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 June 30, 2009





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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  ̈  Yes     ̈  No





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check
one):





 ̈  Large
Accelerated Filer     x  Accelerated
Filer


 ̈  Non-Accelerated
Filer  ̈ Smaller Reporting
Company





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 July 24,
2009 was 29,825,365.




















POZEN
Inc.


FORM
10-Q




For
the Three Months Ended June 30, 2009




INDEX




PagePART
      I.
                FINANCIAL INFORMATIONItem
      1.
                Financial Statements (unaudited)Balance Sheets as of June 30, 2009 and December 31,
      2008
                1Statements of Operations for the Three and Six Months
      Ended June 30, 2009 and 2008
                2Statements of Cash Flows for the Six Months Ended June
      30, 2009 and 2008
                3Notes to Financial Statements
                4Item
      2.
                Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                12Item
      3.
                Quantitative and Qualitative Disclosures About Market
      Risk
                24Item
      4.
                Controls and Procedures
                24PART II.
                OTHER INFORMATIONItem
      1.
                Legal Proceedings
                25Item
      1A.
                Risk Factors
                25Item
      4.
                Submission of Matters to a Vote of Security
      Holders
                39Item 6.
                Exhibits
                40Signature and Certifications
                41Exhibit Page
                42


- i
-
 Table of Contents





PART
I. FINANCIAL INFORMATION





Item 1. Financial Statements





POZEN Inc.


BALANCE SHEETS


(Unaudited)








June
      30,
                  2009
              
              
              December
      31,
                  2008ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              16,867,053
              
              
              $
              26,119,249Short-term
      investments
              
              
              31,155,163
              
              
              
              35,562,723Accounts
      receivable
              
              
              948,512
              
              
              
              8,119,435Prepaid
      expenses and other current assets
              
              
              232,645
              
              
              
              562,161Total
      current assets
              
              
              49,203,373
              
              
              
              70,363,568Property
      and equipment, net of accumulated depreciation
              
              
              51,063
              
              
              
              72,563Total
      assets
              
              $
              49,254,436
              
              
              $
              70,436,131LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              2,107,416
              
              
              $
              7,328,428Accrued
      compensation
              
              
              1,101,678
              
              
              
              2,172,314Accrued
      expenses
              
              
              2,193,633
              
              
              
              5,737,254Deferred
      revenue
              
              
              12,344,708
              
              
              
              12,344,708Total
      current liabilities
              
              
              17,747,435
              
              
              
              27,582,704Long-term
      liabilities:Deferred
      revenue
              
              
              1,028,726
              
              
              
              7,201,080Total
      liabilities
              
              
              18,776,161
              
              
              
              34,783,784Preferred
      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; 29,825,365 and
      29,778,310 shares issued and outstanding at June 30, 2009 and December 31,
      2008, respectively
              
              
              29,825
              
              
              
              29,778Additional
      paid-in capital
              
              
              171,250,310
              
              
              
              168,541,451Accumulated
      other comprehensive income
              
              
              72,220
              
              
              
              221,520Accumulated
      deficit
              
              
              (140,874,080
              )
              
              
              (133,140,402
              )Total
      stockholders’ equity
              
              
              30,478,275
              
              
              
              35,652,347Total
      liabilities and stockholders’ equity
              
              $
              49,254,436
              
              
              $
              70,436,131








See
accompanying Notes to Financial Statements.





- 1
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POZEN Inc.


STATEMENTS OF OPERATIONS


(Unaudited)





Three
      Months ended June 30,
                    
                    
                    Six
      months ended June 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    2008Revenue:Licensing
      revenue
                    
                    $
                    4,034,689
                    
                    
                    $
                    24,519,015
                    
                    
                    $
                    8,138,309
                    
                    
                    $
                    28,370,096Development
      revenue
                    
                    
                    881,290
                    
                    
                    
                    8,605,038
                    
                    
                    
                    5,536,053
                    
                    
                    
                    12,582,946Total
      revenue
                    
                    
                    4,915,979
                    
                    
                    
                    33,124,053
                    
                    
                    
                    13,674,362
                    
                    
                    
                    40,953,042Operating
      expenses:General
      and administrative
                    
                    
                    4,783,168
                    
                    
                    
                    3,142,869
                    
                    
                    
                    9,211,160
                    
                    
                    
                    5,991,842Research
      and development
                    
                    
                    4,559,256
                    
                    
                    
                    17,144,221
                    
                    
                    
                    12,584,613
                    
                    
                    
                    30,256,753Total
      operating expenses
                    
                    
                    9,342,424
                    
                    
                    
                    20,287,090
                    
                    
                    
                    21,795,773
                    
                    
                    
                    36,248,595Interest
      and other income
                    
                    
                    156,025
                    
                    
                    
                    497,140
                    
                    
                    
                    387,732
                    
                    
                    
                    1,258,404Income
      (loss) before income tax expense
                    
                    
                    (4,270,420
                    )
                    
                    
                    13,334,103
                    
                    
                    
                    (7,733,679
                    )
                    
                    
                    5,962,851Income
      tax expense
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Net
      income (loss) attributable to common stockholders
                    
                    $
                    (4,270,420
                    )
                    
                    $
                    13,334,103
                    
                    
                    $
                    (7,733,679
                    )
                    
                    $
                    5,962,851Basic
      net income (loss) per common share
                    
                    $
                    (0.14
                    )
                    
                    $
                    0.45
                    
                    
                    $
                    (0.26)
                    
                    
                    $
                    0.20Shares
      used in computing basic net income (loss) per common share
                    
                    
                    29,815,228
                    
                    
                    
                    29,759,250
                    
                    
                    
                    29,802,015
                    
                    
                    
                    29,741,406Diluted
      net income (loss) per common share
                    
                    $
                    (0.14
                    )
                    
                    $
                    0.43
                    
                    
                    $
                    (0.26
                    )
                    
                    $
                    0.19Shares
      used in computing diluted net income (loss) per common
    share
                    
                    
                    29,815,228
                    
                    
                    
                    30,707,710
                    
                    
                    
                    29,802,015
                    
                    
                    
                    30,636,529





See
accompanying Notes to Financial Statements.





- 2
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POZEN Inc.


STATEMENTS OF CASH FLOWS


(Unaudited)





Six
      months ended June 30,2009
              
              
              2008Operating
      activitiesNet
      (loss) income
              
              $
              (7,733,679
              )
              
              $
              5,962,851Adjustments
      to reconcile net (loss) income to net cash used in operating
      activities:Depreciation
              
              
              20,001
              
              
              
              39,310Loss
      on sale of fixed assets
              
              
              1,498
              
              
              
              —Bond
      amortization income
              
              
              (241,255
              )
              
              
              (574,798
              )Noncash
      compensation expense
              
              
              2,676,205
              
              
              
              2,693,056Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              7,170,923
              
              
              
              (7,300,035
              )Prepaid
      expenses and other current assets
              
              
              329,517
              
              
              
              536,377Accounts
      payable and accrued expenses
              
              
              (9,835,269
              )
              
              
              3,778,735Deferred
      revenue
              
              
              (6,172,354
              )
              
              
              (7,546,097
              )Net
      cash used in operating activities
              
              
              (13,784,413
              )
              
              
              (2,410,601
              )Investment
      activitiesPurchase
      of equipment
              
              
              —
              
              
              
              (6,493
              )Purchase
      of investments
              
              
              (18,081,096
              )
              
              
              (43,020,061
              )Sale
      of investments
              
              
              22,580,611
              
              
              
              38,819,288Net
      cash provided by (used in) investing activities
              
              
              4,499,515
              
              
              
              (4,207,266
              )Financing
      activitiesProceeds
      from issuance of common stock
              
              
              32,702
              
              
              
              160,296Net
      cash provided by financing activities
              
              
              32,702
              
              
              
              160,296Net
      decrease in cash and cash equivalents
              
              
              (9,252,196
              )
              
              
              (6,457,571
              )Cash
      and cash equivalents at beginning of period
              
              
              26,119,249
              
              
              
              37,660,068Cash
      and cash equivalents at end of period
              
              $
              16,867,053
              
              
              $
              31,202,497





See
accompanying Notes to Financial Statements.





- 3
-
 Table of Contents





POZEN Inc.


NOTES TO FINANCIAL STATEMENTS


(Unaudited)




1.           Significant
Accounting Policies





General





POZEN Inc. (“we” or “POZEN” or the
“Company”) was incorporated in the State of Delaware on September 25, 1996 and
is operating in a single reportable segment. The Company is a pharmaceutical
company focused primarily on products for the treatment of acute and chronic
pain and other pain-related conditions. Since inception, the Company has focused
its efforts on developing products which can provide improved efficacy, safety
or patient convenience in the treatment of acute and chronic pain and pain
related conditions. The Company may enter into collaboration agreements to
commercialize its product candidates, and has entered into, and may continue to
enter into such collaborations. The Company’s licensing revenues include upfront
payments upon contract signing, additional payments if and when certain
milestones in the product’s development or commercialization are reached, and
the eventual royalty payments based on product sales. Additionally, the
Company’s development revenues include the billings for the direct costs and
certain personnel-related time incurred in performing additional development
activities described under its collaboration agreements.





2.           Summary
of Significant Accounting Policies





Use of Estimates—The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from the estimates and
assumptions used.





Revenue Recognition—The
Company records revenue under two categories: licensing revenues and development
revenues. With regard to the licensing revenues, 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 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 104”), 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 straight-line 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:





·
            The
      September 2006 $40.0 million licensing fee received from AstraZeneca AB,
      or AstraZeneca, related to the August 2006 Collaboration and License
      Agreement with AstraZeneca has been deferred and was initially being
      amortized over 40 months. The AstraZeneca licensing fee relates to the
      Company’s proprietary fixed dose combinations of the proton pump
      inhibitor, or PPI, esomeprazole magnesium with the non-steroidal
      anti-inflammatory drug, or NSAID, naproxen, in a single tablet. As a
      result of the revised development timeline agreed upon in the September
      2007 amendment to the AstraZeneca agreement, we extended the amortization
      period by 3 months. The September 2007 amendment included a $10 million
      payment in connection with execution of the amendment. This payment was
      deferred to be amortized over 31 months. In 2008, we subsequently extended
      the amortization periods by 4 months, as a result of revisions to the
      development timeline. We recognized $6.2 million and $7.4 million of
      licensing revenue from the amortization of the AstraZeneca licensing fee
      and September 2007 amendment for the six months ended June 30, 2009 and
      2008, respectively, and we recognized $3.1 million and $3.7 million for
      the three months ended June 30, 2009 and
2008.








- 4
-
 Table of Contents





·
            The
      June 2003 initial licensing and patent-issuance milestone payments
      totaling $25.0 million for MT 400 received from GlaxoSmithKline, or GSK,
      have been deferred and were amortized over the expected period of
      development. During 2005 the amortization period was decreased to 39
      months based upon the August 2005 submission to the U.S. Food and Drug
      Administration (“FDA”) of the Treximet®
      new drug application (“NDA”) which occurred earlier than previously
      anticipated. The 2005 change in the amortization period resulted in a $0.7
      million increase in the 2005 full-year amortization. During 2006, based
      upon the June 2006 receipt of an approvable letter from the FDA related to
      the Treximet NDA and the December 2006 receipt of a notice from the FDA
      that it had requested additional analyses and supporting information
      relating to submitted data, $1.9 million of the $25 million initial
      licensing and patent-issuance milestone payments was deferred to 2007.
      With the receipt of a second approvable letter in August 2007, unamortized
      deferred revenue was amortized through March 2008. We recognized $0.2
      million of licensing revenue from the amortization of GSK milestone
      payments during the six months ended June 30, 2008 and no revenue was
      recognized during the three months ended June 30, 2008 and the three and
      six months ended June 30, 2009. The GSK upfront payments are now fully
      amortized.





Milestone payments are recognized as licensing 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.





Treximet royalty revenue is recognized
when earned as will any future royalty revenues with respect to the manufacture,
sale or use of the Company’s products or technology. For Treximet or those
future arrangements where royalties are reasonably estimable, the Company
recognizes revenue based on estimates of royalties earned during the applicable
period and reflect in future revenue any differences between the estimated and
actual royalties. During the three and six months ended June 30, 2009, the
Company recognized $0.9 and $2.0 million of royalty revenue which is included
within licensing revenue in the accompanying statements of operations. During
the three and six months ended June 30, 2008, the Company recognized $0.8
million and $0.8 million of royalty revenue which is included within licensing
revenue in the accompanying statements of operations.





