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, 2008





OR





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





For
the transition period from 
to





Commission
File Number 000-31719








POZEN
Inc.


(Exact
name of registrant as specified in its charter)








Delaware
            62-1657552(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer
              Identification
      No.)





1414
Raleigh Road


Suite
400


Chapel
Hill, North Carolina 27517


(Address
of principal executive offices, including zip code)





(919)
913-1030


(Registrant’s
telephone number, including area code)








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





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


 ̈  Large
Accelerated Filer     x  Accelerated
Filer      ̈  Non-Accelerated
Filer  ̈ 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 25,
2008 was 29,763,560.














POZEN
Inc.


(A
Development Stage Company)


FORM
10-Q





For the
Three Months Ended June 30, 2008





INDEX





PagePART I.
            FINANCIAL INFORMATIONItem 1.
            Financial Statements (unaudited)Balance Sheets as of June 30, 2008 and December 31,
      2007
            1Statements of Operations for the Three and Six-Month Periods
      Ended June 30, 2008 and 2007 and Period From Inception (September 26,
      1996) Through June 30, 2008
            2Statements of Cash Flows for the Six-Month Periods Ended
      June 30, 2008 and 2007 and Period From Inception (September 26, 1996)
      Through June 30, 2008
            3Notes to Financial Statements
            4Item 2.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            11Item 3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            22Item 4.
            Controls and Procedures
            22PART II.
            OTHER INFORMATIONItem 1.
            Legal Proceedings
            23Item 1A.
            Risk Factors
            23Item 4.
            Submission of Matters to a Vote of Security
      Holders
            35Item 6.
            Exhibits
            36Signature and Certifications
            37Exhibit Page
            38








- i
-


PART I. FINANCIAL INFORMATION





Item 1. Financial Statements





POZEN Inc.


(A
Development Stage Company)


BALANCE
SHEETS


(Unaudited)








June
      30,
              2008
            
            
            December
      31,
              2007ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            31,202,497
            
            
            $
            37,660,068Short-term
      investments
            
            
            41,025,121
            
            
            
            36,282,108Accounts
      receivable
            
            
            9,429,038
            
            
            
            2,129,003Prepaid
      expenses and other current assets
            
            
            662,020
            
            
            
            1,198,397Total
      current assets
            
            
            82,318,676
            
            
            
            77,269,576Property
      and equipment, net of accumulated depreciation
            
            
            84,668
            
            
            
            117,485Total
      assets
            
            $
            82,403,344
            
            
            $
            77,387,061LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
            
            $
            5,387,048
            
            
            $
            2,536,040Accrued
      compensation
            
            
            983,855
            
            
            
            1,392,849Accrued
      expenses
            
            
            5,132,885
            
            
            
            3,796,164Deferred
      revenue
            
            
            15,780,058
            
            
            
            15,936,125Total
      current liabilities
            
            
            27,283,846
            
            
            
            23,661,178Long-term
      liabilities:Deferred
      revenue
            
            
            11,085,044
            
            
            
            18,475,074Total
      liabilities
            
            
            38,368,890
            
            
            
            42,136,252Preferred
      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; 29,763,560, and
      29,704,760 shares issued and outstanding at June 30, 2008 and December 31,
      2007, respectively
            
            
            29,764
            
            
            
            29,705Additional
      paid-in capital
            
            
            165,224,731
            
            
            
            162,371,437Accumulated
      other comprehensive income (loss)
            
            
            (18,020
            )
            
            
            14,540Deficit
      accumulated during the development stage
            
            
            (121,202,021
            )
            
            
            (127,164,873
            )Total
      stockholders’ equity
            
            
            44,034,454
            
            
            
            35,250,809Total
      liabilities and stockholders’ equity
            
            $
            82,403,344
            
            
            $
            77,387,061








See
accompanying Notes to Financial Statements.


- 1
-
 Table of Contents


POZEN Inc.


(A
Development Stage Company)


STATEMENTS
OF OPERATIONS


(Unaudited)


Three
      Months Ended June 30,
            
            
            Six
      Months Ended June 30,
            
            
            Period
      From
              Inception
              (September
      26,
              1996)
      Through
              June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007
            
            
            2008RevenueLicensing
      revenue
            
            $
            24,519,015
            
            
            $
            3,701,000
            
            
            $
            28,370,096
            
            
            $
            7,402,000
            
            
            $
            126,208,875Development
      revenue
            
            
            8,605,038
            
            
            
            8,233,383
            
            
            
            12,582,946
            
            
            
            12,188,387
            
            
            
            37,157,566Total
      Revenue
            
            
            33,124,053
            
            
            
            11,934,383
            
            
            
            40,953,042
            
            
            
            19,590,387
            
            
            
            163,366,441Operating
      expenses:General and
      administrative
            
            
            3,142,869
            
            
            
            2,924,565
            
            
            
            5,991,842
            
            
            
            6,155,104
            
            
            
            80,361,451Research and
      development
            
            
            17,144,221
            
            
            
            13,603,599
            
            
            
            30,256,753
            
            
            
            20,908,017
            
            
            
            218,587,356Total
      operating expenses
            
            
            20,287,090
            
            
            
            16,528,164
            
            
            
            36,248,595
            
            
            
            27,063,121
            
            
            
            298,948,807Interest
      and other income
            
            
            497,140
            
            
            
            746,706
            
            
            
            1,258,404
            
            
            
            1,536,019
            
            
            
            15,981,822Income
      (loss) before income tax expense
            
            
            13,334,103
            
            
            
            (3,847,075
            )
            
            
            5,962,851
            
            
            
            (5,936,715
            )
            
            
            (119,600,544
            )Income
      tax expense
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (667,000
            )Income/(loss)
            
            
            13,334,103
            
            
            
            (3,847,075
            )
            
            
            5,962,851
            
            
            
            (5,936,715
            )
            
            
            (120,267,544
            )Non-cash
      preferred stock charge
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            27,617,105Preferred
      stock dividends
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            934,478Net
      income/(loss) attributable to common stockholders
            
            $
            13,334,103
            
            
            $
            (3,847,075
            )
            
            $
            5,962,851
            
            
            $
            (5,936,715
            )
            
            $
            (148,819,127
            )Basic
      net income/(loss) per common share
            
            $
            0.45
            
            
            $
            (0.13
            )
            
            $
            0.20
            
            
            $
            (0.20
            )Shares
      used in computing
              basic
      net income/(loss)
              per
      common share
            
            
            29,759,250
            
            
            
            29,502,372
            
            
            
            29,741,406
            
            
            
            29,485,882Diluted
      net income/(loss) per common share
            
            $
            0.43
            
            
            $
            (0.13
            )
            
            $
            0.19
            
            
            $
            (0.20
            )Shares
      used in computing
              diluted
      net income/(loss)
              per
      common share
            
            
            30,707,710
            
            
            
            29,502,372
            
            
            
            30,636,529
            
            
            
            29,485,882








See
accompanying Notes to Financial Statements.


- 2
-
 Table of Contents


POZEN Inc.


(A
Development Stage Company)


STATEMENTS
OF CASH FLOWS


(Unaudited)





Six
      Months Ended June 30,
            
            Period
      from
              September
      25, 1996
              (inception)
      through
              June
      30,
              20082008
            
            
            2007Operating
      activitiesNet
      income/(loss)
            
            $
            5,962,851
            
            
            $
            (5,936,715
            )
            
            $
            (120,267,544
            )Adjustments
      to reconcile net income/(loss) to net cash used in operating
      activities:Depreciation
            
            
            39,310
            
            
            
            46,579
            
            
            
            1,066,786Write-down
      of impaired assets
            
            
            —
            
            
            
            —
            
            
            
            155,576Bond
      amortization income
            
            
            (574,798
            )
            
            
            (895,242
            )
            
            
            (4,068,431
            )Noncash
      compensation expense
            
            
            2,693,056
            
            
            
            2,681,825
            
            
            
            24,742,886Noncash
      financing charge
            
            
            —
            
            
            
            —
            
            
            
            450,000Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (7,300,035
            )
            
            
            (4,763,761
            )
            
            
            (9,429,038
            )Prepaid
      expenses and other current assets
            
            
            536,377
            
            
            
            553,147
            
            
            
            (662,020
            )Accounts
      payable and accrued expenses
            
            
            3,778,735
            
            
            
            3,955,682
            
            
            
            11,503,789Deferred
      revenue
            
            
            (7,546,097
            )
            
            
            (7,402,000
            )
            
            
            26,865,102Net
      cash used in operating activities
            
            
            (2,410,601
            )
            
            
            (11,760,485
            )
            
            
            (69,642,894
            )Investment
      activitiesPurchase
      of equipment
            
            
            (6,493
            )
            
            
            (16,351
            )
            
            
            (1,307,029
            )Purchase
      of investments
            
            
            (43,020,061
            )
            
            
            (37,153,528
            )
            
            
            (216,467,826
            )Sale
      of investments
            
            
            38,819,288
            
            
            
            37,949,375
            
            
            
            179,493,116Net
      cash provided by (used in) investing activities
            
            
            (4,207,266
            )
            
            
            779,496
            
            
            
