        loss consists of the following components for the three and nine months ended
        September 30, 2006 and 2005:
  **Three
                  Months Ended September 30,**
              
              **Nine
                  Months Ended September 30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Net
                  loss
              
              $
              (4,066,206
              )
              $
              (4,685,778
              )
              $
              (18,931,770
              )
              $
              (14,173,669
              )Unrealized
                  gain (loss) on marketable securities
              
              
              10,856
              
              
              (1,614
              )
              
              566
              
              
              (9,099
              )Total
                  comprehensive loss
              
              $
              (4,055,350
              )
              $
              (4,687,392
              )
              $
              (18,931,204
              )
              $
              (14,182,768
              )
 
   -
            5
            -
 Index
  *Stock-based
        Compensation* —On
        January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”)
        No. 123(R), “Share-Based Payment,” which requires us to account for share-based
        payment transactions using a fair value-based method and recognize the related
        expense in our results of operations. Prior to our adoption of SFAS No. 123(R),
        as permitted by SFAS No. 123, we accounted for share-based payments to employees
        using the Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for
        Stock Issued to Employees,” intrinsic value method. Accordingly, prior to
        January 1, 2006 we generally recognized compensation expense for restricted
        stock awards and did not recognize compensation cost for employee stock options,
        as all such options had an exercise price equal to the market value of the
        underlying common stock on the date of the grant. SFAS No. 123(R) allows
        companies to choose one of two transition methods: the modified prospective
        transition method or the modified retrospective transition method. We chose
        to
        use the modified prospective transition methodology. Under this transition
        method, our compensation cost recognized includes compensation costs for
        all
        share-based payments granted prior to, but not yet vested as of, January
        1, 2006
        based on the grant date fair value estimated in accordance with the original
        provisions of SFAS No. 123, and compensation cost for all share-based payments
        granted subsequent to January 1, 2006 based on the grant date fair value
        estimated in accordance with the provisions of SFAS No. 123(R). Accordingly,
        we
        have not restated our financial results for prior periods.
  Under
        the
        fair value recognition provisions of SFAS No. 123(R), stock-based compensation
        cost is estimated at the grant date based on the fair value of the award
        and is
        recognized as expense over the requisite service period of the award. The
        fair
        value of restricted stock awards is determined by reference to the fair market
        value of our common stock on the date of grant. Consistent with the valuation
        method we used for disclosure-only purposes under the provisions of SFAS
        No.
        123, we use the Black-Scholes model to value service condition and performance
        condition option awards under SFAS No. 123(R). For awards with only service
        conditions and graded-vesting features, we recognize compensation cost on
        a
        straight-line basis over the requisite service period. For awards with
        performance or market conditions granted subsequent to our adoption of SFAS
        No.
        123(R), we intend to recognize compensation cost over the expected period
        to
        achieve the performance or market conditions.
 
 The
        adoption of SFAS No. 123(R) had a significant impact on our results of
        operations. Our consolidated statements of operations for the three and nine
        months ended September 30, 2006 includes the following stock-based compensation
        expense:
 
 **Three
                  Months Ended**
                **September
                  30, 2006**
              
              **Nine
                  Months Ended**
                **September
                  30, 2006**Research
                  and development
              
              $
              468,700
              
              $
              1,582,400General
                  and administrative
              
              
              1,005,300
              
              
              3,159,800Operating
                  loss
              
              
              (1,474,000
              )
              
              (4,742,200
              )Tax
                  benefit
              
              
              -
              
              
              -Net
                  loss
              
              $
              (1,474,000
              )
              $
              (4,742,200
              )
 
 Unrecognized
        stock-based compensation expense, including time-based options,
        performance-based options and restricted stock awards, expected to be recognized
        over an estimated weighted-average amortization period of 2.02 years was
        $10.7
        million at September 30, 2006. Unrecognized stock-based compensation expense
        expected to be recognized over the remaining period ending December 31, 2006
        was
        $1.6 million at September 30, 2006.
 
 Stock
        Plans
  On
        November 20, 1996, the Company established a Stock Option Plan (the “Option
        Plan”) and authorized the issuance of options for up to 1,605,310 shares of
        common stock to attract and retain quality employees and to allow such employees
        to participate in the growth of the Company. Awards were permitted to be
        made
        under the Option Plan to eligible employees, officers, consultants and
        non-employee directors in the form of incentive or nonqualified stock options.
        Eligible participants under the Option Plan include executive and key employees
        of the Company. The vesting periods for options granted under the Option
        Plan
        range from immediate vesting at issuance to four years or immediately upon
        a
        significant change in ownership as defined by the plan document. The exercise
        price for incentive stock options may not be less than 100% of the fair market
        value of the common stock on the date of grant (110% with respect to incentive
        stock options granted to optionees who are holders of 10% or more of the
        Company’s common stock).
  In
        May
        2000, the Board of Directors adopted, and in June 2000 the stockholders
        approved, the POZEN Inc. 2000 Equity Compensation Plan (the “Plan”). The Plan
        became effective upon the completion of the Company’s initial public offering in
        October 2000, after which time no further grants were made under the Option
        Plan. The Plan provides for grants of incentive stock options, nonqualified
        stock options, stock awards, performance units, and other stock-based awards,
        such as restricted stock units and stock appreciation rights, to employees,
        non-employee directors, advisors and consultants. At adoption, the Plan
        authorized up to 3,000,000 shares of common stock for issuance under the
        terms
        of the Plan. The maximum number of shares for which any individual may receive
        grants in any calendar year is 1,000,000 shares. The vesting periods for
        awards
        made under the Plan generally range from immediate vesting at issuance to
        four
        years or may fully vest immediately, as described in and in accordance with
        the
        Plan, upon a change of control as defined in the Plan. If options granted
        under
        the Plan expire or are terminated for any reason without being exercised,
        or if
        stock awards, performance units, or other stock-based awards are forfeited
        or
        otherwise terminate, the shares of common stock underlying the grants will
        again
        be available for awards granted under the Plan.
  -
            6
            -
 Index
  In
        2004,
        the Board of Directors adopted and the stockholders approved an amendment
        to and
        restatement of the Plan. The amendment to the Plan provided for an increase
        in
        the number of shares of common stock authorized for issuance under the Plan,
        from 3,000,000 to 5,500,000, or an increase of 2,500,000 shares. In addition,
        the amendment to the Plan limited the number of shares that may be issued
        pursuant to grants other than options under the Plan to 2,000,000 shares
        and
        made certain other clarifying changes. These plans are discussed in more
        detail
        in Note 7 to our financial statements for the fiscal year ended December
        31,
        2005 included in our Annual Report on Form 10-K filed on March 8,
        2006.
  In
        May
        2004 an award of 98,135 restricted stock units was made to the Company’s chief
        executive officer under the Plan. The restricted stock award vests in equal
        amounts on January 1, 2005, January 1, 2006 and January 1, 2007 and is payable
        in shares of common stock upon cessation of employment or the provision of
        service to the Company or, as provided in and in accordance with the plan,
        upon
        a change of control.
  On
        January 3, 2005, pursuant to an incentive program (the “Trexima incentive
        program”) approved by the Compensation Committee of the Board of Directors of
        the Company, stock options were granted to all of the Company’s employees,
        including its executive officers, to purchase an aggregate of 506,772 shares
        of
        common stock. As of September 30, 2006, due to forfeitures resulting from
        employee terminations, options to purchase an aggregate of 375,251 shares
        of
        common stock remain outstanding under the Trexima incentive program. Each
        performance-based option will vest in full upon the later to occur of (i)
        January 3, 2007 or (ii) the receipt by the Company of an action letter from
        the
        FDA indicating approval of the NDA for the product candidate
        Trexima,  which
        is
        being developed pursuant to the Company’s collaboration agreement with
        GSK ; provided,
        however that 25% of each such option will be forfeited if receipt of the
        FDA
        approval letter for the Trexima NDA does not occur prior to June 30, 2007,
        and
        100% of each such option will be forfeited if receipt of the FDA approval
        letter
        for the Trexima NDA does not occur on or before December 31, 2007. These
        performance-based options, which were granted under the Plan, as amended
        and
        restated, have a ten-year term and an exercise price of $7.06, which was
        equal
        to the Nasdaq reported market closing price of the common stock on January
        3,
        2005, the date of grant.
  Time-Based
        Stock Awards
 
 The
        fair
        value of each time-based award is estimated on the date of grant using the
        Black-Scholes option valuation model, which uses the assumptions described
        below. Our weighted-average assumptions used in the Black-Scholes valuation
        model for equity awards with time-based vesting provisions granted during
        the
        nine months ended September 30, 2006 are shown in the following
        table:
 
 **Three
                  months ended**
              
              **Nine
                  months ended****September
                  30, 2006**
              
              **September
                  30, 2006**Expected
                  volatility
              
              
              83.0
              %
              
              76.0
                  - 83.0
              %Expected
                  dividends
              
              
              0
              %
              
              0
              %Expected
                  terms
              
              
              6.25
                  Years
              
              
              6.25
                  YearsRisk-free
                  interest rate
              
              
              4.9
              %
              
              4.3
                  - 5.1
              %
 
 The
        expected volatility rate is currently estimated based on an equal weighting
        of
        the historical volatility of POZEN common stock over a six year period. The
        expected term was estimated based on a simplified method, as allowed under
        SEC
        Staff Accounting Bulletin No. 107, averaging the vesting term and original
        contractual term. The risk-free interest rate for periods within the contractual
        life of the option is based on seven year U.S. Treasury securities. The
        pre-vesting forfeiture rate used for the three and nine month periods ended
        September 30, 2006 was based on historical rates. As required under SFAS
        No.
        123(R), we adjust the estimated forfeiture rate to our actual
        experience.
 
 A
        summary
        of the time-based stock awards as of September 30, 2006, and changes during
        the
        nine months ended September 30, 2006, is as follows:
  -
            7
            -
 Index
 
 **Underlying**
                **Shares**
                **(000s)**
              
              **Weighted-Average
                  Exercise Price**
              
              **Average
                  Remaining Contractual Term**
                **(years)**
              
              **Aggregate
                  Intrinsic Value**
                **(000s)****Stock
                  Awards**Outstanding
                  at January 1, 2006
              
              
              3,317
              
              $
              7.67Granted
              
              
              826
              
              
              10.91Exercised
              
              
              157
              
              
              5.34Forfeited
                  or expired
              
              
              49
              
              
              9.28Outstanding
                  at March 31, 2006
              
              
              3,937
              
              
              8.42
              
              
              7.6
              
              $
              32,663Exercisable
                  at March 31, 2006
              
              
              1,927
              
              $
              7.38
              
              
              6.2
              
              $
              17,968Granted
              
              
              57
              
              
              12.81Exercised
              
              
              18
              
              
              2.10Forfeited
                  or expired
              
              
              288
              
              
              10.41Outstanding
                  at June 30, 2006
              
              
              3,688
              
              
              8.36
              
              
              7.3
              
              $
              2,445Exercisable
                  at June 30, 2006
              
              
              1,816
              
              $
              7.31
              
              
              5.9
              
              $
              2,168Granted
              
              
              81
              
              
              10.31Exercised
              
              
              154
              
              
              7.46Forfeited
                  or expired
              
              
              69
              
              
              10.39Outstanding
                  at September 30, 2006
              
              
              3,546
              
              
              7.19
              
              
              7.1
              
              $
              16,134Exercisable
                  at September 30, 2006
              
              
              1,730
              
              $
              7.38
              
              
              5.7
              
              $
              9,590
 
 The
        aggregate intrinsic value represents the pretax value (the period’s closing
        market price, less the exercise price, times the number of in-the-money options)
        that would have been received by all option holders had they exercised their
        options at the end of the period. The exercise price of stock options granted
        during the three and nine month periods ended September 30, 2006 was equal
        to
        the market price of the underlying common stock on the grant date. The total
        intrinsic value of stock options exercised during the three and nine month
        periods ended September 30, 2006 was $0.4 million and $1.2 million,
        respectively.
 
 Restricted
        Stock
  As
        of
        September 30, 2006, there was $0.1 million in unrecognized compensation expense
        related to unvested restricted stock units under the May 2004 award of 98,135
        restricted stock units granted to our chief executive officer described above.
        That cost is expected to be recognized over the period ending December 31,
        2006.
        The grant-date fair value of these restricted stock units was $12.24 per
        share.
        There were 32,712 unvested restricted stock units outstanding at September
        30,
        2006 and no time-based restricted stock was granted nor forfeited during
        the
        three and nine month periods ended September 30, 2006.
  Performance-Based
        Awards
  The
        fair
        value of each performance-based option granted under the Trexima incentive
        program was estimated as of the grant date using the Black-Scholes option
        valuation model without consideration of the performance measures. The inputs
        for expected volatility, expected term, expected dividends, and risk-free
        interest rate used in estimating fair value of performance-based awards in
        the
        nine months ended September 30, 2006, are the same as those noted above under
        Time-Based Stock Awards.
  Determining
        the appropriate amount to expense based on the achievement of stated goals
        in a
        performance-based award requires judgment, including forecasting future
        performance results. The estimate of expense is revised periodically based
        on
        the probability of achieving the required performance targets and adjustments
        are made as appropriate. The cumulative impact of any revisions is reflected
        in
        the period of change. If any applicable financial performance goals are not
        met,
        no compensation cost is ultimately recognized and any previously recognized
        compensation cost is reversed.
  As
        of
        September 30, 2006, there was $0.3 million in unrecognized compensation related
        to performance-based awards granted under the Trexima incentive program.
        That
        cost is expected to be recognized over the period ending September 30, 2007.
        The
        grant-date fair value of these performance-based options was $3.77 per share.
        There were 375,251 unvested performance-based options outstanding at September
        30, 2006. No performance-based awards were granted nor exercised during the
        nine
        months ended September 30, 2006; 13,342 and 65,160 awards were forfeited
        during
        the three and nine month periods ended September 30, 2006. At September 30,
        2006
        the performance-based options had an intrinsic value of $2.2 million and
        a
        remaining contractual life of 8.3 years.
  -
            8
            -
 Index
  2005
        Stock-Based Compensation
  The
        following table illustrates the effect on net loss and net loss per share
        for
        the three and nine months ended September 30, 2005, if we had accounted for
        all
        employee stock-based compensation during that period based on the fair value
        method as prescribed by SFAS No. 123(R).
  **Three
                  Months**
                **Ended
                  September 30,**
              
              **Nine
                  Months**
                **Ended
                  September 30,****2005**
              
              **2005**Net
                  loss attributable to common stockholders as reported
              
              $
              (4,685,778
              )
              $
              (14,173,669
              )Add:
                  Stock-based employee compensation expense reflected in reported
                  net loss,
                  net of related tax effects
              
              $
              615,197
              
              $
              955,746Deduct:
                  Total stock-based employee compensation expense determined under
                  the fair
                  value-based method for all awards, net of related tax
                  effects
              
              
              (1,305,369
              )
              
              (4,349,233
              )Pro
                  forma net loss attributable to common stockholders
              
              $
              (5,375,950
              )
              $
              (17,567,156
              )Earnings
                  per shareBasic
                  net loss per common share as reported
              
              $
              (0.16
              )
              $
              (0.49
              )Basic
                  net loss per common share pro forma
              
              $
              (0.19
              )
              $
              (0.61
              )Diluted
                  net loss per common share as reported
              
              $
              (0.16
              )
              $
              (0.49
              )Diluted
                  net loss per common share pro forma
              