With regards to the development
revenues, the Company’s licensing agreements may include payment for development
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 EITF 99-19, “Reporting Revenue Gross as a Principal versus Net
as an Agent”, under the collaboration agreements with AstraZeneca and GSK, the
Company recognizes as development revenue the billings for the direct costs and
certain personnel-related time incurred in performing additional development
activities described within the related agreements. We recognize development
revenue for development activities performed pursuant to the AstraZeneca and GSK
agreements. The collaboration agreements establish the rates for billing
personnel-related time incurred and consequently, the associated costs incurred
to perform the additional development activities are not separately captured
from ongoing personnel costs.





Development revenue and direct billed
costs for the three and six months ended June 30, 2009 and 2008 were the
following:





Three
      months ended June 30,
                
                
                Six
      months ended June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Development
      Revenue
                
                $
                881,290
                
                
                $
                8,605,038
                
                
                $
                5,536,053
                
                
                $
                12,582,946Direct
      Costs
                
                $
                227,415
                
                
                $
                7,955,144
                
                
                $
                3,966,802
                
                
                $
                11,003,063











- 5
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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; however, given the
recent disruption in the credit markets and the downgrades of previous
high-credit companies, the possibility of a loss is increased. 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, on an on-going basis, for market 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 three month period ended June 30, 2009 and 2008, the Company
had $49,000 and $214,000, respectively, of interest income and $107,000 and
$283,000, respectively, of bond amortization income included in other income for
the period. For the six month periods ended June 30, 2009 and 2008, the Company
had $147,000 and $683,000, respectively, of interest income and $241,000 and
$575,000, respectively, of bond amortization income included in other income for
the period. The Company has considered the impact of the current economic
environment on its evaluation of the fair value of its investments. We have no
investments in debt securities with maturities of greater than one year. As of
June 30, 2009 and December 31, 2008, there were no investments in a significant
unrealized loss position.





Short-term investments consisted of the
following as of June 30, 2009:





Amortized
      Cost
                
                
                Unrealized
                  Gain
                
                
                Unrealized
      Loss
                
                
                MarketShort-term
      investments:U.S.
      treasury and agency securities
                
                $
                31,080,702
                
                
                $
                72,161
                
                
                $
                (107
                )
                
                $
                31,152,756Corporate
      notes
                
                
                2,241
                
                
                
                275
                
                
                
                (109
                )
                
                
                2,407Total
      short-term investments
                
                $
                31,082,943
                
                
                $
                72,436
                
                
                $
                (216
                )
                
                $
                31,155,163





Short-term investments consisted of the
following as of December 31, 2008:





Amortized
      Cost
                        
                        
                        Unrealized
                          Gain
                        
                        
                        Unrealized
      Loss
                        
                        
                        MarketShort-term
      investments:U.S.
      treasury and agency securities
                        
                        $
                        30,429,208
                        
                        
                        $
                        213,830
                        
                        
                        $
                        -
                        
                        
                        $
                        30,643,038Corporate
      notes
                        
                        
                        4,911,995
                        
                        
                        
                        12,584
                        
                        
                        
                        (4,894
                        )
                        
                        
                        4,919,685Total
      short-term investments
                        
                        $
                        35,341,203
                        
                        
                        $
                        226,414
                        
                        
                        $
                        (4,894
                        )
                        
                        $
                        35,562,723





Cash and Cash Equivalents
and Concentration of Credit Risk





The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash is invested in interest-bearing investment-grade securities.
Cash is restricted to the extent of a $94,684 letter of credit, maintained in
compliance with the terms of the Company’s office lease.





Cash and cash equivalents include
financial instruments that potentially subject the Company to a concentration of
credit risk. Cash and cash equivalents are of a highly liquid nature and are
insured by the respective financial institutions up to $250,000 per account. Any
excess amounts are uninsured. Cash and cash equivalents are deposited with high
credit quality financial institutions which invest primarily in U.S. Government
securities, highly rated commercial paper and certificates of deposit guaranteed
by banks which are members of the FDIC. The counterparties to the agreements
relating to the Company’s investments consist primarily of the U.S. Government
and various major corporations with high credit standings.





Fair Value
Measurement





On January 1, 2008, we adopted the
provisions of SFAS 157 "Fair Value Measurements" ("SFAS 157"). SFAS 157 was
issued in September 2006 and is effective for financial statements issued for
fiscal years beginning after November 15, 2007. In February 2008, the Financial
Accounting Standards Board ("FASB") released FSP No. FAS 157-2 which deferred
the effective date of SFAS 157 for one year for nonfinancial assets and
nonfinancial liabilities. SFAS 157 was adopted for financial assets and
financial liabilities or for nonfinancial assets and nonfinancial liabilities
that are remeasured at least annually. Accordingly, as of January 1, 2009, we
have fully adopted the provisions of SFAS 157.








- 6
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 Table of Contents





The following table sets forth our
financial instruments carried at fair value as of June 30, 2009 and December 31,
2008:





Financial
      InstrumentsCarried
      at Fair ValueJune
      30,
                  2009
                
                
                December
      31, 2008Assets:Cash
      and cash equivalents
                
                $
                16,867,053
                
                
                $
                26,119,249Short-term
      investments
                
                
                31,155,163
                
                
                
                35,562,723Total
      cash and investments
                
                $
                48,022,216
                
                
                $
                61,681,972





The following table sets forth our
financial instruments carried at fair value within the SFAS 157 hierarchy and
using the lowest level of input as of June 30, 2009:





Financial
      InstrumentsCarried
      at Fair ValueQuoted
      prices
                
                
                Significant
      other
                
                
                Significantin
      active Markets
                
                
                observable
                
                
                unobservablefor
      identical items
                
                
                inputs
                
                
                inputs(Level
      1)
                
                
                (Level
      2)
                
                
                (Level
      3)
                
                
                TotalAssets:Cash
      and cash equivalents
                
                $
                13,069,882
                
                
                
                3,797,171
                
                
                
                —
                
                
                
                16,867,053Short-term
      investments
                
                
                —
                
                
                
                31,155,163
                
                
                
                —
                
                
                
                31,155,163Total
      cash and investments
                
                $
                13,069,882
                
                
                
                34,952,334
                
                
                
                —
                
                
                
                48,022,216





Realized gains and losses from sales of
our investments are included in “Other income (expense), net” and unrealized
gains and losses are included as a separate component of equity unless the loss
is determined to be “other-than-temporary.”





In determining whether a decline in
fair value below the original cost is other-than-temporary, we usea systematic methodology that considers all available evidence,
including the credit rating of the relevant trust, the parity score (a measure
of the trust's ability to meet its obligations as they come due), general market
conditions, and industry and sector performance, among other factors. We also
consider the duration and extent to which the fair value is less than cost, as
well as our intent and ability to hold the investment until recovery or, if
necessary, to the instrument's maturity.When determining
whether an impairment is other-than-temporary we also consider the following
information: (i) if the market value of the investment is below its current
carrying value for an extended period, which we generally define as nine to
twelve months; (ii) if the issuer has experienced significant financial
declines; or (iii) if the issuer has experienced significant changes in its
credit quality, among other factors. The Company did not have any
other-than-temporary impairments during the periods presented.





Accumulated Other Comprehensive
Income—The Company follows the provisions of SFAS 130, “Reporting
Comprehensive Income.” SFAS 130 establishes standards for the reporting and
display of comprehensive income (loss) and its components for general purpose
financial statements. 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 $72,220 of unrealized gains
on its investments that are classified as accumulated other comprehensive income
(loss) at June 30, 2009 and $221,520 of unrealized gains at December 31,
2008.





Comprehensive income (loss) consists of
the following components for the three and six months ended June 30, 2009 and
2008:





Three
      months ended June 30,
                
                
                Six
      months ended June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      (loss) income
                
                $
                (4,270,420
                )
                
                $
                13,334,103
                
                
                $
                (7,733,679
                )
                
                $
                5,962,851Unrealized
      (loss) gain on marketable securities
                
                
                (73,684
                )
                
                
                (47,065
                )
                
                
                (149,299
                )
                
                
                (32,560
                )Total
      comprehensive (loss)income
                
                $
                (4,344,104
                )
                
                $
                13,287,038
                
                
                $
                (7,882,978
                )
                
                $
                5,930,291







Stock-based Compensation—We
follow 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.





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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 conditions
granted subsequent to our adoption of SFAS No. 123(R), we recognize compensation
cost over the expected period to achieve the performance conditions, provided
achievement of the performance conditions are deemed probable.





Our
consolidated statements of operations for the three and six months ended June
30, 2009 and 2008 includes the following stock-based compensation
expense:





Three
      months ended June 30,
                
                
                Six
      months ended June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Research
      and development
                
                $
                431,587
                
                
                $
                590,770
                
                
                $
                849,629
                
                
                $
                922,676General
      and administrative
                
                
                1,041,940
                
                
                
                1,062,547
                
                
                
                1,826,576
                
                
                
                1,770,380Operating
      expense
                
                
                1,473,527
                
                
                
                1,653,317
                
                
                
                2,676,205
                
                
                
                2,693,056Tax
      benefit
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Net
      expense
                
                $
                1,473,527
                
                
                $
                1,653,317
                
                
                $
                2,676,205
                
                
                $
                2,693,056





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 1.85 years was $6.4
million at June 30, 2009 and, over an estimated weighted-average amortization
period of 1.45 years was $9.8 million at June 30, 2008. Unrecognized stock-based
compensation expense expected to be recognized over the remaining period ending
December 31, 2009 was $2.2 million at June 30, 2009 and was $3.1 million at June
30, 2008 for the remaining period ending December 31, 2008.





Time-Based Stock
Awards





For the three and six months ended June
30, 2009, the Company recognized $1.1 million and $2.0 million, respectively, in
compensation for time-based awards. For the three and six months ended June 30,
2009, the Company recognized $1.4 million and $2.4 million, respectively, in
compensation for time-based 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 for the three and six months ended June 30, 2009 and
2008 are shown in the following table:





Three
      months ended June 30,
                
                
                Six
      months ended June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Expected
      volatility
                
                
                73.3
                %
                
                
                72.9
                %
                
                
                73.3
      – 77.8
                %
                
                
                72.9
      – 73.2
                %Expected
      dividends
                
                
                0
                %
                
                
                0
                %
                
                
                0
                %
                
                
                0
                %Expected
      terms
                
                6.0
      Years
                
                
                5.3
      – 6.3 Years
                
                
                6.0
      Years
                
                
                5.3
      – 6.3 YearsRisk-free
      interest rate
                
                
                2.95
                %
                
                
                3.3
                %
                
                
                2.2
      – 2.95
                %
                
                
                2.6
      – 3.3
                %





For the three and six months ended June
30, 2009 and 2008, the expected volatility rate was estimated based on an equal
weighting of the historical volatility of POZEN common stock over approximately
a six year period. For the three and six months ended June 30, 2009 and 2008,
the expected term was based upon average historical terms to exercise. 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 six months ended June 30, 2009 and 2008 was based on
historical rates. As required under SFAS No. 123(R), we adjust the estimated
forfeiture rate based upon actual experience.








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A summary of the time-based stock
awards as of June 30, 2009, and changes during the three and six months ended
June 30, 2009, is as follows:





Time-Based
      Stock Awards
                
                Underlying
                  Shares
                  (000s)
                
                
                Weighted-Average
      Exercise Price
                
                
                Average
      Remaining Contractual Term
                  (years)
                
                
                Aggregate
      Intrinsic Value
                  (000s)Outstanding
      at January 1, 2009
                
                
                3,732
                
                
                $
                9.86
                
                
                
                5.2
                
                
                $
                197Granted
                
                
                459
                
                
                
                5.66Exercised
                
                
                (34
                )
                
                
                0.89Forfeited
      or expired
                
                
                (61
                )
                
                
                12.79Outstanding
      at March 31, 2009
                
                
                4,096
                
                
                $
                9.49
                
                
                
                5.5
                
                
                $
                816Exercisable
      at March 31, 2009
                
                
                2,839
                
                
                $
                8.93
                
                
                
                4.9
                
                
                $
                607Granted
                
                
                48
                
                
                
                7.75Exercised
                
                
                (1
                )
                
                
                2.02Forfeited
      or expired
                
                
                (188
                )
                
                
                9.46Outstanding
      at June 30, 2009
                
                
                3,955
                
                
                $
                9.39
                
                
                
                5.4
                
                
                $
                2,926Exercisable
      at June 30, 2009
                
                
                2,742
                
                
                $
                9.03
                
                
                
                4.8
                
                
                $
                2,018





The aggregate intrinsic value of
options outstanding 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
six month periods ended June 30, 2009 and 2008 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 six month period ended June 30,
2009 was less than $0.1 million and $0.2 million, respectively. The total
intrinsic value of stock options exercised during the three and six month period
ended June 30, 2008 was $2.1 million and $2.4 million,
respectively.