            (38,281,739
            )Financing
      activitiesProceeds
      from issuance of preferred stock
            
            
            —
            
            
            
            —
            
            
            
            48,651,850Proceeds
      from issuance of common stock
            
            
            160,296
            
            
            
            2,023,560
            
            
            
            86,633,265Proceeds
      from collections of stockholders’ receivables
            
            
            —
            
            
            
            —
            
            
            
            1,004,310Proceeds
      from notes payable
            
            
            —
            
            
            
            —
            
            
            
            3,000,000Payment
      of dividend
            
            
            —
            
            
            
            —
            
            
            
            (162,295
            )Net
      cash provided by financing activities
            
            
            160,296
            
            
            
            2,023,560
            
            
            
            139,127,130Net
      increase (decrease) in cash and cash equivalents
            
            
            (6,457,571
            )
            
            
            (8,957,429
            )
            
            
            31,202,497Cash
      and cash equivalents at beginning of period
            
            
            37,660,068
            
            
            
            26,296,884
            
            
            
            —Cash
      and cash equivalents at end of period
            
            $
            31,202,497
            
            
            $
            17,339,455
            
            
            $
            31,202,497Supplemental
      schedule of cash flow informationCash
      paid for interest
            
            $
            —
            
            
            $
            —
            
            
            $
            191,328Supplemental
      schedule of noncash investing and financing activitiesConversion
      of notes payable to preferred stock
            
            $
            —
            
            
            $
            —
            
            
            $
            3,000,000Preferred
      stock dividend
            
            $
            —
            
            
            $
            —
            
            
            $
            772,183Forfeiture
      of common stock options and warrants
            
            $
            —
            
            
            $
            —
            
            
            $
            314,179Conversion
      of common stock warrants to common stock
            
            $
            —
            
            
            $
            —
            
            
            $
            1,080,001





See
accompanying Notes to Financial Statements.


- 3
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 Table of Contents


POZEN Inc.


(A
Development Stage Company)


NOTES
TO FINANCIAL STATEMENTS


(Unaudited)




1.
Development Stage Company





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 intends to enter into collaboration agreements
to commercialize its product candidates, and has entered into, and expects to
continue to enter into such collaborations. The Company’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.





Statement of Financial Accounting
Standards Board (“SFAS”) No. 7, “Accounting and Reporting by Development Stage
Enterprises,” states that an enterprise shall be considered to be in the
development stage if either planned principal operations have not commenced or
planned principal operations have commenced, but there has been no significant
revenue therefrom. The Company will remain a development stage company until
such time as significant revenues have been generated from the marketing and
sale of the Company’s product candidates. As of June 30, 2008, the Company had
$31.2 million in cash and cash equivalents and $41.0 million in short-term
investments. Our operating expenses, net of development revenues, for 2008 and
2009 are expected to increase from the level incurred in 2007. However, we
believe that we will have sufficient cash reserves to maintain that level of
business activities through 2009 provided that certain development expenses are
paid by AstraZeneca AB (AstraZeneca), as outlined in the collaboration and
license agreement dated August 1, 2006 between the Company and AstraZeneca, as
amended by an agreement effective as of September 6, 2007. The Company’s
expenses might increase additionally in 2008 and 2009 if any regulatory agency
requires the Company to conduct additional clinical trials, studies or
investigations in connection with their consideration of the Company’s
regulatory filings for any of its product candidates. The Company is not
currently obligated to make any milestone payments to third parties and does not
currently have any other required material payment obligations during that
period. However, regulatory delays, such as the Company experienced prior to the
approval of the Company’s New Drug Application (NDA) for TreximetTM (formerly
known as Trexima), as a result of the approvable letters the Company received
from the U.S. Food and Drug Administration (FDA) in June 2006 and in August
2007, or unforeseen situations or unforeseen developments in the progress of the
Company’s existing and future product candidates, may increase the Company’s
cash requirements beyond its currently assumed needs.





2.
Summary of Significant Accounting Policies





Unaudited Interim Financial
Statements—The accompanying unaudited interim financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States and applicable Securities and Exchange Commission (“SEC”)
regulations for interim financial information. These financial statements are
unaudited and, in the opinion of management, include all adjustments (consisting
of normal recurring accruals) necessary to present fairly the balance sheets,
statements of operations and statements of cash flows for the periods presented
in accordance with accounting principles generally accepted in the United
States. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to SEC
rules and regulations. It is presumed that users of this interim financial
information have read or have access to the audited financial statements and
footnote disclosure for the preceding fiscal year contained in the Company’s
Annual Report on Form 10-K, filed on March 6, 2008. Operating results for the
interim periods presented are not necessarily indicative of the results that may
be expected for the year ending December 31, 2008.





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 straightline basis over the period
ending on the anticipated date of regulatory approvals, as specified in the
agreements relating to the product candidates, or the conclusion of any
obligation on the part of the Company. For the Company’s current agreements,
these periods are estimated to be as follows:


- 4
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 Table of Contents





·
            The
      September 2006 $40.0 million licensing fee received from AstraZeneca
      related to the August 2006 Collaboration and License Agreement with
      AstraZeneca has been deferred and was being amortized over 40 months. As a
      result of the revised development timeline agreed upon in the September
      2007 amendment, we have extended the amortization period to 43 months.
      This is a change in accounting estimate and was a prospective adjustment
      beginning in the third quarter of 2007. The AstraZeneca licensing fee
      relates to the Company’s proprietary fixed dose combinations of the proton
      pump inhibitor (PPI) esomeprazole magnesium with the non-steroidal
      anti-inflammatory drug (NSAID) naproxen, in a single tablet. We recognized
      $2.7 million and $5.5 million of licensing revenue from the amortization
      of the AstraZeneca licensing fee for the three and six months ended June
      30, 2008, respectively. The September 2007 amendment to the AstraZeneca
      agreement included a $10 million payment in connection with execution of
      the amendment. This payment has been deferred and will be amortized over
      31 months. We recognized $1.0 million and $1.9 million of licensing
      revenue from this amortization in the three and six months ended June 30,
      2008.





·
            The
      June 2003 initial licensing and patent-issuance milestone payments
      totaling $25.0 million for MT 400 received from GSK have been deferred and
      were originally being amortized over 42 months. During 2005 the
      amortization period was decreased to 39 months based upon the August 2005
      submission to the FDA of the Treximet NDA which was earlier than
      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 $0.0
      million and $0.2 million of licensing revenue from the amortization of GSK
      milestone payments during the three and six months ended June 30, 2008,
      respectively. The GSK upfront payments are now fully
      amortized.





·
            The
      September 2003 $1.0 million licensing fee for MT 300 ($2.0 million
      non-refundable upfront licensing fee net of a potential termination fee of
      $1.0 million) received from Valeant Pharmaceuticals North America (Valeant
      NA), a subsidiary of Valeant Pharmaceuticals International (formerly Xcel
      Pharmaceuticals Inc.), has been amortized over 32 months. As the result of
      the receipt in October 2003 of a not-approvable letter from the FDA
      relating to the NDA for MT 300, after three months of amortization, this
      estimated deferral period was increased from an original estimate of 20
      months to 32 months ending in April
2006.





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. During the three
and six months ended June 30, 2008 a $20.0 million milestone was recognized
related to the approval of, and GSK’s intent to commercialize, Treximet. There
was no milestone revenue recognized for the six months ended June 30,
2007.





Treximet royalty revenue is recognized
when earned as will 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, 2008, the
Company recognized $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 recognized $12.6 million
and $12.2 million of development revenue for development activities performed
pursuant to the AstraZeneca and GSK agreements for the six months ended June 30,
2008 and 2007, respectively. The Company’s costs associated with the billed
direct costs totaled $7.9 million and $7.2 million for the three months ended
June 30, 2008 and 2007, respectively. The Company’s costs associated with the
billed direct costs totaled $11.0 million and $10.6 million for the six months
ended June 30, 2008 and 2007, respectively. 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.








- 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. 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). The fair value of the
Company's investments and cash equivalents are based upon quoted prices of
identical assets which the Company has the ability to access, in active markets,
at the measurement date.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, 2008 and 2007, the Company had $0.2 million and $0.3
million, respectively, of interest income and $0.3 million and $0.4 million,
respectively, of bond amortization income included in other income for the
period. For the six month period ended June 30, 2008 and 2007, the Company had
$0.7 million and $0.6 million, respectively, of interest income and $0.6 million
and $0.9 million, respectively, of bond amortization income included in other
income for the period.





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 and its components for general purpose financial
statements. Accumulated other comprehensive income is comprised of unrealized
gains and losses on marketable securities and is disclosed as a component of
stockholders’ equity. The Company had $(18,020) unrealized losses on its
investments that are classified as accumulated other comprehensive income (loss)
at June 30, 2008 and $(4,261) of unrealized losses for the same period of
2007.