              $
              (0.19
              )
              $
              (0.61
              )
  For
        the
        purpose of the above table, the fair value of each option grant was estimated
        as
        of the date of grant by using the Black-Scholes option pricing model with
        the
        following weighted-average assumptions used for grants in the nine month
        period
        ended September 30, 2005: a risk-free interest rate of 3.90% to 4.05%; a
        dividend yield of 0%; a weighted-average expected life of 7.0 years; and
        a
        volatility rate of 97% to 98%. The expected volatility was estimated using
        the
        historical volatility over a period of four years preceding the applicable
        period. The weighted-average fair value of options granted in the nine month
        period ended September 30, 2005 was $7.10. There were no grants issued during
        the three month period ended September 30, 2005.
  *Net
        Loss Per Share* —Basic
        and diluted net loss per common share amounts are presented in conformity
        with
        SFAS 128, “Earnings per Share,” for all periods presented. In accordance with
        SFAS 128, basic and diluted net loss per common share amounts have been computed
        using the weighted-average number of shares of common stock outstanding for
        the
        nine months ended September 30, 2005 and 2006. During the nine months ended
        September 30, 2005 and 2006, the Company had potential common stock equivalents
        related to its outstanding stock options. These potential common stock
        equivalents were not included in diluted loss per share for these periods
        because the effect would have been antidilutive. Accordingly, basic and diluted
        net loss per share is the same for the three months ended September 30, 2005
        and
        2006. In accordance with SFAS 128, the Company has excluded the impact of
        any
        shares which might be issued under the Rights Plan, detailed below, from
        the EPS
        calculation because the Rights are not exercisable since the specified
        contingent future event has not occurred.
  *Rights
        Plan/Series A Junior Participating Preferred Stock* —In
        January 2005, the Company approved a stockholder rights plan (the “Rights
        Plan”), pursuant to which the Company entered into a Rights Agreement dated
        January 12, 2005 with StockTrans, Inc., as Rights Agent, and the Company
        declared a dividend of a right to acquire one preferred share purchase right
        (a
“Right”) for each outstanding share of the Company’s Common Stock, $0.001 par
        value per share, to stockholders of record at the close of business on January
        28, 2005. Generally, the Rights only are triggered and become exercisable
        if a
        person or group acquires beneficial ownership of 15 percent or more of the
        Company’s common stock or announces a tender offer for 15 percent or more of the
        Company’s common stock. The Rights Plan is similar to plans adopted by many
        other publicly-traded companies. The effect of the Rights Plan is to discourage
        any potential acquirer from triggering the Rights without first convincing
        POZEN’s Board of Directors that the proposed acquisition is fair to, and in the
        best interest of, the shareholders and the Company. The provisions of the
        Plan
        will substantially dilute the equity and voting interest of any potential
        acquirer unless the Board of Directors determines that the proposed acquisition
        is in the best interest of the shareholders. In connection with the Plan,
        the
        Company designated 90,000 shares of its authorized Preferred Stock as Series
        A
        Junior Participating Preferred Stock. Each Right, if and when exercisable,
        will
        entitle the registered holder to purchase from the Company one one-thousandth
        of
        a share of Series A Junior Participating Preferred Stock, $0.001 par value
        per
        share, at a purchase price of $80.00, subject to adjustment. Each holder
        of a
        Right (except for the Acquiring Person (as defined in the Rights Plan), whose
        Rights will be null and void upon such event) shall thereafter have the right
        to
        receive, upon exercise, that number of shares of Common Stock of the Company
        (or, in certain circumstances, cash, property or other securities of the
        Company) which equals the exercise price of the Right divided by 50% of the
        current market price (as defined in the Rights Agreement) per share of Common
        Stock at the date of the occurrence of such event. The Rights can be terminated
        by POZEN’s Board of Directors and are subject to optional redemption by the
        Company at $0.001 per Right. The Rights Plan has a 10-year term and contains
        provisions requiring a periodic review and evaluation by the Board of
        Directors.
  -
            9
            -
 Index
  *New
        Accounting Pronouncements* —In
        December 2004, the Financial Accounting Standards Board (FASB) issued Statement
        of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,”
which is a revision of SFAS Statement No. 123, *Accounting
        for Stock-Based Compensation* (“SFAS
        No. 123”). SFAS No. 123(R) supersedes Accounting Principles Board Opinion No.
        25, *Accounting
        for Stock Issued to Employees* (“APB
        25”), and amends FASB Statement No. 95, *Statement
        of Cash Flows* .
        Generally, the approach in SFAS No. 123(R) is similar to the approach described
        in SFAS No. 123. However, SFAS No. 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. We adopted SFAS No. 123(R) on January 1, 2006. SFAS No. 123(R)
        requires us to account for share-based payment transactions using a fair
        value-based method and recognize the related expense in our results of
        operations. Prior to our adoption of SFAS No. 123(R), as permitted by SFAS
        No.
        123, we accounted for share-based payments to employees using the APB 25
        intrinsic value method and, therefore we generally recognized compensation
        expense for restricted stock awards and did not recognize compensation cost
        for
        employee stock options as such options had an exercise price equal to the
        market
        price of the underlying common stock on the date of grant. SFAS No. 123(R)
        allows companies to choose one of two transition methods: the modified
        prospective transition method or the modified retrospective transition method.
        We chose to use the modified prospective transition methodology. We have
        not
        restated our financial results from prior periods as a result of our adoption
        of
        SFAS No. 123(R).
  Under
        the
        fair value recognition provisions of SFAS No. 123(R), stock-based compensation
        cost is estimated at the grant date based on the fair value of the award
        and is
        recognized as expense over the requisite service period of the award. The
        fair
        value of restricted stock awards is determined by reference to the fair market
        value of our common stock on the date of grant. Consistent with the valuation
        method we used for disclosure-only purposes under the provisions of SFAS
        No.
        123, we use the Black-Scholes model to value service condition and performance
        condition option awards under SFAS No. 123(R). For awards with only service
        conditions and graded-vesting features, we recognize compensation cost on
        a
        straight-line basis over the requisite service period. For awards with
        performance or market conditions granted subsequent to our adoption of SFAS
        No.
        123(R), we will recognize compensation cost based on the graded-vesting
        method.
  Determining
        the appropriate fair value model and related assumptions requires judgment,
        including estimating stock price volatility, forfeiture rates, and expected
        terms. The expected volatility rates are estimated based on historical and
        implied volatilities of our common stock. The expected term represents the
        average time that options that vest are expected to be outstanding based
        on the
        vesting provisions and our historical exercise, cancellation and expiration
        patterns. We estimate pre-vesting forfeitures when recognizing compensation
        expense based on historical rates.
  Determining
        the appropriate amount to expense for performance-based awards based on the
        achievement of stated goals requires judgment, including forecasting future
        performance results. The estimate of expense is revised periodically based
        on
        the probability of achieving the required performance targets and adjustments
        are made as appropriate. The cumulative impact of any revisions is reflected
        in
        the period of change. If any applicable financial performance goals are not
        met,
        no compensation cost is recognized and any previously recognized compensation
        cost is reversed.
  The
        Company continues to assess the impact that FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes - an interpretation of FASB
        Statement No. 109” (“FIN 48”), will have on its consolidated financial
        statements. Issued by the FASB in June 2006, FIN 48 clarifies the accounting
        for
        uncertainty in income taxes by prescribing a recognition threshold and
        measurement attribute for the financial statement recognition and measurement
        of
        a tax position taken or expected to be taken in a tax return. The interpretation
        also provides guidance on derecognition, classification, interest and penalties,
        accounting in interim periods, and disclosure. FIN 48 is effective for fiscal
        years beginning after December 15, 2006, and is required to be adopted by
        the
        Company in the first quarter of fiscal 2007.
  *Contingencies*—Five
        purported class action lawsuits were filed during 2004 by holders of the
        Company's securities against the Company and certain of its current and former
        officers, in the U. S. District Court for the Middle District of North Carolina,
        alleging violations of securities laws. These actions were consolidated for
        pre-trial purposes. A lead plaintiff has been appointed by the court and
        a
        consolidated amended complaint was filed on December 20, 2004. The amended
        complaint alleges, among other claims, violations of federal securities laws,
        including Section 10(b) of the Securities Exchange Act of 1934, as amended
        (the
        "Exchange Act"), and Rule 10b-5 and Section 20(a) of the Exchange Act against
        the Company and the Company’s chairman and chief executive officer, arising out
        of allegedly false and misleading statements made by the Company concerning
        its
        product candidates, MT 100 and MT 300, during the class period. On January
        27,
        2005, the Company filed a motion to dismiss the amended complaint. The motion
        to
        dismiss was denied on August 30, 2005 and the case is now in discovery phase.
        On
        March 27, 2006, a motion for class certification was filed. The Company filed
        its brief in opposition to class certification on June 30, 2006. The Company
        and
        the defendant believe that the allegations in this action are without merit
        and
        intend to defend this case vigorously.
  While
        the
        Company cannot predict the outcome or reasonably estimate the range of potential
        loss, if any, from this litigation, it is the current judgment of management
        that it is unlikely that this litigation will have a material adverse effect
        on
        the Company's results of operations, financial condition or cash
        flows.
  -
            10
            -
 Index
  Under
        its
        commercialization collaboration with Valeant NA, related to MT 300, if the
        Company chooses to withdraw the MT 300 NDA for commercial or financial reasons
        under the conditions specified in the agreement, it could be required to
        pay a
        withdrawal fee of $1.0 million. As a result of this contingency, $1.0 million
        of
        the $2.0 million upfront payment received by the Company from Valeant NA
        pursuant to the agreement has not been recognized as revenue and will not
        be
        recognized as revenue until the conditions in the agreement have been satisfied
        or resolved.
  On
        July
        21, 2005, the Company received a letter from Valeant NA seeking payment of
        the
        $1.0 million withdrawal fee. The Company does not believe the withdrawal
        fee is
        payable. The agreement requires that unresolved disputes by the parties be
        referred to the respective chief executive officers for resolution. If still
        unresolved, the agreement provides for binding arbitration. Valeant NA has
        indicated its intention to pursue the dispute resolution provisions provided
        for
        in the agreement. The Company intends to vigorously defend its position under
        the agreement. At this time, it is not possible to determine if any withdrawal
        fee will be required to be paid to Valeant NA when the ultimate resolution
        of
        this dispute is reached, however, it is the current judgment of management
        that
        no reserve is currently required.
  **Item
        2. Management’s Discussion and Analysis of
        Financial Condition and Results of Operations**
  This
        discussion of our financial condition and the results of operations should
        be
        read together with the financial statements, including the notes contained
        elsewhere in this Form 10-Q, and the financial statements, including the
        notes
        thereto, contained in our Annual Report on Form 10-K for the year ended December
        31, 2005, as filed on March 8, 2006.
  This
        report includes “forward-looking statements” within the meaning of the safe
        harbor provisions of the Private Securities Litigation Reform Act of 1995.
        These
        forward-looking statements include, but are not limited to, statements about
        our
        plans, objectives, representations and contentions and are not historical
        facts
        and typically are identified by use of terms such as “may,” “will,” “should,”
“could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,”
“potential,” “continue” and similar words, although some forward-looking
        statements are expressed differently. You should be aware that the
        forward-looking statements included herein represent management’s current
        judgment and expectations, but our actual results, events and performance
        could
        differ materially from those in the forward-looking statements. The
        forward-looking statements are subject to a number of risks and uncertainties
        which are discussed in this Quarterly Report on Form 10-Q, Part II, under
        the
        heading “Item 1A. Risk Factors” and elsewhere in this report and in other
        documents filed by us with the Securities and Exchange Commission. We do
        not
        intend to update any of these factors or to publicly announce the results
        of any
        revisions to these forward-looking statements, other than as is required
        under
        the federal securities laws.
  **Overview**
  We
        are a
        pharmaceutical company focused primarily on products for the treatment of
        acute
        and chronic pain and other pain-related conditions. Our product development
        emphasis is on diseases with unmet medical needs where we can improve efficacy,
        safety and/or patient convenience. Since our inception, we have focused our
        efforts primarily on the development or regulatory approval of pharmaceutical
        products for the treatment of migraine. We are also exploring the development
        of
        product candidates in other pain-related therapeutic areas. We intend to
        enter
        into collaboration agreements to commercialize our product candidates, and
        have
        entered into, and expect to continue to enter into such collaborations. We
        have
        not obtained regulatory approval to market any of our product candidates
        in the
        United States (U.S.). The United Kingdom's (UK) Medicines and Healthcare
        Products Regulatory Agency (MHRA) has issued a marketing authorization for
        our
        product candidate MT 100 for the acute treatment of migraine in the
        UK.
  Our
        business activities to date have included:
  •
              
              product
                  candidate research and development;•
              
              designing
                  and funding clinical trials for our product candidates;•
              
              regulatory
                  and clinical affairs;•
              
              intellectual
                  property prosecution and expansion; and•
              
              business
                  development, including product acquisition and/or licensing and
                  collaboration activities.
  -
            11
            -
 Index
  We
        are
        currently developing Trexima TM  in
        collaboration with GlaxoSmithKline (GSK). Trexima is GSK’s proposed brand name
        for the combination of sumatriptan succinate, formulated with GSK’s RT
        Technology TM ,
        and
        naproxen sodium in a single tablet designed for the acute treatment of migraine.
        Trexima incorporates our MT 400 technology, which refers to our proprietary
        combinations of a triptan (5-HT 1B/1D agonist)
        and a non-steroidal anti-inflammatory drug (NSAID). Under
        our
        MT 400 technology, we seek to develop product candidates that provide acute
        migraine therapy by combining the activity of two drugs that act by different
        mechanisms to reduce the pain and associated symptoms of migraine. We
        filed
        a New Drug Application (NDA) for Trexima with the U.S. Food and Drug
        Administration (FDA) in August 2005 and
        on
        June 8, 2006, we received an approvable letter related to our NDA for Trexima
        requiring us to provide certain additional safety information relating to
        Trexima. An approvable letter is an official notification from the FDA that
        contains conditions that must be satisfied prior to obtaining final U.S.
        marketing approval. We, along with GSK, met with the FDA on July 26, 2006
        to
        discuss the approvable letter and we expect to submit a full response to
        the
        FDA’s approvable letter in the fourth quarter of the year. We expect the FDA
        will complete its review within six months of this submission.
 
 We
        are
        also developing product candidates that combine a type of acid inhibitor,
        a
        proton pump inhibitor (PPI), with an NSAID (our PN program). These product
        candidates are intended to provide management of pain and inflammation
        associated with conditions such as osteoarthritis, and are intended to have
        fewer gastrointestinal complications compared to an NSAID taken alone. In
        August
        2006, we entered into an exclusive global collaboration and license agreement
        with AstraZeneca AB (AstraZeneca) to co-develop and commercialize proprietary
        fixed dose combinations of the PPI esomeprazole magnesium with the NSAID
        naproxen, in a single tablet using our PN formulation technology. Another
        product candidate under our PN development program, PA 325, a combination
        of a
        PPI and aspirin, is currently in formulation development and is not covered
        under our agreement with AstraZeneca.
  In
        addition, we are exploring the development of product candidates containing
        lornoxicam, an NSAID that is currently marketed outside the U.S. (including
        Europe and Japan). These product candidates, which are being developed under
        an
        exclusive license agreement with Nycomed Danmark ApS (Nycomed) granting us
        certain rights to develop and commercialize products containing lornoxicam,
        are
        intended to treat pain or other pain-related indications. We have filed
        Investigational New Drug Applications (INDs) with the FDA for an oral and
        an
        injectable lornoxicam formulation.
  We
        have
        incurred significant losses since our inception and have not generated any
        revenue from product sales. As of September 30, 2006, our accumulated deficit
        was approximately $131.5 million. Our historical operating losses have resulted
        principally from our research and development activities, including clinical
        trial activities for our product candidates and general and administrative
        expenses. Research and development expenses include salaries and benefits
        for
        personnel involved in our research and development activities and direct
        development costs, which include costs relating to the formulation and
        manufacturing of our product candidates, costs relating to preclinical studies,
        including toxicology studies, and clinical trials, and costs relating to
        compliance with regulatory requirements applicable to the development of
        our
        product candidates. Since inception, our research and development expenses
        have
        represented 70% of our total operating expenses. For the nine months ended
        September 30, 2006, our research and development expenses represented
        approximately 54% of our total operating expenses.
  Statement
        of Financial Accounting Standards Board (“SFAS”) No. 7, “Accounting and
        Reporting by Development Stage Enterprises,” states that an enterprise shall be
        considered to be in the development stage if either planned principal operations
        have not commenced or planned principal operations have commenced, but there
        has
        been no significant revenue therefrom. We will remain a development stage
        company until such time as significant revenues have been generated from
        the
        marketing and sale of our product candidates.
  We
        expect
        that we may continue to incur operating losses over the next several years
        as we
        complete the development and seek regulatory approval for our product
        candidates, develop other product candidates and acquire and develop product
        portfolios in other therapeutic areas. Our results may vary depending on
        many
        factors, including:
  •
              
              The
                  progress of Trexima and our other product candidates in the clinical
                  and
                  regulatory process;•
              
              The
                  establishment of new collaborations and progress and/or maintenance
                  of our
                  existing collaborations for the development and commercialization
                  of any
                  of our product candidates;•
              
              The
                  acquisition and/or in-licensing, and development, of other therapeutic
                  product candidates; and•
              