Restricted Stock and
Restricted Stock Units





For the three and six months ended June
30, 2009, the Company recognized $29,000 and $77,000, respectively, in
compensation expense related to restricted stock units. For the three and six
months ended June 30, 2008, the Company recognized $49,000 and $119,000,
respectively, in compensation expense related to restricted stock units. As of
June 30, 2009, there was an aggregate $114,000 of unrecognized compensation
expense related to unvested restricted stock units. Of the aggregate amount,
$36,000 unrecognized compensation expense related to unvested restricted stock
units under the 2007 award of 20,200 restricted stock units with a grant-date
per-share fair value of $16.89 and $78,000 unrecognized compensation expense
related to unvested restricted stock units under the June 3, 2009 award of
11,000 restricted stock units with a grant-date per-share fair value of $7.75.
During the second quarter of 2009, no restricted stock units were forfeited.
There were 14,487 unvested restricted stock units outstanding at June 30,
2009.





Performance-Based
Awards





On May 6, 2008, pursuant to an
incentive program (the “PN 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 281,433 shares of common stock. On September 10, 2008,
additional stock options were granted under the PN incentive program, to
purchase 11,700 shares of common stock. Twenty-five percent (25%) of the PN
incentive program options granted will vest upon the acceptance by the FDA of
the NDA for PN 400. The remaining seventy-five (75%) of the options granted will
vest upon the receipt by the Company of an action letter from the FDA indicating
approval of the NDA for PN 400. The options have a ten-year term. The May 6,
2008 and September 10, 2008 option grants have exercise prices of $14.45 and
$10.82, respectively, which was equal to the NASDAQ reported market closing
price of the common stock on the date of grant. The weighted average
grant-date fair value of these performance-based options was $9.66 and $7.08 per
share for the May 6, 2008 and September 1, 2008 option grants,
respectively. The options also include provisions that require satisfactory
employee performance prior to vesting. Additionally, 20,000 options were granted
to an executive officer on May 6, 2008 under the PN incentive plan, with
identical grant and exercise terms except that 100% of the options granted will
vest upon the FDA indicating acceptance of the NDA for PN 400. The Company is
recognizing compensation costs for these awards over the expected service
period. Total expense related to these awards for the three and six months ended
June 30, 2009 was $0.3 million and $0.6 million, respectively.








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As of June 30, 2009, there was $0.9
million in unrecognized compensation expense related to performance-based awards
granted under the PN incentive program. The June 30, 2009 amount is expected to
be recognized over the period ending July 31, 2010. There were 276,633 unvested
performance-based options outstanding at June 30, 2009. There were 36,500 awards
forfeited during the six months ended June 30, 2009. No awards were forfeited
during the six months ended June 30, 2008. No performance-based awards were
exercised during the six months ended June 30, 2009 and June 30, 2008. At June
30, 2009 the performance-based options had no intrinsic value and a remaining
contractual life of 8.7 years.





The fair value of the performance-based
options granted under the Plan was estimated as of the grant date using the
Black-Scholes option valuation model without consideration of the performance
measures.





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 income or loss per common share amounts have been
computed using the weighted-average number of shares of common stock outstanding
for the six months ended June 30, 2009 and 2008. During the six months ended
June 30, 2009 and 2008, 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 the six months ended
June 30, 2009 because the effect would have been antidilutive. Accordingly,
basic and diluted net loss per share is the same for six months ended June 30,
2009. 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
earnings per share calculation because the Rights are not exercisable since the
specified contingent future event has not occurred.





Reconciliation
of denominators for basic and diluted earnings per share
computations:





Three
      months ended
                  June
      30,
                
                
                Six
      months ended
                  June
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Basic
      weighted average shares outstanding
                
                
                29,815,228
                
                
                
                29,759,250
                
                
                
                29,802,015
                
                
                
                29,741,406Effect
      of dilutive employee and director awards
                
                
                -
                
                
                
                948,460
                
                
                
                -
                
                
                
                895,123Diluted
      weighted-average shares outstanding and
                  assumed
      conversions
                
                
                29,815,228
                
                
                
                30,707,710
                
                
                
                29,802,015
                
                
                
                30,636,529








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 for each one one-thousandth of a share, 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.





Leases—On February 16, 2009,
the Company entered into a Lease Modification Agreement No. 1 (the “Modification
Agreement”) modifying certain terms to our existing lease agreement, dated
November 21, 2001, relating to approximately 17,009 square feet of office space
located at Exchange Office Building, Chapel Hill, North Carolina. Under the
terms of the Modification Agreement, the lease term is extended for an
additional 5 years and 7 months, terminating on September 30, 2015. The
Modification Agreement also provides the Company with a reduced notice period of
7 months for renewals of the lease. The Company is also entitled to a 3-year
lease extension option available at the end of the term and a first offer right
on available space located within the Exchange Office Building property. As a
result of entering into the Modification Agreement, the Company’s noncancellable
future minimum lease payments for operating leases will increase by
approximately $2.7 million over the lease term.








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New Accounting
Pronouncements—In December 2007, the FASB ratified the
consensus reached on Emerging Issues Task Force Issue No. 07-1, “Accounting for
Collaborative Arrangements” (“EITF 07-1”). EITF 07-1 defines collaborative
arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the
arrangement and third parties. EITF 07-1 was effective beginning on January 1,
2009. The Company believes EITF 07-1 does not have a material impact on its
financial statements.





In May 2009, the FASB issued Statement
of Financial Accounting Standards No. 165, Subsequent Events which
provides authoritative accounting literature for a topic that was previously
addressed only in the auditing literature. Three modifications to the subsequent
events guidance in AU Section 560 are: 1) to name the two types of subsequent
events either as recognized subsequent events or non-recognized subsequent
events; 2) to modify the definition of subsequent events to refer to events or
transactions that occur after the balance sheet date, but before the financial
statements are issued; and 3) to require entities to disclose the date through
which an entity has evaluated subsequent events and the basis for that date.
SFAS 165 was adopted effective June 15, 2009.





In April 2009, the FASB issued FSP FAS
107-1, Interim Disclosures
About Fair Value of Financial Instruments which requires disclosures of
the fair value of all financial instruments (recognized or unrecognized), except
for those specifically listed in paragraph 8 of Statement 107, when practicable
to do so. These fair value disclosures must be presented together with the
related carrying amount of the financial instruments in a manner that clearly
distinguishes between assets and liabilities and indicates how the carrying
amounts relate to amounts reported on the balance sheet. An entity must also
disclose the method(s) and significant assumptions used to estimate the fair
value of financial instruments. FSP FAS 107-1 was adopted effective June 15,
2009.





In April 2009, the FASB issued FSP FAS
115-2, Recognition and
Presentation of Other-Than-Temporary Impairment. Statement 115 changes
existing accounting requirements for other-than-temporary-impairment (OTTI) for
debtsecurities by
replacing the current requirement that a holder have the positive intent and
ability to hold an impaired security to recovery in order to conclude an
impairment was temporary with a requirement that an entity conclude it does not
intend to sell an impaired security and it is not more likely than not it will
be required to sell the security before the recovery of its amortized cost
basis. FSP FAS 115-2 was adopted effective June 15, 2009. The Company believes
FSP FAS 115-2 does not have a material impact on its financial
statements.





Contingencies—A purported
class action lawsuit claiming violations of securities
laws was filed on August 10, 2007 in the U.S. District
Court for the Middle District of North Carolina by a holder of its
securities against the Company, its chairman and chief executive officer and one
of its directors. The complaint alleges, among other claims, violations of
Section 10(b), Rule 10b-5, and Section 20(a) of the Exchange Act arising out of
allegedly false and misleading statements made by the Company concerning its
migraine drug candidate, Treximet, during the purported class period, July 31,
2006 through August 1, 2007. By order dated February 15, 2008, the Court
appointed joint co-lead plaintiffs. On April 25, 2008, the Company received the
plaintiffs’ amended and consolidated complaint which added two current officers
of the Company as additional defendants. The Company and individual defendants
filed motions to dismiss the amended and consolidated complaint with the Court
on June 26, 2008. On August 27, 2008, the plaintiffs voluntarily dismissed their
claims against one of the Company’s directors. On February 19, 2009, Magistrate
Judge Dixon, to whom the Court had referred the motion to dismiss, issued a
Recommendation that the Court grant the Company and individual defendants'
motion to dismiss without leave for plaintiffs to file another amended
complaint. Plaintiffs filed objections to the recommendation on March 23, 2009
and a corrected version of the objections on March 26, 2009. Defendants’
response to these objections was filed on April 20, 2009. The matter in now
awaiting a decision by the Court. The Company and the individual defendants
intend to continue to defend these claims vigorously but there can be no
assurance that the Court will accept the Recommendation of the Magistrate
Judge.





The
Company and GSK have received notices of Paragraph IV Notice Letters from Par
Pharmaceuticals Inc., or Par, and Alphapharm Pty Ltd., or Alphapharm, and
Alphapharm’s designated agent, Mylan Pharmaceuticals Inc., and Teva
Pharmaceuticals USA, or Teva, informing us that each company had filed an
Abbreviated New Drug Application, or ANDA, with the Food and Drug
Administration, or FDA, seeking approval to market sumatriptan 85 mg/naproxen
sodium 500 mg tablets. Par, Alphapharm and Teva have each indicated in their
respective Notice Letters that they intend to market a generic version of
Treximet tablets before the expiration of U.S. Patent Nos. 6,060,499, 6,586,458
and 7,332,183. GSK advised us that it has elected not to exercise its first
right to bring infringement suits against Par, Alphapharm and Teva. Accordingly,
we filed suit against Par on November 14, 2008, Alphapharm and Mylan on January
2, 2009 and Teva on April 14, 2009, all in the United States District Court for
the Eastern District of Texas. All three actions have since been consolidated
into one suit. The Company’s filing of these patent infringement lawsuits within
forty-five days of our receipt of the respective Notice Letters from Par,
Alphapharm and Teva resulted in the FDA automatically instituting a stay, or
bar, of approval of Par’s, Alphapharm’s and Teva’s respective ANDAs for up to 30
months or until a final court decision is entered in the infringement suit in
favor of the ANDA applicant, whichever occurs first. Treximet currently has
regulatory exclusivity through April 15, 2011. Treximet may be eligible for an
additional six months of exclusivity upon the completion of certain pediatric
studies.  Written and document discovery are at an early stage. The
cases are set for trial in the fourth quarter of 2010.





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As with
any litigation proceeding, we cannot predict with certainty the eventual outcome
of the pending class action lawsuit described above or a patent infringement
lawsuit against Par, Alphapharm and Teva. Furthermore, we will have to incur
expenses in connection with these lawsuits, which may be substantial. In the
event of an adverse outcome or outcomes, our business could be materially
harmed. Moreover, responding to and defending pending litigation will result in
a significant diversion of management’s attention and resources and an increase
in professional fees.





Under its 2003 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 was not initially recognized as revenue.





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. We do not believe that the withdrawal
fee is payable under the circumstances of receipt of the 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 although the last written communication from Valeant NA was received
in March 2006. In 2008, based upon our evaluation of the facts and
circumstances, we recognized the remaining $1.0 million licensing fee for MT
300. 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.





Subsequent
Events— The
Company has evaluated subsequent events through July 31, 2009, which represents
the date the Company’s Form 10-Q for the quarter ended June 30, 2009 was filed
with the Securities and Exchange Commission.





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, 2008, as filed on
March 6, 2009.





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 below in the section
entitled “Item 1A --Risk Factors.” 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
on developing products which can provide improved efficacy, safety or patient
convenience in the treatment of acute and chronic pain and pain related
conditions. We operate a business model that focuses on the
following:





·
              obtaining patents for innovative ideas which we believe have value in the
      marketplace;





·
                utilizing a small group of talented employees to develop those ideas
      through proof of concept by working with strategic outsource
      partners;





·
              developing a regulatory pathway with the appropriate agency;
      and





·
              determining how best to commercialize our products, which may include
      licensing the resulting product or technology to a strong pharmaceutical
      partner to commercialize.