Comprehensive income (loss) consists of
the following components for the three and six months ended June 30, 2008 and
2007:





Three
      months ended June 30,
            
            
            Six
      months ended June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      income (loss)
            
            $
            13,334,103
            
            
            $
            (3,847,075
            )
            
            $
            5,962,851
            
            
            $
            (5,936,715
            )Unrealized
      gain (loss) onmarketable securities
            
            
            (47,065
            )
            
            
            (2,705
            )
            
            
            (32,560
            )
            
            
            (169
            )Total
      comprehensiveincome (loss)
            
            $
            13,287,038
            
            
            $
            (3,849,780
            )
            
            $
            5,930,291
            
            
            $
            (5,936,884
            )





Stock-based Compensation—On
January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”)
No. 123(R), “Share-Based Payment,” which requires us to account for share-based
payment transactions using a fair value-based method and recognize the related
expense in our results of operations.





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 intend to recognize
compensation cost over the expected period to achieve the performance
conditions.





Our
statements of operations for the three and six months ended June 30, 2008 and
June 30, 2007 includes the following stock-based compensation
expense:





Three
      months ended June 30,
            
            
            Six
      months ended June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Research
      and development
            
            $
            590,770
            
            
            $
            305,490
            
            
            $
            922,676
            
            
            $
            789,627General
      and administrative
            
            
            1,062,547
            
            
            
            750,902
            
            
            
            1,770,381
            
            
            
            1,725,532Operating
      expense
            
            
            1,653,317
            
            
            
            1,056,392
            
            
            
            2,693,057
            
            
            
            2,515,159Tax
      benefit
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      expense
            
            $
            1,653,317
            
            
            $
            1,056,392
            
            
            $
            2,693,057
            
            
            $
            2,515,159





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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 1.45 years was $9.8 million at June 30, 2008 and, over an
estimated weighted-average amortization period of 1.9 years was $11.0 million at
June 30, 2007. Unrecognized stock-based compensation expense expected to be
recognized over the remaining period ending December 31, 2008 was $3.1 million
at June 30, 2008 and was $2.6 million at June 30, 2007 for the remaining period
ending December 31, 2007.





Stock
Plans





On November 20, 1996, the Company
established a Stock Option Plan (the “Option Plan”) and authorized the issuance
of options for up to 1,605,310 shares of common stock to attract and retain
quality employees and to allow such employees to participate in the growth of
the Company. Awards were permitted to be made under the Option Plan to eligible
employees, officers, consultants and non-employee directors in the form of
incentive or nonqualified stock options. Eligible participants under the Option
Plan include executive and key employees of the Company. The vesting periods for
options granted under the Option Plan range from immediate vesting at issuance
to four years or immediately upon a significant change in ownership as defined
by the plan document. The exercise price for incentive stock options may not be
less than 100% of the fair market value of the common stock on the date of grant
(110% with respect to incentive stock options granted to optionees who are
holders of 10% or more of the Company’s common stock).





In June 2000, the stockholders approved
the POZEN Inc. 2000 Equity Compensation Plan (the “Plan”). The Plan became
effective upon the completion of the Company’s initial public offering in
October 2000, after which time no further grants were made under the Option
Plan. The Plan provides for grants of incentive stock options, nonqualified
stock options, stock awards, performance units, and other stock-based awards,
such as restricted stock units and stock appreciation rights, to employees,
non-employee directors, advisors and consultants. At adoption, the Plan
authorized up to 3,000,000 shares of common stock for issuance under the terms
of the Plan. The maximum number of shares for which any individual may receive
grants in any calendar year is 1,000,000 shares. The vesting periods for awards
made under the Plan generally range from immediate vesting at issuance to four
years, as described in and in accordance with the Plan, and upon a change of
control as defined in the Plan. If options granted under the Plan expire or are
terminated for any reason without being exercised, or if stock awards,
performance units, or other stock-based awards are forfeited or otherwise
terminate, the shares of common stock underlying the grants will again be
available for awards granted under the Plan.





In May 2004, the stockholders approved
an amendment to and restatement of the Plan. The amendment to the Plan provided
for an increase in the number of shares of common stock authorized for issuance
under the Plan, from 3,000,000 to 5,500,000, or an increase of 2,500,000 shares.
In addition, the amendment to the Plan limited the number of shares that may be
issued pursuant to grants other than options under the Plan to 2,000,000 shares
and made certain other clarifying changes.





In June 2007, the stockholders approved
the amendment and restatement of the Plan to, among other things, increase the
number of shares authorized for issuance under the 2000 Plan from 5,500,000 to
6,500,000 shares and continue the various performance criteria for use in
establishing specific vesting targets for certain awards under the Plan so as to
qualify the compensation attributable to any such awards as performance-based
compensation under Section 162(m) of the Internal Revenue Code.





Time-Based Stock
Awards





The fair value of each time-based award
is estimated on the date of grant using the Black-Scholes option valuation
model, which uses the assumptions described below. Our weighted-average
assumptions used in the Black-Scholes valuation model for equity awards with
time-based vesting provisions granted for the three and six months ended June
30, 2008 and 2007 are shown in the following table:





Three
      months ended June 30,
            
            Six
      months ended June 30,2008
            
            2007
            
            2008
            
            2007Expected
      volatility
            72.9
      %
            
            78.8
      – 79.2 %
            
            72.9
      – 73.2 %
            
            76.0
      – 79.2 %Expected
      dividends
            0
      %
            
            0
      %
            
            0
      %
            
            0
      %Expected
      term
            5.32-6.25
      Years
            
            6.25
      Years
            
            5.32-6.25
      Years
            
            6.25
      YearsRisk-free
      interest rate
            3.3
      %
            
            4.6
      – 4.7 %
            
            2.6
      – 3.3 %
            
            4.6
      – 5.1 %





A summary of the time-based stock
awards as of June 30, 2008, and changes during the six months ended June 30,
2008, is as follows:


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Time-Based
      Stock Awards
            
            Underlying
              Shares
              (000s)
            
            Weighted-Average
      Exercise Price
            
            Average
      Remaining Contractual Term
              (years)
            
            Aggregate
      Intrinsic Value
              (000s)Outstanding
      at January 1, 2008
            
            3,445
            
            $         9.60
            
            6.4
            
            $   11,167Granted
            
            311
            
            10.20Exercised
            
            (33)
            
            0.33Forfeited
      or expired
            
            -
            
            -Outstanding
      at March 31, 2008
            
            3,723
            
            9.44
            
            6.3
            
            $     6,509Exercisable
      at March 31, 2008
            
            2,406
            
            $        8.44
            
            5.4
            
            $     5,836Granted
            
            35
            
            14.45Exercised
            
            (25)
            
            5.29Forfeited
      or expired
            
            -
            
            -Outstanding
      at June 30, 2008
            
            3,733
            
            9.80
            
            5.7
            
            $     7,813Exercisable
      at June 30, 2008
            
            2,419
            
            $         8.52
            
            5.2
            
            $     6,800





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, 2008 and 2007
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
months ended June 30, 2008 was $2.1 million and $2.4 million, respectively. The
total intrinsic value of stock options exercised during the three and six months
ended June 30, 2007 was $1.6 million and $2.3 million,
respectively.





Restricted Stock and
Restricted Stock Units





As of June 30, 2008, there was an
aggregate $224,000 of unrecognized compensation expense related to unvested
restricted stock units. Of the aggregate amount, $52,000 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 $172,000 unrecognized compensation expense related to unvested
restricted stock units under the May 6, 2008 award of 14,000 restricted stock
units with a grant-date per-share fair value of $14.45. As of June 30, 2008,
there was no unrecognized compensation expense related to the May 2004 award of
98,135 restricted stock units. There were 17,487 unvested restricted stock units
outstanding at June 30, 2008.





Performance-Based
Awards





In January 2005, pursuant to an
incentive program (the “Treximet incentive program”) approved by the
Compensation Committee of the Board of Directors of the Company, stock options
were granted to all of the Company’s employees, including its executive
officers, to purchase an aggregate of 506,772 shares of common stock. Each
performance-based option would vest in full upon the later to occur of (i)
January 3, 2007 or (ii) the receipt by the Company of an action letter from the
FDA indicating approval of the NDA for the product candidate Treximet,provided,
however that 25% of each such option would be forfeited if receipt of the FDA
approval letter for the Treximet NDA did not occur prior to June 30, 2007, and
100% of each such option would be forfeited if receipt of the FDA approval
letter for the Treximet NDA did not occur on or before December 31, 2007. These
performance-based options, which were granted under the Plan, as amended and
restated, had a ten-year term and an exercise price of $7.06, which was equal to
the Nasdaq reported market closing price of the common stock on January 3, 2005,
the date of grant. The grant date fair value of these performance-based options
was $3.77 per share. The receipt of the FDA approval letter for the Treximet NDA
had not occurred on or before December 31, 2007 as described under the terms of
the initial grant, and therefore all options to purchase shares of common stock
under the Treximet incentive program were forfeited during the 2007 year and the
related compensation expense was reversed.





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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. Twenty-five percent (25%) of the
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 and an exercise price of
$14.45, which was equal to the Nasdaq reported market closing price of the
common stock on May 6, 2008, the date of grant. The weighted grant-date
fair value of these performance-based options was $9.66 per share. The
options also include provisions that require satisfactory employee performance
prior to vesting. An additional 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
receipt by the Company of an action letter from the FDA indicating acceptance of
the NDA for PN 400.