              Costs
                  related to the pending class action lawsuit against us and our
                  president
                  and chief executive officer relating to the approvability of MT
                  100 and MT
                  300.
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            12
            -
 Index
  We
        do not
        currently have commercialization or manufacturing capabilities. We have entered
        into collaborations and currently plan to enter into additional collaborations
        with established pharmaceutical or pharmaceutical services companies to
        commercialize and manufacture our product candidates once approved. Our ability
        to generate revenue is dependent upon our ability, alone or with collaborators,
        to achieve the milestones set forth in our collaboration agreements, to enter
        into additional collaboration agreements, and successfully develop product
        candidates, obtain regulatory approvals and successfully manufacture and
        commercialize our future products.
  **Status
        of Our Product Candidates**
  There
        follows a brief discussion of the status of each of our product candidates,
        as
        well as the costs relating to our development activities. Our research and
        development expenses that are not direct development costs consist of personnel
        and other research and development departmental costs and are not allocated
        by
        product candidate. We do not maintain records that allocate our employees’ time
        by the projects on which they work and, therefore, are unable to identify
        costs
        related to the time that employees spend on research and development by product
        candidate. Total compensation and benefit costs for our personnel involved
        in
        our research and development activities during the nine month period ended
        September 30, 2006 were $5.2 million. Other research and development department
        costs for the nine month period ended September 30, 2006 were $0.4 million.
  **MT
        400/Trexima**
  **** On
        June
        8, 2006, we received an approvable letter from the FDA related to the NDA
        for
        Trexima. An approvable letter is an official notification from the FDA that
        contains conditions that must be satisfied prior to obtaining final U.S.
        marketing approval. The approvable letter reflected that the FDA has determined
        that Trexima is effective as an acute treatment for migraine headaches. The
        FDA
        has requested additional safety information on Trexima, some of which require
        new studies. We, along with GSK, met with the FDA on July 26, 2006 to discuss
        the approvable letter and we expect to submit a full response to the approvable
        letter providing additional safety information in the fourth quarter of the
        year. We expect the FDA will complete its review within six months of this
        submission. There are no guarantees that FDA will find the submission to be
        satisfactory, that the FDA will approve the NDA, or that additional testing
        will
        not be required prior to approval.
  As
        part
        of our Phase 3 clinical program for Trexima, we conducted two Phase 3 pivotal
        trials using a formulation of Trexima developed by GSK. The Phase 3 pivotal
        trials, including the endpoints required to evaluate Trexima, were designed
        to
        demonstrate superiority to placebo for relief of pain and the associated
        symptoms of migraine (nausea, photophobia and phonophobia) at two hours;
        we
        believe that this is the current FDA standard for establishing efficacy of
        migraine products. Additionally, the program was designed to demonstrate
        that
        each component makes a contribution to the efficacy of Trexima (the “combination
        drug rule” that the FDA requires of all combination products). The efficacy
        endpoint for the combination is sustained pain free, which is defined as
        improvement from moderate or severe pain to no pain at two hours and remaining
        at no pain through twenty four hours without the use of rescue
        medicine.
  In
        February 2005, we completed the first Phase 3 pivotal trial, in which Trexima
        demonstrated superiority over the individual components measured by sustained
        pain-free response (p<.001) and, with the exception of the incidence of
        nausea-free at two hours, all other regulatory endpoints were met (p <.001).
        Trexima did reach statistical significance for the nausea endpoint compared
        to
        placebo by three hours and maintained superiority through twenty-four hours.
        All
        of the active treatments (Trexima, sumatriptan and naproxen) had a similar
        incidence of nausea at two hours compared to placebo. In April 2005, we
        completed the second Phase 3 pivotal trial, in which Trexima
        demonstrated superiority over the individual components measured by sustained
        pain-free response (p<0.001 vs. naproxen; p=0.009 vs. sumatriptan) and met
        all other regulatory endpoints versus placebo.
  We
        met
        with the FDA in April 2005 to discuss the results of our two Phase 3 pivotal
        trials, along with other information required for the submission of the Trexima
        NDA. The Trexima NDA submission was made in August 2005 and was accepted
        for
        review by the FDA in October 2005. In October 2005, we received a $20.0 million
        payment from GSK, payable under our collaboration agreement with GSK upon
        the
        FDA’s acceptance for review of the Trexima NDA.
  In
        addition to our Phase 3 pivotal studies and three standard pharmacokinetic
        studies, we completed two additional pharmacokinetic Phase 1 studies requested
        by the FDA and these were submitted to the FDA within the Trexima NDA. We
        also
        completed a long-term, twelve-month open label safety study for Trexima.
        The
        final results of this study were submitted to the NDA, as previously agreed
        with
        FDA, in December 2005 with the 120-day safety update report to the NDA.
        Additional safety data from two GSK-sponsored studies were submitted to the
        FDA
        within the 120-day safety update report, and the final reports of those studies
        were filed to the IND during the first quarter of 2006. GSK has funded and
        continues to conduct pre-approval market support studies for Trexima under
        our
        IND.
  We
        cannot
        reasonably estimate or know the amount or timing of the costs necessary to
        complete the development of Trexima or when, if and to what extent we will
        receive future cash inflows from Trexima. The additional costs that we may
        incur
        include expenses relating to clinical trials and other research and development
        activities and the cost and timing of activities necessary to obtain regulatory
        approval.
  -
            13
            -
 Index
  We
        incurred $79,000 in direct development costs associated with the development
        of
        MT 400/Trexima for the nine-month period ended September 30, 2006 and we
        have
        incurred $24.5 million from inception to date. Our direct development costs
        do
        not include the cost of research and development personnel or any allocation
        of
        our overhead expenses.
  **MT
        100**
  In
        May
        2004, we received a not-approvable letter from the FDA with respect to our
        NDA
        for MT 100, our proprietary combination of metoclopramide hydrochloride and
        naproxen sodium. In September 2005, after an FDA advisory committee concluded
        that the potential but unquantified risk of the occurrence of an involuntary
        neurological movement disorder known as tardive dyskinesia associated with
        the
        use of metoclopramide would outweigh the benefits of the MT 100 combination,
        we
        decided to discontinue further development of MT 100 in the U.S. and to
        reevaluate our MT 100 European strategy. As a part of that reevaluation,
        in
        September 2005 we terminated our license agreement with Nycomed for the
        development and commercialization of MT 100 in Denmark, Norway, Sweden and
        Finland in exchange for a payment to Nycomed of $250,000. We are exploring
        the
        possibility of selling or otherwise disposing of the MT 100 asset to a third
        party, although there can be no assurance that we will, or will be able to,
        consummate such a transaction.
  In
        October 2002, we submitted a Market Authorization Application (MAA) for MT
        100
        for the acute treatment of migraine to the Medicines and Healthcare Products
        Regulatory Agency (MHRA) in the United Kingdom (UK). In November 2005, we
        received notification that the MHRA had granted us marketing approval for
        MT 100
        in the UK.
  We
        are
        not currently conducting and do not plan to conduct any clinical trials for
        MT
        100 and do not expect to incur any additional significant development costs
        related to MT 100. We incurred $82,000 in direct development costs associated
        with the development of MT 100 for the nine-month period ended September
        30,
        2006 and we have incurred $39.8 million from inception to date. Our direct
        development costs do not include the cost of research and development personnel
        or any allocation of our overhead expenses.
  **MT
        300**
  In
        October 2003, we received a not-approvable letter from the FDA related to
        our
        NDA for MT 300, which we had submitted in December 2002. Subsequently, we
        continued our communications with the FDA relative to the NDA. Based upon
        our
        most recent discussions with the FDA, in which the FDA affirmed its previously
        stated concerns that approval of the NDA was problematic due to the higher
        incidence of nausea at two hours following dosing in patients treated with
        MT
        300 compared with placebo, and our understanding of the current FDA standards
        for approving migraine drugs, we believe it is not possible to reverse the
        not
        approvable status of the NDA for MT 300.
  We
        therefore, began discussions with Valeant NA regarding termination of our
        MT 300
        commercialization agreement. In July, 2005, we received a letter from Valeant
        NA
        seeking payment of a $1.0 million withdrawal fee required under certain
        conditions under the agreement. Under the agreement, if we determine that
        additional studies or data that are required by the FDA for approval of the
        NDA
        for MT 300 would jeopardize the commercial viability of MT 300 or exceed
        our
        financial resources available for MT 300, we may elect to withdraw the NDA.
        If
        we notify Valeant NA of this situation and Valeant NA elects not to assume
        control of efforts to seek approval of the NDA, then, under the conditions
        outlined in the agreement, upon notice from Valeant NA the agreement will
        terminate and we would be required to pay Valeant NA a termination fee of
        $1.0
        million. If Valeant NA decides to assume development, it would be credited
        $1.0
        million in development expense. We do not believe that the withdrawal fee
        is
        payable under the circumstances of receipt of a not-approvable letter from
        the
        FDA. The agreement requires that unresolved disputes by the parties be referred
        to the respective chief executive officers for resolution. If still unresolved,
        the agreement provides for binding arbitration. Valeant NA has disputed our
        conclusion that the withdrawal fee is not payable and has indicated its
        intention to pursue the dispute resolution provisions provided for under
        the
        agreement. We can give no assurance that Valeant NA will agree to termination
        terms acceptable to us, or that we will not be required to pay Valeant NA
        the
        withdrawal fee described above.
  We
        are
        not currently conducting any clinical trials for MT 300 and do not expect
        to
        incur any additional significant development costs related to MT 300. Given
        our
        current assessment that we do not believe we can reverse the not-approvable
        status of the NDA for MT 300, we believe that we will not receive any cash
        inflows from MT 300.
  We
        incurred $40,000 in direct development costs associated with the development
        of
        MT 300 for the nine-month period ended September 30, 2006 and we have incurred
        $14.6 million from inception to date. Our direct development costs do not
        include the cost of research and development personnel or any allocation
        of our
        overhead expenses.
  -
            14
            -
 Index
  **PN
        Program**
  Under
        our
        PN program, we have completed formulation development and clinical studies
        for
        combinations of a proton pump inhibitor (PPI) and an NSAID in a single tablet
        intended to provide effective management of pain and inflammation associated
        with chronic conditions such as osteoarthritis, and intended to have fewer
        gastrointestinal complications compared to an NSAID taken alone in patients
        at
        risk for developing NSAID associated gastric ulcers. To date, we have conducted
        studies with two PN product formulations in this program - PN 100, a combination
        of the PPI lansoprazole and the NSAID naproxen, and PN 200, a combination
        of the
        PPI omeprazole and naproxen. Our future development and commercialization
        efforts under the PN program will be covered under our exclusive collaboration
        agreement with AstraZeneca, which we entered into on August 1, 2006. Under
        our
        agreement with AstraZeneca, we and AstraZeneca will co-develop and AstraZeneca
        will commercialize proprietary fixed dose combinations of the PPI esomeprazole
        magnesium with the non-steroidal anti-inflammatory drug (NSAID) naproxen,
        in a
        single tablet. The initial product to be developed under the agreement, PN
        400,
        will be indicated for the management of pain and inflammation associated
        with
        conditions such as osteoarthritis and rheumatoid arthritis in patients who
        are
        at risk for developing NSAID-associated gastric ulcers.
  In
        discussions with the FDA during 2005 regarding our development plans for
        studies
        to pursue FDA approval of PN 100 and PN 200, the FDA agreed that by including
        naproxen as the NSAID within the PN formulation, we could expect that all
        indications for use of naproxen in adults would accrue to the PN product,
        if
        clinical trials successfully demonstrated improved safety (lower incidence
        of
        gastric ulcers) of the PN product compared with naproxen alone and the PN
        formulation was shown to be bioequivalent to marketed formulations of naproxen.
        Prior to entering into our collaboration agreement with AstraZeneca, we
        completed a study designed to demonstrate the bioequivalence of the naproxen
        component of our PN 200 product candidate development formulation to
        enteric-coated naproxen. This study demonstrated that the PN formulation
        was
        bioequivalent to the reference drug, EC Naprosyn®.
 
 In
        early
        2006, we submitted a Special Protocol Assessment (SPA) to the FDA for our
        pivotal Phase 3 clinical trials for PN 200. The SPA is a process in which
        the
        FDA provides evaluations and guidance on clinical trial protocols for pivotal
        Phase 3 clinical trials. In April 2006 we announced that we had reached an
        agreement with the FDA on the Phase 3 pivotal clinical trials for PN 200
        for the
        treatment of the signs and symptoms of osteoarthritis, rheumatoid arthritis
        and
        ankylosing spondylitis in patients at risk of developing NSAID-associated
        gastric ulcers. We also reached agreement with the FDA that the development
        program and study design proposed for PN 200 would be applicable to a product
        that contained an isomer of omeprazole combined with naproxen. In light of
        our
        collaboration agreement with AstraZeneca, we, along with AstraZeneca, expect
        to
        meet with the FDA during the next few months to confirm whether, notwithstanding
        the use of a different PPI, the core development program and the SPA already
        agreed upon will apply to the new product consisting of proprietary fixed
        dose
        combinations of esomeprazole magnesium with naproxen. We commenced certain
        PN
        200 trials in the third quarter of 2006 to test longer-term gastro-protection
        of
        the PN product concept. Additional trials with PN 400, the naproxen/esomeprazole
        fixed combination, will begin once the new product is formulated and clinical
        supplies are manufactured, with Phase 3 clinical trials expected to begin
        in the
        third quarter of 2007.
 
 In
        2005,
        we also had discussions with the FDA concerning the implications of the FDA’s
        guidance issued in June 2005 concerning labeling of NSAID-containing products,
        which resulted from an FDA advisory committee meeting held in February 2005.
        The
        advisory committee addressed the safety of NSAIDs, and, in particular, the
        cardiovascular risks of COX-2 selective NSAIDs. Based on our discussions
        with
        the FDA reviewing division for PN products, we believe that, unless new
        information about naproxen safety concerns becomes available, long-term
        cardiovascular safety studies will not be required at this time for FDA approval
        of our PN product candidates containing naproxen. However, we cannot guarantee
        that such studies will not be required. We will continue to evaluate and
        review
        with the FDA its expectations and recommendations regarding the efficacy
        and
        safety requirements and study design necessary to support approval of NDAs
        for
        our PN and PA product candidates.
 
 Additionally, we
        have met with four national European regulatory agencies to discuss the
        proposed development program for PN. While further clarification will be
        needed,
        based on the intention to develop the esomeprazole combination, further clinical
        studies, beyond those specifically required for the NDA submission in the
        U.S.,
        will need to be conducted. In part, these studies will be required as the
        naproxen-containing products on the European market differ in strength and
        formulation from those available in the U.S.
 
 We
        cannot
        reasonably estimate or know the amount or timing of the costs necessary to
        continue exploratory development and/or complete the development of any PN
        product candidates we may seek to develop or when, if and to what extent
        we will
        receive cash inflows from any PN products. The additional costs that may
        be
        incurred include expenses relating to clinical trials and other research
        and
        development activities and activities necessary to obtain regulatory
        approvals.
  We
        incurred direct development costs associated with the development of our
        PN
        program of $6.5 million during the nine-month period ended September 30,
        2006
        and we have incurred $14.7 million from inception to date. Our direct
        development costs do not include the cost of research and development personnel
        or any allocation or our overhead expenses.
  -
            15
            -
 Index
  **PA
        Program**
  In
        our PA
        program, we are exploring the development of a combination of a PPI and aspirin
        in a single tablet. Similar to the PN program, our PA product candidate is 
intended to have fewer gastrointestinal complications compared to
        an aspirin taken alone, in patients at risk for developing aspirin
        associated gastric ulcers. Our PA product candidates are not covered under
        the
        AstraZeneca agreement, and we have retained all rights to this
        program.
  Our
        PA
        product candidate, PA 325, is currently in formulation development. We plan
        to commence a Phase 1 proof of concept study of PA 325 in the fourth
        quarter of 2006.
  We
        cannot
        reasonably estimate or know the amount or timing of the costs necessary to
        continue exploratory development and/or complete the development of any PA
        product candidates we may seek to develop or when, if and to what extent
        we will
        receive cash inflows from any PA products. The additional costs that may
        be
        incurred include expenses relating to clinical trials and other research
        and
        development activities and activities necessary to obtain regulatory
        approvals.
  We
        incurred direct development costs associated with the development of our
        PA
        program of $0.2 million during the nine-month period ended September 30,
        2006
        and we have incurred $0.6 million from inception to date. Our direct development
        costs do not include the cost of research and development personnel or any
        allocation of our overhead expenses.
  **Lornoxicam
        Program**
  In
        this
        program, we have begun development work and conducted clinical studies to
        investigate the development of novel product candidates containing lornoxicam,
        alone or in combination with other active ingredients, as potential treatments
        for pain or other indications. Our exploratory and development work is being
        conducted under an exclusive license agreement with Nycomed, pursuant to
        which
        Nycomed licensed to us certain rights to develop and commercialize products
        containing lornoxicam in the U.S. As a part of our agreement with Nycomed,
        we
        have also granted certain exclusive rights to Nycomed to supply us, or our
        commercialization partners, if any, with lornoxicam active drug substance
        for
        use in the manufacture of any of our lornoxicam product candidates.
  Oral
        Tablet Formulation .
        We
        filed an IND with the FDA in 2003 for an oral lornoxicam tablet formulation
        and
        completed our first human study with this formulation in 2004 in patients
        undergoing dental surgery. The data from this study confirmed the acute safety
        profile for lornoxicam in these patients and provided preliminary evidence
        of
        efficacy in this pain model. As a result of the FDA advisory committee meeting
        held in February 2005 addressing the safety and cardiovascular risks of NSAIDs,
        described above, the FDA has indicated that long-term cardiovascular safety
        studies will be required prior to NDA approval of new NSAID products that
        may be
        used on an intermittent or chronic basis, such as our oral tablet lornoxicam
        product candidate.
 
 Injectable
        Formulation .
        We
        filed an IND with the FDA for an injectable lornoxicam formulation in May
        2005,
        and during 2005 we initiated the first human studies with this formulation
        under
        our IND. We have completed a Phase 1 pharmacokinetic study as well as two
        Phase
        2 studies to evaluate lornoxicam for management of acute post-operative
        bunionectomy pain and for management of migraine pain. In the Phase 2
        bunionectomy study, both active doses of lornoxicam were significantly better
        than placebo in the acute management of pain following bunionectomy. Based
        on
        the results of our Phase 2 migraine study, we currently do not intend to
        pursue
        the migraine indications.
 
 We
        will
        likely reassess the direction of our lornoxicam product candidates in the
        fourth
        quarter based on the results of our clinical studies, the regulatory environment
        and commercial opportunities. We cannot reasonably estimate or know the amount
        or timing of the costs necessary to continue exploratory development and/or
        complete the development of any lornoxicam product candidates we may seek
        to
        develop or when, if and to what extent we will receive cash inflows from
        any
        lornoxicam products. The additional costs that may be incurred include expenses
        relating to clinical trials and other research and development activities
        and
        activities necessary to obtain regulatory approvals.
  We
        incurred direct development costs associated with the development of our
        lornoxicam program of $3.3 million during the nine-month period ended September
        30, 2006, and we have incurred $8.5 million from inception to date. Our direct
        development costs do not include the cost of research and development personnel
        or any allocation or our overhead expenses.
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            16
            -
 Index
  **Collaborative
        Arrangements**
  We
        have
        entered into and plan to continue to enter into collaborations with established
        pharmaceutical or pharmaceutical services companies to develop, commercialize
        and/or manufacture our product candidates. Our existing collaborations are
        described below.
  ***GlaxoSmithKline
        (GSK)***
  In
        June
        2003, we signed an agreement with GSK for the development and commercialization
        of proprietary combinations of a triptan (5-HT 1B/1D agonist)
        and a long-acting NSAID. The combinations covered by the agreement are among
        the
        combinations of MT 400. Under the terms of the agreement, GSK has exclusive
        rights in the U.S. to commercialize all combinations which combine GSK’s
        triptans, including Imitrex ® (sumatriptan succinate) or Amerge ® (naratriptan hydrochloride), with a long-acting NSAID. We are responsible
        for
        development of the first combination product, while GSK is to provide
        formulation development and manufacturing. GSK has proposed Trexima as the
        brand
        name of the combination of sumatriptan succinate, formulated with GSK’s RT
        Technology TM ,
        and
        naproxen sodium in a single tablet, being developed under the agreement.
        Pursuant to the terms of the agreement, we received $25.0 million in initial
        payments from GSK following termination of the waiting period under the
        Hart-Scott-Rodino notification program and the issuance of a specified patent.
        In May 2004, we received a $15.0 million milestone payment as a result of
        our
        commencement of Phase 3 clinical trial activities. In October 2005, we received
        a $20.0 million milestone payment upon the FDA’s acceptance for review of the
        Trexima NDA. Additionally, GSK is obligated to make payments to us in an
        aggregate amount of up to $20.0 million upon FDA approval of the Trexima
        NDA and
        upon notification of intent to commercialize Trexima. In addition, GSK will
        pay
        us two sales performance milestones totaling $80.0 million if certain sales
        thresholds are achieved. Up to an additional $10.0 million per product is
        payable upon achievement of milestones relating to other products. GSK will
        also
        pay us royalties on all net sales of marketed products until at least the
        expiration of the last to expire issued applicable patent (August 14, 2017
        based
        upon the scheduled expiration of currently issued patents). GSK may reduce,
        but
        not eliminate, the royalty payable to us if generic competitors attain a
        pre-determined share of the market for the product, or if GSK owes a royalty
        to
        one or more third parties for rights it licenses from such third parties
        to
        commercialize the product. The agreement terminates on the date of expiration
        of
        all royalty obligations unless earlier terminated by either party for a material
        breach or by GSK at any time upon ninety (90) days’ written notice to us for any
        reason or no reason. Among the contract breaches that would entitle us to
        terminate the agreement is GSK’s determination not to further develop the
        combination product under certain circumstances. GSK has the right, but not
        the
        obligation, to bring, at its own expense, an action for infringement of certain
        patents by third parties. If GSK does not bring any such action within a
        certain
        time frame, we have the right, at our own expense, to bring the appropriate
        action. With regard to certain other patent infringements, we have the sole
        right to bring an action against the infringing third party. Each party
        generally has the duty to indemnify the other for damages arising from breaches
        of each party’s representations, warranties and obligations under the agreement,
        as well as for gross negligence or intentional misconduct. We also have a
        duty
        to indemnify GSK for damages arising from our development and manufacture
        of MT
        400 prior to the effective date of the agreement, and each party must indemnify
        the other for damages arising from the development and manufacture of any
        combination product after the effective date.
  ***AstraZeneca
        AB (AstraZeneca)***
  In
        August
        2006, we entered into a collaboration and license agreement with AstraZeneca,
        a
        Swedish corporation, regarding the development and commercialization
        of **** proprietary
        fixed dose combinations of the proton pump inhibitor (PPI) esomeprazole
        magnesium with the NSAID naproxen, in a single tablet for the management
        of pain
        and inflammation associated with conditions such as osteoarthritis and
        rheumatoid arthritis in patients who are at risk for developing NSAID associated
        gastric ulcers. Under the terms of the agreement, we granted to AstraZeneca
        an
        exclusive, fee-bearing license, in all countries of the world except Japan,
        under our patents and know-how relating to combinations of gastroprotective
        agents and NSAIDs (other than aspirin and its derivatives). AstraZeneca may,
        at
        no additional cost, elect to include Japan in the licensed territory within
        two
        years after the effective date of the agreement.
 
 Pursuant
        to the terms of the agreement, we received an upfront license fee of $40
        million
        from AstraZeneca following termination of the waiting period under the
        Hart-Scott-Rodino notification program. In addition, AstraZeneca has agreed
        to
        make milestone payments upon the achievement of certain development events
        and
        sales events. If all development milestones are achieved, total development
        milestone payments due us under the agreement will be $160 million. If all
        sales
        milestone events are achieved, total sales milestone payments due us under
        the
        agreement will be $175 million. We will also receive a royalty based on annual
        net sales by AstraZeneca, its affiliates or sublicensees under the agreement
        during the royalty term. The royalty rate varies based on the level of annual
        net sales of products made by AstraZeneca, its affiliates and sublicensees,
        with
        percentages ranging from the mid-single digits to the mid-teens. In addition,
        the agreement provides for certain reductions to the royalty rate based on
        qualified royalty payments to other third parties and loss of market share
        due
        to generic competition. Our right to receive royalties from AstraZeneca for
        the
        sale of such products expires on a country-by-country basis upon the later
        of
        (a) expiration of the last-to-expire of certain patent rights relating to
        such
        products in that country, and (b) ten years after the first commercial sale
        of
        such products in such country.
  -
            17
            -
 Index
  We
        retain
        responsibility for the development and filing of the New Drug Application
        (NDA)
        for the product in the U.S. AstraZeneca is responsible for all development
        activities outside the U.S., as well as for all manufacturing, marketing,
        sales
        and distribution activities worldwide. We have agreed to bear all expenses
        related to certain specified U.S. development activities. All other development
        expenses, including all manufacturing-related expenses, will be paid by
        AstraZeneca. The agreement establishes joint committees with representation
        of
        both us and AstraZeneca to manage the development and commercialization of
        the
        product. The committees will operate by consensus, but if consensus cannot
        be
        reached, we generally will have the deciding vote with respect to development
        activities required for marketing approval of the product in the U.S. and
        AstraZeneca generally will have the deciding vote with respect to any other
        matters.
 