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We hire experts with strong project
management skills in the specific disciplines we believe are important to
maintain within our company. We contract with and manage strong outsource
partners as we complete the necessary development work, permitting us to avoid
incurring the cost of buying or building laboratories, manufacturing facilities
or clinical research operation sites. This allows us to control our annual
expenses, but to utilize “best in class” resources as required.





After we establish the proof of concept
for an innovative idea, we work with the U.S. Food and Drug Administration, or
FDA, or foreign regulatory agencies to design a clear path forward to the filing
of a new drug application, or NDA, or its foreign equivalent. We may then decide
to seek a strong pharmaceutical partner to license the product or technology to
collaborate with us in the remaining development and to commercialize the
product or technology after approval. The success of our business is highly
dependent on the marketplace value of our ideas and the related patents we
obtain, our ability to obtain from the required regulatory agencies approval to
sell the developed products and our ability to find strong commercial partners
to successfully commercialize the products or to successfully commercialize the
products ourselves.





We have
developed Treximet® (formerly known as TreximaTM) in collaboration with
GlaxoSmithKline, or GSK. Treximet is the brand name for the product combining
sumatriptan 85 mg, formulated with RT TechnologyTM and naproxen sodium 500 mg in
a single tablet designed for the acute treatment of migraine. On April 15, 2008,
the FDA approved Treximet for the acute treatment of migraine attacks with or
without aura in adults. Upon receipt of FDA approval, GSK notified us of its
intention to launch the product and Treximet was available in pharmacies in May
2008.





Treximet
incorporates our MT 400 technology, which refers to our proprietary combinations
of a triptan (5-HT1B/1D
agonist) and a non-steroidal anti-inflammatory drug, or NSAID. Under our MT 400
technology, we sought 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 the NDA for
Treximet with the FDA in August 2005, and in June 2006 we received an approvable
letter requiring us to provide certain additional safety information relating to
Treximet, some of which required new studies. 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. In early January
2007, we delivered a full response to this approvable letter that provided
additional data and analyses and supporting information addressing the FDA’s
safety concerns, including cardiovascular safety. On August 1, 2007, we received
a second approvable letter from the FDA for Treximet in which the FDA requested
that we further address the FDA’s concern about the product’s potential for
genotoxicity. In response to this approvable letter, we submitted the results of
three non-clinical (in vitro) studies that provided clarifying information about
the Chinese Hamster Ovary, or CHO, assay and data from a clinical evaluation of
the genotoxic potential of Treximet in human volunteers which indicated that no
chromosomal aberrations were induced in peripheral blood lymphocytes when
Treximet was administered to volunteers for seven days. On April 15, 2008, the
FDA approved Treximet for the acute treatment of migraine attacks with or
without aura in adults.





We are
also developing product candidates that combine a type of acid inhibitor, a
proton pump inhibitor, or 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, or 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, which agreement
was amended in September 2007 and October 2008. We began the Phase 3 program in
September 2007. As part of the program, we conducted two Phase 3 pivotal trials
in patients who are at risk for developing NSAID-associated gastric ulcers, the
primary endpoint for which was the reduction in endoscopic gastric ulcers. In
October 2008, the FDA informed us that it was conducting an internal review of
the acceptability of using endoscopic gastric ulcers as a primary endpoint in
clinical trials. In late January 2009, the FDA informed us that it had completed
its internal discussions and that there was no change to previous agreements
that gastric ulcer incidence was an acceptable primary endpoint for POZEN’s
clinical programs. The two pivotal trials have been completed and met their
primary endpoints. In both trials, patients taking PN 400 experienced
significantly fewer endoscopically confirmed gastric ulcers compared to subjects
receiving enteric-coated naproxen during the six-month treatment period. In
addition to the Phase 3 pivotal trials, we have completed a long-term, open
label safety study. We terminated a non-pivotal smaller study in patients at
high risk of gastrointestinal related events from NSAIDs which we believe is not
required for approval. We also conducted additional studies at AstraZeneca’s
expense. The NDA for PN 400 was submitted on June 30, 2009. Pending regulatory
approval, the proposed trade name of PN 400 is VIMOVOTM.








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Another product candidate, PA, a
combination of a PPI and aspirin, is currently in formulation and clinical
development testing. Our PA product candidates are excluded from our agreement
with AstraZeneca. We have met with the FDA to discuss the overall development
program requirements. An investigational new drug application, or IND, was filed
in the fourth quarter of 2007. We have completed a study which demonstrated the
bioequivalence of the salicylic acid component of PA32540 as compared to 325 mg
of enteric-coated aspirin which we believe will satisfy the FDA’s bioequivalence
requirement. We filed a Special Protocol Assessment, or SPA, with the FDA for
the design of the Phase 3 studies for the product, the primary endpoint for
which is the reduction in endoscopic gastric ulcers. The SPA is a process by
which the FDA and a company reach agreement on the Phase 3 pivotal trial
protocol design, clinical endpoints and statistical analyses that are acceptable
to support regulatory approval. In October 2008, the FDA informed us that it was
conducting an internal review of the acceptability of using endoscopic gastric
ulcers as a primary endpoint in clinical trials. In late January 2009, the FDA
informed us that it had completed its internal discussions and that there was no
change to previous agreements that gastric ulcer incidence was an acceptable
primary endpoint for our clinical programs. In February 2009, we received
written confirmation from the FDA that endoscopic gastric ulcer incidence was an
acceptable primary endpoint for the Phase 3 clinical studies we proposed in our
SPA for PA32540. We are aware of publications that contain conflicting data
regarding a possible interaction between clopidogrel (Plavix®) and certain
enteric-coated proton pump inhibitor products. To determine whether an
interaction occurs between clopidogrel and PA32540, we intend to undertake a
Phase 1 drug-drug interaction study to evaluate the platelet aggregation effects
of PA32540 plus clopidogrel compared to aspirin plus clopidogrel. We plan to
begin Phase 3 studies for PA32540 in the second half of 2009. We are also
continuing to evaluate how best to commercialize the PA product candidates and
programs.





We are
also conducting both formulation development and early stage clinical studies
with new product concepts that are currently in the exploratory stage. If
warranted, we may file U.S. and international patent applications with claims
directed toward these novel combinations and formulations.





We have incurred significant losses
since our inception and have not yet generated significant revenue from product
sales. As of June 30, 2009, our accumulated deficit was approximately $140.9
million. We record revenue under two categories: licensing revenues and
development revenues. Our licensing revenues include upfront payments upon
contract signing, additional payments if and when certain milestones in the
product’s development or commercialization are reached, and the royalty payments
based on product sales. Additionally, our development revenues include the
billings for the direct costs and certain personnel-related time incurred in
performing additional development activities described under our collaboration
agreements. 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 approximately 73% of our
total operating expenses. For the six months ended June 30, 2009, our research
and development expenses represented approximately 58% of our total operating
expenses.





Operating
losses may be incurred 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 our PN and PA product candidates and our other product
      candidates in the clinical and regulatory
  process;





·
              The ability of GSK to successfully commercialize Treximet in the U.S. For
      example, Treximet was available in pharmacies within one month from the
      date of its approval, but promotional and professional materials for the
      product, including direct to consumer advertising, were not approved on a
      timely basis by the FDA. The lack of approved materials and delayed
      advertising launch may have had an adverse impact on uptake of the
      product, thus negatively impacting our royalty
  revenue;





·
              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;
and





·
              The acquisition and/or in-licensing, and development of our therapeutic
      product candidates.








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We do not currently have
commercialization or manufacturing capabilities. We have entered into
collaborations and may 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 to successfully develop product
candidates, to obtain regulatory approvals and to successfully manufacture and
commercialize our future products. These milestones are earned when we have
satisfied the criteria set out in our revenue recognition footnote accompanying
the financial statements included elsewhere in this Quarterly Report on Form
10-Q. These payments generate large non-recurring revenue that will cause large
fluctuations in quarterly and annual profit and loss.





Status
and Expenses Related to Our Product Candidates





There follows a brief discussion of the status of the development of our product
candidates, as well as the costs relating to our development activities. Our
direct research and development expenses were $9.2 million for the six months
ended June 30, 2009, and $26.6 million for the six months ended June 30, 2008.
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 generally 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 research and development were $3.3 million
for the six months ended June 30, 2009, and $3.5 million for the six months
ended June 30, 2008. Total compensation for the six months ended June 30, 2009
including a $0.8 million charge for non-cash compensation for stock option
expense and a $0.9 million charge for non-cash compensation for stock option
expense for the six months ended June 30, 2008. Other research and development
department costs were $0.1 million for the six months ended June 30, 2009, and
$0.1 million for the six months ended June 30, 2008.





MT
400/Treximet





On April
15, 2008, the FDA approved Treximet for the acute treatment of migraine attacks
with or without aura in adults. GSK notified us of its intention to launch the
product and was available in pharmacies in May 2008. As part of our NDA program
for Treximet, we conducted five Phase 1 trials, two Phase 3 pivotal trials, and
one 12-month open label safety trial using a formulation of Treximet developed
by GSK. The Phase 3 pivotal trials, including the endpoints required to evaluate
Treximet, were designed to demonstrate superiority to placebo for relief of pain
and the associated symptoms of migraine (nausea, photophobia and phonophobia) at
two hours. Additionally, the program was designed to demonstrate that each
component makes a contribution to the efficacy of Treximet (the “combination
drug rule” that the FDA requires of all combination products). The efficacy
endpoint for the combination was 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.
Further, GSK continues to conduct market support studies for Treximet. As
required by the terms of our agreement with GSK, we transferred ownership of the
NDA and other regulatory filings for Treximet to GSK on May 14, 2008, and GSK
now has responsibility for all ongoing regulatory obligations for the product,
including post marketing clinical trial requirements.





We incurred direct development costs
associated with the development of MT 400 of $0.2 million for the six months
ended June 30, 2009. We recorded in the six months ended June 30, 2009, $2.0
million of Treximet royalty revenue, of which, $0.9 million is in accounts
receivable at June 30, 2009. Our direct development costs do not include the
cost of research and development personnel or any allocation of our overhead
expenses.





We, along
with GSK, have received notices of Paragraph IV Notice Letters from Par,
Alphapharm, and Alphapharm’s designated agent, Mylan, and Teva, informing us
that each company had filed an ANDA with the FDA seeking approval to market
sumatriptan 85 mg/naproxen sodium 500 mg tablets. Par, Alphapharm and Teva have
each indicated in their respective Notice Letters that they intend to market a
generic version of Treximet tablets before the expiration of U.S. Patent Nos.
6,060,499, 6,586,458 and 7,332,183. GSK advised us that it has elected not to
exercise its first right to bring infringement suits against Par, Alphapharm and
Teva. Accordingly, we filed suit against Par on November 14, 2008; Alphapharm
and Mylan on January 2, 2009 and Teva on April 14, 2009, all in the United
States District Court for the Eastern District of Texas. All three actions have
since been consolidated into one suit. Our filing of these patent infringement
lawsuits within forty-five days of our receipt of the respective Notice Letters
from Par, Alphapharm and Teva resulted in the FDA automatically instituting a
stay, or bar, of approval of Par’s, Alphapharm’s and Teva’s respective ANDAs for
up to 30 months or until a final court decision is entered in the infringement
suit in favor of the ANDA applicant, whichever occurs first. Treximet currently
has regulatory exclusivity through April 15, 2011. Treximet may be eligible for
an additional six months of exclusivity upon the completion of certain pediatric
studies. Written and document discovery are at an early stage. The cases are set
for trial in the fourth quarter of 2010.








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PN
Program





Under our PN program, we have completed
formulation development and clinical studies for several combinations of a PPI
and a 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 a NSAID taken
alone in patients at risk for developing NSAID associated gastric ulcers. We
initially 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, prior to entering into
our collaboration with AstraZeneca. Our present development and
commercialization efforts under the PN program are covered under our exclusive
collaboration agreement with AstraZeneca, which we entered into on August 1,
2006 and which was amended in September 2007 and October 2008. Under our
agreement with AstraZeneca, we are co-developing with AstraZeneca, and
AstraZeneca will commercialize, proprietary fixed dose combinations of the PPI
esomeprazole magnesium with the NSAID naproxen in a single tablet. The initial
product to be developed under the agreement, PN 400, is being studied 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. On March 2, 2007, we filed an IND with the FDA for PN 400 and in
April 2007, the first Phase 1 study was initiated.