As of June 30, 2008 and 2007, there
were $2.6 million and $38,000, respectively, in unrecognized compensation
expense related to performance-based awards granted under the PN and Treximet
incentive programs. The June 30, 2008 amount is expected to be recognized over
the period ending June 30, 2010, while the June 30, 2007 cost was expected to be
recognized over the period ending September 30, 2007. There were 301,433 and
245,560 unvested performance-based options outstanding at June 30, 2008 and
2007, respectively. No performance-based awards were exercised during the three
and six months ended June 30, 2008 and 2007; no awards were forfeited during the
six months ended June 30, 2008 and 129,691 awards were forfeited during the
three and six months ended June 30, 2007. At June 30, 2008 the performance-based
options had no intrinsic value and a remaining contractual life of 9.8 years,
while at June 30, 2007 the performance-based options had an intrinsic value of
$2.7 million and a remaining contractual life of 7.5 years.





The fair value of each
performance-based option granted under the Plan, including those granted under
the Treximet incentive program, was estimated as of the grant date using the
Black-Scholes option valuation model without consideration of the performance
measures.





Income and Net Loss Per
Share—Basic and diluted net income and net loss per common share amounts
are presented in conformity with SFAS 128, “Earnings per Share,” for all periods
presented. During the six months ended June 30, 2008 and 2007, 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 three and six months ended June 30, 2007 because the effect would
have been antidilutive and, in accordance with SFAS 128, basic and diluted net
loss per common share has been computed using the weighted-average number of
shares of common stock outstanding for the three and six months ended June 30,
2007. Accordingly, basic and diluted net loss per share is the same for the
three and six months ended June 30, 2007.





In
accordance with SFAS 128, the Company has excluded the impact of any shares
which might be issued under the Rights Plan, detailed below, from the EPS
calculation because the Rights are not exercisable since the specified
contingent future event has not occurred.





The
following table reconciles the numerator and denominator used to calculate
diluted net income per share (in thousands) for the 2008 periods
shown:





Three
      months ended
              June
      30, 2008
            
            
            Six
      months ended
              June
      30, 2008Numerator:Net
      income
            
            $
            13,334,103
            
            
            $
            5,962,851Denominator:Weighted
      average common shares, basic
            
            
            29,759,250
            
            
            
            29,741,406Dilutive
      effect of stock options
            
            
            948,460
            
            
            
            895,123Weighted
      average common shares, diluted
            
            
            30,707,710
            
            
            
            30,636,529





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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.





New Accounting
Pronouncements—In September 2006, the FASB issued
Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS
157). SFAS 157 provides a common definition of fair value and establishes a
framework to make the measurement of fair value in generally accepted accounting
principles more consistent and comparable. SFAS 157 also requires expanded
disclosure to provide information about the extent to which fair value is used
to measure assets and liabilities, the methods and assumptions used to measure
fair value, and the effect of fair value measures on earnings. SFAS 157 is
effective for the Company’s 2008 fiscal year. SFAS 157 did not have a material
impact on the Company’s financial statements.





In February 2007, the FASB
issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – including an amendment of FASB Statement No.
115 (SFAS 159). SFAS 159 gives the Company the irrevocable option to
carry most financial assets and liabilities at fair value, with changes in fair
value recognized in earnings. SFAS 159 is effective for the Company’s 2008
fiscal year. SFAS 159 did not have a material impact on the Company’s financial
statements.





In June 2007, the FASB issued Emerging
Issues Task Force (“EITF”) on EITF Issue No. 07-3, “Accounting for Advance Payments for
Goods or Services to Be Used in Future Research and Development
Activities” (“EITF 07-3”). EITF 07-3 requires companies to defer and
capitalize prepaid, nonrefundable research and development payments to third
parties, and amortize them over the period that the research and development
activities are performed or the services are provided, subject to an assessment
of recoverability. EITF 07-3 is effective for new contracts entered into during
fiscal years beginning after December 15, 2007, including interim periods within
those fiscal years. The Company believes EITF 07-3 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. The Company and the individual defendants believe that the
plaintiffs’ allegations are without merit, and intend to defend these claims
vigorously.





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





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Under its commercialization
collaboration with Valeant NA, related to MT 300, if the Company chooses to
withdraw the MT 300 NDA for commercial or financial reasons under the conditions
specified in the agreement, it could be required to pay a withdrawal fee of $1.0
million. As a result of this contingency, $1.0 million of the $2.0 million
upfront payment received by the Company from Valeant NA pursuant to the
agreement has not been recognized as revenue and will not be recognized as
revenue until the conditions in the agreement have been satisfied or
resolved.





On July 21, 2005, the Company received
a letter from Valeant NA seeking payment of the $1.0 million withdrawal fee. The
Company does not believe the withdrawal fee is payable. The agreement requires
that unresolved disputes by the parties be referred to the respective chief
executive officers for resolution. If still unresolved, the agreement provides
for binding arbitration. Valeant NA has indicated its intention to pursue the
dispute resolution provisions provided for in the agreement. The Company intends
to vigorously defend its position under the agreement. At this time, it is not
possible to determine if any withdrawal fee will be required to be paid to
Valeant NA when the ultimate resolution of this dispute is reached, however, it
is the current judgment of management that no reserve is required.





Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations





This discussion of our financial
condition and the results of operations should be read together with the
financial statements, including the notes contained elsewhere in this Form 10-Q,
and the financial statements, including the notes thereto, contained in our
Annual Report on Form 10-K for the year ended December 31, 2007, as filed on
March 6, 2008.





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;
    and





·
            licensing
      the resulting product or technology to a strong pharmaceutical partner to
      commercialize.





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 then 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.





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We have
developed TreximetTM (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 February
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. We began the Phase 3 program in September 2007.
As part of the program, we are conducting two Phase 3 pivotal trials in patients
who are at risk for developing NSAID-associated gastric ulcers. In addition, we
are conducting a long-term, open label safety study. We have 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 are also
conducting additional studies at AstraZeneca’s expense.





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 and
confirmed that the development program for PA32540 will be similar to our PN
product development program. The objective of the program will be to establish
that patients taking our PA32540 product have fewer gastric ulcers than patients
taking enteric coated, or EC, 325 mg aspirin over the study treatment period. 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 PA32540
as compared to 325 mg of enteric coated aspirin and filed a Special Protocol
Assessment (SPA) with the FDA for the design of the Phase 3 studies for the
product, which could begin as early as the second half of 2008.





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, 2008, our accumulated deficit was approximately $121.2
million. We record revenue under two categories: licensing revenues and
development revenues. 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 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. 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, 2008, our research
and development expenses represented approximately 83% of our total operating
expenses.





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Statement
of Financial Accounting Standards Board (SFAS) No. 7, “Accounting and Reporting
by Development Stage Enterprises,” states that an enterprise shall be considered
to be in the development stage if either planned principal operations have not
commenced or planned principal operations have commenced, but there has been no
significant revenue therefrom. We will remain a development stage company until
such time as significant revenues have been generated from the marketing and
sale of our product candidates.





We expect
that we may continue to incur operating losses over the next several years as we
complete the development and seek regulatory approval for our product
candidates, develop other product candidates and acquire and develop product
portfolios in other therapeutic areas. Our results may vary depending on many
factors, including:





·
            The
      progress of our PN and PA product candidates and our other product
      candidates in the clinical and regulatory
  process;





·
            The
      ability of GSK to successfully launch and commercialize Treximet in the
      U.S. For example, Treximet was available in pharmacies within one month
      from the date of its approval, but initial promotional materials for the
      product, including direct to consumer advertising, has not yet been
      approved by the FDA. The lack of approved materials and advertising at
      launch may have had an adverse impact on initial sales of the product,
      thus affecting our royalty revenue during
      the second quarter. GSK has not yet received approval of the promotional
      materials from the FDA, which may negatively impact our royalty revenue in
      the third quarter;





·
            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 other therapeutic
      product candidates.





We do not currently have
commercialization or manufacturing capabilities. We have entered into
collaborations and currently plan to enter into additional collaborations with
established pharmaceutical or pharmaceutical services companies to commercialize
and manufacture our product candidates once approved. Our ability to generate
revenue is dependent upon our ability, alone or with collaborators, to achieve
the milestones set forth in our collaboration agreements, to enter into
additional collaboration agreements, and successfully develop product
candidates, obtain regulatory approvals and successfully manufacture and
commercialize our future products. 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 Annual Report on Form 10-K.
These payments generate large non-recurring revenue that will cause large
fluctuations in quarterly and annual profit and loss.





Status
of Our Product Candidates





There follows a brief discussion of the
status of each of our product candidates, as well as the costs relating to our
development activities. Our research and development expenses that are not
direct development costs consist of personnel and other research and development
departmental costs and are not allocated by product candidate. We do not
maintain records that allocate our employees’ time by the projects on which they
work and, therefore, are unable to identify costs related to the time that
employees spend on research and development by product candidate.





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.