 The
        agreement, unless earlier terminated, shall expire upon the payment of all
        applicable royalties for the products commercialized under the agreement.
        Either
        party has the right to terminate the agreement by notice in writing to the
        other
        party upon or after any material breach of the agreement by the other party,
        if
        the other party has not cured the breach within 90 days after written notice
        to
        cure has been given, with certain exceptions. The parties also can terminate
        the
        agreement for cause under certain defined conditions. In addition, AstraZeneca
        can terminate the agreement at will, for any reason or no reason, in its
        entirety or with respect to countries outside the U.S., upon 90 days’ notice. If
        terminated at will, AstraZeneca will owe us a specified termination payment
        or,
        if termination occurs after the product is launched, AstraZeneca may, at
        its
        option, under
        and
        subject to the satisfaction of conditions specified in the agreement **,** elect
        to
        transfer the product and all rights to us.
  ***Nycomed
        Danmark ApS (Nycomed)***
  *Lornoxicam*
  In
        May
        2003, we entered into a development, option and license agreement with Nycomed
        pursuant to which we obtained an exclusive license to certain development
        rights
        during the option period and an exclusive option to license certain rights
        to
        develop, manufacture and commercialize products containing lornoxicam. In
        July
        2005, we exercised the option and were granted an exclusive license, with
        the
        right to sublicense, develop, manufacture and commercialize single-entity
        products and combination products containing lornoxicam in the U.S. (and
        its
        territories) and Canada (the Exclusive Territory). We were granted a
        non-exclusive license to develop and commercialize combination products
        containing lornoxicam in Belgium, Germany, Greece, France, Ireland, Luxembourg,
        The Netherlands, Austria, Finland, Denmark, United Kingdom, Sweden, Armenia,
        Azerbaijan, Belarus, Estonia, Georgia, Iceland, Kazakhstan, Kyrgyzstan, Latvia,
        Liechtenstein, Lithuania, Moldova, Norway, Russia, Switzerland, Tajikistan,
        Turkmenistan, Ukraine and Uzbekistan (the Limited Territory). We were granted
        a
        non-exclusive license to manufacture single-entity and combination products
        containing lornoxicam outside of the Exclusive Territory, excluding certain
        countries. We granted Nycomed a right of first refusal with respect to the
        development, manufacturing and commercialization, in Iceland, Denmark, Norway,
        Finland, Sweden, Lithuania, Latvia, Estonia, Azerbaijan, Armenia, Belarus,
        Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan,
        Uzbekistan and Ukraine, of certain combination lornoxicam products that we
        may
        develop under the agreement.
  Pursuant
        to the agreement, we paid Nycomed a total of $500,000 for upfront and milestone
        payments during the option period. We paid Nycomed a non-refundable $500,000
        payment in August 2005 to exercise our option under the agreement. We will
        be
        obligated to pay additional milestone payments in an aggregate amount of
        up to
        $500,000 upon the occurrence of certain regulatory approvals. In addition,
        we
        will be obligated to pay Nycomed specified single digit royalties on all
        net
        sales of any licensed single-entity or combination lornoxicam products, with
        the
        amount of such royalties for single-entity lornoxicam products subject to
        reduction upon the occurrences of certain specified events. The obligation
        to
        pay such royalties expires on a product-by-product and country-by-country
        basis
        ten (10) years from the first commercial sale of a product in a given country.
        We are also obligated to pay Nycomed a specified single digit percentage
        of any
        upfront and milestone payments we may receive from our sublicensees up to
        a
        preset maximum amount per sub-licensee.
  As
        a part
        of the agreement, Nycomed will supply us with all of our required clinical
        supply of active drug substance, and may also supply some clinical trial
        materials under certain conditions. Under the agreement, subject to Nycomed's
        ability to meet a specified percentage of our and each of our sublicensee's
        requirements, we and each of our sublicensees (each, a buyer) must purchase
        all
        of their required commercial supply of active drug substance from Nycomed
        for a
        minimum of five years. For each buyer, this exclusive 5-year purchase commitment
        for each of the Exclusive Territory and the Limited Territory begins with
        the
        buyer's first commercial sale of its first licensed lornoxicam product in
        a
        particular specified country within the Exclusive Territory and the Limited
        Territory, respectively, as applicable.
  -
            18
            -
 Index
  Each
        party generally has the duty to indemnify the other for damages arising from
        each party’s breach of its representations, warranties and obligations under the
        agreement, as well as for gross negligence or willful misconduct. In addition,
        we must indemnify Nycomed for any claim brought by a third party arising
        from
        our development, testing, manufacture or sale of any licensed product. Further,
        each party has a duty to maintain commercially reasonable insurance coverage
        commensurate with its obligations under the agreement. Nycomed has the right,
        but not the obligation, to bring, at its own expense, an action for infringement
        of certain patents by third parties. If Nycomed does not bring any such action
        within a certain time frame, we have the right, but not the obligation, at
        our
        own expense, to bring the appropriate action. The agreement terminates upon
        the
        date of expiration of all royalty obligations unless terminated earlier by
        either party for material breach or upon the bankruptcy, insolvency or
        dissolution of either party, or by us if we determine in good faith that
        it is
        not commercially or scientifically feasible to continue development and
        commercialization efforts with respect to products using the licensed
        technology. Nycomed also may terminate the agreement if we or any sublicensee
        initiates a lawsuit challenging the validity of any licensed
        patent.
 
 *MT
        100*
 
 In
        June
        2003, we signed a license agreement with Nycomed for the commercialization
        of MT
        100 in four Nordic countries and received an initial license fee of $500,000.
        As
        a result of our decision to discontinue development of MT 100 in the U.S.
        and to
        re-evaluate our MT 100 European strategy, we terminated this agreement and
        the
        related supply agreement with Nycomed in September 2005 pursuant to the terms
        of
        a termination agreement. The termination agreement provided for the immediate
        termination of the license and supply agreements and all rights and obligations
        of the parties under those agreements, subject to the survival of certain
        specified provisions, including under the license agreement, those related
        to
        confidentiality and indemnification obligations, ownership rights, and
        limitation of warranty and liability, and under the supply agreement, those
        related to confidentiality obligations. Subject to these surviving provisions
        and the parties’ obligations under the termination agreement, the parties also
        agreed to mutually release each other from any and all present and future
        claims
        resulting from events existing as of the date of the termination agreement.
        As
        consideration for Nycomed’s consent to enter into the termination agreement and
        the mutual release, we paid Nycomed $250,000.
  ***Valeant
        Pharmaceuticals North American (Valeant NA) (formerly Xcel Pharmaceuticals
        Inc.)***
  In
        September 2003, we signed an agreement with Valeant NA for the further
        development and commercialization of MT 300. In March 2005, Valeant
        Pharmaceuticals International (Valeant International) acquired Valeant NA.
        Under
        the terms of the agreement, Valeant NA would have exclusive rights in the
        United
        States to commercialize MT 300 subject to certain minimum commercialization
        obligations. Pursuant to the terms of the agreement, Valeant NA paid us an
        upfront fee of $2.0 million. Upon certain future regulatory approvals, including
        the FDA’s approvals relating to MT 300, and the achievement of a predetermined
        sales threshold on MT 300, potential milestone payments of up to $8.0 million
        would be due. Valeant NA is also obligated to pay us royalties on all combined
        net sales of MT 300 and Valeant NA’s D.H.E. 45 ® (dihydroergotamine mesylate) Injection, upon commercialization of MT 300,
        until
        at least the expiration of the last to expire issued applicable patent (2020,
        based upon the scheduled expiration of the last to expire currently issued
        applicable patent), subject to reduction in certain instances of generic
        competition, or in the event that Valeant NA pays royalties to one or more
        third
        parties to license rights from such third parties to commercialize MT 300.
        The
        agreement terminates on the date of expiration of all royalty obligations
        (2020,
        based upon the scheduled expiration of the last to expire currently issued
        applicable patent) unless earlier terminated by either party for a material
        breach or in the event that either party determines not to pursue approval
        of MT
        300, under the conditions described below. Under certain circumstances, the
        agreement provides for the terminating party to facilitate the assumption
        of its
        responsibilities by the non-terminating party. Generally, each party must
        indemnify the other for damages arising from such party’s breach of its
        representations, warranties and obligations under the agreement, as well
        as for
        the gross negligence or willful misconduct by either party. Additionally,
        Valeant NA must indemnify us for damages arising from the development,
        manufacture or use of any product after the effective date of the agreement,
        while we must indemnify Valeant NA for any damages arising from such
        development, manufacture or use prior to the effective date. We must also
        indemnify Valeant NA for any use by us or any sub licensee of certain technology
        owned by Valeant NA.
  -
            19
            -
 Index
  Under
        the
        agreement, if we determine that additional studies or data that are required
        by
        the FDA for approval of the NDA for MT 300 would jeopardize the commercial
        viability of MT 300 or exceed our financial resources available for MT 300,
        we
        may elect to withdraw the NDA. If we notify Valeant of this situation and
        Valeant NA does not assume control of efforts to seek approval of the NDA,
        then,
        under the conditions outlined in the agreement, upon notice from Valeant
        NA the
        agreement will terminate and we would be required to pay Valeant NA a withdrawal
        fee of $1.0 million. If Valeant decides to assume development, it would be
        credited $1.0 million in development expense. Based upon our understandings
        from
        our most recent communications with the FDA and our understanding of the
        FDA’s
        current standards for approval of migraine drugs, we believe it is not possible
        to reverse the not approvable status of the NDA for MT 300 and we have begun
        discussions regarding termination of our commercialization agreement with
        Valeant NA. In July 2005, we received a letter from Valeant NA seeking payment
        of the $1.0 million withdrawal fee. We do not believe that the withdrawal
        fee is
        payable based on our receipt of a not-approvable letter from the FDA with
        respect to our NDA for MT 300. The agreement requires that unresolved disputes
        by the parties be referred to the respective chief executive officers for
        resolution. If still unresolved, the agreement provides for binding arbitration.
        Valeant NA has disputed our conclusion that the withdrawal fee is not payable
        and has indicated its intention to pursue the dispute resolution provisions
        provided for in the agreement. We intend to vigorously defend our position
        under
        the agreement. At this time, it is not possible to determine if any withdrawal
        fee will be required to be paid to Valeant NA upon the ultimate resolution
        of
        this dispute.
  Based
        upon the delays related to commercialization of MT 300 due to our receipt
        of the
        not-approvable letter for MT 300 and our efforts to address with the FDA
        the
        issues raised in that letter, we and Valeant NA had previously agreed to
        extend
        the time for certain activities under our agreement with Valeant NA that
        are
        dependent on the FDA’s actions with respect to MT 300. In the event of
        termination of the agreement, these obligations will not be relevant.
  We
        can
        give no assurance that Valeant NA or Valeant International will agree to
        termination terms acceptable to us or that we will not be required to pay
        Valeant NA the withdrawal fee of $1.0 million described above.
  **Critical
        Accounting Policies and Estimates**
  Management
        makes certain judgments and uses certain estimates and assumptions when applying
        accounting principles generally accepted in the United States in the preparation
        of our financial statements. The development and selection of the critical
        accounting policies, and the related disclosure about these policies, have
        been
        reviewed by the audit committee of our board of directors. We evaluate our
        estimates and judgments on an ongoing basis and base our estimates on historical
        experience and on assumptions that we believe to be reasonable under the
        circumstances. Our experience and assumptions form the basis for our judgments
        about the carrying value of assets and liabilities that are not readily apparent
        from other sources. Actual results may vary from what we anticipate and
        different assumptions or estimates about the future could change our reported
        results. We have a discussion below of four critical accounting estimates:
        revenue recognition, accrued expenses, stock-based compensation and income
        taxes.
  *Revenue
        Recognition*
  Our
        licensing and other collaborative agreements have terms that include up-front
        payments upon contract signing, additional payments if and when certain
        milestones in the product’s development are reached, royalty payments based on
        future product sales and withdrawal fees if certain conditions are met. We
        recognize revenue under these agreements in accordance with SEC Staff Accounting
        Bulletin 101, “Revenue Recognition” as amended by SAB 104, “Revenue Recognition”
(“SAB 101”), and Emerging Issues Task Force 00-21 (“EITF 00-21”), “Revenue
        Arrangements with Multiple Deliverables.”
  Under
        SAB
        101 recognition of revenue from non-refundable up-front payments is deferred
        by
        us upon receipt and recognized over the period ending on the anticipated
        dates
        of regulatory approvals, as specified in the agreements relating to the product
        candidates. If regulatory approvals or other events relating to our product
        candidates are accelerated, delayed or not ultimately obtained, then the
        amortization of revenues for these products would prospectively be accelerated
        or reduced accordingly.
  We
        recognize milestone payments as revenue upon the achievement of specified
        milestones if (i) the milestone is substantive in nature and the achievement
        of
        the milestone was not reasonably assured at the inception of the agreement
        and
        (ii) the fees are non-refundable. Any milestone payments received prior to
        satisfying these revenue recognition criteria will be recorded as deferred
        revenue and only recognized as revenue when both criteria are met.
  Additionally,
        our licensing agreements may include payment for services provided by us
        on an
        hourly rate and direct expenses. We record such revenue in accordance with
        the
        agreements which would generally be based upon time spent and materials used
        on
        the project and the direct costs and certain personnel-related expense incurred
        in performing additional development activities described within the agreement.
  -
            20
            -
 Index
  We
        have
        not previously received royalty revenue but we anticipate such revenue will
        be
        recognized related to the manufacture, sale or use of our products or
        technology. For those arrangements where royalties are reasonably estimable,
        we
        will recognize revenue based on estimates of royalties earned during the
        applicable period and adjust for differences between the estimated and actual
        royalties in the following period.
  Management
        believes that its current assumptions and other considerations used to estimate
        the periods for revenue recognition described above are appropriate, and
        historical changes in our estimates of these periods have not resulted in
        material changes in the revenue we recognized. However, we continually review
        these estimates, which could result in a change in the deferral period and
        might
        impact the timing and amount of revenue recognition. Further, if regulatory
        approval of Trexima is accelerated, delayed or not ultimately obtained, then
        the
        amortization of revenues for this product would prospectively be accelerated
        or
        reduced accordingly. For example, as a result of our receipt in June 2006
        of an
        approvable letter from the FDA related to our Trexima NDA, we have extended
        the
        amortization period for completion of our obligations under our Trexima
        collaboration agreement with GSK.
  As
        of
        September 30, 2006, we had deferred $42.6 million of revenue, of which $1.0
        million is refundable under certain termination or cancellation provisions
        within our licensing agreements. We recognized revenue related to our
        collaborations of $6.5 million for the nine month period ended September
        30,
        2006, $28.6 million for the fiscal year ended December 31, 2005, $23.1 million
        for the fiscal year ended December 31, 2004 and $3.7 million for the fiscal
        year
        ended December 31, 2003.
  *Accrued
        expenses, including contracted costs*
  Significant
        management judgments and estimates must be made and used in connection with
        accrued expenses, including those related to contract costs, such as costs
        associated with our clinical trials. Specifically, our management must make
        estimates of costs incurred to date but not yet invoiced in relation to
        contracted, external costs. Management analyzes the progress of product
        development, clinical trial and toxicology and related activities, invoices
        received and budgeted costs when evaluating the adequacy of the accrued
        liability for these related costs. Material differences in the amount and
        timing
        of the accrued liability for any period may result if management made different
        judgments or utilized different estimates.
  Management
        believes that its current assumptions and other considerations used to estimate
        accrued expenses for the period are appropriate. However, determining the
        date
        on which certain contract services commence, the level of services performed
        on
        or before a given date and the cost of such services involves subjective
        judgments and often must be based upon information provided by third parties.
        In
        the event that we do not identify certain contract costs which have begun
        to be
        incurred or we under- or over-estimate the level of services performed or
        the
        costs of such services, our reported accrued expenses for such period would
        be
        too low or too high, as the case may be.
  We
        recognized accrued costs related to product development and operating
        activities, including clinical trials, based upon the progress of these
        activities covered by the related contracts, invoices received and estimated
        costs, of $1.0 million for the fiscal year ended December 31, 2005, $1.4
        million
        for the fiscal year ended December 31, 2004 and $0.8 million for the fiscal
        year
        ended December 31, 2003. The variance, at each of these ending periods, between
        the actual expenses incurred and the expenses accrued has been less than
        $125,000.
  *Stock-Based
        Compensation*
  On
        January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”)
        No. 123(R), “Share-Based Payment,” which requires us to account for share-based
        payment transactions using a fair value-based method and recognize the related
        expense in our results of operations. Prior to our adoption of SFAS No. 123(R),
        as permitted by SFAS No. 123, we accounted for share-based payments to employees
        using the Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for
        Stock Issued to Employees,” intrinsic value method. Therefore, prior to January
        1, 2006 we generally recognized compensation expense for restricted stock
        awards
        and did not recognize compensation cost for employee stock options, as all
        such
        options had an exercise price equal to the market value of the underlying
        common
        stock on the date of the grant. SFAS No. 123(R) allows companies to choose
        one
        of two transition methods: the modified prospective transition method or
        the
        modified retrospective transition method. We chose to use the modified
        prospective transition methodology. Under this transition method, our
        compensation cost recognized includes compensation costs for all share-based
        payments granted prior to, but not yet vested as of, January 1, 2006 based
        on
        the grant date fair value estimated in accordance with the original provisions
        of SFAS No. 123, and compensation cost for all share-based payments granted
        subsequent to January 1, 2006 based on the grant date fair value estimated
        in
        accordance with the provisions of SFAS No. 123(R). Accordingly, we have not
        restated our financial results for prior periods.
  -
            21
            -
 Index
  Under
        the
        fair value recognition provisions of SFAS No. 123(R), stock-based compensation
        cost is estimated at the grant date based on the fair value of the award
        and is
        recognized as expense over the requisite service period of the award. The
        fair
        value of restricted stock awards is determined by reference to the fair market
        value of our common stock on the date of grant. Consistent with the valuation
        method we used for disclosure-only purposes under the provisions of SFAS
        No.
        123, we use the Black-Scholes model to value service condition and performance
        condition option awards under SFAS No. 123(R). For awards with only service
        conditions and graded-vesting features, we recognize compensation cost on
        a
        straight-line basis over the requisite service period. For awards with
        performance or market conditions granted subsequent to our adoption of SFAS
        No.
        123(R), we intend to recognize compensation cost over the expected period
        to
        achieve the performance or market condition.
  Determining
        the appropriate fair value model and related assumptions requires judgment,
        including estimating stock price volatility, forfeiture rates, and expected
        terms. The expected volatility rate was estimated based on an equal weighting
        of
        the historical volatility of our common stock over a six year period. The
        expected term was estimated based on a simplified method as allowed under
        SEC
        Staff Accounting Bulletin No. 107 averaging the vesting term and original
        contractual term. The risk-free interest rate for periods within the contractual
        life of the option is based on seven year U.S. Treasury securities. The
        pre-vesting forfeiture rate used for the nine months ended September 30,
        2006 was based on historical rates.
  Determining
        the appropriate amount to expense for performance-based awards based on the
        achievement of stated goals requires judgment, including forecasting future
        performance results. The estimate of expense is revised periodically based
        on
        the probability of achieving the required performance targets and adjustments
        are made as appropriate. The cumulative impact of any revisions is reflected
        in
        the period of change. If any applicable financial performance goals are not
        met,
        no compensation cost is recognized and any previously recognized compensation
        cost is reversed.
  *Income
        Taxes*
  We
        record
        deferred tax assets and liabilities based on the net tax effects of tax credits,
        operating loss carry-forwards and temporary differences between the carrying
        amounts of assets and liabilities for financial reporting purposes and the
        amounts used for income tax purposes. We then assess the likelihood that
        our
        deferred tax assets will be recovered from future taxable income and, to
        the
        extent we believe that recovery is not likely, we establish an annual valuation
        allowance. We have not recorded any tax provision or benefit for the years
        ended
        December 31, 2005, 2004, or 2003 and have provided a valuation allowance
        for the
        full amount of our net deferred tax assets. If results of operations in the
        future indicate that some or all of the deferred tax assets will be recovered,
        the reduction of the valuation allowance will be recorded as a tax benefit
        during one or more periods. Until we record a tax provision or benefit based
        upon anticipated utilization of the prior operating loss carry-forwards,
        no
        estimate of the effect of a change in our estimated effective tax rate will
        be
        made.
  **Results
        of Operations**
  ***Three
        months ended September 30, 2006 compared to the three months ended September
        30,
        2005***
  *Net
        loss per share* :
        Net
        loss attributable to common stockholders for the quarter ended September
        30,
        2006 was $(4.1) million or $(0.14) per share as compared to a net loss of
        $(4.7)
        million, or $(0.16) per share, for the quarter ended September 30, 2005.
        The net
        loss for the quarter ended September 30, 2006 included a $1.5 million or
        ($0.05)
        per share charge for non-cash stock-based compensation expenses resulting
        from
        our adoption of SFAS No. 123(R) on January 1, 2006.
  *Revenue* :
        We
        recognized $3.4 million of revenue for the quarter ended September 30, 2006
        as
        compared to $2.4 million for the quarter ended September 30, 2005. The increase
        in revenue was primarily due to the amortization of upfront payments we received
        and other revenue from development activities we completed in the period
        pursuant to our development and commercialization agreement with AstraZeneca.
        Our licensing and collaboration agreements have terms that include upfront
        payments upon contract signing and additional payments if and when certain
        milestones in the product development or related milestones are achieved.
        All
        upfront payments were deferred and the non-refundable portions are being
        amortized over the periods ending on the anticipated dates of regulatory
        approvals, as specified in the agreements relating to the product
        candidates , or
        the
        conclusion of any obligation on our part. Approximately $42.6 million remains
        in
        deferred revenue at September 30, 2006. Substantive milestone payments are
        recognized as revenue upon completion of the contractual events.
  -
            22
            -
 Index
  *Research
        and development* :
        Research and development total expenses decreased by $0.6 million to $4.3
        million for the quarter ended September 30, 2006, as compared to the same
        period
        of 2005. The decrease was due primarily to a decrease in direct development
        costs for Trexima and the lornoxicam program, partially offset by an increase
        in
        direct development costs for the PN program, as compared to the same period
        of
        2005. Direct development costs for Trexima decreased by $1.2 million to $0.1
        million, primarily due to the completion of Phase 3 clinical trial activities
        and regulatory fees incurred for submission of the NDA to the FDA during
        2005 as
        compared to the same period of 2006. Direct development costs for lornoxicam
        decreased by $0.7 million primarily due to a $500,000 payment to Nycomed
        for
        exercise of the lornoxicam option in 2005 as compared to the same period
        of
        2006. Direct development costs for the PN program increased by $1.2 million
        to
        $2.2 million, primarily due to Phase 3 clinical trial activities during the
        third quarter of 2006, as compared to the same period of 2005. Direct
        development costs for the PA program were $0.1 million during the third quarter
        of 2006, as compared to $0.2 million during the same period of 2005. Research
        and development departmental expenses increased by $0.3 million as compared
        to the same period of 2005, primarily due to a $0.2 million increase
        in non-cash compensation charges for stock option expense resulting from
        our
        adoption of SFAS No. 123(R) on January 1, 2006 and bonus payments made to
        certain company employees in recognition of their efforts in connection with
        the
        AstraZeneca licensing agreement. We have included in our research and
        development total expenses the departmental personnel costs associated with
        our
        research and development activities and direct costs associated with
        pharmaceutical development, clinical trials, toxicology activities, and
        regulatory matters.
 