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 chronic 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
enteric-coated, or EC, 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 EC naproxen. This study demonstrated that the PN 200
product was bioequivalent to the reference drug, EC Naprosyn®, with respect to
the naproxen component.





In early
2006, we submitted a 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 have met with the FDA and confirmed the core development
program and the principles in the SPA already agreed upon do apply to the new
product consisting of proprietary fixed dose combinations of esomeprazole
magnesium with naproxen.





In the
third quarter of 2006, we began recruiting subjects for a six month comparative
trial of PN 200 as compared to EC naproxen in patients requiring chronic NSAID
therapy. The primary endpoint for the trial was the cumulative incidence of
gastric ulcers over six months of treatment. Because we did not have final
results until the fourth quarter of 2007, we, together with AstraZeneca reviewed
the interim results of this trial prior to commencing Phase 3 studies of PN 400
in September 2007. This study has now been completed and the results which have
been presented publicly, indicated significantly fewer endoscopically confirmed
gastric ulcers during the six month treatment period in subjects on PN 200
compared to subjects receiving enteric-coated naproxen alone. We conducted two
PN 400 Phase 3 pivotal trials in patients who are at risk for developing
NSAID-associated gastric ulcers, the primary endpoint for which is the reduction
in endoscopic gastric ulcers. In October 2008, the FDA informed us that it was
conducting an internal review of the acceptability of using endoscopic gastric
ulcers as a primary endpoint in clinical trials. In late January 2009, the FDA
informed us that it had completed its internal discussions and that there was no
change to previous agreements that gastric ulcer incidence was an acceptable
primary endpoint for our clinical programs. The two pivotal trials have been
completed and met their primary endpoints. In both trials, patients taking PN
400 experienced significantly fewer endoscopically confirmed gastric ulcers
compared to subjects receiving enteric-coated naproxen during the six-month
treatment period. In addition, we are conducting a long-term, open label safety
study for PN 400. We have terminated a non-pivotal smaller study in patients at
high risk (i.e., previous bleeding from a gastric ulcer) of gastrointestinal
related events from NSAIDs which is not required for approval. We have conducted
additional studies at AstraZeneca’s expense. The NDA for PN 400 was submitted on
June 30, 2009. Pending regulatory approval, the proposed trade name of PN 400 is
VIMOVOTM.








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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 product candidates.





Additionally,
we have met with four national European regulatory agencies to discuss the
proposed development program for PN. Under our agreement with AstraZeneca,
AstraZeneca has responsibility for the development program for PN outside the
U.S., including interactions with regulatory agencies. It is our understanding
that AstraZeneca intends to file marketing applications for PN 400 in certain
ex-U.S. countries based upon clinical data being generated for the NDA after the
NDA is filed.





We cannot
reasonably estimate or know the amount or timing of the costs necessary to
obtain regulatory approval of PN 400. Nor can we 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 $7.3 million for the six
months ended June 30, 2009, $5.5 million of which was funded by development
revenue from AstraZeneca. Our direct development costs do not include the cost
of research and development personnel or any allocation of our overhead
expenses.





PA
Program





As part of 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
induce fewer gastrointestinal complications compared to an aspirin taken alone
in patients at risk for developing aspirin associated gastric ulcers. Our PA
product candidates are covered under the same patent as PN, but we have retained
all rights to this program.








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Our
initial PA product candidate, PA32540, is currently in early-stage clinical
development. We completed a Phase 1 proof of concept study in Canada of an
earlier formulation of PA containing 325 mg of aspirin and 20 mg of omeprazole
(PA32520) in the first quarter of 2007. The primary endpoint was
gastrointestinal damage as measured by the Lanza scoring system used in our
previous PN studies. The results were highly significant (p<0.001) with 10%
of the PA group having Lanza 3 or 4 gastrointestinal damage, whereas 57.5% of
the EC aspirin group had this level of gastrointestinal damage during the 28 day
study. We also completed a second proof of concept study with PA32520 as
compared to 81 mg of EC aspirin. These results confirmed the earlier levels of
gastric damage as measured by Lanza scoring at about 10% for PA32520. While
these results in the second study were numerically different between treatment
groups, they did not achieve statistical significance from the results obtained
with 81mg EC aspirin (21%). After reviewing these data, we decided to increase
the dose of omeprazole to 40 mg per tablet and conduct an additional 28 day
Phase 1 study using the formulation containing 40 mg of immediate release of
omeprazole and 325 mg of aspirin (PA32540) compared to 325 mg EC aspirin.
Topline results from this study indicate a highly significant (P=0.003)
reduction in gastrointestinal damage with the higher strength PA32540 tablet as
compared with 325 mg EC aspirin (2.5% vs. 27.5% grade 3 or 4 Lanza scores,
respectively). In this last study, 75% of subjects treated with the PA32540
tablet showed no gastrointestinal damage at all as compared to < 50% with the
PA32520 tablet. An IND for the product was filed in the fourth quarter of 2007
and we met with the FDA in July 2007 to discuss the overall development program
requirements. We completed a study which demonstrated that the salicylic acid
component of PA32540 was bioequivalent to the reference drug, EC aspirin, with
respect to the aspirin component, and which we believe will allow our PA product
to receive all the cardio- and cerebrovascular secondary prevention claims of
aspirin. In June 2008, we filed an SPA with the FDA for our pivotal Phase 3
trials for PA32540, the primary endpoint for which is the reduction in
endoscopic gastric ulcers. The SPA is a process by which the FDA and a company
reach agreement on the Phase 3 pivotal trial protocol design, clinical endpoints
and statistical analyses that are acceptable to support regulatory approval. In
October 2008, the FDA informed us that it was conducting an internal review of
the acceptability of using endoscopic gastric ulcers as a primary endpoint in
clinical trials. In late January 2009, the FDA informed us that it had completed
its internal discussions and that there was no change to previous agreements
that gastric ulcer incidence was an acceptable primary endpoint for our clinical
programs and in February 2009, we received written confirmation from the FDA
that endoscopic gastric ulcer incidence was an acceptable endpoint for the Phase
3 clinical studies we proposed in our SPA for PA32540. We are aware of
publications that contain conflicting data regarding a possible interaction
between clopidogrel (Plavix®) and certain
enteric-coated proton pump inhibitor products. To determine whether an
interaction occurs between clopidogrel and PA32540, we intend to undertake a
Phase 1 drug-drug interaction study to evaluate the platelet aggregation effects
of PA32540 plus clopidogrel compared to aspirin plus clopidogrel. We plan to
begin Phase 3 studies for PA32540 in the second half of 2009. We are also
continuing to evaluate how best to commercialize the PA product candidates and
programs. We are also conducting both formulation development and early stage
clinical studies with other PA product candidates for indications in addition to
cardiovascular protection.





Additionally,
we have met with three national European regulatory agencies to discuss the
proposed development program for PA. Each of these regulatory agencies has
indicated that reduction in gastric ulcers is an appropriate endpoint for the
pivotal trials, along with demonstrating bioequivalence to the reference drug,
EC aspirin, with respect to the aspirin component. Dose ranging studies may also
be required.





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 currently do not intend to partner the PA program prior to starting the Phase
3 program. We believe value can be added to the PA product candidates as
progress is made through Phase 3 and, if we chose to partner the products as we
have in the past, we believe it would be under economic terms more favorable to
us.




We intend
to conduct extensive market research on the PA product concepts, to support our
evaluation of how best to commercialize the PA product candidates and programs,
which may include commercializing the products ourselves in certain territories.
Changing from a commercialization strategy in which the PA product candidates
are out-licensed, in exchange for milestone and royalty payments, will depend on
our available financial resources, the associated risks of such a change and its
overall impact on the PA product candidates’ value.





We incurred direct development costs
associated with the development of our PA program of $1.0 million during the six
months ended June 30, 2009. Our direct development costs do not include the cost
of research and development personnel or any allocation of our overhead
expenses.





Collaborative
Arrangements





We have entered into and may 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.





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GlaxoSmithKline
(GSK)





In June 2003, we signed an agreement
with GSK for the development and commercialization of proprietary combinations
of a triptan (5-HT1B/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 were responsible for
development of the first combination product, while GSK provided formulation
development and manufacturing. 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 NDA for Treximet, the trade name for the product.
On April 26, 2008 the Company received, from GSK, $20.0 million in milestone
payments which were associated with the approval of, and GSK’s intent to
commercialize, Treximet. 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. On June 30, 2009, the Company accrued
$0.9 million of Treximet royalty revenue and 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 combination 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 or to launch 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.





We, along
with GSK, have received notices of Paragraph IV Notice Letters from Par,
Alphapharm, Alphapharm’s designated agent, Mylan, and Teva, informing us that
each company had filed an ANDA with the FDA seeking approval to market
sumatriptan 85 mg/naproxen sodium 500 mg tablets. Par, Alphapharm and Teva have
each indicated in their respective Notice Letters that they intend to market a
generic version of Treximet tablets before the expiration of U.S. Patent Nos.
6,060,499, 6,586,458 and 7,332,183. GSK advised us that it has elected not to
exercise its first right to bring infringement suits against Par, Alphapharm and
Teva. Accordingly, we filed suit against Par on November 14, 2008, Alphapharm
and Mylan on January 2, 2009 and Teva on April 14, 2009, all in the United
States District Court for the Eastern District of Texas. All three actions have
since been consolidated into one suit. Our filing of these patent infringement
lawsuits within forty-five days of our receipt of the respective Notice Letters
from Par, Alphapharm and Teva resulted in the FDA automatically instituting a
stay, or bar, of approval of Par’s, Alphapharm’s and Teva’s respective ANDAs for
up to 30 months or until a final court decision is entered in the infringement
suit in favor of the ANDA applicant, whichever occurs first. Treximet currently
has regulatory exclusivity through April 15, 2011. Treximet may be eligible for
an additional six months of exclusivity upon the completion of certain pediatric
studies. Written and document discovery are at an early stage. The cases are set
for trial in the fourth quarter of 2010.





AstraZeneca
AB (AstraZeneca)





In August 2006, we entered into a
collaboration and license agreement dated as of August 1, 2006 and effective
September 7, 2006 with AstraZeneca, a Swedish corporation, regarding the
development and commercialization ofproprietary fixed dose
combinations of the 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 had the right, which has now expired, to 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 $40.0 million from AstraZeneca following termination of
the waiting period under the Hart-Scott-Rodino notification
program.








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In
September 2007, we agreed with AstraZeneca to amend our collaboration and
license agreement effective as of September 6, 2007. Under the terms of the
amendment, AstraZeneca has agreed to pay us up to $345.0 million, in the
aggregate, in milestone payments upon the achievement of certain development,
regulatory and sales events. In September 2007 we received a $10.0 million
payment upon execution of the amendment and a $20.0 million payment in
recognition of the achievement of the primary endpoints for the PN400-104 study,
a study which compared acid suppression of different doses of PN 400, and
achievement of the interim results of the PN200-301 study, a six month
comparative trial of PN 200 as compared to EC naproxen in patients requiring
chronic NSAID therapy, meeting mutually agreed success criteria. An additional
$55.0 million will be paid upon achievement of certain development and
regulatory milestones, and $260.0 million will be paid as sales performance
milestones if certain aggregate sales thresholds are achieved. Under the
original agreement, we were to have received development and regulatory
milestones totaling $160.0 million, of which $20.0 million was to be paid upon
the successful completion of the proof of concept studies, and sales performance
milestones totaling $175.0 million.





In
addition, the amendment revised the royalty rates we were to have received under
the original agreement. Under the original agreement, we were to receive a
royalty based on annual net sales by AstraZeneca, its affiliates or sublicensees
during the royalty term. The royalty rate varied based on the level of annual
net sales of products made by AstraZeneca, its affiliates and sublicensees,
ranging from the mid-single digits to the mid-teens. Under the amendment, we
will now receive a flat, low double digit royalty rate during the royalty term
on annual net sales of products made by AstraZeneca, its affiliates and
sublicensees, in the U.S. and royalties ranging from the mid-single digits to
the high-teens on annual net sales of products made by AstraZeneca, its
affiliates and sublicensees outside of the U.S. The amendment also revises the
rate of reduction to the royalty rate based upon loss of market share due to
generic competition inside and outside of the U.S. to account for the new
royalty structure.





Our right
to receive royalties from AstraZeneca for the sale of such products under the
collaboration and license agreement, as amended, 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.