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We incurred $0.2 million in direct
development costs associated with the development of MT400/Treximet for the six
months ended June 30, 2008 and have incurred $25.7 million in costs from
inception to date. In the three and six month periods ended June 30, 2008, we
received $20.0 million in milestone payments from GSK for the approval of, and
GSK’s intent to commercialize Treximet and we accrued $0.8 million of Treximet
royalty revenue. We billed GSK $0.2 million for Treximet activities for the six
months ended June 30, 2008 and billed $2.1 million from inception to date. Our
direct development costs do not include the cost of research and development
personnel or any allocation of our overhead expenses.





PN
Program





Under our PN program, we have completed
formulation development and clinical studies for several combinations of a PPI
and an NSAID in a single tablet intended to provide effective management of pain
and inflammation associated with chronic conditions such as osteoarthritis, and
intended to have fewer gastrointestinal complications compared to an NSAID taken
alone in patients at risk for developing NSAID associated gastric ulcers. 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. Under our agreement with
AstraZeneca, we and AstraZeneca are co-developing, 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 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. 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 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 Special Protocol Assessment, or 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 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
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, have been presented publicly. We are currently
conducting two PN 400 Phase 3 pivotal trials in patients who are at risk for
developing NSAID-associated gastric ulcers. In addition, we are conducting a
long-term, open label safety study. 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 are also conducting additional studies at AstraZeneca’s expense.





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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. While further clarification will be needed
based on the intention to develop the esomeprazole combination, further clinical
studies, beyond those specifically required for the NDA submission in the U.S.,
will likely need to be conducted. In part, these studies will be required as the
naproxen-containing products on the European market differ in strength and
formulation from those available in the U.S. Under our agreement with
AstraZeneca, AstraZeneca has responsibility for the development program for PN
outside the U.S., including interactions with regulatory agencies.





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 $23.4 million for the six
months ended June 30, 2008 and we have incurred $66.5 million from inception to
date, $35.1 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.





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
percent 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 gastro intestinal 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. We met with the FDA in July 2007 and confirmed that the
development program for PA will be similar to our PN product development
program. The objective of the program will be to provide a cardioprotective form
of aspirin that causes fewer gastric ulcers than aspirin alone. As a step toward
achieving that goal, we completed a study which demonstrated that 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 the Phase
3 studies for the product, we must establish that patients taking our PA32540
product have fewer gastric ulcers than patients taking EC 325 mg aspirin over
the six month study treatment period. An IND was filed in the fourth quarter of
2007 and Phase 3 studies could commence as early as the second half of
2008.





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.


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We
incurred direct development costs associated with the development of our PA
program of $2.7 million during the six months ended June 30, 2008, and we have
incurred $10.2 million from inception to date. Our direct development costs do
not include the cost of research and development personnel or any allocation of
our overhead expenses.





MT 300





In October 2003, we received a
not-approvable letter from the FDA related to our NDA for MT 300, which we had
submitted in December 2002. We are not currently conducting any clinical trials
for MT 300 and do not expect to incur any additional significant development
costs related to MT 300, nor do we believe that we will receive any future cash
inflows from MT 300. We incurred no direct development costs associated with the
development of MT 300 for the six months ended June 30, 2008, and we have
incurred $14.7 million from inception to date. Our direct development costs do
not include the cost of research and development personnel or any allocation of
our overhead expenses.





In July 2005, we received a letter from
our partner, Valeant NA, seeking payment of a $1.0 million withdrawal fee
required under certain conditions under the agreement. Under the agreement, if
we determine that additional studies or data that are required by the FDA for
approval of the NDA for MT 300 would jeopardize the commercial viability of MT
300 or exceed our financial resources available for MT 300, we may elect to
withdraw the NDA. If we notify Valeant NA of this situation and Valeant NA
elects not to assume control of efforts to seek approval of the NDA, then, under
the conditions outlined in the agreement, upon notice from Valeant NA, the
agreement will terminate and we would be required to pay Valeant NA a
termination fee of $1.0 million. If Valeant NA decides to assume development, it
would be credited $1.0 million in development expense. We do not believe that
the withdrawal fee is payable under the circumstances of receipt of 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. 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.





Collaborative
Arrangements





We have entered into and plan to
continue to enter into collaborations with established pharmaceutical or
pharmaceutical services companies to develop, commercialize and/or manufacture
our product candidates. Our existing collaborations are described
below.





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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. At June 30, 2008, the Company accrued
$0.8 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.





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 may, at no additional cost, elect to include Japan in
the licensed territory within two years after the effective date of the
agreement. Pursuant to the terms of the agreement, we received an upfront
license fee of $40.0 million from AstraZeneca following termination of the
waiting period under the Hart-Scott-Rodino notification program.





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 successful proof of concept. 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.





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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 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 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.





Valeant
Pharmaceuticals North American (Valeant NA) (formerly Xcel Pharmaceuticals
Inc.)





In September 2003, we signed an
agreement with Valeant NA for the further development and commercialization of
MT 300. In March 2005, Valeant Pharmaceuticals International (Valeant
International) acquired Valeant NA. Under the terms of the agreement, Valeant NA
would have exclusive rights in the United States to commercialize MT 300 subject
to certain minimum commercialization obligations. Pursuant to the terms of the
agreement, Valeant NA paid us an upfront fee of $2.0 million. Upon certain
future regulatory approvals, including the FDA’s approvals relating to MT 300,
and the achievement of a predetermined sales threshold on MT 300, potential
milestone payments of up to $8.0 million would be due. Valeant NA is also
obligated to pay us royalties on all combined net sales of MT 300 and Valeant
NA’s D.H.E. 45®
(dihydroergotamine mesylate) Injection, upon commercialization of MT 300, until
at least the expiration of the last to expire issued applicable patent (2020,
based upon the scheduled expiration of the last to expire currently issued
applicable patent), subject to reduction in certain instances of generic
competition, or in the event that Valeant NA pays royalties to one or more third
parties to license rights from such third parties to commercialize MT 300. The
agreement terminates on the date of expiration of all royalty obligations (2020,
based upon the scheduled expiration of the last to expire currently issued
applicable patent) unless earlier terminated by either party for a material
breach or in the event that either party determines not to pursue approval of MT
300, under the conditions described below. Under certain circumstances, the
agreement provides for the terminating party to facilitate the assumption of its
responsibilities by the non-terminating party. Generally, each party must
indemnify the other for damages arising from such party’s breach of its
representations, warranties and obligations under the agreement, as well as for
the gross negligence or willful misconduct by either party. Additionally,
Valeant NA must indemnify us for damages arising from the development,
manufacture or use of any product after the effective date of the agreement,
while we must indemnify Valeant NA for any damages arising from such
development, manufacture or use prior to the effective date. We must also
indemnify Valeant NA for any use by us or any sub licensee of certain technology
owned by Valeant NA.





Under the
agreement, if we determine that additional studies or data that are required by
the FDA for approval of the NDA for MT 300 would jeopardize the commercial
viability of MT 300 or exceed our financial resources available for MT 300, we
may elect to withdraw the NDA. If we notify Valeant of this situation and
Valeant NA does not assume control of efforts to seek approval of the NDA, then,
under the conditions outlined in the agreement, upon notice from Valeant NA the
agreement will terminate and we would be required to pay Valeant NA a withdrawal
fee of $1.0 million. If Valeant decides to assume development, it would be
credited $1.0 million in development expense. Based upon our understandings from
our most recent communications with the FDA and our understanding of the FDA’s
current standards for approval of migraine drugs, we believe it is not possible
to reverse the not approvable status of the NDA for MT 300 and we have begun
discussions regarding termination of our commercialization agreement with
Valeant NA. In July 2005, we received a letter from Valeant NA seeking payment
of the $1.0 million withdrawal fee. We do not believe that the withdrawal fee is
payable based on our receipt of a not-approvable letter from the FDA with
respect to our NDA for MT 300. The agreement requires that unresolved disputes
by the parties be referred to the respective chief executive officers for
resolution. If still unresolved, the agreement provides for binding arbitration.
Valeant NA has disputed our conclusion that the withdrawal fee is not payable
and has indicated its intention to pursue the dispute resolution provisions
provided for in the agreement. We intend to vigorously defend our position under
the agreement. At this time, it is not possible to determine if any withdrawal
fee will be required to be paid to Valeant NA upon the ultimate resolution of
this dispute.





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Based upon the delays related to
commercialization of MT 300 due to our receipt of the not-approvable letter for
MT 300 and our efforts to address with the FDA the issues raised in that letter,
we and Valeant NA had previously agreed to extend the time for certain
activities under our agreement with Valeant NA that are dependent on the FDA’s
actions with respect to MT 300. In the event of termination of the agreement,
these obligations will not be relevant. We can give no assurance that Valeant NA
or Valeant International will agree to termination terms acceptable to us or
that we will not be required to pay Valeant NA the withdrawal fee of $1.0
million described above. However, since the $1.0 million upfront fee is
currently being accounted for as deferred revenue, a required payment to Valeant
NA would have no impact on our statements of operations.





Results
of Operations





Three
months ended June 30, 2008 compared to the three months ended June 30,
2007





Net income/( loss) per share:
Net income attributable to common stockholders for the three months ended June
30, 2008 was $13.3 million or $0.43 per share, on a diluted basis, as compared
to a net loss of $(3.8) million, or $(0.13) per share, on a diluted basis, for
the three months ended June 30, 2007. The net income for the three month period
ended June 30, 2008 included a $1.7 million or $0.06 per share charge for
non-cash stock-based compensation expense as compared to $1.1 million, or $0.04
per share for the same period of 2006.