 *General
        and administrative* :
        General
        and administrative expenses increased by $1.2 million to $3.7 million for
        the
        third quarter of 2006, as compared to the same period of 2005. The increase
        was
        due primarily to a $0.7 million increase in non-cash compensation charge
        for
        stock option expense resulting from our adoption of SFAS No. 123(R) on January
        1, 2006. Cost associated with our business development activities increased
        by
        $0.5 million to $1.1 million, primarily due to increased legal expenses and
        other consulting expenses related to our licensing activities and bonus payments
        made to certain company employees in recognition of their efforts in connection
        with the AstraZeneca licensing agreement. Costs associated with our public
        company activities decreased by $0.3 million primarily due to a decrease
        in the
        cost of directors’ and officers’ liability insurance, as compared to the same
        period of 2005. General and administrative expenses consisted primarily of
        the
        costs of administrative personnel, facility infrastructure, business development
        expenses and public company activities.
 
 *Other
        income* :
        Interest income was $0.3 and $0.1 million for the quarters ended September
        30,
        2006 and $0.4 million for 2005, respectively. Investment income from bond
        amortization for the period ended September 30, 2006 totaled $0.1 million
        as
        compared to $0.2 million during the same period of 2005.
  ***Nine
        months ended September 30, 2006 compared to the nine months ended September
        30,
        2005***
  *Net
        income (loss) per share* :
        Net
        loss attributable to common stockholders for the nine months ended September
        30,
        2006 was $(18.9) million, or $(0.65) per share, as compared to a net loss
        of
        $(14.2) million, or $(0.49) per share, for the same period of 2005. The net
        loss
        for the period ended September 30, 2006 included $4.7 million, or $(0.15)
        per
        share, charge for non-cash stock-based compensation expenses resulting from
        our
        adoption of SFAS No. 123(R) on January 1, 2006.
  *Revenue* :
        We
        recognized $6.5 million of revenue for the nine months ended September 30,
        2006,
        as compared to $6.4 million for the same period of 2005. Revenue for the
        period
        included $2.6 million of amortization of upfront payments we received and
        other
        revenue from development activities we completed in the period pursuant to
        our
        development and commercialization agreement with AstraZeneca and amortization
        of
        other revenue from our collaboration agreement with GSK. In the second quarter
        of 2006, we extended the amortization period of the upfront payments we received
        pursuant to our development and commercialization agreement with GSK related
        to
        Trexima. Based upon our receipt in June 2006 of an approvable letter from
        the
        FDA related to our Trexima NDA, the remaining Trexima amortization period
        was
        extended to the end of the second quarter of 2007, which we believe represents
        our best estimate of the period required to conclude any obligations on our
        part
        under the agreement. Our licensing and collaboration agreements have terms
        that
        include upfront payments upon contract signing and additional payments if
        and
        when certain milestones in the product development or related milestones
        are
        achieved. All upfront payments were deferred and the non-refundable portions
        are
        being amortized over the periods ending on the anticipated dates of regulatory
        approvals, as specified in the agreements relating to the product
        candidates , or
        the
        conclusion of any obligation on our part. Approximately $42.6 million remains
        in
        deferred revenue at September 30, 2006. Substantive milestone payments are
        recognized as revenue upon completion of the contractual events.
  -
            23
            -
 Index
  *Research
        and development* :
        Research and development total expenses increased by $2.2 million to $16.4
        million for the nine months ended September 30, 2006, as compared to the
        same
        period of 2005. The increase was due primarily to a $1.2 million increase
        in
        non-cash compensation charges for stock option expense resulting from our
        adoption of SFAS No. 123(R) on January 1, 2006 and an increase in direct
        development costs for the lornoxicam and the PN programs, partially offset
        by a
        decrease in direct development costs for Trexima, as compared to the same
        period
        of 2005. Direct development costs for the lornoxicam program increased by
        $2.0
        million to $3.3 million, primarily due to Phase I/II clinical trial activities
        during the first half of 2006 as compared to the same period of 2005. Direct
        development costs for the PN program increased by $4.4 million to $6.5 million,
        primarily due to product development activities including the formulation
        and
        development of clinical trial materials and PN clinical trial activities
        during
        the period ended September 30, 2006, as compared to the same period of 2005.
        Direct development costs for the PA program were $0.2 million during the
        period
        ended September 30, 2006, as compared to $0.4 million during the same period
        of
        2005. Direct development costs for Trexima decreased by $5.1 million, primarily
        due to the completion of clinical trial activities for Trexima and the
        regulatory submission of the Trexima NDA to the FDA during 2005. Research
        and
        development departmental expenses increased by $1.4 million to $5.7 million
        as
        compared to the same period of 2005, primarily due to a $1.2 million increase
        in
        non-cash compensation charge for stock option expense resulting from our
        adoption of SFAS No. 123(R) on January 1, 2006. We have included in our research
        and development total expenses the personnel costs associated with our
        departmental research and development activities and direct costs associated
        with pharmaceutical development, clinical trials, toxicology activities,
        and
        regulatory matters.
 
 *General
        and administrative* :
        General
        and administrative expenses increased by $3.2 million to $10.4 million for
        the
        nine months ended September 30, 2006, as compared to the same period of 2005.
        The increase was due primarily to a $2.6 million increase in non-cash
        compensation charges for stock option expense resulting from our adoption
        of
        SFAS No. 123(R) on January 1, 2006. Costs associated with our business
        development activities increased by $0.9 million to $2.4 million, primarily
        due
        to increased legal expenses and other consulting expenses related to our
        licensing activities and bonus payments made to certain company employees
        in
        recognition of their efforts in connection with the AstraZeneca licensing
        agreement. General and administrative expenses consisted primarily of the
        costs
        of administrative personnel, facility infrastructure, business development
        expenses and public company activities.
 
 *Other
        income* :
        Interest income was $0.7 million and $0.4 million for the nine months ended
        September 30, 2006 and 2005, respectively. Investment income from bond
        amortization for the period ended September 30, 2006 totaled $0.6 million
        as
        compared to $0.4 million during the same period of 2005.
  **Income
        Taxes**
  As
        of
        December 31, 2005, we had net operating loss carry-forwards of approximately
        $96.3 million and $80.7 million for federal and state income tax purposes,
        respectively, which expire between 2011 and 2020. We also have research and
        development tax credit carry-forwards of approximately $8.7 million for federal
        income tax reporting purposes that expire between 2012 and 2020. We currently
        estimate net operating loss, for tax purposes, of approximately $19.2 million
        for the twelve months ending December 31, 2006 and we estimate an effective
        tax
        rate of 0% for the nine month period ended September 30, 2006 based upon
        financial results available at September 30, 2006. Our effective tax rate
        was 0%
        for the nine month period ended September 30, 2005. The estimated effective
        rate
        was based upon estimates of loss for the fiscal year and our ability to use
        remaining net operating loss carry-forwards and other tax credits. However,
        the
        actual effective rate may vary depending upon actual licensing fees and
        milestone payments received, specifically the pre-tax book income for the
        year,
        and other factors. Income taxes have been accounted for using the liability
        method in accordance with SFAS 109, “Accounting for Income Taxes.” Since our
        inception, we have incurred substantial losses and may incur substantial
        and
        recurring losses in future periods. The Tax Reform Act of 1986 (the “Act”)
        provides for a limitation on the annual use of net operating loss and research
        and development tax credit carry-forwards (following certain ownership changes,
        as defined by the Act) that could significantly limit our ability to utilize
        these carry-forwards. We have experienced various ownership changes, as defined
        by the Act, as a result of, among other reasons, past financings. Accordingly,
        our ability to utilize the aforementioned carry-forwards may be limited.
        Additionally, because U.S. tax laws limit the time during which these
        carry-forwards may be applied against future taxes, we may not be able to
        take
        full advantage of these carry-forwards for federal income tax purposes. In
        July
        2006, the FASB issued interpretation No. 48 “Accounting for Uncertainty in
        Income Taxes”, ("FIN 48"). FIN 48 clarifies SFAS No. 109 “Accounting for Income
        Taxes” by providing specific guidance in reporting uncertain income taxes
        recognized in a company’s financial statements, including consistent recognition
        threshold, classification, interest and penalties and disclosures. FIN No.
        48 is
        effective for us as of January 1, 2007. We have not yet determined the future
        impact of the adoption of FIN No. 48 on our financial position, results of
        operations or cash flows; however, there is no impact on our current financial
        statements.
  -
            24
            -
 Index
  **Liquidity
        and Capital Resources**
  Since
        our
        inception, we have financed our operations and internal growth primarily
        through
        private placements of preferred stock and our initial public offering, resulting
        in cash inflows of $133.9 million, and since 2003, from upfront and milestone
        payments from our collaborators, resulting in cash inflows of $103.3 million.
        At
        September 30, 2006, cash and cash equivalents, along with short-term
        investments, totaled $66.6 million, an increase of $20.8 million compared
        to
        December 31, 2005. The increase in cash was primarily due to our receipt
        of a
        $40 million upfront license fee payment in September 2006 pursuant to our
        global
        collaboration agreement with AstraZeneca. Our cash and cash equivalents are
        invested in money market funds that invest primarily in short-term, highly
        rated
        investments, including U.S. Government securities, commercial paper and
        certificates of deposit guaranteed by banks and short-term corporate fixed
        income obligations and U.S. Government agency obligations.
  During
        the nine month period ended September 30, 2006, we moved $25.0 million into
        a
        managed investment account designed to increase the return on our cash. This
        account, which is invested as described above, is managed within our Board
        approved investment policy, which restricts investments to maturities of
        less
        than twelve months, limits concentration to 5% or less and requires minimum
        credit ratings of A1/P1, among other requirements. Because certain holdings
        in
        the managed account have maturities longer than three months, we have classified
        these holdings as short-term investments in our balance sheet and accounting
        principles require reporting such investments at market value. Any difference
        in
        market value and cost is reported in the stockholder’s equity section of our
        financial statements as comprehensive income or loss.
  We
        received $40 million in operating cash during the nine month period ended
        September 30, 2006 pursuant to the terms of our collaboration agreement with
        AstraZeneca. In addition, we recorded a $1.6 million accounts receivable
        for
        invoiced development activities under the terms of the agreement. Cash received
        from financing activities during the period totaled $2.0 million reflecting
        net
        proceeds from the exercise of stock options.
  Based
        upon the direct method of presenting cash flow, cash used in operating
        activities totaled $20.0 million for the nine-month period ended September
        30,
        2006. The indirect method for presenting cash flow is used in the Statement
        of
        Cash Flows included in our financial statements. Cash used in operating
        activities was $27.4 million for the fiscal year ended December 31, 2005,
        $26.4
        million for the fiscal year ended December 31, 2004 and $18.4 million for
        the
        fiscal year ended December 31, 2003. Net cash provided by investing activities
        during the nine month period ended September 30, 2006 totaled $0.6 million,
        reflecting investing activities associated with the sale of short-term
        securities. Cash required for our operating activities during 2006 is projected
        to approximate our 2005 requirements. During the nine month period ended
        September 30, 2006 we recorded non-cash stock-based compensation expense
        of $4.7
        million as a result of adopting SFAS No. 123(R) on January 1, 2006. We also
        reclassified, from current liabilities to additional paid-in capital, $1.4
        million of prior year accrued compensation related to the expensing of
        restricted stock units and performance based options granted under the Trexima
        incentive program. This reclassification also resulted from our adoption
        of SFAS
        No. 123(R).
  As
        of
        September 30, 2006, we had $33.2 million in cash and cash equivalents and
        $33.5
        million in short-term investments. If our operating expenses for 2006 and
        2007
        remain at the level of our operating expenses in 2005, we believe that we
        will
        have sufficient cash reserves to maintain that level of business activities
        throughout 2007 provided that certain development expenses are paid by
        AstraZeneca, as outlined in the agreement.
  As
        part
        of our ongoing assessment of our business and liquidity needs, we regularly
        assess available funding options and will consider available funding
        opportunities as they arise. We may issue shares of common stock in the future,
        to fund additional development activities and increase our working capital.
        We
        have filed with the Securities and Exchange Commission (SEC), and the SEC
        has
        declared effective, a shelf registration statement on Form S-3 under which
        we
        may register up to 8,540,000 shares of our common stock for sale in one or
        more
        public offerings. Certain selling stockholders named in the prospectus for
        the
        registration statement may offer up to an aggregate of 540,000 of such shares,
        and we will not receive any of the proceeds from the sales of shares made
        by the
        selling stockholders. Any additional equity financing may be dilutive to
        stockholders, and debt financing, if available, may involve restrictive
        covenants.
  Our
        forecast of the period of time through which we expect that our financial
        resources will be adequate to support our operations is a forward-looking
        statement that involves risks and uncertainties, and actual results could
        vary
        as a result of a number of factors. Our future capital requirements will
        depend
        on many factors, including:
  ·
            the
                number and progress of our clinical trials and other trials and
                studies;  ·
            our
                success in obtaining, and any delays in obtaining, regulatory approval
                of
                our product candidates and success in, and manner of, commercializing
                our
                products;  -
            25
            -
 Index
  ·
            the
                success of our existing collaborations and our ability to establish
                additional collaborations;  ·
            the
                extent to which we acquire or invest in businesses, technologies
                or
                products;  ·
            costs
                incurred to enforce and defend our patent claims and other intellectual
                rights;  ·
            our
                ability to negotiate favorable terms with various contractors assisting
                in
                our trials and studies; and  ·
            costs
                incurred in the defense of the class action lawsuit that is pending
                against us and our president and chief executive officer relating
                to MT
                100 and MT 300.  **Item
        3. Quantitative and Qualitative Disclosures About Market
        Risk**
  The
        proceeds from our initial public offering and, private placements and revenue
        from our collaboration agreements have been invested, in accordance with
        our
        investment policy, in money market funds that invest primarily in short-term,
        highly-rated investments, including U.S. Government securities, commercial
        paper
        and certificates of deposit guaranteed by banks and short-term corporate
        fixed
        income obligations and U.S. Government and Government agency obligations.
        Under
        our current policies, we do not use interest rate derivative instruments
        to
        manage our exposure to interest rate changes. Because of the short-term
        maturities of our investments, we do not believe that a decrease in market
        rates
        would have a significant negative impact on the value of our investment
        portfolio.
  **Item
        4. Controls and Procedures**
  (a)
        Evaluation of Disclosure Controls and Procedures
  Our
        management, with the participation of our chief executive officer and chief
        financial officer, evaluated the effectiveness our disclosure controls and
        procedures as of the end of the period covered by this report. Based on that
        evaluation, our chief executive officer and chief financial officer concluded
        that our disclosure controls and procedures as of the end of the period covered
        by this report were designed and functioning effectively to provide reasonable
        assurance that the information required to be disclosed by us in reports
        filed
        under the Securities Exchange Act of 1934 is recorded, processed, summarized
        and
        reported within the time periods specified in the SEC’s rules and forms and
        accumulated and communicated to our management, including our chief executive
        officer and chief financial officer, as appropriate to allow timely decisions
        regarding disclosures. We believe that a controls system, no matter how well
        designed and operated, cannot provide absolute assurance that the objectives
        of
        the controls system are met, and no evaluation of controls can provide absolute
        assurance that all control issues and instances of fraud, if any, within
        a
        company have been detected.
  (b)
        Change in Internal Control over Financial Reporting
  No
        change
        in our internal control over financial reporting occurred during our most
        recent
        fiscal quarter that has materially affected, or is reasonably likely to
        materially affect, our internal control over financial reporting.
  **PART
        II. OTHER INFORMATION**
  **Item
        1. Legal Proceedings**
 