We
further amended the collaboration and license agreement effective October 1,
2008 to shorten the timing of AstraZeneca’s reimbursement obligation for certain
development expenses incurred by us under the agreement and to update the
description of the target product profile studies (as defined in the agreement)
for PN 400.





We retain responsibility for the
development and filing of the 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 established joint
committees with representation of both us and AstraZeneca to manage the
development and commercialization of the product. The committees 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, will 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 any time, 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.





Results
of Operations





Three
months ended June 30, 2009 compared to the three months ended June 30,
2008





Net income (loss) per share:
Net loss attributable to common stockholders for the three months ended June 30,
2009 was $(4.3) million or $(0.14) per share, on a basic and diluted basis, as
compared to a net income of $13.3 million, or $0.43 per share, on a diluted
basis, for the three months ended June 30, 2008. The net income (loss) for the
three month period ended June 30, 2009 included a $(1.5) million or $(0.05) per
share charge for non-cash stock-based compensation expense as compared to $(1.7)
million, or $(0.06) per share for the same period of 2008.








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Revenue: We recognized $4.9
million of revenue for the three months ended June 30, 2009 as compared to $33.1
million for the three months ended June 30, 2008. Licensing revenue for the
three months ended June 30, 2009 was $4.0 million compared to $24.5 million for
2008. The decrease in revenue was primarily due to the $20.0 million in
milestone payments received from GSK for the approval of, and GSK’s intent to
commercialize, Treximet in 2008. Development revenue was $0.9 million for the
three months ended June 30, 2009 compared to $8.6 million for 2008. The decrease
was due to the decrease in development services accompanying the completion of
PN clinical activities. 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 $13.4 million
remains in deferred revenue at June 30, 2009. Substantive milestone payments are
recognized as revenue upon completion of the contractual events. Additionally,
our development revenues include the billings for the direct costs and certain
personnel-related time incurred in performing additional development activities
described under our collaboration agreements.Our costs associated with
the billed direct costs totaled $0.2 million and $8.0 million for the three
months ended June 30, 2009 and 2008, respectively. All costs associated with our
development revenues are included in research and development expenses in our
Statements of Operations. The collaboration agreements establish the rates for
billing personnel-related time incurred and consequently, the associated costs
incurred to perform the additional development activities are not separately
captured from ongoing personnel costs.





Research and development:
Research and development expenses decreased by $12.6 million to $4.6 million for
the three months ended June 30, 2009, as compared to the same period of 2008.
The decrease was due primarily to a decrease in direct development costs for PN
and PA program activities, as compared to the same period of 2008. Direct
development costs for the PN program decreased by $10.4 million to $2.6 million,
primarily due to the decrease in development services accompanying the
completion of PN clinical activities, as compared to the same period of 2008.
Direct development costs for the PA program decreased by $0.9 million to $0.3
million, while exploratory programs decreased by $0.9 million to $0.2 million
during the second quarter of 2009, as compared to the same period of 2008. Other
departmental expenses decreased by $0.4 million primarily due to decreased
personnel costs, as compared to the same period of 2008. 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, and regulatory
matters.





General and administrative:
General and administrative expenses increased by $1.6 million to $4.8 million
for the three months ended June 30, 2009, as compared to the same period of
2008. The increase was due primarily to increased legal costs for patent defense
and marketing research expenses which were $1.5 million and $0.6 million,
respectively, as compared to the same period of 2008. 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 $0.1 million for the three months ended June 30, 2009 and $0.2 million for
the three months ended June 30, 2008. Investment income from bond amortization
for the three month period ended June 30, 2009 totaled $0.1 million as compared
to $0.3 million during the same period of 2008. Investment income decreased
primarily due to declining short-term interest rates.




Six
months ended June 30, 2009 compared to the six months ended June 30,
2008





Net income (loss) per share:
Net loss attributable to common stockholders for the six months ended June 30,
2009 was $(7.7) million or $(0.26) per share, on a basic and diluted basis, as
compared to a net income of $6.0 million, or $0.19 per share, on a diluted
basis, for the six months ended June 30, 2008. The net income (loss) for the six
months ended June 30, 2009 included a $(2.7) million or $(0.09) per share charge
for non-cash stock-based compensation expense as compared to $(2.7) million or
$(0.09) per share for the same period of 2008.








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Revenue: We recognized total
revenue of $13.7 million for the six months ended June 30, 2009 as compared to
total revenue of $41.0 million for the six months ended June 30, 2008. The
decrease in revenue was primarily due to the $20.0 million of milestone payments
received in 2008 from GSK for the approval of, and GSK’s intent to commercialize
Treximet. Licensing revenue for the six months ended June 30, 2009 was $8.1
million compared to $28.4 million for 2008. Development revenue was $5.5 million
for the six months ended June 30, 2009 compared to $12.6 million for 2008. 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 $13.4 million remains in deferred revenue
at June 30, 2009. Substantive milestone payments are recognized as revenue upon
completion of the contractual events. Additionally, our development revenues
include the billings for the direct costs and certain personnel-related time
incurred in performing additional development activities described under our
collaboration agreements. Our costs associated with the billed direct costs
totaled $4.0 million and $11.0 million for the six months ended June 30, 2009
and 2008, respectively. All costs associated with our development revenues are
included in research and development expenses in our Statements of Operations.
The collaboration agreements establish the rates for billing personnel-related
time incurred and consequently, the associated costs incurred to perform the
additional development activities are not separately captured from ongoing
personnel costs.





Research and development:
Research and development expenses decreased by $17.7 million to $12.6 million
for the six months ended June 30, 2009, as compared to the same period of 2008.
The decrease was due primarily to a decrease in direct development costs for our
PN program and exploratory programs. Direct development costs for the PN program
decreased by $16.1 million to $7.3 million, primarily due to clinical trial
activities and other product development activities during the six months ended
June 30, 2009, as compared to the same period of 2008. Direct development costs
for the PA program decreased by $0.8 million to $1.0 million. Direct development
costs for the exploratory programs decreased by $1.0 million to $0.3 million,
offset by an increase of $0.5 million in the early stage gastroenterology
program, ORD2020, as compared to the same period of 2008. Other departmental
expenses decreased by $0.2 million primarily due to decreased personnel costs,
as compared to the same period of 2008. 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 $3.2 million to $9.2 million
for the six months ended June 30, 2009, as compared to the same period of 2008.
The increase was due primarily to increased legal costs for patent defense and
marketing research expenses, which were $2.5 million and $0.9 million,
respectively, as compared to the same period of 2008. General and administrative
expenses consisted primarily of the costs of administrative personnel, facility
infrastructure, legal expenses, market research, and public company
activities.





Other income: Interest income
was $0.1 million and $0.7 million for the six months ended June 30, 2009 and
2008, respectively. Investment income from bond amortization for the six months
ended June 30, 2009 totaled $0.2 million as compared to $0.6 million during the
same period of 2008. Investment income decreased primarily due to declining
short term interest rates.





Income
Taxes





We
estimate an annual effective tax rate of 0% for the year ended December 31,
2009. Our effective tax rate was 0% for the six month period ended June 30,
2009. 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,
or 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 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 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 and state income tax
purposes.





We
currently file income tax returns in the U.S. federal jurisdiction, and the
state of North Carolina. We are no longer subject to federal or North Carolina
income tax examinations by tax authorities for years before 2005. However, the
loss carryforwards generated prior to 2005 may still be subject to change, if we
subsequently begin utilizing these losses in a year that is open under statute
and subject to federal or North Carolina income tax examinations by tax
authorities.





We
recognize any interest and penalties accrued related to unrecognized tax
benefits as income tax expense. During the six months ended June 30, 2009 and
2008, there were no such interest and penalties.





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Liquidity
and Capital Resources





At June 30, 2009, cash and cash equivalents, along with short-term investments,
totaled $48.0 million, a decrease of $13.7 million compared to December 31,
2008. The decrease in cash was primarily due to the operating loss for the
period and the reduction of accounts payable and accrued expenses offset in part
by cash receipts for development activities and royalty payments received
pursuant to the terms of our agreements with AstraZeneca and GSK. Our cash is
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.





Short-term investments are held in 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. We have considered the impact
of the current economic environment in evaluating the fair value of our
investments. We believe we are adhering to a conservative investment policy.
Nonetheless, given the current credit crisis and other market risks, a downgrade
in any of our A1/P1 investments could result in required action under our
investment policy, and may result in an investment loss.





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
between market value and cost is reported in the stockholders’ equity section of
our financial statements as comprehensive income or loss.





We received $15.0 million in operating
cash during the six months ended June 30, 2009 pursuant to the terms of our
collaboration agreements with AstraZeneca and GSK. In addition, our balance
sheet included a $0.9 million accounts receivable for royalties under the terms
of the GSK agreement. Cash received from financing activities during the period
totaled $32,702 reflecting net proceeds from the exercise of stock
options.





Based upon the indirect method of
presenting cash flow, cash used in operating activities totaled $13.8 million
for the six months ended June 30, 2009. Cash used in operating activities was
$2.4 million for the six months ended June 30, 2008. Net cash provided by
investing activities during the six months ended June 30, 2009 totaled $4.5
million, and net cash used in investing activities for the six months ended June
30, 2008 totaled $4.2 million reflecting investing activities associated with
the purchase and sale of short-term securities. Cash required for our operating
activities during 2009 is projected to increase from our 2008 requirements as a
result of decreased milestone payments. We currently expect to end the year with
greater than $45.0 million in cash, cash equivalents and short term investments,
assuming the receipt of $10 million in milestones. During the six months ended
June 30, 2009 and June 30, 2008 we recorded non-cash stock-based compensation
expense of $2.7 million and $2.7 million, respectively, associated with the
grant of stock options and restricted stock.





As of June 30, 2009, we had $16.9
million in cash and cash equivalents and $31.1 million in short-term
investments. Our cash operating expenses for 2009 and 2010 are expected to be in
the $35 million to $45 million range. We believe that we will have sufficient
cash reserves and cash flow to maintain our planned level of business activities
through 2010.





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 sell
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, or 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, or any delays, in obtaining, regulatory approval of our product
      candidates and success in, and manner of, commercializing our
      products;





·
            the
      success of our existing collaborations and our ability to establish
      additional collaborations;





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·
            costs
      incurred to commercialize our products ourselves should we decide not to
      enter into 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;





·
            costs
      incurred in the defense of the class action lawsuit that is pending
      against us and our president and chief executive officer and certain
      executive officers relating to Treximet;
and





·
            costs
      incurred in the defense of our Treximet patents against generic companies
      that have filed ANDAs with the FDA to market the product prior to the
      expiration of our patents.





Item 3. Quantitative and Qualitative Disclosures About Market
Risk





The proceeds from revenue from our
collaboration agreements have been 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 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





Our management, with the participation
of our chief executive officer and chief financial officer, evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) 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 are
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 (i) recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms and (ii) accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding
disclosures. 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.





Our management’s report on internal
control over financial reporting procedures (as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934) is included with the
financial statements reflected in Item 1 of this Quarterly Report on Form 10-Q
and is incorporated herein by reference.





No change in our internal control over
financial reporting occurred during the second fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.








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PART II. OTHER INFORMATION





Item 1. Legal Proceedings





A purported class action lawsuit
claiming violations of securities laws was filed on August
10, 2007 in the U.S. District Court for the Middle District of North
Carolina by a holder of its securities against the Company, its chairman
and chief executive officer and one of its directors. The complaint alleges,
among other claims, violations of Section 10(b), Rule 10b-5, and Section 20(a)
of the Exchange Act arising out of allegedly false and misleading statements
made by the Company concerning its migraine drug candidate, Treximet, during the
purported class period, July 31, 2006 through August 1, 2007. By order dated
February 15, 2008, the Court appointed joint co-lead plaintiffs. On April
25, 2008, the Company received the plaintiffs’ amended and consolidated
complaint which added two current officers of the Company as additional
defendants. The Company and individual defendants filed a motion to dismiss the
amended and consolidated complaint with the Court on June 26, 2008. On August
27, 2008, the plaintiffs voluntarily dismissed their claims against one of the
Company's directors. On February 19, 2009, Magistrate Judge Dixon, to whom
the Court had referred the motion to dismiss, issued a Recommendation that the
Court grant the Company and individual defendants' motion to dismiss without
leave for plaintiffs to file another amended complaint. Plaintiffs filed
objections to the recommendation on March 23, 2009 and a corrected version of
the objections on March 26, 2009. Defendants’ response to these objections was
filed on April 20, 2009. The matter is now awaiting decision by the Court. The
Company and the individual defendants intend to continue to defend these claims
vigorously but there can be no assurance that the Court will accept the
Recommendation of the Magistrate Judge.