Revenue: We recognized $33.1
million of revenue for the three months ended June 30, 2008 as compared to $11.9
million for the three months ended June 30, 2007. Licensing revenue for the
three months ended June 30, 2008 was $24.5 million compared to $3.7 million for
2007. The increase in revenue was primarily due to $20.0 million in milestone
payments received from GSK for the approval of, and GSK’s intent to
commercialize, Treximet along with $0.8 million of Treximet royalty revenue.
Development revenue was $8.6 million for the three months ended June 30, 2008
compared to $8.2 million for 2007. 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 $26.9 million remains in deferred revenue at June 30, 2008.
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 $8.0 million and $7.3 million
for the three months ended June 30, 2008 and 2007, 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 increased by $3.5 million to $17.1 million for
the three months ended June 30, 2008, as compared to the same period of 2007.
The increase was due primarily to an increase in direct development costs for PN
and PA program activities, as compared to the same period of 2007. Direct
development costs for the PN program increased by $3.0 million to $13.0 million,
primarily due to Phase 3 clinical trial activities and other PN product
development activities pursuant to the amended AstraZeneca agreement entered
into during the third quarter of 2007, as compared to the same period of 2007.
Direct development costs for the PA program increased by $0.8 million to $2.0
million, while the Treximet and exploratory programs decreased by $0.6 million
to $0.2 million during the second quarter of 2008, as compared to the same
period of 2007. Other direct development costs and departmental expenses
increased by $0.4 million primarily due to increased personnel costs, as
compared to the same period of 2007. 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 $0.2 million to $3.1 million
for the three months ended June 30, 2008, as compared to the same period of
2007. The increase was due primarily to increased personnel costs, including
reduced non-cash stock based compensation expense, as compared to the same
period of 2007. 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 $0.2 million for the three months ended June 30, 2008 and $0.3 million for
the three months ended June 30, 2007. Investment income from bond amortization
for the three month period ended June 30, 2008 totaled $0.3 million as compared
to $0.4 million during the same period of 2007. Investment income decreased
primarily due to declining short-term interest rates.





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Six
months ended June 30, 2008 compared to the six months ended June 30,
2007





Net income/(loss) per share:
Net income attributable to common stockholders for the six months ended June 30,
2008 was $6.0 million or $0.19 per share, on a diluted basis, as compared to a
net loss of $(5.9) million, or $(0.20) per share, on a diluted basis, for the
six months ended June 30, 2007.  The net income for the six
months ended June 30, 2008 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 2007.





Revenue: We recognized total
revenue of $41.0 million for the six months ended June 30, 2008 as compared to
total revenue of $19.6 million for the six months ended June 30, 2007. The
increase in revenue was primarily due to $20.0 million in milestone payments
received from GSK for the approval of, and GSK’s intent to commercialize,
Treximet along with $0.8 million of Treximet royalty revenue. Other licensing
revenue for the six months ended June 30, 2008 was $7.5 million compared to $7.4
million for 2007. Development revenue was $12.6 million for the six months ended
June 30, 2008 compared to $12.2 million for 2007. 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 $26.9 million remains in deferred revenue
at June 30, 2008. 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 $11.2 million and $10.8 million for the six
months ended June 30, 2008 and 2007, 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 increased by $9.3 million to $30.3 million for
the six months ended June 30, 2008, as compared to the same period of 2007. The
increase was due primarily to an increase in direct development costs for our PN
program, partially offset by a decrease in direct development costs for our PA
and exploratory programs, as compared to the same period of 2007. Direct
development costs for the PN program increased by $9.8 million to $23.4 million,
primarily due to clinical trial activities and other product development
activities during the six months ended June 30, 2008, as compared to the same
period of 2007. Direct development costs for the PA and exploratory programs
decreased by $0.9 million to $2.9 million, as compared to the same period of
2007. Other direct development costs and departmental expenses increased by $0.4
million primarily due to increased personnel costs, as compared to the same
period of 2007.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 decreased by $0.2 million to $6.0 million
for the six months ended June 30, 2008, as compared to the same period of 2007.
The decrease was due primarily to reduced personnel costs and marketing research
expenses, as compared to the same period of 2007. General and administrative
expenses consisted primarily of the costs of administrative personnel, facility
infrastructure, business development expenses and public company
activities.





Other income: Interest income
was $0.7 and $0.6 million for the six-month periods ended June 30, 2008 and
2007, respectively. Investment income from bond amortization for the period
ended June 30, 2008 totaled $0.6 million as compared to $0.9 million during the
same period of 2007.





Income
Taxes





We
estimate an annual effective tax rate of 0% for the year ended December 31, 2008
based upon financial results and annual forecasts available at June 30, 2008.
Our effective tax rate was 0% for the six month period ended June 30, 2008.
However, the actual effective rate may vary depending upon actual licensing fees
and milestone payments received, specifically the pre-tax book income for the
year, and other factors. Income taxes have been accounted for using the
liability method in accordance with SFAS 109, “Accounting for Income Taxes.”
Since our inception, we have incurred substantial losses and may incur
substantial and recurring losses in future periods. The Tax Reform Act of 1986
(the “Act”) provides for a limitation on the annual use of net operating loss
and research and development tax credit carry-forwards (following certain
ownership changes, as defined by the Act) that could 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.





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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 2003. However, the
loss carryforwards generated from 1996 through 2002 are 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
adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes (“FIN 48”), on January 1, 2007 and as a result, there were no
material impacts to the financial statements.





We
recognize any interest and penalties accrued related to unrecognized tax
benefits as income tax expense. During the six month periods ended June 30, 2008
and 2007, there were no such interest and penalties.





Liquidity
and Capital Resources





Since our inception, we have financed
our operations and internal growth through private placements of preferred stock
and our initial public offering, resulting in cash inflows of $133.9 million.
Since 2003, we have received $152.5 million from upfront and milestone payments
from our collaborators. Additionally, since 2004, we have received $28.6 million
of development revenue payments associated with development activities pursuant
to the terms of our agreements with AstraZeneca and GSK. At June 30, 2008, cash
and cash equivalents, along with short-term investments, totaled $72.2 million,
a decrease of $1.7 million compared to December 31, 2007. The decrease in cash
was primarily due to operating expenses for the period offset in part by cash
receipts for development activities and milestone 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. Because certain holdings in
the managed account have maturities longer than three months, we have classified
these holdings as short-term investments in our balance sheet and accounting
principles require reporting such investments at market value. Any difference in
market value and cost is reported in the stockholder’s equity section of our
financial statements as comprehensive income or loss.





We received $26.1 million in operating
cash during the six months ended June 30, 2008 pursuant to the terms of our
collaboration agreements with AstraZeneca and GSK. In addition, our balance
sheet included a $8.6 million accounts receivable for invoiced development
activities under the terms of the AstraZeneca and GSK agreements. Cash received
from financing activities during the period totaled $160.3 thousand reflecting
net proceeds from the exercise of stock options.





Based upon the indirect method of
presenting cash flow, cash used in operating activities totaled $2.4 million for
the six months ended June 30, 2008. Cash used in operating activities was $11.8
million for the six months ended June 30, 2007. Net cash used in investing
activities during the six months ended June 30, 2008 totaled $4.2 million, and
net cash provided by investing activities for the six months ended June 30, 2007
totaled $0.8 million reflecting investing activities associated with the sale of
short-term securities. Cash required for our operating activities during 2008 is
projected to increase from our 2007 requirements as a result of increased
development activities. During the six-month periods ended June 30, 2008 and
June 30, 2007 we recorded non-cash stock-based compensation expense of $2.7
million associated with the grant of stock options and restricted
stock.





As of June 30, 2008, we had $31.2
million in cash and cash equivalents and $41.0 million in short-term
investments. Our operating expenses for 2008 and 2009 are expected to increase
from the level of our operating expenses in 2007 as a result of increase
development activities. However, we believe that we will have sufficient cash
reserves to maintain our planned level of business activities through 2009
provided that certain development expenses are received from AstraZeneca, as
outlined in the agreement.





As part of our ongoing assessment of
our business and liquidity needs, we regularly assess available funding options
and will consider available funding opportunities as they arise. We may 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 (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.








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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, and 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;





·
            the
      extent to which we acquire or invest in businesses, technologies or
      products;





·
            costs
      incurred to enforce and defend our patent claims and other intellectual
      rights;





·
            our
      ability to negotiate favorable terms with various contractors assisting in
      our trials and studies; and





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





Item 3. Quantitative and Qualitative Disclosures About Market
Risk





The proceeds from our initial public
offering, private placements and 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 8 of this Annual Report on Form 10-K 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. The Company
and the individual defendants believe that the plaintiffs’ allegations are
without merit, and intend to defend these claims vigorously.