 Five
        purported class action lawsuits were filed during 2004 by holders of our
        securities against us and certain of our current and former officers, in
        the U.
        S. District Court for the Middle District of North Carolina, alleging violations
        of securities laws. These actions were filed as a single consolidated amended
        complaint on December 20, 2004. The amended complaint alleges, among other
        claims, violations of federal securities laws, including Section 10(b) of
        the
        Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule
        10b-5
        and Section 20(a) of the Exchange Act against us and Dr. John R. Plachetka,
        our
        chairman and chief executive officer, arising out of allegedly false and
        misleading statements made by us concerning our product candidates, MT 100
        and
        MT 300, during the class period. The amended complaint requests certification
        of
        a plaintiff class consisting of purchasers of our stock between October 4,
        2002
        and May 28, 2004. On January 27, 2005, we filed a motion to dismiss the amended
        complaint. On August 30, 2005, our motion to dismiss was denied and the case
        is
        now in the discovery phase. On March 27, 2006, a motion for class certification
        was filed. We filed our brief in opposition to class certification on June
        30,
        2006.
  We
        believe that the allegations in the class action lawsuit are without merit
        and
        intend to defend this action vigorously. While we cannot predict the outcome
        or
        reasonably estimate the range of potential loss, if any, from this litigation,
        it is the current judgment of management that it is unlikely that this
        litigation will have a material adverse effect on our results of operation
        or
        financial condition.
  -
            26
            -
 Index
  **Item
        1A. Risk Factors**
  Described
        below are various risks and uncertainties that may affect our business. These
        risks and uncertainties are not the only ones we face. You should recognize
        that
        other significant risks and uncertainties may arise in the future, which
        we
        cannot foresee at this time. Also, the risks that we now foresee might affect
        us
        to a greater or different degree than expected. Certain risks and uncertainties,
        including ones that we currently deem immaterial or that are similar to those
        faced by other companies in our industry or business in general, may also
        affect
        our business. If any of the risks described below actually occur, our business,
        financial condition or results of operations could be materially and adversely
        affected.
  ***Risks
        Related to Our Business***
  **We
        depend heavily on the success of our product candidates, which may never
        be
        approved for commercial use. If we are unable to develop, gain approval of
        or
        commercialize those product candidates, we will never receive revenues from
        the
        sale of our product candidates.**
  We
        anticipate that for the foreseeable future our ability to achieve profitability
        will be dependent on the successful development, approval and commercialization
        of our current product candidates. Many factors could negatively affect our
        ability to obtain regulatory approval for our product candidates. For example,
        in June 2006 we received an approvable letter relating to our NDA for Trexima,
        in which the FDA requested additional safety information on Trexima which
        will
        require some additional studies. We expect to submit a full response to the
        FDA’s approvable letter in the fourth quarter of 2006. However, there can be
        no
        guarantee that the FDA will approve our NDA based on the information contained
        in our response to the approvable letter, or at all. Further, we have decided
        to
        discontinue development of MT 100 in the U.S. and to explore the possibility
        of
        selling or otherwise disposing of the MT 100 asset, based upon the determination
        of an FDA Advisory Committee in August 2005. The FDA Advisory Committee
        determined, following our receipt of a not approvable letter from the FDA
        in
        2004 for our NDA for MT 100, that the potential, but unquantified, risk of
        tardive dyskinesia, an involuntary movement disorder associated with the
        use of
        metoclopramide, one of the components of MT 100, outweighed the benefits,
        as
        defined by the FDA, of metoclopramide hydrochloride in combination with naproxen
        sodium. Further, based upon our understandings from our recent communications
        with the FDA, in which the FDA restated its concerns that approval of MT
        300 was
        problematic due to the higher incidence of nausea at two hours following
        dosing
        in patients treated with MT 300 compared with placebo, we do not believe
        it is
        possible to reverse the not approvable status of MT 300 stated in the not
        approvable letter we received from the FDA in 2003. In addition to the inability
        to obtain regulatory approval, many other factors could negatively affect
        the
        success of our efforts to develop and commercialize our product candidates,
        including those discussed in the risk factors that follow as well as negative,
        inconclusive or otherwise unfavorable results from any studies or clinical
        trials, such as those that we obtained with respect to MT 500, which led
        to our
        decision to discontinue development of that product candidate in
        2002.
  **We
        have incurred losses since inception and we may continue to incur losses
        for the
        foreseeable future. We do not have a current source of product
        revenue.**
  We
        have
        incurred significant losses since our inception. As of September 30, 2006,
        we
        had an accumulated deficit of approximately $131.5 million. Our ability to
        receive product revenue from the sale of products is dependent on a number
        of
        factors, principally the development, regulatory approval and successful
        commercialization of our product candidates. We expect that the amount of
        our
        operating losses will fluctuate significantly from quarter to quarter
        principally as a result of increases and decreases in our development efforts
        and the timing of payments that we may receive from others. We expect to
        continue to incur significant operating losses and do not know when, if and
        to
        what extent we will generate product revenue.
  Our
        only
        current potential sources of revenue are the payments that we may receive
        pursuant to our collaboration agreements with GSK and AstraZeneca. Our remaining
        milestone payments under our collaboration agreement with GSK related to
        Trexima
        are payable upon FDA approval of and GSK’s intent to commercialize Trexima. As a
        result of our receipt in June 2006 of an approvable letter relating to our
        NDA
        for Trexima requesting certain additional safety information, we cannot
        guarantee when or if we will receive future payments under that agreement.
        Further, we may have to pay Valeant NA a $1.0 million withdrawal fee if we
        do
        not prevail in our current dispute with them as to whether the withdrawal
        fee is
        payable. This amount is currently reflected in our financial statements as
        deferred revenue and will never be recognized as revenue if repaid.
  -
            27
            -
 Index
  **Changes
        in regulatory approval policy or statutory or regulatory requirements, or
        in the
        regulatory environment, during the development period of any of our product
        candidates may result in delays in the approval, or rejection, of the
        application for approval of one or more of our product candidates. If we
        fail to
        obtain approval, or are delayed in obtaining approval, of our product
        candidates, our ability to generate revenue will be severely
        impaired.**
  The
        process of drug development and regulatory approval for product candidates
        takes
        many years, during which time the FDA’s interpretations of the standards against
        which drugs are judged for approval may evolve or change. The FDA can also
        change its approval policies based upon changes in laws and regulations.
        In
        addition, it can decide, based on its then current approval policies, any
        changes in those policies and its broad discretion in the approval process,
        to
        weigh the benefits and the risks of every drug candidate. As a result of
        any of
        the foregoing, the FDA may decide that the data we submit in support of an
        application for approval of a drug candidate are insufficient for approval.
        Further, changes in policy or interpretation may not be the subject of published
        guidelines and may therefore be difficult to evaluate. For example, the FDA
        has
        not recently published guidelines for the approval of new migraine therapies,
        and we have had to rely on periodic guidance from the FDA obtained in
        conversations and other meetings, the content of which may be subject to
        significant modification over the period of a drug’s development program. There
        is also the risk that we and the FDA may interpret such guidance
        differently.
  Further,
        additional information about the potential risks of marketed drugs may affect
        the regulatory approval environment, or the FDA’s approval policies, for new
        product candidates. For example, in February 2005 an advisory committee convened
        by the FDA met to address the potential cardiovascular risks of COX-2 selective
        NSAIDs and related drugs in response to disclosures made about possible adverse
        effects from the use of some of these drugs. On April 7, 2005 the FDA issued
        a
        Public Health Advisory (Advisory) based, in part, upon the recommendations
        of
        the advisory committee. The Advisory stated that it would require that
        manufacturers of all prescription products containing NSAIDs provide warnings
        regarding the potential for adverse cardiovascular events as well as
        life-threatening gastrointestinal events associated with the use of NSAIDs.
        Moreover, subsequent to the FDA advisory committee meeting in February 2005,
        the
        FDA has indicated that long-term studies evaluating cardiovascular risk will
        be
        required for approval of new NSAID products that may be used on an intermittent
        or chronic basis. For example, we believe that long-term cardiovascular safety
        studies will be required for NDA approval of our oral lornoxicam product
        candidate. We do not know to what extent the FDA’s actions may otherwise
        adversely affect or delay the approvability of our product candidates which
        contain NSAIDs.
  **If
        we, or our current or future collaborators, do not obtain and maintain required
        regulatory approvals for one or more of our product candidates, we will be
        unable to commercialize those product candidates. Further, if we are delayed
        in
        obtaining or unable to obtain, any required approvals, our collaborators
        may be
        entitled to terminate their agreements with us or reduce or eliminate their
        payments to us under these agreements or we may be required to pay termination
        payments under these agreements.**
  Our
        product candidates under development are subject to extensive domestic and
        foreign regulation. The FDA regulates, among other things, the development,
        testing, manufacture, safety, efficacy, record keeping, labeling, storage,
        approval, advertisement, promotion, sale and distribution of pharmaceutical
        products in the United States. In order to market our products abroad, we
        must
        comply with extensive regulation by foreign governments. If we are unable
        to
        obtain and maintain FDA and foreign government approvals for our product
        candidates, we, alone or through our collaborators, will not be permitted
        to
        sell them. Failure to obtain regulatory approval for a product candidate
        will
        prevent us from commercializing that product candidate. None of our product
        candidates have been approved for sale in the U.S. or any foreign market
        (except
        for MT 100, which has been approved for sale in the UK) and they may never
        be
        approved. For example, in June 2006, we received an approvable letter relating
        to our NDA for Trexima, in which the FDA requested additional safety information
        on Trexima thereby delaying regulatory approval, and any subsequent commercial
        sales, if at all. We also previously received not-approvable letters from
        the
        FDA relating to our NDAs for MT 100 and MT 300.
  In
        the
        U.S., a separate NDA or supplement must be filed with respect to each indication
        for which marketing approval of a product is sought. Each NDA, in turn, requires
        the successful completion of preclinical, toxicology, genotoxicity and
        carcinogenicity studies, as well as clinical trials demonstrating the safety
        and
        efficacy of the product for that particular indication. We may not receive
        regulatory approval of any of the NDAs that we file with the FDA or of any
        approval applications we may seek in the future outside the U.S.
  -
            28
            -
 Index
  Further,
        our current or future collaboration agreements may terminate, or require
        us to
        make certain payments to our collaborators, or our collaborators may have
        the
        right to terminate their agreements with us or reduce or eliminate their
        payments to us under these agreements, based on our inability to obtain,
        or
        delays in obtaining, regulatory approval for our product candidates. For
        example, under our PN collaboration agreement with AstraZeneca, AstraZeneca
        has
        the right to terminate the agreement if certain delays occur or specified
        development and regulatory objectives are not met. Further, under our MT
        300
        collaboration agreement with Valeant NA, we may elect to withdraw the NDA,
        if we
        determine that additional studies or data that are required by the FDA for
        approval of the NDA would jeopardize the commercial viability of MT 300 or
        exceed our financial resources available for MT 300. If we notify Valeant
        NA of
        this situation and Valeant NA elects not to assume control of efforts to
        seek
        approval of the NDA, then upon notice from Valeant, the agreement would
        terminate and we would be required to pay to Valeant NA a withdrawal fee
        of $1.0
        million. In 2005 we began discussions regarding termination of our
        commercialization agreement with Valeant NA. On July 21, 2005, we received
        a
        letter from Valeant NA seeking payment of the $1.0 million withdrawal fee
        required under certain conditions under the agreement. We do not believe
        that
        the withdrawal fee is payable based on our receipt of a not-approvable letter
        from the FDA with respect to our NDA for MT 300. The agreement requires that
        unresolved disputes by the parties be referred to the respective chief executive
        officers for resolution. If still unresolved, the agreement provides for
        binding
        arbitration. Valeant NA has disputed our conclusion that the withdrawal fee
        is
        not payable and has indicated its intention to pursue the dispute resolution
        provisions provided for in the agreement. We can give no assurance that Valeant
        NA will agree to termination terms acceptable to us or that we will not be
        required to pay Valeant NA the $1.0 million withdrawal fee.
  If
        we or
        our contract manufacturers do not maintain required regulatory approvals,
        we may
        not be able to commercialize our products. Approval of a product candidate
        may
        be conditioned upon certain limitations and restrictions as to the drug’s use,
        or upon the conduct of further studies, and is subject to continuous review.
        The
        FDA may also require us to conduct additional post-approval studies. These
        post-approval studies may include carcinogenicity studies in animals or further
        human clinical trials. The later discovery of previously unknown problems
        with
        the product, manufacturer or manufacturing facility may result in criminal
        prosecution, civil penalties, recall or seizure of products, or total or
        partial
        suspension of production, as well as other regulatory action against our
        product
        candidates or us. If approvals are withdrawn for a product, or if a product
        is
        seized or recalled, we would be unable to sell that product and therefore
        would
        not receive any revenues from that product.
  We
        and
        our contract manufacturers are required to comply with the applicable FDA
        current Good Manufacturing Practices (“cGMP”) regulations, which include
        requirements relating to quality control and quality assurance, as well as
        the
        corresponding maintenance of records and documentation.
  Further,
        manufacturing facilities must be approved by the FDA before they can be used
        to
        manufacture our product candidates, and are subject to additional FDA
        inspection. We, or our third-party manufacturers, may not be able to comply
        with
        cGMP regulations or other FDA regulatory requirements, which could result
        in a
        delay or an inability to manufacture the products.
  Labeling
        and promotional activities are subject to scrutiny by the FDA and state
        regulatory agencies and, in some circumstances, the Federal Trade Commission.
        FDA enforcement policy prohibits the marketing of unapproved products as
        well as
        the marketing of approved products for unapproved, or off-label, uses. These
        regulations and the FDA’s interpretation of them may impair our ability to
        effectively market products for which we gain approval. Failure to comply
        with
        these requirements can result in federal and state regulatory enforcement
        action. Further, we may not obtain the labeling claims we believe are necessary
        or desirable for the promotion of our product candidates.
  **Because
        we do not believe it is possible to convince the FDA to reverse its conclusion
        as stated in its not-approvable letter for MT 300, we do not expect to receive
        any revenue from sales of MT 300 in the United States.**
  In
        October 2003, we received a not-approvable letter from the FDA related to
        our
        NDA for MT 300. The letter was issued based on the FDA’s conclusion that we had
        not submitted substantial evidence of effectiveness for MT 300 as an acute
        treatment for migraine. The FDA noted that, although MT 300 provided a
        statistically significant improvement over placebo on the pre-defined endpoint
        of sustained pain relief at 24 hours post dose as well as relief of pain
        at two
        hours post dose, MT 300 failed to achieve statistical significance versus
        placebo for the relief of all of the ancillary symptoms of migraine (nausea,
        photophobia and phonophobia) at two hours. Further, the FDA noted that the
        incidence of nausea, one of the associated symptoms of migraine, was
        statistically significantly higher following MT 300 treatment versus placebo
        at
        two hours. Since our receipt of the not-approvable letter, we have had
        continuing communications with the FDA regarding the MT 300 NDA. Based upon
        our
        understandings from our most recent communications with the FDA and our
        understanding of the FDA’s current standards for approval of migraine drugs, we
        do not believe it is possible to reverse the not approvable status of the
        MT 300
        NDA. Therefore, we do not believe that we will receive any revenue from sales
        of
        MT 300 in the U.S.
  **Our
        reliance on collaborations with third parties to develop and commercialize
        our
        products is subject to inherent risks and may result in delays in product
        development and lost or reduced revenues, restricting our ability to
        commercialize our products and adversely affecting our
        profitability.**
  -
            29
            -
 Index
  Under
        our
        current strategy, and for the foreseeable future, we expect to depend upon
        collaborations with third parties to develop our product candidates and we
        expect to depend substantially upon third parties to commercialize our products.
        As a result, our ability to develop, obtain regulatory approval of, manufacture
        and commercialize our existing and any future product candidates depends
        upon
        our ability to maintain existing, and enter into and maintain new, contractual
        and collaborative arrangements with others. We also engage, and intend in
        the
        future to continue to engage, contract manufacturers and clinical trial
        investigators.
  In
        addition, the identification of new compounds or product candidates for
        development has led us, and may continue to require us, to enter into license
        or
        other collaborative agreements with others, including pharmaceutical companies
        and research institutions, such as our license and development agreement
        with
        Nycomed pursuant to which we obtained an exclusive license to certain rights
        to
        develop, manufacture and commercialize products containing lornoxicam. Such
        collaborative agreements for the acquisition of new compounds or product
        candidates would typically require us to pay license fees, make milestone
        payments and/or pay royalties. Furthermore, these agreements may result in
        our
        revenues being lower than if we developed our product candidates ourselves
        and
        in our loss of control over the development of our product
        candidates.
  Contractors
        or collaborators may have the right to terminate their agreements with us
        or
        reduce their payments to us under those agreements on limited or no notice
        and
        for reasons outside of our control. We currently have a collaboration with
        GSK
        for the development and commercialization of certain triptan combinations
        using
        our MT 400 technology in the U.S., a global collaboration with AstraZeneca
        for
        the development and commercialization of proprietary combinations
        of gastroprotective agents and naproxen, and a collaboration with
        Valeant NA in the U.S. for the development and commercialization of MT 300.
        In
        these collaboration agreements, as well as under our lornoxicam license
        agreement with Nycomed described above, our collaborators have the right
        to
        terminate the agreement upon a default by us. In addition, GSK and AstraZeneca
        are entitled to terminate their agreements upon 90 days’ notice for any reason.
        Substantial delays in obtaining regulatory approval to market Trexima, such
        as
        may result from our receipt in June 2006 of an approvable letter relating
        to our
        NDA for Trexima in which the FDA requested additional safety information,
        could
        increase this risk of termination of the GSK agreement. Additionally, both
        GSK
        and AstraZeneca have the right to reduce the royalties on net sales of products
        payable to us under the respective agreements if generic competitors attain
        a
        pre-determined share of the market for products marketed under the agreements,
        or if either GSK or AstraZeneca must pay a royalty to one or more third parties
        for rights it licenses from those third parties to commercialize products
        marketed under the agreements. AstraZeneca is also entitled to terminate
        its
        agreement with us if certain delays occur or specified development or regulatory
        objectives are not met. Valeant NA is entitled to terminate its agreement
        with
        us and a $1.0 million withdrawal fee payable by us in the event we choose
        to
        withdraw the NDA if we determine that additional studies or data that are
        required by the FDA for approval of the NDA would jeopardize the commercial
        viability of MT 300 or exceed our financial resources available for MT 300.
        Due
        to our belief that the FDA will not approve the NDA for MT 300, we began
        discussions with Valeant NA regarding termination of our agreement. Valeant
        NA
        has demanded payment of the $1.0 million withdrawal fee, which POZEN is
        disputing.
  If
        our
        current or future licensees exercise termination rights they may have, or
        if
        these license agreements terminate because of delays in obtaining regulatory
        approvals, or for other reasons, and we are not able to establish replacement
        or
        additional research and development collaborations or licensing arrangements,
        we
        may not be able to develop and/or commercialize our product candidates.
        Moreover, any future collaborations or license arrangements we may enter
        into
        may not be on terms favorable to us.
  A
        further
        risk we face with our collaborations is that business combinations and changes
        in the collaborator or their business strategy may adversely affect their
        willingness or ability to complete their obligations to us.
  Our
        current or any future collaborations or license arrangements ultimately may
        not
        be successful. Our agreements with collaborators typically allow them discretion
        in electing whether to pursue various regulatory, commercialization and other
        activities or with respect to the timing of the development, such as our
        agreement with GSK under which GSK determined, among other things, the exact
        formulation and composition of the product candidates using our MT 400
        technology for use in the Trexima clinical trials. If any collaborator were
        to
        breach its agreement with us or otherwise fail to conduct collaborative
        activities in a timely or successful manner, the pre-clinical or clinical
        development or commercialization of the affected product candidate or research
        program would be delayed or terminated. Any delay or termination of clinical
        development or commercialization, such as the delay in commercialization
        we are
        currently experiencing as a result of the approvable letter we received from
        the
        FDA in June 2006 related to our Trexima NDA, would delay or eliminate our
        potential product revenues. Further, our collaborators may be able to exercise
        control, under certain circumstances, over our ability to protect our patent
        rights under patents covered by the applicable collaboration agreement. For
        example, under our collaboration agreements with GSK and AstraZeneca, GSK
        and
        AstraZeneca each has the first right to enforce our patents under the respective
        agreements and would have exclusive control over such enforcement
        litigation.
  Other
        risks associated with our collaborative and contractual arrangements with
        others
        include the following:
  •  we
        may
        not have day-to-day control over the activities of our contractors or
        collaborators;
  •  third
        parties may not fulfill their regulatory or other obligations;
  •  we
        may
        not realize the contemplated or expected benefits from collaborative or other
        arrangements; and
  -
            30
            -
 Index
  •  disagreements
        may arise regarding a breach of the arrangement, the interpretation of the
        agreement, ownership of proprietary rights, clinical results or regulatory
        approvals.
  These
        factors could lead to delays in the development of our product candidates
        and/or
        the commercialization of our products or reduction in the milestone payments
        we
        receive from our collaborators, or could result in our not being able to
        commercialize our products. Further, disagreements with our contractors or
        collaborators could require or result in litigation or arbitration, which
        would
        be time-consuming and expensive. Our ultimate success may depend upon the
        success and performance on the part of these third parties. If we fail to
        maintain these relationships or establish new relationships as required,
        development of our product candidates and/or the commercialization of our
        products will be delayed or may never be realized.
  **A
        collaborator may withdraw support or cease to perform work on our product
        candidates if the collaborator determines to develop its own competing product
        candidate instead.**
  We
        have
        entered into collaboration and license agreements, and expect to continue
        to
        enter into such agreements, with companies that have products and are developing
        new product candidates that compete or may compete with our product candidates.
        If one of our collaborators should decide that the product or a product
        candidate that the collaborator is developing would be more profitable for
        the
        collaborator than our product candidate covered by the collaboration or license
        agreement, the collaborator may withdraw support for our product candidate
        or
        may cease to perform under our agreement. In the event of a termination of
        the
        collaborator’s agreement upon such cessation of performance, we would need to
        negotiate an agreement with another collaborator in order to continue the
        development and commercialization efforts for the product candidate. If we
        were
        unsuccessful in negotiating another agreement, we might have to cease
        development activities of the particular product candidate. For example,
        our
        development and commercialization agreement with GSK is subject to this risk.
        GSK has publicly disclosed that it is exploring the development of several
        early-stage compounds for the treatment of migraine. If GSK decides to focus
        its
        development and commercialization efforts on its own products rather than
        continuing to work with us on Trexima or any other product candidates that
        may
        be developed under the agreement, it has the ability to terminate our agreement
        upon 90 days’ written notice. Any substantial delays in obtaining, or failure to
        obtain, regulatory approval from the FDA to market Trexima, including as
        a
        result of our receipt in June 2006 from the FDA of an approvable letter
        requesting additional safety information for Trexima, would exacerbate this
        risk. In such a case, we would need to enter into a new development and
        commercialization agreement and would need to start the development process
        all
        over again. If we were able to negotiate a new development and commercialization
        agreement to develop our MT 400 technology, which is not certain, we would
        face
        delays and redundant expenses in that development.
  **We
        need to maintain current agreements and enter into additional agreements
        with
        third parties that possess sales, marketing and distribution capabilities,
        or
        establish internally the capability to perform these functions, in order
        to
        successfully market and sell our future drug products.**
  We
        have
        no sales or distribution personnel or capabilities. If we are unable to maintain
        current collaborations or enter into additional collaborations with established
        pharmaceutical or pharmaceutical services companies to provide those
        capabilities, or, alternatively, we are unable to develop internally sales
        and
        distribution capabilities, we will not be able to successfully commercialize
        our
        products. To the extent that we enter into marketing and sales agreements
        with
        third parties, our revenues, if any, will be affected by the sales and marketing
        efforts of those third parties. Further, we cannot guarantee that, should
        we
        elect to develop our own sales and distribution capabilities, we would have
        sufficient resources to do so, or would be able to hire the qualified sales
        and
        marketing personnel we would need.
  **We
        need to conduct preclinical, toxicology, genotoxicity and carcinogenicity
        and
        other safety studies, and clinical trials for our product candidates. Any
        negative or unanticipated results, unforeseen costs or delays in the conduct
        of
        these studies or trials, or the need to conduct additional studies or trials
        or
        to seek to persuade the FDA to evaluate the results of a study or trial in
        a
        different manner, could cause us to discontinue development of a product
        candidate or reduce, delay or eliminate our receipt of revenues for one or
        more
        of our product candidates and adversely affect our ability to achieve
        profitability.**
  Generally,
        we must demonstrate the efficacy and safety of our product candidates before
        approval to market can be obtained from the FDA or the regulatory authorities
        in
        other countries. Our existing and future product candidates are and will
        be in
        various stages of clinical development. Depending upon the type of product
        candidate and the stage of the development process of a product candidate,
        we
        will need to complete preclinical, toxicology, genotoxicity and carcinogenicity
        and other safety studies, as well as clinical trials, on these product
        candidates before we submit marketing applications in the United States and
        abroad. These studies and trials can be very costly and time-consuming. For
        example, long-term cardiovascular safety studies, such as those the FDA has
        indicated will be required for approval of certain product candidates containing
        NSAIDs, typically take approximately three years. In addition, we rely on
        third
        parties to perform significant aspects of our studies and clinical trials,
        introducing additional sources of risk into our development
        programs.
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            31
            -
 Index
  It
        should
        be noted that the results of any of our preclinical and clinical trial testing
        are not necessarily predictive of results we will obtain in subsequent or
        more
        extensive clinical trials or testing. This may occur for many reasons,
        including, among others, the variability of patient characteristics, including
        patient symptoms at the time of study treatment, the larger scale testing
        of
        patients in later trials, or differences in formulation or doses of the product
        candidate used in later trials. For example, our results from the first of
        our
        two Phase 3 pivotal clinical trials of Trexima differed from the results
        of our
        second Phase 3 clinical trial and from the Phase 2 proof-of-concept trial
        of MT
        400 that we conducted prior to entering into our collaboration with GSK.
        Whereas
        in the Phase 2 trial statistical significance was reached at two hours over
        placebo in the relief of all associated symptoms of migraine (nausea,
        photophobia and phonophobia), in the first Phase 3 study Trexima failed to
        achieve statistical significance at two hours compared to placebo in the
        relief
        of nausea. In the second Phase 3 pivotal clinical trial, Trexima demonstrated
        superiority over the individual components measured by sustained pain-free
        response (p<0.001 vs. naproxen; p=0.009 vs. sumatriptan) and met all other
        regulatory endpoints versus placebo.
  The
        successful completion of clinical trials depends upon many factors, including
        the rate of enrollment of patients. If we are unable to recruit sufficient
        clinical patients during the appropriate period, we may need to delay our
        clinical trials and incur significant additional costs. We also rely on the
        compliance of our clinical trial investigators with FDA regulatory requirements
        and noncompliance can result in disqualification of a clinical trial
        investigator and data that is unusable. In addition, the FDA or Institutional
        Review Boards may require us to conduct additional trials or delay, restrict
        or
        discontinue our clinical trials on various grounds, including a finding that
        the
        subjects or patients are being exposed to an unacceptable health risk. For
        example, even though we are entitled to submit an NDA for Trexima as a 505(b)(2)
        application, the FDA may require us to conduct more studies or trials than
        we
        now believe are necessary or required.
  Further,
        even though we may have completed all clinical trials for a product candidate
        that were planned for submission in support of a marketing application, we
        may
        be required to conduct additional clinical trials, studies or investigations
        to
        support our marketing applications. In addition, we and/or our marketing
        or
        development partners may determine that pre-approval marketing support studies