The
Company and GSK have received notices of Paragraph IV Notice Letters from Par,
Alphapharm, Alphapharm’s designated agent, Mylan, and Teva, informing us that
each company had filed an Abbreviated New Drug Application, or ANDA, with the
Food and Drug Administration, or FDA, seeking approval to market sumatriptan 85
mg/naproxen sodium 500 mg tablets. Par, Alphapharm and Teva have each indicated
in their respective Notice Letters that they intend to market a generic version
of Treximet tablets before the expiration of U.S. Patent Nos. 6,060,499,
6,586,458 and 7,332,183. GSK advised us that it has elected not to exercise its
first right to bring infringement suits against Par, Alphapharm and Teva.
Accordingly, we filed suit against Par on November 14, 2008, Alphapharm and
Mylan on January 2, 2009 and Teva on April 14, 2009, all in the United States
District Court for the Eastern District of Texas. All three actions have since
been consolidated into one suit. The Company’s filing of these patent
infringement lawsuits within forty-five days of our receipt of the respective
Notice Letters from Par, Alphapharm and Teva resulted in the FDA automatically
instituting a stay, or bar, of approval of Par’s, Alphapharm’s and Teva’s
respective ANDAs for up to 30 months or until a final court decision is entered
in the infringement suit in favor of the ANDA applicant, whichever occurs first.
Treximet currently has regulatory exclusivity through April 15, 2011. Treximet
may be eligible for an additional six months of exclusivity upon the completion
of certain pediatric studies. Written and document discovery are at an early
stage. The cases are set for trial in the fourth quarter of 2010.





As with any litigation proceeding, we
cannot predict with certainty the eventual outcome of the pending class action
lawsuit described above or the patent infringement lawsuits against Par,
Alphapharm and Teva. Furthermore, we will have to incur expenses in connection
with these lawsuits, which may be substantial. In the event of an adverse
outcome or outcomes, our business could be materially harmed. Moreover,
responding to and defending pending litigation will result in a significant
diversion of management’s attention and resources and an increase in
professional fees.





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.













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Risks Related to Our
Business


We
have incurred losses since inception and we may continue to incur losses for the
foreseeable future. Product revenue is dependent upon the commercialization
efforts of our partners, including the sales and marketing efforts of GSK
relating to Treximet.





We have
incurred significant losses since our inception. As of June 30, 2009, we had an
accumulated deficit of approximately $140.9 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 and amount of payments that we may receive from others. We expect
to continue to incur significant operating losses associated with our research
and development efforts and do not know the amount or timing of product revenue
we will receive as a result of sales of Treximet by GlaxoSmithKline, or GSK, or
future sales of our other product candidates by our commercial partners. For
example, GSK’s inability to launch Treximet with approved promotional and
professional materials, including direct to consumer advertising, may have had
an adverse impact on uptake of the product, thus affecting our royalty
revenue.





Our only
current potential sources of revenue are the payments that we may receive
pursuant to our collaboration agreements with GSK and AstraZeneca. We received
the remaining regulatory milestone payments under our collaboration agreement
with GSK related to Treximet payable upon approval by the U.S. Food and Drug
Administration, or FDA, and notification of GSK’s intent to commercialize
Treximet, receipt of which were delayed as a result of our receipt of a
second approvable letter for the product on August 1, 2007.





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 commercialization of Treximet, along with
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, approval of
Treximet for commercial use was significantly delayed by our receipt of two
approvable letters, the first of which we received in June 2006 in which the FDA
requested additional safety information on Treximet, some of which required new
studies. On August 1, 2007, we received a second approvable letter from the FDA
for Treximet in which the FDA requested that we further address the FDA’s
concern about the product’s potential for genotoxicity.





In October 2008, the FDA informed us
that it was conducting an internal review of the acceptability of using
endoscopic gastric ulcers as a primary endpoint in clinical trials. Reduction of
endoscopic gastric ulcers was the primary endpoint in our Phase 3 trials for PN
400 and the proposed primary endpoint in the current study design of the Phase 3
trials for our PA32540 product. In late January 2009, the FDA informed us that
it had completed its internal discussions and that there was no change to
previous agreements that gastric ulcer incidence was an acceptable primary
endpoint for our clinical programs. If the FDA had determined that endoscopic
gastric ulcers were no longer an acceptable endpoint in clinical trials, we
might have been required to conduct additional trials and provide additional
data which would have required additional expenses and delayed new drug
application, or NDA, approval of


PN
400.





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.








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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. For
example, in October 2008, the FDA has informed us that it was conducting an
internal review of the acceptability of using endoscopic gastric ulcers as a
primary endpoint in clinical trials. Reduction of endoscopic gastric ulcers was
the primary endpoint in our Phase 3 trials for PN 400. In late January 2009, FDA
informed us that it had completed its internal discussions and that there was no
change to previous agreements that gastric ulcer incidence was an acceptable
primary endpoint for our clinical programs. In the event the FDA had determined
that endoscopic gastric ulcers were no longer an acceptable endpoint, we might
have been required to conduct additional trials and provide additional data
which would have required additional expenses and delayed NDA approval of PN
400. 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) informally and in 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, or the 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. We do not know to what extent the FDA’s actions
may otherwise adversely affect or delay the approvability of our PN or other
product candidates that 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
terminate, or 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 U.S. 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. Except for Treximet, which was approved
for commercial sale in the U.S. on April 15, 2008, none of our other product
candidates have been approved for sale in the U.S. or any foreign market and
they may never be approved. For example, we received two approvable letters
relating to our NDA for Treximet which communicated FDA’s concerns that delayed
marketing approval. 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. In June 2006, we received the first approvable letter
in which the FDA requested additional safety information on Treximet, and in
August 2007, we received a second approvable letter in which the FDA requested
that we address their concern about the potential implications from one
preclinical in vitro chromosomal aberration study in which a signal for
genotoxicity was seen for the combination of naproxen sodium and sumatriptan. We
have 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.





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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. For example, this termination
right could have been triggered by AstraZeneca if the FDA had determined that
endoscopic gastric ulcers were no longer an acceptable endpoint and we had been
required to conduct additional trials which would have delayed NDA approval for
PN 400. Both AstraZeneca and GSK have the right to terminate their respective
agreement with us upon 90 days notice for any reason. 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, or 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. If we or our partners wish or need to identify an
alternative manufacturer, delays in obtaining FDA approval of the alternative
manufacturing facility could cause an interruption in the supply of our
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 limit our or our partners’
ability to 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 or our partners
believe are necessary or desirable for the promotion of our product
candidates.





If
third parties challenge the validity of the patents or proprietary rights of our
marketed products or assert that we have infringed their patents or proprietary
rights, we may become involved in intellectual property disputes and litigation
that would be costly and time consuming and could negatively impact the
commercialization of Treximet and/or any of our products that we develop or
acquire. We have received notice of paragraph IV certifications notifying
us of the filing of ANDAs with the FDA for approval to market a generic version
of Treximet. We filed patent infringement lawsuits in response to these
ANDAs that could lead to costly and time consuming patent
litigation.





The intellectual property rights of
pharmaceutical companies, including us, are generally uncertain and involve
complex legal, scientific and factual questions. Our success in developing and
commercializing pharmaceutical products may depend, in part, on our ability to
operate without infringing on the intellectual property rights of others and to
prevent others from infringing on our intellectual property rights. There has
been substantial litigation regarding patents and other intellectual property
rights in the pharmaceutical industry. For example, third parties seeking to
market generic versions of branded pharmaceutical products often file ANDAs with
the FDA, containing a certifications stating that the ANDA applicant believes
that the patents protecting the branded pharmaceutical product are invalid,
unenforceable and/or not infringed. Such certifications are commonly
referred to as paragraph IV certifications.








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The
Company and GSK have received notices of Paragraph IV Notice Letters from Par,
Alphapharm, Alphapharm’s designated agent, Mylan, and Teva, informing us that
each company had filed an Abbreviated New Drug Application, or ANDA, with the
Food and Drug Administration, or FDA, seeking approval to market sumatriptan 85
mg/naproxen sodium 500 mg tablets. Par, Alphapharm and Teva have each indicated
in their respective Notice Letters that they intend to market a generic version
of Treximet tablets before the expiration of U.S. Patent Nos. 6,060,499,
6,586,458 and 7,332,183. GSK advised us that it has elected not to exercise its
first right to bring infringement suits against Par, Alphapharm and Teva.
Accordingly, we filed suit against Par on November 14, 2008, Alphapharm and
Mylan on January 2, 2009 and Teva on April 14, 2009, all in the United States
District Court for the Eastern District of Texas. All three actions have since
been consolidated into one suit. The Company’s filing of these patent
infringement lawsuits within forty-five days of our receipt of the respective
Notice Letters from Par, Alphapharm and Teva resulted in the FDA automatically
instituting a stay, or bar, of approval of Par’s, Alphapharm’s and Teva’s
respective ANDAs for up to 30 months or until a final court decision is entered
in the infringement suit in favor of the ANDA applicant, whichever occurs first.
Treximet currently has regulatory exclusivity through April 15, 2011. Treximet
may be eligible for an additional six months of exclusivity upon the completion
of certain pediatric studies. Written and document discovery are at an early
stage. The cases are set for trial in the fourth quarter of 2010.





Litigation can be time consuming and
costly and we cannot predict with certainty the outcome. If we are
unsuccessful in such a proceeding and the FDA approved a generic version of our
product, such an outcome would have a material adverse effect on sales of
Treximet and our business.





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.





Under our current strategy, 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, although not a primary component of our current strategy, 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 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 no reason or 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, including Treximet, 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, our
collaborators have the right to terminate the agreement upon a default by us. In
addition, GSK and AstraZeneca are entitled to terminate their respective
agreements with us upon 90 days’ notice for any reason. Additionally, both GSK
and AstraZeneca have the right to reduce the royalties on net sales of products
payable to us under their 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. This termination could have been triggered by
AstraZeneca if the FDA had determined that endoscopic gastric ulcers were no
longer an acceptable endpoint and we had been required to conduct additional
trials which would have delayed NDA approval for PN 400. Valeant NA is entitled
to terminate its agreement with us and a $1.0 million withdrawal fee would be
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 and there are no additional required studies, we began
discussions with Valeant NA regarding termination of our agreement. Valeant NA
has demanded payment of the $1.0 million withdrawal fee, which we are
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.





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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 Treximet clinical trials. Similarly, under our
agreement with AstraZeneca, AstraZeneca has the right to manufacture clinical
trial material itself or through a third party. 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 FDA approval we
experienced as a result of approvable letters we received from the FDA in June
2006 and August 2007 related to our Treximet NDA, or a delay in FDA approval of
PN 400 which could have occurred if the FDA determined that endoscopic gastric
ulcers were no longer an acceptable primary endpoint in clinical trials and we
were required to conduct additional clinical trials for the product, would delay
or possibly 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 their respective agreements and would have exclusive control over
such enforcement litigation. GSK advised us that it has elected not to exercise
its first right to bring infringement suits against Par, Alphapharm and Teva
which have submitted ANDAs to the FDA for approval to market a generic version
of Treximet tablets and we have filed suit against the three companies in the
federal court of the United State District Court for the Eastern District of
Texas.





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;·
              our collaborators may fail to defend or enforce patents they own on
      compounds or technologies that are incorporated into the products we
      develop with them;·
              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·
              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.








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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 or other product candidates 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
or which have greater commercial potential. 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
agreements with GSK and AstraZeneca are subject to this risk. GSK has publicly
disclosed that it is exploring the development of several compounds for the
treatment of migraine. If GSK decides to focus its development and
commercialization efforts on its own products rather than continuing to
commercialize Treximet or work with us on any other product candidates that may
be developed under the agreement, it has the ability to terminate our agreement
upon 90 days’ written notice. And under the terms of our agreement with
AstraZeneca, 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 any time,
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. However, under the circumstance
above, or similar circumstance, 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 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 at the present time. 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, such as our agreement with
GSK which gives GSK responsibility for marketing and selling Treximet in the
United States, 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 potential 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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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, differences in study design, including
inclusion/exclusion criteria, 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 Treximet 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
Treximet failed to achieve statistical significance at two hours compared to
placebo in the relief of nausea. In the second Phase 3 pivotal clinical trial,
Treximet 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 any of our 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 are 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.