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





Item 1A. Risk Factors





Described below are various risks and
uncertainties that may affect our business. These risks and uncertainties are
not the only ones we face. You should recognize that other significant risks and
uncertainties may arise in the future, which we cannot foresee at this time.
Also, the risks that we now foresee might affect us to a greater or different
degree than expected. Certain risks and uncertainties, including ones that we
currently deem immaterial or that are similar to those faced by other companies
in our industry or business in general, may also affect our business. If any of
the risks described below actually occur, our business, financial condition or
results of operations could be materially and adversely affected.





Risks
Related to Our Business





We
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, 2008, we had an
accumulated deficit of approximately $121.2 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 GSK or sales of our other
product candidates by our commercial partners. For example, GSK’s inability to
launch Treximet with approved promotional materials, including direct to
consumer advertising, may have had an adverse impact on initial sales of the
product, thus affecting our royalty revenue during
the second quarter. GSK has not yet received approval of the promotional
materials from the FDA, which may negatively impact our royalty revenue in the
third quarter.





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 FDA approval 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. Further, we may have to pay Valeant NA a $1.0 million withdrawal fee if we
do not prevail in our current dispute with them as to whether the withdrawal fee
is payable. This amount is currently reflected in our financial statements as
deferred revenue and will never be recognized as revenue if repaid.





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.





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We
anticipate that for the foreseeable future our ability to achieve profitability
will be dependent on the successful development, approval and commercialization
of Treximet and 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
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.





Changes
in regulatory approval policy or statutory or regulatory requirements, or in the
regulatory environment, during the development period of any of our product
candidates may result in delays in the approval, or rejection, of the
application for approval of one or more of our product candidates. If we fail to
obtain approval, or are delayed in obtaining approval, of our product
candidates, our ability to generate revenue will be severely
impaired.





The
process of drug development and regulatory approval for product candidates takes
many years, during which time the FDA’s interpretations of the standards against
which drugs are judged for approval may evolve or change. The FDA can also
change its approval policies based upon changes in laws and regulations. In
addition, it can decide, based on its then current approval policies, any
changes in those policies and its broad discretion in the approval process, to
weigh the benefits and the risks of every drug candidate. As a result of any of
the foregoing, the FDA may decide that the data we submit in support of an
application for approval of a drug candidate are insufficient for approval.
Further, changes in policy or interpretation may not be the subject of published
guidelines and may therefore be difficult to evaluate. For example, the FDA has
not recently published guidelines for the approval of new migraine therapies,
and we have had to rely on periodic guidance from the FDA obtained in
conversations and other meetings, the content of which may be subject to
significant modification over the period of a drug’s development program. There
is also the risk that we and the FDA may interpret such guidance
differently.





Further,
additional information about the potential risks of marketed drugs may affect
the regulatory approval environment, or the FDA’s approval policies, for new
product candidates. For example, in February 2005 an advisory committee convened
by the FDA met to address the potential cardiovascular risks of COX-2 selective
NSAIDs and related drugs in response to disclosures made about possible adverse
effects from the use of some of these drugs. On April 7, 2005 the FDA issued a
Public Health Advisory, 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. For example, we believe that long-term
cardiovascular safety studies will be required for NDA approval of any oral
lornoxicam product candidate we may develop. 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.





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Our
product candidates under development are subject to extensive domestic and
foreign regulation. The FDA regulates, among other things, the development,
testing, manufacture, safety, efficacy, record keeping, labeling, storage,
approval, advertisement, promotion, sale and distribution of pharmaceutical
products in the United States. In order to market our products abroad, we must
comply with extensive regulation by foreign governments. If we are unable to
obtain and maintain FDA and foreign government approvals for our product
candidates, we, alone or through our collaborators, will not be permitted to
sell them. Failure to obtain regulatory approval for a product candidate will
prevent us from commercializing that product candidate. 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.





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. 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.





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, and for the foreseeable future, we expect to depend upon
collaborations with third parties to develop our product candidates and we
expect to depend substantially upon third parties to commercialize our products.
As a result, our ability to develop, obtain regulatory approval of, manufacture
and commercialize our existing and any future product candidates depends upon
our ability to maintain existing, and enter into and maintain new, contractual
and collaborative arrangements with others. We also engage, and intend in the
future to continue to engage, contract manufacturers and clinical trial
investigators.


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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 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.
Valeant NA is entitled to terminate its agreement with us and a $1.0 million
withdrawal fee payable by us in the event we choose to withdraw the NDA if we
determine that additional studies or data that are required by the FDA for
approval of the NDA would jeopardize the commercial viability of MT 300 or
exceed our financial resources available for MT 300. Due to our belief that the
FDA will not approve the NDA for MT 300, we began discussions with Valeant NA
regarding termination of our agreement. Valeant NA has demanded payment of the
$1.0 million withdrawal fee, which POZEN is disputing.





If our
current or future licensees exercise termination rights they may have, or if
these license agreements terminate because of delays in obtaining regulatory
approvals, or for other reasons, and we are not able to establish replacement or
additional research and development collaborations or licensing arrangements, we
may not be able to develop and/or commercialize our product candidates.
Moreover, any future collaborations or license arrangements we may enter into
may not be on terms favorable to us.





A further
risk we face with our collaborations is that business combinations and changes
in the collaborator or their business strategy may adversely affect their
willingness or ability to complete their obligations to us.





Our
current or any future collaborations or license arrangements ultimately may not
be successful. Our agreements with collaborators typically allow them discretion
in electing whether to pursue various regulatory, commercialization and other
activities or with respect to the timing of the development, such as our
agreement with GSK under which GSK determined, among other things, the exact
formulation and composition of the product candidates using our MT 400
technology for use in the 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, 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.





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.


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These
factors could lead to delays in the development of our product candidates and/or
the commercialization of our products or reduction in the milestone payments we
receive from our collaborators, or could result in our not being able to
commercialize our products. Further, disagreements with our contractors or
collaborators could require or result in litigation or arbitration, which would
be time-consuming and expensive. Our ultimate success may depend upon the
success and performance on the part of these third parties. If we fail to
maintain these relationships or establish new relationships as required,
development of our product candidates and/or the commercialization of our
products will be delayed or may never be realized.





A
collaborator may withdraw support or cease to perform work on our product
candidates if the collaborator determines to develop its own competing product
candidate 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
agreement with GSK is 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. In such a case,
we would need to enter into a new development and commercialization agreement
and would need to start the development process all over again. If we were able
to negotiate a new development and commercialization agreement to develop our MT
400 technology, which is not certain, we would face delays and redundant
expenses in that development.





We
need to maintain current agreements and enter into additional agreements with
third parties that possess sales, marketing and distribution capabilities, or
establish internally the capability to perform these functions, in order to
successfully market and sell our future drug products.





We have
no sales or distribution personnel or capabilities. If we are unable to maintain
current collaborations or enter into additional collaborations with established
pharmaceutical or pharmaceutical services companies to provide those
capabilities, or, alternatively, we are unable to develop internally sales and
distribution capabilities, we will not be able to successfully commercialize our
products. To the extent that we enter into marketing and sales agreements with
third parties, such as our agreement with GSKwhich 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.





Because
we do not believe it is possible to convince the FDA to reverse its conclusion
as stated in its not-approvable letter for MT 300, we do not expect to receive
any revenue from sales of MT 300 in the U.S.





In
October 2003, we received a not-approvable letter from the FDA related to our
NDA for MT 300. The letter was issued based on the FDA’s conclusion that we had
not submitted substantial evidence of effectiveness for MT 300 as an acute
treatment for migraine. The FDA noted that, although MT 300 provided a
statistically significant improvement over placebo on the pre-defined endpoint
of sustained pain relief at 24 hours post dose as well as relief of pain at two
hours post dose, MT 300 failed to achieve statistical significance versus
placebo for the relief of all of the ancillary symptoms of migraine (nausea,
photophobia and phonophobia) at two hours. Further, the FDA noted that the
incidence of nausea, one of the associated symptoms of migraine, was
statistically significantly higher following MT 300 treatment versus placebo at
two hours. After our receipt of the not-approvable letter, we had continuing
communications with the FDA regarding the MT 300 NDA. Based upon our
understandings from our most recent communications with the FDA and our
understanding of the FDA’s current standards for approval of migraine drugs, we
do not believe it is possible to reverse the not approvable status of the MT 300
NDA. Therefore, we do not believe that we will receive any revenue from sales of
MT 300 in the U.S.





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.


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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.





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 is unusable. In addition, the FDA or Institutional
Review Boards may require us to conduct additional trials or delay, restrict or
discontinue our clinical trials on various grounds, including a finding that the
subjects or patients are being exposed to an unacceptable health
risk.





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.





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 believe 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.


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The FDA
may also require data in certain subpopulations, such as pediatric use, or, if
such studies were not previously completed, may require long-term
carcinogenicity studies, prior to NDA approval, unless we can obtain a waiver of
such a requirement. We face similar regulatory hurdles in other countries to
those that we face in the U.S.





Our costs
associated with our human clinical trials vary based on a number of factors,
including:





·
            the
      order and timing of clinical indications
  pursued;





·
            the
      extent of development and financial support from collaborative parties, if
      any;





·
            the
      need to conduct additional clinical trials or
  studies;





·
            the
      number of patients required for
enrollment;





·
            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®.