        should be conducted. Unanticipated adverse outcomes of such studies, including
        recognition of certain risks to human subjects, could a have material impact
        on
        the approval of filed or planned market applications or could result in limits
        placed on the marketing of the product. We may also determine from time to
        time
        that it would be necessary to seek to provide justification to the FDA or
        other
        regulatory agency that would result in evaluation of the results of a study
        or
        clinical trial in a manner that differs from the way the regulatory agency
        initially or customarily evaluated the results. In addition, we may have
        unexpected results in our preclinical or clinical trials or other studies
        that
        require us to reconsider the need for certain studies or trials or cause
        us to
        discontinue development of a product candidate. For example, results from
        a
        genotoxicity study involving MT 400 may require us to conduct chronic toxicology
        and carcinogenicity studies for Trexima or other MT 400 product candidates
        we
        may develop.
  Once
        submitted, an NDA requires FDA approval before we can distribute or
        commercialize the product described in the application. Even if we determine
        that data from our clinical trials, toxicology, genotoxicity and carcinogenicity
        studies are positive, we cannot assure you that the FDA, after completing
        its
        analysis, will not determine that the trials or studies should have been
        conducted or analyzed differently, and thus reach a different conclusion
        from
        that reached by us, or request that further trials, studies or analyses be
        conducted. For example, the FDA has requested additional safety information
        on
        Trexima in the approvable letter we received in June 2006 relating to our
        NDA
        for Trexima, which will require some additional studies. There is no guarantee
        that such studies will be successful or that the FDA will approve the NDA
        based
        on the additional information and study results contained in our submission
        in
        response to the FDA’s approvable letter, or at all. Further, although we believe
        that we provided the necessary data to support approval of the NDAs for MT
        100
        and MT 300, the FDA issued not-approvable letters for the MT 100 and MT 300
        NDAs
        on May 28, 2004 and October 17, 2003, respectively, and based upon our
        understandings from our most recent communication with the FDA and our
        understanding of the FDA’s current standards for approval of migraine drugs, we
        do not believe it is possible to reverse the not approvable status of the
        NDA
        for MT 300. In addition, based upon our receipt of the not approvable letter
        for
        MT 100 and the outcome of an August 2005 FDA Advisory Committee meeting relating
        to the potential risk of tardive dyskinesia associated with the use of one
        of
        the components of MT 100, we made the decision to discontinue further
        development of MT 100 in the U.S.
  The
        FDA
        may also require data in certain subpopulations, such as pediatric use, or,
        if
        such studies were not previously completed, may require long-term
        carcinogenicity studies, prior to NDA approval, unless we can obtain a waiver
        of
        such a requirement. We face similar regulatory hurdles in other countries
        to
        those that we face in the U.S.
  Our
        costs
        associated with our human clinical trials vary based on a number of factors,
        including:
  •  the
        order
        and timing of clinical indications pursued;
  •  the
        extent of development and financial support from collaborative parties, if
        any;
  •  the
        need
        to conduct additional clinical trials or studies;
  •  the
        number of patients required for enrollment;
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            32
            -
 Index
  •  the
        difficulty of obtaining sufficient patient populations and
        clinicians;
  •  the
        difficulty of obtaining clinical supplies of our product candidates;
        and
  •  governmental
        and regulatory delays.
  **We
        currently depend and will in the future depend on third parties to manufacture
        our product candidates. If these manufacturers fail to meet our requirements
        or
        any regulatory requirements, the product development and commercialization
        of
        our product candidates will be delayed.**
  We
        do not
        have, and have no plans to develop, the internal capability to manufacture
        either clinical trial or commercial quantities of products that we may develop
        or have under development. We rely upon third-party manufacturers to supply
        us
        with our product candidates. We also need supply contracts to sell our products
        commercially. There is no guarantee that manufacturers that enter into
        commercial supply contracts with us will be financially viable entities going
        forward, or will not otherwise breach or terminate their agreements with
        us. If
        we do not have the necessary commercial supply contracts, or if our current
        manufacturer is, or any of our future manufacturers are, unable to satisfy
        our
        requirements or meet any regulatory requirements, and we are required to
        find
        alternative sources of supply, there may be additional costs and delays in
        product development and commercialization of our product candidates or we
        may be
        required to comply with additional regulatory requirements.
  **If
        our competitors develop and commercialize products faster than we do or if
        their
        products are superior to ours, our commercial opportunities will be reduced
        or
        eliminated.**
  Our
        product candidates will have to compete with existing and any newly developed
        migraine therapies or therapies for any newly developed product candidates
        for
        the treatment of other diseases. There are also likely to be numerous
        competitors developing new products to treat migraine and the other diseases
        and
        conditions for which we may seek to develop products in the future, which
        could
        render our product candidates or technologies obsolete or non-competitive.
        For
        example, our primary competitors will likely include large pharmaceutical
        companies (including, based upon their current migraine portfolios, GSK,
        Merck
& Co., AstraZeneca, Johnson & Johnson, Pfizer, Inc. and Endo
        Pharmaceuticals), biotechnology companies, universities and public and private
        research institutions. The competition for our PN products that receive
        regulatory approval will come from the oral NSAID market, or more specifically
        the traditional non-selective NSAIDs (such as naproxen and diclofenac),
        traditional NSAID/gastroprotective agent combination products or combination
        product packages (such as Arthrotec ® and
        Prevacid ® NapraPAC TM ),
        combinations of NSAIDs and PPIs taken as separate pills and the only remaining
        COX-2 inhibitor, Celebrex ® .
  Based
        upon their drug product and pipeline portfolios and the overall competitiveness
        of our industry, we believe that we face, and will continue to face, intense
        competition from other companies for securing collaborations with pharmaceutical
        companies, establishing relationships with academic and research institutions,
        and acquiring licenses to proprietary technology. Our competitors, either
        alone
        or with collaborative parties, may also succeed with technologies or products
        that are more effective than any of our current or future technologies or
        products. Many of our actual or potential competitors, either alone or together
        with collaborative parties, have substantially greater financial resources,
        and
        almost all of our competitors have larger numbers of scientific and
        administrative personnel than we do.
  Many
        of
        these competitors, either alone or together with their collaborative parties,
        also have significantly greater experience than we do in:
  •  developing
        product candidates;
  •  undertaking
        preclinical testing and human clinical trials;
  •  obtaining
        FDA and other regulatory approvals of product candidates; and
  •  manufacturing
        and marketing products.
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            33
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 Index
  Accordingly,
        our actual or potential competitors may succeed in obtaining patent protection,
        receiving FDA or other regulatory approval or commercializing products where
        we
        cannot or before we do. Any delays we encounter in obtaining regulatory
        approvals for our product candidates, such as we are currently experiencing
        as a
        result of the approvable letter we received from the FDA in June 2006 relating
        to the Trexima NDA, and as we previously experienced as a result of the
        not-approvable letters we received from the FDA on MT 100 and MT 300, increase
        this risk. Our competitors may also develop products or technologies that
        are
        superior to those that we are developing, and render our product candidates
        or
        technologies obsolete or non-competitive. If we cannot successfully compete
        with
        new or existing products, our marketing and sales will suffer and we may
        not
        ever receive any revenues from sales of products or may not receive sufficient
        revenues to achieve profitability.
  **If
        there is an adverse outcome in the securities class action lawsuits that
        have
        been filed against us or our current or former directors and officers, our
        business may be materially harmed. Further, defending against these lawsuits
        may
        be expensive and will divert the attention of our
        management.**
  Four
        purported class action lawsuits claiming violations of securities laws were
        filed between June 4 and July 28, 2004 in the U.S. District Court for the
        Middle
        District of North Carolina by holders of our securities against us and certain
        of our current and former officers. These actions have been consolidated
        for
        pre-trial purposes. A fifth case filed on August 6, 2004 has also been
        consolidated with those actions for pre-trial purposes. By order dated November
        4, 2004, the court appointed a lead plaintiff, who filed a consolidated amended
        complaint (amended complaint) on December 20, 2004. The defendants named
        in the
        amended complaint are POZEN and John R. Plachetka, our chairman and chief
        executive officer. The complaint alleges violations of federal securities
        laws,
        including violations of Section 10(b) of the Securities Exchange Act of 1934,
        as
        amended, and Rule 10b-5, and violations of Section 20(a) of the Exchange
        Act
        against Dr. Plachetka. The amended complaint alleges that we made false and
        misleading statements concerning our product candidates MT 100 and MT 300
        during
        the class period. The amended complaint requests certification of a plaintiff
        class consisting of purchasers of our stock between October 4, 2002 and May
        28,
        2004. In January 2005, we moved to dismiss the amended complaint. On August
        30,
        2005, our motion to dismiss the complaint was denied and the case is now
        in the
        discovery phase. On March 27, 2006, a motion for class certification was
        filed.
        We filed our brief in opposition to class certification on June 30,
        2006.
  As
        with
        any litigation proceeding, we cannot predict with certainty the eventual
        outcome
        of the pending class action lawsuit described above. Furthermore, we will
        have
        to incur expenses in connection with this lawsuit, which may be substantial.
        In
        the event of an adverse outcome, our business could be materially harmed.
        Moreover, responding to and defending the pending litigation will result
        in a
        significant diversion of management’s attention and resources and an increase in
        professional fees.
  **If
        we are unable to protect our patents or proprietary rights, or if we are
        unable
        to operate our business without infringing the patents and proprietary rights
        of
        others, we may be unable to develop our product candidates or compete
        effectively.**
  The
        pharmaceutical industry places considerable importance on obtaining patent
        and
        trade secret protection for new technologies, products and processes. Our
        success will depend, in part, on our ability, and the ability of our licensors,
        to obtain and to keep protection for our products and technologies under
        the
        patent laws of the United States and other countries, so that we can stop
        others
        from using our inventions. Our success also will depend on our ability to
        prevent others from using our trade secrets. In addition, we must operate
        in a
        way that does not infringe, or violate, the patent, trade secret and other
        intellectual property rights of other parties.
  We
        cannot
        know how much protection, if any, our patents will provide or whether our
        patent
        applications will issue as patents. The breadth of claims that will be allowed
        in patent applications cannot be predicted and neither the validity nor
        enforceability of claims in issued patents can be assured **.** If,
        for
        any reason, we are unable to obtain and enforce valid claims covering our
        products and technology, we may be unable to prevent competitors from using
        the
        same or similar technology or to prevent competitors from marketing identical
        products. In addition, due to the extensive time needed to develop and test
        our
        products, any patents that we obtain may expire in a short time after
        commercialization. This would reduce or eliminate any advantages that such
        patents may give us. In certain territories outside the U.S., our issued
        patents
        may be subject to opposition by competitors within a certain time after the
        patent is issued. For example, in October 2005 oppositions were filed against
        our issued European patent for MT 400 by Merck & Co., Inc. and Almirall
        Prodesfarma asserting that the European patent should not have been granted.
        Such opposition proceedings may not be resolved for several years, and may
        result in the revocation of the issued patent.
  We
        may
        need to submit our issued patents for amendment or reissue if we determine
        that
        any claims within our patents should not have been issued. While such a
        submission may be based on our view that only specified claims should not
        have
        been granted to us, there can be no assurance that a patent examiner will
        not
        determine that additional claims should not have been granted to us. Such
        a risk
        exists with one of our patents covering MT 100, which we submitted for reissue
        after determining that certain specified claims that are not central to our
        protection of MT 100 should not have been issued.
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  We
        may
        need to license rights to third party patents and intellectual property to
        continue the development and marketing of our product candidates. If we are
        unable to acquire such rights on acceptable terms, our development activities
        may be blocked and we may be unable to bring our product candidates to
        market.
  We
        may
        enter into litigation to defend ourselves against claims of infringement,
        assert
        claims that a third party is infringing one or more of our patents, protect
        our
        trade secrets or know-how, or determine the scope and validity of others’ patent
        or proprietary rights. As a result of such litigation, our patent claims
        may be
        found to be invalid, unenforceable or not of sufficient scope to cover the
        activities of an alleged infringement. With respect to some of our product
        candidates, under certain circumstances, our development or commercialization
        collaborators have the first right to enforce our patents and would have
        exclusive control over such enforcement litigation. For example, under our
        collaboration agreements with GSK and AstraZeneca, GSK and AstraZeneca each
        have
        the first right to enforce our patents under their respective
        agreements.
  If
        we are
        found to infringe the patent rights of others, then we may be forced to pay
        damages in an amount that might irreparably harm our business and/or be
        prevented from continuing our product development and marketing activities.
        Additionally, if we or our development or commercialization collaborator
        seek to
        enforce our patents and are unsuccessful, we may be subject to claims for
        bringing a failed enforcement action, including claims alleging various forms
        of
        antitrust violations (both state and federal) and unfair competition. If
        we are
        found to be liable for such claims, then we may be forced to pay damages
        in an
        amount that might irreparably harm our business and/or be prevented from
        continuing our product development and commercialization activities. Even
        if we
        are successful in defending any such claims of infringement or in asserting
        claims against third parties, such litigation is expensive, may have a material
        effect on our operations, and may distract management from our business
        operations. Regardless of its eventual outcome, any lawsuit that we enter
        into
        may consume time and resources that would impair our ability to develop and
        market our product candidates.
  We
        have
        entered into confidentiality agreements with our employees, consultants,
        advisors and collaborators. However, these parties may not honor these
        agreements and, as a result, we may not be able to protect our rights to
        unpatented trade secrets and know-how. Others may independently develop
        substantially equivalent proprietary information and techniques or otherwise
        gain access to our trade secrets and know-how. Also, many of our scientific
        and
        management personnel were previously employed by competing companies. As
        a
        result, such companies may allege trade secret violations and similar claims
        against us.
  **If
        we fail to acquire, develop and commercialize additional products or product
        candidates, or fail to successfully promote or market approved products,
        we may
        never achieve profitability.**
  As
        part
        of our business strategy, we plan to identify, self-invent and/or acquire
        product candidates or approved products in areas in which we possess particular
        knowledge. Because we do not directly engage in basic research or drug
        discovery, we may rely upon third parties to sell or license product
        opportunities to us. Other companies, including some with substantially greater
        financial, marketing and sales resources, are competing with us to acquire
        such
        products and product candidates. We may not be able to acquire rights to
        additional products or product candidates on acceptable terms, if at all.
        In
        addition, if we acquire new products or product candidates with different
        marketing strategies, distribution channels and bases of competition than
        those
        of our current product candidates, we may not be able to compete favorably
        in
        those product categories.
  **None
        of our future products may be accepted by the market.**
  Even
        if
        our product candidates perform successfully in clinical trials and are approved
        by the FDA and other regulatory authorities, our future products may not
        achieve
        market acceptance and may not generate the revenues that we anticipate. The
        degree of market acceptance will depend upon a number of factors,
        including:
  •  the
        receipt and timing of regulatory approvals;
  •  the
        availability of third-party reimbursement;
  •  the
        indications for which the product is approved;
  •  the
        rate
        of adoption by healthcare providers;
  •  the
        rate
        of product acceptance by target patient populations;
  •  the
        price
        of the product relative to alternative therapies;
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  •  the
        availability of alternative therapies;
  •  the
        extent and effectiveness of marketing efforts by us and third-party distributors
        and agents;
  •  the
        existence of adverse publicity regarding our products or similar products;
        and
  •  the
        extent and severity of side effects as compared to alternative
        therapies.
  **If
        we do not receive adequate third-party reimbursements for our future products,
        our revenues and profitability will be reduced.**
  Our
        ability to commercialize our product candidates successfully will depend,
        in
        part, on the extent to which reimbursement for the costs of such products
        and
        related treatments will be available from government health administration
        authorities, such as Medicare and Medicaid in the U.S., private health insurers
        and other organizations. Significant uncertainty exists as to the reimbursement
        status of a newly approved healthcare product. Adequate third-party coverage
        may
        not be available to enable us to maintain price levels sufficient to realize
        an
        appropriate return on our investment in product research and development.
        If
        adequate coverage and reimbursement levels are not provided by government
        and
        third-party payors for use of our products, our products may fail to achieve
        market acceptance.
  Our
        future revenues, profitability and access to capital will be affected by
        the
        continuing efforts of governmental and private third-party payors to contain
        or
        reduce the costs of healthcare through various means. We expect that a number
        of
        federal, state and foreign proposals will seek to control the cost of drugs
        through governmental regulation. We are unsure of the form that any healthcare
        reform legislation may take or what actions federal, state, foreign and private
        payors may take in response to any proposed reforms. Therefore, we cannot
        predict the effect of any implemented reform on our business.
  **If
        product liability lawsuits are successfully brought against us, we may incur
        substantial liabilities and may be required to limit commercialization of
        our
        product candidates.**
  The
        testing and marketing of pharmaceutical products entails an inherent risk
        of
        product liability. Product liability claims might be brought against us by
        consumers, healthcare providers, pharmaceutical companies or others selling
        our
        future products. If we cannot successfully defend ourselves against such
        claims,
        we may incur substantial liabilities or be required to limit the
        commercialization of our product candidates. We have product liability insurance
        that covers our human clinical trials in an amount equal to up to $10.0 million
        annual aggregate limit with a $0.1 million deductible per claim. The amount
        of
        insurance that we currently hold may not be adequate to cover all liabilities
        that may occur. However, insurance coverage is becoming increasingly expensive,
        and no assurance can be given that we will be able to maintain insurance
        coverage at a reasonable cost or in sufficient amounts to protect us against
        losses due to liability. We intend to expand our insurance coverage to include
        the sale of commercial products if we obtain marketing approval for any of
        our
        products and commercial sales of the product begin. However, we may not be
        able
        to obtain commercially reasonable product liability insurance for any products
        approved for marketing. If a plaintiff brings a successful product liability
        claim against us in excess of our insurance coverage, if any, we may incur
        substantial liabilities and our business may be harmed or fail.
  **We
        may need additional funding and may not have access to capital. If we are
        unable
        to raise capital when needed, we may need to delay, reduce or eliminate our
        product development or commercialization efforts.**
  We
        may
        need to raise additional funds to execute our business strategy. We have
        incurred losses from operations since inception and we may continue to incur
        additional operating losses. Our actual capital requirements will depend
        upon
        numerous factors, including:
  •  the
        progress of our research and development programs;
  •  the
        progress of preclinical studies, clinical and other testing or the need conduct
        additional trials, studies or other testing;
  •  the
        time
        and cost involved in obtaining any regulatory approvals;
  •  the
        costs
        of filing, prosecuting, defending and enforcing any patent claims and other
        intellectual property rights;
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  •  the
        effect of competing technological and market developments;
  •  the
        timing of our receipt, if any, of milestone payments and royalties under
        collaborative agreements;
  •  the
        effect of changes and developments in, or termination of, our collaborative,
        license and other relationships;
  •  the
        terms
        and timing of any additional collaborative, license and other arrangements
        that
        we may establish; and
  •  our
        ability to arrange for the commercialization of our product
        candidates.
  Our
        operating expenses for the nine-month period ended September 30, 2006 totaled
        $26.8 million, including non-cash compensation expense of $4.7 million related
        to stock options and other stock-based awards, primarily associated with
        our
        adoption of SFAS No. 123(R) on January 1, 2006. For fiscal years 2003 through
        2005, our average annual operating expenses (including average non-cash deferred
        compensation of $0.6 million) were $25.4 million. We are currently expecting
        operating expenses for the 2006 fiscal year to be between $35.0 million and
        $36.0 million, including non-cash compensation expenses, related to stock
        options and other stock-based awards expected to be $6.5 million, resulting
        from
        our adoption of SFAS 123(R) on January 1, 2006. As of September 30, 2006,
        we had
        an aggregate of $66.6 million in cash and cash equivalents and short-term
        investments. If our operating expenses for 2006 and 2007 remain at the level
        of
        our operating expenses in 2005, we believe that we will have sufficient cash
        reserves to maintain that level of business activities throughout 2007 provided
        that certain development expenses are paid by AstraZeneca, as outlined in
        the
        agreement. However, our expenses might increase in 2007 and 2008 beyond
        currently expected levels if any regulatory agency requires us to conduct
        additional clinical trials, studies or investigations, including in connection
        with their consideration, or reconsideration, of our regulatory filings for
        our
        product candidates. In addition, we may be required to pay Valeant NA a
        withdrawal fee of $1.0 million if we do not prevail in our current dispute
        with
        them as to whether the withdrawal fee is payable under our MT 300 collaboration
        agreement.
  We
        may be
        unable to raise additional equity funds when we desire to do so due to
        unfavorable market conditions in our industry or generally, or other unforeseen
        developments in our business. Further, we may not be able to find sufficient
        debt or equity funding, if at all, on acceptable terms. If we cannot, we
        may
        need to delay, reduce or eliminate research and development programs and
        therefore may not be able to execute our business strategy. Further, to the
        extent that we obtain additional funding through collaboration and licensing
        arrangements, it may be necessary for us to give up valuable rights to our
        development programs or technologies or grant licenses on terms that may
        not be
        favorable to us.
  The
        sale
        by us of additional equity securities or the expectation that we will sell
        additional equity securities may have an adverse effect on the price of our
        common stock.
  **We
        depend on key personnel and may not be able to retain these employees or
        recruit
        additional qualified personnel, which would harm our research and development
        efforts.**
  We
        are
        highly dependent on the efforts of our key management and scientific personnel,
        especially John R. Plachetka, Pharm.D., our Chairman, President and Chief
        Executive Officer. Dr. Plachetka signed an amended and restated employment
        agreement with us on March 14, 2006, for a three-year term with automatic
        one-year renewal terms. We have also entered into employment agreements with
        certain of our other key management personnel, which provide for one or two-year
        terms with automatic one-year renewal terms. If we should lose the services
        of
        Dr. Plachetka, or are unable to replace the services of our other key personnel
        who may leave the Company, such as Dr. Marshall E. Reese, Executive Vice
        President, Product Development, William L. Hodges, Senior Vice President
        Finance
        and Administration and Chief Financial Officer, or Kristina M. Adomonis,
        Senior
        Vice President, Business Development or if we fail to recruit other key
        scientific personnel, we may be unable to achieve our business objectives.
        There
        is intense competition for qualified scientific personnel. Since our business
        is
        very science-oriented, we need to continue to attract and retain such people.
        We
        may not be able to continue to attract and retain the qualified personnel
        necessary for developing our business. Furthermore, our future success may
        also
        depend in part on the continued service of our other key management personnel
        and our ability to recruit and retain additional personnel, as required by
        our
        business.
  ***Factors
        That May Affect Our Stockholders***
  **Our
        stock price is volatile, which may result in significant losses to
        stockholders.**
  There
        has
        been significant volatility in the market prices of biotechnology companies’
securities. Various factors and events may have a significant impact on the
        market price of our common stock. These factors include:
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            37
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  •  fluctuations
        in our operating results;
  •  announcements
        of technological innovations, acquisitions or licensing of therapeutic products
        or product candidates by us or our competitors;
  •  published
        reports by securities analysts;
  •  positive
        or negative progress with our clinical trials or with regulatory approvals
        of
        our product candidates;
  •  governmental
        regulation, including reimbursement policies;
  •  developments
        in patent or other proprietary rights;
  •  developments
        in our relationships with collaborative partners;
  •  developments
        in new or pending litigation;
  •  public
        concern as to the safety and efficacy of our products; and
  •  general
        market conditions.
  The
        trading price of our common stock has been, and could continue to be, subject
        to
        wide fluctuations in response to these factors, including the sale or attempted
        sale of a large amount of our common stock into the market. From October
        16,
        2000, when our common stock began trading on the Nasdaq National Market,
        through
        September 30, 2006, the high and low closing prices of our common stock ranged
        from $2.25 to $21.75. Broad market fluctuations may also adversely affect
        the
        market price of our common stock.
  **Sales
        of substantial amounts of our common stock in the public market could depress
        our stock price.**
  We
        have
        not sold shares of common stock in a public offering since our initial public
        offering in October 2000. Accordingly, we have a relatively small number
        of
        shares that are traded in the market and four of our stockholders and their
        affiliates beneficially hold approximately 34% of our outstanding shares.
        Any
        sales of substantial amounts of our common stock in the public market, including
        sales or distributions of shares by our large stockholders, or the perception
        that such sales might occur, could harm the market price of our common stock
        and
        could impair our ability to raise capital through the sale of additional
        equity
        securities. For example, as we recently announced, beginning in September
        2006 our chief executive officer and one of our directors may sell up
        to an aggregate of 1,010,000 shares pursuant to Rule 10b5-1 trading plans.
        Further, stockholders’ ownership will be diluted if we raise additional capital
        by issuing equity securities. We have filed with the SEC, and the SEC has
        declared effective, a shelf registration statement on Form S-3 under which
        we
        may register up to 8,540,000 shares of our common stock for sale to the public
        in one or more public offerings. Certain selling stockholders named in the
        prospectus for the registration statement may offer up to 540,000 of such
        shares, and we would not receive any of the proceeds from sales of those
        shares.
  **Anti-takeover
        provisions in our charter documents and under Delaware law could prevent
        or
        delay transactions that our stockholders may favor and may prevent stockholders
        from changing the direction of our business or our
        management.**
  Provisions
        of our charter and bylaws may discourage, delay or prevent a merger or
        acquisition that our stockholders may consider favorable, including transactions
        in which you might otherwise receive a premium for your shares, and may also
        frustrate or prevent any attempt by stockholders to change the direction
        or
        management of POZEN. For example, these provisions:
  •  authorize
        the issuance of “blank check” preferred stock without any need for action by
        stockholders;
  •  provide
        for a classified board of directors with staggered three-year
        terms;
  •  require
        supermajority stockholder approval to effect various amendments to our charter
        and bylaws;
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  •  eliminate
        the ability of stockholders to call special meetings of
        stockholders;
  •  prohibit
        stockholder action by written consent; and
  •  establish
        advance notice requirements for nominations for election to the board of
        directors or for proposing matters that can be acted on by stockholders at
        stockholder meetings.
  Further,
        in January 2005 our board of directors adopted a stockholder rights plan,
        similar to plans adopted by many other publicly-traded companies. The
        stockholder rights plan is intended to deter an attempt to acquire us in
        a
        manner or on terms not approved by our board of directors.
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  **Item
        6. Exhibits**
  **Exhibit**
                **Number**
              **Description**10.1†
              Collaboration
                  and License Agreement dated August 1, 2006 between the Registrant
                  and
                  AstraZeneca AB.10.2†
              Side
                  Letter dated September 19, 2006 Re: Collaboration and License Agreement
                  dated as of August 1, 2006 by and between POZEN INC. and AstraZeneca
                  AB31.1
              Certification
                  of the Chief Executive Officer pursuant to Rule 13a-14(a) under
                  the
                  Securities Exchange Act of 1934, as adopted pursuant to Section
                  302 of the
                  Sarbanes-Oxley Act of 2002.31.2
              Certification
                  of the Chief Financial Officer pursuant to Rule 13a-14(a) under
                  the
                  Securities Exchange Act of 1934, as adopted pursuant to Section
                  302 of the
                  Sarbanes-Oxley Act of 2002.32.1
              Certification
                  of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
              Certification
                  of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 † Confidential treatment requested as to certain portions.
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            40
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  **SIGNATURES**
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
 