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 or
to submit additional data 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, in reviewing our NDA for Treximet, the FDA expressed
concern about the potential implications from one preclinical in vitro
chromosomal aberration study, one of four standard genotoxicity assays, in which
genotoxicity was seen for the combination of naproxen sodium and sumatriptan.
Further, additional information about potential drug-drug interactions may
restrict the patient population for our products, thus limiting our potential
revenue. For example, recent scientific publications contain conflicting data
regarding a possible interaction between clopidogrel (Plavix®), a widely
prescribed anti-platelet agent, and certain enteric-coated proton pump inhibitor
products. If an interaction is proven to exist, it may impact the number of
patients for whom our PA product candidates, which contain the proton pump
inhibitor, omeprazole in an immediate release form, could be prescribed for
cardiovascular protection.





Once
submitted, an NDA requires FDA approval before the product described in the
application can be distributed or commercialized. 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 requested additional safety information on Treximet in the
approvable letter we received in June 2006 relating to our NDA for Treximet,
which required conduct of additional studies, and in August 2007, we
received a second approvable letter in which the FDA raised an additional
concern about the potential implications from one preclinical in vitro
chromosomal aberration study, one of four standard genotoxicity assays, in which
genotoxicity was seen for the combination of naproxen sodium and
sumatriptan.





Further,
although we believed that we provided the necessary data to support approval of
the NDAs for MT 100, our proprietary combination of metoclopramide hydrochloride
and naproxen sodium, and MT 300, the FDA issued not-approvable letters for the
MT 100 and MT 300 NDAs in May 2004 and October 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 and have withdrawn the MAA for the product in the
U.K.





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.





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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;·
              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 and our
partners 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®
NapraPACTM),
combinations of NSAIDs and PPIs taken as separate pills and the only remaining
COX-2 inhibitor, Celebrex®, and new
agents such as prasugrel, which has been approved in several countries and is
currently under review by FDA.





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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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 experienced as a result of the
approvable letters we received from the FDA in June 2006 and August 2007
relating to the Treximet NDA, and 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 lawsuit that has been
filed against us or our current directors and officers, or we are unable to
defend our patents in patent infringement lawsuits against generic companies
filing ANDAs for our products, our business may be materially harmed. Further,
defending against these lawsuits may be expensive and will divert the attention
of our management.





A purported class action lawsuit
claiming violations of securities laws was filed on August
10, 2007 in the U.S. District Court for the Middle District of North
Carolina by a holder of our securities against us, our chairman and chief
executive officer and one of our directors. The complaint alleges, among other
claims, violations of Section 10(b), Rule 10b-5, and Section 20(a) of the
Exchange Act arising out of allegedly false and misleading statements made by us
concerning our migraine drug candidate, Treximet, during the purported class
period, July 31, 2006 through August 1, 2007. By order dated February 15, 2008,
the Court appointed joint co-lead plaintiffs. On April 25, 2008, we received the
plaintiffs’ amended and consolidated complaint which added two of our current
officers as additional defendants. We and the individual defendants filed a
motion to dismiss the amended and consolidated complaint with the Court on June
26, 2008. On August 27, 2008, the plaintiffs voluntarily dismissed their claims
against one of our directors. On February 19, 2009, Magistrate Judge Dixon,
to whom the Court had referred the motion to dismiss, issued a Recommendation
that the Court grant the Company and individual defendants' motion to dismiss
without leave for plaintiffs to file another amended complaint. Plaintiffs filed
objections to the recommendation on March 23, 2009 and a corrected version of
the objections on March 26, 2009. Defendants’ response to these objections was
filed on April 20, 2009. The matter is now awaiting a decision by the Court. The
Company and the individual defendants intend to continue to defend these claims
vigorously but there can be no assurance that the Court will accept the
Recommendation of the Magistrate Judge.





The
Company and GSK have received notices of Paragraph IV Notice Letters from Par,
Alphapharm, and Alphapharm’s designated agent, Mylan, and Teva, informing us
that each company had filed an Abbreviated New Drug Application, or ANDA, with
the Food and Drug Administration, or FDA, seeking approval to market sumatriptan
85 mg/naproxen sodium 500 mg tablets. Par, Alphapharm and Teva have each
indicated in their respective Notice Letters that they intend to market a
generic version of Treximet tablets before the expiration of U.S. Patent Nos.
6,060,499, 6,586,458 and 7,332,183. GSK advised us that it has elected not to
exercise its first right to bring infringement suits against Par, Alphapharm and
Teva. Accordingly, we filed suit against Par on November 14, 2008, Alphapharm
and Mylan on January 2, 2009 and Teva on April 14, 2009, all in the United
States District Court for the Eastern District of Texas. All three actions have
since been consolidated into one suit. The Company’s filing of these patent
infringement lawsuits within forty-five days of our receipt of the respective
Notice Letters from Par, Alphapharm and Teva resulted in the FDA automatically
instituting a stay, or bar, of approval of Par’s, Alphapharm’s and Teva’s
respective ANDAs for up to 30 months or until a final court decision is entered
in the infringement suit in favor of the ANDA applicant, whichever occurs first.
Treximet currently has regulatory exclusivity through April 15, 2011. Treximet
may be eligible for an additional six months of exclusivity upon the completion
of certain pediatric studies. Written and document discovery are at an early
stage. The cases are set for trial in the fourth quarter of 2010.





As with
any litigation proceeding, we cannot predict with certainty the eventual outcome
of the pending class action lawsuit described above or the patent infringement
lawsuits against Par, Alphapharm and Teva. Furthermore, we will have to continue
to incur expenses in connection with these lawsuits, which may likely be
substantial. In the event of an adverse outcome or outcomes, our business could
be materially harmed. Moreover, responding to and defending 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.








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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. For
example, if we are unsuccessful in litigation against Par, Alphapharm, Teva and
other companies who may file ANDAs for Treximet, such companies could market a
generic version of the product after marketing exclusivity expires. In addition,
due to the extensive time needed to develop, test and obtain regulatory approval
for our products, any patents that protect our product candidates may expire
early during commercialization. This may reduce or eliminate any market
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. Such
opposition proceedings and related appeals may not be resolved for several
years, and may result in the partial or total revocation of the issued patent.
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. As a result of these
oppositions and subsequent proceedings, the European Patent Office found that
claims relating to combinations of sumatriptan and naproxen for the treatment of
migraine were valid. However, broader claims relating to certain other 5-HT
1B/1D agonists and long-acting NSAIDs were held to be insufficiently supported
by the presently available technical evidence.





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 was
the case 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. In April 2006, we received an
office action on the reissue application and, consistent with our decision not
to devote further resources to the development of this product in the U.S., the
reissue application was abandoned in January 2007.





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. For example, we filed patent infringement lawsuits
against Par, Alphapharm and Teva in the federal court in the Eastern District of
Texas in connection with their respective ANDA submissions to the FDA containing
paragraph IV certifications for approval to market sumatriptan 85 mg/naproxen
sodium 500 mg tablets, a generic version of Treximet tablets, before the
expiration of our patents. 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 has the first right to
enforce our patents under their respective agreements. GSK advised us that it
has elected not to exercise its first right to bring an infringement suit
against Par, Alphapharm and Teva, each of which have submitted ANDAs to the FDA
for approval to market a generic version of Treximet tablets.





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.








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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 products may be accepted by the market.





The
commercial success of our product candidates depends upon the acceptance of
these products in the marketplace. Even if a product displays a favorable
efficacy and safety profile in clinical trials, market acceptance of a product
will not be known until after it is launched and a product may not generate the
revenues that we anticipate. The degree of market acceptance will depend upon a
number of factors, including:





·
                the acceptance by physicians and third-party payors of Treximet as an
      alternative to Imitrex, generic sumatriptan, and other
      therapies;·
                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;·
                the availability of alternative therapies;·
                the extent and effectiveness of marketing efforts by our collaborators,
      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.








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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 entail 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 commercialized product and human clinical trials in an amount
equal to up to $10 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 will explore, on an on-going
basis, expanding our insurance coverage related to the sale of Treximet and for
the inclusion of future marketed products when we obtain marketing approval for
such products and commercial sales of such products 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.





In the
future, 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;·
              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 commercialize or arrange for the commercialization of our
      product candidates.





Our operating expenses for the six
months ended June 30, 2009 totaled $21.8 million, ($16.3 million net of
development revenue received from AstraZeneca for development activities
performed under the agreement) including non-cash compensation expense of $2.7
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 2006 through 2008, our average annual operating expenses (including
average non-cash deferred compensation of $5.3 million) were $53.6 million
($36.5 million net of development revenue received from AstraZeneca for
development activities performed under the agreement). As of June 30, 2009, we
had an aggregate of $48.0 million in cash, cash equivalents and short-term
investments. If our operating expenses for 2009 and 2010 approximate the net
level of our operating expenses in 2008, we believe that we will have sufficient
cash reserves and cash flow to maintain that level of business activities
through 2010 provided certain increased development expenses are paid by our
collaborative partner. However, our expenses might increase during that period
beyond currently expected levels if we decide to, or any regulatory agency
requires us to, conduct additional clinical trials, studies or investigations
for any of our product candidates, including in connection with the agency’s
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 a 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.








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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,
which was amended on September 28, 2007, 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 which were amended on September 28,
2007. 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.
Everardus Orlemans, Ph.D., Senior Vice President, Product Development, John G.
Fort, M.D., Chief Medical Officer, or William L. Hodges, Senior Vice President
Finance and Administration and Chief Financial Officer 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:





·
            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;


·
            commercial
      success of Treximet and our other products in the marketplace once
      approved;


·
            governmental
      regulation, including reimbursement
policies;


·
            developments
      in patent or other proprietary
rights;


·
            developments
      in our relationships with collaborative
  partners;


·
            announcements
      by our collaborative partners regarding our products or product
      candidates;


·
            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 (now
known as The NASDAQ Global Market), through July 24, 2009, the high and low
sales 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 two of our stockholders and their
affiliates beneficially hold approximately21% 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, our chief executive officer may sell
up to an aggregate of 725,000 shares pursuant to a Rule 10b5-1 trading
plan. Sales under this or a similar plan began in October 2006. Further,
stockholders’ ownership will be diluted if we raise additional capital by
issuing equity securities. We filed with the Securities and Exchange Commission
a shelf registration statement on Form S-3, which became effective January 15,
2009, for an offering 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.








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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;


·
            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.





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




Our
annual meeting of stockholders was held on June 3, 2009. There were present at
the annual meeting of stockholders in person or by proxy stockholders holding an
aggregate of 26,986,790 shares of our common stock out of a total number of
29,812,035 shares of common stock issued and outstanding and entitled to vote at
the meeting. Our stockholders voted on two matters, as follows:




1. The
stockholders elected three Class III directors to each serve for a three year
term (until our 2012 annual meeting of stockholders and until their successors
have been duly elected and qualified) by the following votes (there were no
abstentions or broker non-votes in connection with the election of the Class III
directors):




Number
      of Shares of
                      Common
      StockFor:
                    
                    
                    Withheld:John
      R. Plachetka, Pharm.D.
                    
                    
                    26,760,237
                    
                    
                    
                    228,658James
      J. Mauzey
                    
                    
                    26,768,237
                    
                    
                    
                    220,658Angela
      M. Larson
                    
                    
                    26,654,322
                    
                    
                    
                    334,573




The other
directors whose terms of office as director continued after the meeting are as
follows: Arthur S. Kirsch, Kenneth B. Lee, Jr., Jacques F. Rejeange, and Paul J.
Rizzo.




2. The
stockholders ratified the appointment of Ernst & Young LLP as our
independent auditors for the fiscal year ending December 31, 2009 by the
following votes (there were no broker non-votes in connection with the
ratification of our independent auditor):




Number
      of Shares of
                Common
      StockFor:
              
              Against:
              
              Abstain:26,683,320
              
              285,146
              
              20,429








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Item 6. Exhibits





Exhibit
                Number
              Description31.1
              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.










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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)July
      31, 2009
                  By:
                  /s/
      JOHN R. PLACHETKAJohn
      R. PlachetkaPresident
      and Chief Executive OfficerJuly
      31, 2009
                  By:
                  /s/
      WILLIAM L. HODGESWilliam
      L. HodgesChief
      Financial OfficerJuly
      31, 2009
                  By:
                  /s/
      JOHN E. BARNHARDTJohn
      E. BarnhardtPrincipal
      Accounting
Officer








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EXHIBIT INDEX





Exhibit
                Number
              Description31.1
              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.








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