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;


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·
            undertaking
      preclinical testing and human clinical
trials;





·
            obtaining
      FDA and other regulatory approvals of product candidates;
    and





·
            manufacturing
      and marketing products.





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 we have previously experienced as a result
of the not-approvable letters we received from the FDA on MT 100 and MT 300,
increase this risk. Our competitors may also develop products or technologies
that are superior to those that we are developing, and render our product
candidates or technologies obsolete or non-competitive. If we cannot
successfully compete with new or existing products, our marketing and sales will
suffer and we may not ever receive any revenues from sales of products or may
not receive sufficient revenues to achieve profitability.





If
there is an adverse outcome in the securities class action lawsuits that have
been filed against us or our current or former directors and officers, our
business may be materially harmed. Further, defending against these lawsuits may
be expensive and will divert the attention of our management.





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
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. The Company and the
individual defendants believe that the plaintiffs’ allegations are without
merit, and intend to defend these claims vigorously.





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





If
we are unable to protect our patents or proprietary rights, or if we are unable
to operate our business without infringing the patents and proprietary rights of
others, we may be unable to develop our product candidates or compete
effectively.





The
pharmaceutical industry places considerable importance on obtaining patent and
trade secret protection for new technologies, products and processes. Our
success will depend, in part, on our ability, and the ability of our licensors,
to obtain and to keep protection for our products and technologies under the
patent laws of the United States and other countries, so that we can stop others
from using our inventions. Our success also will depend on our ability to
prevent others from using our trade secrets. In addition, we must operate in a
way that does not infringe, or violate, the patent, trade secret and other
intellectual property rights of other parties.





We cannot
know how much protection, if any, our patents will provide or whether our patent
applications will issue as patents. The breadth of claims that will be allowed
in patent applications cannot be predicted and neither the validity nor
enforceability of claims in issued patents can be assured.If, for any reason, we are
unable to obtain and enforce valid claims covering our products and technology,
we may be unable to prevent competitors from using the same or similar
technology or to prevent competitors from marketing identical products. In
addition, due to the extensive time needed to develop, 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.


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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. As a result of such litigation, our patent claims may be
found to be invalid, unenforceable or not of sufficient scope to cover the
activities of an alleged infringement. With respect to some of our product
candidates, under certain circumstances, our development or commercialization
collaborators have the first right to enforce our patents and would have
exclusive control over such enforcement litigation. For example, under our
collaboration agreements with GSK and AstraZeneca, GSK and AstraZeneca each has
the first right to enforce our patents under their respective
agreements.


If we are
found to infringe the patent rights of others, then we may be forced to pay
damages in an amount that might irreparably harm our business and/or be
prevented from continuing our product development and marketing activities.
Additionally, if we or our development or commercialization collaborator seek to
enforce our patents and are unsuccessful, we may be subject to claims for
bringing a failed enforcement action, including claims alleging various forms of
antitrust violations (both state and federal) and unfair competition. If we are
found to be liable for such claims, then we may be forced to pay damages in an
amount that might irreparably harm our business and/or be prevented from
continuing our product development and commercialization activities. Even if we
are successful in defending any such claims of infringement or in asserting
claims against third parties, such litigation is expensive, may have a material
effect on our operations, and may distract management from our business
operations. Regardless of its eventual outcome, any lawsuit that we enter into
may consume time and resources that would impair our ability to develop and
market our product candidates.





We have
entered into confidentiality agreements with our employees, consultants,
advisors and collaborators. However, these parties may not honor these
agreements and, as a result, we may not be able to protect our rights to
unpatented trade secrets and know-how. Others may independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets and know-how. Also, many of our scientific and
management personnel were previously employed by competing companies. As a
result, such companies may allege trade secret violations and similar claims
against us.





If
we fail to acquire, develop and commercialize additional products or product
candidates, or fail to successfully promote or market approved products, we may
never achieve profitability.





As part
of our business strategy, we plan to identify, self-invent and/or acquire
product candidates or approved products in areas in which we possess particular
knowledge. Because we do not directly engage in basic research or drug
discovery, we may rely upon third parties to sell or license product
opportunities to us. Other companies, including some with substantially greater
financial, marketing and sales resources, are competing with us to acquire such
products and product candidates. We may not be able to acquire rights to
additional products or product candidates on acceptable terms, if at all. In
addition, if we acquire new products or product candidates with different
marketing strategies, distribution channels and bases of competition than those
of our current product candidates, we may not be able to compete favorably in
those product categories.





None
of our products may be accepted by the market.





The
commercial success of our other 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 and other
therapies;





·
            the
      receipt and timing of regulatory
approvals;





·
            the
      availability of third-party
reimbursement;


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·
            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.





If
product liability lawsuits are successfully brought against us, we may incur
substantial liabilities and may be required to limit commercialization of our
product candidates.





The
testing and marketing of pharmaceutical products entails an inherent risk of
product liability. Product liability claims might be brought against us by
consumers, healthcare providers, pharmaceutical companies or others selling our
future products. If we cannot successfully defend ourselves against such claims,
we may incur substantial liabilities or be required to limit the
commercialization of our product candidates. We have product liability insurance
that covers our commercialized product and human clinical trials in an amount
equal to up to $10.0 million annual aggregate limit with a $0.1 million
deductible per claim. The amount of insurance that we currently hold may not be
adequate to cover all liabilities that may occur. However, insurance coverage is
becoming increasingly expensive, and no assurance can be given that we will be
able to maintain insurance coverage at a reasonable cost or in sufficient
amounts to protect us against losses due to liability. We 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;


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·
            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 arrange for the commercialization of our product
      candidates.





Our
operating expenses for the year ended December 31, 2007 totaled $51.4 million,
including non-cash compensation expense of $4.3 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 2005 through 2007, our average
annual operating expenses (including average non-cash deferred compensation of
$3.6 million) were $38.2 million. We will continue discussions with AstraZeneca
on the timing and scope of marketing studies to support the commercialization of
PN 400. These marketing studies may impact revenue and expenses for the 2008
year.As of June
30, 2008, we had an aggregate of $72.2 million in cash and cash equivalents and
short-term investments. If our operating expenses for 2008 and 2009 remain at
the level of our operating expenses in 2007, we believe that we will have
sufficient cash reserves to maintain that level of business activities through
2009 provided certain increased development expenses are paid by AstraZeneca, as
outlined in the agreement. 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.





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.
Marshall E. Reese, Executive Vice President, Product Development, 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. Dr. Reese has informed the Company of
his intention to retire some time in the next 12 to 24 months. The Company
anticipates an orderly transition of Dr. Reese’s responsibilities to other key
POZEN employees upon his retirement. 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.





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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 National Market (now known as
The NASDAQ Global Market), through June 30, 2008, 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 four of our stockholders and their
affiliates beneficially hold approximately 30% 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 and one of our
directors may sell up to an aggregate of 1,180,000 shares pursuant
to Rule 10b5-1 trading plans. Sales under those plans began in October
2006. Further, stockholders’ ownership will be diluted if we raise additional
capital by issuing equity securities. We have filed with the SEC, and the SEC
has declared effective, a shelf registration statement on Form S-3 under which
we may offer up to 8,540,000 shares of our common stock for sale to the public
in one or more public offerings. Certain selling stockholders named in the
prospectus for the registration statement may offer up to 540,000 of such
shares, and we would not receive any of the proceeds from sales of those
shares.





Anti-takeover
provisions in our charter documents and under Delaware law could prevent or
delay transactions that our stockholders may favor and may prevent stockholders
from changing the direction of our business or our management.





Provisions
of our charter and bylaws may discourage, delay or prevent a merger or
acquisition that our stockholders may consider favorable, including transactions
in which you might otherwise receive a premium for your shares, and may also
frustrate or prevent any attempt by stockholders to change the direction or
management of POZEN. For example, these provisions:





·
            authorize
      the issuance of “blank check” preferred stock without any need for action
      by stockholders;


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·
            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 May 6, 2008. There were present at
the annual meeting of stockholders in person or by proxy stockholders holding an
aggregate of 26,747,099 shares of our common stock out of a total number of
29,737,799 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 II directors to each serve for a three year
term (until our 2011 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 II
directors):




Number
      of Shares of
              Common
      StockFor:
            
            Withheld:Arthur
      S. Kirsch
            
            26,632,482
            
            114,617Kenneth
      B. Lee, Jr.
            
            26,588,061
            
            159,038Bruce
      A. Tomason
            
            26,605,620
            
            141,479




The other
directors whose terms of office as director continued after the meeting are as
follows: John R. Plachetka, Pharm.D, James J. Mauzey, Jacques F. Rejeange, Paul
J. Rizzo and Peter J. Wise, M.D.







2. The
stockholders ratified the appointment of Ernst & Young LLP as our
independent auditors for the fiscal year ending December 31, 2008 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:26,678,051
            
            48,397
            
            20,651


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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
      29, 2008
            By:
            /s/
      JOHN R. PLACHETKAJohn
      R. PlachetkaPresident
      and Chief Executive OfficerJuly
      29, 2008
            By:
            /s/
      WILLIAM L. HODGESWilliam
      L. HodgesChief
      Financial OfficerJuly
      29, 2008
            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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