 POZEN
                  Inc.
                (Registrant)November
                  3, 2006
              By:
              /s/
                  JOHN R. PLACHETKAJohn
                  R. PlachetkaPresident
                  and Chief Executive OfficerNovember
                  3, 2006
              By:
              /s/
                  WILLIAM L. HODGESWilliam
                  L. HodgesChief
                  Financial OfficerNovember
                  3, 2006
              By:
              /s/
                  JOHN E. BARNHARDTJohn
                  E. BarnhardtPrincipal
                  Accounting Officer
 
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  **EXHIBIT
        INDEX**
 
 **Exhibit**
                **Number**
              **Description**10.1†
              Collaboration
                  and License Agreement dated August 1, 2006 between the Registrant
                  and
                  AstraZeneca AB.10.2†
              Side
                  Letter dated September 19, 2006 Re: Collaboration and License Agreement
                  dated as of August 1, 2006 by and between POZEN INC. and AstraZeneca
                  AB31.1
              Certification
                  of the Chief Executive Officer pursuant to Rule 13a-14(a) under
                  the
                  Securities Exchange Act of 1934, as adopted pursuant to Section
                  302 of the
                  Sarbanes-Oxley Act of 2002.31.2
              Certification
                  of the Chief Financial Officer pursuant to Rule 13a-14(a) under
                  the
                  Securities Exchange Act of 1934, as adopted pursuant to Section
                  302 of the
                  Sarbanes-Oxley Act of 2002.32.1
              Certification
                  of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
              Certification
                  of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 † Confidential treatment requested as to certain portions.
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